Among Donald Trump’s cabinet appointments, the most important for investors is the secretary of the Treasury, who will guide Trump’s economic agenda.
Scott Bessent is well suited for the role and was considered the front-runner for the position after the election. However, he had to win a “knife fight” to get the position according to the Wall Street Journal, as he was pitted against several other candidates favored by Trump loyalists.
The in-fighting had nothing to do with Bessent’s qualifications. His background in economics and finance is solid, including an undergraduate degree from Yale University and later teaching there. He currently runs Key Square, a macro hedge fund he founded, after two stints working for George Soros.
His former boss, Stan Druckenmiller, endorsed Bessent, saying “Having worked for me and George all those years, he’s been exposed to everything a Treasury secretary has to deal with.”
Bessent will face an array of assignments when he assumes the Treasury helm. The first will be getting an extension of the debt ceiling that expires at the end of this year. It should be easy to pull off because Republicans will control both houses of Congress and they will not threaten to shut down the government with Trump as president.
The next assignment will be to pave the way for Congress to extend key provisions of the Tax Cut and Jobs Act that are set to expire. During the presidential campaign, Trump stated that he favored lowering the marginal tax rate on corporations from 21 percent to 15 percent and he also added numerous tax cut proposals along the way.
Bessent’s reputation is that he is a “fiscal hawk,” and his stated goal is to cut the federal budget deficit roughly in half to 3 percent of GDP. So, how might he get there?
Michael Strain of AEI contends the top priority will be to extend tax cuts for businesses and allow them to fully expense the costs of certain investments in the year the spending occurs. The passage of this provision would likely boost capital spending but could also increase budget imbalances and federal debt outstanding.
Strain sees three sources of revenue to offset the revenue losses. They include measures designed to repeal the Inflation Reduction Act of 2022, raise revenue from households by allowing some tax cuts from 2017 to expire and pursue more fundamental tax reform.
My own take is the latter two options are unlikely, considering that Trump campaigned to lower personal taxes and the appetite for tax reform has also diminished considerably since Paul Ryan stepped down as House Speaker in 2018. If so, it could be difficult to rein in budget deficits.
The biggest challenge he will face, however, relates to Trump’s international economic policy that calls for the largest increases in tariffs since the 1930s.
The problems in the international arena today are similar to those in the mid-1980s when the U.S. ran large trade and budget deficits, the dollar was strong and U.S. multinationals outsourced production abroad.
At that time, President Reagan authorized Treasury Secretary James Baker to enter into agreements with America’s principal trading partners. They included the Plaza Accord, intended to produce an orderly decline in the U.S. dollar, and the Louvre Accord which sought to stabilize the dollar.
In contrast, Trump’s approach is to act unilaterally and pressure America’s trading partners to reduce their bilateral trade surpluses. If they do not comply, he has threatened to increase tariffs on imports from China by 60% and all other countries by 10-20 percent. This week he threatened to impose tariffs on Mexico, Canada and China through an executive order on Inauguration Day.
According to Wendy Edelberg and Maurice Obstfeld of Brookings, the value of the goods subject to these hikes in 2023 would be 10 times greater than during the initial round of the trade war in 2018-2019.
This could be very challenging for Bessent as he balances achieving the goals of the Trump administration while keeping financial markets calm.
Prior to the election, he held the view that tariffs were a negotiating tool to extract concessions from America’s trading partners and they should be phased in over time. This appeared to pit his views with those of Robert Lighthizer, Trump’s former trade czar, who favors acting boldly and swiftly in implementing higher tariffs.
Since the election, Bessent has modified his stance somewhat to bring it more in line with Trump’s. In a Fox News interview, he said, “The truth is that tariffs have a long and storied history as a revenue-raising tool and a way of protecting strategically important industries in the U.S. President-elect Trump has added a third leg to the stool: tariffs as a negotiating tool with our trading partners.”
The test ahead is what he will do if investors become concerned that tariffs will harm the U.S. and global economy.
One thing he has going for him is that Trump considers the stock market’s performance a measure of his success. During the trade war with China from mid-2018 to mid-2019, he halted the escalation after the market sold off.
The market could be more vulnerable this time with the next round of tariff hikes likely to be substantially larger and stock market valuations much higher. In that event, Bessent’s task will be to convince Trump that backing away from a trade war is vital to preserve the favorable image many voters have of his handling of the economy.
Nicholas Sargen, Ph.D., is an economic consultant for Fort Washington Investment Advisors and is affiliated with the University of Virginia’s Darden School of Business. He has authored three books including “Investing in the Trump Era: How Economic Policies Impact Financial Markets.”
