How Trump’s Budget Undermined a Decade of Republican Fiscal Conservative Messaging

An employee with the House Budget Committee displays US President Donald J. Trump's 2019 fiscal budget for the media in the Longworth House Office Building in Washington, DC, USA, 12 February 2018. (Photo: JIM LO SCALZO/EPA-EFE/REX/Shutterstock)

Immediate forecasts on the impact of the spending bill passed in early February include deficits exceeding $1 trillion and a total national debt of $30 trillion. While the bill does address some major needs and non-controversial spending, the ultimate forfeitures in the bill include national security, national prosperity, and fiscal restraint. Barring a complete shift in fiscal attitude from Congress or an about-face by President Donald Trump on deficit spending, things do not look positive for the United States.

The spending bill tacks on $300 billion to total expenditures, with a little more than half going to defense spending. The bill also sets aside $80 billion for post-hurricane disaster relief for areas such as Houston and Puerto Rico. In addition to disaster relief, the Children’s Health Insurance Program (“CHIP”) received 10 years of dedicated funding.

The bill also includes a myriad of other odds and ends, such as racehorse tax credits and restructuring of Medicare/Medicaid to offset costs for poorer recipients. The real standout from the bill is its neutralization of sequestration (a policy where budget cuts for non-defense spending had to be reflected in cuts for defense spending).

While deficit spending is the norm in the United States — sequestration was ultimately a failure in that Congress simply raised all spending, rather than cut its total spending — this bill comes with special challenges and caveats. American economic recovery in the wake of the “Great Recession” has been sluggish.

The US Capitol dome at sunrise after an early morning House vote to halt the government shutdown and approve the budget package in the US Capitol in Washington, DC, USA, 09 February 2018. (Photo: SHAWN THEW/EPA-EFE/REX/Shutterstock)

Throughout Barack Obama’s tenure, America never saw GDP growth exceed 3% (the average since World War II). Spurred on by the Trump tax cuts (via fund repatriation, market confidence, and record low unemployment numbers), government revenues posted a surplus in January. Those same tax cuts that have spurred growth and confidence have also set the stage for a painful dichotomy. Maximizing this uptick in growth requires stewardship and fiscal discipline.

Economic growth is generally accompanied by inflation. Inflation lowers the buying power of consumers, prompts short-term spending and long-term retention of income, and can cause stocks to drop due to other assets becoming more attractive (such as Treasury bonds). While some prices will inflate, others will deflate. Deflation helps to drive the price of certain assets down, like the housing market did in 2008, and depreciates the value of consumer assets.

This means that unless wages rise to outpace the cost of inflation, American consumers will have less purchasing power while accruing more debt (at both the federal and personal level), with fewer valuable assets to pay down such debt.

The next issue is a much more macroeconomic and governmental concern. Simply stated, when the government reduces its revenue (e.g. lowers taxes) it can expect a short-term deficit while reaping a long-term yield. As stated above, the American economy is responding extremely well to Trump economic policies. However, long-established economic analysis should create some caution.

James Knable with the House Budget Committee displays US President Donald J. Trump’s 2019 fiscal budget for the media in the Longworth House Office Building in Washington, DC, USA, 12 February 2018. (Photo: JIM LO SCALZO/EPA-EFE/REX/Shutterstock)

Given that government revenues, as a trend, will fall, Congress must, in kind, cut spending. This is because the liabilities of the federal government, which were rarely commensurate with its income, are now even less affordable than they were under the previous tax regime. While economic growth and an increased tax base do help cut into that deficit, the compound nature of much of the U.S. government’s liabilities is such that growth in revenue will never catch up to growth in liabilities. That, too, is assuming that spending remains the same, which is clearly not the case in this scenario.

So, what does this mean for the average American?

First and foremost, it means that Americans who elected representatives running on platforms of fiscal conservatism were, by and large, betrayed. The spending bill saw little dissent from members of the GOP in both the House of Representatives and the Senate.

Secondly, the “death spiral” that Social Security and Medicare are on will only be exacerbated. Social Security was already estimated to go insolvent by 2034, and Medicare by 2028.

Thirdly, the Federal Reserve will have to exercise more discretion in its monetary easing policies to control inflation as asset revaluation occurs. Anyone with a 401K or stock portfolio already saw a preview of how the market reacts to this with the mid-January market correction.

Jerome H. Powell (R) takes the oath of office as Chairman of the Board of Governors of the Federal Reserve System from Federal Reserve Board Member Vice Chairman for Supervision, Randal Quarles (L) in Washington, DC, USA, 05 February 2017. (Photo: JIM LO SCALZO/EPA-EFE/REX/Shutterstock)

Lastly, it means that what you can afford today won’t be as affordable tomorrow unless your wages go up. The Consumer Price Index (“CPI”) indicates a general trend of the cost of goods rising (worth noting: a negative CPI means that products become cheaper).

In the long term, these issues mean that Americans at or near retirement will need to diversify assets to adjust for inflation and deflation. Additionally, individual retirement accounts and pensions will need additional investment to be viable as the economy moves ahead. Even with such planning and adjustments, it’s still not guaranteed that stock portfolios and asset accumulations will weather the cumulative effect of the debt.

The practical effect of the debt is the greatest long-term threat for Americans. Dan Coats (Director of National Intelligence) identified the national debt as the greatest threat to American security. This assessment is shared by numerous officials in both the Department of Defense and intelligence communities.

The potential damage inflicted by both debt and a weakened American dollar is two-fold for the United States. The first threat is simply that the outstanding foreign debt controlled by other nations could be “called in” at any point, and the likelihood of an American default on such an action is high. This, in turn, would cripple American spending and accelerate asset sales, leading to a major economic crisis.

Books entitled ‘Income Tax Regulations’ are stacked in the room before the start of the House Ways and Means Committee markup on a Republican-crafted tax reform plan, on Capitol Hill in Washington, DC, USA, 06 November 2017. (Photo: MICHAEL REYNOLDS/EPA-EFE/REX/Shutterstock)

The second is the Greek problem. Greece’s spiral into major financial issues began with a budget deficit between 9 and 13% of GDP. Under this spending plan, the United States sits at 7% deficit spending. The task ahead is simple: the United States must rein in its spending, lest it flirt with proving numerous intelligence and military assessments about the debt correct.

That’s not to say that the American economy is damned. Congress did give itself a way out of this potential death spiral. In neutralizing sequestration for two years, Congress bought itself some fiscal wiggle room. Since entitlement spending is a compounding cost (taxpayers pay in less than they receive in payouts), the costs increase year to year and drive additional spending. To rein in the debt and deficit, reform needs to occur in these programs.

Since sequestration required equal cuts to defense, the budget was balanced on the back of military preparedness (despite constituting only 20% of total spending). With the death of sequestration, Congress can finally begin addressing the root cause of American debt and deficit issues without compromising its military mission.

It remains to be seen whether Congress will have the conviction to do so. Throughout sequestration, Congress opted to simply bump every spending cap, rather than cut any waste. Trump’s 2018 budget does suggest that the president is looking to cut entitlement spending and reduce the runaway drivers of debt.

In the interim, however, the House and Senate opted to throw the U.S. into dangerous levels of debt that stand to impact the American economy for far longer than the spending mandate in 2019. Either way, it’s incumbent on Americans to understand that cuts are going to be a necessary part of ensuring American stability and personal prosperity to leverage the Trump boom properly.

(Brandon Davis)

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