If Hillary Clinton Is Elected President, Here's What Will Happen to the U.S. Economy

© TheStreet If Hillary Clinton Is Elected President, Here's What Will Happen to the U.S. Economy

Editor's note: This story was originally published in mid-January. As Hillary Clinton continues to see a credible challenger in Vermont Senator Bernie Sanders for the Democratic nomination, it's worth taking another look at what the U.S. economy may look like under a President Clinton.

TheStreet will be covering tonight's Democratic town hall on CNN live on social media. Follow TSTpolitics on Twitter.

When it comes to economic matters, what would Hillary Clinton do?

Would she mirror her husband Bill, who embraced former Goldman Sachs executive Robert Rubin's vision to repeal the Glass-Steagall Act, deregulate the telecom industry and sign the Commodity Futures Modernization Act, which exempted credit-default swaps from government oversight? Of course, Bill Clinton also turned the largest ever federal budget deficit into the largest surplus. If not Bill, will Hillary instead follow in the footsteps of President Barack Obama, who signed the Affordable Care Act, the Dodd-Frank Wall Street Reform Act and created the Consumer Financial Protection Board on the way to raising taxes on the country's highest earners for the first time since the late-1990s?

The former New York senator supports all of Obama's singular achievements in addition to strengthening the Volcker Rule, which imposes a "risk fee" on banks that make speculative bets with funds from their own accounts, and passing the "Buffett Rule," which would close tax loopholes by establishing a higher minimum rate for those in the highest income bracket.

True to her centrist roots on economic issues, Clinton, it seems, wants to appeal to those whose livelihood is tied to financial services as well as the consumer/labor advocates who increasingly comprise the base of the Democratic Party.

"If she is thinking about a policy issue, she's going to want to hear from the business side, the consumer side, the labor side, and in that regard, her positions may not be starkly black-and-white," said Tracy Sefl, a Democratic strategist and former Clinton campaign staffer. "She likes to bring together multiple voices."

One thing is clear: Clinton isn't going to adopt Bernie Sanders' leftist rhetoric or his policy prescriptions. She's not about to promise to break up the country's largest financial institutions within a year of getting elected, or label Wall Street an industry that's run on "greed, fraud, dishonesty and arrogance," as Sanders often does. As the Sanders campaign isn't shy about exclaiming, Clinton's top campaign donors are investment banks.

Here's how Clinton plans to deal with the overarching issues affecting the country's economy -- and what effects her actions will have (assuming she's able to push her agenda through what is likely to be a Republican-controlled Congress):

Wall Street Regulation

Unlike Vermont Senator Sanders, Clinton doesn't support restoring Glass-Steagall, which has emerged as something of Democratic campaign litmus test. Glass-Steagall was passed in 1936 in the throes of the Depression to separate commercial banking from investment banking, a structure flaw in the U.S. economy that legislators of the period deemed a principle cause of the market's implosion.

Yet Clinton maintains that even if Glass-Steagall hadn't been repealed, Lehman Brothers, AIG, Bear Stearns, among others wouldn't have been prevented from making risky bets. She made that clear during a November debate, saying "I just don't think it would get the job done." It's a position that exposes her to the charge of being too cozy with Wall Street.

Rather than focusing on Glass-Steagall, Clinton counters that a different kind of regulatory framework is needed to monitor a very different financial system, one increasingly shaped by "shadow banking," i.e. hedge funds and other non-bank institutions.

In a detailed set of proposals, Clinton calls for levying a "graduated risk fee every year on the liabilities of banks with more than $50 billion in assets and other financial institutions that are designed by regulators for enhanced oversight." Those fees, Clinton says, would be scaled "higher for firms with greater amounts of debt and riskier, short-term forms of debt."

Clinton likens it to a deterrent as well as a rainy day fund. Banks that operate both commercial and investment operations are in effect, public trusts, and the public has a right to insist that they are properly maintained.

"The fee would therefore discourage large financial institutions from relying on excessive leverage and the kinds of 'hot' short-term money that proved particularly damaging during the crisis," reads her policy statement.

In effect, Clinton is trying to close some of the loopholes in the Dodd-Frank Act that bank industry lobbyists, working with Republicans, have been able to open up as part of larger bills, usually tied to the federal budget. Integral to the proposal is to hold bankers personally responsible for risky best taken by their financial institutions. Therefore, Clinton would also seek legislation to hold executives accountable by extending the statute of limitations for major financial crimes to 10 years from 5 years, and requiring that executives lose bonus pay when a bank pays a fine related to their bad decisions.

