Everything Wrong With the Moody’s Analysis


moodysRecently, Mark Zandi, Moody’s chief economic analyst, came out with a new report praising Hillary Clinton’s economic plan. According to the report, Clinton’s plan would yield a 2.7% average GDP growth per year, and add an additional 3.2 million jobs, thus allowing a net total of 10.4 million jobs. However, many things do not add up towards a “strong” Clinton economic growth forecast.

The first issue with Hillary’s economic plan is that a simple $1.5 trillion expenditure by the federal government over 10 years would somehow translate into a 2.7% average GDP growth per year. Even with just using simple economic multipliers, this would not be possible. However, expenditure itself is not the reason on why the 2.7% average growth wouldn’t happen. Even if the federal government did spend $1.5 trillion, most of this “supposed” growth should come from what remains of the US free-market society (which is very little).

The second issue (which is cited within the report itself) is that private sector investments would grow very little. Taking this at face value, this is not a good formula/recipe for a good economy. Private sector investments are vital for any economy to grow and function. From just using this face value statement, a 2.7% average growth would be extremely unrealistic.

The third issue (also cited in the report itself) is that personal households would have reduced incentives to work, invest, or save. Again, taking the statement at face value, we can see that this would simply not work. You and I already know that savings are essential for any economy to function, as savings is the key ingredient for the accumulation of capital, and that the accumulation of capital will result in higher productivity. Without higher productivity, economic growth would start to slow down.

Issue number four is that Clinton would apparently close the deficit between expenditures and revenues. How so? Clinton would increase revenues by taking from the wealthy, and by decreasing defense/military expenditures. Already we can see that with the nature of Hillary Clinton and her voting record, a decrease of military expenditures is extremely unlikely to happen in the near future. It’s also evident that taking from the wealthy would not result in a dramatic increase in revenues, which leads us to ask the next question, how would the US government (or Hillary’s administration) finance the remainder of this gap? Higher taxes on middle class workers (see the third concern above), finance via debt (reduces the US’s worthiness of credit), or inflation (see the third concern above, again)? The most likely answer to this multi-billion dollar question is that Clinton would most likely go with route number two: finance with debt.

Fifth issue: This is where the report starts falling dramatically. The analysis of Clinton’s economic plan uses a 2009 purchasing power figure in order to simulate the likely outcome. One issue with using a 2009 figure would imply that the US dollar would be 9.74% stronger than 2015 (or, what inflation figures have been recorded in 2016) purchasing power figures. This would result in a stronger simulation of the economy. Even if inflation is taken into account throughout the whole simulation of Clinton’s plan, the numbers would still be biased. A more suitable solution is to start with the current purchasing power of the US dollar and allow inflation to factor in what would happen to the economy over the 10-year period.

Sixth issue: The Report cites that an additional 3.2 million jobs would be added to the US economy within the time span of 10 years, allowing a total of 10.4 million jobs to be added. However, Hillary wants to raise the minimum wage to at least 12 dollars. From what we know, raising the minimum wage to 15 dollars would result in 6 million job loss. Most jobs that are lost when the minimum wage is increased, are those of minorities. Hillary also cites that higher immigration is needed for a stronger economy. While true that a larger amount of immigration would result in higher skilled and lower skilled workers would add towards the strength of the economy, the combination of a higher minimum wage and higher immigration would most likely result in a larger amount of unemployment. This could potentially add to the already cited 6 million job loss.

Seventh issue: Clinton plans on making insurance for high-end healthcare plans more expensive for employers to give to their employees. The two most likely results are that this would shift demand towards what can be classified as middle-end healthcare plans, and thus would raise prices of healthcare for middle-class citizens. The US healthcare epidemic is not a result of greed, but a result of a market failure designed by government policies which restricts supply and increases demand via subsidies like Medicare/Medicaid. The greed part is the symptom side of the epidemic. The next most likely result is that firms offering these high-end healthcare plans would take up the new prices, but would change the compensations of the employees receiving high-end healthcare plans (example, smaller office space, less equipment, extremely low raise of wages, etc.).

