Key economic indicators have judged the current US economy to be in good health. Inflation is low and US manufacturing is picking up. Employment figures are improving but structural unemployment remains a concern. The Trump phenomenon has improved confidence. Len Harlan, Chairman, Castle Harlan Executive Committee, has been a close observer of US politics over many years – his business interests have brought him close to Washington and New York politics while also maintaining close links with Australia which he visits regularly. Len Harlan addressed The Sydney Institute on Tuesday 13 March 2018 to give a considered update on the US economy and the Trump Administration.

THE TRUMP ADMINISTRATION AND THE US ECONOMY

LEN HARLAN 

Thank you, Gerard. It’s a pleasure to be here.

Many people find Trump shocking and Trump is shocking because he is actually doing what he said that he would do. Unfortunately, among politicians, that is shocking. His key campaign promises were “Make America Great Again” and “Drain The Swamp” meaning change Washington, which he said repeatedly. So, the question is, what did he inherit and what is he doing and where is he going?

Well, Trump inherited a bloated bureaucracy which was doing little and hardly keeping up with technological changes. We’re talking about congressional stalemate. We’re talking about complacency. We’re talking about divisiveness. Washington was not working both literally and figuratively. The Congress starts on Tuesday and quits on Thursday and the federal government pays for every congressman to go home for a short weekend of four days.

Trump inherited a bloated bureaucracy which was doing little and hardly keeping up with technological changes.

We are talking about the swamp. And, if you want to have a change, you must disrupt. That is key. You must disrupt. Great business leaders know this – you bring innovation through disruption. Trump is the great disruptor of our country and perhaps our generation. We have had other disruptors. Steve Jobs was a disruptor in technology. But I’m talking about in the political realm.

Trump is the great disruptor of our country and perhaps our generation. We have had other disruptors. Steve Jobs was a disruptor in technology. But I’m talking about in the political realm.

Yes, Trump is a mess but it’s good that he is because he is a change agent and that’s what’s needed. It’s needed in our country and I suspect in some other places as well. He’s a change agent who’s dealing with normalcy, complacency, tradition and political correctness. Especially political correctness which was getting to be obscene. Trump is not a politician. He’s not left. He’s not right. He’s not a Republican. He’s not a Democrat. He’s a man who keeps his promises and he’s not an ideologue.

Trump’s focus is in two parts: who he is and his character and what are his beliefs. Unfortunately, the focus on Trump and his character distracts from what he’s done. As I have said before, don’t listen to what he says, watch what he does.

Disrupters are action-oriented people: impulsive and pragmatic. So, what we need to do is separate style from beliefs. Unfortunately, in the United States, many of us think of the presidency with a mystical view of Camelot. We all know that the one president that we thought was Camelot wasn’t so Camelot – and I’m referring to JFK. We put our presidents on a pedestal. We want them to be the ideal human being in all respects. I’m afraid there is no such animal.

We put our presidents on a pedestal. We want them to be the ideal human being in all respects. I’m afraid there is no such animal.

So let’s take a look at Trump’s style. He’s a bully, but he’s also an earth-shaker. Look what he’s done with tariffs, look what he’s done with North Korea – those are earth-shaking steps forward. Bullies get to do that, politicians don’t. Bureaucrats certainly don’t.

He’s a negotiator. Real Estate, Trump’s background, is a zero sum game and it means there has to be a quid pro quo. If I do something, I want something in return. There is no free lunch – all very New York. He’s impatient, he dislikes process, he’s not interested in the status quo, and he’s action-oriented and impulsive.

Trump is also irreverent. He has broken down the PC culture dramatically. He is focused very much on the self. In other words, one takes responsibility for oneself; we don’t wear our feelings on our sleeves. This really helps people relate to each other.

Trump is also irreverent. He has broken down the PC culture dramatically. 

Trump is pragmatic and opportunistic. He’s more open to new ideas than you can possibly imagine. If you read between the lines, he’s forever having people march through the White House with ideas ­– with challenges. There is a certain tumult going on in which we see people leaving, people coming. In my estimation, this is the result of challenging people on ideas and how to get them done.

Trump is not afraid to raise issues, and he forces discussion, sometimes too publicly. A good example is gun control. He’s pushed for one item, and then another ­– how many times has he been all over the map? Of course, the journalists don’t like that at all, they want consistency. But what happens is he listens and he hears. In the case of gun control, he’s had many sessions in the White House where he has sat and listened to the people. Everyone has a say. And this is important. But, he’s also a little like the cow that gives a gorgeous can of milk and then kicks the bucket over. I can’t tell you the number of times I say, “Oh my gosh he’s just shot himself in the foot”. But this is the character of the man.

