Kaletsky: What Trump will and won’t do

 
Depending on your interests in the American firmament, this could be a welcome relief or a disappointment. Last week, the hopes and fears of American elites got a full hearing at the Milken Global Conference — a Davos-like event for 4,000 guests including globalist politicians, central bankers, financiers and technology billionaires. The bash epitomises the rootless cosmopolitan elitism that Charles Gave loves to hate, but does attract more important Americans who would not waste time going to Davos. It’s a more businesslike gathering, where speakers tend to get to the point.
This year, the American elite showed up to conduct what Bloomberg News aptly described as a “peer review of President Trump’s first 100 days in office”. In particular, the focus was on how much they and their businesses could hope to gain from the new administration’s tax cuts, deregulation and public investment projects.
The answer, to judge by comments, both on and off the record, from Trump cabinet members, politicians of both parties and Congressional staffers and lobbyists, is much less than the markets expected when Trump was elected and some investors even today seem to expect. Here are the main impressions that I came away with, in descending order of certainty (that is, with my most confident conclusions first):
Infrastructure: We should forget about any significant stimulus to the US economy or the construction industry from the $1 trln of new investment promised by the Trump campaign. Elaine Chow, Trump’s Transport Secretary, said three times in the course of a 20 minute presentation, that the Federal government accounts for only 16% of US infrastructure spending — and that meant, in her view, that less than $200 bln of Federal money would “leverage” $1 trln of spending. How state governments would be induced to raise the rest of this money seems not to have been considered, except insofar as more public-private partnerships would be good news.
In any case, there seems to be no urgency about starting any of this work. The $1 trln infrastructure promise, even if it could be financed, is supposed to be spread over ten years. Moreover, Chow said that the phrase “shovel-ready projects” has been banned from the Transport Department’s lexicon. Meanwhile, the concept of “infrastructure investment” has been stretched to include “workforce development” organised by Trump’s daughter Ivanka, according to Reed Cordish, the White House official responsible for industrial initiatives.
Deregulation: This is the aspect of Trump’s economic rhetoric that should be taken most seriously. His key economic appointees — Steve Mnuchin and Wilbur Ross — both of whom spoke at the conference, seem determined to deregulate whatever and wherever they can. Even if the Congressional Democrats manage to block legislative changes, for example in Dodd-Frank or the Clean Air acts, the administration has scope to weaken energy, environmental and financial regulations, simply by re-interpreting existing laws. “You don’t have to change the regulations, if you can change the regulators,” seems to be the watchword.
As a result, the prospect of less regulation is a much better reason for the upsurge in business confidence, than the hope of big tax cuts or public investment programmes. There are, however, two problems. Small businesses that complain most about regulation may get less benefit than they expect as so much red tape comes from states rather than Federal agencies. At the other end of the size spectrum, business such as energy and utilities could suffer from deregulation, since lifting controls on oil and gas exploration will add to the downward pressure on prices.
The one major industry that seems guaranteed to gain from deregulation is finance, especially small business and mortgage banking. The tightening of credit standards after the financial crisis locked many middle-income families out of the housing market and sometimes even denied them the opportunity to benefit from low interest rates by refinancing. This is an injustice Trump seems determined to redress, while trying to avoid the excesses of the sub-prime bubble, to judge by comments from Steve Mnuchin and Steven Schwartzman.
Protectionism and border-adjusted taxes: Although there will be some further escalation of protectionist rhetoric and some minor tweaks to anti-dumping duties and other targeted tariffs, large scale changes in trade policy, including the introduction of border-adjusted taxes are extremely unlikely. Wilbur Ross, Trump’s supposedly protectionist Commerce Secretary, admitted that he has changed his views about the incompetence of trade negotiators and other government officials. “I’ve been heartened,” he said, “to find the quality of people in the government was very high — they were just trapped in a dysfunctional system”.
He expressed satisfaction with the improvements already achieved in trade relations with China during the first 100 days, with the implication that further change was not likely. As for border adjustment taxes, the Senate Finance Committee’s staff director noted: “Big import companies and especially the large retailers have certainly done a good job of educating our members” about the costs of border adjustment to consumers and potential voters.
Health care reform: Obamacare is very unlikely to be abolished as the Republicans unanimously promised. So many Americans have now enjoyed benefits from state-subsidised health care that Obamacare has started to develop the political untouchability of other “entitlements” such as Social Security and Medicare. As a result, full-scale repeal is almost out of the question. The objective of repeal has morphed into “replace” and soon it will change into “repair”. As this shape-shifting occurs, hopes are fading that healthcare reform will generate large reductions in public spending that can finance tax cuts.
Taxes: With savings from Obamacare repeal and windfalls from border adjustment taxes vanishing like desert mirages, the last major economic question is what sort of tax reform Trump can achieve. The answer will depend on how much deficit financing the fiscal conservatives in Congress will accept. Trump’s announcement three weeks ago of “the biggest tax cut in the history of our country” accompanied by the flimsiest two-page account of how it might be financed, was not taken seriously even by his own Treasury Secretary. As Mnuchin said, the tax proposal was “purposely vague” so that the President could work with legislators to craft something that “Congress will pass”.
The problem with this approach is that fitting any version of Trump’s tax cuts into the deficit limits required to circumvent the filibuster rules in the Senate will require “dynamic budget scoring” with very ambitious growth assumptions. Mnuchin insists that the US economy will grow by at least 3% annually from now on, and he pointed out that the difference between 2% and 3% growth for the Congressional deficit accounting would be $3-$4 trln. But it is far from clear that fiscally conservative Senate Republicans would accept such speculative growth accounting, while the Democrats would surely vote against whatever the Republicans propose.
The most likely outcome seems to be a temporary tax cut, resulting in a fairly small budget deficit rise and modest Keynesian stimulus, combined with a redistribution of tax burdens from companies and high earners to middle-income personal tax payers. Whether Trump’s voters will welcome this reverse-Robin Hood income distribution remains to be seen.

Conclusion

Overall, Trump will have less effect on US macroeconomic performance or on the world economy, for better or worse, than was widely expected when he won the election. This is indeed what markets have come to believe in the three months since the inauguration. But Trump’s sectoral impact will nevertheless be substantial.
His policies should continue to be bullish for US banks, especially smaller banks, and for homebuilders. But they will be less helpful than expected for manufacturing exporters and businesses involved in infrastructure. His tax changes will probably have less effect than expected on US tech companies and cash-rich multinationals. And his deregulatory policies are unequivocally bad news for energy businesses exposed to falling prices of oil, gas or coal.
Only one thing about Trump’s economic policies is certain. The prosperous elites whom Trump and other populists attack will continue to gather every year for mutual admiration at the Milken Conference and Davos — and the populists’ policies will not hurt these prosperous elites.