Playing Guts Ball: Be careful what you wish for

As we have watched President Trump operate in the first few weeks of his Administration I am struck by several things, first, as Dan Bale points out in the Washington Post, “he might be rare among politicians, one who is prepared to keep his promises and who knows that an immediate and all-out assault on the status quo might be needed to get things moving.”

Second, as he has declared war with the press and they with him we must discount many of the most dire media headlines because, in truth, we’ve heard it all before and a lot of it is just hype to sell papers or air time.

Let me share with you some quotes. “…Executive aggrandizement is not safe for democracy.” (Des Moines Register) “…The President’s scheme would end the American state as it has existed throughout the long years of its life.” (New York Herald Tribune) “A former president of the American Bar Association labeled the …plan a shortcut to dictatorship.” Finally, in an open letter to Congress a former member of the opposing party writes, “The duty of Congress now … is to keep the President from destroying democracy and setting up personal government in its place.”

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You’ve seen or heard commentary very much like this regarding President Trump already. Except that my quotes are from 1937 and they were written with regard to Franklin D. Roosevelt. My point being that our analysis of events, actions and risks needs to come from the center, not the left or right because those views tend to have a bias that hasn’t changed in 100 years or more.

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So, make no mistake as a staff writer at Vox notes, “Trump’s departure from the decades-long bipartisan consensus was politically brilliant. His promise to put America first resonated with tens of millions of Americans who know that agreements like NAFTA have caused job losses in the US.”

So, today as we talk about trade and taxes and their potential impact on future elections let’s recognize that the President and his team are smart. They would not have gotten to where they are if they were not. But, trade and taxes will require every bit of the team’s intellect to get it right because depending upon how all of that plays out two more states in addition to the ones we noted in the last issue will be in play over these issues.

Those states are Florida and Minnesota. President Trump won Florida by 113,000 votes a margin of 1.2%. He won Minnesota by 45,000 votes or 1.6%.

It would not take much to swing the election in either state. Indeed, as reported on Minnesota Public Radio, “Minnesota farmers … count on billions of dollars in exports to overseas markets — especially to China (where) exports have exploded the last 10 or 15 years. If Trump really goes after China, the likely retaliation could hurt U.S. farmers. Now, they’re waiting to see what the Trump administration actually does.”

Minnesota is the 4th largest food and agricultural exporter in the United States and that industry is the largest single industry in Minnesota with 75,000 farms and more than enough votes to sway the 2020 election in that state.

During the campaign President Trump said, “I’m going to tell our NAFTA partners that I intend to immediately renegotiate the terms of that agreement to get a better deal for our workers. If they do not agree to a renegotiation, then I will submit notice … that America intends to withdraw from the deal.”

We have already seen the earliest skirmishing in what will likely be a long and drawn out affair. The President’s intent to build the wall with Mexico and who will pay for it caused the Mexican President to cancel his proposed early trip to visit with President Trump. I predict that there will be much more of this to come. President Trump does have a caustic side to his personality and that will get in the way of international negotiations.

Mexico is the third largest trading partner of the United States and the second largest for the state of Minnesota. While the President wants to bring jobs back to America, that’s unlikely to happen in Minnesota. The current unemployment rate is 3.7%; essentially full employment.

More to the point however, is that while certain portions of, “… American manufacturing was significantly hurt by NAFTA, Minnesota … is less reliant on those kinds of jobs than other states, and is a national leader in manufacturing of goods like medical technology and electrical equipment — products that require highly skilled workers ….” (Minneapolis Post)

The problem for the President is that while the America First theme worked on the campaign trail, trade is a very complex issue with a lot of moving parts. Paul Vaaler, an associate professor for both the University of Minnesota’s law and business schools, believes, “Trump’s plan to redraw NAFTA carries a potentially negative impact for Minnesota businesses, in particular.” If that were to happen, both sides would suffer.”

That view is echoed by Cosette Creamer, a political science professor at the University of Minnesota, “In terms of Minnesota alone, we’re the 16th largest exporter in the U.S. That’s a large number of jobs that are supported through exports of goods and services abroad, and it would potentially be the industry hit the hardest.”

So, there is real risk to the electoral map if NAFTA is renegotiated. While the U.S. may get ‘a better deal’ it is highly likely that the Mexicans will exact some price for that which would affect U.S. exports and in that event Minnesota stands to be hurt.

But, the President likes to play ‘guts ball’ if you will and he also said on the campaign trail, “I am going to instruct the U.S. Trade Representative to bring trade cases against China, both in this country and at the WTO. If China does not stop its illegal activities, including its theft of American trade secrets, I will use every lawful presidential power to remedy trade disputes, including the application of tariffs….” (Real Clear Politics, June 28, 2016) He went on to also say, “I am going to instruct my Treasury Secretary to label China a currency manipulator.”

Given that the President is moving on many of his other campaign promises we must assume that he will move in some way against the Chinese as well. When he does he will be, in effect, opening a two front trade war with both the Mexicans and the Chinese. Winter Nie writing in Fortune Magazine with regard to the China trade said that, “If Trump were to impose the 35% to 45% tariffs that he talked about in his campaign, the situation could evolve quickly into a total rupture. What is certain is that a complete rupture would hurt American companies and China as well, though America will likely be the bigger loser.”

