Actor Dennis Quaid appears in an Esurance commercial where he convincingly says: ”Nobody wants to hear about insurance.” Well, when it comes to federal deficit details, it’s probably true that nobody wants to hear about them either. But like insurance, it’s knowledge you might need to help protect your assets.
President Obama was working diligently in 2009 to jumpstart a recovery from the Great Recession. Yet, Republicans obstructed everything he tried to do and decried his stimulus spending and the federal deficits it was causing. Now, with a Republican in the White House, it’s a much different story and they believe deficits are more acceptable. Needless to say, most congressional Republicans are shameless hypocrites but that doesn’t mean we should discount concerns about government spending on a credit card.
Typically, government revenues increase when unemployment is low, like it is today and deficits are moderated when the economy is growing, as it has been recently. Well, that’s not what’s happening in 2019 and I believe federal deficits are a much bigger problem today than they were a decade ago.
Due to the Bipartisan Budget Act of 2019 that President Trump recently signed, government spending will increase over the next two years by a total of $320 billion. This law put an end to the sequester spending caps of the Budget Control Act of 2011, which were a Tea Party-forced attempt to limit federal spending through 2021. Congress, however, lacked the political will to adhere to these caps in subsequent budget legislation so spending and deficits just kept increasing.
Consequently, it might be instructive to dive deeper into the intricacies of the current federal debt of $22.6 trillion.
The smaller part of it is called “intra-government” debt because it’s owed to various trust funds the government maintains, like the one for Social Security. It’s something like borrowing from your IRA. You manage this money but it’s in a dedicated account that you can’t normally access for current expenses. Although intra-government debt isn’t the same as that held by China or Japan, it must be repaid by future taxpayers if these accounts are to fulfill their intended purpose.
The larger part of the federal debt is called “public debt,” which is approaching $17 trillion. A little over half of this debt is owed to U.S. holders of government bonds. Most of the rest is held by foreign entities, including China and the largest foreign holder, Japan.
The Congressional Budget Office (CBO) and many economists typically evaluate the public debt as a percentage of the U.S. gross domestic product or GDP, which is the value of all the goods and services produced in a year. It’s similar to what mortgage lenders do when considering a loan. The higher the borrower’s income (GDP), the more debt they can handle. Currently, federal public debt is 79 percent of GDP.
Last week the CBO published updated estimates of federal revenue, spending and deficits for the coming decade. This report predicted that the economy – GDP — will grow by 2.3 percent in 2019 and then level off below 2 percent in succeeding years. These projections are based on numerous assumptions and a change in anyone of them could significantly alter these somewhat mediocre results. However, I think the chances that economic growth will significantly improve are very slim.
The media has been highlighting the CBO results in numerous articles like this comment from MSN: “According to CBO projections, the federal budget deficit will reach $960 billion this year and average $1.2 trillion in the 10-year period through 2029.” The CBO is also projecting that public debt will exceed $29 trillion in 2029 and 95 percent of GDP — the highest level since just after World War II. CBO’s director, Phillip. L. Swagel warned “Federal debt …. is on an unsustainable course.”
I suspect most readers aren’t sure what all of this means to them personally. Well, that’s not in the job description of the best crystal balls — but some conclusions are valid:
The Trump/GOP tax cut of 2017 is not supercharging economic growth and paying for itself. The almost $2 trillion it cost would have been much better invested in repairing U.S. roads, bridges, water systems and airports. Yet, the trajectory of the deficits makes it nearly impossible for Congress to pass a robust infrastructure program or any other legislation requiring large federal expenditures.
The economy has gotten huge amounts of stimulus recently from the tax cuts and the budget acts of 2018 and 2019. Still, Trump is looking for more juice to boost the apparently sagging economy but there’s not a lot available since interest rates and taxes are already low.
At the same time the president is creating chaos in global markets and supply chains, causing problems that won’t be quickly or easily fixed. Stock market bears are poised to chase off the bulls. The eventual recession – and there is bound to be one — will greatly exacerbate the deficits.
So, even if Democrats take the Senate and the White House in 2020, a recession would make significant tax increases more problematic and put a damper on the various ambitious policies they are proposing like expanded health care coverage and climate change initiatives.
It could be like 2009 where Democrats inherit a fiscal mess primarily created by Republicans and then have to battle them tooth and nail to correct it.