Kamala Harris’s Economic Policy Profile

Sep 9, 2024

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A Comparative Review

As the 2024 political landscape sharpens, two contrasting economic philosophies are emerging: Kamala Harris’s interventionist approach and Donald Trump’s classical liberal strategy. Harris’s policies aim to expand government programs and market regulations, seeking to ease financial pressures on individuals and stimulate economic growth. Meanwhile, Trump’s policies emphasize deregulation, free markets, and individual economic freedom, drawing on a classical liberal framework that minimizes government intervention. This article critically examines Harris’s proposals in light of historical and contemporary economic lessons, comparing them to Trump’s approach, which is rooted in economic freedom and deregulation.

Income Taxes

Harris proposes expanding the child tax credit, increasing the Earned Income Tax Credit (EITC), and ensuring no tax hikes for those earning under $400,000. These measures aim to provide short-term relief to families but could pose long-term risks. History has shown that similar expansions of social programs often lead to fiscal instability.

In Argentina, a similar expansion of social programs “resulted in mounting fiscal deficits, which were initially financed through debt. However, when external borrowing dried up, the government resorted to printing money, leading to hyperinflation and a collapse in confidence” (IMF, Argentina’s Economic Crisis: Causes and Cures). The concern is that without a sustainable funding model, Harris’s plans may cause similar outcomes.

Comparative Economic Theory:
Economist Arthur Laffer’s theory, as outlined in The Laffer Curve: Past, Present, and Future, emphasizes the risk that excessive tax credits or social programs can reduce government revenue and lead to budget crises. Harris’s proposals, if not paired with sound fiscal management, could increase U.S. deficits, contributing to economic instability in the long run.

Economic Impact Analysis:
While Harris’s tax policies aim to alleviate poverty and support working families, the long-term impact on the U.S. deficit is a concern. Estimates from the Congressional Budget Office (CBO) suggest that expanding these tax credits without corresponding revenue increases could add billions to the national deficit annually, exacerbating the U.S. debt-to-GDP ratio.

Inflation Control

Harris plans to combat inflation by imposing a federal ban on price gouging for essential goods like food and groceries. However, price controls historically have led to unintended consequences. In Venezuela, for example, “price controls, introduced to protect consumers, instead led to widespread shortages and the creation of black markets. Businesses could no longer afford to produce at the capped prices, leading to a collapse in supply” (IIEP, Economic Consequences of Price Controls in Venezuela).

Moral Hazard Consideration:
Milton Friedman warned that “price controls create perverse incentives for producers to reduce output and consumers to increase demand, leading to persistent shortages” (Capitalism and Freedom). Harris’s plan, while aimed at protecting consumers, risks falling into the same traps observed in countries that used price controls to combat inflation.

Economic Impact Analysis:
While price gouging bans may temporarily protect consumers, they often distort market pricing mechanisms. A study from the National Bureau of Economic Research (NBER) suggests that price controls, if improperly managed, can reduce the availability of goods and lead to black markets, ultimately increasing inflationary pressures rather than reducing them.

Affordable Housing

Harris’s housing plan includes down payment assistance, tax credits for first-time homebuyers, and repurposing federal land for housing development. While these policies aim to increase affordability, similar government-led programs have historically led to inefficiencies.

In the Soviet Union and Venezuela, “government-driven housing programs led to inefficiencies, poor-quality construction, and eventually a collapse in housing supply as the government struggled to maintain control over housing markets” (Oxford University Press, Housing and Urban Development in the Soviet Union). Venezuela’s intervention in the housing market further “stifled private investment, leading to a shortage of affordable homes and deteriorating living conditions” (Journal of Housing Economics, Public Housing Policies and Their Failures in Venezuela).

Economic Impact Analysis:
Harris’s housing plan could increase homeownership in the short term, but its long-term sustainability depends on private sector participation. A report by the Urban Institute indicates that down payment assistance programs are only effective when paired with market-driven housing policies that ensure sustainable supply growth. Without this, housing prices could continue to rise, and supply might not keep up with demand.

