The stock market remains in a trance, hovering just below the Dow 20,000 threshold while it awaits clarity on what President-elect Donald Trump will do. Initial post-election optimism is fading somewhat -- especially after Wednesday’s contentious and combative press conference -- as evidenced by renewed interest in safe haven assets like gold and Treasury bonds.
The conventional wisdom is that Mr. Trump’s aggressive fiscal stimulus plans will boost the economy via tax cuts and spending increases. This is a reason the Federal Reserve raised interest rates last month and has penciled in three more quarter-point hikes in 2017.
But the details about what Mr. Trump may do are more complicated. Here’s a look at the three areas of the economy that will surely be a focus for him in the months to come:
Much of the political headlines out of Washington this week have involved timing of possible legislative action to repeal and replace the Affordable Care Act. Late on Wednesday night, the Senate set the Obamacare repeal process into motion in a near party-line vote that will ease the way for subsequent legislation that could come to a vote next month.
The Wednesday night vote allows repeal legislation to be carried by a simple majority vote, removing the threat of a Democratic filibuster.
Assuming a repeal is carried, what will be the impacts?
According to the Congressional Budget Office, it would boost U.S. GDP growth by 0.7 percent over a 10-year period due to marginal job gains. That expansion would save the government $216 billion over this period. The labor participation rate is also expected to rise as people lose the subsidized health care coverage they can get outside the workplace.
On the downside, a full repeal without a replacement would increase the number of uninsured people by 23 million.
An analysis by Societe Generale breaks down what a likely piecemeal repeal would entail. Just ending the individual mandate to buy insurance, for instance, would boost employment (via lower costs for businesses) and raise profits, but increase the government deficit. Insurance premiums would also likely rise.
Mr. Trump’s proposed tax cuts are estimated by Societe Generale to help maintain GDP growth in a 2 percent-2.5 percent range through 2018 at the risk of boosting inflation, a worry noted in the Federal Reserve’s December meeting minutes.
A better solution would be targeted tax cuts designed to boost languishing labor productivity via investment in new equipment and machinery. U.S. productivity gains have slowed sharply recently, averaging just 0.6 percent annualized growth since 2010, compared to the 2.2 pace of the 1990s and 2.7 percent in the 2000s. Higher productivity increases the economy’s potential growth rate and raises living standards, so it’s a desirable thing.
There is some evidence that the expansion of regulatory oversight during President Obama’s term could be responsible for the decline in productivity and, as a result, could be creating a drag on the overall economy.
The financial sector in particular has been hit hard via the Dodd-Frank reforms, pushing down commercial bank labor productivity to just 0.3 percent annualized in the 2010s vs. 3.3 percent in the 2000s and 4.8 percent in the 1990s. Obviously, coming out of the financial crisis, changes were needed. But perhaps the government went too far.
Ideas suggested by Societe Generale include relaxing regulatory standards for well capitalized banks, consolidating the number of regulatory bodies and reversing the Volcker Rule, which eliminated proprietary trading inside the big banks.