Where did the Trump boost go?

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Kim Asger Olsen

Kim Asger Olsen

Partner

The surprising incompetence of the Trump administration in terms of interacting with the congress has so far led to an embarrassing defeat for the attempts to “repeal and replace” Obamacare. The bungling of this project has led to doubt whether the White House is able to steward Congress towards adopting economic policies touted by Trump during his campaign.

When Donald Trump was elected president, markets expected a vigorous economic policy providing a significant boost to the economy. The main drivers were supposed to be an ambitious infrastructure program, a net expansion of federal spending and a tax cut.

Half a year into the Trump presidency, the optimism has given way to doubts and despair in the markets concerning the direction of future economic policies.

At the end of the summer recess, there are 4 different issues where Trump and his administration can run into trouble:

  1. The debt ceiling

The first is the debt ceiling. Alone among the larger nations, the US congress must each year in September approve a law allowing for a financing of public deficits.  Republicans used this law several times to demonstrate against Obama in pointless episodes of “government shutdowns”, meaning that the federal government could not pay salaries for its employees and use emergency procedures to service the government debt.

This time it appears that moderate Republicans are uniting with Democrats in a bipartisan initiative to avoid a shutdown and the Trump administration has quickly joined the initiative.

  1. The budget

The second economic issue is the budget for the beginning of the fiscal year 2018 on 1 October 2017.

Trump already presented his 2018 budget proposal in May and it was roughly as expected: Deep cuts to spending programs hated by conservatives (including Medicaid), an increase in military spending (most of it in line with the long term projections by the Obama administration), non-specified tax cuts and all built on unrealistic assumptions about economic growth in the future.

Under normal circumstances budgets require 60 votes in the senate to pass. The senate could remove this rule (as it did in order to nominate trump’s candidate for the Supreme Court) but it seems very unlikely that it will happen. Along with Trump’s dwindling influence over the congressional republicans, the right-wing Republicans have lost in stature, and a bipartisan budget agreement could be in the offing.

  1. The tax reform

Then there is the tax reform, which was a major talking point for Trump during the campaign. There is a near-universal agreement that the US tax code needs a major overhaul. But that is about as far as the agreement goes.

The Republican party is still gripped by the illusion from the Reagan years that tax cuts will pay for themselves through higher economic growth. All evidence since 1980 tells the opposite, but facts are unlikely get in the way of ideology. The tax code overhaul is likely to mean a reduction of taxes on corporations, higher and higher medium incomes. The good thing is that it will contribute to economic growth. The bad thing is that the growth stimulus is small, while it for sure will increase the government deficit.

  1. The USD 1 tn infrastructure program

Trump’s infrastructure program is also in limbo. On the campaign trail Trump fumed against US’s crumbling infra-structure (motorways, bridges, channels, airports, rails, water locks, dams) and wanted to allocate USD 1 tn towards that project). From a pragmatical point of view, it is the most meaningful element of the Trump economic policy: It will create tons of jobs to the professions supposed to be Trump’s base, it will give a boost to overall productivity of the US economy and it can be financed over very long time periods.

But that part of Trump’s economic program will run into resistance from a large part of the Republican who instinctively is against increasing the role of the Federal government in the economy.

Meanwhile the economy is chugging along at a pace well below the growth rates seen leading up to the financial crisis from 2008 and onwards.

Business investment is picking up, unemployment stands at 4.3 according to the latest opinion polls and the inflation remains benign.

Since the financial markets apparently have decided to pin to high hopes on the all-but-dead Trump boost to the economy, there are two substantive issues left to worry about:

Since wages do not grow, US consumers are increasing their debts again after a long pause where debts were worked down. And the Federal Reserve is apparently determined to begin bringing down its balance sheets by selling bonds.