Under President Trump: Six Questions on the Economy

SMITH BRAIN TRUST – The question of who will be the 45th U.S. president has been answered with the upset victory of Republican Donald Trump. Now many are asking what U.S. economic policy will look like under his administration. Experts from the University of Maryland's Robert H. Smith School of Business will explore some of the larger economic questions facing the new administration at a pair of events next week in Washington, D.C. Here is a snapshot of some of the big issues:

What will fiscal policy look like under a Trump administration?

Fiscal policy, including Trump's proposed tax cuts, will be among the top priorities for the new administration, says UMD School of Public Policy professor Phillip L. Swagel, a fellow in the Smith School's Center for Financial Policy. So that's the topic he will start with when he moderates a panel discussion on macroeconomic issues at the Post-Election Market and Policy Outlook event, hosted by CFP and the Ed Snider Center for Enterprise and Markets. The center is hosting two days of panels on policy, markets and financial regulation on Nov. 16 and 17, 2016, at the Smith Suite in the Ronald Reagan Building in Washington, D.C. 

"The markets, they're expecting a fiscal expansion — tax cuts, more spending, lower taxes," Swagel says. "Beyond that, they are not sure." 

He'll ask panelists, including  Dino Falaschetti, chief economist of the U.S. House Committee on Financial Services, and Jim Allen, head of Americas capital markets policy for the CFA Institute, about fiscal policy priorities and how Trump is likely to interact with the Republican-controlled House and Senate.

Swagel says Trump is likely to launch a plan in his first 100 days in office for new infrastructure spending — a proposal with broad bipartisan agreement. "I have a pretty good sense that they are going to push infrastructure spending toward the people who voted for Trump, more rural areas, in the middle of the country," Swagel says. 

How about monetary policy?

The Federal Reserve is widely expected to raise its key interest rate next month, amid signs that the economy is nearing full employment and with inflation beginning to inch higher. Rates have been near the Fed's emergency setting since the financial crisis. A robust new fiscal stimulus package under a Trump administration would likely stoke new inflationary pressures, which could make the case for more aggressive monetary tightening and bolster the yield curve. Swagel says he'll ask the panelists how they think that will play out.

Fed Chair Janet Yellen's future with the new administration remains unclear. Early on in the campaign, Trump praised her stewardship at the Fed, but in September, he accused her of playing politics by keeping rates artificially low under President Barack Obama. Her four-year term expires in February 2018, about a year into the Trump presidency. 

Will Trump tear up existing trade deals?

The president-elect has said he'll renegotiate the North American Free Trade Agreement or will walk away from the 20-year old treaty that slashed tariffs on trade with Canada and Mexico. And he has promised not to sign the Trans-Pacific Partnership, which would reduce tariffs between the U.S. and 11 other Pacific Rim countries, including Canada, Australia and Japan.

Though many blame free trade for a loss of U.S. manufacturing jobs, others worry that ending the trade deals could bring about a new era in protectionism, triggering trade wars and risking a new recession in the U.S. "There is trade and goods, and then there's the labor market, and they are in two parallel universes," says Smith School professor Albert "Pete" Kyle. For the Trump administration, the challenge will be in how to bring back well-paying, blue-collar manufacturing jobs from places like Mexico and China, while maintaining strong trade ties globally. 

"We are going to have a debate in this country that we haven't had," Kyle said. "It's been an intellectually dishonest debate so far, both from Republicans and Democrats over the years about the hidden costs of the cheap products that we get from exporting our jobs. And the hidden costs are that rural America and small-town America is collapsing and dying and the culture of the people is collapsing and dying along with it." 

He said he expects trade to fuel tension between the United States and "countries with whom we are not cooperating hand-in-glove politically and economically," citing China as a key example. 

Can Trump address the opportunity deficit? 

