If I think that Trump’s policies would be bad for the economy, then how do I explain the recent strength in the stock market? My answer is that stock investors see signs that Trump will not enact his economic agenda, and instead will govern more like a Mitt Romney Republican. I hope they are right.
Yahoo.com has an article that fleshes out this argument:
4 Ways Trump’s economic plan is already morphing
Fewer tax breaks for the wealthy. Trump’s tax plan during the campaign included a huge tax cut for the wealthy, on the supply-side principle that they’d spend more and help create more jobs. In October, the nonpartisan Tax Policy Center estimated that Trump’s plan would save the top 1% of earners an average of $215,000 per year, while middle earners would only save $1,000 or so. . . .
That no longer seems to be the plan. Steve Mnuchin, Trump’s nominee for Treasury Secretary, said recently there will be “no absolute tax cut for the wealthy.” What he means by “absolute” is that tax rates will still come down, perhaps according to Trump’s original plan, which would lower the top rate from 39.6% to 33%. But Trump would also put new limits on the amount of deductions filers can claim, and the wealthy tend to claim far more deductions than other filers . . .
A softer touch on trade. Trump talks tough about punishing trade partners if they don’t help create more American jobs, but Trump’s nominee for commerce secretary, Wilbur Ross, is far more diplomatic. He recently told Yahoo Finance, “there aren’t going to be trade wars,” . . .
A lower infrastructure target. The Trump campaign plan called for $1 trillion in new infrastructure spending. The target has now been cut to $550 billion, according to Trump’s transition web site. . . .
Janet Yellen is okay after all. Trump strongly suggested that if elected, he’d replace Yellen as chair of the Federal Reserve, arguing that she had politicized the central bank by favoring the policies of President Obama. But Mnuchin and Ross both praised Yellen after receiving their cabinet appointments, reflecting the view of much of the business community that she has been a steady hand on the economy during turbulent times. So expect no fireworks at the Fed. Trump has plenty of other battles to fight.
This last point is something I predicted a few weeks back. The Trump people will have their hands full on other issues, and I doubt they’ll see any reason to take on the Fed. In addition, if they did go after the Fed with legislation, the GOP Congress would come out with something hawkish. It would not even get through the Senate. More importantly, the Trump people don’t want a hawkish policy, as they are going all out for stimulus. So why would they replace Yellen with John Taylor, or some other plausible choice. And obviously Trump is not going to pick someone to the left of Yellen, like Christina Romer. I suppose he might pick an obviously corrupt person, but there’s much more spotlight on the Fed than back when Arthur Burns was picked. Someone transparently subservient to Trump would lead to a massive fight on Capital Hill. I think we should expect about the same monetary policy under Trump as we had under Obama, give or take a bit due to incompetence.
BTW, the list above does not include deregulation expected under Trump, which is also a factor driving stocks higher. Of course all of this remains to be seen. And note that the sort of conventional policy mix described above will not bring back blue color jobs, or lead to sustained 4% GDP growth. Trump’s also picking the same sort of foreign policy hawks that Marco Rubio would have picked, albeit a bit loonier. So America was dragged into the gutter for 12 months, turned into a Philippine-style banana republic, to give us roughly what a Mitt Romney clone would have provided?
Off topic, Lorenzo from Oz always tends to leave some of the most thoughtful comments. Here’s an excerpt from a couple of very interesting remarks that he left after the previous post:
If this is the new gilded age, then The Donald is leading us to a Republican Party that looks like its gilded age equivalent — the Party of the northern working class, protection and assimilation. The Democrats don’t seem to have noticed that their period of dominance (1930-1972) was based on a low migration period (1920-1965) when convergence of norms and expectations made Washington-based expansive programs look sensible. The more diverse the society gets, the less and less plausible trust-Washington-competence looks. (With its Northern charm and Southern efficiency, as JKF called it.)
The previous period of high migration (to 1920) was a period of Republican dominance. The more diverse the society gets, the more appeal the politics of national identity but central government reticence. (Austrian economics was born in the Danubian Monarchy, the most wildly ethnically diverse of the major Powers: not an accident methinks.)
Polls regularly show very low popular confidence in the US Federal Government and steadily trending downward trust therein. Yet the Democrats keep pushing that this increasingly distrusted level of government should do more and more and the society should become more and more diverse. Methinks there is some contradiction in their politics …