Trump is not afraid to raise issues, and he forces discussion, sometimes too publicly.

But what are his beliefs? He has very strong beliefs. You see this in his moves and the moves of his government, which is very significant.

He has very strong beliefs. You see this in his moves and the moves of his government, which is very significant.

First, he believes strongly in the rule of law. It’s a foundation of our society and it’s a foundation of his belief. He feels that the rule of law should be strong, fair and even-handed in its application. Even handed in its application – I’ll come back to that later in examples of where he is attempting to change the attitude of prior administrations which did not even-handedly deal with the law, specifically sanctuary cities.

First, he believes strongly in the rule of law.

He believes strongly in capitalism. That any person can do anything and make it to the top. Or what is known as the American Dream. And, as part of the belief in capitalism, he believes in fair trade and less regulation. In other words, create an environment where people can make it to the top. Regulations in the United States have begun to stifle that ability.

The American Dream strongly believes in the constitution of the United States, which says that there is a separation of powers into the three branches. That is very important because Trump has taken particular declarations that were instituted by the prior administration and reversed them. I’ll give you one very good example: Deferred Action for Childhood Arrivals or DACA. This involves the undocumented young people who were born in the United States or came to the United States as little children.

Trump reversed Obama’s ruling that these children could stay and be part of the community and the press went after him with a vengeance. But they didn’t really look at what he said. He said he would cease the regulation in six months because he wanted congress, the people’s forum, to decide how to handle DACA. He said it was not for the president to decide. This is the most tangible example I can think of that shows Trump’s respect for the US constitution and respect for the way that the law is to be implemented. He is turning it back to the people. Unfortunately, with a congress that is just tied up in its own underwear, they have been wrestling with it for far too long.

Unfortunately, with a congress that is just tied up in its own underwear, they have been wrestling with it for far too long.

The government, he believes, is there to defend all people. When Trump talked about a compromise with congress on DACA, the Democrats kept talking about 800,000 individuals. Trump believes it is more than a million. A million four, a million six, something like that. For Trump, it is not just about these young people, but how they are to be respected and gain the respect of the community.

Trump is focused on the moderate use of presidential power. This is a very big change from the prior administration. And he’s focused on self-reliance, not government reliance. He says we will reward our friends and we will punish our enemies. The role of government is to protect its people, both from the outside and within, and to serve its people, not the other way around. To serve its people. And fairness is quid pro quo. We see evidence of that now in all the trade agreements that he is attempting to renegotiate and negotiate. But the key is to negotiate from strength. You play to win. And strength enables you to compromise.

Trump is a risk taker, he’s not risk adverse.

The bottom line is he has a deep belief in American people, and hence he practises retail politics like nobody else has ever done. He talks directly to the American people through social media, he bypasses the press so that he gets his words out. He also has rallies which are pep rallies (whatever you want to call them) but they’re really a way for him to relate to the people of the United States, to the population. It’s not just a man sitting in the White House or Mar-a-Lago in Palm Beach, Florida. This is a man who’s out there. But he’s out there not shaking hands at railroad stops; he’s out there in big gatherings with a big audience.

The bottom line is he has a deep belief in American people, and hence he practises retail politics like nobody else has ever done.

So what has Trump disrupted? Let’s talk about foreign policy for a moment.

Trump has been focused on the US national interest, rather than on the past or a vague global agenda. In other words, he’s saying, yes, America first, but not America alone.

To me everyone has a motivation for whatever they do and the motivation for Trump is clearly, my country, America.

Of the quid pro quo which I mentioned ­– reward your friends, punish your enemies – there I give you a wonderful example. I am referring to the reward to Australia and punishment to North Korea. Australia has been the only country in the world who has stood with America in every major military campaign that we have had, starting with World War II. There is an affection that Trump embraces so that he quickly gave a special dispensation for the steel and aluminium tariffs to Australia. That’s a reward to friends. In turn, he asks for something. He asked that Australia step up and continue to support the sanctions on North Korea. He has also supported the open sea ways in the South China Sea.

I am referring to the reward to Australia and punishment to North Korea. Australia has been the only country in the world who has stood with America in every major military campaign that we have had, starting with World War II.

It’s a partnership. That’s what he’s after and there is where he is headed. A threat to the United States, he believes, is a threat to our allies and, in particular, Australia and Japan in this part of the world.

