ETF Expert Corner

AEI’s Mike Strain on Potential Economic Impact of Trump’s Presidency

November 15th, 2016 by ETF Store Staff

Mike Strain, Director of Economic Policy Studies at the American Enterprise Institute, offers his perspective on the election outcome and discusses the potential economic impact of Trump’s presidency.



Transcript

You can listen to our interview with Mike Strain by using the above media player or enjoy a full transcription of the interview below.

Nate Geraci: I'm now pleased to welcome to the program, Mike Strain, Director of Economic Policy Studies at the American Enterprise Institute. This is one of the big think tanks in Washington, D.C. As I mentioned earlier, Mike is a regular contributor to the Washington Post. He's been published by the New York Times, Forbes, Bloomberg View. He's appeared on CNN and CNBC. Mike has been all over the election from the very beginning. Mike, great to have you back on the program.

Michael Strain: It's great to be back. Thank you for having me.

Nate Geraci: Mike, we're now a week removed from election day, and you've had some time to digest what we saw happen. I guess, first, what were your thoughts on how the election played out? How surprised were you as the results started rolling in and it was becoming apparent that Trump would win?

Michael Strain: I was quite surprised. I think a lot of people were. I mean, if you think about it probabilistically, if we had 10 of these elections, I always figured that Mr. Trump would win three of them, and I think that probability is probably still right. It just so happened that one of those three is what we ended up with.

Nate Geraci: What do you think happened here because just about all of the pollsters got it wrong. Everyone obviously had Clinton winning. What do you think happened? What changed between what the polls were showing us and what actually happened in terms of voter turnout?

Michael Strain: I'm still kind of making my way through the exit polls and digesting some of that. There were actually some exit polls that were put out in the early days, last Tuesday and Wednesday that I think had some information that wasn't entirely accurate. It looks to me like it's a pretty simple story at this point that Mrs. Clinton wasn't able to bring enough people out to the polls, especially in states like Pennsylvania and Wisconsin and Michigan that have had some trouble with white, working class voters. President Obama was able to bring more people out than she was. Donald Trump won by the same number of votes that Mitt Romney did, and that was enough to win him the electoral college this time.

Nate Geraci: You mentioned working class voters, and we're going to focus today on the potential economic impact of a Trump presidency, but just looking back, how much of Trump's voter turnout do you think was based on a portion of this country simply not seeing job growth and wage gains and upward mobility over the past decade? In other words, how big of a factor do you think the economy was in actually mobilizing Trump's voter base?

Michael Strain: I think the economy was a large factor. I would stretch the time period back even further than 10 years. I think we have been through a period of time in the 1980's and in the 1990's in the 2000's and certainly in the current decade that saw some significant changes to the structure of the labor market, some significant changes to local communities, to the job market in local communities. Those changes have been gradual, and they've been slow burning, and they have had a big influence on politics. We saw those changes accelerate during the Great Recession, and the recovery from the Great Recession has been unusually weak. I think that the combination of longer term changes that have kind of always been on people’s minds that have been affecting these communities for some time combined with the acute pain of the Great Recession, certainly, and the slow recovery created an environment where people were more susceptible and more attracted to the President Elect's message. We'll know more as more data comes in and as people are able to take a deeper dive on some stuff. That seems like a pretty compelling hypothesis to me.

Nate Geraci: Again, we're visiting with Mike Strain, Director of Economic Policy Studies at the American Enterprise Institute. All right Mike, we're going to jump around a bit here in terms of how Trumps' policies might impact the economy. I thought we might start with infrastructure spending. Trump has said, "If we do what we have to do correctly, we can create the biggest economic boom in this country since the New Deal when our vast infrastructure was first put into place. It's a no brainer." Do you agree with that?

Michael Strain: I think it's important to have a nuanced understanding of economic growth. Certainly, if we have a large debt, financed infrastructure program, that will help short-term economic growth. It will have some other consequences as well, but I think it's reasonable to forecast that there will be positive growth effects for that program. Of course, that debt has to be paid for, and that debt could weigh on future growth. That stimulative effect will not last forever, and won't last very long. It almost surely won't even last the duration of Mr. Trump's first term. Those factors have to, I think, be front and center in the discussion. In terms of the first four quarters or the first eight quarters that the President Elect is President, I think that will have a positive impact on short-term growth.

Nate Geraci: You mentioned, obviously, the infrastructure spending will have to be financed with debt. Do you think that given where interest rates are right now, even though they have spiked up here recently, is this an opportune time to pursue fiscal stimulus just because it can be financed so cheaply?

