First, the good news. It is now safe to watch TV again (except for all the ads from lawyers). The campaigns are over and our choices have been made. Some are happy and some are not. What happens next is transitioning from promises and electioneering to policy decisions and actual governing. What can we expect and what should these political leaders be focusing on?
Update provided by Chris Kuehl, Ph.D. an economist and Managing Director of Armada Corporate Intelligence. Visit www.armada-intel.com for more information.
Three things stand out as far as projected policy. Trump and the GOP are committed to what has been described as nationalist populism. This approach means the US will become more isolationist when it comes to world affairs and more protectionist when it comes to the economy. This is the intent in any case but making this a reality will be challenging.
The first major shift will involve trade. Trump asserted that he would impose a 20% tariff on anything that was exported into the US and a 60% tariff on goods from China. That is easier said than done. In his first term he tried to impose significant tariffs on imported steel and aluminum but by the time the plan was implemented there were exemptions for Canada, Mexico, Europe, South Korea, Australia, Brazil, Argentina and even Japan. China dodged the tariffs by transshipping.
Countries hit by tariffs retaliate with tariffs and restrictions of their own. Remember when Japan struck back with a major tariff on imported bourbon to get the attention of Mitch McConnell. It is also very possible that Trump has proposed these tariffs as a negotiating technique. Several of his allies suggests these tariffs will be reduced or eliminated if the target nation provides something in return. This could be better access for US made goods or promises to shift production to the US. There is evidence that Taiwan Semiconductor decided to build their newest plant outside Phoenix for that very reason.
Another major policy shift involves US engagement in global affairs. It is likely the US restricts support for Ukraine and may back away from commitments in the Middle East as well. There is talk of withdrawing from NATO and the US will not engage in most of the international meetings. This strategy may erode as well because it means the US will not have a seat at the table when decisions are being made. The most pressing issue will be Taiwan. Will the US back that nation if China attacks. North Korea is a potential crisis point as well. Given how integrated Taiwan, South Korea and Japan are in the US economy this will be an important set of decisions. This could also be a negotiating tactic. The US has been demanding that Europe play a larger financial role in NATO and with Ukraine and Japan has been pressure to play a bigger role in opposing China.
The third issue is immigration. There is universal agreement that something has to be done to control illegal immigration. This is an issue in Europe and Asia as well. The challenge is that the patterns have changed. The migrants today are better classified as refugees as they are fleeing tyrannical regimes, drug wars and the like. They are not interested in assimilation or even working in the US. Ultimately, they want to go home. This creates a major drain on US resources. The border will be tightened and it will be expensive. At the same time the US faces an acute labor shortage and needs migrants with the right skills and willingness to adapt to living in the US.
What should we be demanding from those we just elected? From the business perspective there are three issues that emerge at the top of nearly every list.
It starts with labor. Economists and analysts have been sounding the demographic alarm for years. By 2030 the entire Boomer generation (76 million) will have reached retirement age. There has to be a focused effort to train and educate people for the jobs of today.
The second major issue is regulation. Thousands of these are promulgated every year and they have become a major burden. Many of the regulations have nothing to do with the core business and are directed at social issues. There are many that are contradictory and overall, they are expensive. The average cost of regulatory compliance for a company is $277,000 annually (19% of payroll costs). A small company with 20 employees is paying one million dollars in compliance costs per year. Manufacturers pay $350 million in compliance costs annually and that is 12% of the sector’s value to GDP.
The third issue is infrastructure support. The US transportation system has been graded D- by civil engineering associations. The power grid is woefully inadequate. The data center expansion alone will require 45 terawatts of energy. This means radical expansion of power plants fueled by everything available (oil, gas, coal, nuclear, wind, solar). The ports are inefficient as unions block the use of technology and water availability has become a major issue as well. The US is welcoming reshoring but companies can’t move to the US if there are no workers, no power, no water, bad roads and regulations that cost them millions. And then, there is the issue of taxes. They are very often distorting and too high for many businesses to handle.
In the midst of all these major economic challenges there is one that hits people most directly. Housing continues to be the chief concern for many as the US is still short 4.5 million homes and that is up from the year prior. The majority of this shortage is in the lower cost sectors but many of the fast-growing cities are facing a deficit at every level. This has contributed to the rise in the price of an average house to between $420,000 and $440,000. There are obviously radical differences in price depending on the region. In California the price is between $780,000 and $900,000 while in North Dakota it is between $260,000 and $280,000. The most recent significant shift in demand has seen Boomers choosing to live in multi-family units (some version of senior living) and Millennials finally starting to favor single family homes as they start to focus on raising children.
