“It’s The Economy, Stupid”

Amidst all the political hysteria, gamesmanship, claims of chaos, in-fighting, and media counter-punching, Mr. Trump would be wise take to heart James Carville’s 1992 winning campaign slogan for Bill Clinton’s presidential run to defeat President George H. W. Bush – “it’s the economy, stupid.” Rather than insult, the phrase is intended to be an admonition not to underestimate the importance of the economy in every policy and political decision a president makes.

The economy is everything. A strong US economy supports a strong US military that has historically, (under proper leadership) filled the void that bad actors are all too eager to exploit. A strong economy reduces political turnover and institutionalizes effective polices, leading to better long term planning which further compounds economic growth and predictability.

A strong US economy improves job prospects and wages for the full spectrum of the US population and brings back into the labor pool millions of Americans who gave up looking for work during a decade of sub-par job creation. Incentives can be put in place to encourage domestic business to remain in the US and explore innovative ways of balancing the productivity-boosting promise of technology and robotics along with human capital to maximize US manufacturing competitiveness. New tax and trade policies that encourage domestic growth without devolving into trade wars will be key.

The liberal economic ideal of globalization has largely proven a failure for the working classes of the developed world. It allowed companies to move across borders unimpeded by taxes or tariffs to take advantage of cheaper labor and resources. Manufacturers took the easy road toward improving productivity, which was cheaper labor costs, but at the expense of the heart of our consumer-driven economy, the working middle class.

Bad US corporate tax policy further exacerbated the flight of American manufacturing. If Thailand, for instance, offers educated, skilled, and inexpensive labor, no corporate income tax, and if US tax law provides no penalties for the move, why not do so? It became the path of least resistance – to continue existing manufacturing processes while moving toward cheaper labor and friendly tax policies.

But two opposing sea-changes are going on today that will provide Mr. Trump and the GOP with one of their most significant challenges (bigger than repealing and replacing Obamacare). The first one propelled Mr. Trump into the White House and is threatening to similarly disrupt European political stability, and that is Populism. The working middle class, or the ‘silent majority’ has had enough and they are demanding change in the form of better jobs and wages, with increasing fervor throughout the developed world.

The other sea change, less discussed, will serve to hamper job and wage growth at home if the tenets of globalization are left largely in place. Coming technologies and robotics will be as disruptive to manufacturing processes and hiring as the Internet was to virtually every industry and product from the late 90’s to today. But, while the challenges will be huge, so are the opportunities.

As the discussion of tax and trade policy moves into center stage in the coming months, we will hear a lot about ‘border adjustment.’ The lobby against it is significant because it threatens immediate access to cheap goods (especially retailers) made possible by globalization.

Simply put, border adjustment is a corporate tax on goods coming in and a tax-break on goods leaving our country. It removes the incentive for companies to book profits or to headquarter outside the US for tax purposes.

Other countries use border adjustment in the form of what is known as value-added taxes VAT. These are indirect taxes charged by governments on imported goods (avoiding the nasty word tariff) at the consumer level. The US is the only major nation without a VAT.

Our current corporate tax rate is among the highest in the developed world at 35%. Trump and the Congress want to reduce it to between 15 and 20%. But paying for the cuts is a major concern for conservative Republicans, on principle and Democrats, for political reasons. Border adjustment will be the first of it’s kind and is expected to raise a trillion dollars in ten years, largely offsetting the cost of the tax cuts. Others are less concerned about direct offsets claiming that increased tax revenues from economic improvement will more than offset the initial reductions in revenues from the cuts.

But the second argument bypasses the need to arrest the detrimental effects of globalization replacing them with policies that encourage manufacturers to find innovative ways to domestically produce goods and services that balance technology with labor, while remaining globally competitive. It is encouraging that CEOs are signalling a willingness to comply if the tax code and regulatory burdens are sufficiently reformed.

Arguably, the most significant opportunity and challenge facing Mr. Trump and congressional Republicans is the long-term future of the US economy. Together, they have a once-in-a-lifetime opportunity to get this right; to effectively navigate us away from the detrimental effects on the middle class of globalization, bring home trillions in corporate cash to be invested in plant and equipment and jobs here, to remove unnecessary regulatory burdens that impede investment, fund and incentivize research, training, and cooperation between governmental agencies, universities and corporations, reform our corporate tax system, and design trade policy that reverses decades of erosion of middle-class lifestyle and American economic competitiveness. The forces of opposition, inertia and status quo are overwhelming, but if successful, an American economy growing at 3-5% will be the bedrock of the best domestic and foreign policy Republicans could ever hope for.