We must brace ourselves for some serious economic changes in America.
For the first time since 2006, the Republicans control the presidency, the Senate and the House of Representatives. There is almost no limit on executive authority in this situation and the primary constraint on legislation is the extent to which Donald Trump and congressional Republicans disagree. For some GOP priorities, it will be necessary to get 60 votes in the Senate, but this seems unlikely to stop much: If necessary, the Republicans in the Senate can change the filibuster rules so that Democrats have less power to object to legislation.
However, President-elect Trump and the influential House Republicans do not see eye-to-eye on some big issues. So what exactly should we expect to see in terms of domestic economic and financial policies?
First, we can expect an enormous tax cut that will be tilted towards people at the upper end of the income distribution. On this point, President-elect Trump and the House leadership are in complete agreement. Some version of this Trump plan will pass without much difficulty.
This means America will see a large increase in the deficit and the national debt (see these projections for details). Republicans will justify this plan with the assumption that tax cuts for the wealthy will produce a higher rate of economic growth. This assumption, which was also made by the George W. Bush administration when it put tax cuts in place in the early 2000s, will again prove unrealistic.
Second, President-elect Trump will want more federal government spending, including to build his wall with Mexico and also for infrastructure and other initiatives (including military-related ones). House Republicans will be less enthusiastic, but this spending will also likely pass without too much difficulty. This will further increase the budget deficit and the national debt. The effect that this will have long term on economic growth and the number of well-paying jobs remains to be seen.
Third, House Republicans have cued up a large wish list on financial deregulation, which includes plans to remove nearly all of the safeguards that were put in place after the financial crisis of 2008. Mr. Trump will likely embrace this with enthusiasm.
The political rhetoric around this mix will sound a lot like what we heard when George W. Bush was elected in 2000. The policies will be justified with extremely optimistic projections — and the Congressional Budget Office’s independent thinking will come under great pressure from ideologues in Congress.
The Trump agenda does not end here. It is also likely to include initiatives effectively rolling back the coverage provided by the Affordable Care Act (Obamacare), as well as further restrictions on legal immigration and efforts to deport immigrants that already reside in the United States. Trump, through executive action, will likely lead the way on these issues.
Some elements of his policy agenda will take a little longer. The Federal Reserve Board of Governors — and the Federal Reserve System — will be brought more directly under Washington’s political control. The Trump presidency will likely mark the end of the Fed’s independence. In the short term, this will keep monetary policy on the easy side (i.e., low interest rates). But we can expect significant inflation in the future, as well as monetary policy geared to ensure the reelection of politicians.
The independent financial regulatory agencies that keep an eye on Wall Street will also succumb to political pressure, either through budget cuts, changes in the personnel in charge, or both. The Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) will all see changes that move us toward more financial deregulation. In the short-run, this will mean more credit on easier terms, at least for large financial firms. But over a longer period of time, we are likely to experience another serious financial crisis with global implications.
All in all, we should expect Trump’s economic agenda to double down on the policies put in place under George W. Bush: Big tax cuts, runaway spending and financial deregulation. At best, most Americans will see their incomes stagnate. But we will also likely see a severe recession and financial crash of some variety during the coming years. In sum, the American middle class will be crushed.