Moody's Talks - Inside Economics - Bonus Episode: Assessing the Macroeconomic Consequences of Biden vs. Trump

Episode Date: July 3, 2024

President Joe Biden and former President Donald Trump will pursue very different economic policies if reelected. Both have put forward a wide range of proposals to change the tax code, government spending, and trade, immigration and regulatory policies that if implemented could have significant consequences on the economy’s performance for years to come. In this bonus episode of Inside Economics, the team considers what policies would likely be implemented under different election scenarios and their economic impact.Read the full analysis by Mark Zandi, Brendan La Cerda and Justin Begley: Assessing the Macroeconomic Consequences of Biden vs. TrumpGuest Hosts: Justin Begley - Economist, Moody's Analytics, Brendan La Cerda - Director/Senior Economist, Moody's AnalyticsHosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, and Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s AnalyticsFollow Mark Zandi on 'X' @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Sandy, the chief economist and Moody's Analytics, and I'm joined by Bevy of colleagues. Of course, my two co-hosts. I'm Marissa, DeNataly, and Chris Doreadis. Hi, guys. Hey, Mark. Chris, you're back in the country.

I am. Back in action. Yeah, you look rested, well-rested. Yeah. You look like you have a tan. Ready to go. I think it's the lighting. I think it's the lighting.

I thought I was going to say it looks like he has more gray hair, but that can't possibly. No. That can't be. No. It's distinguished. Nice. Nice. Nice recovery.

Good stuff. How was Italy? What was the highlight? Oh, there are so many. You know, saw some great places. The Dolomites were probably the highlight in terms of location. And then just being able to see family and, of course, great food. Yeah.

Have you been to the Dolomites? Marissa, I've never had. I never have. Yeah. Yeah. I think I told you I studied abroad in Italy when I was in college and oh that's right I went then so that was a long time ago but yeah it was it was one of my favorite places I went in the whole country it's so beautiful all country's beautiful it's kind of a magical place really yeah and I guess that's why it seems like half the country you were saying last week I think isn't from America half of the US was in Italy when you were there visit I think they were all on my plane. They're all in your plane. Yeah.

Reports were cramped. Yeah, absolutely. And we've got two other colleagues. We've got Brendan Lacerda and Justin Begley. Hi, guys. Hey, Mark. Thanks for having us. What are you guys doing here? We'll find out, right? We're going to talk about the election. We're going to talk about what's going to happen if Trump wins.

What's going to happen if Biden wins? Yeah. I don't know if we're getting to what happens if Robert Kennedy wins. I don't think we covered that one yet. Who? Who? Kennedy. Oh, Kennedy. I forgot about it.

We didn't do that scenario. Yeah, yeah. Well, it's good to have you guys on board. We're going to talk about the study we just released a few days ago. I think it's a few days ago, right? Was it Thursday? It was a week ago. The macroeconomic consequences of Biden v. Trump, where we evaluate the economic impact of the candidate's proposals.

And there's a lot to unpack there. I guess first question I should ask you guys, did you guys ever work on a presidential campaign or anything political before? I probably should have asked you before you did the study. You're not getting paid, are you? By anybody? No.

Sadly no. Sadly no. Okay. No, I've never volunteered for a campaign. No? Never knocked on a door? No. How about you, Justin?

Have you ever participated in a campaign? No. I've never even donated a dollar to a to a candidate before. So, you know, I'm young. I like to keep my mind. Yeah, yeah. Brendan, have you contributed to anybody? Yeah, you know what?

I do like to collect like bumper stickers from some of the candidates. So I even somewhere around here, I might have like my Obama 08 magnet sticker. I like collecting like the memorabilia. Got it. I got some betterment from Federman. But do you have to contribute to the campaign to get those challenges? You know, like $5 and you get, you know, like a sticker or something like that. Right.

So you will see the name on the I donated $5 list. Well, you know, I did work on a campaign, the John McCain campaign. It is, you know, this was a, I started working on that campaign well before Obama was even on the scene. So I had no idea who Obama was. And McCain was, at the time, it was before, you know, the economy, it became front and center. Remember, it ultimately became all about the financial crisis. But before that, it was about foreign policy and his foreign policy views were more consistent with mine. So I started helping out on that campaign. I tell you, it was a good experience. It really was a

very interesting experience. I was the guy who was in charge of monitoring the economic data, you know, as they came in on a daily basis and commenting. The one thing I did get a little annoyed at is I was starting to scream, hey, guys, there's this crisis developing. the financial markets, look out, you know, we're going to have a problem. So this was the 08. The 08, yeah. And this was, you know, 07, I was starting to send up flares and no one wanted to hear it. No one was paying any attention.

Couldn't get, I was waving my hands. I was screaming from the balcony. You know, no one really, they just, you know, they're so busy focused on other things. So. Well, I mean, famously, McCain, you know, I think it was during a campaign speech, you know, said that the state of the American economy is strong. And people were, I think people rightly reacted. Like, you know, that's just ridiculous.

It's, yeah, he just didn't. The general tone was definitely, he was a great guy, you know, and I think just the wrong guy at the wrong time, you know. I mean, it was a different time, you know, when the economy wasn't front. That definitely was not his thing. So, and he had no interest in it and really no expertise. It was all foreign policy. but I found the whole process, you know, very interesting and fascinating, just the way a campaign works. But anyway, I, for sake of disclosure, I'm not involved in any campaigns.

I've not contributed any money. My wife might have. I'm not sure, but I have not. And I've decisiously done that because I knew we were going to do this kind of work and didn't want to have any appearance of, you know, any kind of conflict. But what about you guys, Chris and Marissa, it doesn't matter. You can tell me, I'm not going to answer the question. No, I've never. No, yeah, just curious.

It's involved in any manner or contributed anything. Yeah, I know Chris is like on the board of the Batchie Ball Society. You know, he was president of that and he was like lobbying the Italian government for more botchy ball courts or something. I heard, is that right? There was the Biden administration. Oh, it was the Biden administration. Oh, you want some infrastructure money.

That was what... That's right. Yeah, I hope you got turned down, buddy. I'm a lifelong independent, so... I like... Okay, lifelong independent. That's very good. Okay, so we did this study, and this isn't the first time.

