A close election raises economic questions. Mark Zandi explains what could follow if Harris or Trump wins.

Our presidential candidates can argue over who has the better plan for the economy, but the most serious threat to the economy is the election itself, its political aftermath, and the implications for economic policy.

The most immediate worry is that the election will be close and contentious. That is what the Moody’s Analytics presidential election model suggests.

Our model explains the share of the vote that goes to the incumbent party by state. It includes political variables, like voter turnout and third-party candidates, and of course economic variables. Voters consistently say their number-one issue is the economy.

The most important economic variable is the cost of a gallon of regular gasoline. Anything less than $3.50 per gallon nationwide favors Vice President Kamala Harris; anything over that favors former President Donald Trump. According to AAA, the nationwide average is currently about $3.20.

Fixed mortgage rates also matter a lot. Anything less than 6.5% favors Harris and anything over that favors Trump. The average fixed rate for a 30-year mortgage was 6.08% as of Thursday.

Real (after-inflation) household income growth is also key to the election. With wages consistently rising faster than inflation in all swing states, this, too, favors Harris.

Even with the economy breaking Harris’ way, she wins only by carrying Pennsylvania and only by a few thousand votes. A race this close is likely to end up in the courts and ultimately at the U.S. Supreme Court. Social unrest such as what occurred on Jan. 6, 2021, may ensue and could roil financial markets and undermine already fragile consumer and business sentiment. This poses nothing but downside risk to the economy.

The election will ultimately be sorted out, but the economy will quickly face serious new challenges that will depend on the makeup of the government. The most likely scenario assumes that Harris wins, the Senate flips to the Republicans, and the Democrats take control of the House.

This scenario is largely consistent with the policy status quo and thus smallish changes to tax and spending policy. The economy should continue to perform well with unemployment and inflation low and stable. There will not be meaningful progress on the nation’s daunting fiscal outlook, but we do not expect it to worsen.

However, plenty of political drama will pose a serious threat to the economy. The expiration of the Treasury debt limit suspension at the start of 2025 will quickly ignite a firestorm.

Past debt limit battles have been settled at the last moment with lawmakers kicking the debt limit debate down the road and narrowly avoiding a government default. But odds are high that lawmakers will fail to come to terms in a timely way, since the dispute over the debt limit will conflate with a heated debate over tax and government spending issues.

The most prominent of these issues is the question of what to do about expiring tax cuts for individuals. The personal tax provisions in the Tax Cuts and Jobs Act passed by Trump are set to expire at the end of 2025.

Harris wants to extend the tax cuts only for those making less than $400,000 and plans to help pay for this by unwinding some of Trump’s tax cuts for corporations. Senate Republicans won’t go along. A nasty standoff could include a government shutdown and even a breach of the debt limit.

In a very different scenario, Trump wins, and given his political coattails, both the Senate and House swing Republican. The policies adopted in this scenario would be a break from the status quo that results in higher inflation, higher interest rates, and a diminished economy.

Trump’s tariff hikes and immigration enforcement measures would contribute most directly to this outcome. His expected executive orders on such moves will be challenged in court, but the policies will be implemented long before the judicial system rules on their legality.

Trump’s first-term tariff hikes were limited. They applied to about $300 billion of U.S. imports at their peak, were limited to specific products mostly from China, and did measurable economic damage. Trump is now proposing much higher across-the-board tariffs on over $3 trillion of imported goods.

Immigration enforcement measures, including the mass deportation of unauthorized immigrants, would quickly cause a significant tightening in the already tight job market. The surge in immigration across the southern border since the pandemic has presented many challenges, but the benefits have been a significant increase in labor supply and help in easing wage and price pressures.

The Federal Reserve, vigilantly focused on labor costs and inflation, will feel compelled at least to postpone interest rate cuts. Economic growth will throttle back, and recession concerns will re-intensify.

Under any election scenario, lawmakers are unlikely to make the hard choices on taxes and government spending needed to rein in future budget deficits and the inexorably mounting debt. According to the Congressional Budget Office, under current law, the nation’s debt-to-GDP ratio will balloon.

It is not hard to imagine that at some point global investors will balk at buying U.S. debt during a debt-limit or budget battle that highlights the nation’s dysfunctional politics and budget process. Interest rates will spike, setting off a fiscal crisis.

This election has brought into clear relief the daunting political and fiscal challenges the nation faces.