President Joe Biden and former President Donald Trump will pursue very different economic policies if reelected. Both have put forward a wide range of proposals to change the tax code, government spending, and trade, immigration and regulatory policies that if implemented could have significant consequences on the economy’s performance for years to come. In this bonus episode of Inside Economics, the team considers what policies would likely be implemented under different election scenarios and their economic impact.
President Joe Biden and former President Donald Trump will pursue very different economic policies if reelected. Both have put forward a wide range of proposals to change the tax code, government spending, and trade, immigration and regulatory policies that if implemented could have significant consequences on the economy’s performance for years to come. In this bonus episode of Inside Economics, the team considers what policies would likely be implemented under different election scenarios and their economic impact.
Guest Hosts: Justin Begley - Economist, Moody's Analytics, Brendan La Cerda - Director/Senior Economist, Moody's Analytics
Hosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, and Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s Analytics
Follow Mark Zandi on 'X' @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn
Mark Zandi: Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist Moody's Analytics, and I'm joined by a bevy of colleagues. Of course, my two co-hosts. Marisa DiNatale, and Cris deRitis. Hi guys.
Marisa DiNatale: Hey, Mark.
Cris deRitis: Hey, Mark.
Mark Zandi: Cris, you're back in the country.
Cris deRitis: I am. Back in action.
Mark Zandi: Yeah. You look rested. Well rested.
Cris deRitis: Yep.
Marisa DiNatale: You look like you have a tan.
Cris deRitis: Ready to go. I think it's the lighting.
Mark Zandi: Ready to go.
Cris deRitis: I think it's the lighting.
Mark Zandi: I was going to say, it looks like he has more gray hair, but that can't possibly be.
Cris deRitis: No.
Marisa DiNatale: That can't be.
Cris deRitis: No.
Mark Zandi: It's distinguished.
Cris deRitis: Nice, nice, nice recovery. Good stuff.
Marisa DiNatale: How was Italy? What was the highlight?
Cris deRitis: Oh, there's so many. Saw some great places. The Dolomites were probably the highlight in terms of location and then just being able to see family and of course, great food everywhere.
Mark Zandi: Have you been to the Dolomites Marisa? I never have. You have?
Marisa DiNatale: Yeah. Yeah. Oh, I think I told you I studied abroad in Italy when I was in college.
Mark Zandi: Oh, that's right.
Marisa DiNatale: I went then. So that was a long time ago. But yeah, it was one of my favorite places I went in the whole country. It's so beautiful.
Mark Zandi: Whole country's beautiful. It's kind of a magical place, really. Yeah, and I guess that's why all it seems like half the country, you were saying last week, I think half of the US was in Italy when you were there visiting.
Cris deRitis: I think they were all on my plane.
Mark Zandi: They were all on your plane. Very good.
Cris deRitis: Airports were cramped. Absolutely.
Mark Zandi: And we got two other colleagues. We've got Brendan, La Cerda and Justin Begley. Hi guys.
Brendan La Cerda: Hey Mark. Thanks for having us.
Mark Zandi: What are you guys doing here?
Brendan La Cerda: We'll find out, right? We're going to talk about the election. We're going to talk about what's going to happen if Trump wins. What's going to happen if Biden wins? I don't know if we're getting into what happens if Robert Kennedy wins. I don't think we covered that one yet.
Mark Zandi: Who?
Brendan La Cerda: Kennedy.
Mark Zandi: Oh, Kennedy. I forgot about him.
Brendan La Cerda: We didn't do that scenario.
Mark Zandi: Yeah. Yeah. Well, it's good to have you guys on board. We're going to talk about the study we just released a few days ago. I think it's a few days ago, right? Was it...
Brendan La Cerda: Thursday.
Mark Zandi: It was a week ago. The macroeconomic consequences of Biden V. Trump, where we evaluate the economic impact of the candidate's proposals, and there's a lot to unpack there. I guess first question I should ask you guys, did you guys ever work on a presidential campaign or anything political before? I probably should have asked you before you did the study. You're not getting paid, are you, by anybody?
Brendan La Cerda: No.
Mark Zandi: Holy moody.
Brendan La Cerda: Sadly no.
Mark Zandi: Sadly no. Okay.
Brendan La Cerda: No. I've never volunteered for a campaign.
Mark Zandi: No?
Brendan La Cerda: Never knocked on a door. No.
Mark Zandi: How about you, Justin? Have you ever participated in a campaign or been involved?
Justin Begley: I've never even donated a dollar to a candidate before, so no, I'm young. I like to keep my money.
Mark Zandi: Yeah. Yeah. Brendan, have you contributed to anybody?
Brendan La Cerda: Yeah, you know what? I do like to collect bumper stickers from some of the candidates. So even somewhere around here, I might have my Obama '08 magnet sticker. I like collecting the memorabilia.
Mark Zandi: Got it.
Brendan La Cerda: I got some Fetterman.
Mark Zandi: Oh, do you have to contribute to the campaign to get those?
Brendan La Cerda: Yeah. Like $5 and you get a sticker or something like that.
Mark Zandi: Right.
Brendan La Cerda: So you will see my name on the I donated $5 list.
Mark Zandi: Well, I did work on a campaign, the John McCain campaign. This was, I started working on that campaign well before Obama was even on the scene. So I had no idea who Obama was, and McCain was at the time, it was before the economy became front and center. Remember, it ultimately became all about the financial crisis, but before that, it was about foreign policy and his foreign policy views were more consistent with mine. So I started helping out on that campaign. I tell you, it was a good experience. It really was a very interesting experience. I was the guy who was in charge of monitoring the economic data as they came in on a daily basis and commenting, and the one thing I did get a little annoyed at is I was starting to scream, "Hey guys, there's this crisis developing in the financial markets. Well look out. We're going to have a problem."
Marisa DiNatale: So this was the '08.
Mark Zandi: The '08. Yeah. And this was, '07, I was starting to send up flares and no one wanted to hear it. No one was paying any attention. I was waving my hands, I was screaming from the balcony. No one really, they were so busy focused on other things.
Brendan La Cerda: Well, I mean, famously McCain, I think it was during a campaign speech, said that the state of the American economy is strong, and I think people rightly reacted like that's just ridiculous.
Mark Zandi: Yeah, he just didn't...
Brendan La Cerda: The general tone was definitely so stupid.
