Our sad choices: Hillary Clinton and Donald Trump
Photo Credits Left to Right: WikiMedia Commons/Voice of America,  Wikimedia Commons/Michael Vadon

On the day when Hillary Clinton and Donald Trump are to be locked in verbal combat, we should take a look at how they differ in the issue of greatest interest to the people: the economy, and how to bring it back to health.  

My Biases

I should first put my biases on the table for your examination. That way, you can discount what I claim in any manner you think fit. In fact, I have left a fairly long electronic “paper trail” in what I have written in my posts about these two, including:

• Hillary Clinton’s Proposed Destruction of the Economy   (December 16, 2015)
• Bernie Sanders Is Probably The Democrats’ Nominee   (January 20, 2016) (How I regret that title!)
• Donald Trump’s Uncertain Trumpet   (February 26, 2016)
• The Noose Tightens on Hillary Clinton   (March 6, 2016)
• Globalization, Xenophobia, and Donald Trump   (March 8, 2016)
• Economic Plans of Trump, Sanders, and Clinton Are Fantasies   (April 12, 2016)
• The Anguish of a Conservative Voter   (May 9, 2016)
• Donald Trump’s Lack of Knowledge   (May 12, 2016)
• Are We No Longer a Nation of Laws?   (June 11, 2016)
• This Smells to High Heaven!   (July 5, 2016)
• Hillary Clinton’s Troubles Are Not Finished   (July 8, 2016)
• Donald Trump’s Acceptance Speech   (July 22, 2016)
• If Hillary Clinton Were President …   (August 7, 2016)
• Hillary and The Donald: What a Choice!   (September 15, 2016)

As you can probably tell from the tenor of my titles, I deeply dislike the idea of either of these two becoming president. I think both of them do not qualify to become the most powerful individual in the world.  I hold these opinions from the perspective of a conservative Republican who believes deeply in free-market economies. In Hillary’s case, not only are her ideas about the nature of economic systems just plain wrong, but she is a serial liar and a criminal, albeit un-convicted. Donald Trump on the other hand suffers from a severely underdeveloped ideology, which explains the inconstancy of his expressed opinions. He also seems to lack a lot of knowledge about the nature of reality, which explains his underdeveloped ideology.

A Comparison of Their Proposed Economic Policies

To compare their proposed economic policies, let us begin with Clinton first. The main distinguishing mark of her policies is their unremitting hostility to the organizations that are the major producers of wealth, the corporations, and to the most important investors who make the growth of those corporations possible, the so-called “1%”. In fact the most well developed part of her economic proposals is her proposals for additional taxes that seem designed to destroy economic growth.

What her progressive ideology keeps her from seeing is that the truly stinking-rich use most of their incomes for the benefit of society by investing it in the economy. It should be noted the Federal Reserve research paper linked in the last sentence seems initially dubious of the proposition the rich save most of their income for investments. The authors are simply reviewing countervailing past research to show the doubts researchers have had about the proposition in the past. You have to read pretty far down in the paper, Do the Rich Save More? by Karen E. Dynan, Federal Reserve Board; Jonathon Skinner, Economics Department, Dartmouth College; and Stephen P. Zeldes, Graduate School of Business, Columbia University, before you find the following conclusion from their own research.

The portion of their income the rich actually consume is necessarily only a fraction of their income, as the appetites of even the rich and the time they have to consume it are finite. A family with an income of $10 million might consume $2 million, and then re-invest $8 million. Assuming Clinton could actually increase taxes on rich and eliminate most of the tax shelters the rich have to reduce income taxes, what would be the effect on our economy? Let us take my example of the $10 million income family that consumes $2 million of their income. Let us assume Clinton would be successful in raising their taxes to an effective tax rate of 43.6% (from 39.6% now) on ordinary income, and 24% (from 20% now) on capital gains and dividends. That is, no matter how their income is distributed between ordinary income and investments, their total effective tax rate would increase by 4%. Let us say our family has ordinary income of $5 million and investment income of $5 million. Clearly, the details would change with every rich family, but with these assumptions the family’s taxes would increase from the current $2.98 million to $3.38 million under Hillary. Their disposable income after taxes is currently $7.02 million of which the family consumes $2 million and invests $5.02 million. Under Hillary their disposable income would fall to $6.62 million. Would the family philanthropically absorb all of the $0.4 million increase by decreasing their personal consumption? I feel pretty safe in saying it would be their investments that would be reduced.

For richer families, say with incomes in the hundreds of millions, their personal consumption would quite probably remain relatively small (maybe they would hold personal consumption to only $10 million). If they earned only $100 million that would mean about 90% of their income would go into savings used for investment, were it not for taxes reducing their disposable income. If a family’s income increases to $500 million, maybe their consumption would increase to $15 million. The higher income goes, the larger the investments become as a fraction of total income, and the more likely almost all the increase in taxes would go into reducing  investments. If the top marginal tax rate increases x%, the total U.S. investments would also decrease about x%. The country would then suffer lower GDP growth. With current GDP growth being less than 2% as it is, the country can hardly afford Clinton’s desired 4% increase in top marginal rates.

In addition, Clinton is proposing a very large increase in federal spending. The American Action Forum (AAF), a center-right policy institute, estimates that

Secretary Clinton’s proposals would, on net and over a ten-year period (2017-2026), increase revenues by $1.3 trillion, increase outlays by $3.5 trillion, for a combined deficit effect of nearly $2.2 trillion over the next decade.

