Trump's Policy Offsets: Deregulation, Tax Cuts, and Economic Growth

As the world awaits the second Trump administration, investors are keen to understand the potential impacts of his policies on the economy and markets. While some policies may have negative effects, others could offset these impacts, leading to a more balanced economic outlook. This article explores the 'offsetting effects' of Trump's policies, focusing on deregulation, tax cuts, immigration policy shifts, and tariffs.

Deregulation and tax cuts are expected to have a positive impact on economic growth. The Trump administration's goal of removing 10 regulatory rules for each new regulatory rule is likely to create an environment of hyper deregulation, encouraging business investment and unleashing 'animal spirits' in both the economy and markets. This deregulation could have a psychological impact, boosting investor confidence and driving market moves.

Tax cuts, such as the extension and expansion of the Tax Cuts and Jobs Act (TCJA), are also expected to stimulate economic growth. The fiscal multipliers for lower- and middle-income people range from 0.3 to 1.5, significantly more than the estimated multiplier effect of a one-year tax cut for higher-income people, which is estimated to be 0.1 to 0.6. Additionally, a reduction in the top corporate tax rate to 15% for domestic manufacturers could make the U.S. a more competitive jurisdiction.

However, immigration policy shifts and tariffs may have negative effects. A mass deportation of undocumented immigrants could represent a major labor supply shock, potentially reversing the 2023 growth tailwind and risking a wage-price spiral. Tariffs, such as those proposed on Chinese imports, could lead to supply chain disruption and headwinds for U.S. equities.



The scale and sequencing of these policies will be key in mitigating or amplifying their effects. Deregulation, by spurring investment and unleashing 'animal spirits,' could mitigate the potential growth drag from tariffs. However, a concurrent push on tariffs and immigration could amplify inflationary risks and growth drag. The key lies in the scale and sequencing of policies. For instance, a strong deregulation agenda could partly offset the negative growth impact of tariffs. Conversely, a simultaneous push on tariffs and immigration could exacerbate inflationary risks and growth drag.

The selection of hedge fund manager Scott Bessent as Treasury secretary under a second Trump administration signals a pragmatic approach to policy-making, with an awareness of market reaction. This appointment suggests that investors could help shape both the substance and timing of specific policy goals. Bessent's background in managing complex portfolios and navigating market dynamics indicates a willingness to consider market feedback in policy decisions. This could lead to a more balanced and market-sensitive approach to economic policy, potentially mitigating some of the negative impacts of policies like tariffs.

In conclusion, Trump's policies, if sequenced and scaled appropriately, could offset negative impacts on growth and inflation. Deregulation and tax cuts could stimulate economic growth, while immigration policy shifts and tariffs may have negative effects. The key lies in the scale and sequencing of policies, with deregulation potentially mitigating the negative growth impact of tariffs. Investors should monitor the substance and timing of specific policy goals, as they will help shape market reactions.