Michael J. Boskin
Michael J. Boskin is Professor of
Economics at Stanford University and Senior Fellow at the Hoover
Institution. He was Chairman of George H. W. Bush’s Council of Economic
Advisers from 1989 to 1993, and headed the so-called Boskin Commission, a
congressional advisory body that highlighted errors in … read more
STANFORD
– Big changes are underway in the United States, as the country gears
up to elect a new president, one-third of the Senate, and the entire
House of Representatives this November. The outcome will have profound
consequences for US economic policy, and thus for the global economy.
As
it stands, Hillary Clinton remains the frontrunner for the Democratic
nomination, though she has not yet pulled away from her socialist
opponent, Senator Bernie Sanders. The bombastic billionaire Donald Trump
is leading the Republican field, followed by firebrand Senator Ted Cruz
of Texas, Senator Marco Rubio, a talented mainstream conservative from
Florida, and, further back, popular Ohio Governor John Kasich and
neurosurgeon Ben Carson.
It
is impossible to know whether these early trends will hold through the
rest of the primaries, now turning to the South and Midwest. America’s
media and political junkies are consumed by the various possibilities.
Can Rubio rally a broad coalition, or will Trump win the Republican
nomination? Would a Trump nomination help Clinton win the general
election?
In
fact, many Republicans fear a contest pitting Trump against Clinton.
Though Clinton has plenty of weaknesses – voters, especially young
people, do not trust her, and she may face legal repercussions for
dealing with highly classified information using a private email server
when she was Secretary of State – the nasty infighting among Republicans
may give her a big advantage in November. Many Republicans believe that
Trump’s nomination would cost them the Senate and the White House.
With
so much uncertainty, there are a number of directions that US policy
could take in the coming years. While a lot of attention has been paid
to headline-grabbing issues like immigration and national security,
American voters are highly concerned about economic issues – concerns
that the leading candidates would address in very different ways.
On
trade, Trump’s ideas are dangerous and would reverse decades of
beneficial bipartisan American leadership in trade liberalization, with
large tariffs on foreign imports, such as from China and Mexico. The
other Republican candidates barely discuss the topic. As for the
Democrats, Sanders inveighs against free trade. Clinton has flip-flopped
on the issue: She now opposes Canada’s Keystone XL pipeline and the
Trans-Pacific Partnership, which she promoted as Secretary of State. The
risk of a trade war is low, but rising.
Clinton
has also inched toward Sanders’s position on financial-system reform,
as his attacks on her for taking large donations and speaking fees from
Wall Street have clearly struck a chord among young voters. Confronting
the big-bank bogeyman has been a centerpiece of Sanders’ campaign;
Clinton is now partly echoing his populist anti-bank positions. The
Democrats favor loose monetary policy, low interest rates, and a
depreciated dollar. Republicans also oppose bailouts, but worry about
excessively loose monetary policy and too much discretion for the US
Federal Reserve outside real emergencies.
These
differences will have a far-reaching impact. By appointing a new Fed
Chair (or reappointing Janet Yellen), and possibly other Fed governors,
the next president will have an indirect influence on interest rates,
exchange rates, and global financial markets. If inflationary pressures
rise – unlikely any time soon, but possible when the global economy
gains strength – the Fed’s response will be a key determinant of
economic stability.
The
candidates also differ enormously in their tax and spending plans – and
thus their deficit and debt proposals. Sanders is proposing about $18
trillion of additional spending over the next decade to cover a
single-payer health-care system, infrastructure investment, and “free”
(that is, taxpayer-paid) tuition at public colleges. During that period,
he would impose tax hikes of $6.5 trillion, mostly on the “wealthy.”
The catch: Democrats define “wealthy” as an annual household income
above $250,000 – roughly the starting salary of an urban couple in their
first jobs after law school. The $11.5 trillion deficit would
eventually have to be covered by a gigantic future tax hike. Clinton has similar spending and tax priorities, though with smaller increases.
The
Republicans want to lower personal income tax rates and broaden the tax
base. They would reduce America’s corporate-tax rate – the highest in
the OECD – to a far more competitive level. Some propose replacing the
current personal and corporate income taxes with a flat tax on
consumption. The Republicans would slow growth in spending in most
areas, while increasing defense spending. Whereas Trump proposes an
outsize $10 trillion in tax cuts and Cruz about $9 trillion (statically
scored), Rubio and Kasich have offered more economically and
arithmetically plausible fiscal plans. Campaign proposals are, of
course, partly aspirational, and will have to be negotiated with
Congress.
The empirical evidence
suggests that tax cuts are more likely than spending increases to spur
growth, and that lower spending is more likely than tax hikes to
consolidate budgets effectively. While past experience indicates that
constraining spending growth will not be easy, especially with the aging
of the post-1945 baby-boom generation fueling rising health-care and
pension costs, many countries – including Canada, the United Kingdom,
Sweden, and even the US itself – have managed to do so in recent
decades.
Republicans
and Democrats differ starkly on reforming exploding entitlement costs,
which have unfunded liabilities several times the national debt. The
Republicans – with the exception of Trump, who rejects future Social
Security “cuts” – would gradually slow growth, whereas the Democrats
propose increasing Social Security benefits. The next leader of the free
world should know that when a ship starts leaking, the first priority
is to plug the leak, not open new ones.
Overall,
the policies proposed by Sanders and Clinton would take the US closer
to a European-style social-welfare state. But, as Republicans point out,
Western Europe’s standard of living is 30% lower than that of the US,
on average; Europe also faces slower growth, higher unemployment, and
heightening social tensions. That is why Republican candidates – for the
presidency, the House, and the Senate – want to roll back President
Barack Obama’s tax and spending increases, expensive health-care reform,
and regulatory overreach.
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