El-Erian: Trump Loses Capital by Taking on Health Care First

Ed. Note: This article first appeared in Bloomberg

Mohamed El-Erian, Allianz SE’s chief economic adviser, said President Trump’s push to reform health care before addressing tax policies could mean he loses some negotiating power down the road.

“By going on health care first, he may reduce the probability of getting tax reform in the summer,” El-Erian said Friday in a Bloomberg Television interview.

“You use up a lot of political capital going with health care first, so that’s the thing the market should look at closely -- the sequencing of policies.”

Republicans unveiled a new health-care bill on Tuesday, called the American Health Care Act, that would include a refundable, age-based tax credit and ends the ACA’s requirement to have coverage.

Markets have rallied since Trump’s victory in November on speculation his promises to boost infrastructure spending, cut regulation and reform the tax code will spur economic growth.

Some Republican senators have been signaling that overhauling the tax code could take longer than expected.

United States employers added 235,000 jobs in February, the first full month under Trump’s administration, a Labor Department report showed Friday.

Still, El-Erian said that globalization and technology have been stunting wage growth, with that figure reaching 2.8 percent compared with the same period last year. Robust gains in jobs should eventually push that higher, he said.

Wage Pressure

“You cannot create so many jobs and not end up pushing wages higher,” said El-Erian, who is also a Bloomberg View columnist. “It’s just taking a lot longer than what history would’ve suggested.”

Federal Reserve Chair Janet Yellen signaled in a speech last week that the central bank may have to raise interest rates at a meeting next week, and even spurred speculation that this year’s increase might be bigger than policy makers have been forecasting.

El-Erian said that officials had been talking up the potential for a rate boost to ensure that there’s no disruption to markets if the central bank has to tighten.

“This report means that we definitely get a hike next week, but it doesn’t mean we get more than three hikes for 2017, not yet at least,” he said.

“That’s why the market likes it, because the market expected a hike next week. The only thing it was worried about is, ‘Do we get even a higher path of future rates?’ And this report suggests that we don’t.”

Posted by: The Trust Advisor


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