Tonight, when President Joe Biden delivers his State of the Union address, he’ll make the pitch to Americans that the economy is much better off now than it was when he took office. But he’ll also lay out a forward-looking agenda that could shape what the economy looks like for the next four years. Whether he or Donald Trump wins the White House in November will have implications for inflation, economic growth, the deficit and more. MM talked to economists about what could be in store under the next president. Government spending: The economy, which grew 3.1 percent in 2023, is expected to expand more slowly this year in the face of still-restrictive interest rates from the Federal Reserve. But experts doubt there will be a surge in spending by Congress in 2025, given heightened concerns about inflation and deficits. Biden has talked about making deficit reduction a priority, though he has focused mostly on revenue-raising measures, like hiking taxes on the wealthy and beefing up IRS enforcement. “I just don’t see a big fiscal stimulus coming out of a Biden second term,” said Josh Bivens, chief economist at the left-leaning Economic Policy Institute. Still, budget deficits are likely to remain elevated under Biden or Trump, said Libby Cantrill, head of U.S. public policy at PIMCO. “The extent of those deficits will, in part, depend on the composition of Congress and whether either candidate has united control of Congress or not,” she said. “If there is a Republican sweep, we would expect Trump to extend all of the expiring Tax Cuts and Jobs Act-related taxes and be supportive of more defense spending. On the other hand, if there is a Democratic sweep, we would expect Biden to extend many of the expiring tax cuts as well as be supportive of both defense and non-defense spending.” A big question mark relates to the fate of the Inflation Reduction Act, which is funding investments in clean energy. Republicans are attacking the law, which they argue reduces efficiency and increases costs by picking winners and losers, but undoing it may create a new set of economic problems. “Right now the sector is proceeding under the impression that a build-out of clean energy will be subsidized and will be producing lots of our energy by the end of 2030,” Bivens said. “Clawing back subsidies and making energy producers scramble to figure out how they’ll be satisfying future energy demand in totally different ways could definitely lead to price spikes and volatility.” Inflation: The rate at which the cost of living is rising has slowed markedly in the past year and a half, inching closer to the Fed’s 2 percent target. Part of that story is that strong demand for labor has been met with more foreign-born workers. Michael Strain, director of economic policy studies at the conservative American Enterprise Institute, said Trump’s talk of “closing the border” and deporting millions of undocumented immigrants could lead to higher costs in certain sectors — particularly those that employ a lot of immigrants such as restaurants, hotels and fresh produce — but might not actually lead to generalized prices increases. “It is possible, certainly, that it could spark a wage-price spiral, which would be inflationary,” he said. “I’m just not totally sure that we should expect that.” Bivens said immigration helps reduce price pressures because while immigrants are both consumers and workers, they tend to be employed at higher rates than current residents, which leads to higher output. “If a future Trump administration really did deport millions of workers, that would be inflationary,” he said. The prospect of more Trump tariffs — the former president has talked 10 percent across the board and 60 percent on Chinese goods — would also raise prices on the affected goods, but it depends. Cantrill said tariffs could potentially be a meaningful drag on growth and have inflationary impacts, though she said Trump might not have the unilateral authority to put those measures in place. If the duties are more targeted, like they were in his first term, “the impact on growth and inflation would be much more de minimis,” she said. For his part, Biden has kept a lot of the Trump tariffs in place. Bivens argues that more tariffs could lead to a further decoupling of the U.S. and Chinese economies. “That might be a small drag on near-term growth but might provide some better resilience in the form of supply-chain diversification,” he said. Happy Thursday — If you stay up to watch SOTU, let us know what you think. Send reaction to zwarmbrodt@politico.com.
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