“Federal Debt Projected to Grow by $8.6 Trillion Over Next Decade” (nytimes) describes the basic economic situation with which Trump is faced. If the economy meets Congress’s rosy growth projections, which seems unlikely given that a rising minimum wage will reduce labor force participation (see Puerto Rico), the government will spend 3.8 percent of GDP over and over any tax revenues received. (The article is unintentionally humorous:
Despite the swelling deficit, the report describes an economy that is currently on “solid ground,” with increasing output and job growth on the immediate horizon.
How can an economy that has to spend more than it generates, borrowing from a hoped-for brighter future, be considered on “solid ground”?)
Given that members of Congress are addicted to being reelected and Americans are addicted to showers of cash (SSDI, SSI, Social Security, food stamps, etc.) and what they perceive as free services (Medicare, Medicaid, Obamacare subsidies) from Washington, what can Trump do as a practical matter? Every federal spending program is popular. Even Reagan wasn’t able to persuade Congress to cut anything substantial (which is why there were big deficits back then; Congress heeded his call to cut taxes, but ignored the calls to cut spending).
If we could grow our way to a Singapore level of per-capita GDP (50 percent higher than U.S.) then all of our fiscal dreams could come true. But Singapore seems to have done that by (1) running an effective public school system, and (2) not having a substantial welfare system (mostly an earned income tax credit-style system in which people whose market-clearing wage is low get a boost, but, unless they’re disabled, they do need to work). Public schools are beyond federal control and the U.S. welfare state has grown more or less continuously since the 1960s.
The most realistic solution is to hold government spending spending constant with inflation (which will be extraordinarily difficult), raise taxes to a deficit of around 150 billion (which will be painful), let slow growth slowly shrink the size of government relative to GDP, and rinse/repeat for 3-4 decades.
The underlying issue is a technical problem: no one knows how to administer the government needed for our modern dynamic economy. The civil service system has given us relatively clean government administration but with side effects of bloat, inefficiency, and (most problematic) plodding action. Proposed reforms typically increase the opportunity for patronage, corruption, or profiteering which (for the proposers) is probably a feature not a bug. Unfortunately, without a solution to this problem it will probably not be possible to hold government spending constant with inflation.
but Singapore seems to have done that by (1) running an effective public school system, and (2) not having a substantial welfare system
And (3) Singapore is full of Singaporeans.
Quite extraordinary that one generation thinks it has the right to live beyond its means and have future generations pay for it. A real failure of democracy.
> And (3) Singapore is full of Singaporeans.
And (4) Singapore is a city-sized country that does not have rural areas to pull down its GDP per capita.
I’m a fan of rural areas, don’t get me wrong. But if GDPpc is the metric, rural areas are the clear losers.
And (4) Singapore is a city-sized country that does not have rural areas to pull down its GDP per capita.
So, in other words, no deplorables.
@Smartest Woman – Agreeing with Hillary isn’t likely to be a popular view on this libertarian blog.
But I do wonder if you are right. Perhaps Hillary accurately identified a segment of people without whom we’d have a higher GDP?
Farm output may only be 1% of GDP, but it’s hard to imagine taking any 1% slice of the remaining GDP and coming up with one which is more important. That is one of the reasons we have an electoral college. Without rural America we wouldn’t have a higher GDP, we wouldn’t have America.
I don’t think Trump is particularly concerned with either economic growth or the federal debt. (Why should he care?) His goal is to bring back manufacturing and construction jobs for his supporters in the white working class, the people you’ve dismissed as 21st century draft horses.
If Trump borrows a trillion dollars and spends it on infrastructure, while simultaneously cutting taxes on the rich (the other part of his coalition), there’d be a huge increase in debt, but the infrastructure spending would also create a lot of construction jobs for lower-skilled workers. Yes, the increase in debt could cause problems down the road, but again, why should he care?
Setting aside Trump, if you want a technocratic answer to rising debt, you need to balance revenue and spending over the course of the business cycle. That means raising taxes, cutting spending, or both. In the mid-1990s, Canada faced a major debt problem, with more than one-third of federal revenue going to interest on the debt. The problem was resolved through a combination of higher revenue, particularly from a national value-added tax (the GST); spending cuts of about 20%; and a boom in exports to the US, driven by a lower Canadian dollar. Starting in 1996, the federal government ran surpluses for 11 years (until the 2008 crisis hit).
Unfortunately, in the US context, both cutting spending and raising taxes seem impossible.
The bulk of federal spending is on Social Security, Medicare, and Medicaid, which are popular (Trump promised not to cut them); defense spending (also popular, Trump promised to increase it); and interest on the debt.
On the revenue side, with income inequality having risen significantly due to winner-take-all markets (in sports and entertainment as well as finance and technology; see Roger L. Martin’s Fixing the Game), the obvious way to raise more money would be to raise taxes on wealthy households. But conservatives believe strongly that wealthy households are already over-taxed.
If the US ever succeeds in overcoming its extreme political polarization and rediscovering some kind of common ground, I’d suggest considering a national value-added tax. Economist Stephen Gordon explains why consumption taxes are more efficient than other taxes. On the spending side, you want to take a close look at the costs and benefits of individual programs and regulations, and cut those where the costs exceed the benefits.
@Neal: please understand that I am a great appreciator of rural areas, and a nonbeliever in the primacy of GDPpc.
Your points are good but “rural” no longer means “agrarian” in the US. A lot of the in-between spaces produce nothing at all.