As a candidate, Donald Trump promised to get rid of the entire national debt “over a period of eight years.” When this promise was made, the national debt stood at $19 trillion; it has since risen to $21.7 trillion. In the fiscal year ending September 30, it grew by $779 billion, up 17 percent from $666 billion in fiscal 2017. This year, after the Trump tax cuts take full effect, another $1 trillion worth of government IOUs will be issued.
“The deficit is absolutely higher than anyone would like,” says Kevin Hassett, chairman of the President’s Council of Economic Advisers. “Historically unprecedented,” adds Jason Furman, who occupied Hassett’s position in the Obama administration. He feels that with unemployment virtually non-existent, and the economy growing at annual rate of at least 3 percent, we should be paying down debt, not spilling more red ink over the national ledger. Indeed, in 2000, the last time the unemployment rate dipped below 4 percent, tax revenues rose 11 percent and the government ran a large budget surplus.
How did candidate Trump intend to pay off the debt? First, he said he wanted to renegotiate trade deals that he believed were destroying the American economy. Second, drive the economic growth rate to 6 percent annually by reducing taxes and the weighty burden of regulations Barack Obama loaded onto businesses.
Trump followed through with both of these plans; the results are not what he anticipated.
Two points can be made in Trump’s defence. The first is that the effect of his rejection of all the trade deals negotiated by his predecessors has not yet been felt. Nor has the effect of the tax cuts. Gary Cohn, who served as Trump’s top economic adviser in the early days of the administration, is the godfather of the tax cuts. He argues that by providing large incentives for corporations to invest now—early write-offs of such investments—the Trumpsters are encouraging investment that will, among other things, increase worker productivity and hence wages, thereby eventually raising the tax take from those higher wages.
Second, Hassett and others in the administration point out that despite a hefty reduction in the corporate tax rate from 35 percent to 21 percent, government revenues rose by $3.3 trillion in the fiscal year just ended. In part this is because the economy is growing at around a 4 percent rate in response to the tax cuts and to a revival of animal spirits as entrepreneurs and corporate chieftains wake up in the morning wondering not what the government is going to do to them, but what it might do for them. So Trump may yet be proven right. And if that proof does not emerge by 2020, he an always blame the Fed.
The problem, says Trump, is that spending rose even more, by $4.1 trillion. Republicans were determined to shore up a seriously weakened military by pumping $200 billion (estimates vary) into the Defense Department over the next few years. They blame reduced spending on training for the increasing incidence of naval accidents, and for the recent damage to more than a dozen poorly maintained and inoperable F-22 fighter planes (cost: $150 million each) at Tyndall Air Force base in Florida because they could not be moved out of the path of Hurricane Michael.
Democrats refused to go along with the increased military spending unless a like sum was allocated to social spending. “These massive increases [in defense spending] are for the most part unnecessary and counterproductive,” declared the Center for American Progress, a left-leaning think tank that describes itself as “non-partisan” (its board includes John Podesta, chairman of Hillary Clinton’s campaign, and billionaire Tom Steyer, leader of the campaign to impeach Trump). Trump swallowed that very bitter pill and went along with increased spending on entitlement programs. This week he attempted to recover some of the lost ground by ordering each cabinet member to cut his/her department budget by 5 percent, which will certainly provide work for the number crunchers who will have to demonstrate that the goal has been met without actually meeting it.
Whatever the causes of the current state of the national fisc, two things are certain. One is that deficits are rising, ballooning an already-high national debt—and will continue to rise as rising interest rates drive up the cost of carrying that debt. Add rising Social Security and healthcare spending on an ageing population and we have “the beginning of a long-term avalanche that . . . [is] going to get worse every year,” says Brian Riedl, senior fellow at the conservative Manhattan Institute and author of “A Comprehensive Federal Budget Plan to Avert a Debt Crisis,” published about a week ago, which calls for reforms of Social Security and Medicare that would include trimming benefits for upper-income recipients and some tax increases.
The second follows from the first. When the next recession comes—and come it will, probably in 2020 if many forecasters are to be believed—it will be difficult for the government to deploy its major weapon, loosening an already too-loose fiscal policy. Politicians are likely to regard further tax cuts and/or increased spending that would boost already runaway deficits as somewhere between imprudent and reckless, and worse still, politically unpopular.
So the burden of countering the next recession will fall on the Federal Reserve Board. But it, too, will likely be out of ammunition. It plans to continue raising rates until they reach the 3 percent level that is considered neutral—pro-growth without encouraging inflation. According to the Economist, “the policy arsenal is still depleted from fighting the last downturn.” The Fed “has less than half” the firepower it had when confronting past recessions.
In short, America goes semi-naked into the next recession. Or stark naked if the politicians have their way. Trump is talking about another round of tax cuts, and the increasingly ascendant progressive faction of the Democratic party is campaigning on a platform of free medical care and college tuition for all.
Unless, of course, Congress recalls the words of Paul Ryan, the speaker of the House who has decided to retire rather than continue as the president’s point man in the House. In 2010 Ryan, the keeper of the traditional Republican position, wrote, “Unprecedented levels of spending, deficits and debt will overwhelm the budget, smother the economy, weaken America’s competitiveness . . . and threaten the survival of the government’s major benefit programs.”
Unless tax cuts pay for themselves by stimulating growth at a Trumpian rate of 6 percent per annum.