Trump and the National Debt
Instead of Eliminating the Debt, Trump Will Add $5.6 Trillion
During the 2016 presidential campaign, Republican candidate Donald Trump promised he would eliminate the nation’s debt in eight years. Instead, his budgets would add $8.3 trillion in four years. It would increase the U.S. debt to $25 trillion.
Trump’s Two Strategies to Reduce the Debt
Candidate Trump had two strategies to reduce the debt. He promised to grow the economy 6 percent annually to increase tax revenues. But once in office, he lowered his growth estimate to 3.5 percent to 4 percent.
These projections are above the 2-3 percent healthy growth rate. When growth is more than that, it creates inflation. Too much money chases too few good business projects. Irrational exuberance grips investors. They create a boom-bust cycle that ends in a recession. Trump’s Fiscal Year 2019 budget lowered annual growth rates down to between 2.4 percent and 2.9 percent annually.
Trump promised to achieve 4 percent growth with tax cuts. In his first 100 days, he released the outline of would become the Tax Cuts and Jobs Act. It cut the corporate tax rate from 35 percent to 21 percent beginning in 2018. The top individual income tax rate drops to 37 percent. It doubles the standard deduction and eliminates personal exemptions. The corporate cuts are permanent, while the individual changes expire at the end of 2025.
But Trump's tax cuts won't stimulate the economy enough to make up for lost tax revenue. According to the Laffer curve, tax cuts only do that when the rates were above 50 percent. It worked during the Reagan administration because the highest tax rate was 90 percent.
Trump’s second strategy is to “eliminate waste and redundancy in federal spending.” He demonstrated cost-consciousness in his campaign. He used his Twitter account and rallies instead of expensive television ads. He outlined his cost-cutting strategies in his book, "The Art of the Deal."
Trump was right that there is waste in federal spending. The problem isn't finding it. Both Presidents Bush and Obama did that. The problem is in cutting it. Each program has a constituency that lobbies Congress. Eliminating these benefits loses voters and contributors. Congress will agree to cut spending in someone else’s district, but not in their own.
Any president must cut into the biggest programs to make an impact on the debt. More than two-thirds of government spending goes to obligations made by previous Acts of Congress. Social Security benefits cost $1 trillion a year, Medicare costs $625 billion, and Medicaid costs $412 billion. The interest on the debt is $363 billion.
To lower the debt, military spending must also be cut. Obama spent $770 billion in FY 2017. Instead of cutting, Trump added $40 billion. In FY 2019, he asked for an additional $20 billion, taking total military spending to $886 billion.
That leaves $1 trillion in the FY 2019 budget to pay for everything else. That includes agencies that process the Social Security and other benefits. It also includes the necessary functions performed by the Justice Department and the Internal Revenue Service. You'd have to cut almost all of it to eliminate the $985 billion national deficit. You can't reduce the deficit or debt without major cuts to defense and mandated benefit programs. Cutting waste isn't enough.
Trump’s Business Debt Influences His Approach to U.S. Debt
Trump has a cavalier attitude about the nation’s debt load. During the campaign, he said the nation could "borrow knowing that if the economy crashed, you could make a deal.” He added, “The United States will never default because you can print the money."
Trump thinks about the national debt as he does personal debt. A 2016 Fortune magazine analysis revealed Trump's business is $1.11 billion in debt. That includes $846 million owed on five properties. These include Trump Tower, 40 Wall Street, and 1290 Avenue of the Americas in New York. It also includes the Trump Hotel in Washington D.C. and 555 California Street in San Francisco. But the income generated by these properties easily pays their annual interest payment. In the business world, Trump's debt is reasonable.
But sovereign debt is different. The World Bank compares countries based on their total debt-to-gross domestic product ratio. It considers a country to be in trouble if that ratio is greater than 77 percent. The U.S. ratio is 104 percent. That's the $21.516 trillion U.S. debt as of September 28, 2018, divided by the $20.658 trillion nominal GDP.
So far, this high ratio hasn't discouraged investors. America is the safest economy in the world. It has the largest free market economy and its currency is the world's reserve currency. Even during a U.S. economic crisis, investors purchase U.S. Treasurys in a flight to safety. That's one reason why interest rates plunged to 200-year lows after the financial crisis. Those falling interest rates meant America's debt could increase, but interest payments remained stable at around $266 billion.
But that changed in late 2016. Interest rates began rising as the economy improved. As a result, interest on the nation's debt will double in four years.
The United States also has a massive fixed pension expense and health insurance costs. A business can renege on these benefits, ask for bankruptcy, and weather the resultant lawsuits. A president and Congress can't cut back those costs without losing their jobs at the next election. As such, Trump's experience in handling business debt does not transfer to managing the U.S. debt.
Trump is wrong to assume that the United States could simply print money to pay off the debt. It would send the dollar into decline and create hyperinflation. Interest rates would rise as creditors lost faith in U.S. Treasurys. That would create a recession. He's also wrong in thinking that he could make a deal with our lenders if the U.S. economy crashed. There would be no lenders left. It would send the dollar into a collapse. The entire world would plummet into another Great Depression.
National Debt Since Trump Took Office
At first, it seemed Trump was lowering the debt. It fell $102 billion in the first six months after Trump took office. On January 20th, the day Trump was inaugurated, the debt was $19.9 trillion. On July 30, it was $19.8 trillion. But it was not because of anything he did. Instead, it was because of the federal debt ceiling.
On September 8, 2017, Trump signed a bill increasing the debt ceiling. Later that day, the debt exceeded $20 trillion for the first time in U.S. history. On February 9, 2018, Trump signed a bill suspending the debt ceiling until March 1, 2019. On March 15, 2018, the debt exceeded $21 trillion. The debt will continue to increase until the 2019 deadline. The Committee for a Responsible Federal Budget estimates it could be $22 trillion by then. If so, Trump will have overseen the fastest dollar increase in the debt in just three years.
Trump's Fiscal Year 2019 budget projects the debt would increase $8.3 trillion during his first term. That's almost as much as Obama added in two terms while fighting a recession. Trump has not fulfilled his campaign promise to cut the debt. Instead, he's done the opposite.
How It Affects You
The national debt doesn't affect you directly until it reaches a tipping point. A study by the World Bank found that if the debt-to-GDP ratio exceeds 77 percent for an extended period of time, it slows economic growth. Every percentage point of debt above this level costs the country 1.7 percent in economic growth.
The first sign of trouble is when interest rates start to rise significantly. Investors need a higher return to offset the greater perceived risk. They start to doubt that the debt can be paid off
The second sign is that the U.S. dollar loses value. You will notice that as inflation. Imported goods will cost more. Gas and grocery prices will rise. Travel to other countries will also become much more expensive.
As interest rates and inflation rise, the cost of providing benefits and paying the interest on the debt will skyrocket. That leaves less money for other services. At that point, the government will be forced to cut services or raise taxes. That will further slow economic growth. At that point, continued deficit spending will no longer work.