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.