Two weeks after Donald Trump won election as our 45th president, I made a couple predictions in these pages— namely that the agenda that Trump touted during the campaign would bear little relationship to what would actually happen in Washington during his administration. Instead, I wrote, “Here’s what Americans can really expect over the next four years.
“‰ Huge tax cuts for big business and the wealthy: Whatever Republicans say on the campaign trail, this is the one policy that is a guarantee whenever Republicans control the levers of power in Washington. America’s wealthiest companies and individuals will see hundreds of billions of dollars in tax cuts, while most Americans will see modest reductions at best, and many will likely pay more. Income inequality will continue to worsen.
“‰ A ballooning federal budget deficit. President Reagan exploded the deficit. President George W. Bush inherited a $200 billion budget surplus and left President Obama with a $1.3 trillion deficit. Obama has managed to cut the deficit by two-thirds during his presidency, but with the GOP back in charge, and passing out huge tax cuts, the deficit will spike. Mark this one down… it’s a virtual guarantee. Republicans will claim that deficits will fall from all the new business generated by their tax cuts, but this is, without a doubt, the most discredited theory in economics. It will not happen.”
I was reminded of these predictions last week, when the Treasury Department announced that the federal government is on track to borrow nearly $1 trillion in the first year of the Trump administration, an 84-percent jump from the last year of the Obama administration. The $1.5 trillion tax cut plan, approved last December, was guaranteed to add to the deficit. And the GOP’s big boost in military spending approved earlier this month will further add to the budget woes, with the latest forecast now pegging the 2019 deficit at $1.2 trillion. That represents a doubling of the deficit in just two years under President Trump. And that’s before so much as a dollar of Trump’s supposed infrastructure plan has been added to the mix. He wasn’t kidding when he said he’s the king of debt.
Now I don’t claim to be a fortune teller, although these predictions from 15 months ago were spot on. What I am, however, is a student of political history, and since the days of Ronald Reagan, the Republicans have been as predictable as the sun coming up in the morning. No matter the question, the answer from the GOP is always more tax cuts and bigger deficits. They just can’t help themselves.
Unfortunately, as the preeminent economist John Maynard Keynes pointed out, there is a time for government debt and a time to pay the bills— and the Republicans have it exactly backward.
Those who remember their history will recall that Republicans fought tooth and nail in the wake of the 2008 financial crash to block the financial stimulus that virtually every economist agreed was necessary to prevent a much deeper slide into a full-blown depression. That’s classic Keynesian economics… when the economy is hurting, the government can right the ship through fiscal stimulus, particularly public works.
The big recovery package that Obama passed despite GOP opposition injected hundreds of billions of dollars into the economy at the same time that it repaired our highways and bridges, added broadband infrastructure, kept police, firefighters, and teachers on the job, and built hundreds of new schools.
The stimulus package worked. Within a few months, job losses had been stemmed, the economy was growing again and the growth continued throughout the remaining years of Obama’s presidency. It would have grown faster with more stimulus, but Republicans blocked that after they regained control of Congress in 2010 and the economy’s progress was slowed as a result.
Yet by 2016, the economy was doing well enough despite the GOP efforts. Unemployment was near record lows and incomes were starting to rise, even for average Americans. The Dow Jones, which sat at 7,949 the day Obama took the oath of office and hit 6,547 six weeks later as the recession reached rock bottom, sat at 19,827 as Obama handed over the reins. And the $1.3 trillion deficit that Obama inherited from George W. Bush, had been trimmed by two-thirds.
It was just one more case study demonstrating that Keynes had it right. And that Republicans had it wrong.
Keynes, as I said, also believe in paying the bills. When the economy is strong, Keynes argued, governments need to use their taxing authority to pay down the debt they incurred when the economy needed stimulus.
This is not only sound fiscal policy, it’s actually good economics. Higher taxes are, in effect, fiscal stimulus in reverse and they can help keep an economy from expanding too quickly and creating the inflationary pressures and potential instability that often lead to the next downturn. That’s why the recent Republican tax cut package was so reckless— it poured gasoline on a well-controlled flame. In 2016, the economy wasn’t too hot or too cold— it was just about right. Now, in the wake of the GOP tax cuts, we’re seeing growing worries about inflation, higher interest rates, and an overheating economy, all of which contributed to the recent volatility on Wall Street.
The GOP kept the brakes on when the economy actually needed the gas, and now that a little braking might be in order, they’ve put the pedal to the metal. Clearly, the GOP leadership is lacking a competent economist.
What’s worse is that the GOP’s debt bomb will leave the country unable to respond to the demographic challenge posed by the retirement of the baby boom, which will increase the demand on programs like Social Security, Medicare, and Medicaid.
It will also leave the country less able to provide the appropriate level of fiscal stimulus the next time the economy goes sour. And with the GOP in charge, that’s probably sooner rather than later.