What Trump’s Speech Might Mean For The Economy

Because it’s early in President Trump’s term, it’s tough to predict what will occur. His speech to Congress on Tuesday was normal in terms of historical precedent, which is unusual for his unorthodox style. The speech didn’t have that many specific economic policy proposals, but we did learn where he may be leaning on the issues of trade policy and healthcare. The one thing I’m disappointed about is we received no information on his opinion about the border adjusted tax. The speech seemed to have a unifying tone which may be why this type of policy pronouncement wasn’t made. It will be up to Congress to decide the nitty gritty details of the legislation. If Trump doesn’t like the direction it is going in, he may interject. I think his approval of a specific plan will put it over the edge, but we’re not close to that yet as we’re still in the beginning of this long process for tax policy and healthcare policy.

The one point mentioned with regards to tariffs was his story about how Harley Davidson told him a country was charging a 100% tariff on their motorcycles. This gave Trump ammunition to support tariffs which match what other countries are setting. The country wasn’t named specifically. It was unclear if the concept of instituting a fair-trade system implied putting a 100% retaliatory tax back on that country’s exports to America. This can be interpreted as starting a trade competition where tariffs are hiked or as a negotiation tactic aimed to get other countries to lower their tariffs on American exports.

President Trump’s discussion of infrastructure improvements was a key theme of the speech. He mentioned using public and private funds. There is a gray area because it can be interpreted in two ways. He can either push forward with the plan I reviewed a few months ago which relies on tax credits to encourage private spending or he can support a more traditional approach where the government takes a lead role in the process. Trump wants to cut spending without touching entitlements, yet simultaneously wants have a plan to build up the country’s infrastructure. Something must give because these goals contradict each other.

An important point about infrastructure is much of the spending is about maintenance and repairs. While the repairs are vital, it’s not a program which can improve productivity like the interstate highway system did. This is the harsh reality of the situation. It is the exact opposite of a ‘free lunch’ as money is spent without much of a return. On the other hand, I view the regulatory cuts as a ‘free lunch’ because of the excessive nature of the current ones in place. Cutting the red tape that prevents projects from being started creates jobs and won’t necessarily hurt the environment because the laws have become too burdensome.

In case you have forgotten, President Trump has issued a few executive orders on the topic of regulation. The most referred to order by the President is the one where two regulations are cut for every new one issued. This is a pay as you go system which aims to control the growth of regulations. The other general executive order was the one which set up a Regulatory Reform Officer position at each government agency. Within 60 days the officer must present his/her findings on regulations which inhibit job creation or are outdated. This is a self-audit of each agency to create ways to unleash the power of the private sector to create jobs.

The infrastructure executive action that I mentioned aims to expedite the environmental review process because sometimes projects are delayed to avoid making tough decisions. It’s not that all projects should be accepted while ignoring potential negative environmental effects; it’s that a quick decision saves businesses money even if the project is rejected. The order identifies high priority projects which help the general welfare of the country. These projects get a quicker response. The agency must say what the reason for the delay is if it takes more than 30 days. The final executive action on regulatory reform, so far, is about financial regulations. It aims to review the Financial Stability Oversight Council created by Dodd-Frank. The goal of this action is to analyze each regulation to see its effect. The ones with negative effects will be repealed.

The biggest policy pronouncement in the President’s speech was his support of tax credits to pay for people’s healthcare. This plan is supported by the moderate establishment politicians within the GOP such as Paul Ryan. He didn’t say the tax credits would be advanceable and refundable which is what conservatives oppose. Refundable tax credits give the poor money back even if they don’t owe income taxes. This would be paid for by taxing expensive healthcare plans. Clearly the fiscal conservatives are against this.

I would classify President Trump’s support of the whole establishment plan as moderate as he didn’t specifically review the refundable tax credit portion. Even if Trump pushed for this plan explicitly, it may not have been enough to push it forward because Rand Paul, Ted Cruz, and Mike Lee oppose it, which is enough to halt it without Democratic support. Some compromise will need to be made, which incorporates some of Rand Paul’s ideas and some establishment ideas.

Conclusion

            The stock market is up slightly in the after-hours market in response to the President’s speech. This shows me that there weren’t enough details to move the market. Having a few different policies have their chances of being passed change by a small amount isn’t going to move the market. Trump is expected to put out his budget in mid-April which will give details on where he stands on important policies. He said he supported not denying patients with pre-existing conditions, but that doesn’t necessarily mean he’s against Rand Paul’s plan which allows patients with pre-existing conditions to get coverage for two years. Trump’s promise to put aside trivial issues may mean some harsh remarks towards specific firms will be kept to a minimum. This a positive for the stock market.

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