“Angry is the New Hope” was the title and theme of the presentation on December 6 from Dan Clifton, Partner and Head of Policy Research for Strategas Research Partners. Hope was the watch word of the Obama administration, but the surprise election of Donald Trump reflects anger in the electorate. This anger stems from the persistent, subpar economic growth since the end of the financial crisis. In the eight years since, growth in GDP has averaged just 2%, versus the long term trend of 3%. That 1% annual shortfall, has created a cumulative GDP gap of $2.6 trillion dollars. The support that Bernie Sanders received late into the campaign indicates the voter anger extends across the political spectrum, not just within the Republican Party.
While Donald Trump’s election may have surprised many people, beneath the surface there were several indications that he would prevail:
- Audiences for the Republican debates were three times what the Democrats attracted in 2008, the last time there was an outgoing administration. Ratings for these debates were even greater than popular reality television shows suggesting a great interest in making changes in Washington.
- Weakness in the U.S. equity markets in the three months leading up to the election has a reliable history as an indicator for a loss by the party in power.
- The finance and energy sectors outperformed the broad market in the last three months, also predicting a Republican win.
- Support for populist, “non-traditional” parties, is gaining momentum around the world as confirmed by the Brexit vote in the United Kingdom. The push for change is global, not limited to the U. S.
This global shift toward populism is creating an urgency for governments to get their economies moving faster again. Hence, the victory for Donald Trump. Clifton listed several areas of emphasis for the new Trump Administration:
- Greater geo-political risk—as we have already seen from the phone call to the President of Taiwan, Trump has little concern for protocol and his use of Twitter increases the chance of off-the-cuff communications.
- Trade Policy—Trump made bold changes to trade policy a key part of his campaign and as president he will have the power to enact many of them unilaterally. Will he do so without seeking the guidance of his advisors or the congress?
- Fiscal Policy—the financial markets have quickly priced in everything Trump promised to do during the campaign (witness the sharp increase in interest rates and stock markets). In reality congress is unlikely to give him everything he wants and, even that, more slowly than the market expects. In particular, congress is likely to be more concerned about increasing the budget deficit than will be the president.
- Tax Reform—done correctly, tax reform (unlike a tax cut) will be neutral to the deficit in the early years, but achieving it is difficult and slow. True tax reform has only been done once before (1986). A key question is whether it’s done via budget reconciliation, which is very partisan and leads to compromises that reduce the effectiveness, or dynamic scoring which accounts for the stimulating effect of the reduction in tax rates. Clifton called repatriation of foreign earnings the crown jewel of tax reform with a forecast of a potential $1 trillion coming into U. S. over fifteen months. This will add to the stimulus impact from tax reform and fiscal spending.
- Stimulus spending—also difficult to get done quickly–see Obama’s disappointing efforts in 2009. Clifton thought infrastructure stocks had run up too far, too fast since the election and that energy-related projects will get the emphasis from president Trump. He is likely to give a green light to several dozen projects currently being held up by the Obama administration over global warming concerns.
Trump made repealing Obama Care a signature feature of his campaign but the Republicans in congress are unlikely to repeal it without a viable replacement (which they don’t yet have). More likely they will start by cancelling the surtaxes included in the plan. This will provide a little more stimulus. The Dodd-Frank law is likely to remain in place, but will also face revisions.
Finally, Clifton predicted that lobbyists will enjoy increased influence in the new administration. Trump will be much more susceptible to their approaches because he is not the ideologue that Obama is.
In response to questions, Clifton predicted that James “Mad Dog Mattis will get the waiver of the seven year rule to allow him to take the Secretary of Defense post and he will be a tough negotiator in that role. As a consequence, David Petraeus (another former general) will not become Secretary of State.
There are several big hurdles in the road to tax reform. One is whether to enact “border-adjustable taxes” (also called the out-sourcing tax) that would prohibit companies from deducting the cost of imported goods from taxable income. This would hurt import heavy industries (like retailers) and help exporters. Momentum seems to be in favor of it, but it would likely draw a challenge from the World Trade Organization.
The second hurdle is a restriction on using repatriated foreign earnings for share buy-backs. While it would enjoy political support, it would be very difficult to enact, as money is fungible. It would also be counterproductive by reducing the amount repatriated, and limiting the capital gains take from buybacks.
To the last question about raising the debt ceiling, Clifton called this an under-appreciated, but very important point. It will have to be addressed by this summer and could interfere with the tax reform efforts.