First Trust ROI Podcast
On the ROI podcast, we discuss some of the most important questions facing investment professionals today, ranging from macroeconomic views, to perspectives on the equity and fixed income markets, to insights on practice management. We aim to cut through the noise, examine the data, and provide fresh insights to investment professionals as they help their clients find better ways to invest…seeking to generate attractive returns on their investments.
First Trust ROI Podcast
Ep 33 | Brian Wesbury | Post-Election Economic Insights | ROI Podcast
In this episode, Brian Wesbury discusses the implications of Trump's recent election victory. Recorded the day after Election Day, Brian explores potential changes in economic and tax policies, providing insights into the future economic landscape.
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Hi, welcome to this episode of the First Trust ROI podcast. I'm Ryan Isakainen, etf strategist at First Trust. While we're recording this episode the day after election day, I'm very excited to have Brian Westbury joining me once again for the podcast. Brian and I will discuss the implications of a Trump victory in this election, what he thinks is likely to happen with economic policy, tax policy and a number of other things. Thanks for joining us on this episode of the First Trust ROI Podcast, brian. Thanks again for joining us on the podcast here.
Ryan:We are recording this the day after Election Day it's November 6th. We're going to post this on Monday, which is November 11th. As it stands right now, it seems like President Trump, or President-elect Trump, will be taking power in January. The Senate flipped to the Republicans. The House at the time that we're recording this is kind of uncertain, but it seems to Senate flipped to the Republicans. The House at the time that we're recording this is kind of uncertain, but it seems to be leaning to the Republicans. So I guess my question for you is if you were advising the incoming Trump administration on what they could do to have the biggest impact right away from an economic policy standpoint, what advice would you give them.
Brian:Yeah, this is, I mean. What happened is huge. It was a landslide victory, and we haven't seen one of those since, basically 2012, with Barack Obama, and the results are astounding to me. I mean, new York State is closer to being red than Texas is to being blue. That's amazing, and so I would argue that he got a mandate, and the question is, what's that mandate for? He clearly talked about cutting taxes. I always believed that Kamala Harris wanted to be the Santa Claus that spent and gave money to people, and therefore Trump can't be quite the anti-Santa Claus like and say we're going to cut spending even though he has.
Brian:Elon Musk and all that, but I believe that we're going to come back to that. But you have to be a Santa Claus, and what his Santa Claus was was giving tax cuts. So tip workers, social Security policemen, firemen, overtime teachers, like I think, the only person that didn't get a tax cut under his proposals was me, so he's more of a robin hood than that.
Brian:Maybe he's like giving, giving like money he's just letting you keep more of your own. But I think that one of the biggest things he could do for the markets is to propose to make his tax cuts that he put in in his first term permanent. And that's going to be a big fight. We're going to talk about the SALT deduction, the state and local tax deduction. There will be some compromise, depending on how the House really shakes out.
Brian:The second thing and this, actually, I probably should have said first in his first term I mean, people didn't think he was going to win. He might not have even thought he was going to win. In other words, when he went in, he wasn't prepared to govern and really grab control of the reins. He didn't get people in the right spots and Congress kind of hijacked his agenda and went off in their direction. So this was Paul Ryan and Mitch McConnell. This time that's not going to happen.
Brian:What I've heard him talk about is he wants to put in tariffs, he wants to cut taxes and he wants to put Musk in charge of spending.
Brian:So I'm only talking about not RFK Jr and a healthy America, but the economic policies, and I believe that's what Ronald Reagan did got spending under control, cut taxes, and then Trump wants to have the Fed cut interest rates, and I'm sure we're going to talk about that with inflation. That's not what Reagan did. He let Volcker raise rates, but the combination of a smaller government, lower taxes and tight money actually made the economy boom, and I would hope that's where we go. It's not clear that we get there, but if you wanted to have the most immediate impact, it's to make sure that tax rates are lower and that the tax cuts that are scheduled to expire at the end of the year don't cuts that are scheduled to expire at the end of the year don't, because then you will encourage more investment. And I think by the way, that's kind of what the market is saying right now that these policies are going to be a little bit better for the market, and we'll see how long that lasts.