Michael Strain: I think there is an argument certainly that it's attractive, that given low interest rates and given the state of the nation's infrastructure, and given the view that some people hold that there's still significant slack left in labor markets, particularly in industries like construction, that now is a good time for that sort of a program. There are competing views, of course, which argue that it's extremely difficult, it's just a matter of execution to have an infrastructure program that does the kind of things that you would think textbook Keynesian stimulus would do because it's hard to assign the contracts, and there's a lot of cronyism, and you have to get the money out the door, and there aren't those kind of shovel-ready projects that are available. We'll have a debate about that. I think it's interesting that typically you hear Republicans making the arguments against those kinds of Keynesian stimulus programs. I think it's at least likely that you'll hear Republicans making arguments in favor of those programs. It's also important to think about how these things are financed. A number of suggestions have been put forward. One is to do a traditional debt finance program, government debt finance. Mr. Trump's campaign, and I suppose now the transition, have been talking about offering tax credits to businesses and financing these programs in a different way. That will affect the ability of the programs to actually stimulate the economy, and it will affect the composition of the projects that are actually eventually selected. There's a lot in the air right now. I think it's too early to say that we will have an infrastructure program that will deliver short-term growth effects. I think that the possibility that will happen is certainly real.

Nate Geraci: Mike, for our listeners, just taking a step back here, why is infrastructure important to our economy? In other words, why does it matter if we have better roads and better bridges and airports? What does that ultimately do?

Michael Strain: I think that's actually the heart of the matter. There are two views on how this sort of an endeavor should be undertaken. One view is to say, okay, we are operating at a growth rate of X percent. In the case of the US economy, let's say it's 2%. We want to increase the rate of growth over the next few years to a target, let's say it's 3%, 3-1/2%, I think the transition is talking about 4%. In order to do that, we need to spend X amount of dollars, the federal government needs to spend X amount of dollars, and that will provide that kind of a boost to the economy. Now, let's find a whole bunch of projects to spend that money on. That was the way that the Obama administration approached the stimulus when they came into office, and that's the typical way that advocates of Keynesian stimulus spending think about spending. Another way to think about it is to say, "Okay, what actually needs to get done? If we fix the roads in Missouri, would that make Missouri's economy more productive? Would that help consumers and businesses to go about their economic activities in a more productive and more efficient manner? Would that add to social welfare, which may not show up in GDP statistics, but which is certainly an important consideration? Yes or no? Should we fix this airport, or should we fix the water system in this city? Should we fix this bridge?" Because there are real tangible, economic benefits to doing that because those projects have high social value. Then identifying those projects and then figuring out how to fund them without the kind of logic and motivation of a government funded stimulus program. Those are two very different approaches to infrastructure spending. I favor the latter approach, and if we followed the latter approach, the answer to your question would be, yes, these are good things to do, and they'll actually help because that's the first order consideration. In traditional infrastructure spending, that’s designed to stimulate the economy, whether the projects are a good thing to do is actually a second order consideration, which in my view is inferior.

Conor Kelly: Mike, it's Conor. Let's talk about the deficit for a second because apparently nobody else running for President will talk about it. I mean, we stand at 20 trillion dollars, and there's talk that with Trump's proposed tax cuts and some of this stimulus that we've talking about, he could run a deficit north of a trillion dollars a year. First of all, long term, what is your view of the sustainability of the debt in our country, and what is it going to take for people in DC to actually start addressing this problem?

Michael Strain: Well, it's funny. We used to care quite a bit about this, and you'll recall in the myths of history, a man named Mitt Romney running for President. Back in 2012, Governor Romney went through quite a few contortions to argue that his program of marginal income tax rate cuts would not add to the debt, those cuts would be revenue neutral. Then we saw just a couple years later during the GOP primaries of this cycle that consideration had just gone completely out the window, and candidates from Marco Rubio to Jeb Bush to certainly Donald Trump were proposing tax packages that would significantly add to the deficit. Now, I think now we're in a situation where we really could return to 800 billion dollar deficits or even higher than that, which is what we saw in the early years of the Obama administration. That to me is concerning. It's especially concerning in a global geopolitical and economic environment in which confidence that the United States is the leader of the free world, for lack of a better term, I guess, is shaken. We've been able to have deficits like this because the dollar has unquestionably been the world's reserve currency, and because the idea of the United States not honoring our debt and not ultimately behaving in a responsible manner, relative to other countries in the world, has just not been questioned. We may see some questions along those lines which could make it harder for us to borrow so much from abroad. I think we'll see, but there should be no confusion that the national debt is a significant concern, that if we add five or six trillion dollars to it over the next presidential administration, that will also be a significant concern, and that we may not, you know, I think the talk of a debt crisis and talk of us being the next Greece, I think is overblown, but this is a real problem. It's a problem that requires attention, and it's not looking like the President Elect is going to make the problem any better.