Mark Zandi: He was a great guy, and I think just the wrong guy at the wrong time. I mean, it was a different time when the economy wasn't front. That definitely was not his thing. And he had no interest in it or really no expertise. It was all foreign policy. But I found the whole process very interesting and fascinating, just the way a campaign works. But anyway, for sake of disclosure, I'm not involved in any campaigns. I've not contributed any money my wife might have, I'm not sure, but I have not, and I've done that because I knew we were going to do this kind of work and didn't want to have any appearance of any kind of conflict. So what about you guys, Cris and Marisa? It doesn't matter. You can tell me. I'm not going to answer the question.
Marisa DiNatale: No, I've never-
Mark Zandi: No, yeah, just curious.
Marisa DiNatale: ... been involved in any manner or contributed anything.
Mark Zandi: Yeah, I know Cris is on the board of the Bocce Ball Society. He was president of that, and he was lobbying the Italian government for more bocce ball courts or something. I heard. Is that right, Cris?
Cris deRitis: There was the Biden administration.
Mark Zandi: Oh, it was the Biden administration. Oh, you wanted some infrastructure money. That was what?
Cris deRitis: That's right.
Mark Zandi: Yeah. I hope you got turned down, buddy.
Cris deRitis: I'm a lifelong independent.
Mark Zandi: Okay, lifelong independent. That's very good. Okay, so we did this study, and this isn't the first time. We've done this for many presidential campaigns, now going back, I can't even remember how far back, I think all the way back to Kerry. What did Kerry, it was Kerry Bush, right? Kerry Bush. It was all the way back to Kerry Bush. So we've been doing this a long time, and so it's been a long tradition. I guess I'm going to throw out the first, there's going to be a series of questions, but first question is why did we do this study? I mean, that's a reasonable question, right? Why are you guys even thinking about this? Brendan, do you want to take a crack at that? Justin? I've got an answer, but I'm curious what your answer. I've never asked you the question. I'm just really curious how you would answer the question. Why did we do this?
Brendan La Cerda: I would say one very good reason we do it is because we get a ton of requests to do it. I think it is a very client-driven scenario. There's lots of businesses and investors who want to understand how the proposed policies are going to affect their revenues, their costs. This affects business planning, capital allocation, so they want to know what the economy's going to look like two, four years down the road.
Mark Zandi: Justin?
Justin Begley: Yeah, I'd double click on a lot of what Brendan just said there and just say also that economics is kind of inextricably tied to fiscal policy in many ways. So when a candidate is proposing certain policies on let's say child tax credits or what have you, it is going to affect things like employment decisions. It's going to affect how much the deficit increases or decreases if they're focusing on spending or tax policy. And all these things are going to affect downstream macroeconomic variables that are going to take corporations and households. So just on a general level, policy proposals, if they are realized after an election, they matter.
Mark Zandi: Yeah, the way I'd answer that question was a question, how could we not do it? I mean, really? I mean, we're forecasting the outlook for the economy. That depends on fiscal policy, tax spending policy, regulatory policy, everything that comes out of Washington, and we have to have a view on that, and if you can have a view on that, you have to have some sense of how the election is going to play out and what Congress is going to look like and so forth and so on. And that obviously generates a lot of different scenarios. Now, I will say in many other presidential elections, the differences between the candidates are more on the margin. This one, I'll have to tell you, I've done this a number of times. The differences here are big. So it's like we're going to go down two different paths here or four different paths depending on how things play out, what the scenarios are, and the interest is extraordinary.
Our clients all over the world, not just here in the United States, but literally all over the world. I mean, I just got a call from one of our sales folks in Tokyo, Japan, and they're really interested in this work, so very difficult not to do. I find it difficult though, because immediately people think you're being political, and I guess to some degree we are, I guess. I mean, but how do you talk about economic policy in the context of a presidential election, which is very heated and you've got folks on both sides with very strong views and opinions and not come across as being political. I mean, that's a tough one. That's a really tough one. But you got to stick to your methodology, stick to the data and the facts and do the best you can and be very transparent about what you've done, all the assumptions you've made and everything you've done to produce the results so that you're an open book, and try to mitigate that critique that you're being overly political. but I don't know that we had a real choice about doing it.
Let me ask you this. This is a question I get all the time and listener, we're going to dive into the meat of the matter here and give you a sense of the scenarios we constructed and the results, the economic impacts, but just to get a more broader sense of things. I've often heard people say, well, presidents don't really matter what their policies are. They don't make a difference in terms of what happens in terms of the economic outlook. I mean, really, does it really matter? What do you guys think? Brendan?
Brendan La Cerda: That's such a cynical view. I think it's completely wrong. Yes, the president's economic policies matter. As we were just talking about, I checked the numbers earlier. Federal outlays are 20 to 25% of GDP. Almost a quarter of the economy is federal government distribution. The issue though is that the president's constrained by Congress. The bulk of how the government affects the economy is through spending. So some coordination between the president and Congress, and he has the veto power and he has a lot of input on legislations. There's a lot of coordination between what goes on with congressional leaders and what the president, it's not really a mystery like is he going to veto it or not? He is been part of the whole negotiation process the whole time, and I would even say just particularly in the context of this election, we have to appreciate how much the president can just do under their own executive power, namely tariffs, enforcing immigration, appointing fed chairs. There's a lot of ways that the president can put their thumb on the scale of the economy.
Mark Zandi: Yeah. Justin, do you have a different view or you want to flesh that out at all?
Justin Begley: Yeah, no, I have the same view that Brendan has. I would just kind of add another scope to it as well, that over the last couple of decades there's been increasingly the centralization of power at the executive level where Congress has kind of delegated a lot of its regulatory authority, for instance, to the executive. And you have this kind of administrative increase in its regulatory power across federal agencies. And so even there, Brendan mentioned that presidents can unilaterally decide a lot of things on trade, for instance, like Trump with his tariffs proposals, also immigration proposal, but then also think about what the EPA can do. That's an executive agency that's somewhat disconnected from Congress and they can make them and other agencies can make a whole wide spread of regulatory changes that can meaningfully impact the economy.
Mark Zandi: Yeah. Marisa, you have a view on this?
