Bonus Episode: Assessing the Macroeconomic Consequences of Biden vs. Trump

Episode Summary

Executive Summary: Inside Economics discusses Moody’s Analytics’ election study on the macroeconomic consequences of Biden vs. Trump. The hosts argue presidential policy matters because of fiscal, tax, trade, immigration, and regulatory power, then outline four election/congress scenarios and their economic effects. Trump’s sweep is modeled as the most inflationary and recessionary path, while Biden-divided Congress is the baseline.

Main Topics: Why Moody’s produced the election study (Priority: 5/5): The team explains that clients and investors need scenario analysis for policy-driven impacts on revenues, costs, capital planning, and the broader economic outlook. Do presidents matter for the economy? (Priority: 5/5): Speakers argue that presidential policies matter materially because presidents influence spending, taxes, regulation, tariffs, immigration, and can shape congressional outcomes. Methodology and scenario construction (Priority: 5/5): The analysts describe how they built scenarios using campaign speeches, websites, budgets, and Moody’s global macro model, while excluding hard-to-quantify items like Fed independence. Baseline outlook and assumptions (Priority: 4/5): The baseline assumes Biden wins with divided Congress, modest policy change, gradual Fed easing, continued low unemployment, stable deficits, and continuation of major Biden-era legislation. Trump Republican sweep scenario (Priority: 5/5): This is the most disruptive case: universal tariffs, mass deportations, lower corporate taxes, gutted IRA provisions, higher inflation, delayed rate cuts, and a mild recession in 2025. Biden Democratic sweep and divided-Congress cases (Priority: 3/5): The Democratic sweep is a lower-probability, more redistributive and tax-raising scenario; Trump divided Congress is a watered-down version of the Republican sweep with smaller policy changes. Limits, uncertainty, and conservatism of the model (Priority: 4/5): Speakers note the analysis is conservative because it assumes no retaliation to tariffs and does not fully capture expectation effects, supply-chain disruptions, or Fed-policy shocks.

Key Arguments: Presidential elections matter economically because presidents influence fiscal policy, trade, immigration, regulation, and executive-branch actions that affect households, firms, and markets. The current election is unusually consequential because the policy differences between Biden and Trump are large enough to create meaningfully different macro paths rather than minor margin shifts. Past presidential performance is a poor guide to future outcomes because the economy’s state changes over time; the first Trump and Biden terms occurred under very different conditions, especially the pandemic. Trump’s proposed tariffs and deportation policies are far larger than in his first term and are modeled as inflationary, confidence-damaging, and recessionary. The baseline forecast is relatively sanguine: growth near trend, inflation returning to target, the Fed normalizing rates, and deficits high but stable. The Republican sweep scenario is intentionally conservative; if retaliation, supply-chain disruption, or unanchored inflation expectations were added, the adverse effects would likely be worse. Tariff revenue offsets part, but not all, of Trump’s proposed tax cuts; the overall deficit still widens materially under the Republican sweep. The Democratic sweep scenario would extend and expand redistribution and corporate tax increases, but is lower probability because Senate control is hard for Democrats to secure.

Data Points: Probability of Biden win with divided Congress: 40% - Main baseline scenario in the study Probability of Trump Republican sweep: 35% - Trump wins presidency plus GOP control of House and Senate Probability of Trump win with divided Congress: 15% - Trump presidency with split Congress Probability of Democratic sweep: 10% - Biden win plus Democratic control of House and Senate Federal outlays as share of GDP: 20% to 25% - Used to argue the president matters economically Trump universal tariff assumption: 10% - Republican sweep scenario Trump/Republican immigration assumption: 1 million unauthorized immigrants deported per year - Republican sweep scenario Corporate tax rate under Trump sweep: 21% to 15% - Republican sweep scenario Tariff coverage in Trump first term peak: about 10% of U.S. imports - Compared with the proposed universal tariff Import content of U.S. consumption: about 10% - Used to estimate inflationary effect of tariffs Trump first-term support during pandemic: about $3 trillion - Deficit-financed relief mentioned in discussion Biden American Rescue Plan: about $2 trillion - Deficit-financed relief mentioned in discussion Total pandemic support cited: closer to $6 trillion - Combined Trump and Biden relief discussed in the podcast Deficit effect under Trump sweep: about 1 percentage point of GDP per year - Estimated increase in the budget deficit 10-year deficit impact of tax cuts: $3.4 trillion - Over the next decade under Trump sweep Tariff revenue offset: $1.7 trillion - Offsetting part of the tax-cut cost over 10 years Pennsylvania polling edge in model: Biden up by about 0.6 percentage points - Referenced as a close-election indicator Baseline Fed funds rate: around 3% mid-decade - Baseline scenario Baseline 10-year Treasury yield: just over 4% - Baseline scenario Baseline deficit level: around 5% to 6% of GDP - Baseline scenario Republican-sweep recession timing: mid-2025 - Model output for Trump sweep Republican-sweep unemployment move: from 4% to a little over 5% - Approximate recession outcome Political balance embedded in scenarios: 50% Biden/divided or Democratic sweep vs. 50% Trump/divided or Republican sweep - Illustrates overall election uncertainty

Pivotal Quotes: "I think it is a very client-driven scenario." — Brendan Lacerda: Explaining why Moody’s publishes the election study "The differences here are big." — Mark Zandi: Describing how unusually consequential this election is compared with others "It sounds right, just listening to the scenario itself, it sounded like a stagflation scenario." — Chris Druides: Reacting to the Trump Republican sweep results

Implications: Listeners should expect materially different growth, inflation, and deficit paths depending on the election outcome. The study suggests Trump’s sweep is the riskiest macro path, while divided government is more stable, and policymakers, firms, and investors should plan for policy volatility rather than assuming campaign rhetoric is empty.