Trump Must Spend His Political Capital on Tax Cuts Now

Real Clear Markets ^ | December 24, 2016 | Larry Kudlow

[expat_panama]

President-elect Donald Trump's transition continues to go smoothly. Better than smoothly. Confidently. More than confidently. Transcendently.

And to top it all off, the Dow is up 9 percent since the election, while economic-sensitive small-caps have jumped nearly 16 percent. These are signs of Trump confidence.

Hard-nosed investment manager Ray Dalio, founder of Bridgewater Associates and a non-political guy, expects the Trump years to be as transformational as the Reagan-Thatcher years. Dalio says the Trump era could "ignite animal spirits" and "shift the environment from one that makes profit-makers villains with limited power to one that makes them heroes with significant power."

That's as good a summary as I have found.

Since the election, I have argued that the Barack Obama/Hillary Clinton war against business will come to an end, and that America will once again reward success, not punish it. And while the Left has demonized Trump's cabinet appointees as a terrible group of successful business people, free-market capitalists such as myself regard this group as very good indeed.

Why shouldn't the president surround himself with successful people? Wealthy folks have no need to steal or engage in corruption. Their business success demonstrates that they know how to achieve goals and convince skeptics that good deals can be made to the benefit of both sides. Isn't this just what America needs?

And most of these folks aren't political. They won't be afraid to reach across the aisle for bipartisan solutions. And that includes Mr. Trump himself. For many of his years he was a Democrat. Just like Ronald Reagan. Just like me.

I've always loved Winston Churchill's comment that "If you're not a socialist in your twenties, you have no heart. But if you're not a capitalist in your thirties, you have no mind."

In our new book, JFK and the Reagan Revolution, Brian Domitrovic and I explain how the two great pro-growth tax-cutting presidents -- JFK the Democrat, Ronald Reagan the Republican -- used civility and respect to communicate key ideas in a bipartisan effort that yielded terrific results for American prosperity.

So far, this has been the Trump way. Not only has he conducted himself with great civility, beginning with his Oval Office meeting with President Obama, he has sought an inclusive approach wherever possible, irrespective of party.

Yet with less than a month until the inauguration, it is crucial that Mr. Trump embarks on immediate bipartisan efforts to strengthen the economy. It was the number-one election-year issue. And despite strong post-election increases in business and consumer-confidence -- along with the stock rally -- the economy is weakening yet again.

Measured year-to-year, real GDP is rising only 1.7 percent. Business fixed investment continues to decline. Productivity is flat. Consumer spending has barely risen in the last two months, while both auto production and sales are slumping. Non-financial domestic profits have declined year-to-year for the last six quarters.

Of all these factors the slump in business fixed investment is the most harmful. If you go back in history, across the four long post-war recoveries of the '60s, '80s, and '90s, BFI averaged nearly 7 percent. In the Obama recovery, BFI was only 4 percent. Over the past two years, it has been flat.

Using a back-of-the-envelope rule of thumb, if the JFK/Ronald Reagan/Bill Clinton investment performance were in place now, our economy would be growing at 3 rather than 2 percent. A big difference.

That's why pro-growth tax reform is so important. It is reported that Mr. Trump will immediately move to overturn costly Obama regulations, especially on small business. This is good. It will add to growth.

But the big decision will be whether to repeal and rewrite Obamacare or enact tax reform as the first order of legislative business.

Replacing Obamacare is hugely important, both to improve our health-care system and remove the economic drag of its taxing, spending, and regulating. But business tax reform -- with low marginal corporate rates for large and small companies, easy repatriation, and immediate expensing for new investment -- will have an enormously positive impact on the weakest part of our economy, namely business investment.

That's where we'll see 3 or 4 percent growth, higher productivity, more and better paying jobs, and fatter family pocketbooks.

If there were a way to combine a two-year budget resolution with reconciliation instructions (51 Senate votes) to reform health care and taxes in one full sweep, that would be ideal. However, if tax reform (be it business or individual) comes second, and the start dates are postponed until 2018, then businesses and consumers will postpone economic activity. That could make 2017 a much weaker economic story than confidence surveys and the recent stock market suggest.

There's a great transition going on, but the economy needs immediate attention. Tax reform is the key.

Larry Kudlow is a senior contributor at CNBC, and also co-author with Brian Domitrovic of the new book JFK and the Reagan Revolution: A Secret History of American Prosperity.

[Paulie]

Have to disagree, at least somewhat.

While lower and more equitable taxes are important, it is all those onerous, unfair, senseless, and choking regulations that are really hurting us.

In fact I submit that leaving fiscal policy alone and using said ‘political capital’ on gutting the mountains of regulations - even getting rid of an alphabet agency or two - will have a larger positive impact and more durability than tax cuts which, incidentally, come and go with every new Congress.

[expat_panama]

While lower and more equitable taxes are important, it is all those onerous, unfair, senseless, and choking regulations...

Most of the regs are executive actions that T can do whenever he wants, but the tax cuts are legislative and that's deal-making that he can do a lot more easily now (while O & company still wants T to "succeed") than later.

