Donald Trump may have upped his performance in Wednesday night’s debate, but in all likelihood, it will be too little late.
Most poll aggregators are giving Donald Trump less than an 8% chance of winning the presidency on November 8th, with Nate Silver writing Thursday morning that “Clinton probably finished off Trump last night.”
So if the polls are to believed, we are likely to be looking at a Clinton presidency come January, along with a Democratic-controlled Senate and a Republican House of Representatives. With the economy growing at just 1.5% per year, job growth beginning to moderate, and the Federal Reserve looking to raise rates to head off greater inflation, the new government will have it’s work cut out for it. So how will the Clinton economy differ from the Obama economy, and can she get Republicans to collaborate with her? Here are 3 potentially economy-moving events that could occur following the election.
Repatriation and Infrastructure Deal: The best case scenario is that President Clinton, a likely Democratic Senate, and an almost certain Republican House can strike a deal on a badly needed infrastructure bill that both Trump and Clinton have endorsed this election season. The problem is that House Republicans will be loathe to spend hundreds of billions of dollars on new infrastructure projects without the means to pay for it.
That’s where a so-called deemed repatriation comes in. U.S. multinational firms have roughly $2.2 trillion dollars held overseas, due to a rule in the tax code that allows them to avoid paying income tax as long as they don’t bring earnings from overseas subsidiaries back into the United States. With a deemed repatriation, these companies could be forced to pay a one-time tax on these earnings at a lower rate than the headline 35% corporate rate. Cowen and Company analyst Chris Krueger argued in a recent note to clients that there is “near 100% probability that the outlines of this deal will be pushed and feature prominently in the first half of 2017 under a Clinton Presidency.”
Clinton could follow President Obama’s lead, who has called for a forced repatriation of overseas earnings at a 14% rate, followed by a 19% tax on overseas earnings thereafter. That would be more than enough to pay for the $250 billion in infrastructure spending that Clinton is hoping for. And this would certainly boost growth in 2017, as the extra spending would increase demand, but the new infrastructure would also increase economic growth in the long run.
Total Corporate Tax Overhaul: It’s unlikely, however, that a Republican House will agree to what is essentially a large increase on businesses without something in return. Krueger, for one, believes the best chance for an infrastructure bill will actually come in during the lame duck session between November 9th and inauguration on January 20th. He argues that the example of European lawmakers going after Apple’s Irish cash hoard will light a fire under at least some Republicans to come to the negotiating table. If European lawmakers are going to tax the money anyway, the logic goes, even Republicans would rather have that revenue in the U.S. so it can pay for legitimate government expenditures.
But in return, they will ask for a broad tax overhaul that lowers the corporate rate, closes some loopholes, and subjects foreign earnings to no tax, or at least a far lower tax than what President Obama has asked for. There is certainly room for compromise, and there is bipartisan consensus that the federal government should make new investments in infrastructure. A deal of this nature, perhaps during the lame duck session, would be the best outcome for the economy in 2017.
Government Shutdown: The worst possible outcome is that the election gives both left-wing Democrats and right-wing Republicans reason to believe that the people delivered them a mandate to pursue their ideological priorities. Right now, the polls are indicating that Democrats will take over the Senate and perhaps cut the Republican majority in the House to single digits. But the most vulnerable Republicans also tend to be the more moderate members of that caucus, meaning the Republicans in 2017 could be weakened but even more ideologically driven.
Speaker Ryan—if he is reappointed by his colleagues—will have to walk a tightrope by both pleasing his hard-right membership, while having fewer moderates to rely on, at the same time that he tries to actually get stuff done. As the parties drift further apart, the chances that this will end in another government shutdown only grow. According to Krueger, the House will need to pass a continuing resolution in November to avoid a shutdown, followed by the need to raise the debt ceiling in March.
The Treasury Department will be able to kick the can down the road with “extraorinary measures” so that the drop-dead deadline for raising the debt ceiling won’t occur until the fourth quarter of 2017, but the issue will be hanging over Congress at the same time that it tries to accomplish tax reform and confirm a Supreme Court justice. The legislative branch hasn’t shown a great ability to walk and chew gum at the same time, and so we should worry that another government shutdown fight is just around the corner. This could scare markets and slow growth even further. Let’s just hope that the November election will convince that Republicans and Democrats will have to learn to compromise if they are to avoid giving a shock to the U.S. economy when it can least afford it.