We've done this for many presidential campaigns now going back. I can't even remember how far back. I think all the way back to Carrie... What do you carry? He could... It was Carrie Bush, right? Carrie Bush. It was all the way back to...

Kerry Bush. So we've been doing this a long time. And so it's in a long tradition. I guess I'm going to throw out the first – there's going to be a series of questions, but first question is why did we do this study? I mean, you know, it's a reasonable question, right? Why are you guys even thinking about this? Brendan, do you want to correct that, Justin? I mean, I've got an answer, but I'm curious what your answer. I've never asked you the question. I'm just really curious how you'd answer the question. Why did we do this? I would say one very good reason we do it is because we get a ton of requests to do it. I think it is a very client-driven scenario. There's lots of businesses and investors who want to understand how the proposed policies are going

to affect their revenues, their costs. This affects, you know, business planning, capital allocation. So it's, you know, they want to know what the economy is going to look like to four years down the road. Justin? Yeah, I'd double click on a lot of what Brennan just said there and just say also that economics are, is kind of inextricably tied to fiscal policy in many ways. So when a candidate is proposing certain policies on, let's say, child tax credits or what have you, it's going to affect things like employment decisions. it's going to affect how much the deficit increases or decreases that they're focusing on spending or tax policy. And all these things are going to affect kind of downstream macroeconomic variables that are going

to take corporations, get households, just on a general level policy proposals, if they are realized after an election, they matter. Yeah, the way I'd answer that question was as a question, how could we not do it? I mean, really? I mean, we're forecasting the outlook for the economy. That depends on fiscal policy, tax spending policy, regulatory policy, everything that comes out of Washington. And, you know, we have to have a view on that.

And if you can have a view on that, you have to have some sense of, you know, how the election is going to play out and what Congress is going to look like and so forth and so on. and that obviously generates a lot of different scenarios. Now, I will say in many other presidential elections, the differences between the candidates are, you know, more on the margin. This one, I'll tell you, I've done this a number of times. The differences here are big. So it's like we're going to go down two different paths here,

four different paths depending on how things play out, you know, what the scenarios are. And the interest is extraordinary, you know, our clients all over the world, not just here in the United States, but literally all over the world. I mean, I just got a call from one of our sales folks in Tokyo, Japan, and they're really interested in this work. So very difficult not to do. I do, I find it difficult, though, because how do you, because immediately people think you're being political, right? And I guess to some degree we are, I guess. I mean, but how do you talk about economic policy in the context of a presidential election, which is very heated, and you've got to focus on both sides with very strong views and opinions,

and not come across as being political, right? I mean, that's a tough one. That's a really tough one. But, you know, you got to stick to your methodology, stick to the data and the facts and do the best you can and be very transparent about what you've done, you know, all the assumptions you've made and everything you've done. done to produce the results so that you know you're an open book and try to kind of mitigate that critique that you're being overly political but I don't know that we had a real choice about doing

it let me ask you this this is a question I get all the time and listener we're going to dive into the the meat of the matter here and give you a sense of the scenarios we constructed and in the results the economic impacts but just to kind of to get a more broader sense of things You know, I've often heard people say, well, you know, presidents don't really matter what their policies are. They don't make a difference in terms of, you know, what happens in terms of the economic outlook. I mean, really, does it really matter? What do you guys think? Brendan?

That's such a cynical view. I think it's completely wrong. Yes, the president's economic policies matter. As we were just talking about, I checked the numbers earlier. federal outlays are 20 to 25% of GDPs. Almost a quarter of the economy is federal government distribution. The issue, though, is that the president's constrained by Congress. The bulk of how the government affects the economy is through spending,

so some coordination between the president and Congress. And he has the veto power, and he has a lot of input on legislations. There's a lot of coordination between what goes on with congressional leaders and what the president. It's not really a mystery like, is he going to veto it or not. He's been part of the whole negotiation process the whole time. And I would even say just particularly in the context of this election, we have to appreciate how much the president can just do under their own executive power, namely tariffs, enforcing immigration, appointing Fed chairs.

There's a lot of ways that the president can put their thumb on the scale of the economy. Yeah. Justin, do you have a different view or do you want to flesh that out at all? Yeah, no, I have the same view that Brennan has. I would just kind of add another scope to it as well. But over the last couple decades, there's been increasingly the centralization of power at the executive level where Congress has kind of delegated a lot of its regulatory authority, for instance,

to the executive. And you have this kind of like administrative increase in its regulatory power across federal agencies. And so even there, you know, from, you know, Brandon mentioned that, you know, presidents can unilaterally, decide a lot of things on trade, for instance, like Trump with his tariffs proposals, also immigration proposals, but then also think about like what the EPA can do. That's an executive agency that's

somewhat disconnected from Congress and they can make them and other agencies can make a whole wide spread of argumentary changes that can meaningfully impact the economy. Yeah, Mercy, you have view on this? Yeah, I mean, I think we've seen it happen, right? We've saw, I mean, at the sort of extreme example, if you look at the pandemic or you look at the financial crisis, just actions of the president taking stimulus measures, you know, and we've seen it from both sides of the aisle, sending stimulus money to businesses to households that's had a real impact on the economy. So look at the Inflation Reduction Act under President Biden. You're seeing, you know, serious investment across the country, across the country, different states in chip manufacturing and, you know, environmentally friendly ways of producing energy. So it really has an impact on both businesses and households. It can. And some of that, you know, some of that is congressional action with the help of the president. A lot of this

has been by executive order or has been with just, you know, one party, right, going along with I might also add on the legislative side of that, never underestimate a president's ability or rally Congress to push his economic agenda through. I mean, we saw this with the IRA. We saw this with the Trump tax cuts, with even like the Bush debt tax cuts, Obama's Affordable Care Act. Presidents have historically been pretty good at pushing their economic agenda through Congress, whether they have a, you know, Congress that's controlled by their own party or they just go right through reconciliation. They really do have an extraordinary amount of bandwidth in order to do that.

