2499067541
2499067541

How a Democratic trifecta could impact the US economy

Economic opinion

2499067541

Abstract

Kamala Harris’ nomination has given Democrats new momentum. She now leads Donald Trump in most polls, including in many swing states. Her strong debate performance could further cement her lead. Her rise has also boosted Democrats’ chances of winning a trifecta (i.e. the Presidency, the House and the Senate). Democrats are still likely to lose the US Senate, as they have to defend three seats in Republican-leaning states. Nonetheless, betting markets now give Democrats a 20.5% chance to win a trifecta. If that were to happen, Kamala Harris will find it much easier to implement her economic plans. These plans include a ban on price gouging, lowering housing costs, increasing the child-tax credit, raising taxes on large corporations (while supporting SMEs) and immigration reform.

 

Introduction

With the Democratic National Convention now over, the US presidential race is in its final stages. President Biden’s exit from the race and Kamala’s subsequent nomination have given Democrats new momentum. Polls now suggest Kamala Harris has a lead of 2.7% nationally and is leading in all swing states, except Georgia and Arizona (see figure 1). Betting markets now give Democrats a 57% chance to win the race to the White House. Yet the US presidential election is not the only election that matters in November. Down-ballot races, especially for the US House and Senate will also be of critical importance, as the new president would need support from Congress to pass key legislation.

Most political analysts believe that Republicans would be highly likely to win a government trifecta if Donald Trump were to win the election. Betting markets estimate the probability of a divided government under a Republican President at only 32% (see figure 2). In contrast, betting markets assign a 16% probability to a scenario where Democrats win the White House but fail to take control of Congress. This is because Democrats face a tough election cycle in the US Senate. Democrats now only have a 51-49 majority and have to defend three seats in states that Donald Trump won in the 2020 elections by 8 percentage points or more. This makes Republicans clear favorites to win the Senate (78% probability).

That said, Kamala Harris’ successful campaign launch has boosted the odds of a Democratic trifecta to 20.5%. That is still quite a material chance. As we already analyzed the impact of Republican sweep in depth in our research report in January, we’ll focus more in depth on the impact of a Democratic sweep on the economy here.

Economic impact of a Democratic sweep

It is important to note that the Democratic Caucus in the Senate will become more ideologically left-leaning than during Joe Biden’s term. Joe Biden faced serious opposition to his legislative proposals from two conservative formally-Democratic-turned independent senators, Kirsten Synema and Joe Manchin. Both senators blocked the passage of his 3.5 trillion USD Build Back Better Act and opposed filibuster reform (the rule requiring a majority of 60 senators to pass non-budget related legislation). Yet neither senator is running for reelection. As current Democratic candidates are more left-leaning, Kamala Harris will thus probably find it easier to pass major legislation if Democrats manage to gain control of Congress.

Kamala Harris has laid out multiple economic policy proposals that would require approval of Congress. A first set of proposals focuses on bringing down costs for the middle class. Harris wants to ban price-gouging on food and groceries (the details of this proposal remain unclear). She also wants to lower housing costs by reforming permit regulation, providing construction funding to local governments and by giving first-time homebuyers 25000 USD to go towards down payments. She also has plans to bring down medical costs.

Kamala Harris also proposed a series of tax proposals. She wants to increase the child-tax credits, bring down taxes on tips and expand the earned-income tax credit for poorer Americans. She plans to finance her plans through higher income taxes on Americans earning more than 400k a year and by raising corporate tax rates from 21% to 28% (with some carve-outs for SME’s).

The tax increases would be insufficient to cover the costs of her economic proposals, however. According to calculations by The Economist, her proposals would increase America’s deficit by 1.4 trillion USD (5% of US 2023 GDP) over the next decade. That said, Donald Trump’s plans are even more profligate, costing an estimated 4 trillion USD (14.6% of US 2023 GDP) over the next decade. As the USis already running a 7% budget deficit, increasing the deficit will do little to stimulate economic growth. On the contrary, it could raise government borrowing costs, pushing up lending rates across the board.

Kamala Harris’s policy platform is light on economic reform, overall. However, she mentioned one notable reform in her acceptance speech, namely a pathway to citizenship for undocumented immigrants. This reform would allow undocumented immigrants, who make up around 5% of the US labor force, to move to higher paying, more productive jobs and will increase their consumption and investments. The reform could raise US GDP by an estimated 1.7 trillion USD over 10 years1. That said, even with a Democratic trifecta, it will be tricky to pass this reform in the US Senate as it would require filibuster reform.

Conclusion

Renewed Democratic momentum have increased the odds of a Democratic trifecta. If this scenario were to materialize, Kamala Harris would likely use this opportunity to lower taxes and costs for lower- and middle-class families, while raising taxes on wealthier Americans and corporations. Meanwhile, her plans are likely to cause the deficit to expand, thus potentially driving up borrowing costs, implying economic costs. That said, she has also promised to reform the labor market, by providing a pathway to citizenship for undocumented immigrants.

 

 

https://www.americanprogress.org/article/citizenship-undocumented-immigrants-boost-u-s-economic-growth/

Disclaimer:

Any opinion expressed in this KBC Economic Opinions represents the personal opinion by the author(s). Neither the degree to which the hypotheses, risks and forecasts contained in this report reflect market expectations, nor their effective chances of realisation can be guaranteed. Any forecasts are indicative. The information contained in this publication is general in nature and for information purposes only. It may not be considered as investment advice. Sustainability is part of the overall business strategy of KBC Group NV (see https://www.kbc.com/en/corporate-sustainability.html). We take this strategy into account when choosing topics for our publications, but a thorough analysis of economic and financial developments requires discussing a wider variety of topics. This publication cannot be considered as ‘investment research’ as described in the law and regulations concerning the markets for financial instruments. Any transfer, distribution or reproduction in any form or means of information is prohibited without the express prior written consent of KBC Group NV. KBC cannot be held responsible for the accuracy or completeness of this information.

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