The Economy Under President Trump

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jan 20, 2017 3:10:18 PM

and tagged Politics and the Economy

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inaugurationToday, America carried out the peaceful transition of power that is at the heart of our democracy—except that we don’t actually have a democracy but a republic. In a democracy, the people make the decisions. In a republic, they elect representatives who make the decisions for them. This is a subtle but important difference, and one that represents a very deliberate decision by the founders, who distrusted popular sentiment.

Beyond separating the people from direct control of the government, the founders intentionally built multiple conflicts and ambiguities right into the structure of government. Three branches, each able to hold the others accountable. Multiple layers of authority within each of the branches, for the same reason. Multiple levels of government—federal, state, municipal—all fighting for their own interests. Frankly, it’s a mess.

Faster growth ahead?

Because of this complex structure, though, anything that actually gets through is likely to have fairly wide support, representing a reasonable national consensus. Errors to one extreme can and have happened, but they are usually followed by a correction.

From an economic point of view, this is very clear when we consider the last Bush presidency, the Obama presidency, and now the beginning of the Trump presidency. A couple of themes stand out. Deregulation and tax cuts were followed by reregulation and tax increases, which will (presumably) be followed by more deregulation and tax cuts. In this sense, the Trump presidency is not only not that unusual but could actually be somewhat predictable if we use the Bush presidency as a template.

With the economy solid and increasingly likely to accelerate, the fiscal stimulus of a tax cut would add fuel to the fire, sparking faster growth. Less regulation, and an increased appetite for growth, would drive businesses to expand faster and take on more risks. Banks would lend into the upward cycle, making more money and taking more risks as well. This is all part of the normal economic cycle (and just what we saw in the mid-2000s)—as is the ultimate recession and restructuring, when we write off all the bets that didn’t work out.

We can reasonably expect faster growth—and better animal spirits—for the first part of the Trump administration. It may look a lot like, perhaps, 2003 through 2007.

The challenge: keeping the recovery going

The problem in comparing now with then is that the starting conditions are not the same. Compared with George W. Bush, Trump takes office with a large structural deficit, a much higher level of debt, and a deteriorating demographic and governmental financial profile, as the baby boomers retire and start collecting social security and Medicare. Although Bush was able to run the economy hot for a period of years, this administration’s ability to do so will likely be constrained by the weaker starting conditions.

The question will be whether 2017 looks more like 2005 or more like 2007.

Much depends on whether the new administration and the Republican Congress can work together effectively to spark higher real growth levels—the primary determinant of how long a Trump expansion can last. With inflation starting to rise, the Fed embarking on a rate increase cycle, and full employment, the easy recovery has been made. Keeping it going will be increasingly challenging. This is the problem any president would face at this stage of the cycle.

And that, in the end, will determine whether the Trump presidency succeeds or not. Presidents Reagan and Clinton are remembered not for their controversies and scandals but for how the country did as a whole. What we think about 2017, looking back from 2027, will depend largely on whether Trump and Congress are able to implement policies that allow for sustainable growth beyond the cyclical rebound we are currently enjoying.

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