Reconciliation being... Being basically lowering the vote threshold so that certain budget items or budget bills don't need to be passed with a super majority in the Senate. simple majority. Yeah. And of course, both Biden and Trump used reconciliation to get, in the case of Trump, the tax, TCGA, the tax cut and jobs act through. And Biden used that reconciliation for the IRA to get that through into legislation. Yeah.

Right. Here's the other one I often hear from folks that, well, you know, the candidates, they say a lot of stuff when they're campaigning. you know, it's all bluster. It doesn't really matter because that's not what they're going to, you know, end up doing when they become president. What do you think about that particular room? Chris, maybe I'll go to you first.

You have a view on that? How do you think about that? There certainly is a lot of bluster and certainly in the primary season, right? That's typically where you hear a lot of that kind of extreme type of thought as they're trying to chalk you for a position. But I disagree that, you know, we should discount everything they say. I think in general,

the candidates are pretty clear on what they're trying to achieve. Maybe it's not to the degree that they may say on the campaign trail, but I think we do need to take them at their word, certainly. And then, of course, at the end of the day, they're not, we just talked about all the power they have, but they don't have all the power, right? So there are going to be those checks and balances that are going to shape that policy eventually,

but they're going to set the priorities in the agenda, right, over the next few years here. And so clearly they are going to have an impact. Yeah, I think presidents matter a lot. I mean, obviously they matter a lot really overwhelmingly during a crisis like the pandemic. I mean, Trump got $3 trillion worth of support, deficit finance support through to help people out. And then Biden passed the $2 trillion American Rescue Plan deficit finance. So it's five trillion. I think it's even when you add it all up, it's closer to $6 trillion in support.

And that's everything from stimulus checks to food assistance to small, help to small business, you know, on and on and on and on. And, you know, obviously the president was critical to that. But, you know, I think even in typical times that they matter a lot. And I don't agree with the idea that it's, you know, because it's bluster, because it's politicking, that it doesn't matter. You know, the one thing that has struck me about both Trump and Biden from their, you know, first presidential runs and what they did as president in their, in their first term was they did exactly what they said they were going to do. I mean, he's like, oh, he's not going to do that.

No, really? No, there's no way. Yeah, he did it. He did it. And, you know, maybe not to the degree, you know, like Trump is saying 60% tariff on all Chinese. he's imports into the United States. No, but, you know, it's going to be a big, probably going going to be a big number. You know, I don't know what the number is going to ultimately end up being. So I don't, I think it's really important to pay attention because what they're saying,

they're, they mean it. They're going to go do it. And it's, you know, really important. Before we get to our study, one other quick question, because, and I'm asking you questions that I'm getting all the time. You know, Trump was president. from 2017 through 2020, Biden, 2021 through the current period. So they've got a track record. Well, who was better for the economy when they were president? I mean, that's a reasonable question. I think a reasonable question.

Yeah. Brendan? You notice how I start with you, Brendan, every single time? Probably looking at the Zoom tiles and just seeing them. Yeah, that's what I'm doing. Yeah. Yeah, Ken, you know, maybe I'd take a little bit of a different view than you about, you know, would the president's first term be a good predictor of the second term? And I would say, like, mostly no.

I, you sort of going back through like the two-term presidents, it's a lot of, like, difference between the first term and the second. I mean, I think Clinton, the economy is like coming out of the recession, sort of, you know, pieces things back together a little bit. And then, but the really thing about it is like a second term, you get, you know, like the tech, IT boom. You know, like, I don't think anyone could have foreseen that, you know, thinking that's like the first election. Even thinking about like Bush, Bush to George W. Bush, I think like the first term, I guess, you know, the economy did okay. I know, there was a recession, you know, towards the beginning around like 9-11, but, you know, the housing, you know, boom through like, you know, 05-06. You know, the economy's really roaring and then completely collapses, you know, at the end of his term. So I don't know if you could, you would say that, you know, the second Clinton or Bush.

terms were predictive of the first. I guess, you know, my real point is I was, I was thinking about this. And, you know, there's the old expression that, you know, insanity is repeating the same thing over and expecting a different result. But if you flip it around, should you always expect the same result from doing the same thing? And I want to say no, because the state of the economy is different. Totally. Think back to the first Trump term, big tax cuts. They weren't inflationary because there was a ton of slack in the economy. So I'm not going to see. It was the right prescription for the economy.

So I think that's the sort of my main message is. The stimulus was, will you mean? Right. The TCJA tax tax. Yeah. I mean, you're saying this, the deficit finance fiscal support was the right policy because the economy was operating below full employment. Would you also argue tax cuts for the right policy?

Maybe we should even go there. That's all different. Yeah, I think really looking forward towards the, you think about, you know, Biden's first term, a ton of stimulus. A lot of the things trumped in his first term, you know, tax cuts, tariffs and these things. None of those policies are going to work the next four years. Yeah, good point. Because the economy is quite supply constrained. And we need to think more about policies that boost efficiency and productivity than policies that stimulate demand.

So, yeah, the same playbook isn't going to work for either candidate the second time around. Yeah, good point. Mercer, you got a view on that question. I just think it's, you know, I agree with Brendan. It's really hard to extricate the policy from the events going on in the global economy at the time someone is president, right? So you have a pandemic, you know, like that fundamentally alters not only the choice of policy, but the efficacy of the policy put in place. You have something like, like 9-11, you have a war, you have the housing collapse. I mean, those things, you know, people could argue that maybe some of those things were precipitated or were the fault

of certain presidents in their administrations that maybe came before. That's like a separate thing. I don't think is what you're asking. But, but yeah, I think it's impossible to answer without the context of what's going on in the world at the time. You know, it's really hard to extricate that. Yeah, good point. Chris, got a view? Yeah, I think an agreement here, right? Reading between the lines, just in terms of, you know, they have lags, you have all sorts of other things going out in the economy. It's very hard to, you know, generate a scorecard and say, oh, well, the unemployment rate was X. Right. Under this, under this four-year period, therefore, you know, causality is that the president

was responsible for that or solely responsible for that. So, you know, but I think that a lot of that, that argumentation goes on, right? There's, you know, all sorts of campaign ads out there saying, you know, Joe Biden's responsible for all the inflation that ever existed since the beginning of time. The other side is, you know, certainly blaming Trump for all the ill. So, you know, they're going to see that type of campaigning going on. But there's just not very difficult to extricate those policies and define a cause and effect relationship with the economy.

