analysis
Kamala Harris or Donald Trump? The question of who will be the next US president is also troubling German companies and economists. But what does Harris actually have in mind for the economy?
In her speech at the US Democratic Party Convention last week, Kamala Harris focused more on foreign policy – and emotional messages. The presidential candidate has signaled at least some of her economic policy plans.
If Harris is elected, she wants to strengthen the middle class and expand financial support for families and children. The Democrat also wants to limit rent increases, create housing and introduce a price cap on food. At the same time, she plans to raise the tax rate for companies by a third – from the current 21 percent to 28 percent.
National debt at record levels
Harris wants to use this to finance her projects and curb the rise in debt in the United States. Due to multi-billion dollar economic stimulus packages, climate policy measures and higher interest rates, the national debt is growing continuously. In July alone, it rose by $270 billion compared to the previous month – to a record level of $35.1 trillion.
Clemens Fuest, President of the ifo Institute, considers this to be risky: “The biggest risk at the moment is the pro-cyclical fiscal policy with a rampant government budget deficit. Having a budget deficit of seven percent of gross domestic product with economic growth of two percent and full employment is irresponsible.”
Criticism of Tax increases
However, many economic experts are still critical of the announced tax increases. They could put a strain on the US economy and its competitiveness. But German companies that are based in the US and do a large part of their business there would also not be happy about higher taxes. This is because more taxes usually mean less profit. And that could also have a negative impact on the stock markets.
Fuest therefore advises against tax increases. He would “not recommend increasing the tax rate to 28 percent. That is only the tax at the federal level. Together with the corporate taxes of the states, this results in tax rates of over 30 percent in some cases. This increases the incentive to use tax loopholes.”
Instead, the economist believes it makes sense to close the many loopholes in the US tax system, for example when it comes to taxing capital gains or options as part of executive salaries. This would have less of a public impact than raising the tax rate, but would be more convincing in terms of tax policy.
Price controls could have the opposite effect
Harris' plans to impose price controls on food has been received with varying degrees of success in the economy. The politician wants to curb inflation and, above all, stimulate consumption, an important pillar of the US economy.
However, according to economists, price controls could have the exact opposite effect – namely market distortion and rising prices. Thomas Obst, economic expert at the employer-friendly IW Cologne, is therefore critical of the plan: “Price controls on food or rents are economically dangerous. They are playing with fire. They confuse cause and effect. In the worst case, they lead to rising prices, bottlenecks in supply or the formation of black markets.”
The expert considers the idea of price controls to be just as economically questionable as Donald Trump's statements that he wants to have more influence on the Federal Reserve's monetary policy as US President. “Both are economic ideas from the past that have historically failed time and again in many countries such as Venezuela, Turkey and Argentina.” Fuest also stresses: “Price controls on food outside of competition policy are generally counterproductive; this is more likely to be suggested by populist politicians who deceive their voters into believing that price controls can increase their standard of living. One can only hope that Kamala Harris corrects her position here.”
Climate-friendly Restructuring the economy
Companies that operate in the renewable energy business could benefit from a victory for the Democrat. Harris wants to push for climate-friendly transformation the economy and further expand the production of “green” technologies such as batteries and solar modules in the USA. According to observers, the company would be prepared to invest billions more to do this.
What Harris plans to do with the economy beyond that, however, has not yet become clear, says Obst: “I have been missing a clear profile from Kamala Harris so far. She has hardly made any appearances in terms of economic policy so far. Her first statements do not bode well, and there is a risk of counteracting the truly remarkable successes of Bidenomics.”
“Not a big supporter of free trade”
However, for the global economy and international cooperation, a President Kamala Harris would be far better than another term for Donald Trump, said Fuest. Trade wars and one-upmanship on punitive tariffs are unlikely to occur under her. Harris has also explicitly committed to the US's global commitment to NATO.
“Kamala Harris, like Joe Biden, is not a big supporter of free trade,” said Fuest. “But she would not start economic wars like Donald Trump has announced.”
