I have a plan to dunk a basketball. First, I’ll grow a foot taller. Next, I’ll recapture the athleticism of my youth, so I can jump a lot higher. I didn’t say I had a serious plan—just a plan.
Today, the Trump administration released a plan to balance the federal budget over the next decade, and it’s no more plausible than my plan to become LeBron James. It does reveal the administration’s fiscal priorities, like deep cuts in spending on the less fortunate and the environment, no cuts to Medicare or Social Security retirement benefits, steady increases in spending on the military and the border, and an abiding faith in the restorative miracles of tax cuts for corporations and well-off families. But its claim to a balanced bottom line is based on a variety of heroic assumptions and hide-the-ball evasions, obscuring trillions of dollars’ worth of debt that it could pile onto America’s credit card.
Budget proposals always involve some guesswork into the unknowable, and administrations routinely massage numbers to their political advantage. But this proposal is unusually brazen in its defiance of basic math, and in its accounting discrepancies amounting to trillions-with-a-t rather than mere millions or billions. One maneuver in President Trump’s budget arguably waves away an estimated $5.5 trillion in additions to the national debt from tax cuts, nearly $20,000 for every American alive today, enough to fund the EPA at current spending levels for nearly 700 years. Trump critics in the budget-wonk world are pointing to another $2 trillion of red ink as a blatant math error—or, less charitably, as an Enron-style accounting fraud.
Numbers that huge tend to melt into abstraction. And the media will help downplay them by declaring the Trump budget dead on arrival in Congress, as if the fact that it won’t be rubber-stamped into law means that nothing in it matters. But a presidential budget is a detailed blueprint for governing—and in this case, the blueprint has a fair amount in common with blueprints offered by the Republicans who still control Congress. It matters for policy and it matters for politics.
It also matters that Trump’s numbers don’t add up. Whether or not you agree with the Tea Party philosophy behind the numbers, Trump and his hard-driving budget director, Mick Mulvaney, deserve credit for backing up their limited-government rhetoric by proposing $3.6 trillion in spending cuts, including politically courageous cuts in farm subsidies, rural development programs and other benefits geared toward Trump’s base. But they do not deserve credit for their aspirations to balance the budget, any more than I deserve credit for my aspirations to dunk. Budgets hinge on assumptions about taxes, spending and economic growth, and the Trump budget plays fast and loose with all three to try to achieve the illusion of balance, relying heavily on spectacular growth assumptions as well as vague and unrealistic promises to eliminate tax breaks and additional spending programs that go conveniently unnamed in the text. It proclaims that “we have borrowed from our children and their future for far too long,” but it is a blueprint for far more borrowing and far more debt.
Ultimately, the Trump budget reads like a corporate prospectus for a shady widget manufacturer who claims that cutting widget prices will spark a massive surge in widget sales, while also promising major cutbacks in ineffective widget salesmen and unnecessary widget costs. It doesn’t pencil out. And it’s worth understanding the main reasons it doesn’t pencil out, because soon Republicans in Congress will get to use their own pencils.
The Growth Spurt: Economic growth is as vital to balancing budgets as physical growth is to dunking basketballs. A booming economy means more tax revenue flowing into Washington, because workers have more income and corporations have more profits; and less federal spending flowing out of Washington, because fewer unemployed workers and poor families need the government safety net. “Economic growth,” Mulvaney recently said, “solves all our problems.”
So the Trump budget simply stipulates terrific economic growth. Specifically, it assumes the U.S. economy will expand an average of 3 percent per year over the next decade, more than 1 percentage point higher than the Congressional Budget Office assumes. And it uses that assumption to chop about $3 trillion off the 10-year deficit. “Everything is keyed to getting us back to 3 percent,” Mulvaney said yesterday.
Terrific economic growth would be a terrific thing, and we should all hope for a recession-free decade of non-stop boom. But in the budgeting world, diverging that dramatically from the official forecasts is essentially cheating. President Barack Obama’s growth forecasts sometimes slightly overshot the CBO’s, but Trump’s gap with the CBO is nearly three times as large as Obama ever had in eight years. The U.S. economy hasn’t grown at a 3 percent rate for two consecutive years since 2000, which, not coincidentally, was when President Bill Clinton’s last budget balanced.
Trump aides say it makes sense to assume 3 percent growth, since it’s at the heart of the president’s promises to make America great again. Mulvaney calls it the guiding principle of Trumponomics, a rejection of the pessimistic notion that 2 percent is as good as it gets; he suggested yesterday that he probably should have assumed a more aggressive baseline of 3.5 percent or 4 percent growth, because 3 percent should merely be seen as normal. “Honestly, we have aspirations to do better,” one senior OMB official told me.
But 3 percent isn’t just something that will happen automatically, especially at a time when the population is aging, immigration is slowing, and productivity is lagging. The Trump budget does not go into great detail justifying its growth assumptions, other than to suggest that rolling back onerous regulations and promoting domestic energy development will help the good times roll. It also suggests that one of the keys to the Trump boom will be tax reform, which happens to be the next area where its math gets fuzzy.
The Tax Dodge: So far, Trump has only unveiled a one-page summary of his tax reform principles, not tax reform legislation. Nevertheless, his budget “assumes deficit-neutral tax reform,” which is a bit like the old joke about the economist on a desert island who assumes a can opener. Trump’s tax reform principles, which he repeats on page 13 of his budget, do not look deficit-neutral at all. Groups like the Tax Foundation, the Tax Policy Center and the Committee for a Responsible Federal Budget have estimated that they would add between $4 trillion and $6 trillion to the debt.
