Sunday, November 20, 2016

Some early Thoughts on the Impact of the Trump Economic Policies

by Bill McBride on 11/20/2016 08:11:00 AM

Just a few thoughts about the economic impact of the Trump plan ...

First, in broad brushes, the Trump economic plan seems to be:
1) Renegotiate trade deals and / or impose tariffs.
2) Stricter enforcement and control on immigration, and the deportation of illegal immigrants.
3) Significant Infrastructure spending.
4) Tax cuts mostly for high income earners and corporations.
5) No changes to Social Security and Medicare.
6) Deregulation.

We can see why this appeals to many Trump supporters: More favorable trade deals or tariffs means less price competition for domestic producers of goods. Less immigration (and deportations) means less labor competition in the U.S.. More government infrastructure spending means more jobs.   Small business owners like the sound of deregulation.  And everyone likes tax cuts, even if most of the benefits accrue to high income earners.

Mr. Trump has also promised no changes to Social Security and Medicare. I've spoken to several Trump supporters - who are counting on social security and medicare in retirement - and they believe strongly that Mr. Trump will protect both programs (House Speaker Paul Ryan says they will privatize Medicare, but Mr. Trump's supporters don't think that will happen).

Most analysts think there will be fiscal stimulus in 2017 and 2018, with a combination of tax cuts and some increase in infrastructure spending.  In general, analysts believe that any changes to trade agreements will take time, and that deportations will not increase significantly.  The bottom line for analysts is that the portions of the program that will boost the economy in the short term will be enacted, and the portions that won't (trade deals, deportations) and changes to the ACA (Obamacare) will be delayed.

This is why analysts have been somewhat positive on the impact of the Trump economic proposals for 2017.  However no one knows what will actually be proposed.  What matters is the details.

A few thoughts on the details:

Members of Mr. Trump's team have been talking about a $1 trillion infrastructure plan. However the infrastructure proposal is really a proposal for about $100+ billion in tax credits to spur private investment in infrastructure. The $1 trillion in infrastructure investment is the projected size of the private investment, not the proposed government spending. This proposal is actually very modest in terms of a fiscal boost.  If this is a privatization scheme, then there might be a modest short term boost, but the long term impact will be negative.

On trade, there are winners and losers. Everyone who shops at WalMart and other large retailers benefits from lower prices due to imports, however for people who have lost jobs because of cheaper imported goods, the lower prices does not offset their lower wages (these are the losers). If there are tariffs, everyone will pay more at WalMart, and some people might get higher paying jobs in the U.S.. There are winners and losers - but the net impact of tariffs on the U.S. economy will probably be negative.

On deregulation: Usually regulations are intended to prevent long term negative events, so deregulating has a short term positive impact - even if the regulation is important. An example would be FDA drug approval. If the FDA stopped regulating drugs, there would be snake oil salesmen everywhere. The negative impact of the non-approved treatments would not be realized for some time, and the victims would have no recourse later - since the snake oil salesmen would have moved on. The FDA is not perfect, but these are necessary regulations to protect consumers. The same is true for banking regulation (as we learned during the great recession).

And on tax cuts: Most of the benefits will probably go to high income earners.  These are people with a propensity to save, so the boost to the economy will be modest.

I expect the estate tax will be repealed and that will increase wealth inequality in the U.S..  Most people don't realize that the estate tax only falls on a few estates - and that much of the wealth that is transferred to heirs has never been taxed!    As an example, imagine that someone owns stock in a company, or owns real estate, for many years.  And the stock or real estate appreciates significantly.  When the individual dies, there is a step-up in basis to the current market value - and the capital gain on the appreciation is never paid.   Just something to remember when this debate heats up.

Bottom line: we need to wait for the details, but there will probably be a modest stimulus boost for 2017.