Why Deficits Matter
Back in the Bush years Dick Cheney famously said “deficits don’t matter.” When Obama was in office though, deficit spending — even in the name of national economic recovery — was maligned by the Republican opposition. Now that Trump is at the helm, deficits are fine again.
It’s a great talking point when you have an administration that’s Democrat-led… it’s a little different now that Republicans have both houses and the administration.
But deficits do matter and it matters when the government borrows money and why it does so.
A (very) brief economics lesson
Not to get too wonkish, but when we talk about a “good” versus a “bad” economy we’re talking about how fast money changes hands. Too slow and you have a recession. Too fast and you have inflation. Economic policy is about walking a tightrope between those two gulfs.
When the economy speeds up the cost of borrowing money goes up. When it slows down the cost goes down. How that works isn’t terribly important here; the point is: good times mean high rates and bad times mean low rates.
While the “how” is complex, the reason is simple. Money moves slowly when people are afraid of taking risks and spending money. Lower rates make borrowing more appealing, risks less risky, and get money moving in the economy again.
Money moves quickly when people are excited to spend money but if they spend money too fast prices will skyrocket. Increasing the interest rate, cutting borrowing, and raising taxes puts the breaks on the economy, keeping inflation under control.
Now is not the time for deficit
But while people can only be tempted into borrowing by a low rate, governments can make borrowing decisions as a matter of policy. Unlike people, they never have retirement or a kid’s college education on the financial horizon.
Thus, governments can borrow, not just when rates are low but because rates are low. They can then use that money to pay for infrastructure and other investments which will still be around when the economy picks back up and interest rates go up.
Then, when rates are high, government can reduce borrowing, increase taxes (not cut them) and pay down that low-rate debt. In effect, readying things for the next economic storm.
Right now, the economy is strong.
But in the country as a whole the economy is riding high on the growth of the last eight or so years. The unemployment rate is just above 4% — only a point above full-employment. The stock market is hitting record highs. The Federal Reserve is nudging the U.S. prime rate above 1% for the first time since 2008.
All of those are indicators that the economy is running hot, not cold. All of those are indicators that what it very much does not need is for the government to borrow money, cut taxes, and dump a bunch of cash into circulation.
The Trump Tax Cuts
But that is exactly what the Trump Tax Cuts will do. It’s a chain-reaction.
- Tax cuts flood investment markets with cash.
- Interest rates rise to keep pace with the cash influx.
- Higher rates drive up the cost for the government to borrow the money it needs to finance the tax cuts.
- Government borrowing further increases the deficit.
- Increased deficit makes the US a greater credit risk, making future borrowing more expensive.
All the while, these cuts will finance largess to the upper 1% rather than the investments in roads, bridges, telecommunications, and other public works projects which could actually create the surplus capacity needed to fuel real growth.
Like a plane in a vertical climb, this looks great until it doesn’t — until the climb slows, the engine stalls, and the pilot finds himself miles above the ground in a craft that’s given its all to go nowhere and is now caught the iron grip of gravity. When the economy does eventually nose downward, the extra trillion-and-a-half in deficit-financed tax cuts will act like heavy weight in a diving plane, fighting the pilot and pulling the struggling airframe remorselessly into the ground.
Tell Congress what you think!
While it’s difficult to know what will be in the Trump Corporate Tax Cut when it comes out of conference committee it is almost certain to represent at least $1,500,000,000,000 in deficit spending if not substantially more.
Text RESIST to 50409 to tell your representatives or Senators what you think about this or any other issue before Congress or use Facebook messenger to do the same thing by clicking here.
You can also text TAXES instead to see the immediate, estimated impact on your tax bill based on the Trump framework.
More On Taxes
Want to learn more about the Trump’s corporate tax cut and how it’ll affect you? We’ve got you covered.