Trump and the National Debt

Mark Tiller
12 min readMay 18, 2017

NOTE: This is Part Two of a four-part series on Trumpian Economics: See Part One here.

The Boast, Bigly:

Apparently, the primary season is the time when candidates are allowed to invent fantasy budget proposals, fulfilled by economic pixie dust. According to Trump’s advisor David Malpass, Trump’s April 2016 boast that he would pay off the national debt in eight years was made during “a very hard-fought primary campaign.” Oh, okay; that explains it. It’s sort of like a political Spring Break — you make crazy promises and then later regret getting your picture taken with special interest groups while holding an obscene political contribution in your hand. Is that it?

In fact, I wonder if Trump knew (knows?) the difference between a budget deficit and a trade balance (the yearly deficit or surplus of trade with other countries), because he claimed that he could eliminate the debt in part by renegotiating trade deals. He claimed many times that “China is killing us,” presumably because we have a large deficit with them (we are importing more from them than they are importing from us). Let’s be clear — trade deficits (trade imbalances) are not budget deficits (budget imbalances); trade deficits have nothing directly to do with the national budget. They are only related to the national debt in the sense that every economic factor is indirectly related to the others in the long run.

President Trump’s team is now trying to hobble together a budget, trying their best to live up to the many promises he has made. Trump is like a father who promised his daughter everything she wanted for Christmas, including a magical pony, but only has $36 to spend.

It’s true that every candidate tends to over-promise during the election campaign and must plant their feet back on the ground when it comes to governing. But in the case of candidate Trump, who spoke as if he were campaigning for the position of an absolute monarch with unchecked powers, this is an especially hard landing.

It’s also important to distinguish between radical proposals and nonsensical proposals. Senator Sanders’ proposal for free college tuition is a radical proposal, and this and some of his other proposals would have a tough time getting through Congress even if it had a Democratic majority. But it’s not impossible, and in fact is the status quo in other countries. On the other hand, President Trump’s claim to pay off the national debt is simply nonsensical.

Some of you might at this point, say: “Okay, okay, it’s just Trump talking. You know you can’t take him seriously. He is just speaking symbolically, like building the Wall, or Making America Great Again, or imposing 35% tariffs, or supporting Saudi Arabia, Japan, and South Korea developing nuclear weapons. It’s not a real proposal.”

I don’t agree. I think when the president says something, we must take him seriously. It’s not good enough to say it’s just rhetoric, or locker room talk, or a metaphor, or some other excuse. If a candidate, much less a politician, makes nonsensical proposals, it is a revealing tell, and it is proper for the citizenry to question his judgment. If a president says we must distribute aluminum hats to all citizens to protect against secret Martian mind control efforts, it’s not really funny… we should pay attention.

When Gerald Ford was president he famously said that “There is no Soviet domination of Poland and Eastern Europe.” Of course he knew otherwise, but that sloppy wording for what he really meant to convey (that he didn’t accept Poland’s status) stuck to him the whole campaign and hurt him badly. When Obama spoke of campaigning in “57 states” with one more to go besides Hawaii and Alaska, (rather than 47), the press treated it as a fundamental misunderstanding of math, and others argued he meant 57 Muslim states.

So before we let Mr. Malpass and Mr. Trump off the hook too easily, let’s consider Trump’s debt statement for a moment. It’s an educational moment.

Why can’t we pay off the national debt?

First, I suspect the majority of Americans don’t know the difference between the budget deficit and the national debt. (Skip this graphic if you do.)

The deficit is the shortfall in one year’s budget, i.e., the amount of spending that exceeds total revenues. If the U.S. is spending $4 trillion in a year, but collecting only $3.5 trillion in revenues, the budget deficit of $.5 trillion will require borrowing, by selling treasury bonds to investors. On the other hand, if the U.S. were collecting $4.2 trillion, we would have a $.2 trillion surplus, which means we could “pay down” $.2 trillion of our accumulated national debt.

$3.5 trillion (rev)-$4 trillion (spending)= -$.5 trillion ($500 billion deficit)
$4.2 trillion (rev)-$4 trillion (spending)= +$.2 trillion ($200 billion surplus)

Every year we run a deficit, we issue new bonds and increase the overall national debt, just as every year that an individual borrows more on a credit card, his or her overall debt increases. But when the U.S. budget is in surplus (as was the case in the last four years of the Clinton administration), our overall national debt declines. Each year, as previously-issued Treasury bonds come due and investors cash them in, the Treasury Department issues new ones to cover them, “rolling over” (refinancing) the debt. Therefore, if we have a surplus, we can pay off some of these bonds without issuing new ones, reducing total amount of outstanding bonds, and therefore reducing the national debt. (It’s actually more complicated than that, of course.)