Ryan:So I want to stay on taxes for a moment. As you mentioned, the individual tax rates that he put in in the first Trump term are set to expire at the end of next year, which is 2025. So do you expect that he will just kind of lock in what was already passed and maybe try to make those permanent, or will there be some marginal decreases in the tax rate as well?
Brian:He wants to cut corporate tax rates a little bit more? Yeah, and those are already permanent though, right.
Ryan:Those are 21% corporate tax rate.
Brian:That's not permanent, because at the end of this term they would have gone at the end of next year.
Ryan:Everything was going back to where it was. Oh, I thought the corporate were permanent and the individual were temporary. If you're right and I'm wrong, then I'm willing to admit it, irrespective.
Brian:But I think he wants to cut it. Vice President Harris wanted to raise it and so I think part of the rally in stocks is a little bit of relief from both of those. One we could have a lower one. Number two we didn't have a higher one, so that's good news for the market. Corporate taxes should be zero because we double tax corporate income and it shouldn't be done that way because we tax capital gains, we tax all the money they pay out, we tax everything, and so we should cut those taxes. Number two the SALT deduction, which I think that should be zero. It's $10,000 now. It really does like cost people that live in high-tax states more. It encourages those states not to raise their taxes as much, but it's likely to slip a little and in negotiations you want those high-tax state senators and congresspeople to vote with you so to make those tax cuts permanent it's going to take a lot of votes and I think they're going to have some negotiating to get that done.
Ryan:So in my self-interest, I'm kind of hoping that they raise the self-deduction as a resident of New York State, but I do understand the argument that it would maybe restrain spending somewhat, although I'm not sure that we've seen that in New York State Right exactly the other part of tax policy that the incoming Trump administration has talked about, at least during the campaign, was tariff policies and putting increasing tariffs. I'm wondering what your thoughts are on tariffs in general and maybe more specifically as it relates to the incoming administration's policy, Because I've heard you talk before about the Great Depression and the Smoot-Hawley tariff act and how that was extended what was something bad already to make it even worse. So talk a bit about tariffs.
Brian:Yeah, the analogy I would use right here is kind of COVID. So one of the things that makes an economy, or a free market economy, so strong is the division of labor. You know, I don't have to be a plumber, I don't have to be a carpenter. We all specialize and, as a result, we become more productive as a unit, as a nation, as a world. And that's what free trade is. It allows the world to be more productive. So I have always been a free trader from that point of view, just like I'm a free trader from a free market point of view. And specialization, a division of labor, covid.
Brian:When we locked everything down, you could see what happened to the supply chain. Well, if you close down world trade, you're going to get similar things happening, because all of a sudden, stuff that you bought from overseas isn't available and you can't set up factories and produce things overnight. And so if, let's say, we were to put 100% tariff on everything, are we really going to, you know, the next day, be able to produce all these things that we bought from overseas? No, it's impossible, and you can see it.
Brian:During COVID it didn't happen. We ended up with shortages and all kinds of supply chain problems, and that's what would happen. So that's why Smoot-Hawley was part and parcel with the Great Depression tight money, rising taxes and tariffs. Now, having said that, china is an unfair trader, absolutely, and in fact the proof kind of is in the pudding because Trump put tariffs on China, president Biden left them in place, actually made them a little bit worse on China, and so I completely agree with them. One of the reasons that we one of the things that we need to think about with free trade is the United States is heavily dependent on China in a lot of cases for pharmaceuticals, even things like Advil and Tylenol, but other pharmaceutical products and military, like heavy metals and steel and things like that. And semiconductors.
Brian:Yeah, and semiconductors. And if we can't get those pieces that we need to survive if we were to say, get in a war with China, that gives them leverage over us, and so I think we should do everything we can to take that away. Plus, they're not fair traders. They steal intellectual property rights. We know they're now spying on government officials. I mean, anyway, I've made my case. If you raise tariffs across the board, you ruin the benefits of global trade.
