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Who could possibly lose to Donald Trump? Let’s not underestimate how much skill is involved here. It takes a lot to be trailing so far behind in the polls, given the former U.S. president’s well-known and appalling character defects and several of his policy stands. Well, it seems that the answer is only this particular bunch of Democrats could lose to Mr. Trump, including the likes of President Joe Biden, Senators Elizabeth Warren and Bernie Sanders, Congresswoman Alexandria Ocasio-Cortez, etc. If Mr. Trump wins in November, it won’t just be because voters were particularly drawn to him, but that they were turned off by what the Democrats had to offer.

Let me preface what follows by saying that it is certainly not to be taken as an endorsement of Mr. Trump’s candidacy. I think he’s dangerous to the economic outlook and unfit to govern in so many respects. What follows is more of an attempt at seeking to understand why he is perhaps curiously polling so well relative to Mr. Biden. I think that is a function of how Americans look at the relative economics they get out of both candidates, whether correctly so or not, and whether or not I agree with their conclusions.

While I think many of Mr. Trump’s policies are misguided and dangerous, one can say the same about the Biden administration’s policy biases. Where the rub lies, however, is that while I think most Americans have a very poor understanding of how dangerous Mr. Trump could be on multiple touch points, they understand how Mr. Biden’s policies could well slam their personal finances and they want nothing to do with that.

Biden’s crushing tax proposals

Mr. Trump said he’d retain the Tax Cuts and Jobs Act corporate income tax rate cut to 21 per cent from 35 per cent, but abandon his earlier pledge to cut it further down to 15 per cent. He also said he would make permanent the individual tax cuts that included a large increase in basic exemptions and lowered personal income tax (PIT) rates.

Mr. Biden, on the other hand, and as per his earlier proposals, would seek to hike PIT rates, double the top capital gains tax, tax unrealized gains with a 25-per-cent minimum tax, raise the corporate income tax rate by seven percentage points to 28 per cent, and quadruple stock buyback taxes to 4 per cent, the latter of which shouldn’t exist anyway.

There is no question in my mind that the stock market wins under Mr. Trump’s tax policies – and potentially by a lot – which is why I don’t necessarily believe in some of the gloomy calls on the Street. If Mr. Biden wins, then watch out. There is also no question that after-tax incomes and corporate profits would suffer if Mr. Biden’s proposals went through.

Spending plans

The United States has a rising debt problem and so higher tax revenues under Mr. Biden’s proposals could assist, right? Maybe that’s what is driving the Biden administration’s tax policies, and if so, then the bond market could benefit, right? Wrong.

After all, the U.S. federal government is running a deficit equal to 6.3 per cent of GDP even now after the U.S. economy has been booming. Federal government public debt now stands at US$34-trillion, which is about 50 per cent higher than it was just before the pandemic. There has been no attempt to rein in deficits or public debt. As a share of nominal GDP, U.S. federal public debt stands at 120 per cent, or about 15 per cent higher than before the pandemic.

The Biden administration had a chance to contain government spending and repair deficits in the good times and it went in the opposite direction. Instead, it maintained current spending at a level that is about one-third higher than before the pandemic and rising.

The added problem is that the Biden administration would probably spend the proposed tax revenues and thwart any chance at an improved fiscal outlook. The administration has a very clear bias toward increasing the size of government and with that its tax revenues and spending. Congressional Budget Office baseline projections show the U.S. federal government’s deficit-to-DP ratio stuck at 5-to-6 per cent for years to come and then rising toward the 7-to-10-per-cent range in the long term, albeit one should take their projections with a mountain of salt.

The rest

As for the rest of the comparison, Mr. Biden’s position on trade policy isn’t that much better than Mr. Trump’s. Yes, it’s less punitive, but Mr. Biden is certainly no friend to free traders either.

It’s not entirely clear who would have the biggest impact upon inflation, the Federal Reserve and the bond market, but I suspect it would be Mr. Biden. Mr. Trump widened Washington’s deficit, and extending TCJA (Tax Cuts and Jobs Act) measures would do likewise for longer. Mr. Biden’s policies to date have translated into even bigger and more frequent bond auctions, more inflation and higher bond yields. In plain language, that means Mr. Biden is partly responsible for the rise in the 30-year fixed mortgage rate.

On regulations, Mr. Trump would likely be more favourable to multiple sectors relative to Mr. Biden. Examples include oil and gas and financials. Some believe that Mr. Trump’s lightened banking regulations contributed to some of the regional banks’ issues, but others disagree with that view. Then again, Mr. Trump could look at this and say that the lesson from the regional banks’ issues in the aftermath of a lighter regulatory touch was that the Fed will smother the consequences with its various tools. There are huge moral hazard issues here, but if you’re a politician, you might figure you’ll further deregulate and then expect the Fed to deal with any messy side effects.

As for the Fed, both Mr. Biden and Mr. Trump pose risks. The Dems are no friends to Federal Reserve chairman Jerome Powell. The Democrats’ Ms. Warren has been a vicious critic of Mr. Powell’s. Mr. Trump probably soon regretted appointing Mr. Powell based upon his frequent attacks on the Fed. Neither leader is likely to favour appointing someone with hawkish views and so the risk with either one of them may be higher inflation for longer. Mr. Trump is crass, vulgar and explicit in his attacks on the Fed, but my point is that both options pose risks.

So where does all of this leave us? Americans are not necessarily irrational in driving favourable polling numbers for Mr. Trump despite his many, many shortcomings and the risks that some of his proposals represent. Americans are probably taking a bird in hand is worth two in the bush approach here. They have a vague understanding (perhaps) of the dangers Mr. Trump pose, but they fully understand what could happen to their take-home pay and investments, to after-tax profits, to the regulatory burden they would face and to the potential effects on the cost of borrowing and inflation. It’s likely too late for the Dems to pivot on any of these matters as they risk losing, and losing badly.

Derek Holt is vice-president and Head of Capital Markets Economics for Scotiabank

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