The current national debt is almost $20 trillion. As bonds come due, we pay the interest on it, currently (FY 2017) about $266 billion net interest out of the yearly budget. (The interest payments are not financed and thus do not add to the debt.) At any rate, in order to pay off the $20 trillion in eight years, we would have to have a budget surplus of approximately $2.5 trillion per year.

$2.5 trillion (surplus) x 8 (years) = $20 trillion (national debt)

However, because for the last four years, the current yearly balance has been a deficit of approximately $500 billion, this means we would need to make a combination of budget cuts and/or tax increases of $3 trillion per year.

Current: $3.5 trillion (rev) — $4 trillion (spending) = $-.5 trillion (deficit)
+ 3 trillion in additional taxes and/or budget cuts= +$2.5 trillion (surplus)

Of course, raising taxes is a very tough sell. So, could we cut $3 trillion in spending? Good Luck, Mr. Trump — the entire budget is $4 trillion and most of it is “uncontrollable” (see below).

Mandatory Spending

Currently about 64% of the budget consists of entitlements (Social Security, Medicare, Medicaid, Veterans’ Benefits, Unemployment Insurance, etc.). Beneficiaries are “entitled” by law to receive these; they cannot be cut without changing the laws governing them. Another approximately 7% of the budget are the interest payments on the national debt, which by law we must pay (to investors who are cashing in their bonds). These and a few other smaller items are called “budget uncontrollables” or “mandatory spending,” and constitute about 72% of the budget.

So unless we plan on denying benefits to retirees, veterans, and the disabled, and cut Medicare and Medicaid, this part of the budget is off-limits. There are some adjustments that could be made to entitlement laws, but in each case even minor changes will incur the wrath of very powerful interest groups like the American Association of Retired Persons, whose members do something really radical — they vote. It’s as close to political suicide as it comes to suggest raising the retirement age, taxing benefits of wealthy entitlement recipients, or other such ideas.

So, yes, we could cut discretionary spending (which is only about $1 trillion of the budget), but there is not enough there. And raiding discretionary spending is going to get more and more difficult. In fact, because of an aging population, inflationary medical costs, increasing veterans’ costs, etc., medical entitlements are projected to double in the coming ten years, squeezing discretionary spending further. Note the rate of growth expected in the next ten years in the [grey and black] mandatory categories below.

Note that the non-mandatory spending, or the red and blue discretionary spending (the majority of which is the military budget), is only about ¼ of the budget, or about $1 trillion — or double the current deficit. This means if we cut EVERYTHING in the discretionary budget — i.e., everything the U.S. government does beyond pay for entitlements and interest payments — we would have a surplus of approximately $.5 trillion.

Yes, we would no longer have a Congress, a President, or federal courts. No more Department of Defense, no more Department of State, no more Department of Anything. No independent agencies or commissions… no Environmental Protection Agency, no Central Intelligence Agency, no Nuclear Regulatory Commission, no Consumer Product Safety Commission, no Center for Disease Control, no Federal Bureau of Investigation, no air traffic controllers, no food inspectors, no federal aid of any kind, etc. But we would have a $500 billion dollar surplus, without entitlement cuts or tax increases, as long as all these cuts don’t cause a complete collapse of federal authority and/or a depression. Let’s also assume that tariffs, if imposed, don’t cause a trade war and a further blow to the economy, wrecking the collection of taxes, and that we somehow still had an IRS to collect taxes.

Revenue? We don’t have to show you any stinkin’ revenue!

But wait, we determined that we would need a surplus of approximately $2.5 trillion per year, meaning still another $2 trillion in revenue even after slashing all discretionary spending! But President Trump said he will heavily cut — not increase— taxes. This cut is projected to decrease revenues by approximately $5–10 trillion over 10 years (estimates vary wildly — see part 4 of my first article), for an average of $625 billion — $1.3 trillion higher deficits per year (above and beyond the roughly half trillion-dollar deficits we currently are generating). He has also promised the biggest military buildup we have ever seen, and that we “are gonna love it.”

The Trump administration is also promising de-regulation and lower corporate income taxes. Since the 1980s, we have been told by supply-side economists and their political allies that if only we reduce the regulatory and tax burden on business, productivity will be enhanced and the economy will grow so robustly that more tax revenues will be generated even at the lower rates. Of course, no one can deny the economic logic that lowered taxes will indeed cause more growth, as businesses have more to invest (or even consume). But as we saw in the Reagan years, it wasn’t enough growth to make up for the lower rates, and consequently deficits soared and the national debt tripled. Not even the most rabid supply-sider today would suggest enough growth in the economy to create an additional $3 trillion in revenues per year plus enough to pay for massive tax cuts and increased military spending and a multi-trillion dollar infrastructural plan and a host of other promises. In fact, Trump assured us that all Americans will be covered by the replacement plan for Obamacare (quite a surprise to congressional Republicans), which he is apparently secretly designing at the moment in between golf rounds.