Well, I also say that in the context of the pandemic, right? I mean, look, I mean, the pandemic. pandemic completely washed out the last year of Trump's first term 2020. What do you do with that? I mean, in my view, there were signs the economy was weakening coming into 2020 because of the tariffs and other policy. And, you know, there was reasonably, the yield curve had inverted in 2019, you know, historically a telltale sign of recession. Even if we didn't have a recession, it felt like 2020 was lining up to be a pretty tough year. But we'll never know, right, because the pandemic. And then, of course, Biden inherited the pandemic. So the first couple of years of

his, three years of his presidency, you've been all about getting out from under the pandemic. So, you know, even if you had a, there was no event, a pandemic event, it would have been difficult with the pandemic event. You know, it's tough. You know, one thing I have thought of, what I thought that I have done is I said, okay, let's look at the economy. as of 2019, so that's, you know, effectively three years into the Trump first term. And then in 2023, last year, effectively three years in to the Biden first term, you know, you're kind of Biden's still, it's still the pandemic is still having an effect, but much less so. And here's the interesting thing. If you go back and you kind of look at job growth or GDP or unemployment,

in stock prices, housing values, real incomes, profitability, any measure you want to use, you kind of inflation, you turn it all up, you come away from it saying, yeah, yeah, I can't really tell you. It did better, you know, because the numbers are pretty good, actually. Unemployment's low in both years. GDP growth was solid in both years. Biden created more jobs than Trump, but, you know, inflation is a little bit higher under Biden than under Trump.

So you kind of, you know, add it all up, net it all out. you come away thinking that you can't use, you know, the economy's performance in their first term as a guide to trying to understand, you know, whose economic policies are going to be better going forward. Justin, you see you shaking your head. I was just going to say, I have a very controversial thing to say. Oh, okay. Nice. Nice.

We've been waiting. That the economy was really good under Trump and the economy's been good under Biden. It's okay to say those things. Ah, okay. That is controversial. Not, not really. When you say under Biden, it's been good. You mean post-pandemic.

Both pandemic. Okay. Yeah. We get rid of the supply chain issues when you kind of basically where we're at now. Yeah. On a setting. Yeah. Yeah.

That seems reasonable. Yeah. But at least good enough that it's hard to, you can't say one's better than the other. The economy under one was. Yeah. Difficult. Yeah. Okay. All right, let's turn to the study. And I should say it's out there for public consumption. You know, you can Google Lucerta, Begley, Zandi, macroeconomic consequences of Biden v. Trump, you'll go right to it and, you know, get all the gory details. But let's talk about it. And maybe Justin, I'll go to you. Can you kind of lay out the scenarios that we considered here and maybe even talk a little bit about, you know, the problem, we've attached probabilities to these scenarios, these scenarios, these.

four different scenarios. So maybe you could do that a little bit and give us a little bit political context. And then I'll turn to you, Brendan, and you can flesh out whatever Justin missed or you felt didn't highlight appropriately enough. Sure. We have four scenarios that we outline in the paper. The first is what we believe is the most likely scenarios. We attach a 40% probability to it. That would be Biden wins the presidency. This is what our presidential election model is suggesting is the most likely scenario right now. And he has to deal with then a divided Congress. So we have the Republicans winning the Senate, mostly because of Joe Manchin's retirement from

West Virginia, it's very red state, likely to go to the GOP in this upcoming election. And then the Republicans would only need one more state after that to take the Senate. And then the Democrats would win the House. And that basically is because of how thin the majority for Republicans are, is in the House right now. And they would really only need to pick up roughly four seats, the Democrats would, to win in November. So that's our first scenario. Policy-wise, that's going to look a lot like the status quo. It's our baseline for the upcoming years.

And it's kind of a continuation of a lot of current policy. The second scenario. And that was 40% probability? That's a 40% probability. Okay. All right. The second scenario is our Republican sweep scenario. So that assumed that Trump wins in November and then the Republicans kind of ride his coattails in the Senate and the House picking up majorities in both of those chambers.

We had to have a 35% probability to that. Trump generally has that ability to drum up enthusiasm among. his base. And if he does get enough Republican voters to turn out for him in November, then that'll likely have a lot of benefits to the Republicans down ballot. But the second scenario, we'll flesh out kind of some of the policy distinction, but we assume that Trump kind of gets everything he wants when he enters the White House. And then we have what we- There was a scenario. That was 35% 35. So very not too much different than the baseline, the Biden.

Yeah, it kind of aligns with our view that this is going to be a very close race, a uniquely close race. You know, it's maybe maybe even like a Bush Gore type race where it's really, really close. Did I tell you the theory I have about who's going to determine who's going to win the election? Did I ever tell you this? Maybe. I don't know. It's my wife. It's actually my wife. Yeah. You know, because, you know, we live in the suburbs of Philly, right?

And it feels like it's going to boil down to PA and a few thousand votes in PA. And it's going to be in the kind of purple counties, big purple counties with lots of population. I mean, that's where we are. And, you know, I live on a circle, a mile long circle that is as purple as it gets. and it just feels like a microcosm of what's going on. And I think it's going to be my wife that's going to determine the deciding vote. So all eyes on her. Our model right now has Biden up by like 0.6 percentage points in Pennsylvania.

Is that right? I have a handful of votes. Yeah. So maybe, maybe. Sorry to stop you. That's our Republican sweep scenario, 35% probability. The second, oh, the third scenario that we have. have is what we call the Trump and divided Congress scenario.

