Steven Mnuchin Picked As Treasury Secretary

Yesterday I posted an article about why John Allison would be a great pick as Treasury Secretary. As few hours later, Trump picked Steven Mnuchin, the finance chairman of his campaign, to be his Treasury Secretary. Trump may have met with John Allison to seek his incite opposed to actively considering him for the role. Maybe John Allison is being considered for another role. I still don’t consider meeting with John Allison to be a bad thing, but it is a disappointment to see him not get the job. Steven Mnuchin was the chairman of Dune Capital, spent 17 years at Goldman Sachs, and worked for Soros Fund Management.

The differentiating factors among the candidates are likely not their resumes because they all have impressive ones. The differentiation comes from the candidates’ ideas and how strong their relationship is with President Trump. Hindsight shows us Steven Mnuchin won the job because of his prior relationship with Trump. He was originally chose because of his ideas, so I’m not saying ideas don’t matter.

I watched Treasury Secretary Mnuchin and Commerce Secretary Wilbur Ross do an interview on Fox Business. I will explain the takeaways I have from the interview. It was a long interview, but unfortunately some of the most important details weren’t discussed.

The three topics discussed were tax reform, regulatory reform, and trade. Although I’m more negative about the future of the economy than the mainstream viewpoint, I think the sentiment that President Trump will be against expanding trade is wrong. Trump is not a typical politician, so when he speaks of tariffs, he’s not saying that they will be his priority. It is a negotiating tactic with the goal of showing America is in a position of strength, meaning it should be the country dictating the rules.

Wilbur Ross says America will not be a part of the Trans Pacific Partnership and re-negotiate NAFTA. He says America’s goal will be to expand exports not decrease imports. He wants other countries to allow American firms to compete fairly in their markets. This practice is great for foreign consumers who get access to new products. It also promotes job growth in America with the goal of balancing the massive trade deficit. Ross is in favor of bilateral trade deals which give America a better negotiating position than a 15 country deal like the TPP. If America is advocating for free markets, this is great for global growth.

One part where Ross is mistaken, in my perspective, is his anti-Chinese dumping stance. If China wants to sell steel at a loss in America to create jobs in China, America should let it. Dumping hurts American steel jobs, but helps other firms who consume the steel. China cannot permanently provide steel at a loss. Its economy is in a massive debt bubble. That burst will surely change the dumping dynamic.

The final point Ross made was that there would be $200 billion in corporate pre-tax savings if 10% of regulations are cut. Clearly this is a great idea. Regulations being cut are more important than tax reforms for spurring the economy, in my opinion, because regulations can completely prevent some business activity from taking place because they are either too complicated or too expensive to comply with.

Mnuchin discussed repealing Obamacare in the first 90 days. This is not surprising as Trump picked Tom Price as HHS Secretary. He worked as a regional banker, so he knows the specifics of how to dismantle Dodd Frank and encourage lending. This is a long term positive which may not be seen immediately because of the economic downturn ahead. Both gentleman also want to reign in the EPA. This will be a benefit to the oil and gas industry as pipelines have been prevented from being built, with the most prominent one being the Keystone Pipeline.

The key idea where Mnuchin disagrees with Allison is he agrees with having the FDIC and having banking regulations. The FDIC is a bad idea because it guarantees deposits which is an inherent moral hazard. Banks will take less risk if depositors are not insured by the government because customers will leave the risky ones. This is why I would describe Mnuchin as someone who brings improvements, but isn’t a game changer who will bring real capitalism to America. One of those improvements would be the privatization of Fannie and Freddie. This may make it more difficult to get a home loan in the short term, but will prevent future housing bubbles from being created. The Fed has created a second housing bubble, but low interest rates are a separate bubble cause.

When asked about the Federal Reserve Mnuchin stated Trump will make the two appointments to fill the open fed governor positions. He said interest rates will remain low for some time. I don’t know why he thinks interest rates will be low, but this may signal Trump’s plan to pressure the Fed to keep interest rates low, so the government can afford to pay for his infrastructure stimulus without ballooning the deficit. He also spoke about what I consider a myth which is that the government will be able to extend the maturity dates of loans without the Federal Reserve stepping in and buying them through quantitative easing part four.

On infrastructure stimulus, the men proposed a combination of what we’ve heard. They promoted their private partnership plan along with some increased government spending. The interviewer should have asked a follow up question on how this spending will be paid for considering the tax cuts coming. However, since it wasn’t asked we will have to wait and see what the first 90 days of President Trump’s term will bring.

The tax cut is for middle income citizens and for corporations. The upper income will get a lower tax rate along with less tax deductions making a neutral impact to taxes paid. The tax code will be simplified and include the child care tax credit. There will be 3 separate rates instead of 7. Mnuchin promised 3% to 4% GDP growth which is ridiculous because government shouldn’t be making economic guarantees which it cannot uphold. Given the economy is at the end of the cycle, the GDP growth rate may be negative in one of Trump’s first four years. He called this growth projection fantastic, but it isn’t considering the potential growth rate under a capitalist system. I don’t know what the growth rate would be under capitalism, but that is the point of capitalism, the market decides, not bureaucrats.

The Trump administration is overly optimistic about the job creation and infrastructure spending that the 10% foreign repatriation tax holiday will bring to the economy. Goldman Sachs estimates $200 billion of $1 trillion of foreign cash will be repatriated based on historical precedent. It also expects $150 billion of the $200 billion will be spent on stock buybacks, not new investments and job hiring like Trump says will happen. Therefore, stock prices will be boosted, but little economic growth will result. These buybacks are bad for the long term health of corporations because buying stocks at high valuations is not a worthy use of cash.