Trump looks at agreements and sees that many of them are out of date; some 30 years old or older. It’s time to re-examine them. And how do you get that attention? The US tradition with our state department has been to sit down and talk for five years, and maybe change a few paragraphs. So Trump says he’ll simply tear the agreement up! That sure gets everybody’s attention. Trump got North Korea’s attention that way too, didn’t he?

Trump believes in fair trade and quid pro quo. Shortly after announcing the US tariffs, he made an exception for the two biggest exporters of aluminium and steel to the United States, the two participants in NAFTA, Mexico and Canada. This is realistic and goes back to my advice that we not listen to what he says, but watch what he does. Alliances with the United States require genuine participation.

Trump believes in fair trade and quid pro quo. Shortly after announcing the US tariffs, he made an exception for the two biggest exporters of aluminium and steel to the United States, the two participants in NAFTA, Mexico and Canada.

In the past, our evangelical presidents ­would go around the world advocating that the West install democracy in the world. Well, some places don’t have the roots for it. To me, a country must start with the rule of law, and follow that with capitalism or mercantilism where people are earning money and have something to lose and then they can move further down the road to democracy.

Let’s look at trade policy because trade policy is really dictating foreign policy and NAFTA is a good example of it. With respect to the TPP, I believe that there will be some accommodation. Trump believes in trade but he believes that everybody should be as one in terms of equality. Until now, Trump’s bark has been worse than his bite. NAFTA appears to be the subject of renegotiation not termination. And, whatever desire Trump has to pick fights with China, it appears to have been moderated by his need for assistance from China in placing pressure on North Korea.

The recently announced tariffs on steel and aluminium were worrisome but the White House immediately exempted Mexico and Canada, and now Australia. While nominally, a member of the WTO, China flouts its principles of open reciprocal and market-directed trade by extensive state support of enterprise, deep restrictions on market entry and investment in protected sectors and forced transfer of technologies and IT. Do you think that’s a good trade? An even balance?

China flouts its principles of open reciprocal and market-directed trade by extensive state support of enterprise, deep restrictions on market entry and investment in protected sectors and forced transfer of technologies and IT

The WTO’s Most Favoured Nation clause allows China, as a late entrant, to benefit from other countries’ best tariff rates without the need for reciprocation. As a result, China has higher tariffs against most categories of products than the US has against China. For example, with non-agricultural products weighted by volume of trade, China’s average tariff on US products is 5 per cent. It’s almost twice what the US tariff is on Chinese products. Those are non-agricultural products. For agricultural products, the average Chinese tariff is almost four times higher at 9.7 per cent versus 2.5 per cent in the United States.

Trump is not incorrect in saying that we do not have true reciprocal trade with China. He sent a shot across China’s bow when he announced the aluminium and steel tariffs because while they do not directly affect China to any great extent, it warned China not to play around. The US is serious. That attitude becomes a very important dynamic as you watch Trump.

On regulatory reform, which is necessary for the basis for the US economy, Trump is making very significant progress. He has reversed Obama era regulations across many different sectors including financial services, energy and the environment labour markets, telecommunication and education. And, whilst some level of regulation is certainly necessary in an advanced economy, many in the business community in the States feel that the Obama administration went far beyond what is necessary. Motivated in many areas by ideological objectives, the Obama administration had regulations growing so rapidly as to impede economic growth.

He has reversed Obama era regulations across many different sectors including financial services, energy and the environment labour markets, telecommunication and education.

It took a long time to come out of the 2008 recession. When the Trump took office with the intent of deregulating, the new administration promised to eliminate two existing regulations for every one new regulation. As of the end of 2017, the White House claims that it had actually issued 22 deregulatory actions for every new regulation. In the first 9 months, 67 deregulatory actions took place versus 3 new ones.

In 2017 alone, 1500 new regulations, that had been planned by the prior administration with the bureaucracy, were withdrawn or delayed. Now the Trump Administration requires that new regulations have public comment which the prior administration ignored. It is about giving power back to the people. The new regulatory body requires that there be regulatory budgets from all parts of the government so that there is a plan.

None of this is hip-shooting. In addition, Trump persuaded Congress to nullify 14 Obama-era rules and one consumer protection rule. This is not insignificant as Congress has always loved to institute rules but not to take them away. The Trump administration estimates that this deregulation, in 2017 alone, has achieved a cost saving in the United States of $9.8 billion.

Trump persuaded Congress to nullify 14 Obama-era rules and one consumer protection rule.

We have to watch Trump, and what is he doing.

