Don't count out economic gains

Dan White

is a senior economist at Moody's Analytics in West Chester

Donald Trump and the Republican Party defied expectations last week. On Nov. 7, hardly anyone, including many in the Republican Party, thought that Trump could win the White House. In fact, many wondered aloud if Republicans could even maintain control of Congress. At Moody's Analytics, even our election model, which had correctly picked every presidential election outcome since 1980, was wrong.

Trump and the Republican Party beat the models and pundits by turning convention on its head and doing the unexpected. They can beat expectations for governing by doing exactly the same.

The left has already set its expectations about what conservative leadership will look like, and the bar appears low. Given some of the policy proposals put forward during the campaign, nowhere is the bar lower than in terms of economic policy.

Call me overly optimistic, but as an economist I see a path forward here.

Now that the emotionally charged hyperbole of the campaign is over, Trump has an opportunity to pivot the conversation in an unexpected direction for Washington by working to compromise with more moderate factions of Congress to get some things done. To get us back on the right long-term economic track, the United States needs three important reforms to happen:

Tax reform, because our existing system is uncompetitive and inefficient.

Entitlement reform, because our existing programs, though vital, are wholly unsustainable and pushing up our national debt.

Immigration reform, because our workforce is aging and becoming more risk-averse. Bringing the world's best and the brightest into the United States, legally, is one key to remaining sustainably competitive.

On tax reform, the left is just waiting for Republicans to blow up the deficit by passing major tax cuts so that they can tell the American people "I told you so." This is why maintaining, at worst, a deficit-neutral approach is essential to defying that expectation. Under current law, our debt-to-GDP ratio is already projected to exceed 80 percent by the end of the first Trump term.

Emerging from four years of President Trump with a lower, or even unchanged, debt-to-GDP ratio would be the fiscal-policy equivalent of Trump winning the election. Hardly anyone, including some folks in his own party, thinks it is possible. Though not easy, however, it is possible, particularly given some more moderate views in Congress, and would go a long way to restoring long-term economic sustainability.

Nowhere will the concept of sustainability be tested more than in President Trump's approach to entitlements. Contrary to many pundit opinions, Trump represents an upside risk to the long-term fiscal outlook in this regard.

Hillary Clinton and congressional Democrats were explicit in their intentions to double down on existing entitlements, not reform them. Such a policy would have been disastrous, given that under current law, per the nonpartisan Congressional Budget Office, entitlements and interest will make up roughly 95 cents of every federal tax dollar collected by the end of Trump's first term.

Expectations on the left are for Republicans to reform these programs by slashing benefits for the most vulnerable Americans. Trump can defy expectations by working across the aisle in Congress to make these programs more sustainable by reforming them back into safety-net programs that provide opportunity, rather than fishing-net programs that often get folks stuck in a cycle of dependency.

This will be a heavier lift than tax reform because, at a minimum, it will involve amending or replacing the Affordable Care Act, something the Republican Party has struggled with for six years. Doing so, however, in a way that does not completely disenfranchise the political left in the way that the ACA disenfranchised the political right would be one of the greatest political accomplishments of our time.

The most difficult political feat Trump has ahead of him will be enacting comprehensive immigration reform. Reading any number of liberal pundits shows that immigration is where many Americans fear the worst from Trump. From forced-deportation squads to the wall, the campaign did not offer up much middle ground for compromise.

To really get our economy growing again, Trump will have the challenge of enacting reforms that boost legal immigration while maintaining the hard line on illegal immigration and national security he set out during the campaign. Fortunately, the two are not mutually exclusive, but reconciling them will require some deft political skill.

This is an area where Trump has received almost as much pushback from senators in his own party as he has from Democrats, and the upper chamber does not look that much different from the way it did in 2013, when it passed bipartisan immigration legislation. The real challenge will lie in passing reforms that will pass both the Senate and the House, where a more moderate stance will be difficult without attracting some support from across the aisle.

None of this will be easy, which is why none of it is expected. The economic baseline does not include balanced tax, entitlement, or immigration reform. But, until Wednesday morning, the baseline also did not include President Trump.

For the national welfare, and for their own political success, Republicans need to do everything possible to avoid looking like the dog who caught the car. And they can do that by defying conventional wisdom and passing these necessary reforms.

Say what you will about him, but Trump is a man who likes to defy expectations. Regardless of how you cast your ballot Tuesday, let's hope he makes it a habit. Here's praying that in four years we can look back at another set of beaten expectations and all be proud.

@DanWhiteEcon daniel.white@moodys.com