President Trump, The Economy, And Your Investments

We are more than four months into President Trump’s term. He has proposed numerous policy changes and implemented some. Many of these changes represent fundamental departures from those of his predecessors. It is natural to be concerned about how such significant changes might affect the economy, your financial plan, and investments. It is also natural to be concerned because many of these changes reflect a worldview different from that of the previous administration and indeed from those of most recent administrations.

To the extent that the administration’s worldview differs dramatically from yours, these policy changes could seem like a distressing personal attack. (Importantly, however, President Trump could not have been elected unless what I characterize as the emerging worldview represented the thinking of many voters.)

Your distress (if you have it) about these changes can easily extend to concerns about your investments.

In this piece, I will contrast the two worldviews and attempt to outline some of the logic supporting the new policies. My summaries will be brief, and therefore incomplete in many respects. Nevertheless, I hope to bring some perspective to what we are seeing.

Issue: Job losses (primarily in manufacturing) by prime working age men, and their inability to find jobs they find dignified and well compensated

• Previous narrative or worldview: This is a complex problem, and solutions are difficult to identify.
• Emerging narrative or worldview: This issue is due to flawed US international trade policy. Fixing international trade will fix the problem.
• Commentary: A major political issue the previous narrative did not address substantively. Many men are struggling, however, there are also non-trade reasons for manufacturing employment decline.

Issue: The relationship between elites and others

• Previous narrative or worldview: Elites know “the answers,” and others should defer to their expertise.
• Emerging narrative or worldview: Elites overestimate their expertise, and disrespect “normal people.”
• Commentary: The emerging narrative explains much of the loss of trust in institutions. Trusted institutions (e.g., the Federal Reserve, the SEC, stock markets, and the Bureau of Labor Statistics) are essential to a well-functioning market economy. The emerging narrative does not yet explain how to restore trust.

Issue: Immigration

• Previous narrative or worldview: Immigrants contribute to the US economy and enrich our culture. They do jobs that many Americans do not want. They pay Social Security and Medicare taxes, supporting these important social programs.
• Emerging narrative or worldview: Immigrants take jobs from American citizens and strain local resources. Their refusal to assimilate and their maintenance of their traditions and cultures threaten our ability to maintain our own traditions.
• Commentary: Objectively, recent immigrants do contribute to economic activity and growth. Extensive deportation will almost certainly reduce economic activity and growth.

Issue: Taxes

• Previous narrative or worldview: Taxes are necessary to fund US government activities. Many of those activities make poor people’s lives better and it is only fair that high income people pay more taxes.
• Emerging narrative or worldview: Taxes are a burden on private economic activity. They reduce economic activity and economic growth. Higher taxes on high income people reduce economic activity even more.
• Commentary: This is an old and ongoing argument. Taxed items (income, assets, transactions) and tax rates are legitimate areas of political debate and decision.

Issue: Government spending

• Previous narrative or worldview: The federal government is best positioned to be responsible for many activities, including national defense, social insurance, international relations, funding research and development.
• Emerging narrative or worldview: The federal government has taken on too many responsibilities. The American people do not support many current federal government activities. Federal government inefficiency is an important part of the problem.
• Commentary: There is genuine disagreement on the appropriate responsibilities of government. It is appropriate for the new administration to reprioritize. New administrations often target government waste. Historically, reducing “waste” has yet to significantly affect total government spending.

Issue: Federal Government support of university research

• Previous narrative or worldview: Federal funding of research at universities has led to fundamental innovations and great progress in computing, pharmaceuticals, biotechnology, and other areas.
• Emerging narrative or worldview: Much of this Federal funding is wasteful and supports faculty and research with biases inimical to the values of many citizens. Many federally funded universities are elitist and don’t take the interests of the people into account.
• Commentary: Federally funded research at universities has led to many fundamental innovations. However, much of the value of these innovations has been captured by companies formed to exploit the newly developed knowledge rather than by the citizens who provide the funding. Thoughtful assessment and prioritization of research funding is appropriate.

Issue: Balance between government spending and revenue (taxes, fees, etc.)

• Previous narrative or worldview: Largely ignored since the Clinton presidency.
• Emerging narrative or worldview: Largely ignored by all but the Freedom Caucus.
• Commentary: This is a central problem for the country. Taxes and government revenue are insufficient to cover government spending. Persistent deficits and growing debt threaten our country’s long-term financial stability.

Issue: The US role in world affairs

• Previous narrative or worldview: While the US has made mistakes internationally, our efforts have made significant contributions to global peace and stability and given the US significant influence to advance its own interests.
• Emerging narrative or worldview: The US has expended blood and treasure to protect non-Americans without compensation or compensating benefits.
• Commentary: Withdrawing American support could encourage (former?) allies to do more for themselves. It is also likely to encourage them to be more vocal about their own interests and to seek other alliances and relationships (including some we might not prefer, such as China) to further those interests.