Marisa DiNatale: Yeah, I mean I think we've seen it happen. I mean, at the sort of extreme example, if you look at the pandemic or you look at the financial crisis, just actions of the president taking stimulus measures, and we've seen it from both sides of the aisle, sending stimulus money to businesses, to households. That's had a real impact on the economy. So look at the Inflation Reduction Act under President Biden. You're seeing serious investment across the country, across different states in chip manufacturing and environmentally friendly ways of producing energy. So it really has an impact on both businesses and households. It can, and some of that is congressional action with the help of the president. A lot of this has been by executive order or has been with just one party going along with it.
Justin Begley: I might also add on the legislative side of that, never underestimate a president's ability to rally Congress to push his economic agenda through. I mean, we saw this with the IRA. We saw this with the Trump tax cuts, with even the Bush tax cuts, Obama's Affordable Care Act. Presidents have historically been pretty good at pushing their economic agenda through Congress, whether they have Congress that's controlled by their own party or they just go right through reconciliation. They really do have an extraordinary amount of bandwidth in order to do that.
Mark Zandi: Reconciliation being?
Justin Begley: Basically lowering the vote threshold so that certain budget items or budget bills don't need to be passed with a super majority in the Senate.
Mark Zandi: In the Senate.
Justin Begley: Simple majority.
Mark Zandi: And of course, both Biden and Trump used reconciliation to get, in the case of Trump, the TCJA, the Tax Cut and Jobs Act through and Biden used that reconciliation for the IRA to get that through into legislation. Here's the other one I often hear from folks that, well, the candidates, they say a lot of stuff when they're campaigning, it is all bluster, it doesn't really matter because that's not what they're going to end up doing when they become president. What do you think about that particular argument? Cris, maybe I'll go to you first. Do you have a view on that? How do you think about that?
Cris deRitis: There certainly is a lot of bluster and certainly in the primary season, right? That's typically where you hear a lot of that kind of extreme type of thought as they're trying to chalk you for position. But I disagree that we should discount everything they say. I think in general the candidates are pretty clear on what they're trying to achieve. And maybe it's not to the degree that they may say on the campaign trail, but I think we do need to take them at their word, certainly. And then of course, at the end of the day, we just talked about all the power they have, but they don't have all the power. So there are going to be those checks and balances that are going to shape that policy eventually, but they're going to set the priorities and the agenda over the next few years here. And so clearly they are going to have an impact.
Mark Zandi: Yeah, I think presidents matter a lot. I mean, obviously they matter a lot really overwhelmingly during a crisis like the pandemic, I mean, Trump got $3 trillion worth of support deficit finance support through to help people out. And then Biden passed the $2 trillion American Rescue plan deficit finance. So it's 5 trillion. I think it's even when you add it all up, it's closer to 6 trillion in support. Then that's everything from stimulus checks to food assistance to help to small business, on and on and on and on. And obviously the president was critical to that, but I think even in typical times, they matter a lot. And I don't agree with the idea that because it's bluster, because it's politicking that it doesn't matter. The one thing that struck me about both Trump and Biden from their first presidential runs and what they did as president in their first term was they did exactly what they said they were going to do. I mean, it's like, oh, he's not going to do that.
No, really? No, there's no way. Yeah, he did it. He did it. And maybe not to the degree like Trump is saying, 60% tariff on all Chinese imports into the United States. No, but it's going to be a big, probably going to be a big number. I don't know what the number's going to ultimately end up being. So I think it's really important to pay attention because what they're saying, they mean it. They're going to go do it, and it's really important. Before we get to our study, one other quick question, and I am asking you questions that I'm getting all the time. Trump was president from 2017 through 2020, Biden 2021 through the current period. So they've got a track record. Well, who was better for the economy when they were president? I mean, that's a reasonable, I think a reasonable question. Yeah. Brendan, you notice how I start with you, Brendan every single time.
Brendan La Cerda: Probably looking at the Zoom tiles and just seeing.
Mark Zandi: Yeah. That's what I'm doing.
Brendan La Cerda: No, that's okay. Yeah. Maybe I'd take a little bit of a different view than you about would the president's first term be a good predictor of the second term? And I would say mostly no. Sort of going back to the two term presidents, you see a lot of difference between the first term and the second. I think Clinton, the economy is coming out of the recession sort of pieces things back together a little bit then. But the really thing about, it's a second term, you get the tech IT boom. I don't think anyone could have foreseen that thinking back to the first election. Even think about Bush. Bush to George W. Bush. Think the first term, I guess the economy did. Okay. I know there was a recession towards the beginning around 9/11, but the housing boom through '05, '06, the economy is really roaring and then completely collapses at the end of his term.
So I don't know if you would say that the second Clinton or Bush terms were predictive of the first. I guess my real point is I was thinking about this and there's the old expression that insanity is repeating the same thing over and expecting a different result But if you flip it around, should you always expect the same result from doing the same thing? And I want to say no because the state of the economy is different.
Mark Zandi: Totally.
Brendan La Cerda: Think back to the first Trump term, big tax cuts. They weren't inflationary because there was a ton of slack in the economy, so it was the right prescription for the economy. So I think that's sort of my main message.
Mark Zandi: The stimulus ones what you mean,
Brendan La Cerda: Right? The TCJA, tax
Mark Zandi: Cuts, I mean, you're saying the deficit finance, fiscal support was the right policy because the economy was operating below full employment. Would you also argue tax cuts were the right policy? Maybe we shouldn't even go there. That's a whole different thing.
Brendan La Cerda: Yeah, repeat, I think really looking forward towards, you think about Biden's first term, a ton of stimulus, a lot of the things Trump did in his first term, tax cuts, tariffs and these things, none of those policies are going to work the next four years.
Mark Zandi: Yeah, good point.
Brendan La Cerda: The economy is quite supply constrained, and we need to think more about policies that boost efficiency and productivity than policies that stimulate demand. So the same playbook isn't going to work for either candidate the second time around.
Mark Zandi: Yeah, good point. Marisa got a view on that question.
Marisa DiNatale: I just think I agree with Brendan. It's really hard to extricate the policy from the events going on in the global economy at the time someone is president. So you have a pandemic that fundamentally alters not only the choice of policy, but the efficacy of the policy put in place. You have something like 9/11, you have a war, you have the housing collapse. I mean, those things, people could argue that maybe some of those things were precipitated or were the fault of certain presidents in their administrations that maybe came before. That's a separate thing, I don't think is what you're asking. But yeah, I think it's impossible to answer without the context of what's going on in the world at the time. It's really hard to extricate that.