Expanding Social Programs and Tax Credits

Harris’s plans to expand the EITC, increase child tax credits, and cancel medical debt are designed to alleviate economic inequality. However, countries like Venezuela and Greece serve as cautionary tales, demonstrating the risks of expanding social programs without adequate funding.

In Venezuela, welfare expansion, combined with price controls, “contributed to runaway inflation and a collapse of the private sector” (World Bank, The Fall of the Venezuelan Economy). Greece faced a similar crisis when “expanding social spending during periods of fiscal deficit led to unsustainable debt levels, triggering austerity measures and a prolonged economic crisis” (Brookings Institution, The Greek Financial Crisis: Overview and Policy Options).

Economic Impact Analysis:
Expanding social programs without offsetting revenue increases risks creating a fiscal imbalance. According to the CBO, expanding the EITC and child tax credits could add substantial costs to the federal budget, raising concerns about long-term fiscal sustainability.

Proponents of Harris’s policies argue that the U.S. has the financial resources to manage increased social spending without risking collapse, unlike countries such as Venezuela or Greece. For instance, the Center on Budget and Policy Priorities (CBPP) claims that “expanding the EITC and child tax credits has been shown to lift millions of children out of poverty and improve long-term economic outcomes.”

However, this argument overlooks the long-term fiscal risks. As economist Friedrich Hayek noted, “government control over the economy, even with the best intentions, often leads to an erosion of individual freedoms and economic inefficiencies that are difficult to reverse” (The Road to Serfdom). The U.S. already has a high debt-to-GDP ratio, and adding further spending could exacerbate this, leading to increased borrowing costs or inflation.

Snowball Effect of Expanding Government Control

When initial government interventions fail to deliver the desired results, governments often respond by expanding their control, creating a “snowball effect.” In Venezuela, price controls led to shortages, which led to rationing and black markets; similarly, housing assistance led to inefficiencies, resulting in further regulations or government ownership of housing markets.

As the Cato Institute explains, “the more government attempts to fix market inefficiencies through intervention, the more it creates an environment where private sector solutions are crowded out, leading to long-term economic stagnation” (Kontorovich, Lessons from the Soviet Economic Experience).

Counterproductive Strain on Markets

While Kamala Harris’s proposals may seem moderate in the U.S. political landscape, they carry the risk of placing undue strain on markets. These policies, instead of leading to their intended outcomes, could repeat the pattern seen in countries where government interventions led to deeper economic crises.

The cumulative effect of these measures is the most concerning. As inflation, housing shortages, and fiscal strain take hold, further interventions may become necessary, leading to a cycle of government control. Without careful management and a nuanced approach, the U.S. could find itself following the path of countries that adopted overly interventionist policies.

The Importance of Learning from Economic History

The risks of Kamala Harris’s economic policies lie in their potential to create unintended consequences and trigger a cycle of increasing government intervention. While some social spending and regulatory measures may be necessary, it is crucial to strike a balance between market freedom and government involvement. Policymakers must learn from historical examples and carefully consider the long-term economic impacts before expanding government control.

An Alternative Path: Donald Trump’s Classical Liberal Economic Policies

Donald Trump’s economic policies offer a classical liberal alternative to Harris’s interventionist strategies. Grounded in the principles of deregulation, free markets, and individual responsibility, Trump’s approach aims to reduce government interference, foster private sector growth, and ensure long-term economic stability. Historical successes have shown that such strategies often lead to increased prosperity, innovation, and resilience.

Income Taxes:

Trump’s 2017 Tax Cuts and Jobs Act embodies a classical liberal approach by reducing taxes for individuals and corporations, incentivizing investment, job creation, and consumer spending. His plan to extend these tax cuts beyond 2025 continues this philosophy, empowering individuals and businesses to make their own financial decisions. Additionally, Trump’s proposal to make Social Security income tax-free for all retirees reflects the classical liberal commitment to protecting earned income from government overreach.

Historical Example: The Reagan Tax Cuts (1981)

Ronald Reagan’s 1981 Economic Recovery Tax Act, which significantly lowered income taxes, spurred one of the most prosperous periods in U.S. history. The “Reagan Boom” saw GDP growth, lower unemployment, and increased tax revenues as the economy expanded.