Issue: Separation of powers; checks and balances

• Previous narrative or worldview: The separation of powers is fixed; the President, the Congress, and the Courts each have their roles.
• Emerging narrative or worldview: The Executive Branch’s role has been artificially restricted by Congressional and court actions.
• Commentary: President Trump is the latest in a long line of presidents who have expanded presidential power at the expense of Congress and the courts.

Issue: Regulation

• Previous narrative or worldview: Regulation is an essential mechanism in governing the country. Congress establishes regulatory agencies in the Executive Branch and sets rules about how they should function. Regulation also reins in corporations and other non-governmental actors in the public interest.
• Emerging narrative or worldview: Independent regulatory agencies represent a congressional usurpation of executive branch authority. Many of these agencies are structured unconstitutionally and restrict the President’s authority. Current levels of regulation are excessive and restrict economic activity unnecessarily.
• Commentary: See the discussion immediately above. “Regulatory capture,” which occurs when regulated companies gain influence over or even control of the agencies that regulate them, would also restrict the President’s authority. There is genuine disagreement about the scope and intensity of regulation. It is appropriate for the new administration to implement its own views.

This president is trying to accomplish different goals than previous presidents were.

The policies the president selects to accomplish his objectives may be ineffective and may also have unintended consequences. However, this is true of the policies of any president. Making change in a country as large and complicated as the United States of America is exceedingly difficult. Unintended consequences are almost certain to occur.

In his recent exploration of tariff policy and its effects, the president experienced this reality. The stock market reaction and the reaction of business leaders were much more intense and much more negative than the president seems to have anticipated. The president pulled back.

One of President Trump’s personal characteristics influences his governing style significantly. He has expressed a strong preference for personal loyalty from his aides and advisors. This limits the range of advice he receives, which results in more unanticipated consequences from his policies and decisions than might otherwise occur.

What does all this mean for the economy and your investments?

The president is not out to ruin the economy. He is trying to make things better in the view of the people who elected him. He is trying to improve the economy for his constituents.

He also has personal business interests, and he seems not to be shy about any public benefits that might accrue to those interests.

The economy is likely to work less well due to some of the president’s policies. (Large) tariff increases are (large) tax increases. Deportations are restrictions on labor supply and can have a negative impact on economic activity and economic growth. Preferential treatment for the president’s businesses and those of his supporters will make the economy less efficient.

On the other hand, reduction in regulation and tax cuts may have positive effects on the economy. The net impact is uncertain and unpredictable.

The same sorts of considerations applied to the policies of the president’s predecessors. When one shares a worldview with the promulgator of a policy, one tends to be forgiving of the potential flaws. But they are flaws nonetheless. For example, recent health care policy (beginning with Johnson and concluding with Obama: Medicare, Medicaid, and the Affordable Care Act) has provided health care coverage to many more Americans. However, the cost is extremely high. We spend far more on health care as a percentage of GDP than any other developed country, with at best comparable health care outcomes.

In addition, we are collectively unwilling to pay for all of the health care and retirement benefits (Social Security) that we choose to provide. The combination of spending and borrowing to pay for it is driving the country ever deeper into debt.

While many of the administration’s actions represent the implementation of an emerging worldview and narrative, some directly threaten principles foundational to the exceptional economic success our country has enjoyed. I am not an institutional economist, but I would identify among those principles:

• Free speech
• Free inquiry
• The rule of law
• Free economic competition
• Unfettered innovation

Many of the administration’s actions in these areas have prompted significant opposition. Whether those actions will stand remains to be seen. To the extent that key principles are compromised, I would not expect the country’s economic productivity and progress to continue to be exceptional relative to other countries. However, that does not mean that there will be no economic progress or growth in productivity.

I have devoted this entire article to the new administration and its actions. I do not mean to suggest that these are the only factors that will influence the success of your financial plan and investments. The US economy is very strong, with many millions of productive workers organized to deliver a myriad of products and services with great efficiency. We are all fortunate to live in this country, with one of the highest living standards in the world. Your financial plan and investment portfolio build on this important reality and position you to benefit from potential economic improvements.

Furthermore, the potential for economic growth is extraordinary. For example, artificial intelligence promises to increase productivity in many areas of the economy. We are also likely to see rapid progress in biotechnology, energy production and storage, and other important contributors to our prosperity.

In summary:

• Changes in regime and changes in worldview are necessarily uncomfortable but need not predict economic decline or catastrophe.
• Some of the administration’s actions, if unchecked, could lead to a future of less exceptional or even below-average economic activity and prosperity.
• The US economy is vibrant and productive. Even less exceptional performance offers the potential for enhanced prosperity in the coming decades.