Given the fiscal catastrophe our government is rushing toward, we can hardly afford increased deficit spending. Mandated entitlement spending and payment of interest on the national debt are increasing at such a rate that by the middle 2020s, every single penny of government revenues will be required for those expenditures. Every other government activity, including defense against such serious threats as ISIS, Russia, Iran, China, and North Korea, would cease.

Now, let us briefly consider some of Donald Trump’s economic proposals. As I have written in several posts, my greatest differences with Trump are with his position in entitlement spending (he does not want to reduce any of it), and with his ideas of free-trade, which he claims is tremendously unfair to the United States. Yet approximately two-thirds of the federal budget is mandatory entitlement spending, and rapidly increasing. Only 16% of the budget is defense and national security spending, which is rapidly decreasing. If entitlement spending is not decreased, financial collapse of the government is an absolute certainty. Of course, on this subject Hillary Clinton is even more delusional with increases in entitlements that include government subsidies for child care, expansion of Obamacare, and new Social Security benefits.

Also, Trump’s anti free-trade statements railing against the export of U.S. jobs completely misunderstands the source of U.S. employment problems. When a country like China has a comparative advantage over the U.S. in producing a good, it is profitable for both nations to trade. Ricardo’s law of comparative advantage is the only classical law to have a rigorous mathematical proof. That is very rare indeed for any major aspect of human social reality! Since absolutely any foreign trade that substitutes a foreign production of a good for U.S. production will destroy U.S. jobs that used to produce that good, and since virtually all U.S. foreign trade is of that nature, one would have to forbid all U.S. foreign trade if one insists no U.S. jobs be displaced.

One advantage of foreign trade for the U.S. is that it provides goods for American consumers at a lessor cost than if those goods were produced in the U.S. The other advantage is that it frees capital for more profitable applications. In addition, if the United States were truly a free-market economy,  the social and economic costs of displaced jobs would be very transitory.  Supplying a demand for goods from a foreign source frees up capital that formerly was used to produce those goods domestically. If government economic regulations and taxes did not hinder the transfer of that freed capital to more profitable investments for which the United States does have a comparative advantage, the problem of job displacement  would be solved by the creation of jobs from those more profitable ventures. Rather than railing at free-trade, Trump would be better advised to rail against the government intrusions into the economy that create barriers to the rapid redeployment of capital.

However, Trump’s policies do have a positive side, whereas all Clinton’s policies would be destructive to the economy. Trump’s current team of economic advisors have convinced him, if he truly did need to be convinced, that both government economic regulations and taxes, especially for companies, need to be drastically cut back. His proposal to cut the business tax rate from 35 percent to 15 percent is especially important to get economic growth to take off. Right now the only two countries in the world that have higher corporate taxes are Chad and the United Arab Emirates. This gives our country a tremendous competitive disadvantage in competing with foreign companies.

What Can Go Wrong?

So what can possibly go wrong? Our most immediate economic need right now is to revive our economy from its current economic doldrums. Our second greatest economic need is to rescue our federal government from financial collapse.

The symptoms of our economic troubles are becoming more numerous and more unambiguous. Yesterday, in an article by reporter Corrie Driebussch, the Wall Street Journal reported that the S&P 500 companies “are now expected to report an earnings decline for the sixth consecutive quarter in the coming weeks, according to analysts polled by FactSet. That slump would be the longest since FactSet began tracking the data in 2008.” Below is a chart from that article showing how the earnings recession has developed in time.

It is very rare for there to be a corporate earnings recession outside of an actual recession.

Since economic growth is the result of corporate investments, we should be very worried about where these companies are going to get the capital to generate new economic growth. The Federal Reserve has been trying to keep interest rates low to encourage companies to borrow for investment. Yet what they have discovered is that they no sooner create new money to lower interest rates than that money piles up in banks and in excess federal reserves.

The new money is not getting borrowed to be invested, and as a result the velocity of money is falling at just about the right rate to cancel out the growth of the money supply. In the parlance of the 1960s, the Fed has been pushing on a very limp string, moving it no where.

Our economic problems can not be solved by the Federal Reserve with Keynesian monetary policies. The reason why the Fed’s new money is not being borrowed at the rate they desired (which would increase the velocity of money) is because businesses can not see how they can earn sufficient profits through investments to justify borrowing the money. They have been borrowing some money, but they have mostly been using it for buying back their own stock and paying dividends. Why can they not find new profits by investing on new productive capacity? Look no further than the barriers to economic activity raised by high taxes and intrusive economic regulations.

However, decreasing excessive economic regulations and drastically cutting taxes will do only small good if government expenditures are not greatly reduced. Many of our problems are created by inefficient and nonproductive government programs allocating too much of the nation’s capital, denying that capital to the greatest producers of wealth in the country, American companies.

The proof is in the pudding. Below is a plot of real GDP on which a red line that is the linear trend of GDP from the first quarter of 2014 to Q2 of 2016 has been superimposed. For about two years real GDP growth has been trending downward.

Neither Hillary Clinton nor Donald Trump have sufficient answers to save us from economic catastrophe, although Trump comes closest. If only someone had the guts to restart the national conversation on entitlement spending!

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