Attendees at FactSet’s ninth US Investment Process Symposium this week were on hand to hear world renowned economists Paul Krugman and Glenn Hubbard look ahead to what we can expect under a Trump presidency, for trade, the economy, and beyond.
Krugman, whom The Economist has called the “most celebrated economist of our generation,” won the Nobel Memorial Prize in Economic Sciences in 2008 and served as Senior Political Economist on the President’s Council of Economic Advisors under Ronald Reagan.
Hubbard is the Dean and Russell L. Carson Professor of Finance and Economics at the Columbia Business School. From 2001-2003, he was the Chairman of the U.S. Council of Economic Advisors under President George W. Bush, and he served as economic advisor to the Mitt Romney Campaign in 2012.
The discussion was moderated by Brenda Tsai, Global Head of Marketing and Communications at FactSet. We share here some highlights of the conversation.
Q: It has been a rocky and unprecedented election cycle to say the least. As a result of the election, the Republicans will soon control the White House, the Senate, and the House. What policies or actions are most likely to happen? What kinds of economic reforms are we going to see with the Trump Administration?
Krugman: The first thing to say is that a lot of your assessment depends on what you think the politics are going to be, what Congress is going to want to be willing to do, and what Trump is going to be willing to do. We can guess big tax cuts — that’s part of the Trump promise and not something Congressional Republicans will object to. Those cuts are going to be very big; we’re looking at big numbers. Everything after that becomes really uncertain.
Hubbard: We don’t know. Neither side articulated much policy beyond a few broad themes. But I think a lot will happen and a lot will be in the Congressional work. The Republican Better Way agenda is as good a guide as any. The place to start is tax reform, especially business tax reform, and the agenda paves the way. In regulatory reform, I’m a little more skeptical that even a Republican president and Congress can pull off what they want. While I hear a lot of talk, I’m a little more skeptical of big changes.
You’ll see a lot of support for work, the earned income tax credit. Paul Ryan and Trump agree there. On infrastructure, the Trump plan is not well articulated, but it will pass. Entitlement reform is very unlikely to happen in the near term because the administration will put emphasis on growth first.
Q: As we all know, the market dislikes uncertainty. Given the unpredictable nature of Donald Trump, do you think we are in for four years of instability and uncertainty?
Hubbard: I can’t second guess why markets pop down and up. But if you look at what Trump and a GOP Congress are likely to do, starting with business tax reform, and look at the effect on equities, it wouldn’t require much math to realize that’s equity positive. If something ends badly I don’t think it will be tax reform; I think it will be protectionism.
Ronald Reagan said that “personnel is policy.” That remains a real wild card.
Krugman: I don’t much buy the markets don’t like uncertainty. When people say that they mean markets don’t like the substantial possibility of something terrible happening. We’re talking a real negative shock. For the moment, people have backed off that. I think that’s right; the fact of the matter is the initial effect of the tax cuts at least will be a substantial fiscal stimulus. The plans as laid out will be a fiscal stimulus every year that will be as big as the Obama stimulus was at its peak. That’s probably eventually going to end in grief.
The uncertainty concern is not so much the effects of the policies as the response when something else happens. Stuff happens. Stuff will always happen, and who will be there responding? The initial personnel choices are not wildly encouraging; they are not people you would think of as having any clue about these issues. Aside from the build-up of what’s likely to be extremely irresponsible policy on the fiscal side, we’re heading into an administration that fundamentally does not trust experts and is at war with the whole idea of expertise, and that will be a problem when something goes wrong as it always does.
Q: Trump has promoted a more isolationist view of Global economic policy and trade. Can he be successful at isolating the US from the broader economy? If he is, what will the ramifications be for the US economy?
Krugman: Is it feasible? Can you shut down globalization? Yes, it’s happened before. We think of world trade as always growing but it actually did not get back, after World War I, till 1980 what it was in 1913. So you can have long periods where it doesn’t.
Politically if Trump were to actually start to do this stuff, he would find there are a lot more people that would be hurt: blue collar workers, large groups of businesses, whole chains of production. It would be much much more difficult, but I don’t know that it means it won’t happen. It’s a big possibility.
Hubbard: I don’t think it’s going to happen. On trade, we should remind ourselves how valuable trade and globalization is for reasons we teach in Economics 101. No economist ever stood up in 101 and said everyone in the country benefits from trade, but we do want to have trade. The bigger conversation is helping people who’ve lost from trade, but it’s not the dominant issue facing a lot of Donald Trump supporters. There are bigger changes from technology dislocating the labor force than from international trade, and you’re not going to ban all technology. So what are we going to do in the labor market to prepare people better and help those who have been left behind? I think Trump will be dragged to that discussion because he will rapidly see that will be the way to help that base of people.
Q: Despite a strong third quarter, the 2016 estimates for US growth are around 1.5%. The post-WWII average growth rate was 2.9%. Is our current growth rate sufficient? What are the biggest impediments to long term healthy growth?
Hubbard: In the short term, I think we see positive GDP growth. Long term is the interesting question. We don’t know nearly as much as we like to tell the public. We’re less good at predicting big increases in productivity. We can take away impediments for work, like the tax code. We know how to do that. There’s no silver bullet for productivity. And if we want to go back to days the economy would grow much faster, barring some technology change, I don’t think we will. But can it grow at 2.9%? absolutely.
While we all do get older and demography is a big deal, we have seen a big decline in labor participation of men who are not old. That’s a disturbing drop off. We have a tax system that penalizes work for older Americans, and we have very high