Take Five with Greg Valliere, Part II: The next president must focus on growth
Political strategist Greg Valliere, a graduate of George Washington University, he has held many positions during his career, including director of research at the Charles Schwab Washington Research Group and chief political strategist at the Potomac Research Group.
Not only is he regularly quoted in the nation’s financial press, including Barron’s and The Wall Street Journal, he is a regular guest on CNBC, Bloomberg television and radio, Fox Business Network, CNN, and CBS Radio. Now the chief global strategist at Horizon Investments, he recently visited Madison to give his take on the presidential election, and in Part II of our Take Five interview he says policy makers have maxed out on the benefits of monetary policy and now must concentrate on pro-growth fiscal policies.
(Read Part 1 here.)
IB: What should be the next president’s highest priority in terms of the economy — stimulating growth/job creation, deficit reduction, putting entitlement programs on a stronger financial footing, or something else?
Valliere: Just to take the examples you cite, interest rates are so low right now — I think the 10-year yield is around 1.60. Rates are so low that the bond market would not be particularly concerned if the deficit increased in the next year or two. Longer term, we have some issues we have to address such as entitlements and deficit reduction. In the short run, I don’t think that would be a big concern. I would say the bigger concern is this mediocre economic growth. The markets would like to see growth of 3% rather than growth of 2% or less that we’ve had lately. The markets are looking for some hope that we could get more stimulative fiscal policy, and I think that would be on the tax side.
IB: In your view, what’s the best way to raise revenue for the government — by raising tax rates or by cutting tax rates to stimulate economic growth?
Valliere: I would say right now, the latter. I think a tax hike right now would weaken an economy that’s mediocre. I think some stimulus in tax cuts could encourage risk taking. One other thing we should talk about is that while consumer spending has been okay, you have to ask the question why has business investment been so tepid. I would say that one of the reasons is that Washington has regulatory and tax policies that businesses find very objectionable.
IB: So a bit of over-regulation right now, especially for small businesses?
Valliere: You’re hearing an awful lot of corporate leaders say they are reluctant to make a big bet right now because of the economy, and I think one of the reasons is they don’t see pro-growth policies. Businesses would like to see a more pro-growth agenda.
IB: A comparative lack of new business formation is perhaps the most glaring weakness of Wisconsin’s economy, and nationally more businesses are failing than starting. If you were advising the next president, how would you suggest we turn that around? Would you start with regulatory reform?
Valliere: Regulatory reform would be high on the list. I think first and foremost, there is a feeling among businesses that their relationship with Washington is adversarial and the climate needs to change. There needs to be some overture to business from Washington that would highlight a less oppressive regulatory climate. I’d say that’s high on the list. What’s also high on the list is the current tax climate. A lot of businesses would invest more, would take more risks, and would hire more if taxes were reformed.
IB: What do you think of Trump’s tax plan? He significantly cuts rates and tries to achieve some simplification.
Valliere: I view it as an opening bargaining chip. On taxes, Trump will essentially do whatever [House Speaker] Paul Ryan tells him to do. Everyone knows Trump wants tax reform, but the details will be ironed out in the House Ways and Means Committee, which is chaired by Kevin Brady. Paul Ryan would play an enormous role in negotiating a tax deal. What Trump has proposed is a broad outline of general principles. The real nitty-gritty work will be done in the House.
IB: If it turns out that economic growth is slowing down even further, as the first and second quarter GDP numbers suggest, do you think the Fed’s hands are tied with regard to not raising interest rates?
Valliere: Great point. I think Janet Yellen is perhaps the most dovish Fed chairman in our lifetime. I think she is not convinced that we’re out of the woods. I think she feels there is no rush to raise rates when you don’t have much inflation, so I think if the economy would weaken again, you have to ask to ask the question what policies would be available? She could make it clear that she won’t raise rates but I don’t think the Fed has much more in the medicine chest. I don’t see them going to negative rates. I think that’s very unlikely, and I don’t see them doing any more of this quantitative easing. They’ve done it three times and the balance sheet at the Fed is $4 trillion now, so I don’t think they want to go there.
IB: That leaves fiscal policy in Washington with Congress and the presidential administration.
Valliere: That’s the point. So if you buy into the premise that monetary policy is about out of gas, then you have to say that we should do more on the fiscal side. One of the few areas where Trump and Clinton are in agreement is that we need to do a lot more on infrastructure — bridges, highways, dams, all that stuff. That obviously would be labor-intensive. So it’s clearly the fiscal side that’s going to have to start making a contribution because we’ve gotten as much as we can out of monetary policy.
IB: Whatever happened to the massive highway bill they used to do once every five years just for this purpose?
Valliere: They passed a modest one — I think it was a four or five-year deal — about eight months ago, but that’s not enough. If you drive most anywhere in the north, especially in New England or the New York City area, the roads are appalling. The country needs infrastructure improvement, and it’s also good for jobs and GDP. This is a period where the bond market is not particularly concerned about deficits. They are going to have to be concerned in the next decade because we’re all getting older. Entitlements have to be addressed, but in the short run, a strong case can be made for stimulating the economy with fiscal policy, not just monetary policy.
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