So where are the extra trillions per year going to come from? Is he going to make Mexico pay for this too?

Trump also suggested selling off $16 trillion of the government’s assets. But before we sell off the national parks, federal buildings, military bases, and Statue of Liberty, note that the TOTAL assets of the U.S. government are $3.2 trillion. He’d better go bigger. Selling off Alaska to the Russians (aha, now it all makes sense) and Hawaii to the Chinese (President Xi is Trump’s new man-crush) would get us closer, but is probably still not enough, especially considering lawsuits, relocations, etc. There are also mineral rights on U.S. government land, which are ultimately worth many trillions, but not only would that be fiscally irresponsible, but it would mean no governmental control over assets vital to national security and energy market stability (once privatized, they could even be bought by foreign entities). Wait, who could even afford to buy them?

The US Constitution

The only other alternative is that we do not fully honor the national debt. In fact, Trump also threw out this gem during the campaign, claiming he could negotiate a “great deal” and pay creditors less than they invested. Well, that’s a dandy idea except that the full faith and credit of the U.S. government (and The U.S. Constitution) is behind those bonds, which (at least until now) have been called “the safest investment in the world.” In fact, according to the Constitution, the public debt “…shall not be questioned.”

When asked whether the US must fully pay all of its debt, Trump replied: “I have borrowed, knowing that you can pay back with discounts. And I have done very well with debt.” Trump, who says “I love debt,” seems to think the U.S. government is like one of his failed business schemes that can be foisted onto his bankers who agree to lower his indebtedness in order to at least get some pennies back on the money he owes them.

We can’t even imagine what chaos a national default would cause as investors such as the Social Security System, the Federal Reserve, private pension funds, foreign governments, etc. were cheated. Trump even suggested: “You never have to default because you can print the money,” something every high school economics student can rebut.

Whether by default or “monetization,” hyperinflation would lead to tremendous market uncertainty, a massive drop in investment and spending, and virtual elimination of both business and private savings. Next would come a breakdown in trade and layoffs on a mass scale.

Conclusion

If you’ve survived this far, you must realize how difficult it is to reduce the national debt and how ridiculous Mr. Trump’s many comments were. The level of economic ignorance by the President of the United States is staggering and dangerous, especially because of his poor record of taking the advice of others. However, this doesn’t mean that we should not be concerned about the national debt and/or reduce the yearly deficits that add to it, or at the very least, not add massively to our budget deficits— especially during a time of near-full employment and a growing economy, with inflation on the horizon.

Okay, okay, so Trump’s not going to pay off the national debt in eight years and he has continually revised his statements. But realistically, what are the tax cuts, increased military spending, infrastructure, the If-You-Build-It-They-Will Tunnel-Under-It Wall, the better care for veterans, etc. going to do to the deficit and the national debt?

When President Obama took office the yearly budget deficit was at a record $1.4 trillion. It declined over eight years, both in actual terms and [more importantly] in relationship to the overall economy. The FY 2009 deficit was 9.8% of GDP; the FY 2015 deficit was about 2.4%. The deficit has been about a half-trillion dollars now for four years.

Of course, as long as there is ANY deficit, the debt will rise. So while it is true that the debt rose greatly under Obama and a Republican Congress, progress was being made, and by the end of Obama’s term, the deficit was below the historic average as a percentage of the national economy. And this is what matters: our deficit-to-GDP ratio (and the debt-to-GDP ratio). Just as a high-income earner can handle more debt than a low-income earner, the US needs to ensure that its debt does not outrun the ability of the country to manage its interest payments. If we can hold the line on deficit spending, the debt will become a smaller and smaller percentage of the national economy.

projected deficits WITHOUT Trump tax cuts

Now economists expect the deficit to rise to record levels again if Mr. Trump gets what he is promising. The tax cuts alone could add $625 billion — $1.3 trillion per year to the deficit. Will the Republicans in Congress cooperate with this massive redistribution of wealth from our children to us?

Still to come…

Part 3: Trump’s opposition to NAFTA, the TPP, and free trade agreements in general was a cornerstone of his campaign. He claimed China, Mexico, and other countries are “killing us,” and repeatedly told us he “could negotiate a better deal.” But does he really understand trade agreements, or is this another area where his ego is the real issue?

Part 4: Trump’s comments about the budget deficit and national debt reveal just how little he understands about the budget. He must now offer a real budget — not just rhetoric — and if he is allowed to create a fantasy budget using voodoo economics, he could do some very serious harm.

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