Make America Great Again, But For Whom?

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Summary

We just completed a trickle-down economic experiment through monetary policy.

It did little for the real economy, leading to a revolt by middle-class Americans.

Unbeknownst to them, we are now embarking on another trickle-down experiment, but this time through fiscal policy.

I expect a similar outcome.

I always thought it was ironic that President Obama's critics on the right labeled him a populist, and even a socialist at times, when he oversaw one of the greatest trickle-down economic experiments in US history during his two terms in office. He still seems blind to the fact that the Fed's monetary policies of quantitative easing and near-zero interest rates defined the economic policy of his administration over the past eight years. These policies led to an unprecedented amount of wealth creation, which predominately rewarded the rich. Meanwhile, the majority of Americans, who do not participate in financial markets, continue to see meager wage growth, rising healthcare costs and a painstakingly slow economic recovery. The wealth created following the financial crisis never trickled down to the majority of Americans, resulting in an ever-growing wealth disparity. While President Obama is not solely to blame for this outcome, he clearly holds some responsibility, and it cost the Democrats their majority in Congress and the oval office.

This is not to say that the president was disingenuous in his concern for the working class. To the contrary, many of his policies were focused on helping the poor through numerous government programs. Yet in many cases, he surrounded himself with the wrong people. Instead of changing Washington, as he purported he would do on the campaign trail, he allowed Washington to change him. He was given sage advice early on by several elder statesmen who no longer had skin in the game of Washington politics, but he chose instead to listen to party insiders, lobbyists and some of the original architects of the financial crisis. He let his pragmatism be overrun by politics.

I cringed every time I heard the President reference how well the financial markets were performing when discussing the economic achievements of his administration, as though the two were related. I think it was a grave mistake to use the stock market's stellar performance as a measuring stick for the effectiveness of his economic policies, as he often did. The real economy and the stock market have been on diverging paths for a very long time. Not openly acknowledging this fact led many to believe that he had become as dislocated from middle-class America as the mainstream media. This was salt in a wound from the financial crisis that had not yet healed for many Americans who voted for him in 2008 and 2012. This was no longer change they could believe in.

I guess it should come as no surprise that many of these Americans, once again feeling that their voices were not being heard, refused to vote for Hillary Clinton. She campaigned to build on the same policies of the Obama administration. I thought her victory was a slam dunk, simply because her opponent had demeaned, belittled, provoked and chastised nearly every demographic in the country, other than his own, on so many occasions that I could no longer tell when I was watching the real thing or a skit on Saturday Night Live. It was stunning. I couldn't figure out if he was stupid or the smartest guy in the room, but then I remembered what campaign strategist James Carville told Bill Clinton.

Donald Trump connected with many of the working-class Americas who were vehemently opposed to the establishment and had previously voted for President Obama. These people simply want decent-paying jobs, affordable healthcare, lower taxes and higher wages. Trump told them that he would provide all of the above and make America great again. They overlooked his outlandish comments and childish behavior because their own economic well-being was more important to them.

Furthermore, they believed him because he was clearly not a rehearsed politician. Instead, he was an outsider who promised to "drain the swamp" in Washington. He would disband the insiders and lobbyists that had rigged the system against ordinary Americans, and "make our government honest once again." He also promised to "massively cut taxes for the middle class, the forgotten people, the forgotten men and women of this country, who built our country." Now, however, he is following in the footsteps of President Obama by surrounding himself with party insiders, lobbyists and many of the same architects of the financial crisis. I now fear that the swath of disgruntled middle-class Americans that voted for Trump will be disappointed once again.

The Trump administration's top priority is "sustained economic growth," according to Steven Mnuchin, Trump's nominee for Treasury Secretary and a former Goldman Sachs banker. Mnuchin is confident that we can restore a 3-4% rate of economic growth if we reform the nation's tax code. He is promising significant tax breaks for the middle class without cutting taxes on an overall basis for the rich. The Trump administration is also proposing to reduce the corporate tax rate to 15%, which it claims will lead to increased capital investment, improved productivity, job creation and ultimately higher wages. Mnuchin further suggests that these policies will not increase the deficit, because the increased rate of economic growth will result in more tax revenue.

In theory, this makes a great deal of sense. In reality, it looks exactly like the trickle-down economics practiced over the past eight years, except this version is through fiscal rather than monetary policy. I fear a similar outcome, which is continued slow growth and gradually eroding economic fundamentals, but I'm reserving judgment until legislation is passed.

Nearly every independent analysis debunks Steve Mnuchin's and President-elect Trump's claims. Even when we rely on the figures from the Tax Foundation, which Trump regularly cited to sell his proposals on the campaign trail, the numbers don't add up. It was found that Trump's tax plan would increase income for the top 1% by anywhere from 10-16%, which dwarfs the benefits for the middle class, even when accounting for the proposed eliminations of deductions that favor the wealthy. It would also increase the deficit by $2.6 to $3.9 trillion, even after accounting for the benefits of increased economic growth.

Worse yet, in some instances, income taxes would increase for middle-income households due to the proposed repeal of personal exemptions and the head-of-household filing status. The benefits to middle-class households are largely centered on deductions for child care expenses for married couples. Married couples who earn between $50,000-75,000 and have two children with $8,000-10,000 in child care expenses could realize a significant tax reduction. But if you are a single parent or a married couple who earn $50,000-75,000 in income with two children and no child care expenses, your tax bill could actually increase!

Furthermore, I don't see what precludes corporations from using their tax savings to continue funding the repurchase of stock and payment of dividends to their shareholders. This would be more fuel for the stock market, which is good for investors. It does nothing for the rate of economic growth. I come to the same conclusion on the repatriation of corporate cash held outside the US.

The flaw in this tax plan is the same flaw that was rooted in the Fed's monetary policies following the financial crisis. The rate of economic growth in the US economy is fueled by consumption. Real income growth is what drives consumption. If we are going to reduce taxes in order to stimulate the demand for goods and services, then the tax breaks need to be provided to those who have the most propensity to spend. This is simple logic. If the majority of the tax breaks go to the wealthy, they are far more likely to save or invest the additional income. This benefits financial-asset prices, but not the real economy. By the same token, corporations are not going to increase capital investment, hire new workers and increase wages unless they see an increase in demand for goods and service first.

What makes Trump's proposals extremely risky from the standpoint of a market outlook (NYSEARCA:SPY) is that the forecasted increase in the federal debt and deficits worsens significantly. We are already seeing much higher borrowing costs as a result of the surge in long-term interest rates. We are seeing a surge in the dollar, which makes our exports far less competitive and reduces corporate profits for multinational companies. We have also seen an increase in inflation expectations, and faster rates of inflation will further erode the growth in real income.

What should concern investors right now is that we are likely to employ trickle-down economic theory all over again - in a slightly different format. This theory suggests that when we cut taxes for businesses and the wealthy, they will invest to expand and start new businesses, as well as hire new workers, leading to faster rates of economic growth. The rest of Americans benefit from job creation and the wages that they earn. The issue I have with this approach today is that record amounts of wealth and liquidity have already flooded the coffers of corporations and the rich, but the rate of economic growth has stagnated and very little has trickled down. Are we to assume that more of the same will lead to a different result? I don't think so.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Lawrence Fuller is the Managing Director of Fuller Asset Management, a Registered Investment Adviser. This post is for informational purposes only. There are risks involved with investing including loss of principal. Lawrence Fuller makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by him or Fuller Asset Management. There is no guarantee that the goals of the strategies discussed by will be met. Information or opinions expressed may change without notice, and should not be considered recommendations to buy or sell any particular security.