OFF TO THE RACES

Reality Intrudes on Trump’s Dream Palace

The markets are soaring on dicey hopes of health and tax reform, and much of the world is on the brink of political turmoil or worse.

Trader Peter Tuchman wears a "Dow 21,000" hat as he works on the floor of the New York Stock Exchange, Wednesday, March 1, 2017. Stocks opened strongly higher on Wall Street, led by big gains in banks as investors expected interest rates to rise. The early jump Wednesday put the Dow Jones industrial average above 21,000 points for the first time.
AP Photo/Richard Drew
Charlie Cook
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Charlie Cook
March 2, 2017, 8 p.m.

New York Fed Pres­id­ent Wil­li­am Dud­ley told CNN on Tues­day that “there’s no ques­tion that an­im­al spir­its have been un­leashed a bit post the elec­tion,” a ref­er­ence to a term that eco­nom­ist John Maynard Keynes coined to de­scribe people ex­hib­it­ing op­tim­ism—of­ten about the mar­kets—that is not ne­ces­sar­ily groun­ded in facts. Dud­ley’s use of the term is re­min­is­cent of then-Fed­er­al Re­serve Chair­man Alan Green­span us­ing “ir­ra­tion­al ex­uber­ance” two dec­ades ago to de­scribe stock-mar­ket be­ha­vi­or at the time, now re­membered as the tech bubble.

The stock mar­ket has been on fire since Don­ald Trump’s elec­tion. Pres­id­ent Trump’s well-re­ceived ad­dress to Con­gress on Tues­day night sent the Dow soar­ing above 21,000 for the first time, and pushed the S&P 500 in­dex to a re­cord level, over 2,300 and with­in sight of 2,500. The Con­fer­ence Board’s Con­sumer Con­fid­ence In­dex is at a 15-year high while the Uni­versity of Michigan’s Con­sumer Sen­ti­ment In­dex is just barely be­low the dec­ade peak hit in Janu­ary. The latest Na­tion­al Fed­er­a­tion of In­de­pend­ent Busi­ness sur­vey, which came out in the middle of Feb­ru­ary, shows small-busi­ness own­ers more op­tim­ist­ic than they’ve been since Decem­ber 2004.

In­vestors and small-busi­ness own­ers are fo­cused on their own ver­sion of hope and change—prom­ises by Trump of the biggest tax cuts in his­tory as part of a ma­jor re­form pack­age, a 10 per­cent in­crease in de­fense spend­ing, a tril­lion-dol­lar in­fra­struc­ture pro­gram, and re­lief from the reg­u­lat­ory bur­dens on busi­ness. Then there is the feel­ing that now that Re­pub­lic­ans are in charge, they will wave a ma­gic wand and bad parts of the Af­ford­able Care Act will go away, leav­ing only the good parts be­hind.

But is such un­di­luted op­tim­ism jus­ti­fied? The truth is that there are plenty of reas­ons to doubt that any of these hopes will be­come real­ity any­time soon. Moreover, there are oth­er threats in Wash­ing­ton and around the world that should give Amer­ic­ans cause for ser­i­ous con­cern. It would seem that there is a con­sid­er­able amount of se­lect­ive per­cep­tion tak­ing place, with people fo­cus­ing ex­clus­ively on the po­ten­tial for pos­it­ive de­vel­op­ments while stu­di­ously ig­nor­ing the risks that are equally sig­ni­fic­ant.

Treas­ury Sec­ret­ary Steve Mnuchin has pre­dicted that tax re­form will be done by Au­gust, but it’s highly un­likely that any­thing ap­proach­ing Trump’s pre­dic­tion of “his­tor­ic” tax re­form will be done by then or even this year. First keep in mind that the last ma­jor tax-re­form bill en­acted in­to law was in 1986, dur­ing Ron­ald Re­agan’s pres­id­ency, and in the four post-Re­agan ad­min­is­tra­tions, there have been nu­mer­ous pre­dic­tions of an­oth­er big re­form pack­age, but none have comes to pass.

