With the impeachment trial, the coronavirus, and the Iowa caucuses in the news, dry economic statistics aren’t getting much attention right now. But two new reports—the latest gross-domestic-product figures from the Commerce Department and a new set of budget projections from the Congressional Budget Office—shouldn’t be allowed to pass without comment. Indeed, the issues they raise should be central to the 2020 election.
The core of Donald Trump’s platform is that his policies have produced what he touts as “The Greatest Economy in American History!” The truth is very different. By enacting a huge tax cut, in late 2017, that was heavily slanted toward corporations and the rich, Trump and the Republicans gave the economy a temporary boost—in 2018, it grew at an annual rate of 2.9 per cent—that has now faded.
In the fourth quarter of last year, G.D.P.—the broadest measure of activity in the economy—expanded at an annual rate of 2.1 per cent, the new report from the Commerce Department showed. Taking 2019 as a whole, G.D.P. grew at 2.3 per cent. These growth rates are nowhere near the four-per-cent growth that Trump promised in 2016. Instead, they are in line with the average growth rate since 2000, which is 2.2 per cent. And this ho-hum outcome has only been achieved at a tremendous cost. The federal government is now running an enormous budget deficit and accumulating vast amounts of new debt, which will burden taxpayers for decades to come. After three years of Trump’s Presidency, in fact, the United States is starting to look like one of his highly indebted business ventures.
This year, the new report from the C.B.O. says, the deficit will be about a trillion dollars. Ten years from now, it will be roughly $1.3 trillion. Numbers like these are so big that they are hard to take in. The way economists make sense of them is by comparing the dollar amount to the level of G.D.P., much like a family might compare its mortgage to its income. If you do this, you can see just how out of whack with history the Trump Presidency really is.
According to the C.B.O.’s projections, the budget deficit will be 4.6 per cent of G.D.P. this year, and by 2030 it will have risen to 5.4 per cent of G.D.P. Before Trump took office, the United States had never run sustained deficits of this magnitude except during wars, when spending on armaments and other items increased sharply, or during economic slumps, when tax receipts plummeted. “Other than a six-year period during and immediately after World War II, the deficit over the past century has not exceeded 4.0 percent for more than five consecutive years,” the C.B.O. report notes. “And during the past 50 years, deficits have averaged 1.5 percent of GDP when the economy was relatively strong (as it is now).”
What about the level of government debt? “Because of the large deficits, federal debt held by the public is projected to grow, from 81 percent of GDP in 2020 to 98 percent in 2030 (its highest percentage since 1946),” the C.B.O. report says. “By 2050, debt would be 180 percent of GDP—far higher than it has ever been.”
It’s no secret what happened during the early nineteen-nineties to some of Trump’s business ventures, including the Taj Mahal casino, in Atlantic City, and the Plaza, on Central Park South: they went bankrupt under the weight of the debts he had piled on them. Is the same fate in store for the United States? Probably not, fortunately. With interest rates at near-record lows, servicing large debts is easier than it used to be. And, in any case, governments have financing options that are unavailable to private businesses, such as raising taxes or, in extremis, having the central bank issue money and purchase bonds.
Despite the rising indebtedness of the United States, most investors still regard Treasury bonds as a safe asset. But that doesn’t justify the profligacy of Trump and the Republicans in Congress. At some point, interest rates could rise, and investors could lose faith in the U.S. government. Even if that doesn’t happen, “we’re borrowing money for all the wrong things,” Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, points out.
Some of the debt that is being issued to pay for the tax cut could have been used to finance investments in infrastructure, renewable energy sources, universal day care, adult retraining, reducing the cost of higher education, or any other number of programs that yield long-term benefits to ordinary Americans. Instead, the biggest handouts went to corporations, who saw their tax rate reduced from thirty-five per cent to twenty-one per cent.
At the time, the White House argued that this would encourage multinational businesses to repatriate countless billions of dollars in profits they had stashed overseas. Kevin Hassett, who was then the chairman of the Council of Economic Advisers, claimed that once the tax bill was passed, grateful businesses would invest heavily in new factories, offices, equipment, and software—a process economists refer to as “capital deepening”—which, in turn, would raise the productivity and wages of their workers. “Put simply,” Hassett wrote, “capital deepening, which brings additional returns to the owners of capital, brings substantial returns to workers as well.”
The new G.D.P. report shows what actually happened. Business investment did pick up a bit, in anticipation of the tax bill and immediately after it was passed. Since then, though, it has slipped back. For the past three quarters, the broad category of capital spending that the Commerce Department refers to as non-residential fixed investment has actually fallen, with the biggest drop coming in “structures”—a category that includes factories, office buildings, and things like drilling platforms. In the most recent quarter, spending on structures dropped ten per cent. Some of this fall was probably attributable to a drop in the price of oil, but the energy sector wasn’t the only sector to exhibit weakness. Others, such as manufacturing, did, too, Ian Shepherdson, the chief economist at Pantheon Macroeconomics, pointed out to me.
So, what happened to the Trump tax cut? “Business saved some of the tax cut, but most of it seems to have gone on stock buybacks and dividends,” Shepherdson said. “There is zero evidence of any positive impact on capital expenditure.”
Just last week, I pointed out that the Democratic nominee, whoever it is, will need to debunk Trump’s claims about the economy. These latest economic reports provide plenty of material to work with.
