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Trump vs Clinton: Whose economic policies will be better?

By Abheek Barua & Bidisha Ganguly
May 09, 2016 14:13 IST
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The fuzziness of Trump's economic blueprint remains the biggest risk and will cause markets to press the panic button if he pips Clinton to the post, say Abheek Barua & Bidisha Ganguly.

Image: US presidential candidate Hillary Clinton. Photograph: Javier Galeano/Reuters

The impending US presidential election is turning out to be the most difficult to predict in decades, what with the completely unexpected (say, just six months back) Donald Trump as the Republican frontrunner.

The possibility that the party would somehow spike Trump's nomination has dissipated with Ted Cruz's resignation.

In any case, it was Scylla and Charybdis for America's Grand Old Party - Cruz was not exactly popular with the party heavyweights. Going by recent polls, Hillary Clinton seems to be the clear Democrat frontrunner, although it would be unfair to call Bernie Sanders a spent force.

The most likely scenario is that of a Democrat president (Clinton) with the Republicans in majority in both the houses of Congress, making the passage of any legislation a challenge.

Be all that as they may, it might be interesting to look at the different economic policy scenarios under each of these candidates (those interested in a more detailed analysis could read "The elections and its implications for the economy and markets", Capital Economics, April 13).

The change in economic policy stance from the Obama regime is predictably the mildest if Clinton occupies the Oval office.

There is one major departure, though: despite having played a key role in the early negotiations, she is opposed to the Trans-Pacific Partnership, the massive free trade zone that would be created out of bringing 12 (and perhaps more, later) Pacific Rim countries together.

Of course, with the reversal of globalisation a key platform for Trump, he is also opposed to any trade deals. Jettisoning this model of a free trade zone, prima facie, will be seen to crimp US exports and keep import value high (on the back of higher tariffs) and could be negative for the dollar. 

There appears to be consensus on the fact that economic policies under President Trump would certainly be extremely disruptive for both the financial markets and the economy, although how much of his campaign bluster will translate into concrete policy action is something that needs to be watched carefully.

He seems to be an avowed protectionist and trade warrior and will certainly ruffle China's feathers.

If "the Donald" does make it, a trade war with China seems inevitable. China is likely to retaliate by dumping its holding of US treasuries and that could see the dollar take a beating while bond yields go up.

On the tax front, Trump proposes to slash the corporate tax rate to 15 per cent from the current level of 40 per cent and allow companies to write off any investment in plant and equipment the year they are made.

These massive tax cuts can be offset only by massive reductions in spending (for example, by wiping out the entire defence budget).

Without any discussion of such spending cuts, the markets will associate a Trump regime with a major fiscal drag, so that interest rates are bound to rise.

Clinton has relatively tame plans of raising the capital gains on the very rich and pruning rates for the middle class.

However, if the Republicans continue to control Congress, the possibility of these proposals getting Congress approval is slim.

If Sanders does somehow make it, his tax proposals are likely to be far more radical and thus inversely proportional to the possibility of their being cleared.

On monetary policy, it seems a Republican-led Congress would argue for moving to a rules-based monetary framework and seek to replace the current chair of the US Federal Reserve.

Trump has called for the Fed to be audited, though it is not clear if this would change anything in terms of the monetary authority's ability to set interest rates.

Instead, if the Fed is forced to move to a rules-based monetary regime, a rise in interest rates will surely follow.

Clinton, on the other hand, is likely to endorse the present Fed policy and even if she chooses to replace Janet Yellen as Fed chair, the potential replacement is expected to be as dovish, if not more.

Financial markets are in for a period of policy-related uncertainty.

All said, the fuzziness of Trump's economic blueprint remains the biggest risk and will cause markets to press the panic button if he pips Clinton to the post.

Abheek Barua is chief economist, HDFC Bank. Bidisha Ganguly is principal economist, CII.

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Abheek Barua & Bidisha Ganguly
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