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The ADS Ventures Newsletter: The Beginning of the Trump Administration and the 115th Congress
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The Kickoff
Friends and Colleagues,
What a wild three weeks this has been. So much commotion, so much chaos, so much confrontation, so many silly disputes, so many things that fundamentally challenge the foundations of our shared sense of American exceptionalism. It is hard to make sense of what has happened, let alone make predictions for the future.
The most lucid, clear-eyed, and persuasive analysis of the current situation comes not from a political analyst, but from the legendary Boston investor Seth Klarman, in his most recent letter to investors. Seth has a mixed political pedigree, having supported candidates from Cory Booker and Mark Warner to John McCain, Jeb Bush, and Chris Christie. Here are some of Seth Klarman's observations:
"The big picture for investors is this: Trump is high volatility, and investors generally abhor volatility and shun uncertainty. Not only is Trump shockingly unpredictable, he's apparently deliberately so; he says it's part of his plan."
"Exuberant investors have focused on the potential benefits of stimulative tax cuts, while mostly ignoring the risks from America-first protectionism and the erection of new trade barriers."
"President Trump may be able to temporarily hold off the sweep of automation and globalization by cajoling companies to keep jobs at home, but bolstering inefficient and uncompetitive enterprises is likely to only temporarily stave off market forces. While they might be popular, the reason the U.S. long ago abandoned protectionist trade policies is because they not only don't work, they actually leave society worse off."
"The erratic tendencies and overconfidence in his own wisdom and judgment that Donald Trump has demonstrated to date are inconsistent with strong leadership and sound decision-making."
Despite the confrontation and the chaos between the high-speed lanes on the left and the right side of the highway, there appears to be a broad middle median of bipartisan consensus. While they don't necessarily agree on specific details, there is broad bipartisan support for infrastructure investment, an overhaul of the tax code to make our corporations more competitive, and a rethink and reevaluation of outdated regulations and programs, done in a manner that allows full public input and careful evaluation of outcomes based on evidence. There is bipartisan support for a robust and multifaceted response to the threat of terrorism that is guided by longstanding constitutional protections, and a revision of our current health insurance and healthcare system that guarantees access, affordability, and rational cost containment, done in a manner that does not disrupt individual coverage and insurance markets. There are strong efforts to address both the economic inequality that exists among individuals and also within communities in the country.
When President Trump has sought respected leadership such as his appointments of General Mattis, General Kelly, and Dr. Shulkin (VA Sec.), he earns broad bipartisan support and general public and media acclaim. The question remains: does President Trump have the ability to control his impulses and instincts, respect the separation of powers, and seek common ground, common sense, sustainable economic growth, and national security? We don't know the final answer yet, but early indications are ominous.
What We Know About the Trump White House and What We Don't...
After less than 3 weeks of a Trump Administration, we now know with a high level of certainty that...
1)
While many of President Trump's early policy rollouts have been unpopular, his individual engagement threatening companies about moving jobs offshore or high costs on government contracts have been hugely popular. Many Americans are relieved and gratified to see a President who seems to be acting boldly and acting on their behalf.
2)
President Trump will defy Republican orthodoxy and the criticism of Republican Congressional leaders on entitlements, limited government, US foreign and defense policy, individual liberty, and free markets.
3)
Those who underestimate President Trump do so at their own risk. Congressional Republicans, Congressional Democrats, the media, and "the elites" continue to puzzle over the passion of the 40-45% hardcore Trump voters who applaud his every step and misstep. While President Trump's favorability is at historic lows, he has an immovable base that appears ready to support his every move and it is not clear what it would take for members of this 40-45% to withdraw their support. A motivated base that feels heard and recognized for the first time can easily grow to a majority of support. President Trump knows his base.
4)
While almost every president has been shaped, transformed, molded by the presidency, President Trump is entirely unchanged and almost certainly unchangeable. He is unlikely to change his views or style at age 70 and he is uniquely confident and assured in the rightness of his actions. Indeed, President Trump's TV watching habits are so regular and unchanged, and his reactions so predictable, that ad rates for the "O'Reilly Factor" and for "Morning Joe" have skyrocketed. Lobbying groups have found a way to "speak directly into the President's ear".
