Looking Forward to a Decade of Trillion-Dollar Deficits
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Looking Forward to a Decade of Trillion-Dollar Deficits

Credit-Card Republicans Draw Up a Plan for Higher Interest Rates, Slower Growth

David Cay Johnston

Welcome to the era of the Credit Card Republicans. Like the super high interest some people are paying today on pizzas delivered years ago, the president and GOP leaders in Congress talk fiscal responsibility, but cut revenues and spend money like they found the proverbial money tree in a backyard.

Americans worried about their future income should be alarmed at the latest tax and spend actions of Donald Trump and Congress. The almost certain result: short-term economic gain, followed by extreme long-term pain, is likely.

Trump has signed into law a tax cut that borrows an estimated $1.5 trillion over a decade, even though candidate Trump insisted that at $19 trillion the total federal debt was dangerously high and that he would bring the level of debt down.

Trump signed a military spending authorization in December for more than $700 billion. That is more money than even the generals and admirals asked for. And Trump is requiring massively increased spending on military hardware like Navy ships that may be counter-productive to national security. The spending is sure, however, to please investors in military hardware manufacturing companies like Lockheed, Boeing, General Dynamics and the European company Airbus.

And a week ago Trump signed a spending bill that adds $350 billion in federal spending this fiscal year, which ends Sept. 30. That means even bigger federal debts, contrary to his explicit campaign promises and claims that Hillary Clinton would spend your tax dollars with abandon.

And now Trump has put forth his second budget, a plan that adds $7 trillion to the federal debt over ten years. The fiscal 2019 federal budget deficit alone would be $984 billion, which rounds to a cool $1 trillion.

Here is what to expect as the Credit Card Republicans pursue their tax cuts for the rich and increased spending on war:

  • Slower job growth. During the Bush years, the population grew five times faster than jobs.
  • Higher interest rates, which will divert more tax dollars to paying interest on the federal debt.

For a decade the government has borrowed money at a rate of about 2 percentage points per year. However, that is mostly short-term debt that may soon rise to the level at the start of the George W. Bush administration, which was more than 6 percentage points.

On $20 trillion of total federal debt that would mean $1.2 trillion of interest each year on the federal debt. That is a sum larger than even the gigantic Pentagon budget. It is also equal to all the income taxes paid by more than 99% of Americans, IRS data tables show.

Sadly, Trump—the man with the self-proclaimed world’s greatest memory—has forgotten his campaign promises. Instead of lowering the federal debt, he is the one spending other people’s money the way he has throughout his life.

While the University of Pennsylvania gave Trump a degree in economics, his own words show he doesn’t understand the dismal science one bit, as I documented here and in other places.

Congressional Republicans rail about budget deficits, but then propose massive spending financed with borrowed money. Even a Forbes columnist has written that GOP spending may result in perpetual $1 trillion per year budget deficits.

The Committee for a Responsible Federal Budget, a group whose hawkishness on debt I have criticized, warns that $2 trillion annual budget deficits are likely starting in 2027.

Two years ago Mitch McConnell, the very wealthy senator from the poor state of Kentucky, said: “The level of national debt is dangerous and unacceptable.”

McConnell was speaking about the Obama stimulus plan. “We borrowed $1 trillion and nobody could find that it did much of anything,” McConnell said then, a political lie.

Anybody with a degree in economics, or who leads the Senate majority, should know that the stimulus was too small for the size of the problem, but it at least prevented a deeper collapse. McConnell also ignores his role in insisting that 40% of the undersized Obama stimulus go to business tax cuts, which are inherently a form of savings and thus anti-stimulus.

The cost of withholding the government credit card when a Democrat was in the White House was devastating.

In January 2008 the Congressional Budget Office in 2008 projected an economy that this year would be about 10% larger than it is. That’s more than $2.3 trillion of additional GDP that never materialized. The lost output comes to almost $7,200 per person just for this year, my calculations show. That’s almost $29,000 for a family of four.

Over a decade the lost output comes to $48,000 per American.

As Dean Baker, an economist who promotes sound principles in explaining government taxing and spending, wrote two years ago:

“The exact cause of this loss in output is not easy to determine. Usually, the economy bounces back from a recession and more or less returns to its trend path of growth. That didn’t happen with this recession. A main reason it didn’t bounce back is that there was no source of demand to replace the demand generated by the housing bubble.”

Baker relied on these documents: Table 1.2, White House Office of Management and Budget  Historic Budget Tables and the Congressional Budget Office “The Budget and Economic Outlook: Fiscal Years 2008 to 2018.”

As the accompanying chart shows, the actual economic output in America has been running far below the potential because Republicans withheld the credit card when it was needed during the recovery from the Great Recession that lasted from December 2007 to July 2009, the worst economic slump since the Great Depression of 1929-33.

The time to take on debt was then, when private sector spending had fallen. The way to revive the economy and stop a vicious downward spiral that feeds on itself as money grows scarce for basic consumption is government spending, which injects money into the economy.

Going back to 2001, the Bush tax cuts. Which mostly favored the top one in a thousand families, were followed by slower economic growth.  On his watch population grew five times faster than jobs, adding to downward pressure on wages and slower economic growth.
Now with the economy nearing full employment and some modest growth in wages is the time to reduce deficits and, if the economy booms, pay down debt.

Unfortunately, while posing as deficit hawks, the Credit Card Republicans like spending your tax dollars even more than the Democrats, much as that counters widely held beliefs.

Proof of that is in the White House Historic Budget Tables. The Trump administration’s latest tables show that in the past half-century the only budget surpluses were during Democrat Lyndon Johnson’s last year and during all four years of Bill Clinton’s second term.

Since then it’s been deficits all the way down, though they shrank sharply under Obama, from 9.8% of the economy in his first year to 3.1% in his last budget, a reduction of more than two-thirds. You may recall that when Obama took office jobs were vanishing at the rate of about 700,000 per month, the result of the tax-cut-and-borrowed-money policies of George W Bush combined with a withdrawal of government standards for underwriting mortgages.

Trump and his fellow Credit Card Republicans, through tax cuts for the rich and multinational corporations, plan more of their borrow-and-spend while posing as deficit hawks.

February 13, 2018