Trump's Plan to Reduce the National Debt
Trump's Debt Reduction Plan Will Increase It by $5.3 Trillion
Donald Trump promised to reduce the nation's $19.5 trillion debt by growing the economy and reducing waste in federal spending. Instead, his policies will increase the debt by $5.3 trillion. Here are his plans to reduce the debt, and how they will impact the U.S. economy.
"Grow the economy to increase tax revenues."
Trump initially promised to grow the economy by 6 percent annually. Since then, he revised his growth estimate to 3.5 percent to 4 percent.
His administration projected growth rates between 2.4 percent and 2.9 percent annually in the FY 2018 budget.
Tax cuts rely on supply-side economics. It says that tax cuts generate enough growth to replace lost revenues. That worked so well during the Reagan Administration that it was called Reaganomics. But that's because the highest tax rate then was 90 percent. Today's highest rate is 39 percent, not nearly as onerous.
Nevertheless, tax cuts will boost growth in the short-term. That's because the real generator of economic growth is confidence. Trump has the support of a Republican majority in both houses of Congress. They support Trump's tax cut plan. He also promises to reduce regulations. Businesses will have enough confidence in the future to spend more and create jobs. Consumer confidence will also rise, boosting the demand and consumer spending that drives 70 percent of the economy.
In the long run, 4 percent annual growth is unhealthy. Too much money chases too few good business projects. Irrational exuberance grips investors. They create a boom-bust cycle that ends in a recession. For more, see What Is the Ideal Growth Rate?
The Committee for a Responsible Federal Budget estimates Trump's tax plan will increase the debt by $4.5 trillion in the next 10 years.
If he is successful in repealing and replacing Obamacare, that will add another $1.2 trillion to the debt. That's because the ACA imposed taxes to pay for itself. (Source: "Donald Trump's Plans Would Add $5.3 Trillion to the Debt," Time Magazine, September 21, 2016.)
"Borrow knowing that if the economy crashed, you could make a deal. U.S. will never default because you can print the money."
Trump issued these dangerous statements on the campaign trail. His attitude toward his business debt shows these are a core tenet of his success. A recent Fortune magazine analysis showed 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 DC and 555 California Street in San Francisco. But the income generated by these properties easily pays the annual interest payment. In the business world, Trump's debt is reasonable. (Source: "5 Things You Need to Know About Donald Trump's Debt," Fortune Magazine, August 24, 2016.)
The U.S. ratio is already 101 percent. That's $19 trillion in debt divided by $18 trillion in annual economic output (as measured by Gross Domestic Product).
So far, it hasn't discouraged investors. America is the safest economy in the world. That's because 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. Treasuries 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. At that rate, debt interest payments will double in four years.
The federal government will receive $3.6 trillion in tax revenue in FY 2017. Like Trump, that's more than enough to pay off the interest on the debt. But the United States has another type of debt. That's a massive fixed pension expense of $948 billion (Social Security benefits). Also, health care costs $977 billion (Medicare and Medicaid benefits). Those benefits plus the interest consume 66 percent of revenues. A business can renege on these benefits and face lawsuits. A President and Congress cannot cut back those costs without losing their jobs at the next election. Thus, Trump's experience in handling business debt does not transfer to U.S. sovereign debt.
Trump is wrong that he could make a deal with our lenders if the U.S. economy crashed. That's because there would be no lenders left. It would send the dollar into a collapse. That would send the entire world into another Great Depression. Printing money to pay off the debt would send the dollar back into decline. Interest rates would rise as creditors lost faith in U.S. Treasuries. That would create a recession. (Source: "U.S. Will Never Default Because You Print the Money," CNN, May 10, 2016. "Donald Trump's Economic Plans Would Destroy the Economy," The Atlantic, May 8, 2016.)
Reduce the debt by eliminating waste and redundancy in federal spending.
Trump demonstrated his cost-consciousness in his campaign. He used his Twitter account effectively. Trump traveled to meet with voters one-on-one instead of using expensive television ads. He can use this ability in running the government. He outlined how he uses these strategies to success in his book. The Art of the Deal. (Source: "Donald Trump's Campaign Blueprint: His Own Book," The Wall Street Journal, Monica Langley, March 2, 2016.)
There is a lot of waste in federal government spending. The problem isn't finding it. Both Bush and Obama did that. But the problem is overcoming the constituencies that support the various programs. Eliminating these benefits loses voters and contributors. Congress will agree to cut spending overall, but not in their district. (Source: "Why Washington Can't Cut Wasteful Spending," CNNMoney, February 28, 2013.)
But that's not the biggest problem in reducing federal spending. The major obstacle is that waste isn't responsible for most of the federal budget. More than two-thirds goes toward transfer payments, such as the interest on the debt, Social Security, Medicare and Medicaid benefits. Those are obligations that have already been made through previous Acts of Congress.
Another $700 billion a year goes toward military spending. Trump has promised to increase that, not cut it. During his campaign, he promised 90,000 more soldiers, a 350-ship Navy, 100 more fighters, and stronger nuclear and missile defenses. That could add $50 - $100 billion a year to the defense budget. (Source: "President Trump Is Likely to Boost U.S. Military Spending by $500 Billion to $1 Trillion," Forbes, November 9, 2016.)
That only leaves $507 billion to fund the rest of the government. Even if he cut that in half, it would only reduce the debt to $19.25 trillion. Here are 5 Discretionary Budget Myth-Busters.
How It Affects You
The national debt doesn't affect you directly until it reaches a tipping point. That point is when investors begin to doubt that the debt can be paid off. The first sign is when interest rates start to rise significantly. That's because investors need a higher return to offset the greater perceived risk.
The second sign is when the U.S. dollar starts to lose 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 rises, the cost of providing benefits and paying the interest on the debt will skyrocket. That leaves less money for other services, like the Justice Department. At that point, the government will be forced to cut services or raise taxes. That will slow economic growth. At that point, continued deficit spending will no longer work.
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