Presidential debates normally do not determine the outcome of elections, but the upcoming one pitting Kamala Harris and Donald Trump could be an outlier. The reason? Polls show the race is very close, and the key issue where Trump leads Harris significantly is voter unhappiness with the high post-COVID inflation that has increased consumer prices by about 20 percent since President Biden took office.
Clearly, Harris’s ability to convince voters to trust her handling of the economy could be key to her electoral success. But this is a tall order for two reasons. First, voters know that inflation was low during Trump’s presidency, before it surged under the Biden administration. Second, the “opportunity economy” plan that Harris unveiled last month was widely criticized for lacking a cogent explanation of how she would tackle inflation.
So how might Harris respond to these challenges? She needs to begin by explaining succinctly why inflation spiked. My own rendering is that the path of inflation over the past 15 years has primarily been driven by a series of global shocks and policy responses to them.
Inflation was subdued following the 2008 Financial Crisis during both Obama’s and Trump’s presidencies, principally because economic recoveries in the U.S. and worldwide were sub-par. Despite low interest rates in the U.S. — and negative rates in Japan and Europe — demand was sluggish, which kept prices at bay.
When the COVID-19 pandemic caused unemployment to spike in 2020, massive federal programs were enacted to keep household incomes stable. The Federal Reserve’s zero-interest-rate policy also underpinned demand in housing and construction. By 2021, the combination of resilient demand and global supply disruptions produced sharp increases in prices of goods worldwide.
Although the Fed expected the spike in inflation would be temporary, the global economy was further buffeted by Russia’s invasion of Ukraine in February of 2022 and additional COVID waves. They contributed to a new round of price pressures.
The Fed responded by raising interest rates aggressively. The good news is that this effort, along with an easing of supply-chain bottlenecks and waning fiscal stimulus, have reduced inflation. In response, Fed Chair Jerome Powell has indicated the Fed will begin lowering interest rates this month.
Meanwhile, mortgage rates have fallen to 6.35 percent, 1.4 percentage points below their peak last October.
But Harris faces two big challenges. First, Donald Trump will, without doubt, contend that Biden’s lax fiscal policies exacerbated inflation. Harris can counter by pointing out that Trump followed similar expansionary policies and favored extending COVID relief payments to families at the end of his presidency. In fact, during his tenure, he approved $8.4 trillion of new 10-year federal borrowing versus $4.3 trillion for Biden thus far, according to the Committee for a Responsible Federal Budget.
The other challenge for Harris is that parts of her economic plan are flawed, especially where it blames food retailers for price-gouging. The Washington Post Editorial Board wrote that “Instead of delivering a substantial plan, she squandered the moment on populist gimmicks.” Others have compared it to wage-price controls that the Nixon administration pursued in 1970, which proved ineffective and even detrimental.
Harris would be wise to focus instead on policies that encourage competition and improve productivity. In this regard, Harris announced plans this week to increase federal tax incentives for start-up businesses to $50,000 from $5,000.
Harris is on safe ground citing the recent agreement the Biden-Harris administration reached with pharmaceutical companies to lower the costs of 10 widely used drugs by significant amounts. Similarly, Harris’s proposal to restore the child tax credit that was part of the coronavirus relief package is also popular with voters.
That said, it is questionable whether these talking points will convince voters about her handling of the economy. Therefore, Harris will also have to raise doubts about Trump’s economic proposals.
Harris’ strongest case is to go after Trump’s plan to increase tariffs on Chinese imports by up to 60 percent and those on other imports by up to 20 percent. The latter is the same order of magnitude as the Smoot-Hawley Tariff Act of 1930 which invited retaliation from America’s trading partners and contributed to the Great Depression.
As Harris noted in her address to the Democratic National Convention, tariffs are effectively a national sales tax on these goods, and the burden falls heaviest on low and middle-income families.
The Peterson Institute for International Economics estimates that Trump’s latest proposals would cost middle-class households more than $2,600 each year. This would represent a loss in their after-tax income of more than 4 percent. It would leave them worse off by a net 2.7 percent including the reduced income tax they would pay if the Tax Cut and Jobs Act is extended.
For those in the lowest quintile of U.S. income brackets, the trade-off is even worse: Trump’s tariffs would reduce their after-tax income by 6.3 percent, versus a tax break of 0.5 percent from the Tax Cuts and Jobs Act.
The bottom line is that if these estimates are reasonable, Trump’s proposed tariffs and tax cuts will create more harm than good for the vast majority of American families. In fact, the only income group that would come out ahead is families in the top one percentile.
To win, Harris needs to make the case to voters that they will be better off with her as president. This will require showing how her plans are effective and superior to those of her opponent.
Nicholas Sargen, Ph.D., is an economic consultant and is affiliated with the University of Virginia’s Darden School of Business. He has authored three books including “Investing in the Trump Era: How Economic Policies Impact Financial Market.”