Over the last 15 years, America has virtually tripled its amount of debt while at the same time greatly increased spending for new social policies, including student loans, Obamacare, and Medicaid reimbursements to the states. Some of this money came from other programs like defense, and highway maintenance, but most came from outright borrowings.
The skyrocketing cost of government became an issue as our annual budget deficit soared to over $1 trillion for the first time. In an effort to increase revenues through higher economic growth, our government embarked on a massive Keynesian effort, spending trillions of dollars through “shovel ready” stimulus programs coupled with a “zero interest rate” monetary policy for printing money conducted by the Federal Reserve. The advocates for these policies sold them as investments, but at the end of the day, there was little economic growth to speak of, and we are left with an underfunded military, poor infrastructure, and over twice the amount of debt. Student loan borrowings now exceed $1 trillion, but in a low or no growth economy, the probability for repayment is not high. As weak economic underpinnings led to other loan defaults and failures, large centralized federal government once again took charge with an endless stream of regulatory entanglements. Regulations are really a form of taxation which now impacts every sector of our economy. Consequently, going into the election, Americans were faced with a flat economy, poor military preparedness, and a weakening global image. It didn’t take a Ph.D. in economics to understand that our large government programs were not working.
Donald Trump was elected on a platform of lower taxes, de-regulation, military upgrading, and a re-built infrastructure. In essence, he was looking to grow the economy through private sector incentives, rather than through more government borrowing and spending. Republicans took control of both branches of Congress as well, and it looked like our economy was off to the races. Markets reacted positively, as the new president began killing regulations in a tireless effort to free-up the U. S. economy.
Something happened on “the way to the bank,” however. The legislative part of the growth agenda (namely healthcare) stalled over an impasse between members of the Republican caucus. We quickly cut back our heavy allocation to equities as that impasse became more apparent.
Our analysis suggests that the Trump growth agenda has become less probable, due to the convoluted legislative process. While the Republicans hold a majority of both houses, the strategy for passing healthcare and tax legislation must necessarily circumvent the filibuster rule in the Senate. Because of this rule, the Democrat Minority can kill any growth initiative brought forth by the Republican Majority.
In order to circumvent the 60 vote rule Republicans decided that they must format all legislation in accordance with the budget reconciliation rules of the Senate. Budget items can’t be filibustered, so legislative initiatives can be fashioned around budget reconciliation, while carefully avoiding changing the law. Accordingly, bills often preserve arcane aspects of the prior laws (Obamacare) that makes voting difficult for the purist. (Once you have seen the making of the sausage, the sausage itself, becomes very unappetizing.) Additionally, any proposed reconciliation must be revenue neutral, which may call for complex and perhaps counter-productive inclusions. (Hence, the border adjustment part of the house tax package.)
The entire process of implementing change becomes a “half a loaf is better than none” proposition. Because this legislative strategy is so difficult when it comes to keeping a majority together, it is much more akin to herding cats, rather than cattle or sheep.
We are strong believers in the exponential effects of supply-side economics. Policies to encourage growth through tax cuts and de-regulation can be very strong drivers of increased GDP growth and increased tax revenues. We need the increased tax revenues to take care of our deficits and future obligations.
Our concerns were recently heightened by the Trump Administration’s consideration of a value-added tax and carbon tax, as an overture to Democrats. To incorporate Democrat Support, the marginal tax rate cut for individuals must be sacrificed. It is this marginal tax rate cut that is the “bread and butter” of supply-side economic theory, but it is also the important social crucible of “not helping the rich” which most Democrats insist upon. In the end, a diluted or cosmetic tax change will be for naught and likely cause us to further adopt our all familiar “preservation posture.”
When asked whether we believe the market is too high or “too rich,” we often answer, “It depends.” It depends on the successful implementation of the growth agenda. If the agenda is diluted or ineffectual for some unseen reason, our answer is, “Yes, it’s too rich!” A correction then becomes eminent in our view.
It seems that a more direct and simple solution would be to change the Senate filibuster rule. Cloture (successful override) could be accomplished with a simple majority rather than the 60 votes now in the current rule. The filibuster was really initiated during the Wilson Administration to give the minority a bit more power. The intent may have been good, but the filibuster has since been used to block the wishes of the majority, as well as presidential appointments. Clearly, it has been abused.
Without a 60 vote rule, the majority of both houses will be able to effectively legislate. No more dilution, no more “half a loaf.” After all, this is merely a Senate rule, and not a constitutional change, but it does conflict with the constitutional rights of the “majority.” This would be a quick and shortcut end to this rapidly unfolding drama. Makes sense to me! Hopefully, it makes sense to Senate Majority Leader McConnell as well.
Meanwhile, on your behalf, we will keep a watchful eye, because the upside/downside investment implications are quite large at this point.