With the inauguration of the 45th president imminent and the market’s high expectations for policymaking, what is realistic for investors to expect from Washington in 2017?
We think the bottom line is that governing is harder than campaigning. Many of the items that President-elect Trump and congressional Republicans are looking to tackle in 2017 – a healthcare overhaul, tax reform, infrastructure – are inherently complex and time-consuming, even with Republican majorities in both chambers of Congress. So, while we expect policymakers to focus on advancing the Trump agenda, there is a good chance that some of these agenda items slip into 2018 given the realities of Washington.
Key policy initiatives
Obamacare: Repeal and replace? One of the primary issues of overlap between President-elect Trump’s policy agenda and that of congressional Republicans is the repeal of Obamacare. However, there is less agreement about what comes after repeal – with Trump and some Republicans advocating for a “repeal and replace” approach, while other Republicans supporting “repeal and delay.”
If Trump’s approach is pursued – which seems more likely – it could have implications for the timing of the rest of his agenda. Healthcare policymaking is notoriously complex and time-consuming; it took Congress 14 months to pass Obamacare after holding more than 100 hearings in the Senate and 80 in the House, and Obamacare still managed to pass only on a party-line vote. Also, the committees in Congress that would be tasked to write at least part of the replacement bill will also be in charge of the tax reform bill, another complicated and formidable undertaking. Lastly, Trump has promised that a replacement bill will provide “insurance to everybody.” While Trump may walk back from these comments, the pressure for congressional Republicans to deliver a comprehensive, Trump-endorsed healthcare overhaul has increased, which might take longer (most of 2017?) than many expect.
Tax reform or tax cuts? Another area of agreement between Trump and congressional Republicans is the issue of addressing the country’s tax code to make it more competitive. However, there is less agreement about how actually to do this. House Republicans want to proceed with tax reform on the individual and corporate side, while Trump has put forth a plan that focuses on tax cuts. Tax reform – simplifying the tax code, lowering rates and broadening the base – is notoriously more difficult and time-consuming than tax cuts, since it necessarily results in winners and losers. Yet, many would argue that only tax reform – not tax cuts – at this point in the economic cycle would lead to real improvements in productivity and therefore sustainable economic growth. For this reason, we expect House Republicans to try to advance a tax reform package, at least initially.
But there is a long way to go from here to there. No bill has yet been written, and it is not clear whether Senate Republicans are on the same page as House Republicans, especially when it comes to more controversial topics such as the “border adjustment tax,” which would tax imports and exempt exports.
Assuming tax reform is pursued (not just tax cuts), it will likely take longer than most expect given its complexity and may be a smaller package (e.g., rates not lowered as much) depending on where Republicans fall out on different controversial issues (e.g., the border adjustment tax). While the market appears to be pricing tax reform to be completed in 2017, there is a real possibility we don’t see a bill passed and signed by President Trump until 2018.
Infrastructure: While this is a topic that President-elect Trump discussed often on the campaign trail and one where there is generally bipartisan support, Trump has provided few policy specifics, and this is yet another issue where the devil is in the details. Given the ambivalence many Republicans have for increases in non-defense spending, Trump may need Democrats to help pass an infrastructure bill. It is not clear what the appetite for that would be among congressional Democrats. So this also could slip to 2018.
Trade: Unlike the aforementioned issues, which need congressional approval, the White House has significant discretion around trade. Indeed, one of the first actions President Trump is expected to take is to withdraw the U.S. from the Trans-Pacific Partnership. While this move is expected, Trump’s approach to trade broadly is unknown: Does he follow the advice of his U.S. Trade Representative Robert Lighthizer, who worked under President Reagan and will likely use a more carrot-and-stick approach with trading partners like China? Or will he follow the more extreme and protectionist advice of Peter Navarro, the head of the newly formed National Trade Council? At this point, we don’t know, and as such, trade remains the primary area for a more “left tail” (downside) outcome.