So that's kind of similar to our baseline, except Trump is now in the White House and then Congress is split between Republicans and the Senate and Democrats in the House. We attach a 15% probability to that. We just, we feel that just more likely that a Trump win in the White House would have more significant downstream benefits for Republicans in their congressional races. And so making a divided Congress scenario a little bit less likely if Trump does win the White House. So again, that's a 15% probability. And then our final scenario is a Democratic sweep scenario where we have Biden winning in

November and then, of course, the Democrats taking the House and the Senate. We just give that a 10% probability. you, it's, it's not impossible that Democrats show strong in the Senate. It's just rather unlikely. I mean, the races right now, if you look at Arizona, Nevada, even Montana and Maryland now, they're starting to get, the polling is very close across the two leading candidates in, in, in those states. And it wouldn't take much for one of those to flip in favor of the GOP, but it's not, It's also not impossible that Democrats maintain a majority in the Senate if they have like

a 50-50 split after the Republicans win West Virginia. And then, of course, with Biden in the White House, B.B. Harris would be the deciding vote in the Senate. So that's a 10% probability. Those are all of our scenarios. And again, they have various policy differences and consequences. So if you add up Biden divided Congress at 40, Democratic sweep at 10, that's 50, you add up Trump's, the Republican sweep, plus the Trump and divided Congress, that's 50. So basically 50 50. That's right.

Very close. But our baseline, what's embedded in our baseline forecast, kind of in the middle of the distribution is the Biden divided Congress. And if we get that, then that's kind of already embedded in our thing. in our economic projections. Okay. Brendan, anything you want to add there, flesh out there? There's a lot there, but anything you want to highlight? Yeah, I don't want to drone on for 15 minutes about all the different policy proposals out there. But to sort of simplify this a bit, I would say that, you know, we have our baseline in the other three alternative scenarios. Across each of these scenarios, the main dimensions that were, you know, varying or shocking or hypothetically simulating are tariffs, immigration, corporate tax rates, personal income tax rates,

some of the other elements in the TCJA, and then a lot of the element, the big one near the IRA, inflation reduction act, a lot of elements in there, you know, the green investments, the IRS, auditing, ag subsidies, Medicare drug price negotiation,

a lot of stuff in there that we vary up. So primarily I think, you know, the listeners can sort of think, along those dimensions when we discuss those policies. Right, right. Okay. Because I'm so involved in the study, maybe I'll just ask Chris Maris, are there any questions that you might have about the scenarios that, because I'm so close to it, I may not be asking. Well, are you going to tell us what the economic outcomes are in each of those scenarios? Oh, you're so pushy. You are so pushy. Yeah. That's what I want to know.

Yeah, yeah, yeah, yeah, we're getting there. We're getting there. Hold on, hold on, hold on. We're getting there. Just any other questions, though, about the kind of the scenarios themselves? If not, no words. No, fine. Okay, so, Brendan, you kind of sort of did this already, but maybe can you just describe

the kind of the methodology here? You know, what did we do exactly? Give the listener a better sense of that to try to. before we get to the actual results so that they get a sense of the methodology. Yeah. So Justin and I start by pouring through, you know, campaign websites, candidate speeches, surrogate TV interviews, you know, campaign speeches. Really?

I didn't know that. Anything we, yeah. Surrogate TV. Okay. We're just crawling through the web trying to figure out, you know, particularly, you talked about promise, campaign promises before. And I was going to make one comment, which was, I think, you know, Trump was at a campaign stop in Nevada the other day. And he made some promise about not taxing tipped wages or something.

Plates of the local crowd, of course, you know, all the restaurant and service workers in Vegas. I mean, obviously, like, that's silly. Like, you're not going to stop taxing tips or something like that. But we do look through those speeches because what we want to see is like signals. I don't know about that. I don't know. I don't know. to stop that.

Color of me, cynical on that one, but okay, fair enough. Go ahead. The ultimate Nevada play. What about replacing income taxes with tariff income? Right. Completely replacing the income with income tax with tariffs, which would, even on a static basis, you'd be talking about like a 200% tariff or something. It would just be like, so, you know, it's completely impractical.

But the thing is, you know, what we want to, what we're mainly looking for is because what I believe is, you know, campaign promises, they send a signal. And so we want to see, you know, which promises is you repeating over and over again, you know, which one are they giving prominence to? Because, you know, certainly we can't put every proposal into the scenario. So we're really focused on sort of what the key components or really what the most economically significant components of their policies are. So as I mentioned before, you know, it fell along sort of those key dimensions. So I don't know, we can walk through the Republican sweep assumptions now, which I think sort of give a clear picture. sure. Well, yeah, yeah, I was just going to say, though, I mean, you know, we, we collated all of these

different policies. In the case of President Biden, that was a little easy. That was a lot easier, let's say, because he has a budget that's sitting out there, the 2025 fiscal year budget, which is as explicit as you can get. It's a line item. You know, here's the cost by year for the next 10 years, so you know exactly what he wants. For Trump, that's obviously harder to do because there's nothing on paper, really. It's, you know, we're piecing that all together. There's some things we're just not tackling because they're hard to, impossible to quantify. So, for example, you know, there was a lot of media reports, credible media reports that, you know, President Trump and his campaign are thinking about ways to affect the independence of the Fed.

the ability of the Fed to set monetary policy well-out influence from the executive branch, the president, you know, that obviously we had, if that were correct and present, former, the future President Trump decides to go down that path, that would have enormous implications, but we didn't include that into our analysis. And other straightforward things like tariffs, you know, 10% tariffing across the board, but we assume no retaliation, which obviously is not going to happen. I think broadly speaking, I would say, correct me if I'm wrong, but the choices we made would, are such that if we included what we did not include, it would make the results even

darker. You know, they're understated because of the choices that we made. We're being, let's say, conservative with regard to, you know, how things would play out. You were going to say something else, Brendan, though. Yeah, I was just going to, you had asked about the methodology part. Yeah. So I was going to mention that, yes, after we complete. these assumptions. We had some deliberation about, as you said, what's reasonable, what's unreasonable,

what do we want to include? Yeah. And then, you know, the next step is we go to our Moody's economics or Moody's analytics global macro model. Yeah. That's the same as our workhorse model. That's the one we used to produce our baseline forecast, all of our alternative scenarios. You go in there, make adjustments to the assumptions, spin the model, and report out to you, folks. Yeah, perfect. Anything, Justin, any other nuance you want to mention there in terms of the methodology? Just do we, you know, that people might be interested in or asking about? No, not necessarily, but if they might appreciate the amount of labor we put in the

