Before the 2016 presidential election, economic research group Moody’s Analytics released a detailed comparison of Hillary Clinton’s and Donald Trump’s economic platforms. The report concluded that both candidates could not be more different. The take away from Moody’s report was that Clinton’s economic plan would boost growth without dramatically increasing the national debt, while Donald Trump’s economic agenda would create enormous market volatility and likely lead to recession.
So far, that has not been the case. Since the election, stock prices have seen a record rally on Wall Street; businesses have continued to hire and the economy is nowhere near imploding.
VOA’s Mil Arcega interviewed Mark Zandi, chief economist at Moody’s, about the U.S. economy and his take on what financial experts predicted for Trump.
VOA: Aside from the brief, but sharp decline in financial markets immediately after Donald Trump’s stunning election victory, the U.S. economy seems to be firing on all cylinders. How do you explain that? Did Moody’s get it wrong?
ZANDI: No. That analysis we did back in the summer was — if Mr. Trump, then Mr. Trump got precisely what he wanted, the policy proposals that he had put forward, what would happen to the economy? And the answer is the economy would go into a deep recession.
What he wanted was 11 million undocumented workers to leave the country. What he wanted was a 45 percent tariff on China, 35 percent on Mexico. What he wanted was tax cuts and government spending increases that would increase the budget deficit by $10 trillion over 10 years … So if that is what he got — that would lead to a recession. That hasn’t changed.
Now as president, he’s not pursuing those policies that he put forward. So for example, he’s not talking about kicking 11 million undocumented workers out of the country. He has talked about tax reform and increased spending on the military and infrastructure; we haven’t seen a proposal yet, but no one is now talking about anything on the scale of what he proposed back in the summer. So, Mr. Trump as president is very different than Mr. Trump as candidate.
VOA: Since November, the U.S. stock market has seen one of the longest winning streaks in decades. Where is the optimism coming from?
ZANDI: Primarily two things. One is lower tax rates on corporations, so by lowering the top marginal rate from its current 35 percent to, house Republicans have a proposal that would put it to 20 percent — then, that’s a windfall for stock investors right?
It’s an immediate windfall for them. Businesses are just not paying nearly as much in taxes. And the other factor is less regulation. You know less regulation in the financial system, scaling back the so called Dodd-Frank regulations — that is a boon to financial institutions and that’s the part of the stock market where we’ve seen the biggest price gains. Less regulations on the energy sector … less oversight with regard to mergers and acquisitions so we see more M and A. So these are things that stock investors obviously really like and that’s what’s driven up stock prices.
VOA: Donald Trump says Dodd-Frank [Wall Street Reform and Consumer Protection Act] has been a disaster and makes it harder for businesses to borrow capital needed to expand. Will getting rid of the regulations in Dodd-Frank give businesses greater access to credit?
ZANDI: I don’t think scaling back Dodd-Frank is going to make credit more available … credit is widely available … just look at the data…so if you look at lending by banks to businesses, commercial and industrial lending, that’s been growing at a more than double-digit pace — where — for four or five years. Small businesses are getting lots of credit from the banking system, so credit’s not an issue … that’s not a problem, that’s not holding back investment and economic growth. So Dodd-Frank isn’t a problem here, it’s not an issue with regards to credit.
VOA: The argument is that eliminating banking regulations would make businesses more competitive, but proponents say repealing Dodd-Frank will make the U.S. economy susceptible to financial shocks. Who’s right?
ZANDI: There are things in Dodd-Frank that no one likes. I mean everyone would agree, those are pretty complex pieces of legislation and they didn’t get it completely right, so there are things, that everybody wants changed but the big stuff — no, that would not advance the ball. It would make us less safe, not more safe.
Dodd-Frank is a lot of stuff. The big stuff in Dodd-Frank, like higher capital positions for banks, that’s the cushion that banks have to hold against potential losses in the future … more liquidity, a resolution process for failing financial institutions, which is one of the key reasons why we had a financial crisis in the last go around, less regulatory oversight, scaling back of stress testing. These are very important things that are part of Dodd-Frank. If we take those away, yeah, the financial system will be more vulnerable; the odds that we experience another financial crisis will rise significantly.
If you take that away, yeah, the system’s going to be much less stable, much more prone to crises, and potentially another taxpayer bailout at some point in the future.
VOA: So one month into the Trump presidency, has your outlook for the U.S. economy changed?
ZANDI: No it has not. I mean I do think the odds of getting some fiscal stimulus, that is tax cuts and government spending increases that are deficit financed, that are not paid for are now much higher. And if you do that, you are going to get more growth temporarily … but you’re also going to get more inflation because the economy’s at full employment and higher interest rates and ultimately a weaker economy, so it’s going to be a more cyclical economy; a bigger up and a bigger down. That’s the only real change at this point that I’ve adopted.
You know corporate tax reform is a pretty good thing if you can pull it off and pay for it … but there are some things that are bad. Banning travel, immigration restrictions, making it tougher for skilled workers to come to the country, trade deals that are pulling back on trade, threatening higher tariffs, tweeting, brow-beating companies about their business — these are things that make long-term growth less likely to be strong. So net, net, my long-term growth outlook for the U.S. economy has not changed at this point. We’ll have to see.
