The big red-ink asterisk on the economy
The Trump administration is celebrating the economy’s 3.2 percent annualized growth rate in the first quarter and, as bragging rights go, that’s a good statistic, a measurement that the economy is still humming along. The president and his fellow Republicans are touting it as evidence that their economic program — essentially a big tax cut aimed at corporations and upper earners — is working well.
But those boasts should be accompanied by a very large qualifier: Some of this prosperity is borrowed from the future. Recall that the Trump administration peddled its tax cut with the assertion that it would pay for itself. That is, that the tax cut would generate so much economic activity that, post tax cut, the federal coffers would end up having as much money as though taxes had never been reduced. That exercise in magical thinking let Republicans avoid the base-broadening or budget cuts that it would otherwise take to offset such a tax cut.
Economically literate critics warned all along that there was no way the tax cut would pay for itself, and it obviously hasn’t. For the first four months of fiscal year 2019, the budget imbalance increased by 77 percent over the same period in the last fiscal year.
No, that’s not all the tax cut; Washington has lost spending discipline as well. But let’s be clear: Rather than improving or even stabilizing, the federal deficit is rising precipitously. Indeed, the imbalance between revenues and expenditures for fiscal year 2019, which ends Sept. 30, is now projected to hit about $900 billion and to top $1 trillion in the following fiscal year. We have had larger deficits before, but not in strong economic times. In fact, in 2018, a year when the economy grew by 2.9 percent, tax revenues fell by 0.04 percent. Negative revenue growth is virtually unheard of in a time of a growing economy.
The effect of the tax cut on the nation’s fiscal picture is something that Larry Kudlow, President Trump’s top economic salesman, regularly discounts, downplays, or otherwise waves away — but one that Trump’s number crunchers acknowledge. In March, Russ Vought, acting director of the Office of Management and Budget, conceded that the tax cut had increased our annual red ink, even while he pushed the line that, somewhere over the rainbow, it might pay off.
“Deficits have certainly worsened over the first two years, but over 10 years we believe that deficits will improve,” Vought told Congress. “We believe that the corporate tax cuts are very, very important to our economic growth numbers.”
Hmm. Recall that, back in 2016, Trump said he would eliminate the budget deficit “fairly quickly,” which he defined as five years or so, and eliminate the entire national debt (!) over two terms. So what is the administration now projecting for a budget deficit in 2024? “We will still be looking at $1 trillion deficits,” Vought conceded when US Representative Seth Moulton pressed him on that issue. Even under the administration’s hopelessly optimistic assumptions, the budget won’t come into balance for 15 years. More realistic projections, of course, show the deficit heading higher and higher.
This is all taking place even as vital areas of the government are warning about future challenges. The Social Security Administration, for example, recently projected it will exhaust its trust fund in the next 16 years. Absent corrective action, that will spell a reduction of benefits of about 20 percent starting around 2035. That’s not directly related to the federal budget, but with large yearly deficits, there won’t be dollars available to make up the Social Security shortfalls. Or to use for other looming national problems.
Republicans rightly mock the far left’s modern monetary theory, a much-derided doctrine that contends the federal government can spend as much as it wants, without consequence, simply by printing more money. But in ignoring the borrow-and-spend effects of their own fiscal policies, the GOP has adopted an equally unwise free-lunch fiscal policy of its own.