Mark Zandi: Yeah, real good point. Cris got a view.
Cris deRitis: Yeah, I think I'm in agreement here, reading between the lines, just in terms of they have lags, you have all sorts of other things going on in the economy. It's very hard to generate a scorecard and say, oh, well the unemployment rate was X under this four-year period. Therefore, causality is that the president was responsible for that or solely responsible for that. But I think that a lot of that argumentation goes on. There's all sorts of campaign dyads out there saying, Joe Biden's responsible for all the inflation that ever existed since the beginning of time. The other side is certainly blaming Trump for all the ill, so they're going to see that type of campaigning going on, but there's just not, it's very difficult to extricate those policies and define a cause and effect relationship with the economy.
Mark Zandi: Well, I also say that in the context of the pandemic, right? I mean, look, I mean the pandemic completely washed out the last year of Trump's first term, 2020. What do you do with that? I mean, in my view, there were signs the economy was weakening coming into 2020 because of the tariffs and other policy, and there was a reasonable yield curve had inverted in 2019. Historically, a telltale sign of recession, even if we didn't have a recession, it felt like 2020 was lining up to be a pretty tough year. But we'll never know because the pandemic, and then of course Biden inherited the pandemic. So the first couple years of his three years of his presidency had been all about getting out from under the pandemic. So even if there was no event, a pandemic event, it would've been difficult. But with the pandemic event, it's tough.
One thing I have I thought, that I have done is I said, okay, let's look at the economy as of 2019. So that's effectively three years into the Trump first term. And then in 2023 last year, effectively three years into the Biden, first term kind of binds still the Biden, the pandemic is still having an effect, but much less. And here's the interesting thing, if you go back and you kind of look at job growth or GDP or unemployment, stock prices, housing values, real incomes, profitability, any measure you want use, inflation you total it all up. You come away from it saying, yeah, I can't really tell you. It did better.
Because the numbers are pretty good. Actually, unemployment's low In both years, GDP growth was solid in both years, Biden created more jobs than Trump. Inflation is a little bit higher under Biden than under Trump. So you add it all up, net it all out, you come away thinking that you can't use the economy's performance in their first term as a guide to try and understand whose economic policies are going to be better going forward. Justin, I see, you're shaking your head.
Justin Begley: I was just going to say, I have a very controversial thing to say.
Mark Zandi: Oh, okay. Nice, nice. We've been waiting.
Justin Begley: It's okay to say that the economy was really good under Trump and the economy's been good under Biden, it's okay to say those things.
Mark Zandi: Okay. That is controversial. Not really. When you say under Biden, it's been good. You mean post pandemic effect.
Justin Begley: Post pandemic, when you get rid of the supply chain issues, when you kind of basically where we're at now on a study.
Mark Zandi: That seems reasonable, but at least good enough that it's hard to, you can't say one's better than the other. The economy under one.
Justin Begley: It's difficult.
Mark Zandi: Yeah, difficult. Yeah. Okay. All right. Let's turn to the study, and I should say it's out there for public consumption. You can Google La Cerda, Begley, Zandi, macro-economic consequences of Biden V Trump. You'll go right to it and get all the gory details. But let's talk about it and maybe Justin, I'll go to you. Can you lay out the scenarios that we considered here and maybe even talk a little bit about the, we've attached probabilities to these scenarios, these four different scenarios. So maybe you could do that a little bit and give us a little bit of political context and then I'll turn to you Brendan and you can flesh out whatever Justin missed or you felt didn't highlight appropriately enough.
Justin Begley: Sure. We have four scenarios that we outline in the paper. The first is what we believe is the most likely scenarios we attach a 40% probability to it. That would be Biden wins the presidency. This is what our presidential election model is suggesting is the most likely scenario right now. And he has to deal with then a divided Congress. So we have the Republicans winning the Senate mostly because of Joe Manchin's retirement from West Virginia. It's very red state likely to go to the GOP in this upcoming election. And then the Republicans would only need one more state after that to take the Senate and then the Democrats would win the house. And that basically is because of how thin the majority for Republicans are is in the house right now, and they would really only need to pick up roughly four seats, the Democrats were to win in November. So that's our first scenario. Policy-wise, that's going to look a lot like the status quo. It's our baseline for the upcoming years, and it's kind of a continuation of a lot of current policy. The second scenario-
Mark Zandi: And that was 40% probability?
Justin Begley: That's a 40% probability.
Mark Zandi: Okay. All right.
Justin Begley: The second scenario is our Republican sweep scenario. So that assumes that Trump wins in November, and then the Republicans kind of ride his coattails in the Senate and the house picking up majorities in both of those chambers. We attach a 35% probability to that. Trump generally has that ability to drum up enthusiasm among his base, and if he does get enough Republican voters to turn out for him in November, then that'll likely have a lot of benefits to the Republicans down ballot. But the second scenario, we'll flesh out some of the policy distinction, but we assume that Trump kind of gets everything he wants when he enters the White House. And then we have what we call-
Mark Zandi: There was a scenario that was 35% probable.
Justin Begley: 35.
Mark Zandi: 35.
Justin Begley: 35.
Mark Zandi: So very, not too much different than the baseline, the Biden divided Congress.
Justin Begley: Yeah. It kind of aligns with our view that this is going to be a very close race, a uniquely close race, maybe even a Bush-Gore type race where it's really, really close.
Mark Zandi: Did I tell you of the theory I have about who's going to determine who's going to win the election? Did I ever tell you this?
Justin Begley: Maybe. I don't know.
Mark Zandi: It's my wife. It's actually my wife. Yeah. Because we live in the suburbs of Philly and it feels like it's going to boil down to PA and a few thousand votes in PA, and it's going to be in the kind of purple counties, big purple counties with lots of population, and that's where we are. And I live on a circle, mile long circle that is as purple as it gets, and it just feels like a microcosm of what's going on, and I think it's going to be my wife that's going to determine the deciding vote. So all eyes on her.
Justin Begley: Our model right now has Biden up by 0.6 percentage points in Pennsylvania and-
Mark Zandi: Is that right?
Justin Begley: ... has a handful of votes.
Mark Zandi: Yeah.
Justin Begley: So maybe,
Mark Zandi: Sorry to stop you.
