US Politics: The Fiscal Accelerator

Published on May 6, 2016

Key Takeaways

  •  Whoever wins the White House this November, the US is likely to see a substantial pick up in fiscal spending under the new Administration.
  •  Trump likes to build “stuff,” with infrastructure projects his way to high paying jobs; Hillary is more measured, but pressing a $325 billion infrastructure building program.
  •  Senate and House “dealmakers” will push a legislative agenda embracing higher discretionary spending. The last hurrah of the fiscal hawks may come this summer.

A wild and utterly unpredictable, but always entertaining, US election year took yet another dramatic turn yesterday with the news that Paul Ryan, the Republican Speaker of the House, is resisting “for now” the magnetic pull to endorse the presidential quest of Donald Trump. Well, good luck on that.

But while Ryan’s dilemma matters inside his party, and the coming near-Herculean Republican efforts to reconcile Trump’s instinctive populist policy on the fly with Ryan’s envisioned “ideas-based” agenda will dominate the news cycle for a while, we think it far more interesting to take note of where the two presidential candidates and their parties most overlap and therefore what policies are most likely to emerge next year no matter who wins.

And on that front, our sense is that both Trump and Hillary will be hitting hard the “fiscal accelerator,” a major push in discretionary federal spending in the first years of their first term.

It will provide a badly needed and long overdue boost to US growth after years of the sequestered spending caps. And it will go a long way to taking some of the burden off the Federal Reserve and monetary policy in lifting US growth out of its current near stall speed new normal.

Trump Likes to Build Stuff, Hillary Likes to Plan Stuff

Some of Trump’s impulsive policy pronouncements may never see light of day. But then, that doesn’t really seem to hurt him, and indeed, is not really the point. A master media manipulator, he may be many things to many people, but one thing Donald Trump is not is a fiscal hawk.

A useful filter through the noise of the Trump campaign is that he will pursue every possible way to increase lower middle class incomes, and for the most part, a major push on infrastructure spending and investment is the only possible way to employ that target demographic. And building stuff, as Trump likes to say, is what he knows the most about, and the only way to fund such activity is a massive increase in non-defense discretionary spending.

Hillary Clinton, on the other hand, is taking a more measured approach, but she will very much end up in the same place as any good Democrat would.

In her campaign rhetoric, she takes pains to lay out what a Hillary Administration will undertake to rebuild the economy and to lift wages, always keeping an eye on plenty of funding for education and social spending programs that happen to neatly coincide with the base support of the Democratic party.

Above all, she wants to take bold actions and be seen as bold herself. She will need to spend to do so, and to spend heavily, nowhere more so than her proposed five year $275 billion infrastructure program. She also has a plan to spend $30 billion to retrain workers displaced due to declines in rural economies or who lost jobs in hard hit industries like manufacturing and mining.

As President, Hillary would raise federal spending by over $1 trillion, which she is likely to get, and seek to raise tax and other sources of revenues by roughly $1 trillion, which she is probably not going to get. But you get the picture.

Schumer’s Dealmaking Role

And importantly, and perhaps key to the success of either a Trump or Hillary Administration, they will find a new sense of dealmaking in Congress that will stand in stark contrast to the obstructionist, polarized politics of the Obama years.

Above all, the real power brokers to the fiscal push will be on Capitol Hill, not the White House, in House Speaker Ryan, and in Chuck Schumer, the probable next Senate Majority Leader.

Schumer, in fact, whether Majority Leader or a Minority Leader to a razor-thin Republican Majority, we think is still going to be the single most pivotal member of Congress, Democrat or Republican, in that he is transactional, and someone Ryan and his staff “can work with.”

If it is Trump, for instance, Schumer will help his fellow New Yorker, but will expect things in return. They will tend to see eye-to-eye on fiscal policy or policies to boost incomes, as long as they can fight against each other on other high profile social issues; a sort of political theater played by two master deal-makers.

And if it’s Hillary, while she is far more experienced in dealing with Congress than Trump, she is also more cautious, which is likely to play to Schumer’s advantage. He will help her, but will expect things in return, as he will with Trump, perhaps even more.

Last Hurrah of the Fiscal Hawks

One last point to the fiscal ambitions of the two presidential contenders and what we believe will be a new, more deal-making Zeitgeist on Capitol Hill next year is how the last hurrah of the mostly Republican fiscal hawks is likely to play out over the next few months.

Beyond the sound and thunder of the presidential campaigns, the Republican-controlled Congress still needs to write a budget for the fiscal year beginning October 1. To date it is being blocked in the House by the Republican conference’s Freedom Caucus, whose core of around 20 members is demanding deep cuts in non-defense discretionary spending, and they are threatening to force another government shutdown as an election-eve last stand of the Tea Party hardliners.

They are probably likely to be joined if not led in their crusade by Texas Senator Ted Cruz who, licking his wounds after his Trump thumping, may seek to refurbish his martyr status by leading a Pickett’s Charge against the House and Senate Appropriators with demands for spending cuts.

Speaker Ryan has been patiently working with the House dissidents to meet some of their demands part way in order to whittle down their numbers. But after next week’s Budget Resolution deadline, if the Freedom Caucus doesn’t come round, he is likely to press ahead without them or the Resolution and turn to a Continuing Resolution if he has to that would be passed before October 1 by turning to a handful of Democratic votes if that is what it takes.

The irony that the deficit hawks do not seem to grasp is that a CR will still be at the same higher baseline spending total of $1.030 trillion they are fighting so fiercely to defeat. Ideology and the battle itself, not budget numbers, are their real endgame.

But by next year, both their Caucus numbers and their ideological movement, will be largely swept away by the larger rebellion within the GOP in the rise of Trumpism, and by a Congress more in tune to the public demands for growth and better paying jobs. And those are largely going to come through what we strongly believe will be a fiscal acceleration that will be coming none too soon.

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