5)
President Trump should be taken seriously and literally, particularly in the areas where he feels most passionately and in areas where he feels most closely aligned with his core supporters, i.e. immigration, terrorism, trade, America First nationalism, and reducing and restricting government regulation of business activity. While President Trump will push hard, fast, and relentlessly to reduce government regulation of business activity, he is also comfortable pushing restrictions on individual liberties and rights, whether in reproductive health, where he is the most anti-abortion president since Roe v. Wade, or in individual rights to privacy
. President Trump has a deep and abiding distain and revulsion for what he perceives as the "intellectual elite" and a deep affection and respect for the "financial elite".
6)
The Trump White House will push the limits of executive authority as far as they are able, and move as quickly as possible, for dramatic changes in recent and also in long-settled policies and programs. They relish chaos and care little for process, procedure, protocol, and precedent. The Trump White House is on track to confront the fundamental principles of "separation of powers" in a way that no president has done since 1789.
7)
Virtually nobody expected President Trump to win, including the President himself, and the team around him. As a result, the Trump transition was small, underfunded, and ineffectual. Governor Christie's difficulties and ultimate removal as head of President Trump's transition exacerbated the problems. The Trump team has been playing catch up ever since. The difficulties they have faced in standing up a governing team are best illustrated by the fact that while there are between 1,200 and 1,400 government positions that require Senate confirmation (don't ask why the Congressional Research Service can't give you an exact number. Like everything in the federal bureaucracy, it's complicated), President Trump has only sent 35 nominations to the Senate. Those numbers say it all about the struggles the Trump Administration is facing managing the vast federal bureaucracy that in many instances rejects his ideology, approach, and policies.
8)
President Trump will hit back hard on any criticism of his legitimacy or the legitimacy of his decisions. He doesn't care who he hits, or what the consequences of hitting. Judges, Republican leadership, media, etc. Indeed, he seems to particularly enjoy doubling down on a losing hand.
9)
President Trump has a blind spot to his vulnerabilities in business conflict and in US relations with Russia/ Putin. President Trump's vast foreign and domestic economic holdings will be under increasing scrutiny, and he has devoted almost no White House or corporate resources to ensure that he has some level of protection from unintended and inadvertent conflicts which could become either politically or legally problematic. Trump's comments and connections with Putin are puzzling to virtually all members of Congress (the exception of a few outliers like Rep. Rohabacher). There's no obvious benefit to his favorable comments and actions towards Russia. Increasingly, his behavior towards Russia has raised questions from both Democrats and Republicans as to whether there is "some special bond," and the nature of that bond.
What we don't know...
1)
Which of the two factions in the Trump Administration will prevail on which policies (aside from Trump's passions). President Trump has built a White House staff with two diametrically opposed power axes, the Bannon wing and the Prebus wing. While almost all modern American presidents have had factions and friction amongst their White House staff, no president in modern times has had two factions that are so diametrically opposed in ideology and in priorities. When President Trump offered Bannon the position of Chief Strategist, Bannon insisted in having the news release note that he would not report to the White House Chief of Staff (Reince Prebus). While this may seem like a minor thing, it is totally unprecedented. The White House relies on discipline and hierarchy. Having a freelancer in the East Wing invites chaos, which is precisely what has happened.
2)
How the Trump Administration will handle issues like Obamacare and tax reform, when the interests of the Trump core supporters are at loggerheads with the priorities of the Congressional Republican majorities. On Obamacare, the Congressional Republican majorities and Trump's Secretary of Health and Human Services designee are overwhelmingly in favor of repealing and providing very limited replacement as soon as possible, but certainly in the early months of the Administration. President Trump, in the past, has advocated for a single-payer healthcare system. In an interview with Bill O'Reilly before the Superbowl, President Trump said that the process of repeal and replacement of Obamacare is "complicated" and "maybe it'll take 'till sometime into next year."
3)
Nowhere is the gulf between historic and foundational Republican beliefs and President Trump's stated positions greater than in the national security arena. President Trump has placed well-respected, proven administrators to run the Secretariats of Defense, Homeland Security, and State. At the same time, the Trump National Security Council is populated by individuals with limited or no national security experience, and is headed by a highly controversial former general who is at odds with the Republican foreign policy establishment and with the Republican leadership of the Intelligence, Armed Services and Foreign Affairs/ Foreign Relations Committees in the House and Senate. It is not yet clear who will have the upper hand in formulating foreign and defense policy, and how long will the Cabinet Secretaries continue to serve if White House policies are contrary to their views and beliefs.