Brian:And there are a lot of benefits. I mean, Canada and Mexico are our two biggest trading partners and they're our friends and they're not going away. That's one thing. Second thing is kind of the mechanics of this, and maybe this will shoot any job that I could. You know, they might ask me to come do for Trump, but we only have $4 trillion in imports. Have $4 trillion in imports and if you tax them 100% and nothing changed, we would only get $4 trillion in revenue and we spend six and three quarters. So it wouldn't fix the problem.
Brian:And the only time in American history where we funded ourselves with tariffs and excise taxes was when government was 2% of GDP and it's now 24% of GDP. You can't do it because if you raise tariffs to 100%, global trade would shut down. You would never even come close to $4 trillion in revenue. I mean, who knows what would be left? I guess there'd be some people still drinking Bordeaux wine because they love it so much they don't care how much it costs. There's not many things that would trade if you put 100% tariff on. So I get the concept and for China I think it makes a lot of sense. But trying to fund government this way it's not going to work.
Brian:Now I want to make one other point, though. Tariffs are basically, when you get down to who really pays them and to the nitty-gritty, they're a tax on consumption, and so we always have a choice in any economy. Do you tax people when they earn the money? And remember, the only reason we work is to be able to spend, and so you can either tax it when people earn it or when they spend it.
Brian:And I've always been a believer that taxing consumption and not income is the most efficient way to run a tax system, because you can basically decide yourself whether you want to pay taxes or not. You could be a busboy or a dishwasher in a restaurant, live in a cardboard box in the alley, eat all your meals at 60% off in the restaurant and save every time you made, and open your own restaurant, and so because you wouldn't have paid taxes on that, because you never spent it, and so. But if we tax income, you don't have that option. You don't have a choice. And so if we're moving toward more of a consumption tax, awesome, but if we do that, we have to get rid of the income tax. Now, what I just proposed is massive.
Brian:It would be radical change it would be radical change, massive change, and I highly doubt the Trump administration would spend that much political capital in getting there. So I'm not telling you that's where we're going. But if talking about tariffs moves us in that direction, to thinking about the tax code, I'm all for it.
Ryan:Yeah, You're right, I think tariffs go into the price ultimately and it's almost like a consumption tax on those specific imported goods. And if you had maybe a higher tax on the imported goods but you still had a consumption tax on the domestic goods, it sounds amazing.
Brian:It's too much political capital to get there. I mean, it's a massive change in our tax code.
Ryan:The other side of that, of course, is spending, which you mentioned. Elon Musk is apparently being tasked to be the DOJ the. Department of Government Efficiency is kind of what they're talking about. Yeah, and I don't know if you read his biography where it talks about some of his private companies, the way that he would just strive for efficiency and cut to the bone and he basically made the case that if you want to cut more than you actually should, and then you can add things back and that's kind of the operating philosophy for a lot of the Musk companies, right, operating philosophy for a lot of the Musk companies.
Ryan:I wonder if that will be actually brought into government, because that seems really difficult to do. One you know, you got to find something for all those people to do if they're looking for jobs. He actually said in I think it was with his Joe Rogan podcast interview that he would want to continue to pay those people for a couple years, which I thought was kind of interesting. You fire them, keep paying them. It doesn't actually cost the government more, but those people get out of the way. And then the other side, of course, apart from spending, is decreasing the regulation. That's a long question, brian. What's your thoughts on that?
Brian:I and we as the First Trust Economics Department, have kind of used the four pillars of prosperity to describe the risks to the economy and the market. And the other side of the coin, there's four pillars of prosperity, four pillars of destruction, and so you go back to the Great Depression. What did we do? We raised taxes, raised spending, raised regulation, raised tariffs and had a tight monetary policy, and that was a disaster. It caused the Great Depression.
