Trump’s Trillion Dollar Legacy

Update 410 — Trump’s Trillion Dollar Legacy 
10-Year Cost in Interest Expense: $5.9 Trillion

Whether many Americans will feel indebted to Donald Trump for his policies is TBD. Per this week’s CBO report on the nation’s fiscal future, though, all Americans will be indebted by him.  A look at the fiscal legacy of the Trump administration, below.

Isn’t it time, by the way, to inter the standard GOP debt-to-GDP ratio here in favor of a metric that is market-based, fiscally transparent, and more useful for policy planning? How about instead using as a measure the actual and projected debt-damages, aka, interest expense?

Next week, winners and losers in the economic policy debate and the Iowa caucuses, at long last. Meanwhile, good weekends, all…

Best,

Dana

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This Tuesday, the Congressional Budget Office (CBO) released its 10-year outlook for the U.S. economy. CBO’s debt and GDP projections serving as a sober rejoinder to President Trump’s forecasts —now proven spurious — of three maybe four percent growth under his policies. 

In 2019, the U.S. saw GDP growth of 2.3 percent and the first deficit over $1 trillion since 2012. The CBO also expects the U.S. economy to grow at an anemic pace of 1.7 percent per year on average over the next decade. Paired with this low growth, the cost of servicing the nation’s debt will be $382 billion in FY 2020 and is projected to surpass $818 billion by FY 2030.

During a House Budget Committee hearing on Wednesday to discuss the report, Democrats took aim at the 2017 Republican tax cuts for fueling our recent deficits and called for more public investment in education and infrastructure to help sustain higher growth in the long run. GOP members, on the other hand, blamed mandatory spending programs such as Social Security and Medicare for driving up the debt and credited the tax cuts with boosting GDP. 

Rising Debt, Slowing Growth

While the debt debate is hardly a new one in Washington, the unprecedented tax-cut-fueled deficits during an economic expansion are notable; countercyclicality being the operative principle. Fiscal stimulus in good economic times can overheat the economy and needlessly add to the debt, especially if it has little spending like tax cuts for the rich. Key is the multiplier effect of various kinds of federal spending and tax cuts, as well as whether there is current macroeconomic need for fiscal stimulus.

During economic expansions over the past 50 years, federal budget deficits averaged 1.5 percent of GDP. The CBO projects that the deficit will account for 4.6 percent of GDP in 2020. President Trump’s 2017 tax cuts provided fiscal stimulus to an economy already in the midst of an expansion. At the House Budget hearing, the CBO Director confirmed that the tax cuts only earned back roughly 20 cents on the dollar, a far cry from the promise that tax cuts would “pay for themselves.” The lasting legacy of these cuts will be the $1.9 trillion added to the national debt.

Higher debt for the U.S. could dampen economic growth by increasing interest payments and spooking treasury bondholders, who may in turn demand a higher rate of return. 

Interest Expense 2000-2019:

Source: Federal Reserve Economic Data

In the event of another recession, this would put immense political pressure on legislators. The projected 1.7 percent average annual growth over the next decade is disappointing but not surprising given the aggregate economic policy decisions during the Trump presidency. 

Good Debt vs. Bad Debt

Contrary to the GOP narrative, there is, in fact, good debt and a helpful analytical tool to sort it from the bad.

  • Good public investment, such as on infrastructure and education, can bolster productivity and lead to better lives for the people whom the programs affect. Cited in the House Budget hearing, every one dollar invested in infrastructure yields $1.59 in return. Infrastructure programs are considered to be one of the best public investments that the government can make, along with education. Per a recent University of Pennsylvania study, investing a dollar in early childhood education can yield between four and nine dollars in economic return.  
  • Lower-ROI public investment, e.g., tax cuts for wealthy kids, may produce short-term increases in GDP. But these would be sugar highs. Yesterday, the Department of Commerce announced that 2019 GDP growth was 2.3 percent, the lowest so far of the Trump presidency. Trump has yet to see the three or four percent growth rate that he promised. 

While Republicans downplay the role of their own tax cuts in contributing to the debt, they continue to blame the rise of mandatory spending programs such as Medicare and Social Security for our budgetary predicament. Per CBO projections, mandatory spending will grow from 61.5 percent of the federal budget in 2020 to 65.2 percent by 2030. Mandatory spending growth can be almost fully attributed to changing demographics in our workforce, as the baby boomers enter retirement and start collecting their earned benefits. 

Let’s not shy away from these crucial programs on which millions of Americans depend on because of false fiscal fears. The U.S. should invest in productive economic policies and in high-yield programs, such as early childhood education and new infrastructure. Trump’s trade policy materially impairs business activity and is now one of the main culprits of tepid GDP growth, per The Wall Street Journal.   

Deficit Hawks Playing Possum

President Obama inherited a mess when he entered office in January 2009. GDP had declined by 4.3 percent year-to-year, and unemployment increased from 5 percent to 9.5 percent, peaking at 10 percent in October 2009. The Obama Administration stepped in with much needed, but expensive, fiscal stimulus. Predictably, Republicans were outraged. 

Trump inherited a healthy, growing economy, yet pushed for even more fiscal stimulus in the form of a deficit-financed $1.5 trillion tax cut. The bill passed with unanimous GOP support. It’s Lucy, Charlie, and the football. In the current comic strip, the joke is really on the young and future citizens. 

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