The Year Politicians Turned Their Backs on Economics

On taxes, deficits and prices, Trump, Biden and Harris all seem determined to trash as many economic principles as possible

By Greg Ip. Excerpts:

"It’s too soon to predict the winner of November’s presidential election, but not too soon to predict the loser: economics.

Economists routinely advise against price controls, tariffs, discriminatory taxes and wider budget deficits. Donald Trump, Joe Biden and Kamala Harris are entertaining some or all of them."

"the candidates haven’t just demoted economic principles this year; they’ve jettisoned them altogether. It’s as if they wanted to flip the bird at the economic establishment.

“Doesn’t anyone listen to economists anymore?” asked Columbia University economist Glenn Hubbard, who chaired President George W. Bush’s Council of Economic Advisers. “Economists don’t seem very involved in either campaign or in internal decisions in recent administrations.”"

No taxes on tips

"Tax policy usually involves a trade-off between equity (treating people fairly) and efficiency (improving growth and consumer well-being). Former President Trump’s proposal to end taxes on tips, quickly adopted by Harris, manages to be both inequitable and inefficient. 

It’s inequitable because it would tax people paid mostly via wages, such as cooks, more heavily than similar people paid mostly via tips, such as waiters.

It’s inefficient because it rewards a clumsy and often arbitrary form of compensation. Research finds tips only loosely correlated with quality of service. Tips survive because of social norms and psychological bias: restaurants that replace tips with higher wages have to raise prices, but customers prefer lower posted prices even when the all-in expense is the same. 

When tips are no longer taxed, employees and employers will try to take advantage by structuring more compensation as tips."

Price and rent controls

"The U.S. hasn’t had economywide wage and price controls since the early 1970s, and Harris isn’t proposing them now.

She and Biden are proposing something narrower: taking federal tax benefits away from corporate landlords that raise rents more than 5%, and cracking down on “price-gouging.”"

"Yet as with formal price controls, they short-circuit the essential role of higher prices: drawing in new supply and encouraging substitution toward cheaper alternatives. 

Price controls are justified when a few companies enjoy market power, because they are monopolists or oligopolists, or because of an emergency. Those conditions don’t apply to apartments or food.

After apartment rents soared during the pandemic, developers responded by building record new units. Thanks to that flood of supply, new lease rents are now falling, according to the Labor Department."

"no multifamily developer controls enough of the apartment market to have market power."

"rents aren’t rising much anyway"

"If perceived to be permanent, developers will try to raise rents immediately, screen tenants more tightly, build fewer of the affected buildings (more than 50 units), or convert apartments to condominiums"

[Trump] "routinely called for Medicare to negotiate drug prices. It finally happened this year, under Biden. Given Medicare’s size, and the penalties for not cooperating, drug companies consider this tantamount to price controls."

Tariffs

"Economists have a visceral dislike of tariffs. They’re a tax on imports, and imports are quite useful."

"Trump’s proposed 10%, or even 20%, “baseline” tariff on every country and product serves no obvious purpose. He claims this will cause American consumers to buy U.S. instead of foreign-made goods, boosting jobs and reducing the trade deficit.

Certainly, if you’re willing to force consumers to pay thousands of dollars extra, you can make them buy domestic instead of imported products. But for what purpose? Factory jobs are not intrinsically superior to other jobs; pay and working conditions are often better in services. Protection can be justified for infant industries such as green tech or products essential to national security, like semiconductors. T-shirts, wine and countless other imported products don’t qualify."

"Despite tariffs, the trade deficit widened during Trump’s presidency."

"the European Union and China, will likely retaliate, as they did in his first term."

"manufacturing employment deteriorated in the U.S. after Trump’s trade war began in 2018"

The tax giveaway arms race

"Harris has proposed a $6,000 tax credit for the parents of a newborn child. Not to be outbid, Trump’s running mate JD Vance has pitched a $5,000 credit for every child, no matter how rich the parents."

"The Committee for a Responsible Federal Budget estimates Harris’s promises, beyond those already made by Biden, cost about $1 trillion over a decade; Trump’s Social Security tax repeal would cost at least $1.6 trillion."