Back in August, we asked if Trump could save Trumponomics – in spite of its namesake.
At the time, the Washington Post had just reported that the administration was pondering a temporary payroll tax cut in an effort to guard against a deceleration in the economy headed into an election year.
The news presented something of a public relations quandary for Trump, his aides, advisors and allies. Acknowledging that additional tax cuts – especially measures aimed at helping middle-class families – were indeed under consideration would play well with many voters. And yet, admitting that the White House was discussing how to boost economic activity risked conveying a sense of alarm about the state of the economy.
Read more: Can Trump Save Trumponomics?
To be sure, Trump had plenty of reasons to be alarmed. Just days previous, the preliminary read on August University of Michigan sentiment suggested the Fed’s July rate cut had backfired. Colloquially speaking, it scared everybody to death. “Consumers concluded, following the Fed’s lead, that they may need to adopt a precautionary spending outlook in anticipation of a potential recession”, Richard Curtin, director of the survey, said.
Around the same time, Mick Mulvaney, speaking to Republican donors at the fundraising luncheon in Jackson, Wyoming, admitted that a “moderate and short” recession was possible in the US.
About a week after that, a Quinnipiac Poll found 37% saying the economy was getting worse, versus just 31% who said it was improving. It was the first time since the election that more Americans believed the economy was getting worse than getting better.
And so, it made sense that Trump would be exploring tax cuts and other measures to inoculate the economy ahead of 2020, especially considering how things were going on the trade front in August (tensions were boiling over).
Fast forward two months and it’s dÃ©jà vu all over again – the Washington Post is out reporting that the administration, this time in conjunction with GOP lawmakers, is working behind the scenes to craft a new set of economic measures aimed at bolstering the president and setting his agenda apart from his Democratic challengers.
“White House officials and congressional Republicans have begun early talks on a new package of tax reductions and economic growth measures, under pressure from President Trump, who is agitating to announce a new tax cut proposal heading into the 2020 election”, the Post says, adding that Larry Kudlow is spearheading the effort.
The push comes at a time when the economy is sending mixed signals, with a pretty clear bias to the downside.
The advance read on third quarter GDP showed the US growing at the second-slowest pace in 15 quarters. Although consumption was strong, nonresidential fixed investment fell the most since Q4 2015, while final sales to private domestic purchasers rose just 2.0%, down sharply from Q2. On Thursday, consumer spending came in weaker than expected, and the Chicago PMI printed the lowest in nearly four years.
Friday brings ISM and October payrolls. Trump will be looking for wins. He may get them, or he may not, but barring a blockbuster jobs report, the economic narrative is likely to remain tenuous, something the president is clearly aware of.
Although he called the economy “the best in our nation’s history” on Wednesday, Trump was singing a different tune by Thursday morning. “People are VERY disappointed in Jay Powell and the Federal Reserve. The Fed has called it wrong from the beginning, too fast, too slow”, the president said, around the time the Chicago PMI miss hit the tape. “Dollar & Rates are hurting our manufacturers”, Trump added, on the way to insisting that “we should have lower interest rates than Germany, Japan and all others”.
Obviously, acquiescing to Trump’s demands would entail the Fed taking rates into negative territory, an idea the president’s own economic muse (Kudlow) as well as one of his Fed picks (Judy Shelton) have variously maligned.
“We are having discussions with the White House, we’ll be engaging with them further, and we’ll have discussions with Republicans, too, in the House about what we think the most pro-growth elements can be the most pro-innovation”, Kevin Brady told the Post on Thursday, discussing the administration’s fledgling plan to boost growth. “I think the key is to make permanent some of the key provisions as well in tax reform”, he added.
The problem with all of this should be immediately apparent: Trump is now the proud owner of a $984 billion deficit. That’s 26% wider than 2018 and it’s projected to easily exceed $1 trillion next fiscal year. In short, there is no fiscal breathing room. The US cannot afford more tax cuts – or at least not if you go by what used to be Republican budget orthodoxy.
The tax cuts aren’t paying for themselves, and probably never will, something anyone with any sense of history could have told Trump two years ago.
Worse, the Trump tax cuts have run into a classic Ricardian equivalence problem. Federal belt-loosening (orange line in the visual below) has been almost entirely offset by private sector belt-tightening (black line).
And then there’s that little problem about not controlling the House. “Any tax or economic stimulus package produced by the White House and congressional Republicans would face certain death in the Democrat-controlled House”, the Post goes on to say.
So what’s the point? Why bother?
Well, the GOP is angling to breathe new life into Trump’s narrative and contrast a plan to cut taxes with Democratic proposals to roll back the president’s only signature policy achievement.
True to form, administration sources claim something big is in the works, but they can’t say exactly what it is. A senior official told the Post that “a wide range of proposals were being reviewed for potential inclusion in the new package”. Asked for specifics, the person had nothing to offer, but “said they went well beyond tax cuts to include broader economic policy initiatives”.
Again, it is by no means clear what those initiatives would be.
What is clear, though, is that even if the economy does hold up (where that means the US doesn’t sink into a shallow recession), growth is going to slow. “Going forward, we expect even more pronounced weakness in fixed business investment and exports, along with a slower pace of consumption”, BNP said on Wednesday evening, following the Fed meeting. “Together, we see this dragging growth to around 1.0% q/q saar on average over the next two quarters”.
Asked about the situation on Thursday, Rep. Lloyd Doggett, a senior member of the Ways and Means Committee, didn’t mince words. “I would expect this would just be another distraction from the fact that he’s about to be impeached”, Doggett remarked.
Meanwhile, the ideas championed by the president’s rivals are gaining traction, something Bloomberg’s Brian Chappatta pointed out on Thursday afternoon:
Moody's: "We would expect student loan debt cancellation to yield a tax-cut-like stimulus to economic activity."
— Brian Chappatta (@BChappatta) October 31, 2019
Brian’s tweet was met with pushback from the Twitterati, but as is usually the case when it comes to maligning progressive economic agenda items, the criticism was long on slander and short on everything else.