Deficits? Debt? They’re massive. Who cares?! Political candidates don’t. At least not this year.
President Donald Trump who campaigned on promises to pay down the national debt in eight years. But almost three years in, he’s moving in the wrong direction. Far from shrinking the debt, it has grown on his watch.
The annual deficit – the difference between what the government takes in and what it spends – has exploded thanks to the 2017 tax cut that, despite Trump’s promises, has not paid for itself.
The shortfall will reach $960 billion in 2019 and exceed $1 trillion in 2020, according to a Congressional Budget Office projection released Wednesday. They keep updating the figures higher. The Treasury Department has projected even bigger gaps.
Tax cuts really do create deficits
There are several important things at play here.
First, Trump did deliver on the long-term Republican priority to permanently slash tax rates for corporations. He also delivered lower tax rates for individuals, although those cuts aren’t permanent.
But in selling the tax cuts to Congress and to Americans, Trump’s top aides like Treasury Secretary Steven Mnuchin promised that changes would ultimately pay for themselves.
“Not only will this tax plan pay for itself, but it will pay down debt,” Treasury Secretary Steven Mnuchin said in 2017.
Senate Majority Leader Mitch McConnell similarly said that the law might ultimately be a “revenue generator.” But he fudged his way around Senate filibuster rules to pass the tax cuts under the budget reconciliation process. This parliamentary jiujitsu was accomplished, ahem, by making the individual tax cuts temporary.
The idea was that corporations, flush with cash they didn’t have to give the government in taxes, would invest in their workforces and the money would spread back out into the economy. The government would take less in from each individual company, but there would be more economic activity and, thus, more taxes.
Except it hasn’t worked out like that all.
Instead, the corporations have sat on piles of money or used it to buy back their own stock – a move that helps the stock market and shareholders but doesn’t do much for the economy. And individuals who were getting more of their money in each paycheck after the government took less out, maybe didn’t all realize they were getting a tax cut.
That’s how Republicans signed a massive tax cut into law without any help from Democrats and yet the US finds itself two years later staring at a possible recession, confounding every single promise that tax cuts equal economic growth.
Faced with that reality, Mnuchin has said deficits don’t have anything to do with revenue (taxes), but “are spending issues.”
That’s Washington speak for saying that the problem is big government, not too little taxes and too little growth, a standard Republican line.
King of debt no more
This was not how it was supposed to work, according to Trump, when he was running for President in 2016.
“We’re not a rich country,” Trump told Bob Woodward in 2016. “We’re a debtor nation. We’ve got to get rid of — I talked about bubble. We’ve got to get rid of the $19 trillion in debt.”
That’s when he said he could do it in eight years.
A month later he told CNN’s Wolf Blitzer he was the “king of debt,” suggesting he was comfortable dealing with it.
Back then he was predicting a major economic bubble of some sort was threatening the US and that he could fix it. His main economic promise was that he would play tough with America’s trading partners and get new trade deals that would save American workers and jumpstart the economy in such a way that the debt would be paid down.
Without getting into whether that’s sound economic theory, let’s simply accept that, again, it has not worked out that way.
He has renegotiated a grand total of one trade deal (with South Korea), started a trade war with China and teased possible trade wars with Mexico and Europe.
Which is not to say the economy is in horrible shape. Unemployment remains incredibly low. GDP growth, while not at all what Trump promised, has continued.
The problem is that the debt he promised to pay down in eight years has continued to grow. And if the economy does turn, the government will be addressing it from a position of a massive deficit and growing debt rather than a small deficitand a stable debt load.
In other words, if the government wanted to try to kick-start things during a recession – think massive infrastructure proposals like the 2009 stimulus – they’ll either have to raise taxes or make the deficit (and the debt) even larger than the rates they are now.
All of that can be done, but at a price. The US realistically won’t face a credit crunch, because in a global recession, investors will want to stash their money somewhere safe – and the US Treasury is still seen as a reliable investment. (Remember the fight over the debt ceiling and preventing a US default? This is why that was so important.)
But more borrowing would mean having to spend ever more of the federal budget on interest payments. The other option – printing more money – would risk triggering inflation.
Democrats and debt
But this leads to another really important point. Trump exploded the deficit, but Democrats aren’t exactly making the deficit and the debt the most important issues of 2020. Why? Because while they would nearly all like to raise taxes on wealthy Americans, they’d also like the government to spend more money, too. In the case of Elizabeth Warren and Bernie Sanders, they’d like to spend a lot more, on things like Medicare for All, free child care, student loan forgiveness, free college tuition and more.
Those might be perfectly laudable social programs, but they’re also expensive. And Democrats, while they do like to grouse about the Republican tax bill and all the money it put back in the hands of corporations, don’t often make the debt into a political issue the way Republicans do – even though the last time the US government ran an annual surplus was under Bill Clinton.
In fact, there’s a growing school of thought among some Democrats and progressives that the US can sustain a much larger debt than it does since it’s a major economy that prints its own money. It’s called Modern Monetary Theory. Check it out.
Trump gets defensive when asked about the spending deficit and the national debt. Here’s how it looked when the AP asked him about it in October of 2018.
AP: “You saw the numbers, the coverage in the last couple of days about deficits. “That the projected deficit is a trillion dollars. You railed on President Obama over deficits.”
TRUMP: “Excuse me. No. 1, I had to take care of our military. I had no choice but to do it, and I want to take care of our military. We had to do things that we had to do. And I’ve done them. Now we’re going to start bringing numbers down. We also have tremendous numbers with regard to hurricanes and fires and the tremendous forest fires all over. We had very big numbers, unexpectedly big numbers. California does a horrible job maintaining their forests. They’re going to have to start doing a better job or we’re not going to be paying them. They are doing a horrible job of maintaining what they have. And we had big numbers on tremendous numbers with the forest fires and obviously the hurricanes. We got hit in Texas, Florida, Puerto Rico, Georgia. Georgia was hit very hard this time. Nobody even, you know, treats that one fairly. The farmers got hit very, very hard.”
He did indeed have to deal with all of those things – though the farmers got hit because of the trade war Trump started with China.
But he could have to deal with much worse during an economic downturn.
It’s not that he doesn’t like using the word deficit. He complains all the time about the US trade deficit with China. But that deficit too has grown. In fact, the US posted its largest worldwide trade deficit in history last year. Americans bought $891 million more than they sold to foreign countries. That’s all private money, of course, over which the President has less control. Trump’s got a lot more to do with the more than than $1 trillion public spending deficit he’s not talking about.
Basically, having created the massive deficit, Republicans actually don’t really think it’s a big deal right now, either. But you can bet that if Trump loses and a Democratic president tries to enact a new social program, Republicans will be saying the national debt is a threat to the country. Just not until then.