Brian:Well, if you look at the Trump proposals, we're talking about lower taxes, so that pillar is a green arrow we're talking about, I think, smaller government makes the private sector bigger and makes us more efficient. So, spending less, which is a real positive, regulating less, which is a real positive. Now we have tariffs, which, I would argue, if you go too far, they're a negative. And then President Trump also wants to lean on the Fed to cut interest rates. So you've got easier money. That's why the market is up.
Brian:Other than the tariffs, everything just turned green with this election. But the regulatory part is massive. We, right now in America, spend 7% of our GDP complying with regulations. You know, I mean probably one of the biggest ones for everybody. If you're not running a, if you're a landscaper, you got to have how many pieces of paper just to carry around weed killer in your van. Who knows it's like? The costs are massive, but we all spend lots of money doing our taxes and time, and if you can streamline that stuff, make it more efficient.
Brian:I mean there is a lot of resources that could be redirected to more productive things. So if Musk is able to do his Musk magic and Twitter, I mean he fired 70% of Twitter and it works better than ever. In fact, it's the leading source of news for this whole election. It is amazing what he did and I do believe you could do that with government. Now, I did not listen to the Rogan podcast, but there is a problem in and try to lay off all these bureaucrats. The deep state and I don't mean that in the tinfoil hat way, but the bureaucracy will fight you tooth and nail, and so promising to pay them for a few years might be a way to entice people to move on.
Ryan:He said that you could continue to pay them and they could even go on and do a second career. Right, you know that would be the incentive for the bureaucrats.
Brian:Right, which I mean, yeah, we still spend money and in fact we're wasting it, paying people they're not. But they probably were a negative for the economy in the first place, because all these regulations just hold us back. But let's bring it right down to today. The Russell small cap index is up four or five percent here the day after the election.
Brian:Why? I think a lot of it has to do with that regulation. First, we're not going to tax them more, which is good, but second, it's going to get a lot easier to do business because the regulatory state will not be throttling and strangling them as much as it was.
Ryan:So the interest cost on the outstanding debt is something like three and a half percent of GDP. So you're telling me that the regulation to comply with regulations, the cost of that is double the cost of the interest on the outstanding debt Double Yep.
Brian:That's our personal time. Effort, blood, sweat, tears, money. 7% of GDP is taken up by the cost of regulation.
Ryan:That's amazing, yep. Okay, you mentioned inflation as well, so I want to circle back to that. And, as you mentioned, trump pretty consistently in his first administration tried to kind of nudge or know, I guess, where interest rate policy should go, and you know what will be the impact on inflation if rates are cut too soon.
Brian:My belief is that the embers of inflation are still there. You know so. I've done a lot of camping in my life and one of the greatest things for me in camping is like fall. It's crisp outside and you wake up in the morning and the embers are still in the fire pit and all you got to do is throw a few sticks in there and boom, you're making coffee and you're warm and the fires pop. You don't have to get your flint out and do in there and boom, you're making coffee and you're warm and the fires pop. You don't have to get your flint out and do it all over again.
Brian:You're a boy scout, at one point I'm an Eagle scout, but what I'm getting to is inflation If you don't put the embers out. So, Paul Volcker, he found every drop of water in the whole campsite, threw it on the fire, put sand on top of that, put sand on top of that, put rocks on top of that, drove his truck on top of it and then sat there for three days and it was out all right by the time he was done. Well, now we have these embers and if the Fed reverses course too hard cuts rates again, allows the money supply to grow, that inflation. I mean, you can already see it the last month's numbers were supposedly really good, but it was still 0.2, which is 2.4%, and then the core was 0.3, which is 3.6%. Inflation's not gone and I'm afraid if we throw some embers on that or some wood on that fire fuel, that we get inflation back.
