As the dust settles, we all start to ask: “but can he really do it?” And I don’t mean can he really get congress to sign off on stimulus, or can he really downgrade the wall to a fence. The key to knowing whether the economic optimism of the past week is justified is whether or not Trump will succeed in truly and durably lifting the productivity of the American workforce. Personally, and this may come as a surprise for frequent readers, I am quite optimistic. But make no mistake; doing so will be hard.
As we discussed in The Touchstone of Fiscal Stimulus, changes in productivity will be the ultimate test for success or failure of stimulus in the long run. Obviously Trump wants infrastructure spending – this policy has occupied an outsize amount of bandwidth in the last week – and obviously he wants it big. So, on the one hand, the productivity question is a simple one: will the act of constructing new roads, bridges, airports, power plants, and physical technology like high capacity internet actually lead to increased output per hour of work? There is reason to be optimistic about this, particularly if Trump has to work hard at targeting these policies in order to get them past his more conservative congressional counterparts. I really dislike tax cuts as fiscal stimulus because they don’t target productivity enhancements, but by contrast, thoughtfully engaging our talented builders and engineers to create physical structures and technology which intelligently increase the efficiency of our economy can be a compelling selling point for congress (and the American people). If the ideas are novel enough and convincingly pro-growth, congress should pass it. The thing is, I could make the same argument if Hillary had won, but I’m actually more optimistic about productivity gains under Trump. Here’s why.
The American electorate sent a powerful message in electing Trump, specifically that the policies which have brought the country to this point in the post-crisis years have not sufficiently helped the American workforce at large. We suspected that the mix of job creation in the post-crisis recovery might have contributed to a loss of productivity growth, and the election result reinforces the case. In short, the result is a mandate to migrate the massive monetary policy experiment to something new. Perhaps that means a fiscal experiment, with jumbo-sized stimulus taking new forms, and at an uncomfortably late point in the business cycle with uncomfortably high debt levels. And perhaps this government expenditure evolves into a reformation of our domestic economy, with laser-like focus on boosting the real output of a growing majority of our workforce. I have confidence that Trump can build consensus around this goal, because the signal for the country as a whole from his electoral results in Wisconsin, Michigan, and Pennsylvania is clear: our energetic and skillful workforce feels underutilized, and they may be worried about getting “rusty.”
I have faith that voters in aggregate understand that tariffs, quotas, and subsidies are not likely to bring large scale manufacturing jobs back to America. Not when foreign wages are still a mere fraction of what Americans would need to be paid to durably lift their productivity. Re-shoring of manufacturing, mining, and other lost industrial employment is already occurring but it’s going to highly automated production, which obviously does not result in large scale job creation. (See: Resisting a New Manifest Destiny) The industrial vote was less about rhetoric and more about endorsing the candidate whose empathy with their plight seemed most informed.
Now comes the hard part. If these campaign stances were in fact more of a communication tool for Trump to express his empathy with the plight of the electorate, now he needs some real policies. Every American citizen awakens each morning with a certain amount of energy – energy which can and wants to be used to further our collective prosperity. Underutilization of this energy got us where we are now. The term of art for “big ideas which can fix this” is “Structural Reforms,” but frequently we don’t give specifics. Now we need specifics and sustainable economic growth is on the line.
Trump has advocated for significant increases in military spending, and this seems like a good starting point, because military expenditure is large-scale, and importantly demands a broad array of different skilled occupations. Bolstering our military infrastructure will require high tech training of our workforce, which clearly helps knock the rust off, and such training and job experience will conceivably have civilian applications once the stimulus abates. Durable productivity enhancement may result.
In a completely different vein, the country has vast dependent care needs, for both the young and our seniors. By extension, there is enormous potential gain in efficiently meeting these needs. To the extent the productivity burdens of dependent care could be lessened through structural reforms which universalize compassionate high quality child- and elder-care, productivity (and usage of that daily dose of human energy) of the economy as a whole goes up. I don’t mean lip service and modest tax credit handouts either – I mean literally taking care of children whenever they’re outside of school during working hours.
If – IF – productivity growth returns, as a result of a fiscal stimulus/structural reforms experiment, which is ironically a mix of classically progressive and conservative economic agendas, then paying for it gets easier. Tax policy can be streamlined, but revenue collection can start to go up. Raising revenue is a recipe for a recession at the moment, but, after all, tax rates (particularly for the Trump voter) used to be higher when the economy was in a structurally stronger place.
If this all seems fanciful to you at this point, and that market moves post-election appear to be built on a mountain of serious optimism in the face of a laundry list of related and unrelated risks, you’re right. But for the first time in a period of years, there is a plausible pathway to escape what is holding the economy back. Some optimism is warranted, and only some is in the price.
Click here to read what stimulus means for markets and how we’re positioning portfolios.