Justin Begley: That's our Republican sweep scenario, 35% probability. The third scenario that we have is what we call the Trump and divided Congress scenario. So that's kind of similar to our baseline, except Trump is now in the White House and then Congress is split between Republicans and the Senate and Democrats in the house. We attach a 15% probability to that. We feel that just more likely that a Trump win in the White House would have more significant downstream benefits for Republicans in their congressional races. And so making a divided Congress scenario a little bit less likely if Trump does win the White House. So again, that's a 15% probability. And then our final scenario is a Democratic sweep scenario where we have Biden winning in November, and then of course the Democrats taking the House and the Senate. We just give that a 10% probability. It is not impossible that Democrats show strong in the Senate.
It's just rather unlikely. I mean, the races right now, if you look at Arizona, Nevada, even Montana and Maryland now, the polling is very close across the two leading candidates in those, and it wouldn't take much for one of those to flip in favor of the GOP, but it is also not impossible that Democrats maintain a majority in the Senate if they have a 50 50 split after the Republicans win West Virginia, and then of course with Biden and the White House, VP, Harris would be the deciding vote in the Senate. So that's a 10% probability. Those are all of our scenarios, and again, they have various policy differences and consequences.
Mark Zandi: So if you add up Biden divided Congress at 40, democratic sweep at 10, that's 50, you add up Trump's, the Republican sweep plus the Trump and divided Congress, that's 50. So basically 50 50.
Justin Begley: That's right.
Mark Zandi: Very close. But our baseline, what's embedded in our baseline forecast in the middle of the distribution is the Biden divided Congress, and if we get that, then that's kind of already embedded in our thinking and our economic projections. Okay. Brendan, anything you want to add there? Flesh out there? There's a lot there, but anything you want highlight?
Brendan La Cerda: Yeah, I don't want to drone on for 15 minutes about all the different policy proposals out there, but to sort of simplify this a bit, I would say that we have our baseline in the other three alternative scenarios. Across each of these scenarios, the main dimensions that were varying or shocking or hypothetically simulating are tariffs, immigration, corporate tax rates, personal income tax rates, some of the other elements in TCJA, and then a lot of the big IRA Inflation Reduction Act, a lot of elements in there, the green investments, the IRS auditing, ag subsidies, Medicare drug price negotiation, a lot of stuff in there that we vary up. So primarily I think the listeners can sort of think along those dimensions when we discuss those policies.
Mark Zandi: Right, right. Okay. Because I'm so involved in the study, maybe I'll just ask Cris, Marisa, are there any questions that you might have about the scenarios that, because I'm so close to it, I may not be asking?
Marisa DiNatale: Well, are you going to tell us what the economic outcomes are in each of those scenarios?
Mark Zandi: Oh, you are so pushy. You are so pushy.
Marisa DiNatale: That's what I want to know.
Mark Zandi: Yeah, yeah, yeah. We're getting there. We're getting there. Hold on, hold on, hold on. We're getting there. Just any other questions though about the scenarios themselves? If not, no worries.
Marisa DiNatale: No.
Mark Zandi: Okay, fine.
Cris deRitis: No, I think we're clear.
Mark Zandi: So Brendan, you kind of sort of did this already, but maybe can you just describe the methodology here? What did we do exactly? Give the listener a better sense of that to try to, before we get to the actual results so that they get a sense of the methodology.
Brendan La Cerda: So Justin and I start by pouring through campaign websites, candidate speeches, surrogate TV interviews, campaign speeches.
Mark Zandi: Really? I didn't know that. [inaudible 00:36:00] Okay.
Brendan La Cerda: We're just crawling through the web, trying to figure out, particularly, you talked about campaign promises before, and I was going to make one comment, which was, I think Trump was at a campaign stop in Nevada the other day, and he made some promise about not taxing tipped wages or something, play to the local crowd. Of course, all the restaurant and service workers in Vegas, I mean obviously that's silly. We're not going to stop taxing tips or something like that. But we do look through those speeches because what we want to see is signals.
Mark Zandi: I don't know about that.
Brendan La Cerda: We can just stop that.
Mark Zandi: Color me cynical on that one, but okay, fair enough. Go ahead.
Brendan La Cerda: The ultimate Nevada ploy.
Cris deRitis: What about replacing income taxes with tariff income?
Brendan La Cerda: Right, completely replacing the income with income tax with tariffs, which would even on a static basis, you'd be talking about a 200% tariff or something. I would just be like, it's completely impractical. But the thing is, what we're mainly looking for is because what I believe is campaign promises, they send a signal, and so we want to see which promises is you repeating over and over again, which one are they giving prominence to, because certainly we can't put every proposal into the scenario. So we're really focused on what the key components or really what the most economically significant components of their policies are. So as I mentioned before, it fell along those key dimensions. So I don't know, we could walk through the Republican sweep assumptions now, which I think sort of give a clear picture of what we're, you know?
Mark Zandi: What Yeah, I was just going to say though, I mean we collated all of these different policies. In the case of President Biden, that was a lot easier, let's say, because he has a budget that's sitting out there, the 2025 fiscal year budget, which is as explicit as you can get. It's a line item, here's the cost you buy a year for the next 10 years, so we know exactly what he wants.
For Trump, that's obviously harder to do because there's nothing on paper really. We're piecing that all together. There's some things we're just not tackling because they're hard to, impossible to quantify. So for example, there was a lot of media reports, credible media reports that President Trump and his campaign are thinking about ways to affect the independence of the Fed, the ability of the Fed to set monetary policy without influence from the executive branch, the president.
Obviously, if that were the correct and future president Trump decides to go down that path, that would've enormous implications, but we didn't include that into our analysis and other straightforward things like tariffs, 10% tariff across the board, but we assume no retaliation, which obviously is not going to happen. I think broadly speaking, and I would say, correct me if I'm wrong, but the choices we made would such that if we included what we did not include, it would make the results even starker, they're understated because of the choices that we made we're being let's say, conservative with regard to how things would play out. You were going to say something else Brendan though?
Brendan La Cerda: Yeah, I was just going to, you had asked about the methodology part, so I was going to mention that yes, after we compile these assumptions, we had some deliberation about, as you said, what's reasonable, what's unreasonable, what do we want to include, and then the next step is we go to our Moody's economics or Moody's analytics global macro model. That's the same as our workhorse model. That's the one we use to produce our baseline forecast, all of our alternative scenarios and go in there, make adjustments to the assumptions, spin the model and report out to you folks.