[i_robot73]

Why the false dichotomy? How ‘bout we simply: CUT govt...to the *BONE*, and keep it in its Constitutional confines/

Fixes the regulatory burden (aside from the States) and also the taxing issue (no illegal/uncon. programs to spend $$ on = lower taxes).

[elhombrelibre]

He wasn’t my first choice, as many who disliked my comments know. But his first-things-first should be the wall. It’s his signature issue. Now, if he finds low hanging fruit and wants to grab it, then, fine. But he built his early success on that issue. Keeping that promise affirms his pledge that he’s not a typical politician saying one thing and doing another.

[LydiaLong]

Why the false dichotomy? How ‘bout we simply: CUT govt...to the *BONE*, and keep it in its Constitutional confines/
_________

Because entitlements, once given, are extremely hard to take away. You risk riots, looting, leftists screaming about how hateful conservatives are, etc. The best he can do is reduce by attrition and start investigating welfare fraud.

[LydiaLong]

The economy was NOT the most important issue in this election. It was illegal immigration.

[ROCKLOBSTER]

Trump Must Spend His Political Capital on Tax Cuts Now

What "political capital"? Tax cuts are one of the positions that caught fire across the whole electorate.

(well, except for the parasites)

[urbanpovertylawcenter]

Hey, a good deal is a good deal for everybody!

A bad deal is a good deal for you and a bad deal for me.

Trump will thump the bad deals for US.

[expat_panama]

Good morning and it's a beautiful new day!

Futures traders guarantee that stock indexes will stay flat and that our metals will jump up a % today.

This morning's announcements: Case-Shiller 20-city Index and Consumer Confidence.

Other FR econ threads:

• It’s not a wonderful economy But with some policy corrections...
• The Fed’s Impending Inflation Disaster?
• The Millennial Job Deficit
• Growth, Not Forced Equality, Saves the Poor
• Report: Illegals taking 'middle or high skill jobs,' over 500,000 since 2009
• No More Athleisure, Brick And Mortar, Made in China? How Fashion Will Change In 2017
• BREAKING: U.S. Steel CEO Says 10,000 Jobs To Be Brought Back…
• Meet the Chinese Billionaire Who's Moving Manufacturing to the U.S. to Cut Costs
• Top Ex-White House Economist Admits 94% Of All New Jobs Under Obama Were Part-Time
• Death By China: How America Lost Its Manufacturing Base (Official Version) - Video
• Donald Trump has US consumer confidence near a 13-year high

[expat_panama]

The economy was NOT the most important issue in this election. It was illegal immigration.

The economy can only grow again after we first restore the rule of law, and while illegal immigration is an important step it's not all of it by a long shot.

We got a very big swamp that needs draining...

[bigbob]

Tax cuts requires Congress, Trump can ease regulatory pain via EO.

[amnestynone]

no spend your political capitol on securing the border and getting out of loser trade deals. Then cut spending. People voted for Trump to do that if all you get are tax cuts for the rich elites and cheap labor express they will never vote Republican again and neither will I.Take back the country is nu 1 anything else is just greed stupidity and fecklessness. If the GOP establishment helps us do that then maybe we can cut thier taxes and ours.

[georgiarat]

If Trump squanders all his capital on tax cuts I will be very disappointed. A middle class tax cut is okay, repatriating money abroad okay. He cannot get tagged with is first act being tax cuts for the “wealthy”. He will lose the very Voters rthat gave him the electorial victory in many states.

[ClearCase_guy]

I’ve never understood the basic premise here.

There seems to be a long-standing expectation — “Okay, you were elected president. Congratulations. Now you are allowed to do one thing. One thing only. You have a small amount of political capital — what one thing would you like to spend it on?”

Just seems odd to me. Trump won handily. He has momentum. People expect a wall. So — build a wall. People will see that he meant what he said. BOOM! His political capital just increased. Trump said he would juice the economy. So — cut taxes and regulations. BOOM! The economy takes off like a rocket, and Trump has more political capital than ever before.

This could go on for 8 years.

[RegulatorCountry]

I think the Trump team can walk and chew gum at the same time. There are many stated goals and they’re going to go shock and awe. The left isn’t going to know what hit them.

[Reily]

Except there is no need for those things to happen serially they certainly can happen in parallel.

[Popman]

The economy was NOT the most important issue in this election. It was illegal immigration.

Both are important issues, tied and entangled like a gordian knot...

I think Trump can walk and chew gum at the same time and do both...

[ClearCase_guy]

Oh, absolutely. I expect Trump to push forward along a broad front. He is building an excellent team and he knows how to delegate.

My point is that I’ve never understand the thinking that political capital is some finite, precious thing which must be very carefully spent. Of course it’s not infinite, but I say Swing for the fences! Do a lot! Rack up some achievements and they will allow you to rack up yet more achievements!

People who are afraid to “squander” their political capital don’t achieve much. I think Trump understands this and will show great energy on multiple topics.

[Lazamataz]

Kudlow assumes Trump to be a standard politician, allotted so much political 'capital' to use up.

Nothing could be farther from the truth. The man does not play by the conventional playbook.