“President Trump’s economic agenda is working”, Steve Mnuchin said, in a statement accompanying the federal budget report.
He’s right. It is “working” – working to drive the deficit to infinity and beyond, that is.
The US budget gap exploded 26% wider for the fiscal year, to a truly “impressive” $984 billion, or 4.6% of GDP. That compares to $779 billion and 3.8% of GDP for the fiscal year 2018.
Receipts rose 4%, while outlays jumped 8.2% thanks to spending on Medicare, Social Security, Defense, and, of course, interest on the public debt. The 8.2% increase in outlays is the most since 2009.
Total Federal borrowing from the public surged by $1.052 trillion during FY 2019. That includes the $984 billion in borrowing to finance the deficit, and another $67 billion in net borrowing related to other transactions.
As a reminder, the Congressional Budget Office’s August forecasts showed the US traversing an even more perilous fiscal path than previously thought. “In our projections, the federal budget deficit averages $1.2 trillion between 2020 and 2029”, the CBO said.
The non-partisan group warned that deficits would oscillate between 4.4% and 4.8% of GDP over the next decade. Director Phill Swagel noted the obvious, which is that those figures are “well above the average over the past 50 years”.
There is virtually no historical precedent for deficits of this magnitude outside of economic downturns and war. Similarly, there is no economic rationale for this kind of red-ink-financed stimulus. The disconnect between the unemployment rate and the deficit is anomalous.
The stark divergence in the two lines over there on the right-hand side is unparalleled in modern US history. That represents Trump deploying pro-cyclical fiscal stimulus — ballooning the deficit despite an already hot labor market and even as the economy is doing well.
As the chart header from Goldman notes, this is “unusual”.
Mnuchin on Friday blamed America’s unsustainable fiscal path not on Trump’s flagrantly reckless policies, but rather on “wasteful and irresponsible spending”. (The president’s Fourth of July military party comes to mind.)
Trump habitually faults the Fed for not making it easier on Mnuchin. Last month, the president said “the Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt”, a policy prescription Janet Yellen later maligned as “long rejected”.
Most economists contend that Trump’s foray into late-cycle, supply-side stimulus will never pay for itself, as non-economists like Stephen Moore and Larry Kudlow contend. So far, critics have been proven correct.
With the economy decelerating ahead of an election year, Trump is mulling middle class tax cuts to help shore up growth and pacify those who have come to the realization that the original tax breaks were simply a gift to corporate management teams and the wealthy.
Meanwhile, it’s worth noting that Trump’s claims about boosting incomes are dubious, at best. Earlier this week, the president said at a Cabinet meeting that over 2 1/2 years, net incomes “rose $5,000, not including $2,000 for taxes, so it rose, let’s say, $7,000”. As Bloomberg writes, that is based entirely on estimates from his Council of Economic Advisers. Here’s the truth:
Inflation-adjusted median income rose $1,400 in the past two years, or 2.3% from 2016 to 2018, according to the U.S. Census Bureau, the government agency that tracks and compiles incomes. That compares with a 5% gain under former President Barack Obama, who took office during the last recession, and a decline of 4.2% under George W. Bush, which included the start of the 2008 financial crisis.
Even if you add estimates on the benefit from the Republican tax cuts, income gains still don’t rise to the level that Trump highlighted. The Urban-Brookings Tax Policy Center estimates that middle-income earners received a $930 reduction in taxes on average for the overhaul passed in late 2017. But Trump’s tariffs on Chinese goods all but wiped out those benefits, according to research from the Federal Reserve Bank of New York.
As ever, there is reality, and then there is what comes out of this White House.
A look back at nearly four decades of history shows that in two elections when the incumbent was defeated, the fiscal impulse was neutral in the fiscal year immediately before the election and contractionary (i.e., the change in the structural deficit was positive) the year before that.
(Deutsche Bank)
As Deutsche Bank’s Stuart Sparks wrote last week, “at a superficial level the modestly expansive fiscal impulse of fiscal year 2019 suggests… that the outlook for a second term for the Trump administration is reasonably positive”.
But not so fast. As the 1996 and 2012 elections make clear, it’s crucial to ask what’s going on in the private sector (both of those elections saw the private sector loosen its belt, offsetting retrenchment at the federal level). On that score, the news isn’t so great for Trump.
“The fiscal expansionism of the Trump administration has run into the classic problem of Ricardian equivalence”, Sparks said, before reminding everyone that “the classic example, in fact, of Ricardian equivalence occurs when the public sector cuts taxes”.
Through Q2 2019, the net economic stimulus from the tax cuts appears to have been almost entirely offset by private sector belt-tightening. Indeed, the chart below shows that in the two quarters immediately following the Trump tax cuts, the increase in private-sector net savings offset the fiscal belt-loosening – and then some. Through the first half of 2019, there was just a small net stimulative effect.
(Deutsche Bank)
In other words, we’re not getting much bang for the buck from Trump’s lunatic, late-cycle largesse. Indeed, Q4-to-Q4 growth in 2018 was revised down to 2.8% over the summer, below the administration’s “target”.
All of the above sets up a challenging 2020 economically for the White House. There is no room for more stimulus (as the exploding deficit makes clear), and with the impact from the tax cuts set to totally abate, one wonders what can prolong the sugar high.
War, maybe?
Read more:
‘It’s The Private Sector, Stupid’: Trump May Have A Ricardian Equivalence Problem
Great post, yes the deficit is a YUGE trump problem about to become an even Yuger problem — and of course Moscow mitch and all the GOP nazis will tell the rest of that deficits don’t matter ….
Gotta go, but here’s a little tool
https://www.newyorkfed.org/data-and-statistics/data-visualization/tri-party-repo/index.html#interactive/gcfrepos
Practically all developed nations have been running ever-increasing deficits for as long as I’ve been alive (born 1947).
The ratio ratio of those deficits to GDP has generally been increasing, with no calamitous effects (yet). This has led to the label “Modern Monetary Theory” where deficits indeed to not matter. Confidence matters. International trade matters. Relative currency stability matters. But the deficits themselves have yet to matter, unless you are Argentina or Turkey.
Trump will get away with his profligate federal spending. It’s just the way of the world.
Deficits do matter and there are budgets each year — which is why trump is in panic mode. Even if Congress continues to extend its Continuing Resolution games, they still have to balance the budget each year — hence, the trump panic can be seen in his search for funds for his private WALL project, which as I recall, is still a matter of debate in terms of appropriations and stealing money from the military budget and national security, etc … .. and several law suits related to the issues around this campaign problem.
The trillion dollar budget pie is only so large and has to be cut into various pieces to balance out. Many items do come up for negotiation over and over, but as trump gets boxed-in with deficits, he has to take away money from one group to give to another and so issues like the WALL and its campaign status are played against cutting Medicare, Medicaid, Education, Health Insurance and various messy problems which don’t work when you have a massive tax cut for the wealthy and then have Treasury revenues fall and deficit debt rises and then higher interest rates start to shrink ALL the pie pieces. That’s one of the keys actually, the interest on the debt is causing trouble with Treasury issuance — and actually it connects to IOER and Fed rates and this whole mess gets more and more complex.
Random news thing: “What’s more, the interest payments on the deficits become part of a mounting government debt that must be repaid and could depress economic growth in coming years. In fact, even with low rates this year, the government’s interest payments on the debt were one of the fastest growing items in the budget, rising nearly 16% to $375.6 billion.”
Mental note — That interest amount takes away from future Treasury issuance and other budget items, like the WALL!