I leave it to others to sort out who said what to whom about Russia, loyalty oaths, secrets, and other matters now roiling Washington. Instead, here is an attempt to sort out the economic consequences of the doings of our political class.
If your portfolio is built on a belief that the Trump bump in share prices will endure and increase, you might want to have a rethink. That bump has been the result of a belief by investors that their new president would quickly deliver four pro-growth measures: tax cuts, health care reform, an infrastructure program, and deregulation. With the exception of the latter, which is moving along, none of these gifts is likely to be delivered in time for Christmas, if ever.
A restructuring of the tax code was promised within the first 100 days, later amended to August by Treasury Secretary Steve Mnuchin as he attempted to cope with the fact that the president’s math didn’t add up. Trump’s proposed reduction in the corporate tax rate from the statutory level of 35 percent to 15 percent, and large cuts in personal and small business taxes, with no offsetting revenue enhancements, would blow a hole in the federal budget large enough to induce either runaway inflation or a growth-crippling rise in interest rates. Or both.
Republicans in Congress were having none of it, and came up with their own plan, with more moderate tax cuts and changes in the tax code aimed at filling the revenue gap the cuts create. Those reforms, which included an end to the deductibility of interest on business loans—beloved of highly indebted property developers, one of whom shuttles between the White House and Mar-a-Lago—did not attract the president’s enthusiasm. And the House Republicans’ plan to levy a VAT-like tax on imports met with snorts of derision from senators representing states loaded with Wal-Mart employees, not eager to see sales fall as off as the prices of imported sneakers, gadgets and T-shirts increase. Everyone, back to their respective drawing boards, with Mnuchin trying to figure out how large and unrealistic a growth rate he has to pencil in, and which budget cuts that he knows Congress will reject, to produce a budget that does not increase the deficit. Best guess is that sometime early in 2018 the president and Congress will agree on tax cuts but no significant reform of the tax code. When? Here’s a clue: Kevin Brady, the Texas Republican who chairs the House Ways and Means Committee has abandoned his practice of setting monthly progress goals for his members.
The second source of the Trump bump was the belief that the president and his party would be able to follow through on their seven-year-long promise to “repeal and replace Obamacare”. That feat would, investors believed, save the government $1 trillion over 10 years, to be used to offset revenue losses from cutting taxes. And it would drive down business costs, further enhancing profits and share values. It turns out “repeal” would be easy, “replace” somewhere between difficult and impossible. Trump’s plan, which relieved high earners of the special investment tax on capital gains and dividends, also included less generous treatment of the poor and those with pre-existing medical conditions. That sounded more attractive to the president, who does not have to stand again until 2020, than it did to congressmen who will face the electorate next year. So back again to the drawing boards, with the Senate treating the House version as a series of political death traps to be avoided at all costs.
The third factor underlying the optimism of investor-fans of Trump’s program was the prospect of a “yuge” infrastructure package. That now seems even more remote than a tax cut or health care reform, as the president’s ability to bring anti-spending Republicans along has been diminished by the reduced political clout resulting from presidential gaffes and an acute case of foot-in-mouth disease.
On May 9 Trump fired James Comey, the director of the FBI, which he had every reason and right to do. Unfortunately, only a few months earlier he had conferred privately with Comey—Trump required others at the meeting to leave the room—and, according to what the New York Times claims are Comey’s contemporaneous notes, asked the director to back down on some aspect(s) of the bureau’s investigation of Russian involvement in the U.S. election. Worse, he demanded that the FBI director pledge loyalty to himself, in the manner of Marlon Brando’s Godfather. Comey refused. Trump denies all of this, and sees the attendant fallout as part of “a witch hunt.”
One day later the president added another diversion of congressional attention from his economic program. He met with Russia’s foreign minister, Sergei Lavrov, and its ambassador to the U.S., Sergey Kislyak, with Russia’s Tass photographer but no American press present. The topics quite properly included cooperation in defeating ISIS and how to prevent on-board computers from turning into deadly weapons on airplanes, as one did to bring down a Russian plane over Egypt. But there was more: It seems that the president revealed previously classified information—he has the power to declassify information, so his telling was not illegal—to the consternation of the Israeli intelligence services that provided it to their American counterparts, and the spooks in other countries who have been cooperating with us.
President Vladimir Putin, ever helpful in such matters, has offered to resolve conflicting tales of what happened at the meeting by providing a transcript to the White House and Congress: He generally backs Trump’s version of events. The Russian president’s offer will almost certainly be accepted by Mueller, the widely respected former FBI director who was named special counsel to oversee the investigation of Russian influence on our election. For now, It is Trump and Putin claiming that they have not colluded to influence the election and that no secrets were passed to the Russians, vs. Comey, who is champing at the bit to bring his contemporaneous notes of meetings before the myriad congressional committees seeking the publicity his appearance would bring. And perhaps, but only perhaps, the truth.
The significance of these presidential missteps cannot be overstated. For one thing, they prompt congressional Republicans to keep their distance, making them less subject to presidential pressure and cajoling when he tries to rally support for legislation. For another, they consume time that would otherwise be available for considering legislation. Lyndon Johnson once said of an opposition politician that he could not chew gum and walk at the same time (sanitized version). Congress cannot cope with Trump and legislate at the same time. Mac Thornberry, Republican chairman of the House Armed Services Committee, told an interviewer that “the political drama will drain the energy away from real accomplishments.” To which Republican West Virginia senator Shelley Moore-Capito adds, “When you’re not sure what’s going to happen from the morning to the evening, to definitely takes your eye off the ball.”
John McCain, ever eager to make life difficult for a man who declared the Arizona senator not a war hero because he allowed himself to be captured, carried the commentary one step further, “We’ve seen this movie before. I think it’s reaching the point where it’s of Watergate size and scale.” Meaning, let’s start thinking about impeachment.
Not a serious thought yet. But a bit of uncertainty to add to doubts about the durability of the Trump bump.