Monday, March 27, 2017

Trump Economy Needs Wings And Prayers To Soar

By Albert R. Hunt
The Bloomberg View
March 27, 2017

Donald Trump boasts that he has been an economic genius, creating jobs, cutting $12 billion off the national debt and overseeing a soaring stock market in just his first two months.

These claims are largely phony. He may need braggadocio, though, because on the economy he has been dealt a bad hand politically. This problem is likely to be compounded by two actions his first year.

Perversely, the reason he inherited a bad hand politically is that he got a good one economically: low unemployment, moderate growth and the glimmerings of wage gains. If history is any guide, the last 77 months of job growth won't last a whole lot longer.

By contrast, most successful presidents dating back to Franklin D. Roosevelt inherited economies in dire straits and got political credit for reviving them. President Ronald Reagan took over amid the sluggish growth and soaring inflation of the "stagflation" period, while President Barack Obama assumed office at the start of the worst global economic crisis since the Great Depression. Economic conditions got worse on both occasions, with unemployment hitting double digits, before improving markedly to each incumbent's benefit.

Trump, who promised a booming economy with a 4 percent growth rate, was counting on big tax cuts and huge infrastructure spending to create jobs.

But Republican congressional leaders insisted that the first priority was to repeal and replace Obama's signature health-care system. They failed, revealing schisms in Republican ranks, Speaker Paul Ryan's political ineptitude and Trump's inability to pressure or persuade members of Congress.

It essentially wasted the crucial first three months of Republican rule. Legislation for rebuilding roads, bridges and airports has been put off. Whatever materializes is likely to be less ambitious than Trump's campaign promises -- his proposed budget actually cuts infrastructure spending -- meaning it would have less immediate economic impact.

The priority now is tax reform, with individual and corporate reductions and base-broadening to cover some of the lost revenue. Treasury Secretary Steve Mnuchin predicted that tax reform will be "a lot simpler" than health care. The naive newcomer soon will learn that there's a reason there hasn't been an important overhaul of the tax system in over 30 years. With the devastating health-care defeat, look for Trump to focus tax cuts more on the middle class than on making top-rate, supply-side reductions. Ryan's preferred "border adjustment tax" favoring exports is dead.

The other complication for the Trump White House will be the Federal Reserve Board. The term of Chair Janet Yellen, a distinguished Democratic economist appointed three years ago by Obama, expires next Feb. 3. If the economy is slowing at that point, the question of who succeeds Yellen becomes more important, since the Fed under Yellen is starting to raise interest rates to keep growth from speeding out of control.

Already there is speculation, even some lobbying, for her successor. The possibilities include a former Fed governor, Kevin Warsh, along with Glenn Hubbard, dean of the Columbia Business School and a leading Republican economist in the George W. Bush administration. There is also talk that Gary Cohn, a top Trump economic adviser and former president of Goldman Sachs, might be a more accommodating choice from Trump's point of view.

To the extent he has any economic ideology, Trump, the builder, loves low interest rates. Ironically, that puts him closer to the views of Yellen than to the Republican inflation hawks who worry about the potential of low rates to overstimulate growth.

But reappointing Obama's Fed chair would drive Republicans crazy. Yellen, whom Trump blasted during the campaign as an Obama toadie, probably has little interest in staying. If there are any economic dislocations, Trump can be counted on to lash out at the Fed more than any president since Richard Nixon. He has little respect for any institutions and always blames others for problems.

As always, timing will be essential. At the time of both Reagan's and Obama's re-election, the jobless rate was almost the same as when they took office. But both benefited from favorable trends. In Reagan's case, unemployment had dropped sharply after soaring for awhile, enabling him to proclaim "morning in America." Job growth after the 2008 recession made a persuasive case four years later for the strength of "the Obama economy." Direction matters, politically.

Trump could be in good shape if, in three and a half years, he has pulled a trifecta. That would mean he's not tainted by Russian interference in the 2016 presidential election, his family-business conflicts of interest don't cause an open scandal, and he doesn't get into a war. Oh, and presides over a jobless rate no worse than the 4.8 percent he inherited.


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