Then there is tax reform. Congress passed an historic tax bill in December 2017 that enacts large changes to the tax code on both businesses and households. And many believe the bill will increase corporate profits, cut taxes for most Americans, give a small boost to the economy and increase the federal deficit. But the most critical, unanswered questions about the effects of the bill are probably, what will companies do with their increased profits and how much will the economy be affected by higher deficits? Those are key questions.

With regard to corporate behaviour, initial reactions have already been very positive for workers, with major companies such as Boeing, AT&T and ComCast announcing special bonus and wage increases coming from the tax bill.

On defence, changes have been consistent with Trump’s belief in law and order and US strength in the world community. On the campaign trail, Trump promised to exempt military spending from a process known as sequestration, that has enacted automatic budget cuts since 2013. Sequestration has been extremely unpopular among military leaders, not just because it limits spending, but because it applies in an across-the-board fashion that leaves little room to preserve some programs and cut others.

Trump and Congress reached a budget agreement in February this year that technically does not end the sequester but that establishes new budget caps for 2018 and 2019 that is so much higher than a sequester that a sequester is much less likely to occur, according to budget analysts. The effect on the defence budget is significant. The deal allows base defence spending – not including funding for overseas combat operations – of $620 billion in 2018 compared to the prior level of $549 billion. That’s a very substantial increase. Think of that as expenditures into the US economy. Again, very significant. But, as you know, defence spending goes throughout the world and Australia enjoys part of that US defence spending in terms of technology. In 2019, that number is expected to go up by again another $100 billion. So, the defence industry is profiting.

The effect on the defence budget is significant. The deal allows base defence spending – not including funding for overseas combat operations – of $620 billion in 2018 compared to the prior level of $549 billion.

Let’s talk about energy. The New York Times, hardly a fan of Donald Trump, ran an headline on 28 January this year – Oil Boom Gives the U.S. a New Edge in Energy and Diplomacy. America first but not American alone. The great disruptor is looking at an industry that is being disrupted by shale oil and he’s encouraging it. The Obama industry was hostile to oil and gas production in the US, despite historic technology improvements that have opened up all new areas of production through hydraulic fracking.

The Trump administration is rapidly loosening these restrictions. This year, the US is expected to surpass Saudi Arabia and to rival Russia as the world leader with record output of over 2 million barrels a day, according to the International Energy Association. The growth of US oil and gas not only enhances US energy independence and the US economy, but has very important world security implications. For example, emerging US exports of natural gas undercut Russian energy influence in Europe today. This is just a beginning. Europe was totally dependent upon Russia for their energy and Russia used that as leverage.

So let’s move to the judiciary and what Trump is doing there. Once again, he’s shaken things up. He has broken the log jam. One new Supreme Court Justice and 28 new federal court judges have all been approved and are in place as against zero for the prior two years of the Obama administration. Trump has been able to walk across the aisle, or work both sides of the fence and get something done. His focus is not to use the courts to set public policy. Quite the contrary. He’s focused on appointing judges that believe in the constitution and interpreting the constitution rather than setting social policy. He’s not exercised the privilege that he has – because there are a lot of vacancies – of doing what are called recess appointments of judges, which other administrations have done. He is adhering to the value system of our country and what it stands for in terms of the separation of powers and not to overextend and make it an imperial presidency.

One new Supreme Court Justice and 28 new federal court judges have all been approved and are in place as against zero for the prior two years of the Obama administration.

On immigration it is still a work in progress. I mentioned DACA and Trump giving this back to Congress to deal with. Congress is having serious problems. They’re having difficulty getting it together. But I think we really have to say that on immigration not very much has happened which is a shame since the Trump Administration considers it Congress’ issue.Part of that issue is deportations and the criminal element, DACA, the wall and so on. My interpretation on “the wall” is that Trump wants the US border well protected so that huge numbers of people are not crossing that border illegally. Not a lot of those crossing are Mexicans. Mexico is a transit point for Latin Americans. In fact, a number of Mexicans are returning to Mexico as Mexico is prospering.

Not a lot of those crossing are Mexicans. Mexico is a transit point for Latin Americans. In fact, a number of Mexicans are returning to Mexico as Mexico is prospering.

The US economy is booming by every measure. We have the lowest unemployment rate at 4.1 per cent that we have had in 15 years. Since statistics have been held, this is also the lowest unemployment rate for blacks in the United States ever. Similarly, for Hispanics, and for women. Full employment suggests that productivity improvements are coming. When you have full employment – (and some would say 4.1 per cent represents frictional unemployment – people are moving from one place to another). To keep the economy going we need productivity.