Brian:Real estate guys like low interest rates and who doesn't if you want to buy something or rent it or finance it, but they're not always the best policy. And what the Fed has done since 2008, and we've talked about this before I think they've created real problems. And today, long-term interest rates, the 10-year treasury is up like what? 445? I mean, we've gone up almost a full percentage point from the low, and that's after the Fed cut rates, and what that's telling me is that the long-term bond market is worried that the Fed's going to get too easy and those embers are going to turn back into inflationary flames. This is a really Fed policy, is really important to get right, and they can blow it all if they ask the Fed to ease too much. They can blow it all if they ask the Fed to ease too much.
Ryan:So the fact that basically, from the start of the Fed pivot and when they began to cut rates, the 10-year, as you mentioned, is up something like 100 basis points, is that telling you that the market expects inflation to be higher, or do you think there's another explanation for that?
Brian:I think it's a little bit of everything. We're running $2 trillion deficits and now we're spending 3.5%. I mean it's like we're not Greece yet, we're not Venezuela, we're not Argentina and I don't think we will be for a long, long time. But the market is saying, hey, you have to pay us to fund these things, you know, to fund this massive deficit. So that's one thing spending cuts could really do is by bringing that funding need down. I think they could help calm long-term interest rates down. But the other part is the long-term bond market saying the Fed's going to go too far too fast and bring inflation back. Term bond market saying the Fed's going to go too far too fast and bring inflation back. And so you put those two things together massive borrowing needs and the potential for inflation to come back, and the bond market's protecting itself. They're just putting yields up.
Ryan:What do you expect to happen with some of the fiscal spending bills that were passed into law during the Biden administration? Trillions and trillions of dollars in fiscal spending targeted on very specific areas. You know that was sort of their industrial policy. Do you expect that the Trump administration will roll those back? Will they keep some of them? It strikes me that some of the benefits also accrue to red states, not just blue states.
Brian:So what do you think will happen? Yeah, a lot of that money is focused on clean energy. So it's subsidies for EVs, it's subsidies for solar and wind and trying to get rid of all motor you know, fossil fuel burning motor vehicles by 2030, whatever California wants, I don't even know what their law is Well.
Ryan:they raised the CAFE standard so high that, in order for the automakers to actually comply with them, they have to drastically increase the amount of EVs.
Brian:Right, which is causing them, by the way, to lose billions of dollars.
Brian:And so but we have put in the last 20 years it's almost $20 trillion is the amount of money the world has spent moving in that direction.
Brian:One of the reasons I bring that up is that when you spend other people's money on something for other people, like this whole industry you don't care what you spend and you don't care what you get for it. When you spend your own money, you do. And the interesting thing is, after all of that spending, after all of that spending, Google and Microsoft and Meta they're going to buy nuclear power and not this wind and solar, and that's because it's their own money, and so I do expect the Trump team. That's one of the easiest places to cut back spending. And the other thing is because it's an incentive structure. I always found this a little underhanded and sleight of hand by the Biden administration is they would set up a subsidy and then the more people that took advantage of it, the more it cost, and so they would score it, as this is going to cost us $50 billion next year, and then you find out it cost us $150 billion.
Ryan:There was no cap on their loan.
Brian:There's no cap because it's a subsidy and then everybody just takes it, and so those areas are ripe for picking. I think there's a lot of companies out there that have only survived on just on government subsidies in that area and I think they're going to get hurt because that spending is kind of easy for Trump and the Doge and the Congress to go after and we need to cut spending. The government it's never been bigger. If you add up federal, state and local government spending plus the cost of regulation which we talked about, it's 51 percent of GDP. Plus the cost of regulation which we talked about, it's 51% of GDP. And I mean that's why real growth in America for the last 20 years has only been 2% a year. I mean that's less than half of the rate of growth we had after World War II. And I don't think people realize that. I mean, yes, we're growing, but we're growing half the rate.
