Business

Economists predict good election year

By Erica Batten. A recent Wells Fargo report analyzing the effects of an election year on the U. S. economy trumps the conventional wisdom that economic uncertainty surrounding a changing of the guard leads to slowdown. On the contrary, a variety of measures, including real GDP, consumer spending, disposable income and business fixed investments showed growth during election years.

The report, published in June by Wells Fargo Securities economist Michael Brown in Charlotte and economic analyst Michael Pugliese, looked at economic indicators including real GDP, employment, and industrial production on a quarterly basis from 1960 through 2015. The indicators are variables typically used by the National Bureau of Economic Research to date business cycles.

Median GDP growth was 1.25 percentage points higher during an election year, while industrial production was 1.9 points higher.

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As politicians seek voter support by promising policy changes such as greater infrastructure spending and tax cuts, the economy experiences a boost based on these prospects, the report’s authors suggested.

Both presidential contenders, Hillary Clinton and Donald Trump have proposed changes to the tax code. Clinton plans to increase taxes on the wealthy, adding a 4 percent surcharge to the current top rate. She also wants to increase the estate tax, which Trump has proposed eliminating.

Trump’s plan includes reducing the tax rate on the wealthiest Americans from 39.6 percent to 25 percent and capping taxes on dividends and capital gains at 20 percent.

The Tax Foundation, a nonpartisan research group, has estimated that Trump’s proposed tax cuts would grow the GDP by 11 percent and wages by more than 6 percent over the next 10 years. The cuts would also decrease tax revenues by more than $10 million.

Clinton would use the tax code strategically to incentivize employee profit-sharing. And she proposes tougher restrictions on businesses seeking to move overseas.

Both candidates have come out against the Trans-Pacific Partnership and other trade deals.

Both candidates have said they’ll push for infrastructure projects. In his 2015 book, “Crippled America,” Trump alludes to New Deal-type infrastructure spending as a strategy for boosting the economy. Clinton wants to increase spending on broadband networks and clean energy as well as job-training programs.

Despite the candidates’ similar stances on some issues affecting the economy, Trump and Clinton’s differences on policies regarding immigration, the national debt and the minimum wage could have significant effects on business and household income.

The Wells Fargo report said a new president and Congress can make changes to regulatory policy, trade and fiscal policy, but that, paradoxically, such uncertainty may result in election-year economic growth.

“Households or businesses may anticipate a major policy change following an election year, which could cause them to pull forward their spending plans into the election year,” Brown and Pugliese said in the report. “If businesses anticipate the elimination of a tax credit based upon the election’s outcome, for example, they might pull forward investment plans.”

Studies cited in the report found that a statistically insignificant difference between real total government spending in election and non-election years. In other words, policy makers aren’t boosting government spending in election years to support growth of the GDP.

Brown and Pugliese controlled for several outside factors that could have skewed the results of their study. They looked at the numbers of quarters spent in recession during election and non-election years and found them to be roughly equal. And the median rate of quarterly year-over-year GDP growth during recessions between election and non-election years was statistically insignificant.

The report’s authors also considered the effects party control of the White House, but found that the time period they studied was split evenly between Democratic and Republican control.

“Our results suggest that the general argument that uncertainty during a presidential election year results in slower economic activity does not hold water,” said Brown and Pugliese. “In fact, based on our analysis, we find that real GDP growth, real consumer spending growth, real business fixed investment growth, real disposable income growth and industrial production growth are actually stronger during presidential election years compared to non-election years.”

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