Early on in President Trump’s new administration, too much of his energy is being placed on divisive ‘cultural’ issues and not enough attention is being paid to economic policies. To the degree Trump has turned to the economy, much of his policy has been focused on issues that will not yield long-term economic benefits but contain considerable risk, like trade with Mexico and China. And so, while Donald Trump is only a few weeks into his presidency, I think we can begin to take stock of what his presidency will mean for the US economy.
Here’s the case I made for Donald Trump regarding success or failure after he was elected President in November:
“A successful Trump who keeps his campaign promises would work with McConnell, Ryan, Sanders, and Pelosi to get an infrastructure bill through Congress. Meanwhile he would force US allies to increase their military spending and purchase of US weaponry while the US pares back its own defense spending. And finally, a successful Trump would cut the FICA tax that supposedly ‘funds’ social security, something that is both a cost for employers and for employees and therefore a highly regressive tax. Cutting business taxes or lowering the top tax bracket won’t get that job done. But those kinds of tax cuts will increase income inequality…
“A failed Trump who bought lock, stock and barrel into Republican orthodoxy would go back on his pledge to leave social security and medicare alone and focus on privatizing or cutting social security as a way of lowering the deficit. And he would focus on killing TTIP and TPP or extracting the US from NAFTA. You could make ideological arguments on these issues after robust growth and lower broad unemployment have returned. But, by then we would see whether economic and job growth had changed the path of debt and deficits and unemployment demonstrably. Moreover, none of these goals would immediately stimulate growth in the short term. They could mean recession and doom his presidency, if they became his signature economic goals.”
On balance, Donald Trump is following the second path and not the first. This should be worrying to anyone analyzing the impact of his policies on growth. And indeed, economists have begun to revise down expectations for the Trump administration. Take Goldman’s Jan Hatzius for example:
- First, the recent difficulty congressional Republicans have had in moving forward on Obamacare repeal does not bode well for reaching a quick agreement on tax reform or infrastructure funding, and reinforces our view that a fiscal boost, if it happens, is mostly a 2018 story.
- Second, while bipartisan cooperation looked possible on some issues following the election, the political environment appears to be as polarized as ever, suggesting that issues that require bipartisan support may be difficult to address.
- Third, some of the recent administrative actions by the Trump Administration serve as a reminder that the president is likely to follow through on campaign promises on trade and immigration, some of which could be disruptive for financial markets and the real economy.
– Zero Hedge
What Hatzius is saying is that all of the economic change that Trump has promised will either be difficult to achieve or will be delayed for a considerable time. I think this is a justified worry. My worry about the economics, however, is different. It’s not just that a Trump administration’s blueprint will be delayed or unachievable, but that it is both focused on the wrong outcomes and takes a backseat to so-called cultural and political concerns.
For example, just yesterday, the two issues the Trump Administration was fighting in the media concerned the contentious confirmation process of Education Secretary Betsy DeVos and the Appeals court arguments regarding Trump’s executive order temporarily banning US entry from seven mostly Muslim countries. These two issues have been major political battles that are creating an us versus them mindset amongst voters. And to the degree these kinds of battles continue, they will have the same negative effect on Trump’s political capital as did Obama’s non-prosecution of bankers after the mortgage crisis and his passing of the Affordable Care Act with no Republican votes in either the house of senate. And note that neither of these two present Trump debates has anything to do with the economy.
Right now, Donald Trump looks more like a cultural warrior than a Mr. Fix-It. Yes, he is making good on a lot of campaign promises right off the bat. And that has won him plaudits from his base of support among voters. But the issues he has chosen to focus on appeal to the cultural instincts of an America First frame of mind without any positive impact on the economy.
If anything, the economic impact of his America First policies will be negative. Take the China trade and military issues. The Chinese have repeatedly made clear they see Trump’s policies as a threat to their national interests and that they would be willing to act on both economic and military fronts. Chinese state media has said that the US risks a “large-scale war” if it follows through with its threats regarding the South China Sea and “the two sides had better prepare for a military clash”. Goldman is now saying that a trade war resulting from US tariffs and Chinese retaliation would see US economic growth fall by as much as a quarter percentage point. And indeed, I think a trade war could be coming.
Then, of course, there is Mexico. And while a border tax will certainly fill the US government’s coffers and be used to say that Mexico is paying for a border wall, it is still a tax on American consumers. Because the Republican Party supports it, Trump is likely to use a border adjustment tax, which is really a consumption tax or a VAT. And that means higher prices for US consumers, something which would hurt the economy, at a minimum in the short- to medium-term.
Finally, when you consider the totality of Trump’s stated economic policies like his executive orders on regulations and his proposals to help US companies repatriate foreign money, you can conclude that Trump is more pro-business than he is pro-market. I’m talking here of corporatism masquerading as liberty, something I told readers to watch out for back in 2011. The goal is to create conditions whereby incumbent businesses do well and flourish rather than to create a playing field by which markets allow the best businesses to succeed irrespective of size or power. Luigi Zingales got at this in January when he wrote that:
…A pro-business policy defends domestic enterprises with favorable rates and treatment. A pro-market policy opens the domestic market to international competition because doing so would not only benefit consumers, but would also benefit the companies themselves in the long term, which will have to learn to be competitive on the market, rather than prosper thanks to protection and state aid. A pro-business policy turns a blind eye (often two) when companies pollute, evade, and defraud consumers. A pro-market policy seeks to reduce the tax and regulatory burden, but ensures that laws are applied equally to all.
Paradoxically, a pro-business policy ends up damaging not only the economy, but also, in the long-run, those companies that it had originally benefited.
By favoring incumbent businesses, you make them less efficient. And over the long-term that is damaging to both the businesses and to the US economy.
What we want to see from Trump instead of cultural wars and trade wars is tax reform and lower but smarter regulation, two things he has promised. But more than that, we need to see more money in ordinary people’s pockets. And —I’m sorry— that’s not going to happen by reducing corporate taxes or repatriating foreign corporate money or shielding US corporates from foreign competition through border taxes. Those are trickle down policies. You put money in the pockets of middle class citizens by either DIRECTLY lowering the middle class tax burden or by enacting policies that raise middle class incomes. And the tragic story of Regina Elsa working on a temporary $8.50 an hour contract in an Alabama factory tells you that just because Trump gets more manufacturing jobs to stay in or come back to the US doesn’t mean we’ll see more good, secure, well-paying jobs.
So from where I sit I see a Cultural warrior President, who is getting bogged down over divisive and non-economic issues. I also see a President, who when he does turn to economic policy, is at risk of favoring existing businesses rather than promoting markets. And finally I don’t see a President who is focused on the things that will engender more domestic consumption and investment — improving the after-tax incomes of ordinary Americans by lowering middle income tax burdens and increasing wages.
When Donald Trump focuses on middle class incomes, that’s when you should expect consumption and investment — and hence economic growth — to increase. Until then, don’t expect much.