This article was first published in the October 2016 international edition of Accounting and Business magazine.

There is a paradox at the heart of US politics. When choosing a president, Americans typically rank economic policy as their chief concern – a recent Pew survey showed 84% considered this ‘very important’ to their vote, higher than for any other issue. Yet except during a crisis, US presidents do not run the show when it comes to either fiscal or monetary policy. 

‘The Federal Reserve and Congress usually exercise control, and presidents can struggle to get their way,’ says Ted Alden, a fellow at the Council on Foreign Relations and a former Financial Times Washington bureau chief. ‘They can be glorified lobbyists on many economic matters, such as the level of taxation.’ 

The limitations of presidential heft were underlined by a recent number-crunching from US investment bank Morgan Stanley. Its team found that since 1970 only 35% of presidential election promises were translated into reality in the first year of a new term – the period when commanders in chief are at the peak of their influence. And that was even when Congress and the White House were controlled by the same party. The success rate declined to just over 20% when the legislature was at least partially in the hands of the opposing party. 

What’s more, presidential outcomes have tended to be non-events for financial markets. Going back to 1926, the average nominal return on the main US stock index was more or less the same in election years as in non-election years, according to research from UBS, the Swiss bank. 

So does this mean that economists and investors can afford to skip newspapers’ front pages and move directly to the business pages? In many past contests, this may have been the case. But this time the potential impact of the outcome could be larger.

‘Normally, US candidates have operated within a relatively narrow range on economic and financial matters,’ says Mark Calabria, a director at the Cato Institute and a former top aide on the Senate banking committee. ‘This time you have a candidate – Donald Trump – who is far outside the mainstream, set against an establishment candidate – Hillary Clinton.’ 

While Clinton has laid out an incremental economic agenda, with only modest tweaks to existing policy, Trump has proposed a range of policies that would take Americans in an entirely new direction. 

Walls and tariffs

At various stages of the primary campaign, Trump has proposed a range of abrupt departures from economic orthodoxy – from building a wall across the border with Mexico and imposing illegal trade tariffs on Chinese goods to removing 75 million Americans from the income tax rolls and renegotiating US government debt. 

It is hard to predict in advance which policies Trump would seek to implement as president. The property developer and former reality TV presenter has no track record; he is the first major party candidate in 64 years to have no prior electoral experience. (The last was Dwight Eisenhower, the Allied general who led the liberation of Europe during World War II.) Trump has also backtracked on some more outlandish policy proposals – including effectively defaulting on US government debt. 

‘It could well be that Trump is campaigning in poetry and would govern in prose,’ says Mark Zandi, chief economist at Moody’s Analytics and a former economic adviser to John McCain, the 2008 Republican presidential nominee. ‘Still, there are a range of policy plans laid out in his manifesto that, even if only partially implemented, could inflict substantial damage on the US economy.’ 

Trump’s stance on globalisation – immigration and trade – is causing the most concern. Among the most radical elements is his posture on immigration, which is key to US economic vibrancy, Zandi argues. ‘The growth of the working-age population is coming to a standstill over the coming five to 10 years in the US,’ he says. ‘A flow of people from abroad is critical in maintaining sufficient workforce growth to keep companies expanding inside the US.’ 

Few believe Trump could implement his plan to deport 11 million immigrants or his scheme to build a wall at the Mexican border, both of which would require cooperation from Congress. Still, he has pledged to implement a nationwide E-verify scheme to determine whether employees are authorised to work in the US. 

‘If this were rigorously enforced it is possible we could see between six million and seven million people voluntarily deport themselves, since it would become far harder to find work,’ says Zandi. For context, this would represent a roughly 3% reduction in the nation’s workforce, not counting the immigrants who would be discouraged from coming. 

‘The move could be more disruptive than the headline figures suggest,’ says Zandi. ‘A lot of other jobs in American firms, such as agriculture, landscape gardening and leisure, are reliant on foreign workers. There would also be a hit to tax revenues.’ 

Alden also identifies this as a potentially serious economic concern. ‘While it is possible to make a moral case for stricter controls on undocumented workers, overall this would be a dramatic economic own goal,’ Alden says. ‘And the president has greater sway over immigration than over tax.’ 

In contrast, Clinton has positioned herself as a proponent of immigrant rights and has promised to create an office of immigrant affairs if she wins the White House. Clinton has also promised to create a pathway to citizenship for immigrants. ‘While Trump would stem the flow of new workers, Clinton’s plan could boost the workforce,’ says Zandi. 

