Trump’s Budget

Now that the brouhaha over Trump’s budget has died down, it is probably a good time to reach for perspective on matter.   The effort must first realize that not since Alexander Hamilton headed up George Washington’s Treasury Department has a presidential budget even pretended to reality.  These documents are decidedly political in nature, not economic or financial.  A high-minded observer might properly describe them as aspirational.  A pragmatic one might properly see them as starting position for negotiations with Congress.  In these essential ways, Trump’s so-called “New Foundation for American Greatness” is no different from budgets proposed by Presidents Obama, Bush, Clinton, and just about everyone else before them going back into the mists of political time.

Noise over a supposed calculation error in Trump’s budget arose a few weeks ago with a blog by Larry Summers, former college professor, Democratic White House economist, and President of Harvard University.  He criticized the mathematical acumen of the White House team, claiming that it had committed what he called a “logical error” by double counting in its calculations.  Many in the media embraced Summers’ critique of Trump, even as they rejected his earlier criticisms of women’s mathematical abilities.  Summers’ judgment of both the White House and women is dubious. On the latter, the matter is self-evident.  On this budget, the White House, rather than double counting, made a bold argument that its proposed tax cuts, along with the president’s separate efforts at regulatory reform, would have such profoundly positive economic effects that the resulting income growth, even if taxed at lower rates, would give the treasury a huge boon, big enough to more than make up for any receipts initially lost to lower rates and eventually to balance the budget.  Though this view can claim an internal logic, it is also wholly unrealistic.

To be sure, Trump can point to history. Presidents Reagan and Kennedy made similar claims for their respective tax cuts in the 1980s and 1960s.  But though after each of those cuts federal receipts accelerated, they fell short of initial White House claims.  Trump will likely fall shorter of his projections than either of these two tax cutters.  For one, he expects a bigger response.  He has projected that the pace of growth will increase by more than half from the last ten years, from less than a 2.0 percent annual rate of overall economic growth to 3.0 percent.  It detracts further from the budget’s realism that Trump has less room to work with than did either Reagan or Kennedy.  Tax rates back then were much more onerous than now.  Kennedy reduced the maximum individual rate from 91 percent to 70 percent.  Reagan cut it from 70 percent to 28 percent.  Trump seeks a much more moderate cut from 39.6 percent to 33 percent.  What is more, the Kennedy and Reagan cuts followed recessions, when the economy had a great deal of unused capacity available for rapid growth.  The present environment is quite different.  Unemployment presently is low, and industry, though not at peak capacity use, is much closer to historic highs than to lows.  Kennedy’s and Reagan’s economies furthermore enjoyed youthful workforces, whereas today the dominant influence is aging demographics.

If Trump’s ability to achieve his projected growth acceleration lacks realism, so does his forecast that rapid growth will persist uninterrupted through 2027.  No period in U.S. economic history has produced such an economic miracle.  Indeed, economic history would suggest that over such a period the economy would suffer up to two recessions, not the least because the present recovery has already persisted for eight years, well beyond the average expansionary phase of an economic cycle.  Of course if one could accept the White House’s economic picture, a turn from deficits to balance would flow logically.  It is just not likely to happen.  Still, such an unrealistic assumption on the expansion’s durability is also entirely consistent with what past White Houses have done.  No president has ever anticipated a recession in his budget projections or even a slowdown in the pace of growth.

In one place, however, this document does show an unexpected and somewhat atypical realism.  Trump has built into these projections the anticipation of rising interest rates.  His budget signals that 91-day bill rates will rise from less than 1.0 percent today to about 3.0 percent by 2021 and that 10-year note yields will rise from about 2.2 percent presently to 3.8 percent.  Although an interest rate forecast over such a long stretch of time leaves ample room for skepticism, the White House’s willingness to concede coming increases in the cost of debt service does offer a measure of realism that some of his predecessors lacked.

Trump has also parted with precedent in a very different way.  His proposals, as per his campaign promises, contain a radical reorientation of government spending patterns.  The entitlements part — Social Security, Medicare, Medicaid, and the like — remains, as in past budgets, more or less on automatic pilot.  Trump would however shift the emphasis in discretionary spending away from the domestic and diplomatic departments of the government — state, energy, environmental protection, education, transportation, etc. — and toward defense and homeland security.  On defense, he proposes a 26.7 percent spending rise over the next ten years, 2.3 percent a year on average.   This is quite a change after much slower growth of 1.2 percent a year during the past 10 years.  On non-defense discretionary spending, he proposes an 18.4 percent cut, 1.7 percent a year, after growth of 2.7 percent a year on average during the last ten years.  He would make the biggest relative cuts in the State Department, the Environmental Protection Agency, Agriculture, Labor, and Health and Human Services.  This move, though expected of him, nonetheless speaks to the document’s lack of political realism.  Such a massive shift in emphasis will engender a lot of pushback, probably enough to thwart much of what has been proposed.

For all this lack of realism, this first move by the White House nonetheless serves its political/negotiating purpose.  Congress and all the interests in the country now know the White House’s aspirations and priorities.  As this ponderous process gets going, others will air their aspirations and priorities.  If the effort works as it should, a compromise budget will emerge.  Though it will contain parts of what the White House has proposed, it will also look very different.  It, too, will lack realism, but less starkly than does this document.

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