President Trump's Impact on the National Debt
The national debt has increased by almost 36% since Trump took office
During the 2016 presidential campaign, Republican candidate Donald Trump promised he would eliminate the nation’s debt in eight years. Instead, his budget estimates showed that he would actually add at least $8.3 trillion, increasing the U.S. debt to $28.5 trillion by 2025. However, the national debt may reach that figure much sooner. When President Trump took office in January 2017, the national debt stood at $19.9 trillion. In October 2020, the national debt reached a new high of $27 trillion. That's an increase of almost 36% in less than four years.
The total amount that President Trump contributes to the national debt will probably be higher once the impact of the COVID-19 pandemic is realized.
- During his campaign in 2016, President Trump promised to eliminate the national debt in eight years.
- Instead, it is projected that he will add at least $8.3 trillion.
- As of October 2020, the national debt reached a new high of $27 trillion, an increase of almost 36% since President Trump took office in 2017.
- The national debt and the amount President Trump contributes to it may be higher once the impact of the COVID-19 pandemic is realized.
How Has the National Debt Increased 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 20, 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 Sept. 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 Feb. 9, 2018, Trump signed a bill suspending the debt ceiling until March 1, 2019. By February 2019, the total national debt was at $22 trillion. In July 2019, Trump suspended the debt ceiling until after the 2020 presidential election. On Oct. 1, 2020, the debt hit a new record of $27 trillion.
Trump has overseen the fastest increase in the debt of any president—almost 36% from 2017 to 2020. Trump has not fulfilled his campaign promise to cut the debt. Instead, he's done the opposite.
Will President Trump Reduce the National Debt?
Trump promised two strategies to reduce U.S. debt before taking office:
- Increase growth by 4% to 6%
- Eliminate wasteful federal spending
While on the campaign trail, Trump promised to grow the economy by 4% to 6% annually to increase tax revenues.
Once in office, Trump lowered his growth estimates to between 2% and 3%. These more realistic projections are within the 2% to 3% 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 and they could create a boom-bust cycle that ends in a recession.
President Trump had also promised to achieve between 2% and 4% growth with tax cuts. The Tax Cuts and Jobs Act cut the corporate tax rate from 35% to 21% beginning in 2018. The top individual income tax rate dropped to 37%. It doubled the standard deduction and eliminated personal exemptions. The corporate cuts are permanent, while the individual changes expire at the end of 2025.
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%. It worked during the Reagan administration because the highest tax rate was 70%.
Eliminate Wasteful Federal Spending
Trump’s second strategy was to eliminate waste and redundancy in federal spending. He demonstrated this cost-consciousness during his campaign, such as when he used his Twitter account and rallies instead of expensive television ads.
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 may lose voters and contributors. Congressional representatives may agree to cut spending in someone else’s district, but resist doing so in their own.
Any president must cut into the biggest programs to make a real impact on the national debt.
More than two-thirds of government spending goes to mandatory obligations made by previous Acts of Congress. For FY 2021, Social Security benefits cost $1.2 trillion, Medicare cost $722 billion, and Medicaid cost $448 billion. The interest on the debt is $378 billion.
To lower the debt, military spending must also be cut because it's such a large portion of the budget. Instead, Trump increased military spending in FY 2021 to $933 billion. That includes three components:
- $636 billion base budget for the Department of Defense
- $69 billion in overseas contingency operations for DoD to fight the Islamic State group
- $229 billion to fund the other agencies that protect our nation, including the Department of Veterans Affairs ($105 billion), Homeland Security ($50 billion), the State Department ($44 billion), the National Nuclear Security Administration in the Department of Energy ($20 billion), and the FBI and Cybersecurity the Department of Justice ($10 billion)
What's left of the $4.8 trillion budgeted for FY 2021 after mandatory and military spending? Only $595 billion to pay for everything else. That includes agencies that process 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 eliminate it all to make a dent in the $966 billion deficit.
You can't reduce the deficit or debt without major cuts to defense and mandated benefits programs. Cutting waste isn't enough.
Does Trump’s Business Debt Affect His Approach to U.S. Debt?
During the 2016 campaign, Trump said in an interview with CNBC that he would "borrow, knowing that if the economy crashed, you could make a deal.” However, sovereign debt is different from personal debt. They can't be handled the same way.
A 2016 Fortune magazine analysis revealed Trump's business was $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.
The current U.S. debt-to-GDP ratio is 136%. That's the $26.5 trillion U.S. debt as of June 2020, divided by the $19.5 trillion nominal GDP at the end of the second quarter this year.
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%.
So far, the high U.S. debt-to-ratio hasn't discouraged investors. America is one of the safest economies in the world 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 historical lows in March 2020 after the coronavirus outbreak. Those falling interest rates meant America's debt could increase, but interest payments remain stable.
The U.S. also has a massive fixed pension expense and health insurance costs. A business can renege on these benefits, ask for bankruptcy, and weather the resulting 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.
How the National Debt Affects You
The national debt doesn't affect you directly until it reaches the tipping point. Once the debt-to-GDP ratio exceeds 77% for an extended period of time, it slows economic growth. Every percentage point of debt above this level costs the country 0.017 percentage points in economic growth, according to a World Bank analysis.
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 rises, 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.
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