NEW YORK — Attendees at a conference for finance executives on Tuesday got an earful of sharp talk about the economic impact of Donald Trump’s tax and spending proposals, should they be implemented.
There must have been plenty of Trump supporters in the large, crowded room at FEI’s Current Financial Reporting Issues Conference, but they listened politely and didn’t object as the day’s keynote speaker meticulously lambasted the president-elect’s plans.
The speaker, Joel Naroff, president and founder of Naroff Economic Advisors and a former chief economist for TD Bank, said several times that his comments were not political in nature but based on economic realities. But shortly following a year-and-a-half of 24/7 news coverage on an especially bitter election campaign, some of the comments did, in fact, appear quite political in nature.
“Needless to say, this is not the talk I was expecting to give,” said Naroff, shaking his head.
His most positive musings were about the prospects for a growing economy. Trump’s plans to significantly cut taxes and embark on a $1 trillion spending spree to improve the country’s public infrastructure will surely energize the economy, pushing growth past the sluggish 2% to 2.5% level of recent years, he said.
Naroff pointed out that those Trump policies are close copies of measures taken by both Ronald Reagan and George W. Bush upon entering office. “This is the most traditional Republican economic plan I’ve seen,” he said. “Just as Reagan and Bush got stronger growth, at least for a short period of time, so will Trump.”
Unfortunately, he observed, “No good economy goes unpunished.”
With the country close to full employment, wages starting to pick up, and the presumed economic growth likely to stimulate wages further, inflation will quickly rise, according to Naroff. Additionally, he projected that the tax cuts and spending increases will result in annual budget deficits of $900 million to $1.2 trillion during Trump’s first term. “That’s not a political statement,” he said. “It is simple math and there’s no way around it.”
Such deficits could prove disastrous to the federal government’s efforts to pay interest on the national debt, Naroff said. That’s because the Federal Reserve almost surely will raise interest rates in reaction to economic growth and inflation. The historically low rates of the past several years have significantly helped the government deal with the debt as it spiraled upward, he pointed out.
Naroff acknowledged that some observers are saying the Fed might be cowed by Trump into holding off on rate increases. But he scoffed at the idea.
“I have talked to plenty of Fed chairs, Fed governors, and bank presidents over the years, and the one thing you don’t do is attack the Federal Reserve,” he said. “Because if you want to see people do exactly what they think they should to, try politicizing the Fed.”
And Trump has tried to do that by, for example, saying he won’t reappoint Janet Yellen as Fed chair. “She’s already seen long-term rates go up, and she’s looking at the potential for fiscal stimulus we haven’t seen in eight to ten years,” Naroff said. “What do you think she’s going to do? She’s going to raise rates in December. Something would have to collapse for her to change her mind at this point.”
However, the likely extent of economic growth won’t exactly trigger nirvana, and the growth won’t be sustained, according to Naroff.
There are two ways, he noted, for an economy to grow: improved productivity by the existing labor force and an increase in the labor force. Simple demographics mean that the labor force is projected to grow over the next 5 to 10 years at a 0.5% annual pace, he said — a far cry from the experience during the Reagan administration, as baby boomers and women surged into the job market. And, said Naroff, most economists see productivity growing at only 1% to 1.25% annually.
“Let me be aggressive and say 1.5% [productivity growth],” he said. “What does that give you in terms of potential growth? Roughly 2% to 2.25% — not 4%, not 5%, not 6%. It doesn’t mean we can’t get to 3% or 3.5%, but it does mean that that growth pace won’t be sustainable. We have to change our perspective on what [constitutes] good growth. In an economy that’s restricted in the way this one is, we’re stuck.”
Naroff saved some his harshest remarks for his analysis of some other Trump policies, including Trump’s goal of repealing and replacing the Affordable Care Act.
“It’s really easy to say you’re going to repeal Obamacare while Obama is still president,” he said. “But as of Nov. 9, Republicans own health care. There’s no more saying it’s Obama’s fault, although I’m sure they will.”
He continued: “Restructuring the U.S. health-care system and health insurance is a massively complex issue. Are they going to throw 20 million people out of insurance? I don’t think so. And that insurance only works because of subsidization, so what are they going to do about that? Or about all the regulations in the law?
