Can the GOP Stomach Trump’s Economic Plan?

Republicans are running a united government, but are deeply divided over the new administration’s stated priorities.

House Speaker Paul Ryan listens to US President-elect Donald Trump speak to the press at the Capitol in Washington, DC, on November 10, 2016. / AFP / NICHOLAS KAMM        (Photo credit should read NICHOLAS KAMM/AFP/Getty Images)
House Speaker Paul Ryan listens to US President-elect Donald Trump speak to the press at the Capitol in Washington, DC, on November 10, 2016. / AFP / NICHOLAS KAMM (Photo credit should read NICHOLAS KAMM/AFP/Getty Images)

Small-government Republican rhetoric, meet bigly government Republican President Donald J. Trump.

The neophyte president-elect and first-time public office holder’s heavy-handed, ad-hoc approach to economic management is so anathema to congressional Republicans’ talk about Washington excesses that signs of internal division are already emerging. The bickering could lead to an economically crippling political stasis that defies Wall Street’s assumptions about a potential fiscal boost because of the GOP’s electoral dominance in 2016.

In his latest publicity stunt, the hotel magnate-turned-politician claimed credit for Ford’s decision to keep a plant in Michigan rather than build a new one in Mexico — even though it was made before the election and certainly before the president-elect’s public arm-twisting. Trump played a similarly deceptive numbers game with air-conditioning manufacturer Carrier, only to reveal that he had offered the firm large taxpayer subsidies in exchange for keeping jobs in the United States.

Trump’s election victory, a narrow one despite his frequent false claims of a landslide win, is enough to give him the initial upper hand in intraparty negotiations. For one thing, it has forced House Republicans to tow a much more anti-trade line than they otherwise might. It also brought House Speaker and Wisconsin Sen. Paul Ryan back into Trump’s fold after he distanced himself from the party’s own presidential candidate — a rare development that followed the release of recordings showing Trump bragging about sexually assaulting women and getting away with it.

How will the party square its long-standing rhetoric about smaller government with a president-elect whose vision of economic management is a micro, deal-making approach to macroeconomic policy, all tinged by virulent anti-trade talk and the constant threat of protectionism? Uncomfortably, at best.

Beginning with trade, or deep suspicion thereof, which permeated not only Trump’s campaign but also thus far his appointments and promised initial actions, traditional conservative Republicans have felt deep unease with several components of the new administration’s agenda. But they have had to remain quiet because he propelled the ticket to victory, despite a weak overall mandate. Yet once the business of governing as the ruling party in full control of the executive branch and both chambers of Congress, some of the more salient splits are likely to be expressed more publicly.

Trump’s nominations so far give little reason to believe, as some on Wall Street have, that his anti-trade talk during the campaign was merely bluster. In particular, the appointment of people like Death by China author/director/public speaker/economist Peter Navarro (now the head of the new White House National Trade Council) hardly sets the tone for a diplomatic start to international commercial relations. Naturally, the bluster doesn’t stop with trade, as suggested by renewed tensions around the South China Sea — made worse by the president-elect’s unusually casual tweeting habits.

Infrastructure, another key part of Trump’s rhetoric, also faces hurdles from a Republican Party that staunchly opposed similar plans by President Barack Obama’s administration. True, they might be more open to projects coming from a president from their own party, but given the large gap between Trump’s inner circle and the party, the two agendas might be difficult to square.

“There might be some infrastructure spending in Trump’s fiscal package, but do not hold your breath,” argues Simon Johnson, a professor at the Massachusetts Institute of Technology and ex-chief economist at the International Monetary Fund. “Infrastructure does not appear high on [Senate Majority Leader] Mitch McConnell’s priorities — and a significant number of House Republicans will only support infrastructure spending if it is ‘paid for’ by reductions in social spending (i.e., reducing transfers to less prosperous people, for example by cutting Medicaid and Medicare).” That would betray a central campaign promise by Trump not to touch the programs.

There’s also a risk that, given Trump’s predilection for individual-firm intervention and his unprecedented unwillingness to fully divest of his businesses after being elected, large construction projects will be seen as skewed by personal relationships and ties, leading to a lack of public confidence. After all, America is not Atlantic City.

Taxes and regulation should be simpler for Trump’s team and House Republicans to agree on: Everyone wants to cut both — and sharply. The problem, as previously discussed here, is that the old “trickle-down tax cuts for the rich” theory was tried in spades under George W. Bush, and it failed to boost growth in any sustainable manner. In fact, those policies accelerated an accumulation of wealth at the top of the income ladder that, because it concentrated investments in the highest-yielding asset du jour, which at the time was housing, contributed to the bubble and crash that devolved into the Great Recession. Corporate tax reform has bipartisan support and could be a positive long-run structural reform for the economy if it simplifies the code and boosts revenue collections at Treasury. But reforms must be done right, and there’s little evidence things are heading in that direction.

Then there are the many wild cards of Trump’s foreign policy. Although not directly an economic issue, it could certainly become one if the new president ratchets up nerves sufficiently. Thus far, markets have been blissfully complacent to rising geopolitical risk. But evidence of Russian interference in the U.S. election, and the president-elect’s denial thereof, leaves the United States and the world in uncharted cyber/military waters. Plus, the evolving war of words with China over Taiwan and trade issues remains a great risk to global stability.

Taken together, these hurdles hardly jive with ebullient, record-setting stock markets. Something’s got to give.

Photo credit: NICHOLAS KAMM/AFP/Getty Images

Pedro Nicolaci da Costa is editorial fellow at the Peterson Institute for International Economics. He spent over a decade covering the Federal Reserve, first at Reuters then The Wall Street Journal.