What will the new US Treasury Secretary do?

Last week Steven Mnuchin, President Trump’s nominee for Treasury Secretary, was finally confirmed by lawmakers. Another ex-Goldman Sachs banker, he joins those in the new administration deemed to be “pragmatists,” compared to those of a more ideological bent. Given that the appearance of normality passes for good news in Washington DC nowadays, it is perhaps noteworthy that Mnuchin got off to a decent start.

He has had amicable conversations with both UK Chancellor Philip Hammond and German Finance Minister Wolfgang Schauble. The Trump administration has only had kind words for Brexit Britain but Peter Navarro, who heads the National Trade Commission, had previously let fly at Germany over currency manipulation and unfair trade. More importantly, Mnuchin has had talks with Chinese officials: Vice Premier Wang Yang; Liu He, a minister and a close adviser to President Xi Jinping; People’s Bank of China Chairman Zhou Xiaochuan; and Finance Minister Xiao Jie.

These conversations were probably courteous introductions with both sides expressing the intention to co-operate and maintain the Strategic Economic Dialogue—a formal structure, established in 2006, under which US and Chinese officials regularly hold discussions. Combined with the silence from the more anti-free trade members of the administration, this suggests that for now at least, the risk of a trade conflict has been dialled back.

We can never know for sure, though, where the administration will go on these or indeed other matters. Donald Trump may allow the pragmatists headroom, but his campaign mindset is more in tune with the ideologues.

Though Mnuchin appears to have kicked off his relationship with China uneventfully, a US aircraft carrier strike group, led by the USS Carl Vinson, began patrols in the South China Sea this weekend—a day after China’s naval exercises finished. Two weeks ago in Tokyo, Defence Secretary James Mattis had said of the South China Sea, “at this time, we do not see any need for dramatic military moves at all.” Mattis is a pragmatist, so these manoeuvres are probably more about posturing than provocation.

Even so, they remind us that whatever the niceties about US-China relations day to day, there is deep-seated tension over both trade and security that threatens to erupt at any time. A more truculent stance by either side could easily come about as a distraction from domestic policy or political difficulties. President Trump, who has appointed some strong anti-trade people to his team, has no shortage of such difficulties right now.

Away from his China brief, Mnuchin is also the point man for what President Trump has boasted as a “phenomenal” tax plan coming in March. Gary Cohn, Trump’s Chief Economic Adviser—who is also ex-Goldmans, and another pragmatist—has been working on proposals that fall on Mnuchin’s turf. No one doubts that tax reform is going to be major priority, but it’s not at all clear whether it will be phenomenal, or just convoluted.

These are the things to watch out for. First, there has been a lot of discussion about a “border tax,” or more formally, a destinations-based cash flow tax. This would do away with corporation tax paid on earnings, and replace it with a tax on sales determined by location. In effect, firms would pay a suggested 20 per cent tax on imports, while export sales would be tax deductible, and therefore receive an equivalent subsidy. It is argued this could bring in almost $1.5 trillion in revenues over a decade, enough to pay for the President’s plans for infrastructure and military enhancements. House Republicans have backed the tax, which is liked by exporters. Retailers and oil refiners are lobbying hard against it, and it might be hard to get it though the Senate.

Second, the Trump team wants tax cuts for individuals, and campaigned to cut the seven personal tax rates in the tax code to three. Yet the cut in the top rate from 39.6 to 33 per cent will confer the major benefits to the top 0.1 per cent of taxpayers. That would be hard to square with the President’s rhetoric to his supporters. Mnuchin has said he favours offsetting this by limiting deductible expenses, possibly including mortgage interest, but again, we shall have to see what passes muster in Congress. Third, a special one-off low tax on company income held offshore, estimated to stand at about $2.5 trillion, has also been mooted. Receipts would suffice to help finance tax credits to private companies bidding for infrastructure contracts.

Finally, the esoteric term known as “dynamic scoring” is going to require Senate support for a House proposal to allow for the long-term budgetary accounting of tax reform. Essentially, this is about how to estimate the tax revenue benefits, say over a decade, of allowing a cut in tax payments today. So, for example, the plan to allow companies to expense all their capital spending plans in year one is a revenue loss to Mnuchin’s Treasury, but protagonists argue dynamic scoring provides essential information to lawmakers to gauge the effects of tax changes over time on a broad array of economic variables. Critics say it carries the hallmarks of previous Republican fiscal strategies to justify unfunded tax cuts.

These issues will figure prominently for Mnuchin’s Treasury in the next few weeks. As he deliberates and comes up with policy details, it will be interesting to see if the Treasury subscribes to the President’s assertion last week that he inherited a mess on the economy.

There are few economic variables that can be cited in support of this statement, and many of those that are found wanting are ubiquitous in capitalist societies and attributable to well-known structural problems, including demographics, digital technologies and robotics. The New York Federal Reserve’s latest “nowcast” reckons the US economy is growing at about 3 per cent, to which the Trump team has contributed nothing. There’s no doubt, though, that it could easily create a mess if, contrary to the views of pragmatists, it pursues policies of trade protection and ideologically-driven tax reform.