When it Comes to Fiscal Policy, Does it Really Matter Who Wins the Election?
US politics seem more polarized than ever. President Donald Trump and former Vice President Joseph Biden are running on decidedly different platforms, as are the Republicans and Democrats fighting for Congressional seats in their home states. But we’ve seen a common ground emerge: There have been indications that both political parties may be willing to tolerate bigger budget deficits to stimulate economic growth.
This idea is not a leap to understand within a Democratic agenda. But what about the other side of the aisle, once self-identified as the financially conservative Republican Party? There too we have seen a willingness to support and fund growth with deficit spending—despite the continuing existence of a financially hawkish contingent. Consider that Republicans in the Senate Budget Committee voted to increase the deficit by $1.6 trillion in 2017, which, along with some additional revenue raisers like capping the State and Local Tax Deduction (SALT), allowed them to cut the corporate tax rate to 21%. More recently, in March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) with significant bipartisan support to prop up the economy in the midst of the pandemic.
Lessons from 2008
No matter the election results, I think there will be a fiscal package passed to stimulate growth. The degree of spending would be dictated by the balance of power in the White House and Congress. If there is a Democratic sweep, it could be a large package, in the $2 trillion to $3 trillion range. The precedent is the Democratic clean sweep in November 2008 on the heels of the global financial crisis (GFC) and recession, which put Barack Obama and Joe Biden in the White House. A fiscal package of close to $800 billion passed in February 2009.
If we have divided government (either Trump with a Democratic Senate or Biden with a Republican Senate), no matter who is president, I think we will get a deal, but it will probably be smaller—maybe $1.5 trillion. Once upon a time, $1.5 trillion was a lot of money.
If it is a status quo result, the package would likely be somewhat restrained near $1.0 trillion, but at the same time, I don’t believe it would result in aggressive spending cuts. Lawmakers’ actions this year suggest that they have learned from 2008, when fear of larger deficits limited stimulus spending in response to the financial crisis. In my opinion, that fiscal austerity was a policy mistake and contributed to the “new normal” of deficient growth and lower-than-expected inflation.