Mr. Trump - don't drop that baton

The Irony of Trump’s future economic success: As President Obama prepares to leave office the overall economy is in good shape. The strongest indicator is that the Fed is preparing to raise interest rates in December. While income inequality, lack of wage growth and manufacturing jobs in rust belt states contributed to a surprising election outcome, most national economic indicators are positive.  A jobless rate hovering around 5%, 14 quarters of economic and job growth, rising housing values, strong dollar and a stock market that has more than doubled in value over the last 7 years.

Absent an external shock or a major global crisis, President-elect Trump will benefit from this economic trend without the need for any action on his part. As the economy strengthens, the Fed will continue to raise interest rates, which will strengthen the dollar, reduce worldwide commodity prices (especially gasoline), cost of imports and keep inflation in check. Offsetting this higher interest rates will be a drag on housing industry, automobile production and exports but the net national affect should be positive. Unemployment will continue to fall and wage growth stabilize for which the new president will take instant credit on his 3 AM twitter feeds.

The rest of the Republican agenda is primarily a wealth transfer to the rich and unlikely to have a near term affect on economic growth. The Republican Congress is poised to reduce taxes on the wealthy under the guise of tax reform or job creation. This is a time-honored tradition when Republicans are in charge. Both President’s Reagan and Bush immediately enacted tax reductions which both increased the deficit and income inequality. President Reagan advisers famously coined the term ‘starve the beast’, which meant reduce government revenue near term to later use the increased deficits as reasons to cut social spending. So predictably this tax reduction will increase the deficit but since it is geared to the rich will not provide an economic stimulus. In the near term the rich do not need a tax cut to increase their personal spending, a tax cut merely increases their long term wealth.

The much-touted Infrastructure program is a deliberately fabricated falsehood made to masquerade as a truth (in short a hoax). While the slogan, Infrastructure, is identical to proposals by President Obama and Hilary Clinton the devil is after the headline. While the Democrats proposed funding specific projects the Republicans propose tax credits. Under the ruse that private Industry does everything better, it will grant tax credit and subsidies to investors and contractors who engage in Infrastructure projects. Projects under way or previously planned will qualify so no net new jobs will be created. While not one penny will go towards projects like rebuilding Flint’s poisonous water system, profits in existing projects will increase and billions in tax money will flow to investors simply increasing their profits. Again just a wealth transfer, with no near term economic impact.

Repatriation of corporate earnings trapped overseas is another item that has misguided bi-partisan support and is a triumph of hope of experience. The hope is that with lower tax rates corporations will repatriate trillions of dollars and use that cash to invest in US and create new jobs. The experience is that when this was last done in 2004 under President Bush, corporations used the cash to, acquire other companies, buy back stock or increase dividends and no net new jobs were created. In 2016 with low interest rates and healthy balance sheets corporations are not short of capital and can easily make investments in profitable projects. So this idea too is just a wealth transfer (stock values will go up) with no likely near term economic affect.

While the new Presidents views on trade are amongst his more incoherent ideas, there is a wide spread misunderstanding on both sides of the aisle on the benefits and detriments of trade. Annually the US imports $1.8 trillion and exports $1.2 trillion. While this leads to a $600 billion trade deficit, the export business is a big part of our economy and creates a lot of jobs. Further our trading partners put the cash they earn from us back in the US capital markets buying treasury notes, essentially funding our annual deficit and keeping interest rates low. The total capital flow of trade plus investments is more in balance. Engaging in a trade war by slapping on tariffs or trade restrictions would be catastrophic and in all likelihood counter productive. As an example since the election the Mexican peso has devalued by 10% vs. the dollar so it is cheaper now to produce in Mexico than before the election. A large tariff may not affect imports by very much, but could affect exports when other countries retaliate. So in all likelihood not much will change on trade. However the President-elect will fabricate personal credit on his twitter as he did the other day taking credit for keeping Ford jobs here that were never leaving.

So while the Republican programs will create significant long term issues with the deficit, income inequality and social order, in the near term we are likely to see the continued economic success based on the Foundation that President Obama developed.

So, that is the ultimate irony that President-elect may succeed economically (whether foreign affairs or social issues sink him is a separate set of issues) because of what President Obama bequeathed him.

The Greek gods must be laughing!