On Friday, January 20, Donald Trump was sworn in as the 45th President of the United States. The federal government’s current fiscal condition will limit Trump’s ability to substantially change economic policy; Social Security and Medicare comprise 50 percent of the federal budget. National defense and interest on the national debt comprise another 25 percent. Thus, 75 percent of the federal budget is essentially on auto-pilot before Trump takes office while the other 25 percent includes things such as income security, education and transportation, things unlikely to be substantially changed. Unless Trump is willing to cut entitlements or defense, which thus far he seems uninterested in doing, I would not expect substantial changes in government spending in his administration.
A central part of Trump’s campaign was to “repeal and replace” the Affordable Care Act (aka the “ACA” or “Obamacare”). Although it is unclear what “repeal and replace” will look like, some major reform to the ACA would have been needed regardless of who won the election. The average health insurance premium increase was 22 percent for a policy sold on the individual market in 2016, with the increase being as high as 116 percent in Arizona. Such increases represent hundreds of dollars in additional monthly insurance costs for a family holding one of these policies. Since the ACA prohibits insurance companies from denying coverage to people with pre-existing conditions, many people are simply buying insurance “when they need it” and then dropping coverage afterward. This causes premiums to skyrocket on an unsustainable path. Addressing this deficiency of the ACA would be high on any president’s agenda.
There is continual talk about the Federal Reserve raising interest rates. During the campaign, Trump criticized the Federal Reserve for holding interest rates too low for too long. I expect interest rates to continue to be low, since the federal government simply cannot afford higher ones. Sixty-seven percent of the federal debt has a maturity of five years or less. Thus, every five years (or sooner), the federal government must borrow to pay back the debt that comes due, in addition to its borrowing to cover the current budget deficit. If interest rates revert back to their historical averages, interest payments on the national debt would double to $500 billion, increasing the budget deficit by 50 percent.
On January 20, there were reasons to be optimistic moving forward; auto sales set a record in 2016 and the Big 3 auto companies have recently announced multimillion dollar investments in Michigan. Given Michigan’s continued reliance on automobile manufacturing, these investments will help Michigan’s economy to grow. Job creation is healthy at 180,000 new jobs created per month and gasoline prices are at their lowest in 15 years. Economists do not like Trump’s protectionist rhetoric on trade; but the stock market does not seem to care as it continues to set new records following his election. So, maybe everyone needs to take a page from Alfred E. Neuman’s book and ask, “What, me worry?”