Vice President Kamala Harris doubled down on her economic plan this week, emphasizing the “return on investment” (ROI) from her policy proposals rather than focusing on the cost to taxpayers. While this strategy offers an appealing narrative, traders and investors are grappling with the potential long-term economic impact, particularly in light of a $2 trillion projected deficit over the next decade.
Harris’ comments came after unveiling her economic agenda, which includes extending the Child Tax Credit and Earned Income Tax Credit (EITC). The Vice President pointed to the success of these programs in reducing child poverty by over 50% during the administration’s first year, emphasizing their potential to yield long-term benefits. “The return on that investment, in terms of what it will do and what it will pay for, will be tremendous,” she said.
She also touched on the broader economic effects of increasing homeownership, noting the positive impact on property taxes and public school funding. Harris reiterated that the discussion around these policies should focus on their ROI, suggesting that stronger communities and economic growth could ultimately help fund the programs themselves.
For traders, this messaging presents both opportunities and risks. Government spending on social programs can spur consumption and stabilize markets in the short term, particularly in sectors tied to consumer spending, housing, and local economies. However, the concern remains over the long-term fiscal impact, particularly with mounting federal deficits. The nonpartisan Committee for a Responsible Federal Budget (CRFB) warned that Harris’ policies could add at least $1.7 trillion to the federal deficit over the next decade—a number that could rise to $2 trillion if housing policies are extended indefinitely.
A Closer Look at Fiscal Risks
Critics, including David Bahnsen, founder and CIO of The Bahnsen Group, expressed skepticism over Harris’ focus on ROI without addressing the real financial burden. In a discussion on FOX Business, Bahnsen warned that throwing around the term “return on investment” in public policy can be misleading. “In my world, we can measure ROI, we’re accountable to it, and the person who bears the risk also achieves the reward,” he said, drawing a distinction between private and public sectors.
Bahnsen’s concern reflects broader fears in the market about unchecked government spending and ballooning national debt. While Harris’ proposals have potential to lift certain economic metrics, the sustainability of that growth is questionable if it leads to fiscal instability. The specter of rising interest rates and tightening financial conditions only heightens these concerns for investors.
From an investment perspective, the fiscal outlook may steer market participants towards safer, interest-sensitive assets as the potential for higher national debt increases. Treasury yields could become a key focus as more government borrowing could place upward pressure on interest rates, affecting bond markets and beyond.
Potential Impact on Tax Policy
Harris’ economic plan also touches on potential changes to the tax landscape, including her support for eliminating taxes on tips and raising the minimum wage. According to CRFB estimates, these policies could further increase the deficit by $100 billion to $200 billion over the next decade. This brings into question how these initiatives will be financed, especially since Harris’ campaign signaled alignment with President Biden’s fiscal year 2025 budget, which includes several revenue-raising measures. However, specific details on how Harris’ latest proposals will be funded remain vague.
For equity investors, these tax policy changes might bring a mixed bag. On the one hand, increased consumer spending from higher wages could provide a boost to retail, hospitality, and other service-driven sectors. On the other hand, businesses may face higher operating costs, potentially squeezing profit margins and dampening future earnings growth. The overall balance between economic stimulus and fiscal discipline will be key to maintaining investor confidence.
Key Takeaways
- Short-Term Gains, Long-Term Risks: Harris’ economic policies promise significant short-term benefits in terms of reducing poverty and boosting consumer spending. However, the long-term fiscal risks from increased federal deficits could weigh heavily on future economic growth, prompting concerns for investors about sustainability.
- Interest Rates and Debt Levels: With the CRFB estimating up to $2 trillion in additional deficits over the next decade, traders should keep a close eye on interest rates and bond markets. An increase in government borrowing could lead to higher yields, affecting everything from fixed income investments to broader market liquidity.
- Impact on Sectors: Tax credits and policies favoring homeownership could buoy housing and real estate sectors, while minimum wage increases and tip tax eliminations could provide a boost to consumer-facing industries. However, rising costs for businesses could offset some of these benefits, leading to uneven performance across different sectors.
- Fiscal Accountability: Investors are right to question the lack of clarity on how these new policies will be funded. The risk of escalating national debt without clear revenue offsets could pressure markets, especially if interest rates begin to climb faster than expected.
Conclusion
While Harris’ focus on the “return on investment” in social spending initiatives may have political appeal, the economic implications for markets and traders are complex. The potential for higher deficits and interest rates looms large, raising questions about the long-term sustainability of these programs. For investors, navigating these changes will require a careful balance between capitalizing on short-term growth opportunities and mitigating risks associated with future fiscal instability.
