Which Candidate Is a Bigger Risk to the Economy?

In the short term, progress on vaccines may matter more than any particular president. In the long term, though, it’s the government’s relationship with the economy that will be key.

Voters use socially distanced voting machines set up in the east atrium of the United Center in Chicago on Nov. 3.
Voters use socially distanced voting machines set up in the east atrium of the United Center in Chicago on Nov. 3.
Voters use socially distanced voting machines set up in the east atrium of the United Center in Chicago on Nov. 3. Jonathan Daniel/Getty Images

It is Election Day, and the markets are up. Given Democratic candidate Joe Biden’s lead in the polls, it seems like investors like the idea of him moving into the White House soon. It is easy to see why. If he’s elected, odds are that he will quickly launch a big fiscal stimulus program to help the unemployed, struggling businesses, and state and local governments. All need support for the foreseeable future.

But after the virus, when the economy enters a recovery phase, there would be some economic risks inherent in the Biden agenda as well. He plans to increase the federal minimum wage to $15 an hour—a very large increase for many states and, for some, just a few dollars off from their median wage. While small increases to the minimum wage during economic booms have negligible impacts on employment, a very large increase during a recession, especially a recession that has hit the food and retail sectors very hard, is a much bigger risk. Add on other labor costs from more paid sick leave and health care, and the outlook for a vigorous jobs recovery, especially low-wage jobs, is more uncertain.

Biden also plans to increase corporate tax rates to levels above the international average. This will make U.S. companies less competitive and encourage them to keep more of their profits abroad. Biden likewise plans to give the government a larger role in the economy, especially when it comes to promoting the building of new infrastructure and development of green technology. Whether such moves will actually help the economy depends on if the projects fulfill an economic need or are driven by political interests. If history is any guide, political interests often win out, and there is a dearth of good shovel-ready projects for the administration to start with. Still, some might counter, such spending could at least create good government jobs, as the Works Progress Administration (WPA) did during the Great Depression. But research from economic historian Price Fishback estimates that WPA jobs may have actually slowed the United States’ recovery in the 1930s and 1940s by making workers reluctant to take private-sector jobs.

It is Election Day, and the markets are up. Given Democratic candidate Joe Biden’s lead in the polls, it seems like investors like the idea of him moving into the White House soon. It is easy to see why. If he’s elected, odds are that he will quickly launch a big fiscal stimulus program to help the unemployed, struggling businesses, and state and local governments. All need support for the foreseeable future.

But after the virus, when the economy enters a recovery phase, there would be some economic risks inherent in the Biden agenda as well. He plans to increase the federal minimum wage to $15 an hour—a very large increase for many states and, for some, just a few dollars off from their median wage. While small increases to the minimum wage during economic booms have negligible impacts on employment, a very large increase during a recession, especially a recession that has hit the food and retail sectors very hard, is a much bigger risk. Add on other labor costs from more paid sick leave and health care, and the outlook for a vigorous jobs recovery, especially low-wage jobs, is more uncertain.

Biden also plans to increase corporate tax rates to levels above the international average. This will make U.S. companies less competitive and encourage them to keep more of their profits abroad. Biden likewise plans to give the government a larger role in the economy, especially when it comes to promoting the building of new infrastructure and development of green technology. Whether such moves will actually help the economy depends on if the projects fulfill an economic need or are driven by political interests. If history is any guide, political interests often win out, and there is a dearth of good shovel-ready projects for the administration to start with. Still, some might counter, such spending could at least create good government jobs, as the Works Progress Administration (WPA) did during the Great Depression. But research from economic historian Price Fishback estimates that WPA jobs may have actually slowed the United States’ recovery in the 1930s and 1940s by making workers reluctant to take private-sector jobs.

Of course, a Trump presidency also poses risks, including less social stability, less certainty on trade, and likely a smaller fiscal stimulus while COVID-19 is still raging. But over a longer term, under a second administration led by him, there is more certainty that taxes will stay low and that the deregulations he put in place, which included spurs to cheaper generic drugs and Internet service, will persist. Uncertainty is bad for businesses and markets. In the past four years, of course, there were plenty of days when the stock market would rise or fall following a surprising Trump tweet about trade or health care. But the markets later bounced back and, even during the including the pandemic, the stock market continued to trend upward. Perhaps markets see certainty in low taxes and less regulation and tune out the noise.

Over the next few years, the United States’ and the world’s economic trajectory will largely be determined by innovations in vaccines and therapeutics more than any one president. But after that, economic health will come down to the role Washington plays in the economy. Big economic shocks are often followed by large expansions in the welfare state that endure for decades. Either Biden or Trump would have to tread carefully.

Allison Schrager is an economist, senior fellow at the Manhattan Institute, and co-founder of LifeCycle Finance Partners, LLC, a risk advisory firm. Twitter: @AllisonSchrager

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