President Trump, Year Two: What's Next on the Agenda?

Episode Summary

Executive Summary: Alec Phillips says the Trump administration’s first-year agenda was more successful and more conventional than expected: health care stalled, but tax reform passed with broader changes than anticipated and is likely to modestly boost growth while widening deficits and Treasury borrowing. Looking ahead, he expects 2018 to be dominated by spending, debt-limit, immigration, and trade fights, with NAFTA uncertainty, rising China frictions, limited infrastructure progress, and little chance of major ACA repeal.

Main Topics: Trump’s first-year legislative record (Priority: 5/5): Phillips argues the administration’s priorities broadly matched expectations—tax reform and health care were the main goals—while infrastructure became secondary. The biggest surprise was the mixed outcome: health care largely failed, while tax reform passed in a more expansive form than many expected. Tax reform and economic impact (Priority: 5/5): The tax bill is seen as a meaningful but mostly near-term growth stimulus. Goldman Sachs expects a front-loaded GDP boost, with modest longer-run gains from corporate rate cuts and expensing, especially through higher investment and consumption. Deficit, debt, and Treasury borrowing (Priority: 5/5): Phillips warns that tax cuts and spending will push the federal deficit to unusually high levels for this stage of the cycle, forcing a sharp increase in Treasury borrowing and likely affecting debt markets. 2018 legislative agenda: spending, debt limit, and immigration (Priority: 5/5): The next major negotiation is likely to bundle spending caps, the debt limit, DACA/immigration, and possibly CHIP into one large deal. Phillips sees these as the immediate must-pass issues in Washington. Trade policy: NAFTA, China, and rising frictions (Priority: 5/5): NAFTA remains threatened but withdrawal is seen as unlikely; the larger emerging trade risk is China, where Section 301 and other investigations could lead to restrictions, tariffs, or new investment limits. Infrastructure and health care outlook (Priority: 4/5): Infrastructure is still a priority rhetorically, but Phillips expects a difficult legislative path and limited progress in 2018. On health care, he thinks another large ACA repeal effort is unlikely; only small bipartisan tweaks seem possible. Tech regulation and the political tone in Washington (Priority: 4/5): Technology is becoming a more politically salient issue, but Phillips thinks policy will evolve slowly and in multiple stages because it spans antitrust, media, national security, and taxation concerns. He also says Trump’s Twitter-driven style has made policymaking more uncertain and ad hoc.

Key Arguments: Tax reform was the administration’s clearest success, and it was more expansive than expected, especially on corporate provisions and the elimination of the state and local tax deduction for most taxpayers. The tax cut is expected to add about 0.3 percentage points to GDP growth in both 2018 and 2019, largely because the benefits are front-loaded. Long-run growth benefits should be positive but modest, mainly through stronger corporate investment incentives and full expensing, with deficit effects eventually offsetting some gains. The U.S. federal deficit is unusually large for this stage of the cycle and is projected to rise to around 5% of GDP, requiring Treasury borrowing to roughly double. The next big Washington negotiation likely combines the spending caps, debt ceiling, DACA, and possibly CHIP, making it a very difficult legislative package. A bipartisan immigration deal seems possible in the Senate, but political incentives—especially ahead of the midterms—make it harder for Democrats to cooperate. NAFTA withdrawal is viewed as unlikely, but the administration may use a withdrawal notice as a negotiating tactic to pressure Canada and Mexico. China is the more important emerging trade issue because Section 301 and related actions could trigger restrictions on Chinese corporate investment and possibly tariffs. Infrastructure is likely to be proposed with large headline numbers, but Phillips is skeptical it can pass in 2018 because financing and partisan tradeoffs are too hard. Another broad ACA repeal effort is unlikely; Republicans would face tougher fiscal and political conditions and probably end up with only minor tweaks, if anything. Technology policy is a slow-burn issue; Washington has not yet settled whether the problem is antitrust, media regulation, pricing, or national security. Trump’s communication style has increased uncertainty because policy announcements are more ad hoc and less fully vetted, even if the broad legislative outcomes still follow a somewhat predictable pattern.

Data Points: GDP boost from tax bill in 2018: about 0.3 percentage points - Goldman Sachs estimate of overall tax bill impact on growth this year GDP boost from tax bill in 2019: about 0.3 percentage points - Expected growth lift continues next year Tax cut size over 10 years: a little less than $1.5 trillion - Size of the overall tax package as described in the discussion Annualized effect in 2019: almost $300 billion - Illustrates the front-loaded nature of the tax cut Corporate tax rate: 35% down to 21% - Major corporate-side change expected to support investment CapEx boost estimate: a little less than 1% over the long run - Goldman Sachs view aligned with the Joint Tax Committee Current federal budget deficit: above 3% of GDP - Phillips notes this is high given current economic strength Projected federal budget deficit next year: 5% of GDP - Goldman Sachs forecast for coming fiscal year Borrowing from the public last fiscal year: around $500 billion - Baseline for Treasury financing needs Borrowing from the public this fiscal year: a little over $1 trillion - Expected to roughly double due to tax cuts, spending, and other factors Debt-cap spending increase: about $100 billion per year - Potential impact of raising spending caps over the next couple of years Infrastructure proposal size: $200 billion of federal money - Expected federal contribution over several years, matched by other sources ACA mandate repeal savings: about $300 billion - Savings from repealing the individual mandate were used in the tax bill Debt limit timing: probably by March - Estimated deadline for raising the debt ceiling DACA timing: early March - Some recipients’ work permits begin to expire around this date Trade investigation timing: launched last August; findings due by August, but accelerated - Section 301 investigation into China may be moved up NAFTA withdrawal notice period: at least six months - Legal timing requirement before actual withdrawal can occur

Pivotal Quotes: "we think that the overall fiscal boost will be even a little bit larger than that" — Alec Phillips: On the tax bill’s macroeconomic impact "it feels like we're shifting a little bit away from the pressure on NAFTA and a little bit toward China" — Alec Phillips: On the changing focus of U.S. trade policy "the president coming out and saying he didn't really like the bill after all" — Jake Seward: Referencing the Affordable Care Act repeal effort after House passage

Implications: Expect a busy 2018 in Washington, but mostly around fiscal deadlines and trade tensions, not sweeping domestic reform. Markets should watch borrowing needs, Treasury issuance, NAFTA headlines, China actions, and the low probability of major ACA or infrastructure breakthroughs.