One of the biggest questions now being asked by Wall Street and Washington pundits alike is whether, with the deficit already projected to exceed $1 trillion each of the next few years, will Congress and the Trump administration be able and willing to use fiscal policy when the U.S. economy tanks.
This is no longer a hypothetical to be discussed over drinks after work. It became a real issue over the past few weeks after both Goldman Sachs and J.P. Morgan both projected dramatically slowing economic growth that confirmed what the Congressional Budget Office has been saying since August.
In the past, a slowing economy has typically gotten Congress and the president to enact tax cuts and spending increases. The resulting higher budget deficit was considered normal, appropriate and politically acceptable.
But the federal deficit is already high because of last year’s tax cut. It’s officially projected by the Trump administration’s Office of Management and Budget and Treasury Department to be close to $1.1 trillion this year and it’s not at all certain that U.S. politics will tolerate it going much higher.
Without any further enacted changes in revenues and spending, CBO is forecasting that the deficit will exceed $1.5 trillion in 2028. A new stimulus program could easily get that to $2 trillion.
The previous nominally high record deficit was $1.4 trillion in fiscal 2009.
So the U.S. economy may need help but will American politics, which has been at least rhetorically anti-deficit since Puritan times, allow it?
I’m betting on a much higher deficit.
First, the U.S. may be rhetorically against deficits, but its actual track record is the exact opposite. In the 73 years since the end of World War II, there have only been eight (11 percent of the time) surpluses.
Second, even a rapidly rising, record-setting budget deficit will be no political match for the higher unemployment and lower stock markets that will come from an economic slowdown. The Democrat-controlled House and Republican-controlled Senate will be racing each other to show which one deserves more credit for dealing with it.
Third, Trump, who has already amply demonstrated that he’s okay with big deficits, won’t do anything to stop Congress from raising it even further given that his own reelection will be jeopardized if the economy isn’t doing well.
Fourth, it will make no difference that unemployment will be low and the stock market high relative to historical standards. The comparison voters (and, therefore, Washington) will make will be to recent their experience and expectations rather than to what they were like decades ago. By that standard, it will be “Damn the deficit, full speed ahead.”
Fifth, the split majorities in the next Congress makes a big spending increase/tax cut deal more likely than if a single political party controlled both the House and Senate. Neither Republicans nor Democrats will be able to claim all the credit for dealing with the economy, but both will be able to avoid all the blame for the record-setting increased deficit when they agree to what the other wants.