Nate Geraci: Let's take a quick break here, and when we come back we'll move on from infrastructure spending and the national debt, and I want to go rapid fire on several topics. We'll cover everything from global trade to Trump's energy policies. Let's do that right after the break. You're listening to the ETF Store Show. Welcome back to the ETF Store Show, Nate and Conor in studio. We're also joined today by Mike Strain, Director of Economic Policy Studies at the American Enterprise Institute. Mike is joining us via phone from Washington, D.C. We're covering the potential economic impact of a Trump presidency. Mike, let's just go rapid fire here. We're going to throw out a laundry list of topics. Let's start with Trump's stance on trade. Trump has been viewed as anti-globalization. He's talked about tariffs, opposing the Trans-Pacific Partnership Agreement, ripping up NAFTA. From your perspective, what might that do to the US economy?

Michael Strain: It won't do anything good, that's for sure. I think, here again, there's considerable uncertainty. I think we know for sure that the TPP deal that the Obama administration has spent the last seven years shepherding through is dead. I think that agreement is dead. That, in my mind, represents a significant retreat of the United States from our role as a global economic leader but also as a geopolitical leader in the South Pacific, and I would expect to see China step in and fill the vacuum that we are intentionally leaving there. I think with respect to NAFTA, the President Elect has made a number of statements about NAFTA. I think it will be hard for him to not attempt to renegotiate NAFTA. I think the United States exiting NAFTA is a real possibility, although I guess I wouldn't say it's likely. I think it's actually in the cards. That will cause some disruption and it could hurt the ability of American firms to do business, not only in Mexico, but to do business with Canada, which we do a lot of as well. What happens with tariffs, the rhetoric about instituting tariffs of 45% or whatever with China, I think we'll see. We need to be clear eyed about the fact that the President has significant authority under the law to take unilateral action on trade. It's not like the President needs congressional authorization to do a lot of this stuff. I think we'll see. I think if we do see the United States attempting to renegotiate NAFTA, and if we do see the United States imposing punitive tariffs on imports from other countries, and if we do see those countries retaliating in kind, then I think that we will see consumers and businesses faces higher prices and eating into their real inflation adjusted income at a time when we know that the American people, and especially the people who put Mr. Trump in office, are concerned about slow growth, and their income and wages. Higher prices that will be a consequence of these trade policies will eat into those incomes and those wages even more. He'll be hurting the very people who he's trying to help.

Nate Geraci: Mike, from a purely economic perspective, do tariffs generally work in protecting industry? Will that help keep manufacturing jobs in the US which seems to be one of Trump's main goals?

Michael Strain: No, I think is the right answer to that. I do think that there are some situations and some circumstances where those kinds of trade policies might for a short period of time benefit a particular industry or something to that effect. The medium term effect of those policies is to reduce the efficiency of the economy, to shrink incomes, to slow income growth, and again, to create a more inflationary environment and to create higher prices in those industries that are going to be paid for at the cash register by the people who are hard-working people who are trying to get by in a tough economy.

Nate Geraci: All right, now along similar lines, we know a hallmark of Trump's campaign was building a wall on the Mexican border. He also mentioned deporting some 11 million illegal immigrants, and I certainly don't want to debate the likelihood or the righteousness of either of those. My question is, what impact do those policies have on our economy? Are these something that we should be concerned about purely from an economic standpoint?

Michael Strain: A lot of it depends, I think, on the manner in which it's done. I think if we take him at his word, and if in the first year or two we do see two or three million unlawful immigrants leave the United States, that's pretty rapid. The manner in which that will be accomplished, I think will impose hardships on businesses who employ those workers. I would expect, again, that's a result in higher prices that the consumers will have to face. I will expect that to result in some businesses having a real hard time continuing to operate with any profit, which might result in some businesses shutting down. I would expect that to have a chilling effect on economic activity in those communities overall. The longer term effects of that kind of a policy, I think, are also dim. If we significantly slow the rate of immigration, even among lower skilled workers that seem to be the focus of a lot of this, then that will slow the growth of the overall economy by slowing population growth. Both the short run and medium run effects on the economy are negative.

Nate Geraci: Again, we're visiting with Mike Strain, Director of Economic Policy Studies at the American Enterprise Institute. Mike, what about Trump's energy policy? He spent a lot of time campaigning in coal mining towns. He's talked about eliminating the EPA, finishing the Keystone Pipeline. Can Trump's energy policy help power economic growth at all?

Michael Strain: Yes. I mean, I think if we open more protected lands to exploration, if we eliminate some regulations on the energy sector, I would expect that to have a positive effect on the economy, and those are probably some things that we should be doing.

Nate Geraci: Obviously, we're talking about energy there, but overall Trump is largely seen as pro-business, less regulation. I'm curious, is there anything that we can point to historically showing whether that type of approach tends to be beneficial to an economy?