4)
The Trump Administration is operating with fewer Cabinet Secretaries confirmed and with fewer staff in place than any previous Administration. While the confirmation process is a result of conflict with Democratic members of Congress, the inability of the Administration to identify and recruit individuals for non-confirmable policy positions in the government is increasingly restricting the ability of the Administration to carry out policy. There remains significant uncertainty as to whether Congressional and establishment Republicans who have served in previous Administrations, and have represented a 'government in exile' during the Obama Administration, are willing to serve in the Trump Administration. If the Trump White House continues to have difficulty filling the 6,000+ high level non-confirmable government positions that keep things moving, and ensure White House directives and priorities are faithfully followed and executed, they will have great difficulty controlling the vast federal bureaucracy.
Chet
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Repeal? Replace? Repair?
The repeal and replacement of the Affordable Care Act (ACA) was one of the key policy pillars of the GOP's sweeping political victories this fall, and Congress' focus from the day the 115th Session commenced. While the first two weeks of the Session focused almost unilaterally on how to repeal, and then how to repeal and replace, the ACA, the effort has somewhat rapidly moved to an effort to "repair" the ACA, with both President Trump and Congressional leadership now acknowledging that any ACA overhaul will not be finalized for several months, if this year at all.
This week, Speaker Paul Ryan, R-WI 1, doubled down on his commitment that Congress will act on ACA replacement this calendar year, though Senate Leader McConnell, R-KY, has not made the same commitment this week. The comments come on the heels of President Trump hinting that completion of an ACA replacement may not occur until next year, given the Administration's early trouble with successfully executing executive orders, and Congressional Republicans' inability to identify an appropriative replacement or repair of the ACA.
As Washington, DC has struggled to find a path forward on ACA replacement, constituents in both red and blue states have been vocal in their opposition to a complete repeal of ACA, focusing primarily on the fact that an estimated 20 million people would lose their health care coverage, as well as concerns that insurers could discriminate over pre-existing conditions. These concerns have certainly slowed Republicans in their efforts to move forward on an ACA repeal without an agreed upon replacement, and bolstered Democrats' unwillingness to work with Republicans on a replacement plan.
One option the Republican leadership has explored is legislating a replacement/repair of the ACA this calendar year, but delaying required implementation dates until after the mid-term elections. And, there is debate as to whether the Department of Health and Human Services could actually implement such a mandate with a year or two.
In an effort to show movement on ACA repeal and health care reform, House Republicans are attempting to move smaller bills that will take a piecemeal approach to overhauling the health care system. Yesterday, for example, the House Energy and Commerce Subcommittee on Health passed several bills closing loopholes in Medicaid eligibility including HR 829, The Prioritizing the Most Vulnerable Over Lottery Winners Act of 2017, which would prohibit lottery winners from receiving Medicaid benefits. The attempt to pass such legislation signals the long road ahead for a health care overhaul, though there is no doubt the Congress will continue to prioritize the issue until a resolution is found, a "repair" can be identified, or broader health care reform can be claimed.
Despite the growing discord, there are several areas of common ground, especially among Republicans, that are emerging as likely targets in the health care overhaul, including: drug pricing reduction, allowing consumers to purchase insurance plans across state lines, and the elimination of the Center for Medicare and Medicaid Innovation (CMMI), also known as the CMS Innovation Center.
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Infrastructure - A Hopeful Note of Bipartisanship?
Unique among the Trump Administration's controversial early policy priorities (the Mexican border wall, the executive order to restrict individuals from seven Muslim nations, etc.) one priority, infrastructure, seemed destined for some much-needed bipartisan consensus. During the campaign, then-candidate Trump repeatedly decried the state of America's infrastructure, terming it "third world" in his first presidential debate against Hillary Clinton. President Trump's statement, which mirrored a similar 2014 statement about New York's LaGuardia Airport from former Vice President Biden, seemed to be an area of agreement between Democrats and the President. During the campaign, Hillary Clinton had promised a $275 billion increase in infrastructure investment if elected, and Barack Obama had long called for increased infrastructure spending, either through the creation of a national infrastructure bank, or via direct spending. Trump's promised infrastructure package has exceeded all previous proposals, ranging from $500 billion to $1 trillion.