The 2016 presidential election revealed deep divides among Americans in discussions about the economy, trade and immigration. But Smith School professor Rajshree Agarwal says a unifying theme cuts across many of these divides: a quest for opportunities. For example, urban voters overwhelmingly supported Clinton, while rural, heartland voters overwhelmingly supported Trump. But each group voted based on which candidate would provide them with the best upward mobility options. Agarwal, director of the Snider Center for Enterprise and Markets and the Rudy Lamone Chair of Strategy and Entrepreneurship, says voters grappled with the same question regardless if they were low or high skilled: What are the job opportunities for me?

Americans, whether Trump or Clinton supporters, are a "deeply benevolent people," Agarwal says. "We don't care so much about the fact that somebody else is better than us, we just want to make sure we have the opportunities that we want to go after."

Agarwal says the next administration must forge a plan to reduce the regulatory burden that has reduced opportunities in the United States on both sides of the spectrum. For the small, local enterprise, "occupational licensing has made it harder for a person to open a hair salon today than to open a software application business," she notes. "And the high growth, tech companies are also experiencing heavy regulation, brought upon by incumbents in power. Take ride-sharing services like Uber and Lyft, for example, who have to deal with taxi companies pushing for local laws to protect their profits."

Can Trump address the social issues exacerbated by tax burdens?

At both the low- and high-income levels, heavy tax burdens create incentives to not work, even when people want to do so to enhance their self-esteem. Agarwal says the negative income tax at low-income levels, in terms of lost benefits, is so high that people find themselves worse off if they choose employment over welfare. Meanwhile, at the higher income and education levels, high income taxes often create incentives for one spouse to quit working in light of the tradeoffs associated with raising a family. "More often than not, it's the women who decide to stay at home to take care of the child because the taxes are so high on that income," Agarwal says. In her case, Agarwal and her husband "did the math and it didn't make sense economically for him to work because we were paying more than he made in terms of higher taxes, and paying out in child care and eating out," she said. They decided he would become a stay-at-home dad, a decision that she says in some ways increases the class divide.

"My kids benefitted from a stay-at-home dad who was able to take care of their education, a luxury not possible for families where both spouses have to work to make ends meet," she says.

"These issues — the tax and regulatory burden — are endemic, not just in this election or in the past eight years, but for at least the last 20 to 25 years," Agarwal says.

Will a Trump administration provide regulatory relief for small banks?

With Trump in the White House and Republicans retaining control of the House of Representatives, experts say we are likely to see a reexamination of the regulatory environment, including the Dodd-Frank Wall Street Reform and Consumer Protection Act. And that might benefit small and midsized enterprises, says Smith School professor Michael Faulkender. 

"One argument about what's been going on in the microeconomy is that higher degrees of regulation, higher levels of taxation, and more allocation of resources coming from government tend to benefit larger enterprises, to the detriment of small- and medium-sized enterprises," says Faulkender, who will moderate a panel discussion about small and midsized enterprises.

For small- and medium-sized enterprises, he says big banks generally aren't the best source of capital. They rely more on local and community banks. But the increased regulation under Dodd-Frank has made lending more difficult. 

Easing access to capital for small and midsized enterprises could have a big impact on the economy. Enterprises that are small, generally fewer than 100 employees, and midsized, generally between 100 and 500 employees, have traditionally been the source of growth out of economic downturns. 

"Under Armour started small. Google started small. What enabled companies like those to fully realize their growth potential, partially, was the availability of capital so they could meet what, in economic parlance, we would call their efficient scale," Faulkender says.

The notion of easing regulatory burdens on small banks has gained some bipartisan support. "It could actually move forward because it's popular," Swagel says. 

After several years of Dodd-Frank's regulation, Faulkender says, "The question is: To what extent have some of those small- and medium-size enterprises who are sitting on those kinds of disruptive technologies been curtailed in their ability to fully realize their potential?"

He'll pose that question to the panel. Along with this one: "To what extent might a change in the regulatory environment, a change in tax policies, a change in energy policy, a change in health care policy — all of those things that are now potentially doable, with unified government — to what extent might we be able to realize growth well in excess of what we've been able to realize in the past eight years?"