Mark Zandi: Yeah, perfect. Anything Justin, any other nuance you want to mention there in terms of the methodology just that people might be interested in or asking about?
Justin Begley: No, not necessarily, but if they might appreciate the amount of labor we put into Trump's economic policies. That did take a while. Listening to candidate speeches and all that Biden's was easier, but I will say his fiscal year 2025 budget is dense, so that was no short one.
Mark Zandi: Good point. We know exactly what he wants, but he wants a lot and it's pretty complex.
Justin Begley: Very comprehensive.
Mark Zandi: Yeah, comprehensive, comprehensive. Right. Okay. Okay. I got a question for the group. We want to talk about the results. Obviously that's top of mind for Marisa. I think we should begin with the baseline shouldn't very quickly, what is the contours of the baseline? Brendan, do you want to fire that up?
Brendan La Cerda: Yeah, I mean I think the baseline's not like you business as usual, we have the Fed rate cuts starting in September. I think growth settles around trend rate like 2%, maybe a little bit weaker than that. I'm trying to remember your speech about the baseline. Unemployment rises a little bit. Crest levels off. I would just describe it at this-
Mark Zandi: It's pretty sanguine. It's pretty sanguine.
Brendan La Cerda: ... point as steady as she goes.
Mark Zandi: Yeah, steady as she goes, we stay close to full employment. Inflation comes back to the Fed's target. The Fed normalizes interest rates over the next couple three years. It's kind of a pretty sanguine forecast, pretty sanguine economic forecast.
Justin Begley: Policy changes are also minimal in the baseline. As Brendan says, status quo, some of the Trump tax cuts get extended, but not all of them, just kind of adding some more color.
Mark Zandi: But Biden's asked for extending the tax, the Trump tax cuts for anyone who makes less than 400K, we assume that happens here. But there's no other, we don't assume any major change in corporate tax rates, certainly not on tariffs. On immigration policy we're assuming that gains control of the southern border. So immigration comes back in and normalizes gets back to levels that are consistent with the kind of pre-pandemic levels. We assume that it feels like that's already happening with that executive order. It feels like. We'll see if that holds up in court, but we've seen the numbers come down pretty quickly here.
Justin Begley: No debt crisis.
Mark Zandi: No debt crisis, the IRA, all the policies that Biden got through in his first term, the Inflation Reduction Act. The CHIPS Act, the infrastructure law, they all keep on playing out in terms of the IRA. Those things get more cemented into policy, much more difficult to change that in the future.
Anything else? Budget deficits, they stay high, but they don't get any worse. They're kind of like around what, five, 6% of GDP. It's still very high, but they kind of stabilize and we make no progress really on addressing our long-term fiscal situation. The debt to GDP ratio continues to rise. Interest rates, funds rate settles in around 3%, kind of mid-decade. The ten-year treasury yield stays roughly where it is just over four, a pretty sanguine forecast. Okay, so that's the baseline, that's the 40% probability scenario. Let's go to the Trump sweep scenario, and I guess this is the one that we really paid very close attention to because this is the if after election day Trump is president and the Republicans have swept the Congress, our baseline is going to change and this is how it's going to change. So Brendan, you want to go over that?
Brendan La Cerda: Yeah, absolutely. To go through the main components of the Republican sweep scenario on tariffs, we're assuming a universal 10% tariff. You could put some extra tariffs on China. It doesn't really change the story too much. On immigration, we're going to assume the deportation of 1 million unauthorized immigrants per year. So that's quite a large number of deportations. On corporate tax rates, we're assuming further cuts in the corporate tax rate. Statutory rate goes from 21 to 15. All of the TCJA personal income tax rates are preserved and the IRA is completely gutted except for the agricultural subsidies and the Medicare drug pricing. So the green energy investments are gone. The IRS auditing bump up is gone. Just to clarify there too, our assumption is we saw during Trump's first term when the tariffs hurt farmers, they gave subsidies out to farmers. Probably going to do that again, and the Medicare drug pricing saves the federal government a lot of money so likely to keep that in order to make the budget math work.
Also, I think we were a little skeptical that the Republicans would take another run at healthcare considering it didn't go well the first time around. So that's sort of the key elements of the Republican sweep scenario. In terms of the macro-economy, where is the impact? It's really the tariff and immigration. One of the things that I learned myself working through this scenario with the tariff was that even at the peak of Trump's, first round of tariffs back like 2018 or so, only about 10% of US imports were under tariff. This would be universal. This is 100%. This is leagues and leagues magnitude larger of an impact. We basically assume that no product is spared.
Also, I think we were talking about before about the state of the economy matters. The state of the global supply chains are a lot different today than they were in 2018. Things are still a bit fragile and there's some concern about rocking the boat with such a large move. The other one is the immigration, the deportations up to 1 million per year. We roughly calibrate that assumption because that was roughly the peak number of deportations that the US has ever achieved in one year under the Eisenhower administration, actually back in the '50s, two years, they had a very aggressive deportation policy. Interesting wrinkle of that one is Mexico was actually requesting that the US send their citizens back, which is very different from the current situation. But really how that impacts economy is that the tariffs are quite inflationary. That is going to severely ding consumer and business confidence.
Now, the Fed is going to have to wait longer before cutting rates are going to be more of a delay in rate cutting that weakens the economy plus in the fact that people's purchasing power is just shrunk down by these higher import costs because the import content of US consumption is about 10%. So it's a big share of US consumption that's getting hit with a large tax increase. On the immigration issue, on the immigration proposal, it's both sort of a supply and demand event because it's removing workers from the economy and it's removing consumers from the economy. Our intuition is that during the initial implementation of the policy, that it's likely to be initially inflationary because immigrants more contribute more to production than consumption because their incomes are relatively lower. And I think this is one of the instances where, as you mentioned, the possible downside consequences could be much greater than we assume. We just say, so we just sort of the math of deducting these people from the labor force.