“The danger is in thinking that talking tough to China will produce positive results. It won’t. From Beijing’s perspective, international trade takes a second seat to internal politics. Chinese President Xi Jinping’s top priority is to maintain political stability. He cannot lose face … and hope to retain power at home. He especially cannot deal with an American president who the Chinese feel fails to show proper respect for China itself. And … he really doesn’t have to … mainly because the U.S. needs China more than vice versa. Twenty years ago, the situation might have been different.. China has most of what it needs now, and what it doesn’t have it can easily obtain from vendors outside the U.S. Although a good deal of American high tech equipment is manufactured in China, the lion’s share of the profits go to the American companies that designed the equipment. If that were to stop, American companies would be hurt more than Chinese manufacturers.”

So, the President is walking a very fine line with his efforts on trade. Importantly, even if the President is successful in his trade negotiations and brings jobs home to the U.S. prices for all of us are going to go up because wages in the U.S. are materially higher than in Mexico or China, which is why they got the factories in the first place.

Hence, we should be careful what we wish for. But, the problem for the President is that there is not a clean winning hand. He can change the NAFTA agreement and still lose Minnesota. He can be aggressive with the Chinese but it may result in materially higher prices for goods here at home.

The President is also intent on playing guts ball with regard to the issue of taxes. Everyone, of course, favors lower taxes but on CNBC a Goldman Sachs official, “pointed out that potential GOP tax cuts would produce an even larger budget deficit, even if increased investment modestly offsets the impact on tax revenues….as a result, eventually other taxes would have to be raised or government expenditures cut.”

Thus, we turn to Florida where the National election results have been incredibly close for the past number of elections. It might seem odd to you to make Florida the epicenter of the tax battle but I believe it is for reasons that beyond the fact that it is a swing state.

The bet the President is making is two fold. First, that the economy will grow fast enough to produce additional revenues that will offset the reduction in the tax rate. Second, that companies will use the reduction in taxes to grow their businesses. But, many economists and many in Congress have not bought into that. The Washington Post noted that, “The alarm and anxiety within the Republican Party’s congressional wing toward its own president are remarkable…among Mr. Trump’s most outspoken intraparty critics, the warnings of resistance are unambiguous.”

In truth Florida represents the highest stakes of all for the Republican Party because of the large number of electoral college votes it has. The Post suggests that, “Mr. Trump’s vision will inevitably collide with establishment Republican leaders in Congress and the outcome could determine not just the success of his presidency but also the identity of the party.” That’s one of those over the top newspaper lines to sell papers.

But, On Fox news David Stockman, a Reagan era veteran, “warned that a Trump fiscal bloodbath is fast approaching, not a fiscal stimulus.”

Which brings us dead center to taxes, Medicare and Florida. If Republicans are intent on managing the Nation’s long-term debt levels and lowering taxes at the same time, they cannot do that without reigning in the costs of Medicare. Both Paul Ryan and Congressman Tom Price want to do that. They, according to the Detroit Free Press, “are among Republican leaders in the U.S. House who support legislation to privatize Medicare by converting it to a ‘premium support’ (tax vouchers) system.”

But when the Congressional Budget Office looked at this proposal in 2011 it said, “that turning Medicare over to private insurance plans would result in a skyrocketing cost to seniors and higher administrative costs.”

The CBO has gone on to say, “Just because the Republican Party has majorities in the House and Senate and a Republican President, it is not a mandate to destroy Medicare with a “voucher” plan to pay outright subsidies to insurance companies who make big contributions to many members of Congress.”

The fact is the Republicans are going to get their tax cuts. They have the votes. The question for the party is whether they are going to hold true to their belief that the budget should be balanced and that we have to do something about our long-term debt.

If they do, then Medicare is in play and if that comes to pass then Florida where fully twenty percent of the population is on Medicare also comes into play. In fact, I will go so far as to say, that if they privatize Medicare for current or near term Medicare recipients and rates go up or coverage goes down, Florida will go Democratic in the next election.

Courtesy of an unintended guest at the Republican planning meeting we already know that Congress is concerned with how the ACA will play out. Those concerns will seem like nothing if Medicare changes for the worse. Remember that candidate Trump promised not to touch Medicare or Social Security.

Remember too that our elected officials first do what’s best for them and then their donors. We, the voters, come last. Insurance companies are for profit and privatizing Medicare will not lower costs or improve coverage.

But, as I said at the outset the Trump team is smart as are the leadership of the Republican party. They will do nothing that puts Florida at risk. Thus, whatever changes occur to Medicare that are material in nature will either be obfuscated to such a degree that recipients don’t feel it immediately and/or they will impose those changes on individuals 55 years of age or younger or something along those lines. In short, just as I wrote regarding the ACA repeal, Republicans will spend what they need to in order to insure that both the 2018 and 2020 elections go in their favor.

With regard to Mexico I believe that we will enter into negotiations with both Mexico and Canada and those negotiations will neither be fast nor certain. In the end I believe the one thing we can be certain of is that consumer goods prices are going to go up as a result of whatever comes out of the NAFTA changes.

The real wild card, however, will be China. President Trump can use his bully pulpit with domestic business leaders and that will work to some extent. He can certainly get a ‘win’ out of Mexico although we, as consumers, will be paying for it. But, the Chinese are a very different story. Despite the President’s bluster, the Chinese are every bit as strong a negotiator as we are and as noted above they have less to lose.

So far, the President has not acted with regard to China. If and when he does I believe the odds are overwhelming that, ‘one should be careful what they wish for.’ That outcome is far from certain and presents real risk to America’s interests overseas as well as inflation here in the United States. Given that the President, “might be rare among politicians, one who is prepared to keep his promises,” you should expect a very messy outcome.

 

 

 

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