Eighth issue: Clinton also wishes to impose taxes, regulations, and other government burdens on the fossil fuel industry. With the current output of oil prices looking bleak, especially in the long term for the next two to three years, an increase of costs to employers in the fossil fuel industry would result in an increase in unemployment. While the world continues to focus on oil prices and its evident slump, most do not realize that this slump can also be noticed in the commodities. Any more taxes and regulations in such areas (or even tariffs) could be the final nail in the coffin of what is currently a fragile economy.

Ninth issue: Clinton wants to impose a more complex tax system. With the already extremely complex tax code system in the United States, adding more complexity will not make anything better. In fact, this would most likely result in the decline of tax revenue, which would result in Clinton not closing the deficit in any way or form, especially with her voting history.

Tenth issue: The analysis cites that government debt would not increase (or would increase very little), especially with the emphasis on infrastructure. However, Clinton will use bonds to promote the building of infrastructure. This already contradicts that government debt would not increase during the construction of new infrastructure. With the already known fact that Clinton’s history would not reflect a closing of deficits, this would most likely result in a higher government debt.

Eleventh issue: K12 weekly paid family leave (and medical leave), over the long term would definitely hamper productivity, which in turn, would not make anything any better for employment. This may hamper both the job market, and the overall long term growth of the US economy.

Twelfth issue (and, most notably, the biggest issue): There’s no mention of the Federal Reserve and how interest rates/macroeconomic policies would play out over the 10-year simulation. Without key macroeconomic policies, we can’t really run a quantitative analysis or even predict anything in terms of qualitative economic simulation. When using historical Federal Reserve interest rates and its movement over time, interest rates would most likely drop over time and thus result in an increase in volatility on stock markets and the economy in general. However, one should ask how long can lowering interest rates go until a debt-interest rate bubble blows? I’ve written about the false economic growth of the Scandinavian economies due to the control of macroeconomic policies, as an example.

So, essentially what would happen under a Clinton economy, and why is Zandi’s economic simulation missing all these key essentials and their influences over the economy?

A Clinton economy would be a disaster, even worse than a Trump economy. Why is this? The Clinton economic plan doesn’t allow the private sector to grow or accumulate savings which is the main driver of capital, and hence the driver of productivity all around. The analysis fails to use correct purchasing power figures, thus skewering simulation results, nor does it realize that combining two different policies in many cases such as the higher minimum wage and higher immigration policy would lead to an increase in unemployment. The economic analysis fails to address how healthcare costs would most likely increase under Clinton due to the shift of demand, government burdens on an already dying fossil fuel economy, more complex tax system, the use of debt in order to fund infrastructure, paid leave which would most likely lead to long-term hampering of productivity increases, nor the most likely movement of macroeconomic policies which could lead to higher volatility in the stock market.

One other extremely important note which should be added is that Clinton also wants to add a tax on high frequency trading in the stock market. However, I haven’t added this as an issue in the economic plan, as in reality no one really knows what would happen with the stock market with such fines, because it’s never been done in history. However, in my opinion, I believe it would most likely lead to even more volatility in the stock market. From an economic history point of view, however, this hasn’t been done in history, so the effects are unknown.

Another minor point which I would like to add as well is that there is one thing to praise in this economic analysis! Clinton plans for allowing higher foreign ownership of businesses in the United States. This would most likely allow for an increase in foreign capital flow into the United States, and thus would allow businesses to flourish even more. However, with all the other negatives, the most likely outcome is that it would hamper this single good economic policy.

My final note is that we should also examine Mark Zandi’s track record and his close association with Clinton. Zandi certainly has a poor record in economic predictions and analysis. He also continues to praise Obama’s economic stimulus package, however, as I wrote in my last piece, Obama’s economic stimulus package has only made 1.7 million jobs, and at max (depending on which type of method when calculating how many jobs are made) 3.4 million jobs, thus showing the economic stimulus had very minor gains. Zandi has also donated $2,700 to Clinton’s campaign, which could explain all the contradictions stated above.





* Baland Rabayah is a student of praxeology and contributor at the Being Libertarian Facebook page.

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