Market Response to Trump’s Speech Doesn’t Change Policymaking Realities

The market’s overwhelmingly favorable reaction to President Trump’s first speech to a joint session of Congress was not necessarily surprising: President Trump veered away from the more protectionist and nationalistic tone of his inaugural address to instead deliver a more hopeful, conciliatory and unifying speech. He sought to reassure nervous congressional Republicans that he is presidential, while at the same time, he tried to open the door with congressional Democrats on some shared objectives, such as paid family leave and infrastructure.

Yet, however strong the speech was on style and however bullish the reaction has been among certain risk markets, President Trump’s speech did not significantly change the stubborn facts about policymaking in Washington.

The two priority issues for President Trump and congressional Republicans in 2017 – healthcare overhaul and reform of the tax code – are two of the most complex and time-consuming issues Congress can tackle. To provide some context: Congress has not undertaken tax reform since 1986, when President Reagan had to use significant political capital to advance it (and it still took him several years). Similarly, it took President Obama 14 months to pass the Affordable Care Act (“Obamacare”) at a time when he had bigger majorities in Congress and a higher approval rating than President Trump currently enjoys.

Importantly, there remains very little agreement among congressional Republicans on how to replace Obamacare and how to reform the tax code. On healthcare, while there is broad agreement that Obamacare should be repealed, there is not necessarily consensus that there should be a replacement, not to mention a common vision about what a replacement may look like. On tax reform, even with President Trump’s tacit endorsement of the controversial “border adjustment tax,” a centerpiece of the House Republican tax plan, there remain significant obstacles to the BAT in the Senate. While tax reform can get done without the BAT, it would likely result in a smaller plan that would need to be reworked, which could easily mean a bill is not signed into law until 2018.

This is a long way of saying that while President Trump’s first speech in front of Congress was a success in many ways, it does not necessarily change the inherent difficulties of policymaking, especially in the complex areas of healthcare and tax reform.

Libby Cantrill is PIMCO’s head of public policy and a regular contributor to the PIMCO Blog.

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