The president-elect’s economic plan is a ticket to debtor’s prison.
- By Daniel AltmanDaniel Altman is the owner of North Yard Analytics LLC, a sports data consulting firm, and an adjunct associate professor of economics at New York University’s Stern School of Business.
Donald Trump has done the United States a peculiar favor. By campaigning on promises to cut taxes and raise government spending, which economists agree will increase the national debt by trillions of dollars, he has at least been honest about his party’s abandonment of fiscal conservatism. But there is more to his strategy, which may well bankrupt the nation just as he bankrupted so many companies.
Think back to the eight-year presidencies of Ronald Reagan and George W. Bush. Both spent heavily on the military while cutting income taxes dramatically. Both left the nation with such huge debts that their successors were forced to raise taxes — George H.W. Bush despite his famous campaign promise, and Barack Obama despite the painful aftermath of a deep recession.
Some of Reagan’s and Bush’s advisors also claimed that cutting taxes would increase tax revenue, so great would be the resulting boost to economic activity. That notion has been shown to be false for the United States, time after time. Trump, at least, has employed no such pretension.
Rather, he has relied on his usual business strategy, starting with the seduction of starry-eyed investors (now voters) with the glamour of the Trump name and promises of monumental proportions. The next steps — the ones that led him to repeated bankruptcies — are more ominous: Lever up a mountain of debt, and then leave others to foot the bill when repayment becomes impossible.
Americans already know what happens when this strategy comes to Washington. Reagan and the younger Bush let the nation live beyond its means, too, stealing from legions of unborn Americans to fund their grand ideas. They also stole from as-yet unelected presidents; whoever followed them in power would be the ones to pay the piper. Their own party would return when times were good again.
This politically cynical budgeting has happened in other rich countries, yet it wasn’t until the late 1990s in the United Kingdom that one party finally called it out. No more “Tory boom and bust,” said then-Chancellor of the Exchequer Gordon Brown and his cohorts in the Labour Party as they shamed their Conservative predecessors. Instead, they chose to abide by a “golden rule” — in which the government would be bound to balance its budget over the length of the economic cycle, socking money away in the good times and then using it to soften the bad ones.
The Labour government stuck to its word — at least until the global financial crisis hit — leaving the British national debt 3 percent lower, as a share of gross domestic product, than before they took power. Some commentators said Labour could have done even better, but contrast their record with Reagan, who ballooned the national debt by 12 percent of GDP, and Bush, who erased a rainy-day fund worth $5.6 trillion and ended up increasing the debt by 2 percent of GDP by the end of 2007.
As with his Republican predecessors, any sort of “golden rule” seems to be far from Trump’s thinking, unless we’re talking about interior decorating. The first victim of his presidency is likely to be Paul Ryan’s reputation for prudence. The speaker of the house and the rest of the Republican-led Congress will likely rubber-stamp Trump’s plans for spending and tax cuts, though there is little need for stimulus at this point in the economic cycle. Of course, they had no trouble dashing similar plans when the nation truly needed stimulus in 2010 and 2011, but back then their overriding goal was to derail Barack Obama’s presidency.
To be sure, not all of Trump’s economic proposals are irredeemable, yet even the ones that show some promise are half-baked. The corporate income tax is an unnecessarily volatile source of revenue for the federal government, and even experts aren’t really sure how it affects the economy. So lowering the rate from 35 percent to 15 percent — or even eliminating it entirely — isn’t such a bad idea. But the revenue would have to be replaced with other taxes, preferably stable ones like individual income taxes, and Trump has no such plans.
Investing in infrastructure is also something the economy needs, though more now for long-term growth than for any immediate stimulus. Of course, that infrastructure must actually be useful for the former effect to take hold, and it’s not clear that a big wall on the nation’s southern border would fit that description. The road system, energy grid, and water and waste systems are far more urgent priorities.
Regardless of how taxes are cut and money is spent, adding 30 percent of GDP to the national debt hardly seems like a good idea. At the moment, the debt is still about 75 percent of GDP. Among the countries labeled as “advanced economies” by the International Monetary Fund, only struggling Italy, Japan, and Portugal are higher. The Treasury’s canny refinancing of the debt at low interest rates has made the current burden bearable. But there’s little more it can do, though, especially if Trump’s spending forces interest rates back up.
And that’s exactly what the markets expect to happen. Last week, the yield on the 10-year Treasury note jumped 24 basis points between Monday and Wednesday, and the yield on the 10-year Treasury Inflation-Protected Security doubled. Meanwhile, the price of gold dropped 4 percent, a sure sign that buyers fear higher interest rates; after all, gold doesn’t pay a cent.
A combination of rapidly rising deficits and higher interest rates could make the nation’s debt unsustainable even within Trump’s four-year term — and that’s if his stimulus works. If he stays true to his record in business, another bankruptcy could be on the horizon. This time, though, there won’t be any second chances, and all Americans will be left holding the bag.
Photo credit: SPENCER PLATT/Getty Images
Correction, Nov. 15, 2016: Gordon Brown was chancellor of the exchequer when he said, No more “Tory boom and bust.” A previous version of this article said he was prime minister at the time.