The proposals, she has said, would "prevent conflicts of interest by financial managers," and enforce "constraints on risk" at financial firms. Additionally, Clinton has called for greater oversight and controls on "high-frequency" trading, which she argues makes markets less stable and fair. Her plan would place a tax on "harmful" high-frequency trading "strategies involving excessive levels of order cancellations, which make our markets less stable and less fair."

A group of 170 economists who support Bernie Sanders' more aggressive plans to regulate Wall Street have signed a letter arguing that Clinton's plan doesn't reduce risk in the financial system enough. Those on Wall Street might say that Clinton's plan could constrain financial creativity in an economy that increasingly depends on the financial sector. Since Clinton's proposals, if enacted, likely wouldn't cut Wall Street down to size the way Sanders' would, the Vermont senator believes that the finance sector can expect gentle treatment from the former secretary of state.

Remaking the U.S. Tax Code

This is a biggie, and strikes at the heart of the conflicting world views of the two major parties.

To highlight her differences with the Republican candidates, Clinton has been emphasizing in campaign speeches that as president she would seek to close the so-called "carried interest loophole." In effect, the provision allows money managers, hedge fund operators, to treat fees on their clients' investments as capital gains, which are taxed at a maximum rate of 23.8% rather than the 39.6% rate applied to ordinary income.

Closing the loophole, and raising taxes on short-term capital gains, are being pitched as concrete steps aimed addressing income inequality, an issue resonating with both Democrats and Republicans.

The carried interest loophole allows "individuals making more than $450 million a year on average are taxed at a lower rate than teachers making around $50,000 on average," wrote Morris Pearl, former managing director of Black Rock, the asset management firm. "There is no more striking example of the cost of corruption than tax loopholes that benefit the 1%."

Congress considered doing away with the carried interest loophole back in 2012 when Rep. Dave Camp, a Republican who chaired the Ways & Means Committee, proposed a sweeping tax reform plan that included treating carried interest as regular income. Yet even as the House approved such a measure, it died in the Senate.

Along these same lines, Clinton last week announced a plan to levy a 4% "surcharge" on people earning more than $5 million, generating about $150 billion over 10 years. That's not going to retire the national debt, but it does send a message at a time when her Democratic rival Sanders is gathering strength from progressives insisting that government take substantive actions to address income inequality.

Essentially, if you're super-rich or make most of your money investing, your taxes will probably go up under a President Clinton.

Raising taxes on the wealthy doesn't necessarily hurt the economy, said Michael Lind, a senior fellow at New America, a Washington-based think tank. Tax rates on the highest wage earners was higher before the 1980s when the economy was growing faster, he said.

"The real question is the 'dead-weight loss' of tax avoidance, tax evasion because rich people have the resources as well as the incentives to avoid paying taxes," Lind said in a phone interview. "That's a loss to the economy, and has a very real impact on raising the deficit."

To lower the federal deficit, it will likely be necessary for the next president to widen the tax burden for those earning less than $250,000 through increases in sales or consumption taxes, he added. This is not part of Clinton's plan.

Critics of Clinton's tax plan say that higher investing taxes -- that are already too high -- willhurt economic growth by disincentivizing investment. Legendary investor Warren Buffett, a Clinton supporter, has said, however, that higher taxes on investing won't stop the rich from doing so.

U.S. Corporations, Trade and Foreign Policy

While U.S. corporations may differ with Clinton on taxes, she proved her worth as secretary of state in negotiating free trade agreements with Colombia, Panama and South Korea.

Yet it was in Mexico, where Clinton may have forged her most significant achievement when she helped to negotiate an agreement with Mexico and its state-run oil and natural gas company Petroleos Mexicanos (Pemex) to open drilling rights in the Gulf of Mexico. The agreement, made on behalf of U.S. energy companies, was hashed out in December 2013 with the signing of the U.S.-Mexico Transboundary Agreement, which established a framework to allow U.S. companies to work with Pemex to develop oil reserves that straddle the underwater boundary between the two countries.

The agreement was approved by Congress, signed by Obama and hailed as a landmark achievement by the American Petroleum Institute.

Working for the Obama administration, Clinton also helped to lay the groundwork for the Trans-Pacific Partnership even as she has changed her position on the trade treaty as a presidential candidate. The sweeping agreement, negotiated in closed meetings with 11 Pacific Rim nations, lays out myriad rules to lower import tariffs.

Yet trade treaties have proven to be political liabilities as many Americans believe they send jobs overseas, and Clinton was quick to distance herself from TPP, which is expected to go before Congress in the spring.