Free trade out of vogue

Many mainstream economists also fear that Trump’s trade policy could backfire on the US economy. Free trade is out of vogue in the US in general. Both Clinton and Trump have said they are opposed to the Trans-Pacific Partnership (TPP), a deal between 12 nations that account for a massive 40% of world trade. But, as secretary of state, Clinton had previously described the TPP as the ‘gold standard’ of trade deals. 

‘It is possible that she has backed away from this pro-free trade stance under pressure from the left of the Democratic Party, as represented by her primary challenger Bernie Sanders,’ says Alden. ‘Even so, her record suggests this is a tactical position, and that after some additional tweaks, she would be willing to approve the TPP.’ 

Trump, meanwhile, has been more strident in his anti-trade rhetoric than any other candidate in modern US history. He has accused China of keeping its currency artificially weak to promote exports, and has proposed a 45% tariff on Chinese goods until the nation allows the renminbi to float freely. Tariffs on Mexican goods would also rise by 35% unless the nation is willing to renegotiate the North American Free Trade Agreement (NAFTA) deal, approved in 1993 by president Bill Clinton. 

Taken together these two countries account for around 35% of US non-oil imports. As a result, economists at the rating agency Moody’s calculate that Trump’s policy would increase import prices by 15% and US consumer prices by around 3%. ‘It is hard to imagine China or Mexico tolerating this, so we could expect retaliatory tariffs, leading to a global reduction in trade,’ says Alden.

Meanwhile, even without approval from Congress, Alden argues, the president has considerable potential to spoil trade relations. ‘Presidents can launch “safeguard” cases, invoking  national security laws. They can simply slap tariffs on imports by executive order, without the need for approval from lawmakers,’ Alden explains. ‘Even if such actions were ruled illegal by the World Trade Organisation, it can take years for such cases to be resolved.’

Zandi argues that the US would be jettisoning freer trade just at the point when the benefits should be increasing. ‘The US has not always been good at distributing the benefits of free trade across society or protecting those who have been left behind,’ says Zandi. ‘Still the process of globalisation has fostered the development of a large middle class in many emerging markets; now the US has the opportunity to sell more of the higher-end goods that the country produces best. The heavy lifting has already been done.’

In addition, trade wars can have a disruptive effect on financial markets. This was the case in the US--Japan trade fights in the 1990s. One reason the Clinton administration chose to seek compromise eventually is that the dispute was starting to unsettle financial markets, says Alden. ‘It is not at all clear that Trump would be so pragmatic,’ he argues. ‘Markets hate uncertainty. And we have never had a candidate so far out of the establishment in modern American history.’ 

Tax cuts

Trump has also proposed other economic policies that could shift the US economic outlook, most notably a tax cut that would be nearly three times the size of the iconic Bush tax cuts of 2001 and 2003. The plan would forgo US$9.5 trillion in revenue over a decade, more than 20% of projected federal taxes. (The average tax cut to the top 1% of earners would be around US$275,257 a year, according to the tax policy centre – while the bottom 99% would receive an average tax reduction of around US$2,500.) 

Clinton’s plan, which includes a minimum tax rate of 30% for those earning at least US$2m a year, is thought to be more neutral in terms of budget deficits. (The Committee for a Responsible Federal Budget has said Clinton ‘deserves a lot of credit for committing to pay for all her initiatives and for largely meeting this goal’.) Moody’s economists estimate that Trump’s plan, in contrast, would boost the projected 2020 deficit from around 4% of national income to closer to 10%. 

Still economists are less concerned by Trump’s fiscal policy, largely because it is assumed that even a solidly Republican Congress would be unwilling to implement deficit-boosting tax cuts on such a scale. 

Many economists worry, however, that President Trump would have enough clout in trade and immigration to inflict serious damage to the outlook for US growth, inflation and employment. Based on estimates by Moody’s economists, if Trump’s policies were implemented in full, the US would suffer a deep recession, with a peak-to-trough fall in GDP of roughly 2.5% and the unemployment rate peaking at 7.4% in 2021. Even a heavily diluted version of Trump’s plan, the agency reckons, would cause US growth to come to a near standstill. 

So the radical nature of Trump’s policies means that the 2016 election could be unusually important for the US economic outlook. ‘There is still a refusal among experts to believe that the public could vote for such an insular and economically self-defeating agenda,’ says Calabria. ‘But that is what pundits thought about Brexit too. A victory for the establishment – in the form of Hillary Clinton – is not something that should be taken for granted.’ 

Christopher Fitzgerald and Fernando Florez, journalists