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Summary
Driven by an angry electorate sensing the secular stagnation, Trump’s economic agenda basically amounts to a hostile takeover of the Republican Party.
This is good insofar as much of the electorate doesn’t believe in trickle-down economics, and rightly so.
But there remain considerable economic risks attached to Trump’s economic platform on trade, immigration, and the bond markets.
Here is an observation from David Ignatius:
The electorate senses the “secular stagnation” in the economy that Lawrence Summers, a former Treasury secretary and longtime Clintonite, has been talking about the past three years.
Apparently the voting public is angry (and we don’t exclude the possibility that the non-voting public might even be more angry). The economy is rigged, the political process is rigged, the parties have forgotten much of the electorate, and there is a bit of a revolt against the political elite as a consequence.
On the left we have Bernie Sanders, who has been saying the same thing for the best part of three decades, but only now finds a public. He basically wants to change the US into Denmark.
While in principle there is little wrong with Denmark, but good luck to that. It isn’t the US, and we can’t see the US changing into Denmark anytime soon. Apart from the fact that Sanders’ economic assumptions seem highly optimistic and he’s not going to be the Democratic nominee, bar some really improbable miracle.
But some of the same anger seems to feed the Trump phenomena. Indeed, Trump argues stuff like the real unemployment rate is much higher, the economy is really weak, the stock market is about to crash, China has taken our lunch through trade deals and currency manipulation, and he will sort it all out.
That and other things (non-economic, hence we won’t consider it here) got him the Republican nomination. Some of it amounts to a marked departure of Republican orthodoxy.
This is especially true of his stance on entitlements and trade, but on taxes and the minimum wage Trump has been solidly subscribing to Republican orthodoxy, which can be described as trickle-down economics giving job creators free reign in the form of deregulation and tax cuts.
Until now, it seems. In what could amount to one of the bigger hostile takeovers of a major political party, Trump seems to have reversed these positions now that he has clinched the nomination. Here is the BBC:
Presumptive US Republican nominee Donald Trump has said taxes for rich people may have to go up in an apparent reversal of his stated policy. “On my plan they’re going down. But by the time it’s negotiated, they’ll go up,” Mr Trump told ABC’s This Week. He also apparently reversed his position on the minimum wage, telling the programme: “I’m allowed to change.”
And here Business Insider:
Since all but clinching the Republican presidential nomination this week, Trump has expressed a potential willingness to raise the minimum wage and raise taxes on the wealthiest earners, a marked shift from his proposals during the Republican primary process.
In a “Meet The Press” interview Sunday, Todd pushed the presumptive Republican presidential nominee to answer whether he actually stood by his original policy plans, which called for lowering taxes on the wealthy and keeping the federal minimum wage in place.
Needless to say, this is rather remarkable. If true, it would amount to a strong departure of Republican economic orthodoxy (at least the espoused form), if not actually be a denial of it.
But in a way, it’s good news. For starters, there is little evidence that much of the Republican electorate actually favors (and here) trickle-down economics. And why would they, as there is little evidence it actually works (from Wharton):
The median income in this country hasn’t risen at all in real terms for 40 years. The United States since most of us were born has regularly harvested more wealth than any other nation in the history of the world, but the fruits have been increasingly carried toward the tip of the pyramid. While income in the middle brackets stagnated over the past four decades, income for the upper 1% tripled. As recently as the middle of the 20th century, the share of the United States’ national income taken by the top 10% of income earners was about one-third. Now it is more like 50%. The fortunate pinnacle, the top 1% of all households, received 10% of the nation’s total income in the middle of the 20th century. Now the upper 1% takes about one-quarter of the grand total. If you are in this segment, I hope you can be grateful without believing that this is the way things ought to be.
Indeed, while income in the middle brackets stagnated over the past four decades, income for the upper 1% tripled, and they have been showered by tax cuts (until a couple of years ago when some of these were mildly increased).
But what good has that done to the economy? Investment and economic growth have not been more vigorous, in fact quite the contrary.
For the best part of these four decades, things were masked. First by the influx of women in the labor force, which kept household income and consumption up. Then by the massive increase in household debt, doing the same.
But the financial crisis has done away with the rising debt as a stop-gap mechanism and now the economy is fully exposed to the economic effects of this massive shift in income (and wealth). Here is one percenter Nick Hanauer explaining:
I earn 1000 times the median wage, but I do not buy 1000 times as much stuff. My family owns three cars, not 3,000. I buy a few pairs of pants and a few shirts a year, just like most American men. Like everyone else, we go out to eat with friends and family only occasionally. I can’t buy enough of anything to make up for the fact that millions of unemployed and underemployed Americans can’t buy any new clothes or cars or enjoy any meals out. Or to make up for the decreasing consumption of the vast majority of American families that are barely squeaking by, buried by spiraling costs and trapped by stagnant or declining wages. This is why the fast increasing inequality in our society is killing our economy. When most of the money in the economy ends up in just a few hands, it strangles consumption and creates a death spiral of falling demand.
Or you could simply look at the differential savings rates which shows Hanauer is right:
Yes, we are aware that savings and finance investment are very useful, which powers economic growth. However, one can have too much of a good thing. The mechanism through which this works is to lower interest rates, but these are already rock bottom.
Much of the savings are accumulated at the corporate level, as profits, even after the oil crash, are near record levels and corporate cash holdings are enormous.
But rather than investing this in new capacity, it is distributed into dividends and buybacks, basically reinforcing the inequality and savings trends.
Would Trump be good for stocks?
It depends which Trump shows up. His anti-trade rhetoric could be dangerous. If he really does an about face on taxes for the rich and the minimum wage, this is going to be an interesting experiment.
In the short term, this is likely to be bad for stocks, as it will likely increase the tax burden on the wealthy and it could redistribute income from capital to labor.
This is bad for stock prices in the short term, but we believe that it is necessary in the longer term. The present model has economically (and politically) run into diminishing returns for some time, if not exhausted itself.
One cannot run a healthy economy where almost all the gains go to the top; as Hanauer describes so plastically, an economy will grind to a halt simply because it will be near impossible for most companies to grow the top line, forcing them even more on cost cutting which destroys demand even more, in a vicious cycle.
So we would not be afraid of President Trump; in fact we could welcome him on economic grounds.
There remain some considerable risks though. If he indeed makes good on his promise of sending out millions of undocumented workers, this could impact economic growth very negatively (Newsmax):
If sluggish global growth isn’t enough to pump the brakes on a swift-moving U.S. labor market, deporting the undocumented workers certainly would. That’s the conclusion of fresh research from the American Action Forum, a Washington-based conservative policy group that tested Republican presidential frontrunner Donald Trump’s proposal to rid the labor market of the undocumented. AAF culled Pew Research Center data and Labor Department figures to gauge the industry-level employment impact, and found private-sector payrolls would drop by 4 million to 6.8 million workers, resulting in an output decline of as much as $623.2 billion based on 2012 levels.
Source Seeking Alpha / Shareholders Unite
Broad street alerts has not been compensated for the mention of any publicly traded companies in this article nor do we own positions in any of the companies in this article.
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