Biden And Trump Macroeconomic Convergence Points At Move To High Inflation Regime

The macroeconomic plans of the Biden and Trump campaigns are surprisingly similar and support a move to a high inflation regime. The move would be faster under a Biden administration due to its plans to strengthen workers’ bargaining power.

Fed to Maintain Extreme Dovishness No Matter Who Wins

The Fed has now moved to a policy stance close to that for which Republican incumbent Donald Trump has been calling. The move to average inflation targeting (AIT), especially the decision to no longer hike in the absence of inflation even if unemployment falls below a threshold, addresses Trump’s concerns that the 2018-19 hikes were unjustified. In addition, the Fed decision to massively expand its securities purchases and lend to the nonfinancial sectors has drawn praise from Trump. The bottom line is that it could be difficult for any new chair to ‘outdove’ the Powell Fed.

Fiscal Policies to Widen Deficit Under Trump or Biden Presidencies

A recent study of Democratic nominee Joe Biden’s policy proposals suggests they could add about one ppt of GDP to the deficit. The main difference with Trump’s recent policies is that Biden would raise both revenues and expenditures. Trump, if he won re-election, could well go for another round of tax cuts to stimulate the economy since the US holds the world’s currency, which in effect means a soft budget constraint on Treasury issuance.

The combination of extreme Fed dovishness and further increases in the public debt suggests fiscal dominance under either administration, with the Fed compelled to buy more bonds whenever a ramp up in yields brings about a tightening of financial conditions.

Same Economic Nationalism but Less Mercantilism Under Biden

If re-elected, Trump will likely continue with his policy of discouraging foreign investment abroad by US manufacturers, applying pressure on China to become more of a rule-abiding participant in the global economy, and pursuing the reduction in the trade deficit through bilateral negotiations (Chart 2).

Biden’s priorities are similar to Trump’s, but the former seems less focused on the trade deficit. This suggests fewer risks of trade wars with traditional allies, more global coalition building, and possibly more FDI flows to the US under a Biden administration.

Liberalization of Immigration Under Biden Presidency to Be limited

The changes Biden advocates are mainly humanitarian as well as the legalization of illegals already in the US rather than large increases legal immigration. Biden proposals include ‘mechanisms to temporarily reduce the number of visas during times of high US unemployment, ‘development assistance to central American countries to reduce the flow of migrants from those countries, and provisions to ‘guard against economy-wide wage cuts due to exploitation of foreign workers by unscrupulous employers’.

Stronger Workers’ Market Power Under Biden

VP Biden plans sweeping reforms of the labor market to strengthen workers’ bargaining power. By contrast, Trump’s strategy consists mainly of strong GDP growth and of discouraging productive investments abroad. That said, a group of prominent conservatives, including two Republican senators, have recently signed a letter in support of workers’ rights to organize. In addition, GOP Senator Rubio has also publicly spoken against non-compete clauses.

Stronger Anti-Trust Policies Likely Under Either Administration

While they are not a core focus of either campaign, anti-trust policies are likely to remain a key focus of the next administration, irrespective of who wins, due to the growing bi-partisan consensus on their negative economic impact. It is, however, difficult to argue that one side would pursue them more vigorously than the other. The abandonment of anti-trust enforcement was started under the Reagan administration, but all subsequent presidents, whether Democrat or Republican, upheld it.

Deregulation Under Trump vs Re-Regulation Under Biden

Trump intends to continue with deregulation, especially with regard to environmental rules. By contrast, tighter environmentally friendly regulations are a core component of the Biden platform. While this marked difference will impact sectoral equity and credit performance, over the time horizon relevant to most investors it will have only a limited macroeconomic impact.

The Market Implications of Policy Convergence

No matter who wins in November, the combination of ultra-dovish Fed, loose fiscal policy and fiscal dominance, and economic nationalism increases the risk of a move to a high inflation regime. This transition would take place sooner under a Biden than a Trump administration because of the former’s planned strengthening of labour rights.

In a high inflation regime, the Fed would no longer be able to underwrite the ever widening disconnect between financial asset prices and fundamentals. Such a change would make the higher taxes envisaged by the Biden campaign look trivial by comparison.