President Trump’s address to a joint session of Congress last night highlighted the central economic themes that animated his campaign: a tougher policy on immigration and trade, a focus on infrastructure, broad deregulation, “massive” tax relief and the repeal and replacement of Obamacare. The unifying theme was economic nationalism and renewal.
It was, as these speeches often are, purposely short of policy detail. Elements of the president’s “skinny” budget—an early and incomplete proposal that is will be sent to congress in coming weeks—have been leaked in recent days, signalling a shift in spending priorities that is drawing expressions of support and concern from both sides of the aisle. President Trump is calling for a substantial increase in defense spending and (unrealistically) sharp cuts in other discretionary spending. Entitlement spending will be left untouched. As a formal proposal, the administration’s budget document will be dead on arrival. But as an expression of priorities the budget, along with last night’s speech, still matters.
Now the hard part begins.
Cowen’s Chris Krueger highlights the “five budgets” that matter for economic policymaking this year: (i) a continuing resolution needed by April 28 to fund the government for the remainder of the year (needs 60 votes in the Senate); (ii) a FY17 budget resolution process that doesn’t have much to do with the budget but provides the framework for repeal and replacement of Obamacare with simple majorities in the House and Senate; (iii) a FY18 budget reconciliation process for passing tax reform (also by simple majorities); (iv) a debt ceiling extension needed by August (60 votes in Senate); and (v) a budget for FY18 that must be passed by October 1 (60 votes). It is worth noting that, by using the two budget resolution vehicles for Obamacare and tax cuts, the process of passing the actual budgets to fund the government, change the sequester rules, and extend the debt ceiling are much harder and will require bipartisanship. It is not clear that, as of now, the votes are there for any of these budgets.
Market participants may respond well to the more optimistic tone and calls for more spending and less regulation. However, the current enthusiasm of markets—reflected in rising stock market valuations and confidence indicators—is misplaced and underestimates the risk of gridlock and overstates the stimulus that these plans will provide to an economy already operating at full employment. There is uncertainty whether all Republicans will unite behind the president’s proposals on health care and taxes, particularly if, as most economists predict, the proposals would dramatically expand the deficit. There is even greater uncertainty whether the president’s spending priorities can gain the bipartisan majorities needed for passage. Conversely, failure to agree on a budget could lead to continuing resolutions that keep spending around current levels. Also, the trade and immigration policies of the administration could create a lasting drag on the economic potential of the country. All of this suggests the prospect of a market retrenchment if the legislative process bogs down.
There were a few new elements, including President Trump’s call for a merit-based immigration system. On infrastructure, he confirmed his intent for a $1 trillion program that included both public and private spending. And on health care, he seemed to endorse elements of the plan endorsed by Paul Ryan, with its emphasis on tax credits and choice. Financial issues were barely mentioned, signalling that Dodd-Frank reform may slip as a legislative priority. But, in the end, it would not appear that much has changed. The president has a long road ahead of him to take these priorities and turn them into legislation, and not much clarity for his agenda or for the U.S. economy more broadly.