The economy still Trump's main political asset

The economy still Trump's main political asset

It's the 401K, stupid! It would be a huge boost for the US president if the markets continue to roar, assuming he succeeds with both the corporate tax cut and the infrastructure plan

Friday, July 7, 2017 - 05:50

by LEON HADAR[email protected]

Washington

RENOWNED economists were warning investors on the eve of the 2016 US presidential election to prepare for a global recession if Donald Trump got elected, with some envisioning nothing short of an economic apocalypse if the Donald ended up occupying the White House for the next four years.

After the world-as-we-know-it didn't come to an end on Nov 9, 2016, the warnings became more muted, although quite a few economic pundits predicted that the newly elected president's anti-globalist agenda and protectionist trade policies could ignite a trade war that could lead to a global economic slowdown. "How President Donald Trump will wreck the world economy" was the headline in the British Independent a day or two after the US presidential election.

After these doomsday scenarios failed to materialise in the aftermath of Mr Trump's electoral victory - and, in fact, the Dow, the S&P 500 and Nasdaq have all risen since then - economists had to reassess their bleak predictions, as they tried to deconstruct the message coming from the markets.

The new consensus was that investors thought that then-president-elect Trump's economic policies - including tax reform, regulatory reform, and stimulus spending - were great for business; and that that helped awaken the markets' "animal spirits", to use a term coined by economist John Maynard Keynes.

And the economists also seemed to be confident that the new president would not carry out his pledges to wreck the North American Free Trade Agreement (Nafta) or impose punishing tariffs on exports from China and other economies. His economic advisers, who included many Wall Street veterans, would take care of that, counterbalancing the power of the economic nationalists in the White House.

So instead of expecting economic gloom and doom, the markets were now experiencing the so-called "Trump Bump", reflected in the post-election market rally and the more than 5 per cent gains in stocks after the first 100 days of President Trump in office.

Since then, many of the same economic pundits who had predicted a Trump Recession before the election are now suggesting that the Trump Bump will come to a big bump sooner than later, while the few Trumpists among the economists are forecasting a Trump Boom - years of economic expansion, stock market at historical highs and low interest rates.

TRUMP BOOM?

Both those expecting an end to the Trump Bump, or suggesting that it was already over (let's call them the "Trump bears"), as well as those envisioning the coming Trump Boom (the "Trump bulls"), believe that much of the rally that we've seen in the markets was based on the hope that the business-friendly president would lift regulations that were making life hard for private enterprise, usher in big tax cuts, including a new corporate tax rate, and spend a lot of money on infrastructure spending.

In theory, a fiscal stimulus coupled with more business investment would lead to more economic growth, from the current 2 per cent rate to perhaps 3.5 per cent, 4 per cent, or even 5 per cent.

But the Trump bears would argue that President Trump didn't "inherit a mess" from president Barack Obama and that much of the current good economic news was a result of policies pursued by the former president and an activist central bank that has given us slow but continuing economic expansion that delivered higher corporate earnings, cheerful stock markets, and low interest rates, at the same time that the global economic climate was improving. Fed chair Janet Yellen described it as a "healthy economy".

So, yes, President Trump has lifted some regulations on the financial and energy industries and appointed a bunch of billionaires (which include several Goldman Sachs veterans) to take care of the interests of business.

And the so-called populist president didn't kill Nafta or declare a trade war on China, which clearly amounts to good news for investors, especially when they consider the alternative.

But the markets are seeing very few signs that after six months in office, President Trump is about to fulfil their expectation by delivering on his big economic pledges, including slashing the business tax rate to 15 per cent; allowing American companies to bring back trillions of dollars in profits earned abroad; and investing US$1 trillion in rebuilding American roads and airports.

And President Trump may end up wrecking Nafta, has expressed his discontent with the free trade agreement with South Korea, and is now considering imposing tariffs on steel imports from China and elsewhere, a move that could trigger global trade wars.

From the perspective of "Trump bears", most investors at this point aren't expecting stronger economic expansion that could be driven by a massive infrastructure programme. The chances for that happening are slim, since both Democrats (because they don't want to cooperate with the White House) and Republicans (because they don't like the idea of more government spending) are unlikely to support it.

But investors are still counting on the Trump administration working together with pro-Wall Street Democrats to embrace legislation to lower corporate tax to 15 per cent from 35 per cent.

Even under the worst-case scenario for the Trump administration, a version of such a plan would likely be adopted by Congress early next year, probably after passing new healthcare legislation which would release some government funds to help pay for the tax cuts. That would drive up stocks even if it doesn't raise economic growth.

The best-case scenario for the Trump administration would be winning congressional support for a major infrastructure programme. That could help energise the economies in Rust Belt states and would benefit the white blue-collar workers who provided Candidate Trump with a winning margin last November and who, according to opinion polls, continue to support President Trump. Implementing the infrastructure programme would also provide a stimulus for the economy, and could raise the rate of economic growth by one per cent or so. Not great. But it would create a sense that the economy isn't running on a treadmill, like it's doing now.

As the "Trump bulls" see it, if cutting corporate tax would electrify the financial markets, a massive infrastructure programme would be a boom to the members of President Trump's electoral base, which could create the conditions for President Trump's re-election victory in 2020.

FEELING RICHER

Indeed, an economy where the markets would continue to roar would be a huge political boost for President Trump. Almost all middle class Americans are invested these days in the stock market in the form of their 401K and other retirement plans as well their saving programmes for their kids' college education. So when they discover at the end of the month, that the money they invested in the stock markets is growing and growing, they feel richer and more secure financially.

Democrats are hoping that the political scandals that are engulfing the White House and President Trump's never-ending twitter outbursts and his un-presidential presidential behaviour would erode the support for the president among middle class Republicans who voted for the GOP candidates in the last election. These voters would be so disgusted with President Trump that they would desert him in 2020. He may still win his electoral base, but he could lose the election if many educated and professional Republican voters desert him.

But that would probably not happen if these voters see their investments doing great. This is what they would be chatting around the dinner table in 2020: "Honey, did you see how much our retirement plan made last month? We could do that cruise we were dreaming about." They may also mention President Trump's latest tweet. But they would probably vote for him again, in the same way that voters elected the Republican candidate in the recent special election in Georgia. Those Trump tweets are disgusting, they agree. But they are now confident that they could pay Junior's college tuition. And that's what counts in the final analysis. "Trump bulls" will rejoice.

But this scenario assumes that the White House would succeed in pressing ahead with both the corporate tax-cut plan and the infrastructure programme. Making Corporate America and investors happy without rewarding those struggling white blue-collar workers with infrastructure jobs would raise questions about President Trump's commitment to his populist agenda and could reduce the support of his electoral base. The White House may then try to maintain their loyalty of voters in the Rust Belt states by launching trade wars that would then create uncertainty in the financial markets and ignite recessionary pressures. "Trump bears" will argue that they were right all along.