In an interview with PBS, Clinton said that she was "worried about currency manipulation not being part of the agreement. We've lost American jobs to the manipulations that countries, particularly in Asia, have engaged in." Her flip-flop on TPP, however, has opened her to criticism from both Sanders, and Republican candidates.

The same can be said of her support for authoritarian regimes such as Hosni Mubarak's Egypt and military coup that ousted Honduras's democratically elected president Manual Zelaya. Both cases reflect the historic economic underpinning of U.S. foreign policy: to open markets for U.S. corporations.

While supportive of U.S. corporations doing business abroad, Clinton has been critical of efforts by some companies to skirt U.S. taxes by executing mergers with non-U.S. entities. Paradoxically, that's a position she shares with GOP frontrunner Donald Trump, who has condemned the use of so-called tax inversion deals.

In November, Trump sided with Clinton when she slammed New York-based Pfizer Inc. for executing a $150 billion merger with Ireland's Allergan PLC in order to change its headquarters, thereby leaving "U.S. taxpayers holding the bag."

Free trade is widely considered to be good for the economy. Despite the current rhetoric, Clinton is likely to continue to support it.

"She is positioning herself as Obama's heir on issues such as trade," said Kyle Kondik, managing editor of politics website Sabato's Crystal Ball at the University of Virginia's Center for Politics, in an interview from Charlottesville, Va. "Yes, she did flip on the Trans-Pacific partnership but that's likely to be settled before she would enter office."

Wages and Jobs

Lately, Clinton has been describing herself as a "progressive," an indication that she wants to position herself to the left of where she might have been in the past.

That past included serving on the board of directors at WalMart for six years (1986-92) at a time when the company's worker relations were infamous, and helping to build strategy for an Arkansas governor who rode the centrist Democratic Leadership Council's push for free trade, tough-on-crime policies and welfare reform straight to the White House.

The DLC, of course, closed its doors back in 2011, a clear sign that the party has moved left.

And now Clinton wants to show that she has moved left as well, especially on issues of union organizing, immigration and raising the minimum wage, Kondik added.

"We can expect a high level of continuity with Obama's policies if she's elected," Kondik said. "While she has tried to move to left a little bit to satisfy the more populist wing of the part, I don't think she is naturally more liberal on economic issues than Obama is, she might actually be less but she's moved to where the party is, which has become more liberal over time."

At the top of that list is wage stagnation, a direct product of income inequality, which is arguably a product of a tax code with elements that Democrats have called regressive. As James Surowiecki wrote recently in the New York Review of Books "the top 1% of earners take home more than 20% of the income, and their share has more than doubled in the last 35 years. Over that same period, wages and household incomes have risen only slightly."

Forcing employers to raise salaries probably begins with raising the federal minimum wage. Since 2009, that's been $7.25 an hour. Clinton has been supportive of the labor-led fight for $15 but has also said $12 is a more reasonable target, considering regional differences.

Whether or not raising the minimum wage would hurt the economy is a source of much debate -- and policy papers -- from competing think tanks, industry lobbyists and labor unions. Yet accepting that some change and displacement would occur, raising the minimum wage may actually be a net longer-term positive for the economy, argues New America's Lind.

"Obviously, businesses that would be unable to pay a higher minimum, whatever it is, would suffer," Lind said. "But having a minimum wage that drives low-wage businesses out of existence arguably is a good thing, as it can force businesses to invest in technology rather than labor, which is a good thing from the point of view of overall national productivity."

Reality With Republicans Controlling Congress

To get any of these proposals enacted, Clinton would likely have to barter with a House of Representatives that likely will remain in Republican hands. Assuming that Clinton is elected president and the Democrats fair poorly in mid-term elections, which is customary, Clinton runs the risk of being the first Democratic president to serve without ever having her party control the House.

As a result, raising the minimum wage or increasing taxes on higher earners would probably require a grand bargain with Republicans that might have to include lowering the corporate tax rate.

"Because the political situation will probably be much like it is now, her ability to pass landmark legislation would be blocked," Kondick said. "If you thought Obama's relationship with the House was bad, I don't see why Clinton's would be better. We could be looking at more stalemate.

Whether such an impasse could be broken would depend on one party gaining significant momentum coming out the election in November. Ultimately, though, Clinton's ability to move her economic agenda will rest on how she decides to govern. Will it be through the centrist positions of her husband's administration, the liberal doctrines of Barack Obama or the populism of Bernie Sanders.

Only Hillary knows.