What we can expect from our economy in 2017

The 2016 election cycle sent both Democrats and Republicans into disarray. The political landscape in the U.S. has been thrown into a new configuration, and as goes politics, so goes our economy. As I have said before, “Economics may be the dismal science, but it all comes down to the study of human behavior.”    

The fact is Donald Trump has become our country’s first independent president. He was elected by voters from both parties, and what we can surely expect for the next several years is the unexpected. As a non-politician and non-Washington insider, a Trump administration has an opportunity to change the course of economic growth by running the country more like a business. But the question remains: Can the federal government be run like a business? Is it reasonable to expect that an organization whose purpose is to provide for our defense, oversee issuance of our sovereign debt, regulate trade, and provide a safety net for those unable to do for themselves will be able stand the test of a business person’s approach to decision-making?

So let’s examine how our next president, along with a willing Congress, might influence both our national and local economies. Clearly, a Trump administration will move quickly to pass massive tax reforms. In the tax simplification plan, the number of tax brackets will be cut from seven to three, with the top rate being reduced from 40 percent to 33 percent. As you can imagine, as this compression of brackets occurs some taxpayers will shift into lower tax brackets and some into higher brackets. According to Trump advisers, the equity in this idea comes from the fact that “many” current deductions and loopholes will be eliminated. Surely the “carried interest” deduction is gone for the highest earners, but it is also likely the mortgage interest and charitable deductions will be reduced or eliminated as well. The argument that lower taxes will stimulate the economy and result in a revenue-neutral budget will only partially carry the day with the most conservative members of Congress.

A much bigger deal will be made in the area of corporate tax reform, where the top rate could be cut to as little as 20 percent and a tax on consumption would offset to lost revenues. Under this plan, corporations would be able to immediately write off capital expenditures instead of being depreciated over many years. Additionally, interest on corporate debt would not be deductible, and corporate revenues would be “border-adjusted.” This means that goods and services produced domestically and sold elsewhere would not be taxed, thus creating more U.S.-based businesses and jobs. The end result, it is argued, is that American corporations would return jobs and the accompanying taxes from offshore. It seems logical, but remember that there is nothing sadder than a theory slain by fact.

The second thing a Trump administration is likely to do is to begin the process of implementing pro-business policies. Not only are these new policies going to remove constraints from existing businesses, but they will help with the creation of new businesses. The impact of reversing executive orders on regulatory impediments will have an immediate impact. The reversal of the new Department of Labor rules on overtime pay will have positive monetary and reporting effects. Loosened constraints should allow bankers, particularly community bankers, to make “good” loans to small businesses that wouldn’t have been possible under the old rules. Further, these new pro-business policies will help reduce the trade deficits through renegotiated trade agreements, resulting in increased national savings and freeing up resources for capital investment.

While many of the “first” moves by the Trump administration will have an inflationary effect, it should be small by historical standards and move consumer sentiment from thinking about deflation to thinking about GDP increasing from 3.5 percent to the 4 percent range. We are already seeing the positive impacts as consumer confidence in November rose to 107.1 from October’s 98.6. And this is all good news for Hilton Head Island and Beaufort County, as our local economy depends upon folks in other parts of the nation feeling confident and willing to spend money on vacations.

Elihu Spencer is a local amateur economist with a long business history in global finance. His life work has been centered on understanding credit cycles and their impact on local economies. The information contained in this article has been obtained from sources considered reliable but the accuracy cannot be guaranteed.