Brian:And think about it. We've invented the internet, the computer, the worldwide web, the cell phone, the you know we're, you know Starlink, like Ozempic, ai. Now, you know, I mean the technologies that we have created in the last 20 years. They should have boosted growth a lot and yet we're only growing 2%. Why? Because government is so big it's a ball and chain on the economy. It's a wet blanket on the fire of innovation and it just slows us down. And when you have slower growth like that and the Fed tries to boost us by printing more money, that's what turns into inflation. So that's why Reagan's policy of cutting taxes and spending and regulation to lift growth while the Fed kept money tight to keep inflation, why it worked. We went from the 70s, where we had stagflation, to a booming economy with low inflation. We kind of have some stagflation today and those are the policies we need to get out of it.
Ryan:So the incoming administration will start January 20th. Is it 20th Yep? How long will it take for new policies to actually filter through and have an impact on the economy?
Brian:I think the stock market I mean I get the exuberance we don't have to worry about higher tax rates and it's always really hard to tell how much was or what was priced into the market. Like if everybody was pricing in that Vice President Harris was going to win and corporate tax rates were going to go up and we were going to start taxing unrealized gains. That's not good for the market, right. And so if that was priced in and now they're breathing a sigh of relief and going, thank goodness, and that's why we're up, well then it's probably this rally could last. I think it's a little more exuberance about, oh, the new policies are going to change the world immediately.
Brian:It didn't happen under Reagan. I mean, he cut taxes pretty quickly and held the line on spending pretty quickly. But the market we still had recessions, we still had really tough high unemployment in the first few years of Reagan, and so right now I think the stock market is overvalued I'm sorry to say that but it is. And then today it's even more overvalued because we rallied so hard, and so I still think we're at risk from that. It doesn't mean it can't stay overvalued, but it's overvalued and we're not out of the woods and it takes time for these policies to have an impact, even if he's elected January 20th. The tax cut, it can't move through Congress.
Brian:I mean, it takes a long time at least 100 days and they can immediately cut some regulation. We're likely to see less immigration, which might put a little squeeze on the labor force. I'm okay with that. We need legal immigration, not what's kind of happened, but there's a lot of moving parts and to think that it's immediately going to jumpstart growth, I think that's well wishing, okay.
Ryan:Well, there's a lot more to talk about, but I don't want to keep you too long here. I have a final question for you, a young Brian Westbury, eagle Scout, thinking about what was going to come over the next few decades of his life. Did you plan on being an economist back then, and if not, what did you think you would end up?
Brian:doing. I did not plan on being an economist. I loved math, and so at first I wanted to be an industrial engineer, and so that's what I started my education in. And then they made me take biology and chemistry. And I'm like, are you kidding? Because that was the base courses you had to do in engineering school. And I'm like I'm done with this. And so I just changed to math because, industrial engineering is just applied mathematics anyway.
Brian:And so I just changed to math, because industrial engineering is just applied mathematics anyway. And then, somewhere along the way, I took an econ class and the professor made me fall in love with it and, by the way, he had a forecasting contest, for you know, he had to pick the price of gold and the stock market or whatever, and I won. I had no idea what I was doing, but I won it and I got a subscription to Business Week as my reward. But being the winner and you know it was and it was he was a great teacher and I won that contest. And then I realized I didn't want to stand in front of a blackboard my whole life.
Brian:I really like people and economics is about people, and I went that way. And also I believe that economics understanding the way that markets work has a real impact on people, and that's what I care about. I want the most opportunity for everyone to find their God-given talents and be the most productive they can, and that's why I am such a fighter for free markets and small government, because the bigger government you have, the more you have people dependent on government. The less creative people are, the less vibrant an economy is, and so I really felt like I wanted to be in a profession that could have a big impact on people, and I guess I've had a pretty good career. Hopefully I have.
Ryan:Yeah, I think there's no doubt. I hear from the financial professionals that we interact with on a daily basis, so I think that's a great place to leave the conversation. Thanks again for joining us on the podcast. Let's do it again soon.
Brian:All right.
Ryan:Brian. Absolutely Thanks, brian, and thanks to all of you for joining us on this episode of the First Trust ROI Podcast. We'll see you next time, thank you.
