Trade, Taxes and Regulation

Recently there has been significant change to trade, tax and regulatory policy. On the surface each of these may seem like a big deal. I’d argue that as it relates to the U.S. economy with a GDP over $18 trillion per year, for the average person it really isn’t all that important. I believe when examining policy change there are two important factors to look at. First, do the changes support or suppress economic activity and second, do the changes support long-term wealth creation or societal benefit or will they only result in a short-term impact to profits.

Figuring out the outcome for policy changes is inherently complex and simple answers must be questioned heavily. On the surface restricting trade will likely inhibit economic activity in the short-run potentially having an adverse impact. I can’t pretend to understand the long-run implications but perhaps there is a case to be made that a protectionist trade policy will create a stronger U.S. economy over time. This brings up the role of government. Personally I prefer a free market economy versus one that is actively managed by ever changing elected officials. I suppose this mirrors my investment philosophy as well.

Reducing taxes both at an individual level and a corporate level has a clear positive impact to economic activity and short-term profits as individuals have an increased ability to consume and companies have reduced tax liabilities which increases their earnings. Again, the long-run impact is a bit trickier. Will the short-run reduction in tax revenues be met by future increases in economic growth and greater future tax revenue or will there be less tax revenue in total negatively affecting a broad range of social services?

Regulation also has complex dynamics. The reduction of regulation clearly has the potential to increase economic activity. The question that remains is at what cost? Is increased pollution risk worth a bump in the short-run for economic activity? Is the long-term confidence in the investment industry worth making it easier for companies to operate their businesses? The answer to these questions may seem rhetorical but in practice it’s not that simple. I believe the laws, rules and regulation in the United States has played a major role in our success. Global companies know what they get when doing business in the U.S. these systems and protections attract economic activity. There is a point where the benefit of additional regulation decline and are not worth the negative impact to economic activity. It’s probably not hard to take the position that after the 2008 financial crisis regulatory policy went from too loose to overly restrictive and loosening policy may currently be appropriate.

Policy change cannot be looked at in a vacuum, changes that seem like a dramatic shift may simply be bringing policies that were out of balance between their costs and benefits back towards equilibrium.

Given these complexities and the overall scale of our economy I suggest that investors focus more on making sure they have structured their portfolio efficiently and that the risk levels within their portfolios match their time horizon.

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