The crux of Trump's plan is a plan to leverage private sector capital with the promise of over $100 billion in tax credits, theoretically leveraging $167 billion private equity investment to finance $1 trillion in infrastructure investment. The Administration proposes to cover the $100 billion in tax credits (lost federal tax revenue) with a one-time partial repatriation holiday, allowing companies to repatriate money to the United States with only a 10% tax penalty, rather than a nominal 39.1% corporate tax rate. If $1 trillion were repatriated, federal tax revenues of $100 billion would cover the tax credit portion of the Trump plan, unlocking private investment that could in theory reach Trump's preferred $1 trillion infrastructure package. One significant con of this plan, however, is that all the new infrastructure built under this program would need to produce revenue to repay the private investors; while toll roads and airports can generate revenue through various user fees, other needed infrastructure investments seem less likely to produce the necessary return.
The Trump plan was floated by then-advisor (now Commerce Secretary Nominee) Wilbur Ross in October, just a week before the election. Since then, conflicting reports have emerged as to Trump's preference regarding the details of his infrastructure plan, ranging from a $550 billion plan financed by more conventional government bonds (an approach explicitly dismissed by his campaign's own whitepaper) to a more recent rumor that Trump's economic advisors favored an infrastructure bank, an idea long favored by Democrats. The Trump transition team also muddied the water with a December one-page list of "sample" infrastructure projects, which it provided to the National Governor's Association. That 50 item list included highway, rail, airports, ports/water navigation, and electrical generation/transmission, including a number of projects that had already been promised funding by the Federal Government.
For their part, Democrats have rushed to reclaim the narrative on infrastructure. Just after the Inauguration, Senate Minority Leader Chuck Schumer, D-NY, and a handful of senior Senate Democrats released their own $1 trillion plan "including not only roads and bridges, but also the nation's broadband network, hospitals run by the Department of Veterans Affairs and schools." The plan, contrary to most of the signals from the Trump Administration, would rely on direct federal spending, and Schumer claimed the plan could create as many as 15 million jobs over 10 years.
Congressional Republicans, who repeatedly scuttled infrastructure efforts by the Obama Administration, remain a major sticking point to pushing through a Trump infrastructure package. Although Speaker Ryan and Majority Leader McConnell have both signaled tacit support for an infrastructure investment, paying for it without increasing the federal budget deficit is a major Republican priority. The Ross plan to finance the investment by tapping repatriated corporate earnings has been met skeptically by some in Congress who had hoped to use repatriation to "pay for" comprehensive tax reform, which would likely reduce federal tax receipts in the short term. Last week, the House's Transportation and Infrastructure Committee held its first hearing of the new Congressional session on the Trump Administration's infrastructure plans. Although all of the business and labor leaders who testified at the hearing supported an increased investment in the nation's infrastructure, Members of the Committee, including Chairman Bill Shuster, R-PA-9, acknowledged that paying for the plan "is the $1 trillion question."
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The Defense Forecast
In our previous newsletter, we took an in depth look at President Trump's cabinet selections, including that of retired Marine Corps General James Mattis for the position of Secretary of Defense. The insights on Mattis' military acuity and favorable temperament that General David McKiernan (Ret.), a Senior Advisor to ADS, provided our readers in that newsletter were accurately reflected during Mattis' well-received confirmation hearing before the Senate Armed Services Committee and the overwhelmingly supportive Senate vote on his confirmation, 98-1.
Following confirmation, Secretary Mattis was put to task. Per a Presidential Memorandum issued by President Trump on January 27th, the Secretary has been instructed to conduct a 30-day Readiness Review with an accompanying report that would identify actionable steps to be taken within the current fiscal year to improve readiness. The memorandum further instructs Secretary Mattis to work with the Director of the Office of Management and Budget (OMB) to develop a Fiscal Year (FY) 2018 defense budget as well as an FY 2017 emergency supplemental budget amendment to address perceived gaps in military readiness. The memorandum also requires the development of a plan of action to achieve desired levels of readiness by FY 2019, and directs Secretary Mattis to initiate a review on the nation's nuclear arsenal and ballistic missile defense positions.
