There are real downsides to an administration without one overarching economic philosophy.
There were two major pieces to Donald Trump’s economic platform throughout the 2016 campaign: (1) An “America First” protectionism featuring threats of tariffs and stern warnings to American companies who would move jobs offshore; and (2) Tax reform that covered the standard supply-side gospel (corporate and marginal-income tax cuts, deregulation, etc.). Traditional Reaganite conservatives like me spent most of the campaign praying that if Trump won he would prioritize the supply-side plank of his platform at the expense of the protectionist plank. When Trump shockingly won the election, many pundits turned to his selection of cabinet appointments and economic advisers to get a feel for what a Trumpian economic agenda would look like. But from the very beginning of Trump’s campaign, using those around him to gauge his economic priorities has proven futile, because Team Trump has no philosophical harmony on matters of economic ideology.
It should be noted that this is not in and of itself a bad thing. When good and effective economic policies are adopted by those in power, the impact on the economy is the same regardless of their ideological biases. With that said, our understanding of how the Trump administration aims to handle the economy would be greatly enhanced if the president’s team were bound by a consistent economic philosophy, and thus far it is not. Much effort has been devoted to analyzing the different world views and personalities of Trump World’s key players. But it is their economic ideologies that should grab our attention.
It would appear that on economic policy, the new administration is being slowly divided into three camps: (1) The protectionist die-hards who most advocate the trade platform President Trump campaigned on. In this camp we find Commerce nominee Wilbur Ross, National Trade Council chairman-designate Peter Navarro, and Robert Lighthizer, Trump’s nominee for U.S. Trade Representative. (2) What we might objectively call the “technocrats” — those heavy on business experience but light on ideology. Treasury Secretary Steve Mnuchin, and National Economic Council director Gary Cohn, both Goldman Sachs alumni, fit this bill. 3) The traditional supply-siders, who have been under-represented in Trump’s appointments but maintain a presence through their original influence on the campaign’s platform, not to mention their compatibility with Vice President Mike Pence. These include Stephen Moore, Larry Kudlow, and Mark Calabria, whom Pence just appointed as his chief economist.
It remains to be seen which of these three camps Trump will choose from if and when he does fill the vacant chair of the Council of Economic Advisers. But the meat of Trump’s tax plan remains rooted in supply-side orthodoxies and heavily endorsed by the Moore/Kudlow/Forbes camp of supply-side evangelists, which should give those of us whose sympathies lie in that camp hope.
Where will things go from here, then? There is no doubt that Trump favors some version of tax reform, and I expect he will accomplish the lion’s share of what he has proposed in this vein, including a reduction in the corporate tax rate, a harmonization of how so-called pass-through entities and C corporations are taxed, a repatriation of American companies’ foreign profits, and a full and immediate expensing for business investment. There will no doubt be various details to fine tune, but these major substantive points seem to be agreeable to all camps within Team Trump. Beyond them, though, there is significant uncertainty about the administration’s economic agenda. The “border adjustment tax” is the huge question going into the tax-reform debate, with its protectionist tentacles appealing to the Ross and Navarro camp, its promised deficit reduction giving cover to many on Capitol Hill, and its revenue from Mexico satisfying Trump’s need to save face on his promise that our neighbors to the south would pay for his border wall. The supply-side camp rightly loathes the border adjustment tax, believing it at best to be an untested and unproven gamble on currency markets and at worst to be a tariff under a different name borne by consumers. Cohn, Mnuchin, and the other pragmatists in the middle camp have not yet chimed in on the proposal, but they will likely prove to be the voices President Trump listen to when deciding how to proceed.
Perhaps the team Trump has assembled and will continue to assemble is designed as a composite of his own non-ideological and less-than-consistent economic thinking. He has frequently criticized the neo-Keynesian chairwoman of the Federal Reserve, Janet Yellen, for her accommodation of the stock market through low interest rates, but he has also said “I like low interest rates — I’m a low rate kind of guy.” A truly Hayekian understanding of price discovery has never struck me as a big part of Trump’s economic education. He consistently campaigned on an economic nationalism that he has apparently espoused since at least the mid 1980s. He campaigned on a platform of lower taxes too, but rarely with the same passion he showed for protectionism.
The danger in piecemeal economic policy is that one agenda item may be at direct odds with another.
How economic policy emerges from this unlikely mix of characters remains to be seen. The most likely scenario is that each camp focuses on the priorities most near and dear to it, foreclosing the possibility of a congruent, harmonized economic agenda in favor of piecemeal policymaking. The protectionism of Navarro and Ross may win the day with regards to foreign commerce and labor, even as the tax reformers (who are most likely to cross all camps) get what they want via supply-side cuts. Mnuchin and Cohn seem highly likely to accomplish much of their agenda of financial deregulation as well, with support from the business leaders on Trump’s economic advisory council.
The danger in piecemeal economic policy is that one agenda item may be at direct odds with another. Agreeing to a border adjustment tax in exchange for a lower corporate-tax rate still threatens to make our tax policies less business-friendly. Allowing the camp of Keynesian infrastructure spenders to get their way if it means securing supply-side tax cuts on income and investment risks blowing out deficits, pushing interest rates higher, and giving the Left an excuse to deny the efficacy of lower tax rates. Promoting the freedom of a more efficient and deregulated market while at the same time implementing significant penalties and punishments on companies for cutting the best deals they can on labor and parts is incoherent and directly contradicts the basic market principles conservatives have cherished since 1776.
A pragmatist such as Cohn, who is by all counts an unquestionably effective operator and organizational head, may very well provide the Left an easy target should Trumpian economic policy provide inequitable blessings to the classes of people Trump has campaigned on benefiting. Without a foundational ideology, how will Trump’s team design and implement much needed reforms of Dodd-Frank? If everybody’s favorite part of economics becomes the ingredient list for a comprehensive policy prescription, who pays the piper when low interest rates, stimulus spending, tax cuts, and deregulation all combine together in the absence of a larger vision?
President Trump has thus far not served up any economic heresy that should truly worry free marketers who have studied at the feet of Hayek, Friedman, and Laffer. Indeed, even his anti-free-trade musings are, at least for now, mostly limited to tweets, threats, and self-serving meetings with American CEOs. There is plenty of reason to be optimistic and hopeful that the eventual meal we get will contain fiscally prudent, market-respecting, pro-growth ingredients to satisfy any Reaganite supply-sider. But there’d be even more reason for optimism if the people cooking the meal shared the same tastes.