Trump's economic policies, you know, that did take a while listening to candidate speeches and all that. Biden's was easier, but I will say his fiscal year, 2025 budget is dense. so that that was no uh that was no short point we we know we know exactly what he wants but he wants a lot and it's pretty complex very comprehensive comprehensive yeah comprehensive comprehensive right okay okay i got a question for the group um we want to talk about the results obviously that's top of mind for marissa i think we should begin with the baseline should very quickly what is kind of the base the contours of the baseline brendan you want to fire that up um

Yeah, I mean, I think the baseline's all like business as usual. Yeah. It's, we have the Fed rate cuts starting in September. I think, you know, growth settles around really trend rate, like 2%, maybe a little bit weaker than that. I'm trying to remember your speech about the baseline. Unemployment rises like a little bit and crests levels off. I mean, I would just describe the same way. It's pretty saying.

goes. Yeah, steady as she goes. We stay close to full employment. Inflation comes back to the Fed's target. The Fed normalizes interest rates over the next couple three years. It's kind of a pretty sanguine forecast, pretty pretty same when economic forecasts. All of each changes are also minimal in the baseline. As Brennan says, status quo. Some of the Trump tax cuts get extended, but not all of them. Just kind of adding some more. But, but Biden's asked for extending the tax, the Trump tax cuts for anyone who makes less than 400K. We assume that happens here.

Yeah. But there's no other, we don't assume any major change in corporate tax rates, certainly not on tariffs. On immigration policy, we're assuming that gains control of the southern border. So immigration comes back in and normalizes, gets back to levels that are consistent with kind of pre-pandemic. kind of levels. We assume that. It feels like that's already happening with that executive order. It feels like we'll see if that holds up in court, but we've seen the numbers come down pretty

quickly here. No debt crisis. No debt crisis. The IRA, all the policies that Biden got through in his first term, the Inflation Reduction Act, the Chips Act, the infrastructure law, they all kind of keep on playing out. And in terms of the IRA, those things get kind of more cemented into policy, much more difficult to route that, to change that in the future. Anything else? Budget deficits, they stay high, but they don't get any worse. They're kind of like around, what, five, six percent of GDP.

It's still very high, but they kind of stabilize. And we make no progress really on addressing our long-term fiscal situation. The debt-to-GEP ratio continues to rise. Interest rates, fund rates settles in around. 3% kind of mid-decade, the 10-year treasury yields stays roughly where it is just over 4, pretty, pretty sanguine forecast. Okay, so that's the baseline, that's the 40% probability scenario. Let's go to the Trump sweep scenario.

And I guess this is the one that we really paid very close attention to, because this is the, you know, if on after election day, Trump is president and he is, the Republicans have swept the Congress, our baseline is going to change. And this is how it's going to change. So, Brendan, you want to go over that? Yeah, absolutely. So to go through the main components of the Republican sweep scenario, on tariffs, we're assuming a universal 10% tariff.

You could put some extra tariffs on China. It doesn't really change the story too much. On immigration, we're going to assume the deportation of $1 million, unauthorized immigrants per year. So that's quite a large number of deportations. On corporate tax rates, we're assuming further cuts in the corporate tax rate. Statutory rate goes from 21 to 15. All of the TCJA personal income tax rates are preserved. And the IRA is completely gutted except for the agricultural subsidies and the Medicare drug pricing. So, The green energy investments are gone.

The IRS auditing bumpup is gone. Just to clarify there, too, our assumption is we saw during Trump's first term when the tariffs hurt farmers, they gave subsidies out to farmers. I'm probably going to do that again. And the Medicare drug pricing saves the federal government a lot of money. So likely to keep that in order to make the budget math work. Also, I think we were a little skeptical that the Republicans would take another run at health care, considering it. didn't go well the first time around. So that's that sort of the key elements of the Republican sweep scenario.

In terms of the macro economy, where is the impact? It's really the tariff and immigration. One of the things that I learned myself working through this scenario with the tariff was that even at the peak of Trump's first round of tariffs, it was back like 2018 or so, only about like 10% of U.S. imports were under tariff. This would be universal. This is 100%.

This is leagues and leagues magnitude larger of an impact. We basically assume that no product is spared. Also, I think we were talking about before about the state of the economy matters. The state of the global supply chains are a lot different today than they were in 20. 18, things are still a bit fragile and there's some concern about rocking the boat with such a large move. The other one is the immigration, the deportations, up to one million per year. We roughly calibrate that assumption because that was roughly the peak number of deportations that the U.S. has ever achieved in one year.

Under the Eisenhower administration, actually back in the 50s, they, but two years, they had a very aggressive, deportation policy. Interesting wrinkle of that one is Mexico was actually requesting that the U.S. send their citizens back, which is very different from the current situation. But really, how that impacts economy is that the tariffs are quite inflationary. That is going to severely ding consumer and business confidence because now the Fed is going to have to wait longer before cutting rates. is going to be more of a delay in rate cutting.

That weakens the economy. Plus, in the fact that, you know, people's purchasing power is just shrunk down by these higher import costs. Because import, the import content of U.S. consumption is about 10%. So it's a big share of U.S. consumption that's getting hit with a large tax increase. On the immigration issue, on the immigration proposal, it's removing, you know, it's both sort of a supply and demand event because it's removing workers from the economy and it's removing consumers from the economy.

Our intuition is that during the initial implementation of the policy that it's likely to be initially inflationary because immigrants contribute more to production than consumption because their incomes are relatively lower. And I think this is one of the instances where, as you mentioned, the, the possible downside consequences could be much greater than we assume. We just say, so we just sort of the math of, you know, deducting these people from the labor force.

But, you know, what's hard to anticipate is how this disruption in labor supply could affect production and supply chains and shortages and inventories and kind of just put the whole system into a mess. We don't assume some sort of, you know, snowball effect. But the bottom line is under the Republican sweep scenario, the economy enters a very mild recession around mid-2020-five. So we're talking- Just to point two fingers, factual point. We're also making the assumption that not only does the President Trump under the scenario get everything that he's asked for, but also it happens as soon as he takes office. Because we didn't want to get into this, well, how long will it take for this policy to be implemented, so forth and so on?

