Donald Trump was elected on a platform of hope, but one divergent from that of his predecessor Barack Obama. The Republican president won support from both working-class voters who suffered from the decline in manufacturing jobs, as well as prosperous people in favour of his proposals for lower taxes. But eight months after taking office, the economy is still waiting for the implementation of the Trump programme.
The promise of infrastructure expenditure financed by additional borrowing was unusually bold. It was the missing link between creating jobs, given the unlikelihood of bringing manufacturing back from cheaper overseas markets, and filling the gaps in the US economy to raise its potential growth rate. That, however, requires raising the US debt ceiling, and there are enough fiscally conservative Republicans to make that difficult.
The stock market reacted optimistically, not to say over-enthusiastically, to Trump’s election; the dollar strengthened, and it looked like the president’s agenda would be good for the economy. The positive momentum from 2016 helped as well. Inflation continued to stay stubbornly below the Federal Reserve target, and the labour market remains tight.
Trump has made his demands, but Congress is too gridlocked to deliver results. One notable example was the Obamacare repeal bill, which passed the House of Representatives but became stuck in the Senate. The president’s proposed tax reforms face similar challenges, though have a better chance in the long term of reaching fruition.
It will not be easy for legislators to convince financial markets that tax cuts will lead to higher GDP growth and that this will offset a fall in tax revenues. The Urban-Brookings Tax Policy Center calculated that while the top 1% of taxpayers will gain 11.5% in after-tax income annually (around £175,000), middle quintile taxpayers will gain only 1.3% (around $760). It is estimated that the reforms could reduce tax revenues by $3.4tn in the first 10 years and by $5.9tn the following decade. The Democratic party will not accede to that sort of programme.
The impact of Hurricane Harvey on Texas and neighbouring states will add to federal expenditure. This heightens the need for Trump and his party to demonstrate that his tax reforms will generate extra growth and be self-financing, a difficult task for the Republican leadership. Democrats will obstruct the programme and propose their own version to appease their supporters. A quick result cannot be expected, and it is improbable that any meaningful reforms will be passed before the end of this year.
There is the perennial crisis, too, of raising the debt ceiling. In this context, the large and urgent need for federal funds to repair the damage done by Hurricane Harvey should lead to urgent action by Congress. But even here, brinkmanship can be expected as much from the legislature as from Trump. The prospect of a closure, however short, of the government at the end of September cannot be ruled out. Equity markets are beginning to understand the scale of the jeopardy, and the dollar is weakening.
Trump lacks an effective liaison team in Congress who can advocate for him. His penchant for pre-emptive tweets aimed at Congressional leaders has not helped. There has been a rapid turnover, too, of White House staff, though the economics team has been stable. This may change; Trump’s comments on the Charlottesville protests frustrated Gary Cohn, his chief economic adviser. Cohn is staying in his role, but may simply be waiting until he is appointed, as has been much-rumoured, chair of the Federal Reserve when Janet Yellen’s term ends in February 2018.
The last eight months have been a long and challenging learning process for all sides; the president and his staff on one hand, and Congress on the other. Sense and rationality are unlikely to prevail until the Republican and Democratic parties start readying themselves for next year’s mid-term elections. Look to early 2018 for any progress on tax reforms.
Lord (Meghnad) Desai is Emeritus Professor of Economics at the London School of Economics and Political Science, and Chair of the OMFIF Advisers Council.