Remember when President George H.W. Bush, with unwavering determination, said, “Read my lips, no new taxes?” Well, those who follow Party platforms and the political positions of presidential candidates will long remember that one alongside the Trump Administration’s promise, “The 2017 tax cut will pay for itself with economic growth.”
Well, not even close. That wishful thinking was predicated on the 2017 Trump tax reductions producing 6.7% annual economic growth, according to the non-partisan Congressional Research Service. The best annual economic growth we actually achieved following the Trump tax cuts was 2.5 percent, not counting the financial hit we’ve taken because of the pandemic.
Economic growth following the Trump tax cuts, excluding the costs imposed by the pandemic, was barely above the growth achieved by the Obama Administration and well below the growth under the Clinton, Reagan, and Johnson Administrations. The bottom line is that the Trump tax cuts substantially added to the shortfall between the money the government is spending and revenue the government is raising. That is to say; deficits are going through the roof.
Indeed, the 2017 tax cut did not come close to paying for itself by stimulating economic growth as the Trump administration promised it would. On the contrary, we were on track to run nearly a trillion-dollar budget deficit for the 2020 fiscal year before the pandemic hit.
Now, these essays have generally given the Trump tax cut more credit than have his Democratic critics. The Trump tax cut did put more money in the hands of working families than the Democrats admit, and it did repatriate enormous sums of corporate dollars (about $1Trillion) from abroad. What it didn’t do is stimulate the economy anywhere near what President Trump and his economic advisors projected. Bottom line; the Trump tax cuts will add trillions to our deficit and debt starting this year and on into the years ahead.
We’re repeatedly told, however, that government deficits and government debt simply do not matter. Everyone loves Uncle Sam’s IOU’s, and we can simply print whatever money we need to pay the interest and principle we owe to our lenders (foreign and domestic holders of US debt). Many people in both political parties believe that. Many don’t.
I’m not a deficit nor a debt scold. America is, and hopefully will remain, the world’s most preferred borrower. And being the world’s most preferred borrower means America can and should use its capacity to borrow both liberally and wisely. That said, the enormous sums we are (and have been) borrowing have produced little in the way of new infrastructure such as new superhighways, new or repaired bridges, rapid rail, modern airports or rail terminals. And, indeed, access to quality health care for all of our people has been less than spectacular.
Getting on with the long-deferred job of building 21st-century infrastructure in the United States and delivering on the Trump promise of assuring world-class health care, including coverage for pre-existing conditions, is going to add trillions more to our already enormous deficits and debt.
While we are substantially winding down our armed forces commitments abroad, the years of war since 2004 have taken a toll in blood and treasure. The 2021 proposed defense budget ($740 billion) is still, nominally, higher than the 2020 defense budget, and it maintains 95% of the 2020 budget contingency for fighting abroad even though we have and are, substantially, winding down those foreign fighting commitments and attendant expenses. Three-quarters of a trillion dollars for defense is enormous, but we have more than our share of determined enemies in the world, and the cost of preparedness and deterrence is, of course, high.
The Pentagon plans to retire old weapons systems and replace them with new weapons, including fast-flying hypersonic weapons, artificial intelligence, and hundreds of new, small satellites. The Pentagon budget envisions new nuclear weapons, including new intercontinental ballistic missiles, new B-21 stealth bombers, additional Columbia-class ballistic missile submarines, and a new computer network to transmit launch codes from the president to the launch crews. The Air Force is moving quickly to supplement its ICBM arsenal, fund new satellites, spacecraft, and roll out President Trump’s new U. S. Space Force. The navy, meanwhile, plans to build eight new warships in addition to the twelve new warships funded in the 2020 fiscal budget. That was, incidentally, the largest ship construction request in 20 years to meet President Trump’s vision of building our naval fleet to 355 combat-ready warships.
It is almost hard to imagine that just three presidents ago in 2001, under Clinton, we had eliminated the federal deficit and were on track to eliminate all public debt by 2010. But that was then, and this is now. We are currently in debt to the tune of $26 trillion, $20.83 trillion of which is owed to domestic and foreign lenders, and $5.88 trillion to various intragovernmental accounts. Currently, America’s debt exceeds the entire economic output of the nation. It will rise to 107 percent of GDP in another two years, which will be the highest ratio of debt-to-economic-output in the nation’s history. And here’s the rub; two-thirds of our annual spending is non-discretionary. It consists of various mandatory programs. Perhaps it is time to reflect on just how comfortable we should be with our ever-growing deficit spending.
There was a time, spanning most of the twentieth century, when American dollars held by foreign nations were redeemable for gold. President Nixon administered a final coup de grâs to that practice, fearing (rightly) that other countries (primarily France) were making a run on our gold reserves. Nixon knew that all of the gold we had squired away in Fort Knox could only cover a third of the US dollars in foreign hands.
