The stated goal of this post is to simplify something that is admittedly complicated for the sake of thinking about it freshly and gaining perspective. Deal with the occasional oversimplification.
What is the economy/What are economics?
At it’s most basic, the economy is a tool for distributing resources. It’s what allows people to not have to do everything themselves. I don’t have to grow my own food because someone else is going to do that, and I’ll trade him lumber and skills as carpenter. We’ll both have more food and better housing.
Whatever mechanism you use to do that, that’s the basic idea that’s existed for pretty much all of human history.
Some examples (assuming the theoretical ideal of each):
(These are highly un-academic examples and definitions. If you want something a little more rigorous, try this.)
- Capitalism – mutual self-interest (all of us attempting to maximize the rewards we are able to reap for our work) means that the market will find the most efficient way to distribute resources. A going rate of food-for-carpentry will be established as different farmers and carpenters seek to trade with one another.
- Communism – the state (i.e. the collection of all the people in a given area) owns all the farms and all the woods and everything else. Citizens will farm and do carpentry, and the state will see that these goods and services are distributed fairly to everyone.
- Authoritarian – a ruling monarch or group takes the food it needs from the farmers and the carpentry it needs from the carpenters as tribute, usually providing something like security in exchange.
All systems can be abused in any number of ways (a king might take too much food from his citizens in the name of protection, leaving him fat while the people starve), but the important thing to remember is that in all cases, the goal is ultimately to distribute goods and services in a way that ensures individuals don’t have to do everything themselves, but can still get the things they need to survive.
How do economies grow?
A question worth asking at this point is why, if you grow the food I otherwise would have grown, and if I do the carpentry you otherwise would have done, why things don’t shake out where everyone gives a little to everyone else and takes a little from everyone else, and everything’s hunky-dory.
There’s a couple of factors at play here, but maybe the most important is that it turns out that it’s more efficient for people to specialize. The amount of work it takes to farm 100 acres isn’t twice the amount of work it takes to farm 50 acres. It’s somewhat less than that (for a lot of reasons, like the fact that you already have the tools you need and don’t need to get another set for that other 50 acres, or maybe you’re just better at farming than I am and can do it more successfully on the same number of resources).
Which means that if we split up all the duties required to cover everyone’s needs, at some point we’re producing a surplus of goods – we’re creating more than we consume.
We could do a whole bunch of different things with that surplus, but the concept of a surplus is important in and of itself, because it’s insurance against trouble. Have a year when the crops don’t grow as well as they should? If we had a surplus last year (and some way to preserve it), we’ll still be ok this year. We won’t all starve like we might have otherwise.
But economies really grow when they’re able to invest that surplus into creating new pieces of the economy.
Think about it like this: a really basic economy has roles for people who hunt or gather food, people who prepare that food, people who create clothing, people who manage housing, and maybe a person or two in charge of managing and directing all the other people. But what if, because you had a surplus of food (or clothing, or whatever), one of those people was able to make pottery instead? Now you have a whole new piece to your economy that wasn’t ever there before. And you didn’t lose anything except something that was probably just going to be sitting around, doing nothing anyways!
In a more modern context, surpluses look more like people not having to live paycheck to paycheck, which creates the ability to have a tourism industry. Or for someone to create the Apple Computers in their garage. Surpluses promote innovation and security, and over time that means the economy can get bigger and more specialized (and bigger and more specialized…) without too much risk of utter collapse.
That’s one of the reasons that our modern economy is designed to reward innovation. The way trade works in our economy, if you do/create something that many people want, you can make a lot of money (i.e. surplus, which equates to an ability to have more food, a bigger house, more security from unforeseen problems, etc.). But it also benefits the economy as a whole, because the entire thing gets bigger, theoretically making the system more rewarding for all participants, if only by a little bit.
How does any of this apply to the election?
Let’s go back to the primary goal of any economy for a second: distribute essential goods and services. And not in a socialistic “what’s yours is mine” sort of way (although that’s one way to do it), but in a more basic, “I’m a farmer, you’re a carpenter, let’s both be able to eat and have a home,” sort of way.
What that means is that ideally we’d have a system that does this fairly, one that makes sure, at a minimum, that everyone who “pays their dues” to make the system work is able to get what they need from it to live. (And then on top of that does stuff like reward hard work, high achievement, innovation, and other stuff that adds value to the system as a way to get people to do more of those things.)
