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fiscal stimulus Markets Mick Mulvaney politics

Red Ink: The Politics Of Fiscal Insanity

"I am the most concerned I’ve ever been."

Over the past nine months, the Trump administration has been subjected to withering criticism for the President’s willingness to throw caution to the wind by mortgaging the country’s future in the interest of turbocharging a late-stage expansion with deficit-funded fiscal stimulus.

The President’s defenders both in the mainstream media (and especially in the blogosphere) invariably employ the old Soviet “whataboutism” strategy. “What about Obama?” “What about Democrats’ reckless fiscal policies?” And on and on.

That’s a good strategy to the extent it almost always works with gullible voters who lack the cognitive capacity to extrapolate what that logic would entail were it applied to everyday life. For instance, if I break into your house while you’re at the grocery store and steal your TV, would you accept “well, plenty of other people besides me have stolen TVs” as a mitigating factor if you pressed charges? Of course not, because that wouldn’t make any sense.

But in terms of public borrowing and spending, Republicans pointing to Democrats’ fiscal sins as an excuse for what the GOP has allowed to happen under Trump makes even less sense because the GOP is supposed to be synonymous with fiscal rectitude. To extend the analogy, this situation is akin to the head of your local neighborhood watch program stealing your TV and then pointing to previous instances of theft as an excuse. Not only is it silly for that person to try and cite historical crimes to justify his or her own pilfering, but this person, as head of the neighborhood watch, should be the very last person that anyone should have to worry about when it comes to breaking into homes.

So don’t let that be lost on you when you find yourself bombarded with anti-Obama propaganda in the course of the public borrowing and spending debate.

Further, nobody is suggesting that Trump is solely or even mostly responsible for America’s fiscal trajectory. That’s obviously a straw man. Rather, the point is that Trump’s fiscal policies are i) unnecessary considering how well the economy was already doing, ii) ludicrous because the only thing sillier than piling fiscal stimulus atop an overheating economy is funding that stimulus with debt, and iii) emblematic of the type of thing someone would do when they are focused on delivering short-term, ego-inflating gains to perpetuate a populist policy agenda.

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Not that it matters because you can’t sway people who are vulnerable to propaganda with facts, but exactly none of that is debatable. It just is what it is and people like Mick Mulvaney and Paul Ryan surely know it, but they’re willing to suffer this nonsense for a variety of reasons, not the least of which is that Republicans have begrudgingly come to accept the fact that the composition of the base means you either get on board with the Trump personality cult or you lose GOP votes.

Meanwhile, the dwindling share of Republicans who aren’t on board Trump’s insanity locomotive are on board with reshaping the Supreme Court and getting tax cuts, so they too have demonstrated a willingness to swallow the bitter orange autocrat pill on the (possibly mistaken) assumption that once this national nightmare is over in 2020, they’ll at least have the tax cuts and a conservative court to present as evidence in the court of public opinion where they’ll be tried for crimes against democracy.

In any event, the fact is that until Republicans are willing to push back against what they know is misguided fiscal policy, questions will linger about the relative wisdom of late-cycle, deficit-funded stimulus.

On Thursday, America got the latest reminder of why this might be a bad idea when Treasury reported that the U.S. budget deficit ballooned to $898 billion in the eleven months through August. Do note that we’re now $94 billion ahead of the CBO’s full-year estimate and in this case, “ahead” is a bad thing. The $898 billion figure compares to $673.7 billion during the same period in FY2017. For the month of August, the red ink totaled a truly “impressive” $214 billion. That would be (basically) double the $108 billion deficit logged in August 2017.

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Will Someone Get Larry Kudlow On TV So He Can Explain This Ballooning Deficit?!

With all of that in mind, we thought it was worth presenting the following infographic from Goldman that breaks down exactly how precarious this situation has become. Below the visuals, find some excerpts from the bank’s interview with Maya MacGuineas, the President of the Committee for a Responsible Federal Budget, a bipartisan, non-profit organization based in Washington, DC.

redInk

Via Goldman’s Allison Nathan

Allison Nathan: How concerned are you about the US fiscal situation today relative to past periods?

Maya MacGuineas: I am the most concerned I’ve ever been, for three reasons. First, our fiscal situation is the worst it’s been at any time in US history other than right after World War II. And, of course, the difference is that we haven’t just fought a world war. Nevertheless, US federal debt is estimated to end the decade approaching 100% of GDP, which is significantly higher than the historical average of roughly 40% of GDP.

Second, the increase in debt today is bad policy that’s completely self-imposed. More than 50% of next year’s deficit will result from policy choices made in just the past couple of years, including the tax cuts passed earlier this year and a huge increase in discretionary spending. Deficit spending makes a lot of sense during economic downturns, but not during periods of strong growth like we have today. To me, this reflects more than just poor fiscal choices; it reflects an incredibly broken time in our government. Our politicians are more focused on the short term than the long term, and on politics than on economics, leaving lawmakers utterly unwilling to make any of the hard choices that budgeting requires. And that applies to public policy more broadly. So the debt worries me not only from an economic perspective, but also as a symbol of how broken our government is right now.

Third, the fiscal picture does not bode well for our ability to respond to the rapid pace of change in the global economy today. Technological innovation, shifts in globalization, and other factors affecting the future of work will likely require new policy solutions and potentially new roles for the public sector. However, we will be so handcuffed fiscally that even if want to pursue policies that, for example, facilitate lifelong learning as technology evolves, we won’t be able to.

Allison Nathan: What are the economic implications of this indebtedness?

Maya MacGuineas: On the surface, the implications appear to be few and far between given that the economy and the markets are performing so well. But, as I mentioned, our high federal debt/deficit—combined with still relatively loose monetary policy, even if the Fed is steadily tightening—leaves us dangerously unprepared for an economic downturn. In 2008, our debt-to-GDP ratio was less than half of what it is today. So our fiscal toolbox to address the next downturn is very limited. Longer term, high levels of government debt will likely lead to slower economic growth as higher interest rates crowd out private investments, and higher interest payments jeopardize public investments. And since our entitlement programs are actuarially unsound, any fiscal boost to growth we are experiencing now will ultimately have to reverse in the form of higher taxes and/or spending cuts.

Allison Nathan: Could any of this precipitate a crisis in the near term?

Maya MacGuineas: As bad as the fiscal situation is, I don’t think a crisis is likely anytime soon. The US has the benefit of being a safe haven; we seem capable of being at the very heart of a global crisis and still attracting demand for US Treasuries. So we have many advantages that make a fiscal crisis in this country much less likely than almost anywhere else.

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