Financial markets have responded favorably to the Trump presidency. From market close on November 7, 2016, (the day prior to the election) through April 10, 2017, the S&P 500 index rose more than 10% in value. This fact alone is insufficient to assess the economic policy of any presidential administration. Nonetheless, especially in light of what was been described as a “sense of anxiety” and “foreboding” among economists after the election of Donald Trump, financial markets do not appear to have priced such sentiments into the market.
Here, I speculate on why this might be the case, focusing on five economic policy issues. In an attempt to be balanced, I will focus on two areas that I believe are positive for corporate valuations (deregulation and tax reform), one area that has clear winners and losers (trade), and two areas that are negative (high-skill immigration and long-term fiscal policy.)
There are two important caveats to this discussion. First, I have not seen rigorous empirical research on the relation between Trump’s policy stances and market valuations, and, thus, my discussion should be seen as nothing more than educated speculation. Like any good academic researcher, I welcome having my hypotheses tested and stand ready to be corrected if the evidence does not support my conjectures. Second, any policy, law, or regulation can have both positive and negative effects on companies and on broader society. Just because a policy increases corporate valuations, it does not automatically follow that the policy maximizes social welfare. For example, a regulation that grants a firm monopoly power would be quite positive news for the new monopolist, even though the resulting losses to consumers that arise from monopoly pricing power would outweigh the gains to the firm. My remarks are focused on the narrow question of corporate valuation, not on the broader societal cost-benefit analysis.
Despite Trump’s reputation as a populist: he is a clear friend of the corporate world when it comes to deregulation. The new administration is clearly intent on reducing financial market regulations, environmental regulations, and labor market regulations, among others. On January 30, 2017, President Trump issued an Executive Order on Reducing Regulation and Controlling Regulatory Costs. Included in this executive order was a provision that “for every one new regulation issued, at least two prior regulations be identified for elimination.” This kind of deregulatory rhetoric is music to the ears of most corporate leaders, for whom regulatory compliance is a significant cost of doing business.
II. Corporate Tax Reform
Although the details are uncertain, President Trump and the GOP-controlled Congress favor lowering marginal tax rates on corporate income. The combined statutory federal and state corporate tax rate in the U.S. is approximately fourteen percentage points higher than the average of other nations in the OECD, a gap that has steadily widened over the past few decades. Additionally, many U.S. domiciled multinational corporations strongly support allowing firms to repatriate foreign earnings at a significantly reduced tax rate. Both of these provisions have significant support in Republican circles and would create value for large U.S. corporations.
Although there are industries and occupations that have been harmed by trade, there is a broad consensus in the economics profession that allowing trade based on a nation’s comparative advantage makes both countries better off. Candidate Trump, and now President Trump, has been quite vocal in stating that we have “horrible” trade deals and singling out countries like China and Mexico as harming our economic well-being. Thus, many are concerned that the president’s rhetoric on trade could lead to harmful trade wars. If trade with China were reduced, for example, U.S. domestic exporters in industries, such as transportation equipment and even higher education, would be harmed. In contrast, domestic producers in industries that are currently supplied by Chinese imports (e.g., electronics, machinery) would likely be helped. Basic trade theory suggests, however, that the overall net effect on the U.S. economy would be negative.
IV. High-Skill Immigration
Candidate Trump’s signature issue was building a wall to reduce illegal immigration from Mexico. Since becoming President, he has also issued executive orders restricting immigration based on national origin. Largely lost in these highly politicized conversations is the fact that our nation has significant demand for high-skill immigration (such as Ph.D.s in engineering from the University of Illinois) as well as medical doctors, financial professionals, and many other high-skill fields. According to the Bureau of Labor Statistics, on the last day of February, 2017 there were 5.7 million job openings in the U.S. Although the idea of a “skills gap” between available jobs and the unemployed workers who are seeking jobs is controversial, the technology community has been particularly vocal about the need to allow more highly skilled immigrants into the U.S., as illustrated by the “stapling green cards to diplomas” movement. There is little question that U.S. employers would welcome a reduction in barriers to hiring foreigners trained in the U.S. each year. In this regard, the Trump administration appears to be on a path to disappoint business leaders.
V. Long-Term Fiscal Policy
It is well-documented that U.S. fiscal policy is on an unsustainable path. According to the Congressional Budget Office, publicly held debt rose from 39% of gross domestic product (“GDP”) in 2008 to 75% in 2016. On our current path, assuming tax and expenditure laws do not change, the debt-to-GDP ratio will rise to 86% over the next decade and to an unprecedented 141% within three decades. For perspective, the highest debt-to-GDP ratio in U.S. history was 106% in the immediate aftermath of World War II. The key drivers of spending growth in the years ahead are public spending on Social Security and healthcare programs, as well as interest on the debt. In response to this impending fiscal challenge, neither major-party candidate in the 2016 election offered a meaningful long-term solution. President Trump stated during the campaign that he would not “hurt the people who have been paying into Social Security their whole life” and that changes to Medicare, Medicaid, and Social Security are inconsistent with winning elections. When combined with the tax cuts proposed during the campaign, the Tax Policy Center estimated in October, 2016 that President Trump’s proposals would add nearly $21 trillion to the federal debt over the next twenty years, on top of the already unsustainable baseline deficits mentioned above. In the long-run, such a fiscal stance is bad for business, as it will put pressure on rising interest rates, crowd out private investment, increase the risk of a financial crisis, and/or lead to even higher tax rates in the future.
Overall, whether President Trump’s economic policies turn out to be good or bad for long-term economic growth or overall social well-being will be hotly debated for decades to come. But, the near-term emphases on deregulation and corporate tax relief are likely contributing to the view that Trump’s economic policies are, on net, good for business.
* Josef and Margot Lakonishok Professor of Business and Dean of the College of Business, University of Illinois at Urbana-Champaign.