Which brings us to the election, because the modern debate over the economy seems to be mostly about whether our current system actually does that and less about how to optimize a system that everyone agrees does work in its fundamentals.
(That is, itself, a bit of an oversimplification, because we’re not locked in a Cold War-style standoff between Capitalists and Communists. But there is a significant debate about exactly how much free capitalism is good versus how many checks and social protections against business interests are needed.)
Here’s what I mean.
There are some people who believe that under the current system of business and taxation (broadly speaking), if you work hard and are relatively smart with your decisions that you can get everything you need. You’ll be able to afford stuff like food, a place to live, transportation, essential healthcare, and a few small luxuries (because we live in a wealthy nation with a big economy). They’ll say that any gaps between what the richer and poorer citizens have is a result of differences in work ethic, intelligence, and innovation, and that the richer deserve what they have because they’ve worked for it and they’re the ones who have added to the economy the most.
Then there are others who believe that even with hard work and basic intelligence, under our current system it isn’t guaranteed that you’ll be able to get all the basics you need. In some cases this is because they disagree on what constitutes “the basics” (for example: How much healthcare is an acceptable minimum amount?) but more broadly they’ll say that the economy is being manipulated such that it disproportionately benefits the rich. Meaning you could be tremendously hardworking and innovative, and someone else might still be able to screw you. Legally.
Broadly speaking, the first group are Republicans and the second are Democrats. Democrats will argue for things like a higher minimum wage as a check against fatcat business owners making millions annually, while Republicans will argue that the market is able to set a value on the work those employees provide, and the business owners should be able to reap their rewards for innovating (creating a new business, in this example).
What does this difference affect?
A lot, because as I mentioned, the difference isn’t just in how many checks need to be added to or removed from businesses, but what constitutes “the basics.” That means it touches things like healthcare, trade, banking, minimum wage, public works, and (maybe biggest of all) tax policy.
Those are all subjects to explore in their own right, so for now, let’s look at what the candidates are broadly proposing for the economy.
What are Clinton and Trump proposing?
Let’s start with Donald Trump. The 17 seconds of content (once you subtract the lead in and back-end cards) in his video called “The Economy” (on the “Issues” page of his website) mentions three specifics:
- Everyone’s taxes should down
- The economy should grow
- We should reduce the national debt
And now let’s try to gauge the potential economic impact of each one.
First, taxes. I plan on having another one of these posts entirely on taxes, but we’re going to need at least the big picture here.
Trump says that lowering everyone’s taxes is a big part of how he plans to achieve his #2 point. (“Largely with our great tax plan where everybody’s taxes is [sic] going down, we’re going to grow our economy.”) So how does that work?
Think about it this way: what would you do if you suddenly had an extra $50 every paycheck? You’d have a surplus. So you might save it, but you also might buy a new TV (after a few months), or you might invest it into a project or business, one that has the potential to grow the economy. That all sounds good, and it can be.
But taxes are also important. Taxes pay for things like schools, police, roads, the military, and many, MANY other things. Higher taxes and more government spending aren’t always a good thing, but taxation and government spending are a pretty good way to make sure that everyone has access to roads, water, and power, or to make sure that the nation can defend itself (all things which we can broadly agree are part of the modern “basics” for any participant in the economy). Like the economy at large, sometimes it makes more sense and is more efficient to assign someone (the government, in this case) to do a certain kind of work for everyone else instead of having every individual worry about it themselves.
So cutting taxes is fine, but it also means that you have to cut portions of the government that would have used that funding – unless the economy grows so much due to people investing the extra money they got from tax cuts that the government actually takes in more money than they would have otherwise. (There’s a balance to be found, and where the balance lies is probably the most hotly contested big idea in tax policy.)
This is at the crux of Trump’s plan, and how we get to the bit about the national debt. Because at first blush, it doesn’t seem to add up. If the government takes in less tax revenue, they’re going to have to A) spend less on existing programs, B) cut programs entirely, C) take on new debt, or D) do some combination of A, B, and C. That means no money to pay down the national debt, and it might actually grow.