VOA: Trump enjoys a Republican majority in Congress, but his position on trade and infrastructure spending is almost antithetical to the GOP’s brand of fiscal responsibility.
ZANDI: You would think, right? I mean that’s certainly been a mainstay of thinking, a big part of the Republican Party for a long time, so that would be a mind shift. Now you could make an argument that some of the things that are being proposed, again going back to corporate tax reform, which I think is a great idea, that may, all things being equal, raise growth, increase the size of the economy and help generate the tax revenues to help pay for the tax cuts but that only gets you so far. At some point you’re going to have to pay for it. And that’s of course why House Republicans in their corporate tax reform proposal are also talking about a border adjustment tax. … There’s a lot of good things about that, but the big thing, the most important thing from their perspective I think in getting corporate tax reform done is that it generates a lot of revenue.
VOA: Recessions are cyclical. The longest period of economic expansion was 10 years, which was back in the 1990s. Is the U.S. economy due for another recession soon?
ZANDI: Business cycles don’t have a set life. They vary and depend on lots of different things. You’re right; this is a long expansion already, closing in on 8 years old. I think the probability that we go into recession this year, and going into next year are still low, maybe one in five.
VOA: I want to ask you about something President Trump said to supporters last week, that as president he had “inherited a mess.” What are your thoughts on that?
ZANDI: I can’t talk to anything but the economy, I’ve got views, but for the economy? That’s just wrong, just patently wrong. I mean look, he inherited an economy with an unemployment rate of 4.7 percent. Four-point-seven percent, that’s a low unemployment rate by any standard. Even if you throw in folks that are more marginal to the labor force, you know, the part-timers who want more hours or people who stepped out of the workforce who say they would want a job, it’s low by historical standards.
We sold a record number of vehicles last year, house prices are at record highs. Stock prices even before the election were close to record highs, so no. Yes we have our problems, no doubt about that and yes, the benefits of the economy haven’t accrued to everyone. You know there is an income wealth distribution problem; it’s been in the making for 30 years and that’s still a problem, I’m not arguing about that and there’s still parts of the country where we have issues like if you go into coal country or parts of the manufacturing base that got hit, so it’s not roses for everybody, but to say that the economy is a mess is no, wrong.
VOA: Is there an economic cost to the political uncertainty involving the Trump administration just a month into his presidency?
ZANDI: Absolutely, Uncertainty is a real problem. I mean I think one of the reasons why investors were encouraged after the election was they felt like there would be less uncertainty right? I mean you have a Republican president, you have a Republican Senate and House, it looked like things were going to change, that this reduced the uncertainty with regard to policy and thus it assured investors. But here we are, a month into the new presidency, it doesn’t look like we’re making a whole lot of progress; now investors haven’t really reacted to that yet, but if we don’t get progress, if a month from now we’re talking and nothing’s happened, my guess is that investors will start to get nervous. Two months from now they’ll start selling their stocks and stocks will be down, not up.
VOA: Federal Reserve Chair Janet Yellen told lawmakers that she expects the central bank will raise interest rates three times in 2017. Is the U.S. economy ready for higher interest rates?
ZANDI: Yeah, it should be. I mean, we’re at full employment, 4.7 percent unemployment rate; we ticked up a little bit last month. Inflation’s pretty close to the Fed’s 2 percent target, financial markets fine, the global economy is stable. These are all the things the Fed looks at when trying to decide whether to normalize monetary policy. I think it’s time for the Fed to normalize. Of course, a lot matters, and this goes back to uncertainty, what the Trump administration and Congress ultimately do because that will determine what the Fed has to do, so the Fed is waiting to figure that out, but I think under most reasonable scenarios and given that the U.S. economy is on very solid ground, and it’d be pretty hard to derail it — I think they have to start normalizing and raising rates more quickly.
VOA: So what’s your projected outlook for the U.S. economy in 2017 and beyond?
ZANDI: Look, I think the economy is going to be more cyclical under Mr. Trump. More growth in the near term, less growth as you move toward the end of the decade because of the higher interest rates that will result from the fiscal stimulus.
I have not changed my long-term growth projections for the economy. I think he could get some things done that are good, like corporate tax reform, less regulation, but he also appears to be doing things that will be detrimental to the economy; less immigration, less trade, so net/net no change. But this is based on lots of assumptions, and we’re going to have to see how this plays out and it’s very, very uncertain. And the longer the uncertainty prevails, the less optimistic I will be.
VOA: If President Trump were to ask, what kind of advice would you give him?
ZANDI: Hey, I would say look: focus on corporate tax reform, figure that one out. Focus on targeted appropriate regulatory changes, not wholesale changes. Look, we need more immigrants, we need skilled immigration; we have a lack of labor in this country, our businesses’ biggest problem is going to be a lack of labor. And I would say let’s embrace the world on trade. Let’s not push them away. If we do those things, we’ll be good.