> So far, the financial markets love the coming Donald Trump presidency, and why not? They look at the combination of a big tax cut, big infrastructure spending and lower regulations and see economic stimulus all aroundâ€"big-league stimulus, as the president-elect might say.
Less obvious is the implicit assumption the markets are making that two looming problems with all this stimulation won’t short-circuit the good times. The first is that Mr. Trump won’t set off a crippling global trade war with some of his more protectionist impulses, and the second is that the federal budget deficit won’t grow into the kind of problem that can derail everything else.
So far, though, optimism prevails, as the Dow Jones Industrial Average has risen more than 4% since Election Day. But are the markets making a safe bet? Will a Trump administration get the economic stimulus it envisions without the trade and deficit drags that could pull it down? Let’s look at each element in turn:
TAX CUTS: The climate for a big tax cut next year will be better than at any time since the second set of President George W. Bush’s cuts passed Congress in 2003. That’s because Republicans have full control of all the levers of governmentâ€"presidency, House and Senateâ€"for the first time in a decade.
That doesn’t mean a tax cut is certain. Republicans have a working majority in the House, but barely hung on to their majority in the Senate. They have 51 seats there now, and probably will have 52 after a Senate runoff in Louisiana.
Given that tax bills can pass the Senate with a simple majority that might be enough. Still, with likely across-the-board Democratic opposition, it also leaves little margin for error. Historical reminder: Vice President Dick Cheney had to cast the tiebreaking vote to get that 2003 tax cut through a Republican Congress.
Chances for Republican unity were enhanced considerably when the Trump team scaled back its tax cut plan late in the campaign to bring it closer to the blueprint drawn up by House Speaker Paul Ryan. There remain important differences on offsetting items to reduce the deficit impact, but chances for a significant tax cut are pretty good.
INFRASTRUCTURE SPENDING: In theory, everybody in Washington loves more infrastructure spending. In reality, there are enormous differences, between parties and within the GOP, on how to pay for it.
Some Republicans, especially House conservatives, aren’t nearly as enthused as Mr. Trump seems to be about using deficit spending to improve roads, bridges and airportsâ€"a reality he seemed to acknowledge in an interview with the New York Times last week when he said his infrastructure plan is “not a very Republican thing.â€
Can Mr. Trump use Republican votes to pass a big tax cut and then Democratic votes to get a big infrastructure plan through? Perhaps that is what an unorthodox president who essentially ran as an independent can do. But it will be trickier than it looks on the potholed surface.
LOWER REGULATIONS: A rollback of regulations may be the safest bet of all, simply because the executive branch can largely act on its own.
Already, the expectation that bank regulations will ease, if only through looser enforcement, has helped drive up bank stocks. Beyond that, environmental regulations top the business wish list; the U.S. Chamber of Commerce points to ozone rules, power plant emission requirements and clean-water regulations as areas where it would like changes.
A word of caution, though: Changing regulations takes time, and lawsuits inevitably will tie up some changes in court.
TRADE WARS: This may be the biggest question mark. Loose campaign talk about imposing big tariffs on goods coming from China and Mexico raised fears of a global trade war that would drag down economic activity all around.
Since the election, Mr. Trump has reiterated his promise to pull the U.S. out of the Trans-Pacific Partnership, a pending free-trade agreement in Asia. But other trade talk has softened. Trump rhetoric has focused more toward renegotiating elements of the North American Free Trade Agreement than on simply bolting from it, and the talk of unilaterally imposing big, protectionist tariffs has faded.
Trade tensions still lie ahead, and China is stepping into the free-trade void in Asia quite nicely, to the potential detriment of American companies. But visions of an all-out trade war aren’t as vivid as some feared.
DEFICITS: This is the big potential showstopper for the Trump stimulus. The Committee for a Responsible Federal Budget estimates that Trump’s plans would add $5.3 trillion to the federal debt over the next decade.
House Republicans, in particular, don’t like that kind of number, and that has the potential to mess with both tax-cut and infrastructure plans. Look for a moment of truth in mid-2017, when a Republican president and a Republican Congress have to agree on a plan to raise the federal debt ceiling or face a market-rattling default on American debt.
Write to Gerald F. Seib at jerry.seib@wsj.com
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