In the third Star Wars movie, “Return of the Jedi,” we were introduced to the Sarlacc, a creature that swallows its prey whole and then spends an entire millennium digesting the newly acquired nourishment. I feel as though last Tuesday’s stunning presidential election has turned many of us into Sarlaccs who will spend at least a millennium trying to digest the implications of what just happened.
But we do not have a thousand years to understand the economic ramifications of this, as well as what this might mean to each of us in our various circumstances. Here is my best guess as to what to expect on the economic front.
President-elect Trump has been rather short on details as to our how he will approach the economy despite the fact that, according to several surveys, the majority of Americans feel that he is the preferred candidate to handle the economy.
Notwithstanding his lack a specificity, Trump has given a few campaign pledges, some of which are sure to happen, likely to happen, and unlikely to happen. Here is the list: 1) lower top tax rates, 2) lower corporate tax rates, 3) repeal Obamacare, 4) reduce banking regulation, 5) reduce environmental regulation, especially in coal and other hydrocarbons, 6) significantly increase infrastructure spending, and 7) renegotiate trade agreements including a 35 percent tariff on manufacturing from Mexico.
Almost certainly, the income and corporate tax rates will be reduced. This is not only a campaign promise. It is also a pet project of Republican congressmen. Ditto with the obliteration of Obamacare. Consider it gaming for its last breath. Ditto with banking and environmental regulations. Congress will gladly act on these issues.
Most Americans, whether Democrats, Republicans, or Sarlaccs, want increased spending on roads, bridges, trains, planes, internet, and everything else which falls into the category of infrastructure. As I see it, two things have prevented Congress from acting on these. First, some of the young and intransigent Republican lawmakers feel that they were sent to Washington to disrupt spending of any sort. Second, as long as Barack Obama was president, a Republican-controlled Congress was disinclined to allow infrastructure spending which would improve the economy, make life better, and allow a Democratic president to get any credit.
While the first of these obstacles remains steadfastly in place, the other is now removed. I would give a very high probability to a significant degree of infrastructure spending to commence at some time in late 2017 or mid-2018.
Now we come to the issue of international trade. Given the tightness of the race, there can be little doubt that Trump’s harsh words regarding NAFTA and trade in general, dished up to Midwesterners, helped nudge him to victory. But, as we all know, a campaign is not reality television.
I would guess that if the time comes to revisit the trade deals, Trump will find a way to completely back down on this. He knows firsthand that foreign labor can make for a better bottom line of profit. He certainly has “friends,” or soon will, who run large corporations and profit from free trade. It is difficult for me to imagine that, as president, Trump will favor a region of furloughed factory workers ahead of a few friends in high places.
So what does all of this mean for our economy? In brief, the tax cuts will add to the wealth of the wealthy without generating much spending. The tax cuts in conjunction with the infrastructure spending will make for large federal-budget deficits. Assuming that the economy is not experiencing a recession when the rebuilding of America begins, the jobs market will heat up and ignite a shift in inflation. That should allow the Fed to justify higher interest rates over time. This line of reasoning is why we have seen a drop in bond prices since the election.
The removal of Obamacare will likely move more money into the health-care sector and increase profits in that arena. The financial sector will also likely benefit from lower regulation. Both of these bloated sectors are likely to reach morbid obesity.
Very few people outside the field of macroeconomics understand the relationship between government deficits and total corporate profits. One of the “mysterious” features of 2009-2011 was the fact that despite a deep recession and a lethargic rebound from the economic trough, corporate profits were historically huge.
The reason for this is not the least bit enigmatic to macroeconomists. The “profit equation” (which we have examined in this column) informs that government deficits are one of the components that create corporate profits. When the federal government increases its deficit, it increases aggregate profits dollar for dollar. The government deficits in 2009-2011 went to fund corporate earnings. Thus, a Trump policy prescription will almost surely result in sustained higher corporate profits. This should keep a floor under equity markets in the face of higher interest rates.
One other feature is also quite likely. Unless the federal government spending is quite large, the labor market is unlikely to push real (inflation-adjusted) wages up by any significant amount. Wages will likely continue to languish, while the growth from economic expansion is channeled to equity holders and high-income recipients. The decades-long redistribution from the bottom 90 percent to the top 10 percent of our income earners will almost certainly continue without a large movement in the minimum wage.
This is borne out by the fact that recent upward movements in real wages have come about almost entirely through individual state initiatives to increase the minimum wage. Given the mix of government deficits, a reduction of progressive taxes, and a reduction of financial and healthcare regulations, and hostility in Congress toward higher minimum wages, it is difficult to see how lower wage earners can benefit from the new administration.
The economic point of this may not be obvious. The combination of a high concentration of wealth and income in the hands of a few, coupled with less financial regulation, makes for an unstable economy. The result is likely to be higher financial-asset volatility. This should be a good environment for traders, but is likely to be occasionally knuckle-biting for investors.
I reiterate that this is much to digest. We will examine a few of these things more closely in the weeks ahead.
(Marcus Hutchins is a former economist, treasury-bond arbitrage trader, and hedge fund manager. He retired to Southport in 1997, where he resides with his wife, Andrea, and youngest daughter, Abbey. He welcomes feedback at email@example.com.)