But what's hard to anticipate is how this disruption in labor supply could affect production and supply chains and shortages and inventories and kind of just put the whole system into a mess. We don't assume some sort of snowball effect, but the bottom line is, and under the Republican sweep scenario, the economy enters a very mild recession around mid-2025. So we're talking-
Mark Zandi: Just to two fingers, factual point. We're also making the assumption that not only does the President Trump under the scenario get everything that he's asked for, but also it happens as soon as he takes office. Because we didn't want to get into this, well, how long will it take for this policy to be implemented, so forth and so on. We just assumed so that we could see what the impacts would be very clearly. So that's a working assumption here, so that's why you get this kind of timing.
Brendan La Cerda: Yeah, we brush aside the timing issues and kind of go with FDR, first 100 days. They do exactly what they want to do and push it right through.
Mark Zandi: Yeah, okay.
Brendan La Cerda: As I mentioned, the scenario is it's not particularly pretty. The economy enters a mild recession, mid-2025. Very small like GDP declines. Unemployment rises a little bit. I don't think it's quite one percentage point maybe around there. Part of that has to do with the fact that the economy's losing all these workers. So there's not a lot of layoffs because the economy's losing workers anyways.
Mark Zandi: Okay then. So Justin, you want to, there's so many moving parts here, so many different things. Can you just take one step back and characterize the economy under this scenario? How would you characterize it particularly in the context of the baseline?
Justin Begley: I would characterize it as weaker than it currently is. That's a very broad notion. I mean, as Brendan said, GDP ends up kind of permanently lower, real GDP has a permanently lower inflation spikes early on in the forecast horizon before returning to a more steady target-like a 2% target-like level later on in the forecast period. At the same time though, the tax cuts do give a boost to real incomes. Corporate investment goes up a little bit because of the corporate tax rates. The stock market does not quite as well as our baseline forecast, but it does a little bit better than what we'll talk about later with the democratic sweep scenario and then the watered-down version of the Trump scenario where he has a divided Congress. So it does a little bit better in that regard. But all together, just the fact that there's a recession, even though it's mild, it does kind of set the economy on a little bit more shaky ground.
Mark Zandi: And recession happens to some degree because the higher inflation and then the interest rate, environment's different. And of course you're having a lot of dislocations and effects on confidence and sentiment. And the recession ultimately that we experienced in mid 25, 2025 is relatively modest in the grand scheme of things. I mean, the unemployment rate goes from four to a little over five, something like that. But very clearly growth trajectory under this scenario is lower than under the baseline and inflation is higher than in the baseline. What about deficits in debt? How did they play out?
Justin Begley: The deficit Widens a little bit, actually I'll say by about.
Brendan La Cerda: A little more than a little bit more than a little bit.
Mark Zandi: A little bit more than a little bit.
Justin Begley: I'd say about a percentage points. One and a half percentage points compared to the baseline. And I want to say what is the number like? It gets to 120% or something like that. That's GDP ratio by the end of 2028. Is that right, Brendan?
Brendan La Cerda: Yeah.
Mark Zandi: By the end of 2030, 2034 for 10 years out. Oh, I guess we're taking this out to 2028. Didn't we? It was only four years out. Yeah, right. Okay. Cris, I saw you maybe a question on did you have a question or any comments about this? Did anything surprise you about this result?
Cris deRitis: I was surprised by, in some sense, the tameness of the...
Mark Zandi: The tameness.
Cris deRitis: It sounded like just listening to the scenario itself, it sounded like a stagflation scenario. And we've been worried about a stagflation scenario or parts of, certainly commentators have been worried about stagflation scenarios throughout this whole period. And I just worry that we might, to your point, this might be too conservative if those inflation expectations get unanchored at that point. This thing could be really difficult to control if indeed we have these tariffs and these stagflationary pressures.
Mark Zandi: Well, almost by definition it understates the case because on the tariffs, we're assuming no retaliation. I mean, that's just not going to happen. I mean, other countries are going to respond and that's going to affect the exports of US manufacturers and others to the rest of the world.
Cris deRitis: Make it even worse.
Mark Zandi: Make it worse.
Cris deRitis: Make the growth even lower.
Mark Zandi: Growth even lower.
Cris deRitis: right.
Mark Zandi: And you're right. I mean, we don't make any explicit assumptions around what this might mean for expectations. I mean, because of the circumstance, we're in a full employment economy and you generate this inflationary pressures, we saw what the pandemic and Russian war did to inflation expectations. They jumped and of course got into the wage structure and that's when the Federal Reserve went on high alert and started jacking up interest rates. Same kind of dynamic could play out here, but we're not capturing that kind of dynamic here. The model is not picking up, we're not assuming increase in inflation expectations as a result of all this. And that's another conservative, in my view, another assumption that's relatively conservative. But I think the way you characterize it as stagflation that is directionally where this is headed. It's just a question of to what degree, how much stagflation are reaction going to get here as a result of all this?
Cris deRitis: That's right. That's right. And also just then of course there are all the dynamics then if we are actually going down this path, do we start to have all those carve outs in terms of the tariff policies once again, so it's a Herculean effort they've put forward here, I guess is what I'm stating here and taking it, trying to really understand all the dynamics here is just so difficult. It really depends on what the composition of the Congress is, what the reactions are to.
Mark Zandi: But yet that's why you get paid the big bucks, right?
Cris deRitis: Yeah, absolutely.
Mark Zandi: I mean because Trump wins and the Congress goes Republican, we're going to be sitting on the other side of that election as a group and deciding, well, what does this mean for our forecast? And we're going to have to make these explicit assumptions and actually even more explicit at that point.
Cris deRitis: Absolutely. I guess the one thing I can guarantee under that scenario is the volatility of the forecast is going to go, we're going to be trying to figure this out every day.
Mark Zandi: Right. Marisa, what do you think about the scenario? Is it surprising at all to you?
Marisa DiNatale: No, because there's been a lot in the news about other firms and economists running similar scenarios and it seems to align with what other people's models are predicting, and the headline has been that a Trump win would be inflationary for the economy. So that makes sense to me, just given what he's talking about with tax cuts and tariffs.
Mark Zandi: Going back to something at the start of the conversation, one of the responses I've heard is, well, Trump followed the same policies in his first term. There was no inflation. Why inflation this go around? How do you answer that question, Brendan?