Here’s a sober­ing fact, ac­cord­ing to the Tax Found­a­tion: The U.S. tax code has gone from few­er than 30,000 pages in 1986 to over 70,000 pages today. Tax re­form is really hard un­der the best of cir­cum­stances, and these are not the best of cir­cum­stances. The Re­pub­lic­an ma­jor­ity in the Sen­ate is just 52-48, the GOP ma­jor­ity in the House is not much big­ger, and the pres­id­ent and Treas­ury sec­ret­ary have no gov­ern­ment ex­per­i­ence. A corner­stone of the pack­age that Speak­er Paul Ry­an is push­ing is a Bor­der Ad­just­ment Tax, which would im­pose a 20 per­cent charge on im­ports and has even di­vided Re­pub­lic­ans. A new “Ox­iClean”-style in­fomer­cial aired this week by the Na­tion­al Re­tail Fed­er­a­tion is just a pre­view of com­ing at­trac­tions.

Then there is the broad­er ques­tion: How do you sub­stan­tially cut taxes while in­creas­ing de­fense spend­ing by about 10 per­cent to $54 bil­lion, build a bor­der wall, spend $1 tril­lion on in­fra­struc­ture, and leave So­cial Se­cur­ity or Medi­care un­touched? Does any­one think the State De­part­ment budget is really go­ing to be cut by 27 per­cent? In­fra­struc­ture up­grades are badly needed, but it’s pretty clear they will be pushed back be­hind health care and tax re­form. Trump’s dreams have broad ap­peal, but his math doesn’t add up.

While it is true that the reg­u­lat­ory bur­den is chok­ing our eco­nomy and only got worse over the past eight years, prun­ing reg­u­la­tions will re­quire hand-to-hand com­bat in the courts with pro­ponents of the rules. Amer­ica-first trade policies are apt to cause dis­putes of a mag­nitude we have not seen for dec­ades, and could well raise the prices that people pay for goods. Toss in re­peal­ing and re­pla­cing Obama­care and the need to raise the debt ceil­ing by Au­gust or Septem­ber, and it’s easy to see how Trump’s agenda could be sty­mied by le­gis­lat­ive grid­lock.

Then look around the world. To our west we see troubles with North Korea (think Sea of Ja­pan) and China (think man-made is­lands with mil­it­ary in­stall­a­tions in dis­puted areas of the South China Sea). If we look east, we see an ad­ven­ture­some Rus­sia, par­tic­u­larly in the Ukraine. Then there is Ir­an and the Middle East, and the po­ten­tial for prob­lems in Afgh­anistan, Ir­aq, In­dia, and Pakistan. And don’t for­get Tur­key.

Mean­while, ex­perts say the Dayton Peace Ac­cord is slowly com­ing apart with the po­ten­tial for prob­lems in Bos­nia, Ser­bia, Mace­do­nia, and Kosovo. On the Afric­an con­tin­ent there are prob­lems in Somalia, Ye­men, and Su­dan. Up­com­ing elec­tions in Europe are caus­ing con­cern, not just about the rise of ul­tra-na­tion­al­ism and ex­treme pop­u­lism but also about Rus­si­an in­ter­fer­ence. In less than two weeks we have elec­tions in the Neth­er­lands; the French vote in late April; Ir­an and Kenya go to the polls in May, and Italy may do the same this sum­mer. Of great im­port­ance is the Ger­man elec­tion in Septem­ber with Chan­cel­lor An­gela Merkel, the most im­port­ant lead­er in Europe, in danger of be­ing un­seated. Then there is the threat of ter­ror­ism. Do you think Trump prop­er­ties around the world are beef­ing up se­cur­ity?

So between the Wash­ing­ton policy front, where things are not nearly as rosy as they may ap­pear to Main Street or Wall Street, and a pleth­ora of trouble spots around the world that are keep­ing for­eign policy ex­perts awake at nights, it would be risky to bet that the an­im­al spir­its will be frol­ick­ing for long.

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