Ideas Made to Matter
MIT Sloan experts map economy in year one of Trump presidency
During his first State of the Union, President Donald Trump emphasized shattered regulatory and stock market records, as well as “massive tax cuts” benefiting the middle class and small businesses.
While the first year of a presidency brings change across the board, Trump’s inaugural 12 months focused on the economy. We asked four MIT Sloan faculty experts to weigh in on the most important news for American businesses, unexpected reactions, and what might happen this year.
“I think in some sense everything was aligned to get tax reform done,” said Michelle Hanlon, professor of accounting. “It was kind of a perfect storm to get a tax package through: international pressure building, House Speaker Paul Ryan (R-Wis.) having worked on tax reform for years, a president who campaigned on lower tax rates, and Republicans had the votes.”
Tax reform was at the top of all four experts’ lists, though professor of finance Jonathan Parker said that on the individual side things stayed pretty much the same. The reform bill reduced marginal and average tax rates by about 2 percent (except for the very bottom of income distribution).
“This is a big change only in the sense that a large, unfunded tax cut is highly unusual when the economy is at full employment,” Parker said. “On the corporate side, the legislation was a much more significant reform. On the one hand, we moved toward a territorial system, which is in keeping with the taxation of corporate profits in most other countries in the world. There was also a large rate reduction … more in keeping with other developed countries."
Putting regulations “on a diet” was another major change highlighted by MIT Sloan experts.
“Whether it relates to oil exploration or Dodd-Frank regulations or labor laws or the Federal Communications Commission, we are witnessing a dramatic lowering of regulations that was holding back U.S. businesses,” said S. P. Kothari, professor of accounting and finance.
Visiting professor of finance Chester Spatt offered the Keystone XL pipeline as an example of streamlining existing regulations. The construction of the pipeline was held up for basically the entire previous administration, Spatt said, but Trump approved the project almost on day one.
“I think here the changes are to emphasize less additional regulation and emphasize more streamlining of existing regulations, and also at times not using regulatory barriers on certain types of actions,” Spatt said.
What has been the most surprising or interesting thing to happen to the economy under Trump?
I thought the dramatic nature of the market reaction was quite interesting. I think some of that reflected kind of what initial reactions were on election night. When it appeared Trump was going to be victorious the market had a big sell-off overnight, and I think that was sort of the conventional wisdom before the election. The market cares about how they perceive cash flows — I think ultimately they developed a relatively favorable view focusing on the regulatory and tax issues. — Spatt
I don’t think anyone expected the watershed changes to take place so quickly. The surprise is manifested in the stock market runup that has defied the most astute pundits. Most people didn’t quite know what to expect from the Trump administration — some thought he would be erratic in his policies that would spell disaster — including a trade war, nuclear war, and race war. In reality, the president has been Twitter happy, not trigger happy on all of these issues. — Kothari
Usually an incoming administration has thought about or maybe even mostly written many of the new legislation it intends to enact. This administration came in with outsiders, who had little experience or in some cases understanding of the economic and legal environment. It was also relatively slow to make appointments and so has also been low on personnel. Relative to the typical incoming administration, they haven't staffed many of their positions, they don't have a lot of experts. As a result they have had trouble getting things done, there has been a lot of inconsistency and policy uncertainty, and the administration has ceded a lot of power to Congress. — Parker
I think what was somewhat of a surprise was that the administration got tax reform done in 2017. I think most people thought something would happen in early 2018, but the fact they actually got it in in 2017 was quite a surprise. I think what they did for tax reform was to a large degree good. Any tax package is going to have its pluses and minuses. We needed to get the corporate rate down so that part was good. The provisions on carried interest should have been stronger. — Hanlon
What’s important to keep in mind going into the administration’s second year?
The changes I think so far have probably been pretty modest, but it's clear that a variety of issues are in play and are being studied. The Treasury itself issued a whole series of very detailed reports, trying to lay out what they see as some of the frictions in the market and some of the challenges in the regulatory area. I think most observers thought that these reports were pretty thoughtful and well organized. What gets implemented and what should be implemented — there’s still lots of debate on that. — Spatt
While the business climate and consumer confidence have never been more sunny, the dangers include inflation, because one, the economy is at full-employment level; two, effects of the tapering of quantitative easing are unknown — one theory is that the tapering could deflate prices just as it helped inflate those in the past eight years; and three, tax cuts are predicated on the economy expanding rapidly, but if that does not materialize we would have a gaping hole in the budget. — Kothari
The Consumer Financial Protection Bureau has been a major target of the new administration. It has significant independence from the administration (budgetary independence for example), but if the appointees are replaced with those more opposed to the mission of the agency, then there may be significant changes in the sorts of financial products and offers that financial institutions can offer, and reduced enforcement of current lending laws. — Parker
We’re going to have to watch what happens, meaning there’s always unintended consequences with any big regulation, especially tax reform. We’ll have to keep an eye on what companies do in response, and what other countries do in response. — Hanlon