Brendan La Cerda: I think I start off these tariffs are so what he's proposing is so much bigger than what he did previously and some of his, I mean, we didn't even go to the upper end of what he's threatened. We just took the more middle-of-the-road threat. And I would also say, as you pointed out, we're treating this a lot like a one-off event. It's like 10% tariff at the beginning, and then there's no more after that. So on one hand I've heard people argue, it's like, oh, well, it's not as much as a threat. You shouldn't take them seriously. This is all just negotiating tactic or something along those lines.
But I think living in an environment where you are always living under threat, that there could be a big policy change, oh, we could suddenly institute a new tariff. That could potentially be equally dangerous to the economy. How do you make investment decisions? How do you plan years ahead if you're always living under the threat, that policy could suddenly change. So I think that's one of those scenario could have a lot more scope and could have a darker element to it, depending on how you think about this influences expectations and sentiment.
Mark Zandi: Right, right. Of course. Oh, sorry, go ahead Justin.
Justin Begley: I was going to also add to that. When you look at his immigration or our immigration scenario, based on some of the things that Trump has said, we're talking about deportations that just about double what was the kind of annual average throughout his first term. And again, Brendan mentioned earlier in the podcast that there was some more labor market slack at the time versus now we have a tighter labor market, which is going to kind of jack up the wage pressures as the market tightens back up because of fewer workers. And then also on the tax cuts, we're sending tax cuts in a time when employment, they times up for employment wage built is all together pretty strong and households are on pretty solid financial footing, and they've demonstrated their willingness to spend their money a lot over the last year or so. And so that's going to just further add to the inflationary pressures.
Mark Zandi: Yeah, I think that's a key point. I mean, we're at full employment. We weren't back in that 2017, '18 '19 period, and the inflationary environment was very different back then. The concern was inflation's too low, it's suboptimal below the FEDS target. Now we're here inflation's too high above the Fed's target. So very different kind of initial conditions. One other thing that comes up is this idea that the revenues generated from the higher tariffs could pay for the tax cuts that he's proposing. The across-the-board extension of the individual tax cuts and the lower corporate tax rate. Do you guys got any numbers on that that you can share? The answer is no, it doesn't pay for it, but that doesn't come close. But do you have any sense of the numbers?
Brendan La Cerda: Yeah, well, I did mention these are big tariffs, so they do generate quite a bit of revenue. We'll give credit for that, which pays for a lot of his tax cuts. It at least pays for the corporate tax cut and the extension of the personal, but it doesn't on the IRA getting rid of the IRS auditors, that's going to be a net negative on the budget. And then really with the immigration and all the damage that does, and really the macroeconomic damage that the policies are doing, depleting revenue, raising outlays ends up swelling the deficit. So it's going to add about one percentage point to the budget deficit as a share of GDP per year. So it's going to tack a few percentage points onto the debt to GDP ratio by the end of his term.
Mark Zandi: Yeah. Okay.
Justin Begley: Just to add just a more precise number on that. You estimate that over the next 10 years, the tax cuts will add about 3.4 trillion to the deficit. About half of that will be offset by [inaudible 01:01:29]
Mark Zandi: That's the number I recall. About 1.7 trillion comes from the tariffs. Yeah. Right. So about half. Right. Okay. Okay. We're long in the tooth here. The other two scenarios, maybe just kind of a broad question, anything you want to point Justin, anything you want to point out? But they're lower probability events. I think they add up to 25%, so I don't know that we need to spend a lot of time on them, but anything about them that you want to call out?
Justin Begley: I would just say for the Trump and divided Congress scenario, that one where Trump wins the election and it has to do with the vote of Congress, that's a watered down version of the Republican sweep scenario. It was still a lot of deportation, but looks more like it did in the 2017 to 2020 period when he was in office the first time. He's able to get his personal income tax cuts through or really the extension of the tax cuts through, but he is not able to scale back the corporate tax rate. He's talked about cutting out from 21% to 15%. That kid hasn't happened in the scenario. He leaves the IRA untouched, we assume, but still kind of acts as the IRS's budgets. So yeah, and the tariffs are just generally less in magnitude. They're not 10%. We kind of assume just an average tariff rate of about 5% across the board.
Mark Zandi: And then under the Democratic sweep, it's just President Biden's 2025 budget basically.
Justin Begley: That's right. That is, I mean, there's a lot there.
Mark Zandi: A lot there.
Justin Begley: A lot involved in the paper, but just on a broad level, I can give a one-minute summary. There is the TCJA tax cuts, the personal income tax cuts are extended for everyone making below $400,000 a year, but the top marginal tax rate for those making more than 400,000 gets brought back up to the Obama era of 39.6%. There's also some changes in the payroll tax regime targeted at raising more Medicare revenue. And then there's sweeping changes to corporate income taxes, which include a number of very uncertain and untested policies that are in the budget, but then also just some standard ones like raising the corporate income tax rate from 21% to 28%. And then on the spending side, there's a lot of redistribution efforts going on. Expanded EITC for childless workers, expanded child tax credit, expanded low income housing tax credit, subsidized parental and medical leave, subsidization for first time home buyers, putting a down payment on a home, funding for vocational training and free community college. So that kind of gives you a taste of what some of those spending policy look like.
Mark Zandi: Support for low and moderate income households, basically.
Justin Begley: Yes.
Mark Zandi: Yeah, right. Okay. Again, because we've been going on a while here and the gory details are in the white paper, so folks can avail themselves with that. And of course if you have any questions, fire away. We've been getting a lot of them from clients and others and happy to respond to them and we'll collect those questions for future podcasts. But any parting words? Great work, guys. I know it was a lot of work, and we will continue to monitor policies as they're proposed by the candidates. And at this point, I'm not sure what more we're going to do on the policy side, but I'm sure there will be some things that present themselves as we move along here towards the election that we'll do that. And of course, we'll continue to update every month the election model results and see how that all plays out. But anything else, guys? Anything? Marisa, Brendan, Cris, Justin?
Brendan La Cerda: I'll just say the scenarios as they're currently available on our website, Data Buffet, they'll only cover the United States, but Justin and I are going to meet with our international regional teams and discuss expanding the scenarios internationally, possibly incorporating elements of retaliation. We got to have a day where we just, instead of US economics, we just turn the entire podcast over to Canada Economics. Get the lowest ratings ever, but it'll be great. It'll be great.
Mark Zandi: That's crazy. That's crazy. You guys are nuts. Yeah. Anyway, well thanks everybody, and thank you dear listener for tuning in and we're going to call this a podcast. Take care now.