WASHINGTON. We recently learned that the Federal government’s annual budget deficit continues to grow. In addition, the trade deficit continues to ballooon. Does this mean that the overall Trump economic policy has failed? And for that matter, his trade policies as well? Partisan critics eagerly cite the president’s claim that his policies would reduce both the budget and trade deficits. What’s going on?
In 2018, the annual Federal budget deficit increased by more than 16% from 2017 to $779 billion. That means that the public debt, which is the accumulation of all deficits, increased to more than $22 trillion. The Democrats and their mainstream media (MSM) acolytes quickly pounced on this news to criticize Trump for what they call his “failed economic policies.” They heap their greatest criticism and scorn on the Trump-GOP tax cuts.
The Republican tax cuts, however, did not add one dollar to the deficit. That’s because in fiscal 2018, with the tax cut in effect, the Treasury actually collected slightly more revenue than in it did in fiscal 2017. The increase in the deficit was due to increased government spending, mostly for the military. Contrary to the constant Democrat misrepresentation, the GOP tax cut likely helped keep the deficit down. That’s because those cuts increased annual economic growth from 2% to about 3%.
The congressional budget office claims deficits will grow larger
The Congressional Budget Office (CBO) forecasts annual deficits will get even larger over the next few years. However, the CBO does not have a good record for forecasting deficits, so using their forecasts may yield inaccuracies.
That said, the CBO does point out that reducing the Federal deficit will be extremely difficult. That’s because more than 60% of government spending is for “entitlements.” These entitlements include Social Security, Medicare and Medicaid. Most politicians won’t even talk about cuts to those programs. They regard entitlements as the third rail of 21st century politics.
Now, add in defense spending and interest on the public debt. That leaves less than $1 trillion in the Federal budget for everything else. And that’s why cutting government spending will be difficult.
Working through the issues
Raising tax rates in an attempt to reduce the deficit will also prove difficult. That remains true even if the Federal government can accomplish such a reduction while avoiding an increase tax revenue. That’s because higher tax rates would likely slow economic growth, leaving less earned income subject to taxation.
President Trump already increased military spending heavily during his first two years in office. So perhaps some cutting can occur there. The Trump economic policy plan is to try to hold spending constant. This would then allow increased economic growth to raise additional tax revenue. That, in turn, can reduce the deficit and perhaps even balance the Fededral budget.
How does the Federal (public) debt get repaid?
Of course, the real long term problem with the public debt in America is that no mechanism has ever been put in place to pay any of it back. Currently, the Federal government sells US Treasury bonds and notes to finance the annual deficit. The government then pays semi-annual interest on those bonds. When the bonds mature and when the government must return the principal to the bond owners, the government simply “rolls over” the debt by refinancing it. I.e., by selling new bonds to to cover the amount owed on the matured bonds. This results in an ever-increasing public indebtedness that grows inevitably larger, leading to greater and greater interest expense over time.
Congress absolutely must address this serious issue and finally institute a reliable mechanism to repay the Federal debt. Unfortunately, kicking this can down the road long ago became the solution. But this can’t go on forever.
How about that US trade deficit?
Regarding the increase in the already considerable US international trade deficit, it is far too early to conclude that Trump’s trade and tariff policies are working. In the short term, 2018, the US trade deficit did increase to a record high level. But that doesn’t mean that the Trump economic policy and associated trade policies are not working.
Our trade deficit increased for a number of short-term reasons. For example, once the President announced his new tariff regime, companies significantly increased their purchases in order to buy before those tariffs took effect. That increased imports considerably in the shorter term.
At the same time, the strong dollar made US exports more expensive for foreigners, so they bought less of them. It also meant that, even with tariffs, imports became relatively cheap in dollar terms. That worsened the trade deficit due to currency translation figures.
What Democrats and the media either miss or cannot see, the overall Trump trade policy intends to provide long term economic and trade solutions. Even at the cost of some short term pain. Already, the president has successfully negotiated a more favorable NAFTA replacement treat with Mexico and Canada. Unfortunately, the agreement has yet to get approved by Congress, so it is not yet in force. Agreements with South Korea and Japan are in the process of finalization. But these, too, are not yet in effect.
The Trump economic policy outline: Finding long term solutions to intractible economic problems
Trump finally brought China to the bargaining table after decades of Chinese profiteering due to a previous trade deal that put the US at a disadvantage. These negotiations continue to move forward. When complete, they provide our best chance ever to open the Chinese market to US manufacturers. In the long term, this will lead to a reduction in the US trade deficit.
President Trump continues to work to solve the problems brought about by the budget and trade deficits. But he seeks long term, not short term solutions to these issues, even at the price of some short term pain. His approach is proving to be refreshing, unlike that of past administrations. These administrations were owned and operated by career politicians who never failed to kick the can down the road, leaving the next president solve the tough problems.
Given time, Trump’s policies can work. And they will.
— Headline image: Kicking the can of Federal debt down the road.
Cartoon copyright by Ben Garrison, via grrrgraphics.com, reproduced with permission and by arrangement.