Trump’s Address to Congress: Time for Watchful Waiting.

It’s an interesting term, watchful waiting. In medicine, it is generally defined as a policy of taking no immediate action with respect to a situation or course of events but of following its development closely. Ironically, it has been used once to define American foreign policy with respect to, of all countries, Mexico. That was when Woodrow Wilson used watchful waiting to describe American policy towards Mexico in his State of the Union address, in December 1913. Mexico ‘s long revolution was still raging at the time.

We suggest that this is a good time to engage in some watchful waiting ourselves to determine whether President Trump has, indeed, become more presidential, having succeeded in delivering a, mostly, solid presidential address—mostly, but not entirely. There was a clear demagogic nod in his call for a new initiative which he named VOICE—an acronym for Victims Of Immigration Crime Engagement. The isolationist, anti-immigration sentiment is great enough in this country without creating a government entity to further whip those xenophobic flames. It’s very name is designed to do just that.

The response to President Trump’s address throughout the political spectrum, from left to right has, with some scattered dissension, been remarkably positive. Seventy percent of viewers described their reaction to the speech as positive according to a CNN-ORC (Opinion Research Corporation) poll. We watched the Twitter feed for much of the morning and the “tweets” were overwhelmingly positive.  This is rather telling, given that the Twittershpere is populated by individuals of all political stripes who simply engage in 140-character stream-of-consciousness communication. The stream was clearly flowing President Trump’s way.

One clinical psychologist we know opined that if Trump is, indeed, a narcissist the very positive reaction to his speech might well inform what he says, and, perhaps, what he does in the months and years ahead. If he is motivated by praise and approval, he may have just learned an important lesson.

He railed against job-crushing federal regulations, and has decreed that two regulations be eliminated for every one new regulation. While we think the President’s point regarding excess regulation is well taken, his formulaic answer (two regulations cut for each new regulation) may make for good political rhetoric, but makes little sense otherwise.

With respect to Obamacare, the President and the Republican leadership are somewhat akin to the dog that caught the car. What to do with the car—that’s the tricky part. The Trump Administration is committed to keeping everything that they say is good about Obamacare while doing away with the mandate that makes funding possible for what he says is good.  What is “the good” the Administration wants to preserve?  The coverage for pre-existing conditions, allowing kids to stay on their parent’s policies until they are twenty-six and making health insurance affordable for everyone. “The way to make health insurance available to everyone is to lower the cost of health insurance, and that is what we will do,” he promised. Fair enough and worth some watchful waiting.

Trump endorsed tax credits that would allow Americans to purchase health insurance, a proposal at which some House conservatives have balked, saying it would, in effect, create a huge new government subsidy. And it would, because the poor don’t earn enough to pay taxes or, therefore, to get a tax refund. That’s why we created the so-called refundable tax credit in which a credit is paid to the tax filer even though the filer did not earn enough to pay any federal income taxes.

Congress will also be asked to appropriate what President Trump referred to as “one of the largest increases in national defense spending in American history.” Fair enough.  If our armed forces have been depleted increased investment in defense is certainly warranted.

And everyone agrees that our infrastructure (roads, bridges, airports) requires massive investment.  We’re talking a Trillion here and a Trillion there. All in all, a very expensive, albeit necessary, array of investments.

We’ll need a lot of new money (tax revenue) to do that. Concurrently, President Trump said that his “economic team is developing historic tax reforms that will reduce the tax rate on our companies” and “provide massive tax relief for the middle class.”  All good stuff, but potentially a conundrum for balancing revenue inputs and investment outputs. Certainly, eliminating wasteful programs and regulations will contribute a lot. But eliminating wasteful spending won’t begin to cover the cost of the increased spending we’re about to undertake.

Enter “dynamic scoring.”

It is a safe assumption that when individuals, households or corporations suddenly have more money at their disposal they will, in some way, behave (economically speaking) differently. It is fair to assume that individuals and households will spend somewhat more, and that corporations will invest more, either in labor or capital improvements.  This change in behavior will, of course, result in a somewhat commensurate change in economic activity, which will, of course, result in a change (presumably an increase) in tax revenue to the government. So, the thinking goes, reducing tax rates should result in an increase in tax revenues. Actually, we agree. It seems to make perfect sense. The problem is predicting just what that change in behavior will be and just what increased economic activity will result from that change in behavior.

The reduction in tax rates will be a front-end certainty. The increased economic activity that will follow will be a back-end uncertainty. And the tax revenues that ultimately will flow to the government from that increased economic activity is a whopper of a back-end uncertainty. We’re not suggesting, at all, that the back-end benefit isn’t worth pursuing.  We are suggesting that neither we nor the Administration knows what the ultimate tax largess, if any, will be.

We were, on balance, somewhat encouraged by President Trump’s address. We’re far from ready to celebrate, but we, like most Americans, will wait…watchfully.

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