When President Trump was elected, Paul Krugman wrote, “[I]f the question is when the markets will recover, a first-pass answer is never.”
Still, despite Trump’s critics on tax policy and Chinese tariffs and to the surprise of many in the establishment, the markets are doing just fine. Several days ago, the Dow Jones Index gained its 10,000th point since Trump was elected.
That index, which is made up of a handful of larger U.S. companies, is now over 28,000 points. A more accurate measure of market performance, the S&P 500 Index, is up more than 45 percent since Trump’s election Nov. 8, 2016.
Trump Was Right to Cut Corporate Tax Rates
Clearly, Krugman was wrong. One reason is that the Trump administration oversaw a tax reform package that cut U.S. corporate tax rates from 35 percent to 21 percent. Democrats smear Trump for cutting taxes to corporations, but during the Obama administration, there was bipartisan agreement that the U.S. corporate tax was too high — it’s just that nobody did anything about it.
The 35 percent rate, not even counting the extra taxes states tack on, was extremely uncompetitive internationally, including compared to France (about 30 percent), the United Kingdom (about 20 percent), and South Korea’s 22 percent tax at the time. Because of the higher tax in America, companies such as Medtronic took off to Ireland, which had a corporate tax rate of 12.5 percent.
Worse, the corporate tax was extremely unfair to companies that did all their business in America. The corporate tax of 35 percent was applied globally, but companies only owed the tax if they moved their cash to America. So companies with huge multinational operations used accounting tricks to book profits in foreign countries such as low-tax Ireland, while booking losses and other tax benefits in the United States. This needlessly cost the United States tax revenue.
Companies like General Electric paid next-to-nothing for years, while companies like UPS — which does most of its business in the United States — paid the full 35 percent.
Trump’s corporate tax reform didn’t fix all of this disparity, but it fixed much of it. And because the tax on the global profits of U.S. companies was repealed, companies now have a big incentive to move to the United States $1 trillion and counting that had been sitting overseas. Most important, tax reform increased the return on capital of money invested in America, which should lead to more production and investment in the United States over time.
Tariffs Aren’t Going as Badly as Predicted
Others predicted market doom because of Trump’s tariffs. As outlined before, the global economy has been slowing down since early 2018 due to Chinese stimuli running out, not because of the trade war. That doesn’t mean tariffs are benign, but the effects have been milder than many establishmentarians predicted.
In fact, prices of imports into the United States have gone down, not up. The only place tariffs have gone up is in the capital expenditure (business investment) data, yet even here, it is hard to distinguish the effects of the tariffs versus the results of other factors, including global slowdown that began before the trade war started.
Just as trade tensions with China were starting, many anti-Trump pundits even predicted China would fare better than the United States in a trade war because the United States buys so many Chinese goods. But U.S. stocks have outperformed Chinese stocks since the trade war began.
It turns out buyers possess much more leverage than sellers. This is especially true when buyers are purchasing consumer goods and widgets that can mostly be made domestically or somewhere else.
There is even the possibility, based on the idea of multinationals having too much single-buyer control over the market, that a reshoring of U.S. supply chains would increase American employment and wages, and may increase America’s relative stock market outperformance compared to the rest of the world.
Pump the Brakes on Quantitative Easing Already
But a little cold water is in order. During Trump’s election campaign in 2016, he accused the Federal Reserve of pumping money into the market to help President Barack Obama and called the stock market “a bubble.” Right or wrong, Trump has been cajoling the Fed to do the exact same thing today — though some would argue circumstances are different because of the slope of the yield curve.
Quantitative easing (QE) is printing money to buy treasuries or other assets, which is essentially artificial credit creation. At the peak of the third round of QE, or QE3, the Fed had a balance sheet of $4.5 trillion. That’s what Trump was referencing during the election. The Fed had been planning to reduce the size of its balance sheet — treasuries and mortgage-backed securities built up in the years following the global financial crisis — starting in 2018.
That reduction plan lasted only a few months and was scrapped after global stock markets fell by about 20 percent in late 2018. Now, the Fed is once again injecting liquidity into the market. Even though this isn’t necessarily full-on QE, many investors view it as such, and the Fed’s balance sheet is once again above $4 trillion.
The reasons for the Fed’s latest injections are complicated and beyond the scope here, but constantly pumping money into the market isn’t a good thing and risks sowing the seeds for the next downturn.
Next, much of the recent move higher in U.S. equity indexes has been due to hopes of a “Phase 1” trade deal with China. The two sides seem close to something, but as Helen Raleigh has noted, there’s a huge lack of detail about what this deal contains. Plus, given that many of the global problems aren’t due to the trade war, investors may not be seeing the forest for the trees.
China is still in a slowdown, and so is much of Europe. The global economy could face trouble in 2020 if these two slowdowns continue. Plus, some are projecting U.S. corporate earnings could be weak, too. That doesn’t necessarily mean calamity, but it does mean Republicans, especially conservatives, shouldn’t hang their hats on the stock market.
Don’t Live and Die by the Stock Market
But there’s another reason not to get too excited. Measured in 12-month intervals beginning at the end-of-November market close, Obama’s eight years (Nov. 28, 2008-Nov. 30, 2016) saw an annual S&P 500 Index price return of 12.19 percent. Trump’s three years (Nov. 30, 2017-Nov. 29, 2019) have seen an annual S&P 500 Index price return of 12.82 percent.
That’s why conservatives shouldn’t live and die by the stock market. Conservatism doesn’t fail if the stock market drops, just like your kid isn’t a failure if he spills his orange juice.
Does that mean Trump’s presidency is only about half a percentage point better than Obama’s for the economy? Not at all. As Pete Buttigieg just said, “Where I live, people don’t measure the economy by the stock market.” On this at least, he’s exactly right. Under Trump, wages for the lowest-tier workers are rising faster than under Obama, and wages for nonsupervisory workers are finally rising faster than managerial and professionals’ wages.
But here, too, there’s a risk these wage increases are due to late-cycle tightness in the labor market, which — as firms eventually try to cut costs by shedding inventory and labor — can lead to economic slowdown, not increased consumer growth. That doesn’t mean it is happening now, but only time will tell whether the wage gains we are experiencing are sustainable.
In other words, conservatives shouldn’t live and die by the economy either. The stock market and wages especially, are important means to an end. That end is strong families, healthy communities, and a world-beating country. Business cycles come and go. Hopefully the same won’t be said about our families, communities, and country.
Willis L. Krumholz is a fellow at Defense Priorities. He holds a JD and MBA degree from the University of St. Thomas, and works in the financial services industry. The views expressed are those of the author only. You can follow Willis on Twitter @WillKrumholz.
Author: Willis L. Krumholz