We just assumed that so that we could see what the impacts would be very clearly. So we made that that's a working assumption here. So that's why you get this kind of timing. Yeah, we first has had the timing issues and kind of go with, you know, FDR, you know, first 100 days. Like, you know, they just do exactly what they want to do and push it right through. Yeah. Okay. And as I mentioned, yes, the, the, this.

The scenario is it's not particularly pretty. The economy enters a mild recession mid-2020-five, you know, very small like GDP declines. You know, unemployment rises a little bit. I don't think it's quite one percentage point, maybe like around there. Part of that has to do with the fact that, you know, the economy's losing all these workers. So it, you know, there's not a lot of layoffs because the economy is losing workers anyways. Okay. So, Justin, you want to have there's so many.

moving parts here, so many different things. Can you just take one step back and characterize the economy under this scenario? How would you characterize it, particularly in the context of the baseline? I would characterize it as weaker than it currently is. That's a very broad notion. I mean, as Brennan said, GDP ends up kind of permanently lower, a real GDP kind of permanently lower inflation spikes kind of early on in the forecast horizon before returning to a more steady target-like, a 2% target-like level later on in the forecast period. At the same time, though, the tax cuts do give a boost to real incomes. Corporate investment goes up a little bit because of the corporate tax rates.

the stock market does not quite as well as our as our baseline forecast but it does a little bit better than what we'll talk about later with the democratic sweep scenario and then the the kind of watered down version of of the Trump scenario where he has a divided Congress so does a little bit better in that regard but altogether yeah the just the fact that there's a recession even though it's mild it does kind of set the um the economy on a lot. a little bit more shaky ground. And recession happens to some degree because the higher inflation and then the interest rate in the environment's different.

And of course, you know, you're having a lot of dislocations and effects on confidence and sentiment. And the recession ultimately that we experience in mid-25, 2025 is relatively modest in the grand scheme of things. I mean, the unemployment rate goes from four to a little over five, you know, something like that. But it's very clear. clearly growth trajectory under this scenario is lower than under the baseline. And inflation is higher than in the baseline. What about the deficits in debt? How did that, how do they play out?

The deficit widens a little bit. Actually, I'll say by a little more than a little bit. More than a little bit. I'll say about by about a percentage points, one and a half percentage points compared to the baseline. And I want to say, what is the number like? It gets to 120% or something like that. That's a GDP ratio by the end of 2028. Is that right, Brendan? Yeah.

By then 2030, 2034 for 10 years out. Oh, I guess we're taking this out to 2028, didn't we? It was only four years out. Yeah. Right. Okay. Chris, I saw you kind of maybe a question on your, Did you have a question or any comments about this?

Anything surprise you about this, this result? I was surprised by the, some sense, the tamedness of the... The tamedness. It's sound, right? Just listening to the scenario itself, it sounded like a stackflation scenario. Yeah. And, you know, we've been worried about a stagflation scenario, or parts of, you know, certain of the commentators have been worried about

stackflation scenarios throughout this, this whole period. And I just worry that we might, to your point, this might be too conservative, right? If those inflation expectations get unanchored, at that point, this thing could be really difficult to control. If indeed we have these tariffs and these, you know, stipulationary pressures. Almost by definition it understates the case because, like, on the tariffs, we're assuming no retaliation. I mean, that's just not going to happen. I mean, other countries are going to respond and that's going to affect, you know, the exports of U.S. manufacturers and others to the rest of the world.

Make it even worse, right? Make it worse. Growth even lower. Growth even lower. Yeah. So, and you're right. I mean, we don't make any explicit kind of assumptions around what this might mean for expectations.

I mean, because of the circumstance, we're in a full employment economy and you generate this inflationary pressures, you know, we saw what the pandemic and Russian War did to inflation expectations. jumped. And, of course, got into the wage structure, and that's when the Federal Reserve went on high alert and started jacking up interest rates. Same kind of dynamic could play out here, but we're not, you know, we're not capturing that kind of dynamic, you know, here. That the model is not picking up, we're not assuming an increase in inflation expectations as a result of all this, and that's another conservative. In my view, another assumption that's

relatively conservative. But I think the way you characterize it as stackflation, that is directionally where this is headed. It's just a question of to what degree, you know, how much stackplation or reaction are going to get here as a result of all this? That's right. That's right. And also just then of course there are all the dynamics then, right? If we are actually going down this path, do we start to have all those carve-outs in terms of the tariff policies once again, right? So it's a it's a herculean effort that you've put forward here, I guess is what I'm stating here. And, you know, taking at trying to really understand all their dynamics here is just so difficult. It really depends on what

the composition of the Congress is, what the reactions are to. But yet, that's why you get paid to big bucks, right? I mean, because if Trump wins and the Congress goes Republican, we're going to be sitting on the other side of that election as a group and deciding, well, what does this mean for our forecast, right? We're going to have to make these explicit assumptions, and actually even more explicit at that point. Yeah, absolutely. I guess the one thing I can guarantee in that scenario is the volatility of the forecast is going to go. We're going to be trying to figure this out every day. Right.

Mercer, what do you think? How about the scenario? Is it surprising at all to you? No, because, you know, there are, there's been a lot in the news about other firms and economists running similar scenarios. And it seems to align with what other people's models are predicting and, you know, the headline has been. that a Trump win would be inflationary for the economy. So that makes sense to me, just given what he's

talking about with tax cuts and tariffs. Going back to something at the start of the conversation, one of the responses I've heard is, well, Trump followed the same policies in his first term. There was no inflation. How come why inflation this go around? How'd you answer that question, Brendan. I think as I started off, these tariffs are so, what he's proposing is so much bigger than what he did previously. And we,

like, some of his, I mean, we, we didn't even go to like the upper end of, like, what he's threatened. We just took the more,

like, middle of the road threat. And I would also say, as you, as you pointed out, like, we're treating this a lot like a one-off event. You know,

it's like 10% tariff at the beginning. And then there's, like no more after that. So, you know, on one hand, I've heard people argue, it's like, oh, well, you know, it's not as much as a threat because you shouldn't take them seriously because this is all just like, you know, negotiating tactic or something on those lines. But there's, I think living in an environment where, you know, you're always living under threat that, you know, there could be a big policy change.

