OPINION:
President Biden’s disastrous performance debating former President Donald Trump last month set off panic among Democrats to rescue his candidacy or replace him and among bond investors about the economic policy and interest rate implications of a second Trump presidency.
Mr. Trump would be constrained by a federal deficit that is now a larger share of gross domestic product than at any time in the last century, save World War II, the global financial crisis of 2007-2009 and the COVID-19 pandemic.
The fiscal gap can significantly shrink only if the individual tax reductions in the Tax Cuts and Jobs Act, or TCJA, expire at the end of 2025.
At the same time, the economy is slowing, and the usual remedies won’t do.
The 21% corporate rate is competitive against rates in other industrialized countries and adequately supports investment. And Americans pay too little in taxes for the European-style social safety net Congress has constructed.
The international bond market won’t easily support more debt, especially with China and Japan needing fewer Treasury holdings to shore up ailing currencies.
Mr. Biden has already tried boosting spending with student loan forgiveness, aid to Israel, Taiwan and Ukraine, Federal Deposit Insurance Corp. distributions to bail out failing banks and added Medicaid spending,
Now, his industrial policy investments in manufacturing and infrastructure are kicking in.
Most of these policies can’t be rescinded.
With the crisis in commercial office rental property threatening regional banks, can we afford to let the FDIC stiff depositors the next time a Silicon Valley, Signature or First Republic Bank fails?
Would Mr. Trump care to halt the construction of the new rail tunnel under the Hudson River?
Mr. Trump could pay for extending the individual tax cuts in the TCJA with his 60% tariff on China and 10% across-the-board levy on most other imports. Still, the latter have geopolitical consequences the nation simply can’t handle.
Currently funded at a post-World War II low as a share of GDP, the U.S. military and the defense industrial base are stretched beyond their limits supplying Ukraine and Israel, responding to Iranian-supported terrorists in the Red Sea, shoring up NATO and girding for a showdown with China in the Pacific.
At a time when Japan, our European NATO partners and other allies are increasing defense budgets and facing their own growth problems, shifting the U.S. tax burden to our friends via an import tariff is hardly a good way to sustain that support.
Mr. Trump says he can end the war in Ukraine quickly without explaining how.
Even if he could, Russian President Vladimir Putin’s army could then mass in other places — for example, threatening the Baltic nations and Finland.
For all his bluster about NATO, I doubt Mr. Trump will let the United States abandon Europe.
With the reasonable expectation that Mr. Trump would seek to extend expiring provisions of the TCJA, find more taxes to cut and be compelled by hard global security realities to increase defense spending, the surge in Treasury yields after the recent presidential debate indicates a well-founded fear that another Trump presidency would stoke inflation and boost long-term interest rates.
Mr. Biden’s industrial policies are too costly and could stand trimming, but Mr. Trump wants to scrap some of them altogether.
Manufacturing investment would fall, slowing growth further and putting the U.S. on a path to industrial decline as China widens its lead in electric vehicles, the battery supply chain and green energy and develops a semiconductor industry that both designs and produces high-end chips.
The most rapid areas of job growth have been the health care, leisure, hospitality and government sectors. Immigrants have been critical to filling nursing shortages and other less skilled jobs in the health care and hospitality sectors.
The construction of semiconductor factories is terribly dependent on a supply of skilled immigrant technicians.
In 2023, the U.S. economy added about 250,000 jobs a month to increase GDP by 2.5%. Indigenous population growth and legal immigration could have filled only 100,000 of those positions; illegal immigrants finding work are fueling American growth.
We certainly should seal the border, but we need higher quotas for legal immigration to keep the country growing. Mr. Trump talks only about the former.
Overall, there is a paradox of pain: slower growth, more inflation and higher long-term interest rates as federal borrowing crowds out private sector financing needs.
A stock market crash is unlikely, but ordinary Americans should be careful about putting college and retirement savings into bonds they can’t hold to maturity. Otherwise, they may suffer capital losses as interest rates rise.
An S&P 500 index fund is a good long-term bet as big companies can better cope with inflation and policy uncertainty. If you are a stock picker, consider sectors likely to benefit from inflation or higher interest rates — health care, financials and energy stocks.
• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
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