Days later, Secretary Mattis issued implementation guidance for the budget directives found in President Trump's memorandum. Specifically, he stated that the FY 2017 budget amendment will be submitted to OMB by March 1, 2017, and will be focused on urgent warfighting readiness shortfalls across the joint force and new requirements driven by acceleration in the fight against ISIS. While the amendment will include offsets from lower priority programs, it is expected to be a net increase over the previous FY 2017 topline request of the Obama Administration. Regarding the FY 2018 budget request, Secretary Mattis committed the DoD to delivering its plan to OMB by May 1, 2017.
While the Trump Administration has provided little guidance on hard numbers for defense spending for the remainder of FY 2017 and beyond, the Chairmen of the House and Senate Armed Services Committees have given us some information to work off of. A number floated for a potential supplemental budget amendment is $18 billion, which has largely been vocalized by House Armed Services Chairman Mac Thornberry (R-TX). That was the figure included in last year's House-passed National Defense Authorization Act (NDAA) intended to support additional troops, training, maintenance, facilities and new equipment. When the NDAA was considered in conference, that funding was removed.
Regarding FY 2018 and beyond, the Chairman of the Senate Armed Services Committee, John McCain (R-AZ), recently released a white paper on future defense spending titled "Restoring American Power." The white paper can be viewed
here. In it, Senator McCain details his goals of repealing the Budget Control Act, a $640 billion base defense budget for FY 2018 - which represents a $54 billion increase over President Obama's planned budget - and, a four percent annual increase in defense spending moving forward. That percentage growth would amount to a total of $430 billion over the next five years. Senator McCain's plan also calls for $60 billion in Overseas Contingency Operations (OCO) funding annually. These goals were reaffirmed in a January 24th hearing on the defense budget for FY 2018 and beyond that was held by the full Senate Armed Services Committee.
While unpredictability and a seeming lack of coordination have been dominating themes in Washington since November's election, the Republican majority in Congress and the Trump Administration appear to be in unison when it comes to big-picture defense spending increases. How exactly that will be achieved, particularly considering the requirements of the Budget Control Act, remain to be seen. We'll be sure to update you as more materializes.
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Mass Happenings
On January 25th, Governor Charlie Baker introduced his $40.5B FY 2018 state budget, known as H1. While breaking the $40B mark is a first for Governor Baker, it's not necessarily an indication that the Commonwealth is on financially stable ground. The Massachusetts sales tax revenues have declined, Medicaid spending accounts for 40 percent of the budget and climbing, and a perpetual structural deficit created by the use of one-time revenue sources has strained the Administration's ability to balance revenues and spending, despite a 2.8 percent unemployment rate. During Governor Baker's tenure, he's developed an easy going rapport with legislators that has nurtured bipartisan legislation including pay equity and an FY 2017 budget that stayed relatively flat throughout the approval process. Both his carefully curated relationship with Leadership and the fiscal stability of the H1 budget were called into question when a legislative pay increase rocketed through both chambers in little more than a week; an additional financial burden that will cost an estimated $18 million annually in pay raises for legislators, judges and other select officials, including the Governor and Lieutenant Governor.
According to the Administration, the FY 2018 H1 budget is a 4.3 percent, or $1.7B, increase over FY 2017 projected spending. The new revenue is expected to come from several sources, including a "health assessment" levied on businesses with 10 or more employees, if 80 percent of the company's employee base do not take the employer-sponsored health benefits plan. Despite Governor Baker's assurances that he would not support any new taxes, additional new revenue generating initiatives include a room occupancy tax on short-term rental services like Airbnb, and a bill signed in 2016 that carries a 20-cents-per-ride fee on ride hailing companies like Uber and Lyft. Other key points of H1 include $4M for expected expenses in the new recreational marijuana market, a 2 percent increase in local aid to school districts, a 1 percent increase for the perpetually struggling Department of Children and Families, and provisions narrowing certain welfare eligibility requirements.
The House and Senate will now begin crafting their own versions of the Commonwealth's budget independent of H1. A process of reconciliation between H1, the House budget and the Senate budget will take place in the late Spring and into the early Summer.
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