There’s been a constant refrain by economists that the productivity improvements have not been so great over the last few years. But the way statistics are calculated is crazy. Take an office floor in any building in town and look at it 20 years before. How many assistants were on that floor then? And how many assistants are on that floor compared with executives now. That’s just one small example.

Take an office floor in any building in town and look at it 20 years before. How many assistants were on that floor then? And how many assistants are on that floor compared with executives now.

Sixty-six per cent of individuals rate employment in the economy as excellent or good. In other words, consumer and business confidence is way up. It’s up from 39 per cent at the time of the 2016 election to being now at 66 per cent. The small business optimism index is at the highest level since Ronald Reagan was president.

On wage growth, there’s been a 2.6 gain in workers’ salaries and benefits in 2017, and it looks like heading to a 3 per cent gain since 2017. Those statistics are the best since 2007 according to the Department of Labor. Six of Obama’s eight years in office saw gains of 2 per cent or less. His best gains were 2.2 per cent in 2016 and 2014.

The good part of consumer spending has been driving GDP growth since the end of the recession. It’s been very significant. The worrisome part, however, is that for the past two years that spending has been rising faster than disposable personal income. That means the personal savings rate is dropping and economists will tell you that’s not good news. But there is still a lot of money floating around.

And so too inflation, which is remarkably low and this in the face of a low unemployment rate. Which says that wages will be going up, personal income will be going up, and spending will go up because there will be greater disposable income. This will put a heavy premium on productivity.

In terms of the federal government and its deficit, I like to think of this as a question of debt capacity. If you’re a corporation in the United States, you are deemed to be doing “properly” by borrowing a reasonable amount of money. As the earnings of that corporation increase, the ability to borrow more money increases.

If you’re a corporation in the United States, you are deemed to be doing “properly” by borrowing a reasonable amount of money. As the earnings of that corporation increase, the ability to borrow more money increases.

Let’s think of the United States like a large corporation. If you start to float public debt, the market tells you when you’ve hit the wall. It also tells you when you’re starting to hit the wall because the market will require higher and higher interest rates. If those interest rates start to escalate the message is “slow down”. The US debt interest rate has been remarkably flat.

Trump has departed from traditional Republican orthodoxy because he is much less concerned about debt. If we look at the bond market, the key is that the dollar is the reserve currency. Most economists agree that there’s a global glut of savings; massive pools of savings require equally a massive supply of risk-free assets. There really are only two credible alternatives to US government debt. You’ve got the Eurozone government debt and you’ve got the Chinese government debt. Which of the three would you choose? That’s the reality.

Eurobond markets are still recovering from their debt crisis in Greece, there are doubts about the Italian banking system and Brexit further casts doubt on the future of the union, etc. China is opening up its bond markets, but sovereign debt totals only about $ US 4 trillion according to the IMF. This compares to about $20 trillion in the US federal debt alone.

Eurobond markets are still recovering from their debt crisis in Greece, there are doubts about the Italian banking system and Brexit further casts doubt on the future of the union, etc. 

Let me highlight some important and unresolved issues. Domestically, we’ve got Obamacare, infrastructure, immigration, gun control. In foreign affairs we’ve got the Middle East, Russia and China. There is also the question of Black Swan possibilities, great power conflicts, rogue regimes, the whole cyber area and vulnerabilities, the US mid-term elections and the special counsel investigations.

But keep in mind that Trump is the great disruptor. Great disruptions in the past not necessarily were made by nice, lovable people. You wouldn’t call Steve Jobs lovable. You wouldn’t have called Thomas Edison lovable. You wouldn’t have called John D Rockefeller lovable. It takes a tough person to make a tender chicken.

So, I’d just like to end by reading an ad that was in a number of newspapers in the States by an insurance company. Here’s its message:

Has America lost its courage? Are we no longer the home of the brave? We used to be a nation of people who took their destinies into their own hands. Trailblazers. Pioneers. Visionaries. People whose garages or car trunks could start revolutions. So what happened? When did we go from a nation that celebrates bold, world-changing ideas, to one embracing safe, incremental improvements? When did the visionaries try to improve the future get replaced by people just trying to improve profits for the next quarter? When did being brave become impossible? There’s never been a more important time to be an independent thinker. To implement your vision. Whether that’s starting a business, or growing one. There are difficult times for the fearful and timid, but always have been. But for the courageous, these are times ripe with opportunity, times for making the seemingly impossible, possible. Has America lost its courage? We think not.

for the courageous, these are times ripe with opportunity, times for making the seemingly impossible, possible. Has America lost its courage? We think not.

This statement, I think, represents the American people. So, we need courage to deal with Trump. But Trump is the disruptor and I’m glad he is.

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