Trump and the National Debt
Instead of Eliminating the Debt, Trump Will Add $8.3 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 during that time. It would increase the U.S. debt to $28.5 trillion at the end of eight years, according to Trump's budget estimates.
This figure will probably be higher once the impact of the COVID-19 pandemic is realized. The Congressional Budget Office predicted that the pandemic would raise the FY 2021 deficit to $2.1 trillion. The FY 2020 deficit will be $3.7 trillion.
- President Trump promised to eliminate the national debt in eight years. Instead, he plans to add $8.3 trillion.
- Trump treats the national debt like personal debt.
- He believes that economic growth through tax cuts will pay for itself, though the evidence paints this as unlikely.
Trump’s Two Strategies to Reduce the Debt
While a candidate, Trump had two strategies to reduce U.S. debt. He promised to grow the economy up to 6% annually to increase tax revenues. But once in office, he lowered his growth estimate to 2%-3%.
These more realistic projections are within the 2%-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. They create a boom-bust cycle that ends in a recession.
Trump had promised to achieve between 2%-4% growth with tax cuts. In his first 100 days, he released the outline of what would become the Tax Cuts and Jobs Act. It cut the corporate tax rate from 35% to 21% beginning in 2018. The top individual income tax rate drops to 37%. It doubles the standard deduction and eliminates personal exemptions. The corporate cuts are permanent, while the individual changes expire at the end of 2025.
Trump’s second strategy was 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 mandatory obligations made by previous Acts of Congress. For FY 2021, Social Security benefits cost $1 trillion a year, Medicare costs $722 billion, and Medicaid costs $448 billion. The interest on the debt is $378 billion. Taken together, these total $3.3 trillion.
To lower the debt, military spending must also be cut. Instead, Trump had increased military spending in FY 2021 to $934 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.
- $228 billion to fund the other agencies that protect our nation. They include 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 in the Department of Justice ($9.8 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.
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%.
The U.S. debt-to-GDP ratio is 108.2%. That's the $23.517 trillion U.S. debt as of March 23, 2020, divided by the $21.726 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 in March 2020 after the coronavirus outbreak. Those falling interest rates meant America's debt could increase, but interest payments remain stable.
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 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.
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. It leapt to $22 trillion. In July 2019, Trump suspended the debt ceiling until after the 2020 presidential election. The debt soon rose to $23 trillion. Trump has overseen the fastest increase in the debt of any president.
Trump's Fiscal Year 2021 budget projects the debt would increase $4.8 trillion during his first term. That's as much as Obama added 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 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% 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 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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