Trump never cared about deficits, and that is a good thing

When it comes to deficits and debt, President Trump’s limited grasp of economics is a probably good for the country. During his campaign, Donald Trump promised that he would pay off the federal debt, which was then just over $14 trillion, over two terms in office.

He has already added more than $1.5 trillion to the debt. According to the Congressional Budget Office, the budget is on a path to add more than $7 trillion in debt by that start of 2025.

For people who obsess over debts and deficits, this is terrible news. However, for people who care about the well-being of workers and the economy, this is not a problem.

The story as to why deficits are supposed to be bad is that they lead to high interest rates. The argument is that by borrowing so much money, the federal government pushes up interest rates. The logic is that there is only so much savings out there, so if the federal government demands more, it raises the price of savings, which is the interest rate.

Higher interest rates are bad news because they make it more expensive for consumers to borrow for houses, cars and other big-ticket items. More important, high interest rates are supposed to discourage investment.

Investment is a key factor in productivity growth. The story is that if firms invest more in new plants and equipment it will make workers more productive, allowing them to enjoy higher wages and living standards. From this perspective, by crimping investment, deficits will mean that workers have lower wages and living standards in future years.

There is a simple problem with this story: interest rates remain low in spite of growing deficits. The interest rate on 10-year Treasury bonds, the key benchmark for interest rates in the economy, is hovering near 2 percent. By contrast, in the late 1990s, when the government was running budget surpluses, the 10-year Treasury rate was over 5 percent. In other words, there is no bad deficit/debt story here.

It can also be argued that high budget deficits lead to inflation, but no one can tell that story about today’s deficits. The inflationary rate has remained consistently below the Federal Reserve Board’s 2 percent target. Again, the deficit/debt story doesn’t fit.

Nor can we tell a story about a huge interest burden being imposed on our kids. The interest burden, net of money refunded from the Treasury, is currently around 1.5 percent of GDP. It was over 3 percent of GDP in the early and mid-1990s.

One thing the deficits have done is boost demand in the economy, increasing growth and employment. It is a safe bet that if we cut spending and/or raised taxes it would slow growth, leading to fewer jobs and a higher unemployment rate.

Just because the Trump deficits are not harmful does not mean his tax cut was a good idea. The country would have been far better served if this money had been spent on health care or education, or ideally, promoting clean energy.

In short, there are many reasons for being unhappy with the Trump presidency, but large deficits are not one of them.

Dean Baker is a macroeconomist and senior economist at the Center for Economic and Policy Research in Washington. He wrote this for InsideSources.com.

 

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