That’s because Trump’s principles look like they’re more about tax cuts than real tax reform. His budget proposes lower individual tax rates, lower corporate tax rates, lower investment tax rates, an end to the alternative minimum tax, an end to the estate tax and other tax relief. Its only proposal to offset the cost of those tax cuts is a vague pledge to “eliminate most special interest tax breaks,” but it specifies that tax breaks for mortgage interest, charitable gifts and retirement savings wouldn’t be included, while failing to specify the tax breaks that would be included.
The implication is that the tax cuts would stimulate so much additional economic growth that they would pay for themselves, a supply-side economic theory that has not worked out in practice. President George W. Bush’s tax cuts helped turn Clinton’s surpluses into gaping deficits; the state of Kansas recently had a similar experience of sizable tax cuts creating sizable budget shortfalls. Even the conservative Tax Foundation calculated that the growth effects from Trump’s proposed tax cuts would recoup less than one third of the lost revenues.
The senior OMB official told me those nonpartisan analysts are all jumping the gun, because the administration really does intend to propose tax increases large enough to offset the tax cuts it has already proposed. It just hasn’t decided which loopholes and deductions it wants to close, so it didn’t mention them in its budget. “What the budget is saying is that tax reform will be paid for,” the official said. “There’s a large conversation to be had about how we’re going to do it.”
But the Trump budget doesn’t just assume that tax reform will pay for itself; it also predicts that the economic growth produced by tax reform will help pay for the rest of his budget, an additional $2.1 trillion windfall.
Budget wonks have seized on this as a classic case of double-counting, presuming that the administration was already relying on that growth to make tax reform deficit-neutral in the first place. That would be like proposing to deposit a $20 bill that you’re not even sure is yours in two separate bank accounts, except with 11 extra zeroes at the end of the bill. Former Treasury Secretary Larry Summers called it “the most egregious accounting error in a presidential budget in the nearly 40 years I have been tracking them.”
Mulvaney ducked the issue yesterday, suggesting that the administration doesn’t yet have enough details in its tax plans to provide more accurate accounting. But the other senior OMB official told me the double-counting accusations are wrong, because the budget assumes tax reform will be deficit-neutral without taking growth into account.
In that case, though, a Republican administration is counting on unspecified tax increases to convert a plan that independent analysts believe will cost about $5.5 trillion in its current form into a plan that will cost nothing at all, and would somehow end up producing $2 trillion worth of deficit reduction through growth. It’s conceivable, but it would be more plausible if the budget had disclosed even one of those potential tax increases. It would back up Mulvaney’s rhetoric about “how important it was and is to this president to try and bring some fiscal discipline.”
The Two-Penny Opera: The Trump budget isn’t really about fiscal discipline, but it does have real elements of spending discipline. It includes more than $600 billion worth of Medicaid cuts on top of the more than $800 billion of cuts in the Republican health-care bill that just passed the House. It would eliminate rural housing loans, home heating aid for the poor, the Minority Business Development Agency and dozens of other line items. It would slash funding for climate science, foreign aid, medical research, Social Security disability and food stamps. It would boost spending for the Pentagon, the Department of Homeland Security and the Department of Veterans Affairs for 2018, but it would cut the budget of every other Cabinet department.
Congress probably won’t embrace most of those cuts, but they’re specific proposals for cuts that would move the federal budget towards balance. That said, the largest chunk of Trump’s proposed spending reductions come from a non-specific and even less realistic “two-penny plan,” which would reduce non-defense discretionary spending by an additional 2 percent every year. That’s hard to fathom, because non-defense discretionary spending—which includes the FBI, the EPA, NASA, and almost every other federal dollar that doesn’t go to the Pentagon or entitlements—is already at its lowest level as a share of the economy since the Eisenhower years. Trump is proposing to cut it by about one third over a decade, a total of $182 billion by 2027, while continuing to boost the parts of it (like border security) that he likes. He wants to start in 2018 by eliminating agencies like the Corporation for Public Broadcasting and the National Endowment for the Arts, as well as programs like 21st Century Community Learning Centers, but he wouldn’t be able to re-eliminate them in the out years; he’d have to find new targets for cuts.
The OMB official told me that his agency has already begun of review of the entire federal bureaucracy with an eye to eliminating inefficiencies, and that it expects to have a streamlining strategy in place by next year to follow through with the two-penny plan. But even many Republicans who hold the purse strings in Congress are unenthusiastic about slicing billions of dollars out of the National Institutes of Health, the Centers for Disease Control or the State Department.
“Give me a break,” one congressional Republican appropriator told me. “A lot of the discretionary spending is already squeezed. You can’t get blood from a stone.”
It is tempting to dismiss the Trump budget because so much of it seems unlikely to become law, but it’s still a revealing window into the administration’s priorities. And just because a budget is declared “dead on arrival” does not mean it won’t influence the budget that eventually emerges on Capitol Hill; Trump’s budget may envision larger cuts than Republican leaders want, but it reflects many of the priorities that House Speaker Paul Ryan has included in his budgets in the past. It ought to be taken seriously if not quite literally, to borrow the cliché about Trump.
It just shouldn’t be taken as evidence of fiscal rectitude or a deep aversion to debt, which isn’t really what Trump is about. It looks more like a plan to cut taxes for the rich and spending on the poor, while covering up the effect on the debt by flagrantly violating Washington norms. And that’s exactly what Trump is about.