Last April, lunching amid construction debris at his new hotel five blocks from the White House, Republican presidential candidate Donald Trump told the Washington Post he would get rid of the national debt “over a period of eight years.” It may have been the boldest promise he’s ever made, considering the U.S. hasn’t been debt-free since 1835. The debt at the time was more than $19 trillion, and rising. Trump predicted he could turn back the tide even though he thought the country was headed for a “very massive recession.”
Now that he’s in the White House (and his hotel is open), he has a chance to make good on his commitment to wipe the slate clean. But there’s little evidence to date he’ll even make a serious stab at debt reduction. The real question is how much the debt will increase during his term—or terms—in office. Based on what we know of his tax and spending goals, it appears likely to grow even faster under Trump than it was projected to rise before he took office.
Trump wants to slash personal and corporate income taxes, eliminate Obamacare levies, raise defense spending, build a border wall, renew infrastructure, and protect Social Security and Medicare from cuts. The cuts he does want—at the Environmental Protection Agency, for example—won’t save much money. “President Trump is inheriting a really bad situation. But to make the situation worse … the only justification is we don’t want to do the hard work of real budgeting,” says Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget.
Trump rejects the notion that balancing the budget requires painful choices. His deus ex machina—the miraculous solution to an intractable problem—is stronger economic growth, which would make it possible to cut tax rates and still raise more revenue. In September the Trump-Pence campaign issued a fact sheet saying its program would “conservatively boost growth to 3.5 percent per year on average.” In an October debate, Trump said, “I think you can go to 5 percent or 6 percent.”
His advisers seem to be pulling him to earth lately. He’s been citing 3 percent growth as a target, and the New York Times reported in February that his budget will assume 2.4 percent average growth. But even that is ambitious. The nonpartisan Congressional Budget Office projects potential growth of just 1.8 percent a year from 2017 through 2027, based on estimated annual growth of 0.5 percent in the labor force and 1.3 percent in the productivity of the labor force—i.e., output per hour of work. It will be hard for Trump to add to labor-force growth, especially given his planned controls on immigration and stepped-up deportations of undocumented aliens. His best hope is to boost productivity by using tax cuts to induce investment in machines and software—but even that would be insufficient, according to most simulations.
The Trump administration, in “thinking that you’re going to be bailed out by growth,” is following in the footsteps of governments that couldn’t control their indebtedness, says Harvard economist Carmen Reinhart. Standish Mellon Chief Economist Vincent Reinhart, Carmen’s husband and sometime collaborator, points to a 1991 essay, The Macroeconomics of Populism, by Rudiger Dornbusch and Sebastian Edwards. An initial burst of growth brings a sense of vindication to a populist regime, the writers found, but it’s soon followed by bottlenecks, inflation, and budget deficits, until “it becomes clear that the government is in a desperate situation.”
Trump likes to point out that Obama presided over a huge increase in the federal debt. But it made sense for the government to run deficits during and immediately after the 2007-09 recession. With its deep pockets and solid credit, the U.S. used that deficit spending to offset retrenchment by households and businesses, thus preventing an even deeper downturn. Now that the unemployment rate is below 5 percent, there’s less scope for stimulus. At least that’s the Federal Reserve’s position: Even before Trump has revealed his budget, the Federal Open Market Committee has indicated it’s on track to raise interest rates three times this year to prevent inflationary overheating of the economy.
The levees holding back red ink are softer than usual. Republicans in Congress who prevented Obama from investing in infrastructure are keen to support Trump’s version of the same idea, for instance. “Historically, when one party controls both houses of Congress and the White House, the deficit goes up,” says William Gale, a senior fellow at the Brookings Institution. “You’ve got your hands in the cookie jar.”
The bond market’s “vigilantes”—investors who once pushed interest rates higher at the first sign of fiscal irresponsibility—seem unconcerned. Long-term interest rates did spike in November, but the yield on the 10-year Treasury note has settled around 2.5 percent in the last few months, still well below the historical average.
The general public has gotten blasé, too. Just 52 percent of Americans surveyed by Pew Research Center in January said reducing the deficit should be a top priority for the president and Congress, down from 72 percent who said so when Obama began his second term.
Trump won’t have a completely free hand, of course. Budget hawks in the House Freedom Caucus and Republican Study Committee could put up a fight over raising the debt ceiling. “These people feel fairly emboldened,” says JPMorgan Chase economist Joseph Lupton. “They don’t feel that this movement is dying.”
The best outcome for all concerned would be a high-performing economy. Columbia Business School Dean Glenn Hubbard, who chaired George W. Bush’s Council of Economic Advisers, says he supports the administration’s strategy of focusing first on growth. But things could get ugly if the promised boom doesn’t materialize. Trump’s agenda has to show success soon, Hubbard told reporters after a March 6 speech to the National Association for Business Economics in Washington. “Animal spirits will only take you so far,” he said. “Then you’re like Wile E. Coyote in the cartoon.” You realize there’s nothing beneath your feet, and it’s a long way down.