Finally, some clarity
Donald Trump did not win his Presidency by conforming to traditional Republican archetypes. While the previous Republican White House’s foreign policy espoused neoconservative positions of interventionism and nation building, Donald Trump has stood out as an isolationist. While Democratic standard bearers have been more inclined towards international cooperation, previous Republican administrations also worked hard to generate “coalitions of the willing” when conducting affairs outside the US. In contrast, President Trump’s nationalist mantra “America First” wasn’t just an affirmation of self-interest, it’s “only America first”, according to his inaugural address, with diplomatic repercussions for allies and opponents alike. Historically, Democrats tended to represent the working class while Republicans were associated with the influential upper classes. However, Donald Trump won on a populist, anti-elite message, promising to “drain the swamp” of Washington, get rid of bureaucrats, fire experts with vested interests, and to break down traditional structures of power.
Everyone has been waiting to see what sort of policies we would experience with the new President. He did not make anyone wait long. Since Donald Trump took the mantle of the Presidency on January 20th, he has fired off a whirlwind of executive orders which provide clarity into how his campaign promises would be applied in office.
Within the first week, he withdrew the US from the Trans-Pacific Partnership, put up a Federal government hiring freeze, blocked a key enforcement element of the Affordable Care Act (pending its repeal), reinstated the Mexico City policy barring financial support for NGOs which promote abortion, and opened up construction on controversial energy pipelines in the upper Midwest.
Changing the tone
All of these actions are consistent with the positions the President made as a candidate but, as executive actions, the impact of these decisions are still relatively minor. From an economic and investment point of view, the executive actions which have passed thus far have had a virtually negligible effect. The most significant economic action – withdrawal from the T.P.P. – was already a given and this outcome was absorbed by markets long ago. An executive action lacks the scope of authority found in Congress, and the truly big changes are going to require lawmakers in the legislature to work with the President. However, President Trump comes into office with Republican control of Congress and the judiciary, so getting substantial policy changes through should be straightforward.
For a full week, that seems to be the case while Congress lined up on party lines to confirm Trump’s cabinet picks and support him. Given the support of Congress, President Trump has several avenues where his ascendance will be deeply influential. Social issues will be shaped by his policies, cabinet members, and his Supreme Court nominee. Trump’s skill as a spokesman for American interest has altered expectations of US diplomatic power or cultural influence. Trump rejects the consensus building approach common to allies in EU, UK, and Australia and instead resonates with international leaders with similarly authoritative approach like Nigel Farage or Vladimir Putin; this reorientation has changed the expectations of our opponents and partners on the world stage.
How much does this change in approach matter to the millions of Americans who wanted Trump to change their economic fortunes? These changes may not matter very much. Thus far, President Trump has a tendency to engage individual companies, including tax-benefit deals for Carrier or condemnations for companies that eschew family brands (like Nordstrom). The optics matter politically, but the economy is made of billions of individual decisions from hundreds of millions of players. This individual level of micromanagement isn’t likely to change the national calculus on job and wealth creation.
Resistance and a slowing rate of change
The second week of Trump’s presidency saw executive orders on border security, travel bans on seven predominantly Muslim countries, and block against refugees. These orders sparked a blowback of resistance from the political left, media outlets, and even some of the political right. This stymied the administration, which seems not to have anticipated limits to their authority. Following the travel ban rollout and pushback, the rate of change from the administration has slowed significantly as they attempt to defend, litigate, or re-issue the executive order.
Moreover, the large economically relevant elements of Trump’s campaign promises depend on a unified Republican Congress. These proposals have been subject to slow negotiations or have looked politically unpalatable to a populace that accepted candidate Trump’s big promises.
For example, a key campaign promise was to repeal and replace the Affordable Care Act with a comparable plan at a lower cost. Changing the rules of healthcare could absolutely change the underlying machinery of the economy. However, there is nothing like unity from Congressional Republicans as dozens of healthcare plans are debated endlessly. The lofty promises and high expectations are bumping headfirst into economic reality, and Congress has to figure out how to achieve their goals. After seven years of ObamaCare, only now are Republicans trying to coalesce around a single plan which could - depending on the plan - dismantle, rework, replace, or only repair Affordable Care Act. Nobody knows. Congressional leaders argue for patience dealing with the gridlock. Key boosters for Trump, like Sean Hannity, call the Republicans “spineless” for their failure to work swiftly.
Other key efforts with significant potential effects on the economy - including corporate tax reform, undoing and renegotiating trade deals, implementing a border wall - are difficult to facilitate without the assent of Congress. So, the rate of material economic change largely depends on Congress. Congress, despite broad Republican control, didn’t have a plan of action or a cohesive agenda for implementing changes once the new administration took the reins.
For investors, what changes might matter
If Congress and the administration can work together, there are a great number of agenda items which could profoundly affect our economic fortunes. For instance, Trump as a presidential candidate started his quest for the White House by promising to isolate the US with a southern border wall. The isolation of the US from trading partners, via a wall or through tariffs, could quickly spark unintended consequences – inflation, a lack of US competitiveness, a tit-for-tat trade war, lowered trade prompting global recession, and so on.
There are dozens of unanswered policy questions with similarly significant economic outcomes. Will Trump get his infrastructure spending plan in place? Will the plan spend money on projects which improve growth potential? For instance telecommunications and infrastructure upgrades facilitate information and physical good transportation, spurring commerce. Or, will his proposed infrastructure plan spend on quality of life improvements (water delivery, additional services for retirees) which, while valuable, don’t affect growth? Will Trump and Congress be able to enact tax cuts? Can repatriated US dollars by fixing incentives which push capital offshore. Can they alter the tax code to penalize consumption (like a VAT tax) instead of production? Will Paul Ryan’s proposed border adjustment tax be used to for the wall with Mexico? Will Congress offset Trump’s spending wish list with cuts to other programs to achieve revenue neutrality?
Answering these questions with significant economic impact with require coordination with Congress, which isn’t going to move quickly. Ironically, the resulting delay and gridlock in government is generally good for the stock market. Why? Governmental interference can have positive or negative effects, but in the absence of changes, the status quo is fine. The fundamentals of the US economy are healthy and have been good for several years. If nothing changes and earnings and profitability remain solid, then corporate America should continue to thrive.
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