The Economic Effects of the 2016 Election
The economic effects of the election are likely to be positive, but somewhat muted in 2017. Like anyone seeking office, Donald Trump made extravagant promises to get elected. And like any politician, he will not be able to deliver on all of them. The 46 Democrats (plus two Independents) in the U.S. Senate could hold up any measure indefinitely by filibustering, a procedure which only takes 41 votes. The most likely scenario is that Trump will have to compromise, and his promises on the campaign trail will have to be pared down.
Perhaps more importantly, it will take some time for his proposals to take effect. For instance, his plans to change the tax code may not come up for a vote until later in 2017, and opinions are split on whether or not those changes will become retroactive to January 1, 2017. Similarly, his proposal to spend $1 trillion over 10 years on infrastructure amounts to 0.5 percent of GDP per year, which would surely be welcome in a 2.5 percent GDP world, but it will take time to legislate, appropriate, and fund actual projects.
Withdraw from NAFTA? Highly unlikely although it might be technically possible. Renegotiate NAFTA? Entirely possible, but again, given the time required, any effect in 2017 is likely to be muted.
There are other more immediate ways the Trump election can affect the economy. Trump’s proposals for tax cuts, increased government spending, and deregulation are all pro-growth. As a result, business optimism has risen sharply while the stock market continues to set new highs. That optimism could unleash much-needed investment which could provide a quick boost to the economy. Consumer confidence also leaped after the election, reaching the highest level of the entire recovery.
Other effects of his proposals include rising inflation due to increased government spending and proposed curbs on trade. Higher inflation will drive up wages and interest rates, strengthen the dollar, and perhaps cause the Federal Reserve to raise interest rates more rapidly than expected, all of which have both positive and negative implications.
But there are also two definite downsides to the proposals. Decreased taxes and increased government spending will lead to more debt, and if anti-trade measures do take effect and result in a trade war, it could cause significant harm to the economy.
Overall, it’s certainly a more promising picture than the last few years, but don’t expect instant fireworks.
Dan North is the chief economist for Euler Hermes North America, using macroeconomic and quantitative analyses to help manage Euler’s risk portfolio of more than $150 billion in annual U.S. trade transactions.