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It's Trump's economy now

Republicans' political fortunes are likely to rise or fall based on the impact of the tax bill.

By BEN WHITE

President Donald Trump and congressional Republicans are about to own the U.S. economy in ways that could revive their party’s brand or make the next three years a political nightmare.

The president and GOP leaders were all smiles on Wednesday, celebrating passage of a giant tax cut bill that will slash corporate rates and offer more limited relief to individuals. They are counting on the widely unpopular measure to produce a series of economic benefits including faster growth, fatter paychecks and a bigger, more productive labor force. And they believe it will bring an end to companies shifting profits and production offshore.

“This is going to mean that companies are going to be coming back,” Trump said, as giddy Republicans beamed at him on the White House steps on a sunny December afternoon. “We are making America great again.”

Essentially, Republicans are betting they can take the fairly strong economy Trump inherited from President Barack Obama and fix the remaining broken parts which include a shrunken labor force, limited wage gains and stalled worker productivity.

If they succeed, the GOP could start to reverse their big polling disadvantages in the 2018 midterm elections and set Trump up to win reelection in 2020 if he can somehow navigate the Russia investigations and avoid major foreign policy disasters.

If they fail and the tax bill winds up doing what critics promise it will — driving up deficits and doing little for workers while putting lots of money in the pockets of the already rich — Democrats will be able to turn their current talking points on the tax bill into brutally effective political weapons for many years to come.

One way or another, the GOP’s economic reckoning will now begin.

“Trump until now has made no really meaningful changes to major economic policy. That changes now with this tax bill,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “A year from now they are going to fully own this economy.”

Republican members of Congress acknowledge that once the backslapping is over, their political fortunes will rise or fall based on the impact of the tax bill rather than all the happy talk about it on their side or the doom-saying from Democrats.

“Whether fair or not, that probably will be written about in papers across the country when you have all of government under control,” Rep. Pat Tiberi (R-Ohio), a senior member of the tax-writing Ways and Means Committee and chairman of the Joint Economic Committee, told POLITICO.

Gary Cohn, Trump’s National Economic Council Director, seems very comfortable with this reality.

“This is what Trump hoped to accomplish, this was part of the president’s campaign to return prosperity back to the American worker and make America a competitive place for capital to return and be invested,” Cohn said in an interview. “We believe that is what is going to happen and we believe it will, for the first time in a decade, drive real wage growth in this country.”

Thus far in his presidency, Trump has largely embraced economic numbers on growth and job creation that represent nearly seamless continuation of trends that began under Obama. The monthly jobs gains are slightly smaller now than they were at the same time last year. Economic growth is slightly faster but in line with analyst predictions for 2017 made well before Trump’s election.

Economists and market watchers do credit Trump’s win and the hope for lighter regulation and tax cuts with big jumps in the stock market. But even using the market as an indicator, Trump’s performance lags that of Obama’s first year when markets raced ahead after the end of the financial crisis.

Consumer and business confidence are higher under Trump. But for the president and Republicans in Congress to begin to get real political credit, those soft numbers will have to translate into major new corporate investment in plants and equipment that create American jobs.

They will have to increase worker productivity in ways that lead to higher pay and don’t just create the kind of short-term sugar high that could cause the U.S. Federal Reserve to bump up interest rates faster to ward off inflation.

The GOP got some good news on that front Wednesday as AT&T announced it would give many workers $1,000 bonuses after passage of tax reform and increase its capital expenditure budget by $1 billion. Other similar one-off announcements may follow by companies looking to curry favor with the Trump administration. AT&T in particular is looking to push through an acquisition the White House has vowed to block.

Announcements like AT&T’s will make for good headlines. But the real success or failure of the bill, analysts say, will be found in three main economic numbers: wage gains, productivity and labor force participation.

While wages have shown some improvement and are now rising at a 2.5 percent annual pace, they have largely lagged throughout the economic recovery. Productivity, while also showing signs of improvement, has been stuck at around 1 percent annual growth in recent years, dramatically lower than the level that created the modern middle class in the decades after World War II.

Much of the corporate side of the tax bill, including immediate expensing for capital investments, is aimed at encouraging companies to upgrade technology and buy new tools that will allow workers to produce more and thus win higher pay.

If wage gains and productivity increase under the GOP tax bill, that will likely allow the Fed to worry less about inflation and let any “Trump boom” run further and create greater political benefit for Republicans.

Trump on the campaign trail also railed against the shrunken nature of the labor force. The participation rate now sits at 62.7 percent, near three-decade lows. Some of this reflects retirees who are never coming back to the workforce. But Trump and congressional Republicans believe that their efforts on taxes and regulation will create the kinds of jobs and wages that will lure prime-age workers back into the labor force. This could actually drive up the unemployment rate in a positive way that would mean the tax bill is succeeding while also keeping the Fed at bay on rate hikes.

Democrats, meanwhile, are largely banking on their warnings about this tax bill to come true. And many economists argue that Republicans have in fact dramatically overpromised on what the tax cut bill can do, which could leave Trump and the GOP in political trouble.

“President Trump does own the economy now and will be judged on how we perform over the next several years,” said Megan Greene, chief U.S. economist at Manulife. “The most likely scenario is that we get a boost to growth next year followed by a year that could look worse because this was not new investment but investment that got pulled forward by the tax bill. And on the deficit, there is the risk that we will have to pay for all this someday.”