Why Bidenomics won't help Joe win the election

It’s not the economy, stupid.

Contrary to the conventional wisdom coined on the campaign trail for Bill Clinton in 1992, this year’s US presidential election will not be a referendum on Donald Trump’s economic handling of the Covid crisis, although it will shape the country’s recovery.

Whether Trump or his Democratic rival Joe Biden wins, the next president faces new Covid cases surging towards a third peak, escalating tensions with China and potentially 5m people in long-term unemployment.

Voters have a stark choice between two approaches: higher taxes and investment under Biden, or the status quo of tax cuts and deregulation. Economists argue the former will lead to short-term pain for long-term gain.

The main pillar of Biden’s proposals is to raise the corporate tax rate from 21pc to 28pc – halfway back to its level under Barack Obama. This will constrain business activity by about 25 cents for every dollar of tax increase, according to Oxford Economics.

Biden also wants to increase income tax on the top 1pc of individuals, who earn more than $790,000 (£609,000) a year. The consultancy says this would lead to a cut to consumer spending of less than 20 cents for each dollar of tax increase because higher earners tend to spend a lower proportion of their income.

This effect would be partly offset by Biden’s proposal to raise the hourly minimum wage, which has been static since 2009, from £7.25 to $15. Rabobank expects this would boost consumption by 0.04pc a year, as workers would have more money to spend.

However, because businesses would have to pay more, the Congressional Budget Office estimates this would result in 1.3m workers losing their jobs.

Firms would be even less encouraged to retain workers by Biden’s plans to subsidise research and development, especially in technology, which could result in automation replacing more jobs.

Mitigating business pain would be Biden’s multilateral approach to trade that would focus on repairing relationships with America's traditional allies and remove tariffs on their exports.

The Atlanta Federal Reserve has highlighted that the uncertainty of Trump’s “trial-and-error” approach has had “non-negligible” effects on consumer spending and business investment.

Overall, Moody’s Analytics expects the Biden plans to result in $7.3 trillion of government spending over a decade, mostly focused on healthcare, education and green infrastructure - exceeding spending under Clinton or Obama.

The cost would be a further deterioration of government debt, which already stood at 107pc of GDP before the pandemic and hit 136pc in the second quarter of this year. Rabobank expects it to go as high as 170pc under Biden, compared to 147pc under a second Trump term.

Open borders

The final major aspect of Bidenomics would be reversing Trump’s immigration policies.

This would increase immigration from 600,000 annually back to a million – the pre-Trump level – giving GDP a 0.2pc boost, according to Oxford Economics.

Philip Marey at Rabobank says: “His policies may have some negative side effects in the short term and they do reduce demand for labour but their main strength is they will invest in the knowledge infrastructure, which will provide higher quality jobs even if they raise the public debt considerably.”

He expects GDP growth would be 4pc to 5pc higher under Biden.

Nonetheless, the speed and content of Biden’s recovery package would depend on the makeup of Congress, which has failed to agree on the size and scope of a fiscal package. Even if the Democrats take the Senate in January, they will have to negotiate with Republicans, who are expected to be more fiscally conservative without Trump.

If a “blue wave” does not materialise, Biden would have to compromise, possibly by raising corporate tax to 24pc instead of 28pc, and spending $3 trillion – 60pc of his target. The Tax Policy Center expects a one-year delay on tax increases if the Democrats do not win a filibuster-proof 60-vote Senate majority.

Mega-spending won't win MAGA voters

But the bottom line is, Trump voters don’t care. Analysis of the 2016 election shows demographics were more important in shaping votes than economic factors. This is likely to be amplified further this year by the Black Lives Matter protests and hostility to China, as evidenced by the stability of Trump’s approval ratings.

In 2018, for example, a study by Diana Mutz at the University of Pennsylvania found that white voters felt threatened by other ethnic groups and immigrants domestically, and by China internationally - and that this mattered more in their voting decisions than economic hardship.

As Marey puts it: “If identity trumps the economy, economic policies will not help the Democrats against Trumpism. In light of the demographic trends, the polarisation in American politics will only increase. Biden’s economic recipe will do little to change that.”