“For those of you who think [Republicans are] just going to repeal it and replace it, good luck. I don’t know what they’re going to do, because they spent seven years talking about repealing it and not seven minutes coming up with an alternative plan. But it’s not going be anything near what the business community thinks it will be like.”
Further, he said, who is it that actually wants to bid adieu to the ACA? “Not the 20 million people who have insurance now. Not the insurance industry. Not the health-care provider industry. And every large business should want the ACA to continue, because they’ve been subsidizing uninsured health-care costs for decades. When an uninsured person goes to the hospital, who pays for it? It’s bundled into the hospital’s costs, which get shifted to those who are insured.”
Who’s against Obamacare, other than Republican politicians? Just small businesses, according to Naroff. “But Congress doesn’t do anything for them,” he said. “That’s just reality.”
Turning to Trump’s positions on international trade — he wants to renegotiate NAFTA and not enact the Trans Pacific Partnership — Naroff was equally skeptical.
“Compare it to a lease,” he said. “The tenant says to the landlord, ‘this lease is no good. We have to renegotiate’. The landlord is going to say ‘shove it.’ Or he might renegotiate, but you’re going to have to give him a lot of things in return. If Canada and Mexico think they’re doing fine under NAFTA, why should they open it up?”
Of Trump’s threats to impose steep tariffs on goods coming into the United States from Mexico and China, Naroff said those countries would impose reciprocal tariffs. “The Chinese are not going to sit back and say, ‘Oh good, we have this tariff on our goods.’ If you sell into China, the Chinese will eat your lunch, your dinner, your breakfast, and anything you have in your cupboard. American businesses that are dependent on trade with China will be devastated.”
Naroff allowed that the loss of some American jobs as a result of NAFTA helped fuel the populist anger that Trump rode to victory on Nov. 8. “But they don’t necessarily see that a lot of the goods they buy are a lot cheaper, and that they can buy products they never could have bought at the high prices [they would have carried had they been] produced in the United States.”
He added, “There are almost no economists who don’t think more trade is better than less trade.”
Next, Naroff turned to regulation. Trump wants a lot less of it, which is certainly an exciting prospect for many businesses.
Naroff isn’t a particular fan of regulation either. “Regulations are like trying to kill a mosquito with a cluster bomb,” he said. “You may get the mosquito, but the collateral damage is enormous. And if there’s anything that slows the economy down more than regulation, I don’t know what it is. Overregulation is a real problem — exceeded only by underregulation.”
The fact that so few people had a clue that the housing bubble would collapse the financial system in 2008 serves as a very recent reminder of the dangers of under-regulation.
“What concerns me as an economist is that we don’t know where the next problem will arise,” said Naroff. “There are an awful lot of dumb regulations out there, but as you start pulling on a thread in a sweater, what’s that thread attached to? Can you just pull it out, or will you unravel the sweater? We don’t know which regulation will prevent the next problem.”
Is Trump’s Plan Viable?
Finally, Naroff came full circle with a discussion of whether Trump in fact will be able to get the tax cuts and spending increases that he wants. Again, the speaker’s skepticism was profound.
First, he observed that while everyone is talking about the clash between Democrats and Republicans, almost no one is talking these days about the Tea Party.
“Whether you like them or hate them, they are extraordinarily rigid in their philosophy,” he said. “They want lower government spending and a balanced budget. You want to spend? You pay for it. You want to cut taxes? You pay for it. You can’t add another $300 billion or $500 billion a year to the federal deficit and keep [the Tea Party] happy.”
That suggests some somewhat surreal common ground between the Tea Party, which comprises about one-third of Republican House members, and House Democrats. Together, those groups have large enough numbers to deny Trump his wishes, Naroff noted.
Second, as the filibuster will be available as a tool for Senate Democrats, it won’t be easy for Republicans to pursue their agenda. “Two weeks into Obama’s first term, Mitch McConnell said he was going to spend the next four years making him a one-term president,” Naroff said. “I don’t know if Democrats are going to help [Republicans] along.”
Finally, sequestration, which for the past five years has prohibited new federal spending unaccompanied by an equal amount of spending cuts, tax increases, or both, would have to be repealed in order for Trump to get his way on his economic proposals. That again shines a light on the Tea Party.
“Is Trump’s plan going to be implemented?” Naroff said. “I don’t know. But if the Tea Party people don’t go along with it, and Democrats don’t, that’s the end of that.”