Unless the economy really does grow so much that, when combined with less government spending, the government runs a surplus. Then we could use that surplus to pay down the debt. And just to follow from concept to reality, that’s where the belief that the current system works comes back into play. Trump’s plan is predicated on the idea that allowing citizens to work harder and invest more (by taking less money in taxes) will lead to growth, and that even with fewer public, government run programs, citizens will be able to have all “the basics.” He’s betting the current system really does work that way.
Which means that the devil really is in the details. And by pretty much every serious analysis (like this one), the details don’t add up in Trump’s economic strategy. The principles he’s espousing might be sound at a point, but the measures he’s proposing, most experts agree, are too extreme. Under his plan, resources probably tend to become concentrated at the extreme rich end of the pole, with not enough to go around at the bottom. Moreover, the economy becomes destabilized, because national debt is essentially betting you’ll have future surpluses great enough to offset the current debt.
Clinton’s proposals are a little bit harder to give an outright thumbs up/thumbs down to, but they’re also far more detailed. Conveniently, she also has three main ideas that she puts right at the top of the page, and we’ll use that as a framework rather than trying address every single separate point on her webpage that ties in (although that rigor is appreciated):
- Give working families a raise, and tax relief that helps them manage rising costs.
- Create good-paying jobs and get pay rising by investing in infrastructure, clean energy, and scientific and medical research to strengthen our economy and growth.
- Close corporate tax loopholes and make the most fortunate pay their fair share.
Ok, let’s run down the list.
Giving “working families” (code for the middle class) a raise and tax relief generally corresponds to two things: a rise in the minimum wage, and some new tax credits (the tax rebates you get for doing things like buying a home or claiming dependents – the government uses these to incentivize behaviors it wants to see).
The trick with both of these is that it tends to add stability but curtail rapid economic growth (and in the case of the latter, add debt unless you raise taxes elsewhere). If a business is spending more on payroll because it is required to pay its employees more, it has less to spend on new investments that might grow the business and the economy as a whole quickly. So again – it’s about finding a balance. What’s giving individuals enough security and investment potential, and what’s giving businesses that might rapidly grow the economy enough room to do just that?
Second: invest in infrastructure, clean energy, and research. Part of the reason it’s hard to quantify the effect these proposals will have on the economy is that no one really knows how they’ll pan out. There are many, often competing theories.
Building new infrastructure (roads, trains, electric grids, etc.) is important, but how much of it is essential? It creates temporary jobs, but is it worth the monetary investment? Most would say “yes,” and it’s an easy way to put a lot of people to work while doing something everyone benefits from, but government spending has to be financed by taxes. Most of the time, new taxes (especially under Clinton’s plan) are enacted only on the very wealthy.
So while everyone enjoys the benefits, only a few people share the burdens. And if you’re really cynical about it, you could see it as the government taking rich people’s profits away from them (because they could have employed those people directly with the money they lost in taxes, theoretically creating a long term benefit for themselves greater than an improved road). But it’s also a check against rich people just sitting on their money, or on them not paying their employees enough.
The energy question plays out with somewhat similar arguments, although different in some key details, which brings us to the research investment, the toughest part of this to quantify. See, research is tricky. Most of the time it doesn’t have a direct and immediate economic effect. But when research investment pays off, it usually pays off pretty big.
So in short, this is another idea that flatlines, or even depresses the economy in the short term, because we’re investing surpluses without a tangible immediate result to show for it. But in the long term, research investment tends to open avenues for explosive new growth and really big benefits for everyone involved. Just think about where we’d be without modern medicine. Or iPhones. Both are research paying off.
And finally (at least in the super short version), Clinton proposes closing corporate tax loopholes. Which is great if you can do it – it increases government revenue and prevents companies and big earners from gaming the economic system – but it can be tough to do.
So Clinton’s economic fundamentals are more about creating short term stability than short term aggressive growth. And how does it curl back to our difference in economic theory between the two parties? If you look at Clinton’s plan, it’s got lots of checks against businesses, and thus the people who own them. It taxes the rich more aggressively than the poor and middle classes. It limits what businesses are and aren’t allowed to do, and what they have to provide for their employees. It provides for more people getting a greater number and quality of minimum benefits. It’s trying to level the playing field, to add stability to a system it perceives to be unbalanced.