Kamala Harris, Donald Trump and prosperity

The Biden administration appears happy with the performance of “Bidenomics” over the last several years; the stock exchange is rising and unemployment is low. However, this was achieved by injecting massive liquidity into the United States economy. The price for that has been the accumulation of huge additional debt and rising inflation. A visit to the supermarket now costs the average U.S. citizen some 25 percent more than four years ago.

This bites the ordinary American, while Wall Street gains book value (the high liquidity causes high valuations, which are likely to come down eventually). This tradeoff is not compelling for the broader public. It was always obvious that the massive spending programs would create inflation, even if one of them was ironically called the “Inflation Reduction Act.” This is all past us, and it might haunt Kamala Harris in the 2024 presidential campaign.

Massive debt

The big long-term threat is the massive federal debt. The last four U.S. administrations, including both Republican and Democratic presidents, each added between some $4 and $8 trillion, with the total debt now amounting to over $35 trillion. It is not likely that any candidate will spend less in the future, even if the spending patterns will vary.

The big long-term threat is the massive federal debt.

 

Ms. Harris already described part of her budget plans in a recent speech. They contain the usual, populist “tax the rich” elements, but also sweeteners for the average American, including subsidies for housing. This subsidy scheme is in danger of again leading to a residential housing bubble. The Democratic candidate makes a point of trying to reduce inflation – however tricky that may be, and even though it was exacerbated by the administration in which she has served as vice president. In general, the agenda is a mix of leftist evergreen ideas and moderation.

Donald Trump would have a different approach: reducing corporate taxes in order to enhance investment and job creation. Over the long term, this will increase the basis for tax income and is generally beneficial, though not necessarily popular. However, it is unlikely that he will achieve savings on the spending side.

Original sin

The federal debt will increase further, independent of who wins the election. But there are also other debt-related pitfalls.

The savings of private households have fallen, which also limits consumption spending. It has reduced from some $1.2 trillion in 2020 to some $700 billion now. Credit card debts have risen substantially and are now at $1.3 trillion, while mortgages stand at $12 trillion.

A ticking time bomb is also waiting in commercial real estate debts. Prices have been sluggish and vacancies are at a peak. This is a threat not only to the economy in general but also to the banking system.

The overall debt situation, which will not be addressed by either administration, is the real threat to the U.S. economy and prosperity. This threat – together with other causes – might already result in a recession in the short term. There appears to be no way to get out of the vicious cycle, the original sin being overspending.

It is unfortunate that fiscal irresponsibility is a global phenomenon, applied just as much in democracies and authoritarian systems. Tragically, the world’s largest economy, the U.S., is also the leader in debt, setting a bad example. Overspending is a toxic drug that needs to be increased regularly in order to maintain an illusion of stability. The results are always negative: increased taxes and inflation. We must not forget that inflation is probably the worst version of taxation, hitting the poor especially hard. Welfare overspending is therefore a nasty populist trick – appearing to hand out gifts to the public while financing it through costly inflation.

This comment was originally published here: https://www.gisreportsonline.com/r/harris-trump-prosperity/