For the rest of December, Washington Examiner reporters will be exploring what 2018 has in store in a number of areas, from the White House and Congress to energy and defense. See all of our year ahead stories here.
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President Trump and congressional Republicans in 2018 will face managing an economy that could, for the first time in a long time, be running close to its potential.
Unemployment finished the year at the lowest rate since the dot-com bubble. And forces are aligning to drive it even lower.
The Republican tax cuts are set to provide about $136 billion of stimulus in 2018. Implementing the tax overhaul, which includes complex new arrangements for small businesses and taxation of international earnings, will prove a major task for Treasury Secretary Steven Mnuchin and David Kautter, the Trump Treasury appointee who is also the acting IRS commissioner.
With the tax cuts taking effect, it’s possible that the unemployment rate will dip to 3.5 percent or lower, plumbing depths not seen since the 1960s.
Unemployment that low would be a sign that the economy is performing as well as it could be, at least in the eyes of many central bankers at the Federal Reserve. At some point, rock-bottom unemployment is thought to be a threat to drive up inflation.
Whether that threat is real is a question that Jerome Powell, Trump’s nominee to replace Janet Yellen as chairman of the Fed, would have to weigh. If low unemployment really is a threat to stable inflation, it would be up to him to hasten the plans for raising interest rates over the next few years. If it’s not, though, further rate increases could mean that many people who want jobs don’t get them.
For their part, congressional Republicans and administration officials believe that there are many more people who want jobs but aren’t able to get them. They frequently look beyond the unemployment statistics to figures about labor force participation to make that case. The labor force participation rate is still well below its level before the financial crisis. That might partly be expected, because of the aging of the population, but workforce participation also has been declining among working-age men for years.
House Speaker Paul Ryan and Trump have talked up the prospects of welfare reform as a way of getting more people into the labor pool. Republicans could pursue legislation to overhaul some of the major benefit programs to include more work requirements. Medicaid, in particular, is likely to come under scrutiny from Congress or from the administration. Alex Azar, Trump’s nominee to succeed Tom Price as secretary of the Department of Health and Human Services, would have significant latitude to do some of the same things administratively.
The other big agenda item that Trump economic adviser Gary Cohn has teased is a program of infrastructure spending of as much as $1 trillion in new spending on bridges, ports, and roads in addition to regular government funding.
In theory, improving the transportation system would make logistics easier for businesses, increasing productivity. And productivity drives higher pay.
Although wages and salaries have been rising steadily for years, the country hasn’t seen the catch-up growth that might be expected. Republicans criticized former President Barack Obama for the slow acceleration in wages and now justify their tax reform and the push for infrastructure as ways to boost productivity and compensation.
The same goes for financial regulation. In the Senate, Banking Committee Chairman Mike Crapo of Idaho has assembled bipartisan support for a legislative package that would modestly ease some of the post-crisis rules that Republicans have claimed choke off credit and hamper growth. Trump and House conservatives would like to go further and repeal big parts of the 2010 Dodd-Frank financial reform law, but any such rollbacks would need to be undertaken administratively because of Democratic opposition in the Senate.
There is one major bill that could gain support in 2018, though: legislation to reform the housing finance system. Reform of the secondary mortgage market is the biggest unfinished businesses since the financial crisis and would provide a capstone for the tenure of House Financial Services Committee Chairman Jeb Hensarling. The Texas conservative is set to retire at the end of the year and wants to shutter Fannie Mae and Freddie Mac. In the Senate, a bipartisan duo — Republican Bob Corker of Tennessee and Democrat Mark Warner of Virginia — are working on a plan to keep Fannie and Freddie but allow competitors to offer government-guaranteed mortgage-backed securities.
