Obama is leaving a gift for Trump and it'll be up to him and Congress to use it wisely

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Many academic economists must be perplexed by the last three weeks’ financial news, having confidently opined that a Trump presidency would spell economic disaster.

Let’s hope that they are feeling a little embarrassed by the stock market’s surge, by sharply rising inflation expectations, and by accelerating growth forecasts.

Interestingly, many voters saw what economic “experts” did not: an utter contempt for economic growth by the Obama Administration and the Clinton campaign.

That contempt was visible constantly over the past eight years – in the refusal to allow the XL Pipeline, in the shutting down of the coal industry in West Virginia, in the lack of any serious prioritization of tax reform.

Obama and Clinton had a tin ear for anything but the priorities of the progressive elite, and consequently focused on redistribution, battling global warming, expanding health care coverage on unsustainable financial footings, and punishing bank lending.

Within 24 hours of Trump’s election, the markets not only expressed confidence in a pro-growth Trump agenda; more importantly, they told us how easy it would be to create growth if the political class is willing to do so. So much for the silly “secular stagnation” theories of the left, which were a transparent attempt to deflect blame for slow growth onto the purported absence of innovation, or a list of other purported ills of the market – anything but the costly growth-killing policies of the Obama Administration.

It remains to be seen whether the President-Elect will realize the growth aspirations that are within his reach or be distracted by growth-destroying policies such as vague and indefensible allegations of Chinese currency manipulation, or the mass deportation of non-criminal illegal aliens, or “shovel-ready” Keynesian pyramid building.

The markets are betting that Trump will not be sidetracked from a pro-growth agenda, despite his campaign rhetoric. That belief likely to some extent reflects confidence that congressional Republicans will push back against ill-advised policies. President Trump might secretly welcome that opposition, which would exonerate him from failing to fulfill some ill-advised campaign promises. 

A pro-growth policy agenda that focuses on lower tax rates for corporations and individuals, reduced tax deductions to finance some of the tax revenue foregone, smart and properly targeted growth-supporting reforms of Obamacare and Dodd-Frank, and modest, value-creating and carefully chosen (not hurried, “shovel ready”) infrastructure spending would leave Democrats with even less voter support in two years, clearing the way for further Republican policy initiatives in many other areas, especially education and entitlement reform.

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Is it possible to quickly identify and implement well-targeted healthcare and financial reforms? House Finance Committee Chairman Jeb Hensarling (R-TX) and others in Congress have already identified the low-hanging fruit of potential reforms of Dodd-Frank. Most importantly, they have articulated the key principles that should guide those reforms: restoring rule of law to the regulatory process and allowing banks to regain control of their own lending and other business decisions so long as they are credibly taking risks with their own funds rather than relying on the protection of taxpayers. Rising interest rates (which finally appear likely) will strengthen bank profits and provide a tailwind to encourage more lending.

With respect to Obamacare, the key principles guiding reform in existing Republican proposals are restoring consumer choice and strengthening market competition, while avoiding high premiums for preexisting conditions and ensuring coverage for the lowest-income Americans. The political challenge is finding a way to reduce the size of government subsidies so that coverage can be financially sustainable, and individuals will have the incentive to exercise cost-saving healthcare choices. Although such medicine may not be popular with some voters, it will be much easier for voters to swallow in light of skyrocketing health care costs, diminished choice, and the general understanding that Obamacare is currently fundamentally dysfunctional.

The Obama Administration’s gift to Mr. Trump is the opportunity to substantially spur growth primarily through a combination of targeted changes in tax and regulatory policy. A growth boost need not rely on expensive short-term fixes (such as an overly ambitious infrastructure spending package), and here too, the good news is that the Republican Congress likely will not approve a $1 trillion spending spree on infrastructure.  To succeed, Republicans must avoid the hubris of believing that they can achieve growth by magical thinking. Mass deportations, trade wars, or pyramid building will produce economic and political failure, profiting Elizabeth Warren, but not the average blue collar voter or the Republicans.

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