As an offset to this aspect of the tax reform plan, corporations would be allowed to deduct the full cost of capital assets acquired in the year they were bought. The problem here might be that companies would buy real estate or other assets to reduce their tax bill, bidding up prices to unrealistic levels. The plan would also limit interest deductions by individuals, but this proposal has run into sharp resistance from the real estate industry.



Another initiative that gained considerable traction in the House is the border adjustment tax. This idea would mitigate the revenue loss from lower rates and seemed totally consistent with Trump's objective of encouraging manufacturing within the United States and discouraging imports.

Under the plan exporters would not pay an income tax on products shipped abroad and importers would not be allowed to deduct the cost of products manufactured abroad but sold in the United States. In the absence of a stronger dollar to offset the loss of the deduction, this would put all retailers at a disadvantage and Congressional representatives in every state regardless of party affiliation are under pressure on this issue from their constituents.

The energy industry, which imports crude for its domestic refineries, is also opposed to the border tax. In addition, the World Trade Organisation and the European Union have objected to the plan. China has also told the president that it views the border adjustment tax as a punitive measure likely to provoke retaliation. The trade issue is clearly important to the administration.

Trump has spoken of modifying NAFTA and other multilateral agreements in addition to calling China a "currency manipulator." While international commerce may not be a "level playing field" given the application of the VAT in many countries as well as other bilateral imbalances, Trump does not want to start a trade war because that would impair his growth objectives. Lately, he has softened his language on trade in conversations with Canadian, Chinese and Japanese leaders.



At the beginning of the year, I had hoped the new president would move away from his extreme positions on many issues, but he seemed somewhat extreme during his first several weeks in office. Perhaps now, with the Flynn resignation, the forced (by Xi Jinping) adoption of the "One China" policy, and the court ruling precluding the travel ban, he will take more care in his statements and decisions. The executive order on travel ran into opposition from the start because the seven countries named had not produced a terrorist responsible for the death of a single American. Pakistan, Egypt and Saudi Arabia were countries of origin for terrorists who were responsible for the loss of American lives and they were excluded from the ban, presumably for political purposes. The ban was also ruled likely to violate constitutional provisions.



Jobs, jobs, jobs

One of the reasons Donald Trump was elected was his promise to get the economy growing at a rate that would put more people to work at better wages. Bringing manufacturing back to the United States was one way he proposed to do it, but over the past two decades many jobs have been lost to robotics and not China or Mexico. Since the last recession ended in 2009, growth has been less than 2 per cent on an annual basis, with occasional quarters approaching or exceeding 3 per cent.

Trump has spoken of modifying NAFTA and other multilateral agreements. David Rowe

Trump promised growth of 4 per cent, but that may be hard to achieve. The unemployment rate has come down from 10 per cent during the recession to 4.8 per cent now. While the participation rate has dropped to 63 per cent from 66 per cent, not all of that 3 per cent are potential candidates for the work force.


I have done some analysis on how many more workers would be required to add even 1 per cent to the current level of US growth. Strategas Research estimates that 120,000 additional workers monthly would be required over and above the 150,000 that are currently coming into the work force. That might be difficult to achieve considering the current low level of unemployment.



In any case, higher wages may have to be offered to lure part-time or idle workers back into full-time jobs, and that would create some inflationary pressure that would ultimately be reflected in higher interest rates. I am hoping that an increase in growth to the 3 per cent level also results in an improvement in productivity, a problem in the current recovery. Productivity has only increased at a .5 per cent annual rate and we really need 1 per cent to expand profits and see a rise in our standard of living. Faster growth is conducive to higher levels of productivity because companies are slow to hire workers to meet the increased demand. I know there are many critics of the way we measure productivity but I believe the data is reasonably accurate. We have seen few innovations that have improved output in the last decade.



Interest rates

Both short-term and long-term interest rates could become an impediment for economic growth. Even with low rates, growth has been slow. As rates move up, companies may be less willing to borrow for building inventory and capital projects. If the Trump economic plan were not revenue neutral and government borrowing starts to rise significantly, we are likely to see yields on US Treasurys rise.

US government debt has increased from $US6 trillion in 2000 to something approaching $US20 trillion today, but the cost of servicing the debt has risen only modestly. The blended interest rate in 2000 was 6 per cent, so debt service was about $US360 billion. Today, with the accumulated debt having tripled, the debt service is only slightly higher at about $US380 because the blended interest rate is only a little over 2 per cent as a result of the ample liquidity searching for yield around the world.

Retired Lt-Gen Michael Flynn was forced to quit as national security adviser over leaked phone conversations regarding the US relationship with Russia. AP

If the budget deficit increase were to push interest rates up by 1 per cent, that would add $US200 billion, or equivalent to about 40 per cent of the current level of the annual deficit. The deficit would still be below 5 per cent of GDP, which is a manageable number. I believe we would need to see rates above 3 per cent on the 10-year Treasury for the cost of borrowing to become a problem and we are below that level now.



All of this is happening while the US economy is developing a natural momentum of its own. Initial unemployment claims are at a 30-year low. Sentiment is improving at every level. Consumers, farmers and CEOs are growing more positive because they believe Donald Trump will deliver on his economic promises. The favourable economic outlook is spreading throughout the world. The European Purchasing Managers' Index is rising and growth in Europe is expected to approach 2 per cent.

The implementation of Brexit may change that negatively, but hopefully bilateral trade agreements will soften the impact. Chinese nominal growth is running above 10 per cent and conditions in Japan are improving. The global wind is at Trump's back as he begins to put his economic plan in place.

The new president is not an ideologue. Let's hope his pragmatism dominates his behaviour and he behaves less impetuously going forward. Investors are behind him even if they didn't vote for him. Nobody expects him to get his entire program enacted, but his economic efforts will be viewed as a success if even half is put in place and growth increases 1 per cent with only modest inflation and a minor increase in the budget deficit.

That's what the stock market is telling us is going to happen, and let's hope the stock market is right.