Trump stumbles at first hurdle

Trump has withdrawn legislation to repeal his predecessor’s Affordable Care Act due to lack of support. What does this mean for his presidency – and for markets? Simon Wilson reports.

What’s happened?

In the most humiliating episode so far of Donald Trump’s presidency, the Trump administration and Republican party in Congress last week had to abandon their first major piece of legislation, which would have repealed and replaced the Affordable Care Act (ACA – also known as Obamacare).

With hours to go before a vote was due on Capitol Hill, Trump and the Republicans’ congressional leader, Paul Ryan, withdrew the legislation rather than see it rejected – not because of opposition from the Democrats, but due to a lack of support from their own side. “We are going to be living with Obamacare for the foreseeable future,” Ryan conceded.

Why was this so significant?

Republicans have been vowing to overturn Obamacare for the past seven years, arguing that it hands too much power to the government and takes it away from individuals and businesses. Under the Obama presidency, House Republicans voted more than 50 times to scrap the ACA, knowing that Obama would use his presidential veto to protect the policy. On the campaign trail, Trump railed against Obamacare, and on taking power, the Republicans touted its repeal as a priority.

But when it came to the crunch last Friday, the Trump-Ryan plan was killed off by opposition from both rightwing hardliners (the “Freedom Caucus”) who complained the repeal bill didn’t go far enough, and by moderate Republicans who were spooked by Congressional Budget Office calculations showing that the plan would leave an extra 24 million poorer Americans without health insurance by 2026.

What’s the immediate fallout?

It’s a blow to Trump’s image as a great dealmaker, and has also exposed the unresolved tensions between the neophyte politician in the White House and the party he doesn’t fully lead. Trump made three rookie errors, says Edward Luce in the Financial Times. First, he put his authority behind a bill whose contents he did not know; the fact that it would have broken another of his election promises – to protect entitlements, including Medicaid – apparently took him by surprise. The second blunder was to rush a vastly complex bill through Congress; the third to believe that “threatening Republican dissenters would be enough to do the trick”. But even that downplays the broader significance of the episode.

Which is what?

It raises fundamental questions about this administration’s ability to lead and govern effectively and get any legislation through Congress. The question of what will happen to healthcare reform now is murky enough. Trump has refused to take ownership of the debacle, predicting that Obamacare will now “explode, and it’s not going to be pretty” and that when the system collapses the Democrats will come crawling to him with pleas for a bipartisan deal – “a very, very good bill”, he asserts.

It is worrying enough that a president should present himself as a passive observer of the collapse of a key part of his own country’s healthcare arrangements. But the affair also casts grave doubt on the Republicans’ other planned major reform – the massive tax cuts that equity markets are relying on to deliver a boost to US growth, and an overhaul of the entire tax system.

What do they want to do?

They want to overhaul and simplify the tax code (a mammoth undertaking); cut income-tax rates (easier); and slash corporation tax from 35% to 15% (if you believe Trump’s campaign promises), or to something more like 20%-28% (to judge from figures being bandied about this week).

The trouble is, to make these plans deficit-neutral (as is required to get them through Congress quickly under “budget reconciliation” rules), the administration was relying on $1trn in savings from repealing Obamacare. They also depended on a Ryan-backed plan that now also seems increasingly unlikely to gain support – the “border adjustment tax”, which is a euphemism for a 20% goods import tax, that was expected to raise another $1trn over a decade.

The tax would damage importers and boost domestic production of exports – but it has been slammed as anti-consumer and inflationary by big US businesses (such as Walmart), and is opposed as anti-business by the same Freedom Caucus Republicans who shot down the healthcare reforms.

What does it mean for investors?

The risk is that the “Trump trade” that has pushed markets higher since his election in November will run out of steam if he proves unable to enact his agenda of tax cuts and infrastructure spending. Optimistic equity investors so far seem willing to bet that the healthcare mess will be a wake-up call for his administration, pushing it towards a more measured, bridge-building approach.

Goldman Sachs analysts, for example, argue that “prospects for tax reform are still good”; they expect corporation tax cuts and “incremental tax reforms” by early next year. Steven Mnuchin, the US Treasury secretary, reckons that tax reform will be “much more straightforward” than healthcare. If that proves to be complacent or even hubristic thinking, markets could be hit very hard indeed.

A lame duck president?

President Trump does not have a focused and fully staffed administration, a strong congressional coalition, or a robust popular mandate to fall back on in times of trouble. He lost the popular vote in the presidential election, and is now an exceptionally unpopular president, by any modern standards. In a Gallup poll published this week, Trump’s approval rating fell to 36% – the six presidents to have occupied the White House since the mid-1970s had approval ratings at the same early stage in their presidencies ranging from between 53% (Bill Clinton and the second Bush) to 75% (Carter). To have the backing of barely a third of voters two months in is unprecedented.

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