Ousted FBI Director James Comey’s dismissal likely will hinder President Donald Trump’s proposed tax overhaul and his broader economic stimulus agenda, according to analysts and economists.
While the focus in Washington is on the political fallout of Mr. Trump’s firing of Comey, there’s also an economic impact. Although the stock market’s reaction to the president’s action has so far been muted, any congressional gridlock that obstructs policies aimed at lifting the economy could well end up cooling the market’s ardor.
Stocks took off after Mr. Trump won election last November. On Wednesday, the day after the Comey ouster, the Standard & Poor’s 500 and the Nasdaq Composite both set records. Both were down slightly on Thursday, amid bad news in the retail sector, even as the hue and cry over Comey’s exit continued in Washington.
“Congress has a lot on its hands and very little time,” said Gregory Daco, chief U.S. economist at Oxford Economics. The upshot is “likely delays in the implementation of pro-growth measures,” which he believes won’t be enacted until early next year.
The abrupt nature of Comey’s dismissal, and the ensuing political firestorm, also risks eroding the confidence of investors who are banking on the White House to push through policies to bolster economic growth, such as tax cuts and infrastructure spending.
The firing “diminishes our confidence in the administration’s ability to tackle large, complex issues, like tax reform,” wrote Brian Gardner, Washington analyst for Keefe, Bruyette & Woods, in a note to investors. He described a “pattern in which the White House ricochets from controversy to controversy, does not lay the groundwork for major announcements and fails to coordinate with its political allies before making major political moves.”
As a result, the best that might result is a pared down version of tax reform, focused mainly on businesses. James Brockway, a partner at the New York-based Withers Bergman law firm, who specializes in taxation, forecasts that tax reform-lite will feature a reduction in the corporate rate to 25 percent from the current 35 percent and repatriation of U.S. corporate cash parked overseas, where rates are lower. (Mr. Trump wants to lower the corporate rate to 15 percent.)
But there won’t be tax cuts for individuals, Brockway said, predicting that “comprehensive tax reform won’t happen,” at least not soon. The legislative tug of war, complicated by legions of lobbyists and buckets of campaign contributions, tends to be more difficult for individual taxes than for corporate ones.
That’s because individuals vote. For instance, one omission from the Trump tax plan unveiled in April was continued deductions for state and local taxes.That ignited a firestorm of criticism from lawmakers representing the more populated states, which typically levy higher taxes.
Putting off the question of individual taxes could be tricky for Mr. Trump, who campaigned on a promise of a lighter tax load for people, not just businesses. The administration has proposed reducing the number of individuals’ tax brackets from seven to three and lowering tax rates across the board.
Even before Comey’s removal, expectations of a delay in tax reform were rife, mainly because the effort needed to repeal and replace Obamacare showed the difficulty of getting anything through a fractious Congress. Treasury Secretary Steven Mnuchin has said that getting tax reform passed by August, the administration’s initial target, was “highly aggressive to not realistic at this point.”
Indeed, the legislative dance card for the rest of the year is packed. The GOP health bill, which barely passed the House last week, faces a major rewrite in the Senate. The 2018 federal budget, Mr. Trump’s first full-year fiscal blueprint, comes up in the fall. So does the next deadline to raise the federal debt limit, in September.
Add in the friction surrounding the ongoing investigations over possible Russian attempts to affect the 2016 U.S. presidential election — which two congressional committees, plus the FBI, are investigating. Democrats insist Comey’s defenestration was linked to that, although the White House says it was for other reasons.
Here’s how a delay in Mr. Trump’s economic agenda could play out:
Capital markets. Currently, the markets are quiet in the face of the Comey controversy. Aside from mostly flat stock exchange activity, the traditional refuges of Treasury bonds and gold have seen no huge influxes of buyers.
In 2017, the economic situation is solid, if uninspiring. To Greg Valliere, chief global strategist at Horizon Investments, the saving grace nowadays is that “moderate [economic] growth, low inflation, tolerable interest rates, good corporate earnings will persist.”
But what happens if Capitol Hill stalemates drag on? Ian Bremmer, president of the Eurasia Group, a political risk consulting firm, told National Public Radio that financial markets won’t be disrupted by the immediate political brouhaha. Bourses fall, he said, “either when they’re already looking for bad news because the economy’s heading south, or because there’s something direct and immediate that’s going to have a market impact,” such as a war.
Still, large political disruptions sometimes don’t play out immediately in investments. Look at the “Saturday Night Massacre” of October 1973 (an episode some see as paralleling the Comey incident): President Richard Nixon ordered the firing of the Watergate special prosecutor, Archibald Cox, who was investigating the White House. The next Monday, the S&P 500 fell only about 1 percent.
By year-end, however, it was off 11 percent. Of course, the comparison between then and now is strained: This period also marked the onset of the Arab oil embargo, which touched off a wicked recession and led the market to a decline of over 40 percent in the ensuing year.
By the same token, the present bull market and the economic expansion are eight years old, and may be due for a downturn. The 0.7 percent annual economic growth rate for this year’s first quarter is far below the 2.5 percent tempo during President Barack Obama’s last three months in power, not to mention way down from Mr. Trump’s goal of at least 3 percent growth for the year.
In the meantime, lawyer Brockway said, “Markets are on hold until something happens.” Since late April, when troubles passing a new health law suggested Mr. Trump’s legislative agenda will face an uphill road, market advances have been meager.
Corporate America. Failure to pass a tax bill, even a scaled down version of the White House plan, would bring much disappointment to corner offices throughout the land. During the almost four months of his tenure, President Trump has hosted a parade of CEOs at the White House, with executives expressing enthusiasm about his objective to make the U.S. more business-friendly.
What the president has done so far amounts to a down payment, because he can take some steps unilaterally, by executive order. Mr. Trump has made several moves to lighten the regulatory burden on business, inviting derision from Democrats but applause from the corporate sector. He also has backed away from some of his more extreme campaign rhetoric, such as his stated intention to, in effect, declare a trade war with China and scrap the North American Free Trade Agreement — prospects that made the business elite nervous.
Mr. Trump says the U.S. corporate rate is the highest in the industrialized world, and thus makes the nation less competitive in international trade. While most U.S. companies pay much less than the 35 percent statutory rate and some pay nothing, thanks to clever use of loopholes, the need to pay big fees to accountants and lawyers to achieve that is not the picture of economic efficiency.
Changing the tax code, though, requires Congress to go along. As they wait, Brockway said, CEOs “will hold back on making decisions” about some big spending initiatives.
The economy. And certainly, business decisions will affect how, or whether, the economy continues to grow. Since the end of the Great Recession in 2009 gross domestic product growth has hovered around only 2 percent annually. At the same time, productivity improvement is tepid, and no small part of that owes to muted business capital spending outlays.
The outlook is mixed for how Americans will behave economically, a key issue given that almost three-quarters of the economy is from consumer spending. Although consumer sentiment is high and unemployment, now 4.4 percent, is at its lowest point in nearly a decade, personal consumption expenditures increased a mere 0.3 percent in the year’s first quarter, the slowest pace since 2009.
A dramatic tax cut probably would bring a burst of household spending, as more money would be in the public’s pockets. But the absence of a tax reduction would deprive consumers of that adrenaline shot.
And if Mr. Trump expends political capital on feuds over Comey or other sore points, his agenda would be in trouble on Capitol Hill. The prospects of that happening are growing.
The Trump presidency is in a hole, Valliere reckons. As he put it, “There’s the smell of blood in the water, as the press scrambles for the next bombshell and Trump’s political allies abandon him. The specter of a presidency in trouble is not a good story for the markets — or the country.”
Frontpage February 21, 2020