Oh, we could, you know, suddenly institute like a new tariff. Yeah, that could potentially be equally dangerous to the economy because, you know, how do you make investment decisions? How do you, you know, plan, you know, years ahead? if you're always living under the threat that policy could suddenly change. So I think that's sort of one of those, you know, sort of scenario could have a lot more scope and could have a, you know, a darker element to it, depending on how you think about this influences, you know, expectations and sentiment.

Right, right. Of course. Oh, sir, go ahead, Justin. I'll also add to that. When you look at his immigration or our immigration scenario based on some of the things that Trump has said, We're talking about deportations that just about double what was the kind of annual average throughout his first term. And again, Brandon mentioned earlier in the podcast that there was some more labor market slack

at the time versus now we have a tighter labor market, which is going to kind of jack up the wage pressures as the market tights back up because of fewer workers. And then also on the tax cuts, we're extending tax cuts in a time when employment, well, the economies at full employment, wage votes all together pretty strong. And household are on pretty solid financial footing. And they've demonstrated their willingness to spend their money a lot over the last year or so. And so that's going to just kind of further add to the inflationary pressures. Yeah, I think that's a key point.

I mean, we're at full employment. We weren't back in that 2017-18-19 period. The inflationary environment was very different. Back then, concern was inflation's too low, suboptimal, below the Fed's target. Now we're here, inflation's too high above the Fed's target. So very different kind of initial conditions. One other thing that comes up is this idea that the revenues generated from the higher tariffs could pay for the tax cuts.

that he's proposing, the cross-the-board extension of the individual tax cuts and the lower corporate tax rate. You guys got any numbers on that that you can share? The answer is no, it doesn't pay for it, but that doesn't come close. But do you have any sense of the numbers? Yeah. Well, I did mention these are big tariffs, so they do generate quite a bit of revenue. Right.

We'll give credit for that, which pays for a lot. lot of his tax cuts. It at least pays for like the corporate tax cut and the extension of the personal, but it doesn't, you know, on the IRA, on the IRA, getting rid of, you know, the IRS auditors, that's going to be a net negative on the budget. And then really with the immigration and all the damage that does, and really the macroeconomic damage that the policies are doing, depleting revenue, raising outlays, ends up, you know, swelling the deficit. So, So it's going to add about one percentage point to the budget deficit as a share of GDP per year. So it's going to tack a few percentage points onto the debt to GDP ratio by the end of his term.

Yeah. Okay. Just a more precise number on that. You estimate that over the next 10 years, the tax cuts will add about $3.4 trillion to the deficit. Right. About half of that will be offset by. Yeah. That's the number I expect.

They're a call by 1.7 trillion comes from the tariffs. Yeah. Right. It's about half. Right. Okay. Okay. We're long in the tooth here.

The other two scenarios, maybe I just kind of a broad question, anything you want to point, Justin, anything you want to point out? But there are lower probability events. I think they add up 25%. So I don't know that we need to spend a lot of time on them. But anything about them that you want to call out? I would just say for the Trump and. divided Congress scenario that that one where Trump wins the election and it has to deal with divided Congress.

That's kind of just a watered down version of the Republican swoop scenario. It's still a lot of deportation, but looks more like it did in the kind of 2017 to 2020 period when he was in office the first time. He's able to get his personal income tax cuts through or really the extension of the tax cuts through, but he is not able to scale back. the corporate tax rate, he's talked about cutting out from 21% to 15%, that that kid doesn't happen in the scenario. He leaves the IRA untouched, we assume, and, but still kind of acts as the IRS's budgets. And so, yeah, that's kind of the, and then the tariffs are just generally less

less in magnitude, they're not 10%. We kind of assumes an average tariff rate of about 5% across. the board. And then under the Democratic sweep, it's just the President Biden's 2025 budget, basically. That's right. And that is, I mean, there's a lot there in the paper, but just on a broad level, if I can give like a one minute summary. Yeah. There is the TCGA tax cuts, the personal income tax cuts are extended for everyone making below $400,000 a year, but the top marginal tax rate for those making more than 400,000 gets brought back up to the Obama era 39.6%. There's also some changes in the payroll tax regime targeted at raising more Medicare revenue. And then there's sweeping changes to corporate income taxes, which include a number of very

uncertain and untested policies that are in the budget, but then also just kind of some standard ones like raising the corporate income tax rate from 21%. 28%. And then on the spending side, there's a lot of redistribution efforts going on, expanded EITC for childless workers, expanded child tax credit, expanded low-income housing tax credit, kind of subsidized parental and medical leave, subsidization for first-time home buyers, putting a down payment on a home, funding for vocational training, and free community college. So that kind of gives you a taste of what some of those spending policies look like. Support for low and moderate income households, basically.

Yes. Yeah, right. Okay. Again, because we've been going on a while here, and the gory details are in the white paper, so folks can avail themselves with that. And, of course, if you have any questions, you know, fire away. We've been getting a lot of them from clients and others and happy to respond to them. And we'll collect those questions for future podcasts.

But any parting words? Great work, guys. I know it was a lot of work. And we will continue to monitor policies as they're proposed by the candidates. And at this point, I'm not sure what more we're going to do on the policy side, but I'm sure there will be some things that present themselves as we move along here towards the election. We'll do that. And of course, we'll continue to update every month the election model results.

and see how that all plays out. But anything else, guys? Anything? Marissa, Blunt Brendan, Chris, Justin? I'll just say, you know, the scenarios, as they're currently available on our website, Data Buffet, they're only covered the United States. But Justin and I are going to meet with our international, regional teams and discuss expanding the scenarios internationally, possibly incorporating elements of retaliation.

We got to have a day where we just, instead of U.S. We just turn the entire podcast over to Canada, Canadian economics. It's the lowest ratings ever, but it'll be great. It's crazy. You guys are nuts. Yeah, anyway. Well, thanks, everybody. And thank you, dear listener, for tuning in, and we're going to call this a podcast.

Take care now.