So, where do we go from here?
Early signs on the economic policy front are decidedly mixed. Some appointments by the President-elect are encouraging: at Education, Health and Human Services, Treasury, Defense, Transportation and a pragmatic Chief of Staff, Priebus. Some are problematic: Flynn as the National Security Council boss, Carson as Secretary of Housing and Steven Bannon as Senior Advisor.
After a week or so of muted mutterings, Trump has resumed Twittering at high rate, proving he can still dominate the news without bothering with press conferences and stroking the media. He has successfully pressured Carrier Corporation to reduce the number of planned layoffs in Indiana (thanks for Governor Pence’s goody bag of tax credits) and threatened corporations generally not to move jobs overseas unless they want the heavy hand of Washington to make life decidedly unpleasant (a 35% tariff on their imports?).
The stock market and the U.S. dollar have received a notable boost from promises of infrastructure spending and a push to dismantle some of the egregious regulatory initiatives of the Obama Administration. Lower corporate and individual tax rates are clearly headed down. The bond market is anticipating higher interest rates associated with faster economic growth.
All well and good? But before concluding that the outlook is pleasantly sunny, beware the clouds on the horizon. Chief among these are major increases in the federal budget deficit if tax rate reductions are not coupled with serious loop-hole plugging. For example, it is hard to imagine that radically reducing the tax deduction for the cost of borrowing is something that real estate mogul Trump would buy into. And even if loop holes in the personal tax code are plugged, the currently proposed tax cuts will favor the top 1% significantly, according to former Treasury Secretary Larry Summers, not a way to get a comprehensive overhaul through Congress.
As a mega-borrower in his own right, it’s not hard to imagine President Trump following Ronald Reagan’s budget trajectory. After major cuts in tax rates in 1986 and a dull knife when it came to cutting the budget, rapidly increasing deficits and two rounds of tax increases followed shortly thereafter. Under current proposals, deficits would be swollen by massive tax credits for infrastructure projects, a pernicious form of government financing that disguises spending in the form of tax forgiveness.
Initiatives to control spending are conspicuous by their near-invisibility in the transition teams’ work to date. Outside of the usual mantra to stop “waste, fraud, and abuse" in Medicare and Social Security, there has been no indication from Trump and his people that they are prepared to undertake the structural changes that all comprehensive studies of these two programs call for. Maybe the cost of a new Presidential 747 will focus his attention on the broader problem of Pentagon procurement procedures generally, although past presidents have never had much success in rationalizing this process.
Low-Hanging Fruit. My suggestion is to start with the Office of Management and Budget’s 16 “high error” spending programs. Improper payments last year are estimated to have totaled $137 billion, led by “Medicare Fee for Service” with $43.3 billion and an error rate of over 12%. Number two offender was Medicaid with $29.1 billion in improper payments. The highest error rate was recorded by the earned income tax credit program, a favorite target of rip-off artists, at 24% of the $66 billion disbursed. There must be plenty of low-hanging fruit in these programs; after it has been harvested, the Administration should turn to badly needed structural reforms.
Morale at the State Department must be approaching an all-time low. The President-elect apparently disdains intelligence and diplomatic briefings, leaving the diplomats to pick up the mess after Trump conversations with the likes of the leaders of Pakistan, Taiwan, and the Philippines.
There remains a serious concern about the capacity of the President-elect to adopt a management style that reassures and to follow a focused, thoughtful set of economic policies that encourage investment and innovation. His threats to start trade wars with China and others are a major concern. His strong-arming of Carrier Corporation to abandon its shift of several hundred jobs to Mexico is not a good sign. (The company would have cut costs by $65 million, but settled for a State of Indiana “incentive package” of $7 million.) In addition to generating substantial uncertainty for business investment, repeated interventions of this kind can only rip off taxpayers, much as the fad for movie production subsidies by numerous state governments has proven.
In short, the jury is still out a month after the election. Have we elected an erratic, would-be imperial President or a serious-minded and effective leader? As they say in the investment world, "past performance is not indicative of future results." For better or worse.