Michael Strain: Yes. I mean, I think, I would expect a number of things that the President Elect will do, will have a positive effect on the economy and a positive effective on economic growth. We've seen a lot of regulations in the labor market over the Obama years. We've seen a lot of regulations in the energy sector over the Obama years, and a lot of those regulations are counter-productive and are hurting economic growth, and are hurting income growth for American families. Eliminating some of those will have a positive effect. There are positive effects to reducing marginal income tax rates. Now, again, if those cuts add to the deficit as opposed to being financed through spending reductions, there are problems there as well. There's certainly a short-term effect that American households will enjoy. If the government can actually repeal the Affordable Care Act and replace it with a better program, I would expect that to help the economy as well. The same thing with financial regulations. There is a real upside for the economy here. There are some actions that will be taken that I will expect will have a positive effect on the economy. The real story here is there's just so much uncertainty about what the President Elect is actually going to do, and what the specifics of these programs look like that the verdict can go either way at this point. It would be very easy, for example, to replace the Affordable Care Act with a program that is worse than the Affordable Care Act.

Nate Geraci: All right Mike, the last question I have for you on our rapid fire list here has to do with the Fed. Trump has expressed, I think, what you could call disdain for the Feds low interest policy. He hasn't exactly embraced Janet Yellen. As a matter of fact, I saw last Wednesday, one of Trump's economic advisors said he wouldn't be seeking Yellen's resignation, but they wouldn't likely nominate her to a second term in 2018. How do you think Trump is going to approach the Fed?

Michael Strain: Again, I think we'll see. You know, I think a combination of short-term stimulus from tax cuts and short-term stimulus from an infrastructure program makes the Fed more likely to increase interest rates. Mr. Trump has spent a lot of time criticizing low rates, and so I think maybe he'll like that. At the same time, once he's actually the President, and those higher interest rates put a little bit of a break on the economy, he may not like that. He has appointments to make, both Chair Yellen's term will expire, and there are empty Fed Governor seats right now. We'll see what that looks like. It could be pretty conventional. On the other hand, if he starts publicly bullying the Fed, and if he starts publicly criticizing the Fed, and publicly trying to get the Fed to do things, then that could create an adversarial relationship between the Fed and the White House which would be very bad for the economy, and very bad for the country because Fed independence is really critical to businesses making good decisions.

Nate Geraci: All right Mike, before we let you go, I'm going to give you the opportunity for two quick parting shots here. First, in a nutshell, what is Obama's economic legacy?

Michael Strain: I think it's not looking good. I think the President will get a lot of credit for understanding the magnitude of the problems that he faced when he came into office, and trying to take steps to address that. The President's two signature pieces of legislation were the Affordable Care Act and the Dodd Frank Act, and those are going to almost ... It's very likely going to look quite a bit different. The President failed to get that trade deal through, and the President did a lot of things with executive action on energy, on immigration, on labor market regulations, and I expect those to all be wiped away. There's not going to be a whole lot of significant consequence left. It doesn't look like.

Nate Geraci: Okay, and then looking ahead, obviously we've covered a lot of ground here today in terms of Trump's policies, and certainly, as you mentioned, there are a lot of variables here. There's a lot of uncertainty, but just base case, what do you expect to see out of the economy in 2017?

Michael Strain: I expect to see growth at a decent clip, 2-1/2%, maybe, 3%.

Conor Kelly: Mike, it's Conor. Let's take our view overseas just real briefly, but I did want to get your thoughts on this. Obviously we had the shock of the Brexit vote earlier this summer, and now Trump's election. We have the Italy referendum coming up in a few weeks, I mean, this doesn't seem like it's a US only problem. I don't know if you want to call it populism or what, but it seems like these are feelings that voters are having across the world.

Michael Strain: Yeah, that's right. Certainly across the developed western world. The forces that have been changing the labor market and that have been effecting local communities in places like Pennsylvania and places like Wisconsin and places like Michigan, have been effecting other countries as well. They've been effecting the United Kingdom, they've been effecting France, and they’ve been effecting many of our other European friends. The Great Recession effected those countries as well, and the tepid, slow recovery from the Great Recession effected those countries as well. If you think that this rise of populism that's fueled by anger has significant roots in the performance of the economy, and in economic changes and economic forces, then you would expect to see similar politics emerging in other countries, and that is what we're seeing.

Nate Geraci: Well Mike, with that we'll have to leave it there. As always, we greatly appreciate you joining us today, especially going two segments. Certainly, the next four years should be fascinating to watch unfold. I think you may become a frequent, regular guest on our program. Thank you.

Michael Strain: I always love coming on, love Kansas City, and I'm happy to come back any time.

Nate Geraci: That was Mike Strain, Director of Economic Policy Studies at the American Enterprise Institute. I should mention that Mike is a tremendous follow on Twitter. His Twitter handle is @MichaelRStrain, that's @MichaelRStrain. He tweets out all of is published work, so that's probably the best way to keep tabs on his commentary.