So, President Nixon, in 1971, correctly brought an abrupt end to dollars-to-gold convertibility. Since then, the only thing of value backing the American dollar has been the confidence creditors have in the United States of America. That confidence, as it turns out, is today truly the highest coin of the credit realm. It not only assures that The United States of America pays the lowest interest rate on its debt, but it also ensures that the US dollar remains the world’s reserve currency. International trade transactions the world over are, ultimately, priced in US dollars, which is the most enviable position any currency can attain (remember only America can print US dollars).
So, how careful must we be to assure that the dollar maintains that enviable position among the 180 other currencies in the world, including the Euro, the Swiss Franc, the Chinese Yuan, and the Japanese Yen, or a basket or a formulaic combination of these currencies? The answer? I don’t know, nor, at the moment, does anyone else.
So, What’s the point?
The United States will soon have to face certain realities. Some extraordinary and unanticipated costs drive a need to raise revenue such as managing an unforeseen war or mismanaging an unforeseen pandemic. Unbridled deficits and debt must, sooner or later, be brought under control. There are few options for doing that. We can significantly reduce spending, but the opportunities to do that are, realistically, quite limited given that so much of our spending is unavoidable and mandatory —or, we can significantly raise new revenue. Read my lips.
All comments regarding these essays, whether they express agreement, disagreement, or an alternate view, are appreciated and welcome. Comments that do not pertain to the subject of the essay or which are ad hominem references to other commenters are not acceptable and will be deleted.
Invite friends, family, and colleagues to receive “Of Thee I Sing 1776” online commentaries. Simply copy, paste, and email them this link— www.oftheeising1776.substack.com/subscribe –and they can begin receiving these weekly essays every Sunday morning.
Hal, You rightly sound the alarm but outside of tax increases
there must be more accountability from the Government and of
it’s labyrinth of agencies.
I suggest too, local ,State officials have ballooned their
bureaucracies up to a point causing more stress on an
embattled economy.
In history of our government the government worked for the
people and now the people work for the government.
Thank You for this succinct yet scholarly and fair minded review of a topic not always well understood by the average tax payer..
While I have at times disagreed with some of your columns, this one is spot on. As a country, we have and continue to act recklessly on the financial front and believe that as long as we are the “reserve currency” we can continue to throw money out of helicopters. And with entitlements consuming so much of our budget, with more on the way if Biden is elected, our political leaders will be too timid and afraid to seriously address this issue
Please send this excellent article to the White House, RNP and DNC. Thank you Hal for your informative , fair minded work!
Asking as someone who really doesn’t know – I.e., not rhetorically – have there been times when large tax cuts have produced the economic stimulus promised and/or a significant one at all?
Response to Marc Belgrad Mr. Belgrad posits a question that economists on the right and on the left have debated endlessly. Logic certainly would suggest that people who have more money in their pocket will spend more, and thus, stimulate the economy. The real issue, however, is whether whatever extra spending (stimulation) occurs will fully compensate for the lost revenue that results from the decrease in tax collections. Logic suggests that reduced taxes for those in more modest income brackets will result in more personal spending than reduced taxes for those who already have a substantial surplus between income and expense. Mr. Belgrad’s question cannot be satisfactorily answered here, but it seems difficult to make the case that tax reductions without simultaneous spending reductions can be counted on to produce enough economic stimulation to pay for the lost tax revenue. Then, again, I’m not an economist, but the case that reduced taxes pay for themselves is certainly not the proverbial slam-dunk tax-reduction advocates suggest.
After reading today’s factless and childlessly opinionated article on climate change in the desert sun paper it is a joy to read Hal’s realistic essay backed with facts and well thought out opinions. Our rapidly growing unbelievable debt not just federal but also state and local will cause us problems we can’t even imagine now. But one thing is for sure. Big troubles are coming. Joseph told the Egyptians to fill the silos for the upcoming trouble. Sadly our nations federal state and local money silos are registering zero.
Hal…total interest costs on our $28t today is less then $500b per year; due to abnormally low interest rates.’
If interest rates were to rise to historical norms of 4% the total interest costs woild exceed the defense budget.
Neither party gives a damn,
The tax reduction may have cost us in income tax revenue, but one must look at other benefits to that cost. One for example, was our low unemployment. Before the pandemic, all segments of our population experienced one of the lowest unemployment rates in our history. That in turn also generated a lot of payroll tax revenue. Was this considered in Hal’s wonderful and most interesting article?
Response to LWY:
Of course the added income tax derived from any increased employee income was taken into consideration in this week’s column. Net of that increased income tax collection, the federal government experienced enormous deficits subsequent to Trump’s 2017 tax Act. Was on target to have a $1Trillion deficit in the 2020 fiscal year BEFORE the pandemic hit, and trillions more during the rest of the decade ahead. The 2017 tax cut did not, and could not pay for itself as promised.
Hal, I was referring to payroll tax revenue, not employee income tax revenue.
Response to LWY: Regardless of what tax was being referred to, the deficit was what the deficit was net of all sources of tax revenue.
Hal, I agree the deficit is out of control. But low unemployment helps our financial condition to some degree, since it reduces some of our expenses e.g. welfare, unemployment comp, food stamps, etc.
.