Trump and the National Debt
Instead of Eliminating the Debt, Trump Will Add $5.6 Trillion
Trump’s Two Strategies to Reduce the Debt
Trump’s first strategy was to grow the economy to increase tax revenues. During the 2016 presidential campaign, Trump promised to grow the economy 6 percent annually. Once elected, he lowered his growth estimate to 3.5 percent to 4 percent.
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. The ideal growth rate for a sustainable economy is from 2-3 percent. Trump’s Fiscal Year 2018 budget lowered annual growth rates down to between 2.4 percent and 2.9 percent annually.
Trump promised he could get that growth with tax cuts. He released the outline of his tax cut plan in his first 100 days. Tax cuts rely on supply-side economics. It says that tax cuts generate enough growth to replace lost revenues. During the Reagan administration, it was called Reaganomics. It worked because the highest tax rate was 90 percent. Trump wanted to cut taxes from a moderate 39 percent level. When rates are this low, cuts won’t stimulate the economy enough to offset lost revenue. That's according to the Laffer curve, the theory behind trickle-down economics.
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 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.
To cut enough spending to lower the debt, Trump must cut the biggest programs. More than two-thirds goes to obligations that have already been made through previous Acts of Congress. These include Social Security with a debt of $1 trillion; Medicare, $625 billion; and Medicaid, $412 billion in benefits. The interest on the debt is $363 billion.
During the Obama administration, $770 billion a year went toward military spending. Trump added $40 billion to FY 2017, Obama's last budget. In FY 2018, he requested a $50 billion increase. In FY 2019, he asked for an additional $20 billion, taking total military spending to $886 billion.
That leaves $1 trillion to pay for everything else. That includes agencies that process the mandated benefits, 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 may be thinking about national debt as he does personal debt. 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 Washington D.C. 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.
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 already 101 percent. That's $19 trillion in debt divided by $18 trillion GDP.
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. 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. 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.
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 cannot 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 U.S. sovereign 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, a decrease of $102 billion. But it was not because of anything he did. Instead, it was because of the federal debt ceiling.
Once the debt ceiling was raised, it passed two milestones during Trump’s first two years in office. On September 8, 2017, he 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 deficits for his first four years will total $5.6 trillion. It'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. 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.