Overhaul the nation’s immigration laws? Check. Huge infrastructure spending package? No problem.
Those and other White House priorities, from new trade deals to driverless car regulations, underpin aggressive economic growth assumptions in President Donald Trump’s new budget request that are out of line with most independent forecasts.
The targets are ambitious, as the budget notes, given the current political environment: “2020 is an election year, and there is the risk that this will distract from implementation of the necessary policies required for continued increases in prosperity.”
The White House envisions 3.1 percent real gross domestic product growth this year, measured from the fourth quarter over the same period in 2019, with 3 percent growth continuing each year in a potential second Trump term. That would be a hot streak the U.S. hasn’t seen since the late 1990s.
“It’s conceivable that you get an 80 degree day in January in Boston, but that doesn’t mean it’s going to happen,” said Mark Zandi, chief economist at Moody’s Analytics.
The budget acknowledges that if Trump’s plans are stymied, growth would slow to 2.4 percent this year and just below that rate in future years. This “pre-policy” forecast is still above the Congressional Budget Office’s 2.2 percent projection for 2020, as longtime Senate GOP budget aide Bill Hoagland notes. The CBO projections, which are slightly more pessimistic than those of the Federal Reserve and the Blue Chip economists’ survey, dip below 2 percent starting next year.
Trump’s turbocharged budget forecast also helps achieve a purported $4.6 trillion in 10-year deficit reduction. Reverting to pre-policy assumptions would erase some $2 trillion in savings; results more in line with independent analysts would increase deficits by roughly $3 trillion above White House projections.
Padding growth estimates isn’t unique to this administration. But Hoagland, who's been around presidential budgets for four decades, said this White House has taken it up a notch. “I don’t recall it ever was as aggressive as in this current budget,” he said in an email.
When President Barack Obama ran for reelection in 2012, his budget said real GDP growth would hit 3 percent that year; it ended up at 1.5 percent. That blueprint also projected average growth of close to 4 percent, which also never materialized, in Obama's second term.
Zandi said the situations aren’t directly comparable because there was still slack in the economy at the time, suggesting more room for growth, whereas now the U.S. is at or close to full employment.
‘Supply side’ effects
A senior administration official said their outlook incorporates “supply side” effects from previously enacted policies, such as $1 trillion in overseas profits U.S. companies have brought home so far since the 2017 tax overhaul.
The budget touts other “pro-growth” policies, including the 2018 criminal justice overhaul; repeal of Obama-era regulations; and trade agreements including the U.S.-Mexico-Canada Agreement, which still needs to be ratified by Canada.
“They’re really stretching,” said Zandi, citing modest impacts of recent trade actions, little hard evidence that deregulation has actually boosted growth and virtually no discernible effects from the criminal justice bill.
“The good news is the president called a truce in the trade war, because otherwise we’d be careening towards a recession this year,” Zandi added.
Trump's budget divides his yet-to-be-implemented plans into four categories: labor market, deregulation, trade and fiscal policies.
On labor markets, the administration’s proposal to eliminate family-sponsored immigration pathways and replace them with a merit-based or “points” system based on characteristics like age, skills and job offers hasn’t moved an inch on Capitol Hill.
The White House says the Trump plan would bring in more skilled workers likely to secure higher-paid jobs. But Zandi says the U.S. is experiencing “excruciatingly tight labor markets . . . across all skills,” and being more restrictive towards less-skilled workers “will not net out to meaningfully stronger growth.”
Other labor policies involve “work requirements for receiving social assistance,” which would affect Medicaid, Temporary Assistance for Needy Families, low-income rental assistance and the Supplemental Nutrition Assistance Program. Changes are already being rolled out through regulation and guidance, like allowing states to seek block grants and design their own benefits under Medicaid, and new food stamp rules that could make nearly 700,000 childless adults ineligible.
Fiscal policies include infrastructure spending and extending tax cuts that expire after 2025. While the tax cuts are a decision left for future Congresses, infrastructure is front and center: Trump wants $1 trillion over 10 years.
But there are no specifics on how to pay for that, if at all; raising taxes or cutting spending elsewhere could counter the economic dividends, and lawmakers are nowhere near consensus on a bipartisan plan that could pass. The administration separately wants to cut 2 percent each year from nondefense discretionary programs, which include transportation, education, research and development and other spending that supports longer-term growth.
Those cuts, as well as proposals to curb the growth of entitlements — from student loans to Medicare and Medicaid — also factor into the budget's economic forecasts. Reducing deficits can boost growth by alleviating the “crowding out” effect of government borrowing on private investment; lowering perceived risks in holding U.S. Treasury debt; and reducing the odds of big tax increases down the road.
Cutting budget deficits also reduces borrowing from abroad, which lowers the trade deficit by boosting national savings; lower trade deficits in turn bolster GDP growth in the Commerce Department’s calculations.
Not in the cards
However, a drastic reshaping of health care and other popular programs in an election year isn’t in the cards. Congressional leaders have already said they won’t adopt a budget this year, and Democratic leaders and presidential candidates have blasted Trump’s proposed cuts as cruel.
On trade, aside from building on the U.S.-China détente, the administration wants a post-Brexit accord with the United Kingdom, and separately with the EU. Zandi said a UK deal was plausible, though it wouldn’t have much impact since it would be “all about preserving the status quo” trading relationship. And an EU deal seems far-fetched at this point, with the U.S. and Europe still duking it out over aircraft and farm subsidies, digital taxes, auto imports and more.
New regulatory initiatives are one area where the executive branch can make headway without Congress.
Budget documents cite a few specifics: looser fuel economy standards for cars and light trucks; a new “waters of the United States” definition backed by farmers, home builders, oil companies and others that would remove Clean Water Act protections from certain streams and wetlands; and a unified federal approach to autonomous vehicle regulation.
“These bold actions will support job creation, spur innovation, and yield billions of dollars in benefits for American businesses and families,” budget documents say. But quantifiable benefits, if and when the changes are finalized and if they aren’t blocked in court, are highly uncertain.
Taming ‘animal spirits’
And there’s a wild card: the Federal Trade Commission’s Feb. 11 vote to investigate past acquisitions by Google’s parent Alphabet Inc., Amazon.com Inc., Apple Inc., Facebook Inc. and Microsoft Corp., signaling antitrust concerns.
Such a retroactive review could put a damper on the “animal spirits” and associated stock market records Trump takes credit for. With the five tech goliaths alone representing something like 17 percent of the market capitalization of all U.S. stocks, Zandi said if past acquisitions are unwound, the impact on business investment and stock values could be huge.
For now, however, Zandi sees Trump winning reelection based on the economy's performance and his approval ratings. Unless, that is, Democrats “turn out en masse, like in 2008” to vote him out of office. That, Zandi said, depends in part on whom the Democrats nominate to take Trump on.
And there’s no forecasting model right now that can predict the answer to that question.