Would a Democratic president really be better for the economy than a second Trump term?
Former New York Federal Reserve President William Dudley showed an alarming lack of political judgment in recklessly suggesting the Fed should "consider how their decisions will affect the political outcome in 2020." In doing so, Dudley inadvertently gave President Trump an armory full of ammo for claiming the "deep state" is conspiring to remove him from office, or at least deny him a second term. Even more Trump attacks on Fed independence will surely follow.
But Dudley's economic judgment might be equally dodgy. The central reason he thinks the election might "fall within the Fed's purview" has nothing to do with accusations that Trump is financially corrupt, an agent of foreign influence, or has violated his constitutional oath of office. Rather, it's Dudley's analysis that "Trump's re-election arguably presents a threat to the U.S. and global economy, to the Fed's independence and its ability to achieve its employment and inflation objectives."
Yet a "threat" compared to what alternative policy path? Has Dudley noticed how populist economics has also infected the Democratic Party? Does he think, for instance, that President Bernie Sanders would be less of an economic "threat" than a second Trump term? That's a questionable proposition.
Consider the expansive and expensive Sanders agenda. For starters, he would transform the American health-care system into a single-payer "Medicare-for-all" program that by Sanders' own estimates could cost as much as $40 trillion over a decade. And while Sanders says higher taxes would replace private insurance premiums, that assumes major cuts relative to what commercial insurers currently pay providers. If those deep reductions don't happen, budgetary costs could balloon. And even if they don't, there will almost certainly be significant initial disruption to the American health-care system.
Sanders also has his own sprawling "Green New Deal" plan for tackling global warming and economic inequality. As president, he would directly invest $16.3 trillion into everything from renewable energy research project to funding five years of full salary and benefits for displaced fossil fuel workers. All this as the economy completely gets off carbon fuels by 2050, a transition that Sanders claims would eventually pay for itself.
So right there you have nearly $60 trillion worth of policy ideas that would massively overhaul almost the entire American economy. Would those extreme changes, or even just uncertainty about some of those changes being implemented, be more or less disruptive than, say, extending the current trade war with China and more Trump Twitter attacks on Fed Chair Jay Powell? Has Dudley tried to model any of this?
If he hasn't and still plans to, Dudley should also remember that Sanders has plenty of big ideas on trade and monetary policy, too. Sanders — who's been against all the free trade deals of the past generation — says "of course" he would use tariffs as a negotiating tool with China, but in a "more rational" way than Trump. As for the Fed, Sanders in the past has favored preventing the central bank from raising interest rates until unemployment rates are lower than 4 percent, while also preventing bankers from serving on the central bank.
And it's not just Sanders, of course. Democratic presidential politics is filled with legit candidates offering economically risky ideas that should repulse him. Elizabeth Warren's plan to "reinvent" trade might prevent any new trade deals from happening. She also wants a wealth tax of the sort other nations have found difficult to administer and abandoned. Kamala Harris would create a new tax credit for low- and middle-income taxpayers that is projected to reduce federal revenue by nearly $3 trillion over the next decade.
It's hard to imagine Dudley favoring any of this. He isn't some radical theorist who thinks deficits don't matter and protectionism makes an economy stronger — and yet also somehow ended up as president of the New York Fed. He's a PhD economist who worked at Goldman Sachs for two decades. His past criticism of the Trump tax cuts couldn't be more mainstream: "There is no such thing as a free lunch. The legislation will increase the nation's longer-term fiscal burden, which is already facing other pressures, such as higher debt service costs and entitlement spending as the baby-boom generation retires."
Or maybe Dudley is simply betting Joe Biden will be the Democratic nominee and put forward more traditional center-left economic policies that centrist Wall Street economists like Dudley can live with, including respecting Fed independence. But Biden seems a pretty weak frontrunner on whose fortunes to wage the credibility of an American institution that still seems functional. And as we've already seen, Dudley isn't much of a political handicapper.