- Federal spending in 2016 has been about $3.6 trillion. Our gross domestic product (GPD) is about $18.7 trillion, thus spending is about 19 percent of GDP.
- Tax revenue is about $3 trillion, a little short, hence a deficit of about $600 billion. At 3 percent of GDP, the deficit is not good, but it is survivable.
- Unfortunately, future promises of spending on Social Security and Medicare will soon begin to widen these percentages.
- Under current law, tax revenue will not rise much from its current 16 percent of GDP, but spending will rise within 15 years to about 28 percent of GDP -- not survivable.
In today’s accepted wisdom, Donald Trump as president means that 2017 can’t be predicted. At all.
Endured, possibly enjoyed, but it will be a complete mystery.
Not so — not so in the financial realm. Foreign policy may get a little loopy, but money has its own rules.
Federal spending and GDP
Since the election, the stock market has gone nuts, way up in expectation of big tax cuts and stimulus spending. And the bond market has also gone nuts — rates way up — for similar reasons.
These moves are violations of money rules. Or, given the state of U.S. finance, attempts to ignore the straightjacket that we’re wearing.
Federal spending in 2016 has been about $3.6 trillion. Exciting! Our gross domestic product (GPD) is about $18.7 trillion, thus spending is about 19 percent of GDP. That’s money going out.
Tax revenue is about $3 trillion, a little short, hence a deficit of about $600 billion. At 3 percent of GDP, the deficit is not good, but it is survivable.
Unfortunately, future promises of spending on Social Security and Medicare will soon begin to widen these percentages.
They would already be wider except for the miracle of low interest rates, holding down the interest we pay on our national debt, which is about $14 trillion held in markets, 75 percent of our GDP. That’s in the danger zone.
Under current law, tax revenue will not rise much from its current 16 percent of GDP, but spending will rise within 15 years to about 28 percent of GDP.
A deficit so big is not survivable.
The best math resides in the report of the National Fiscal Commission, whose report was ignored by everyone from Obama to Paul Ryan (who sat on the Commission).\
Debt as a percent of GDP from “The Moment of Truth” report
Good news and bad news
The good news: we can fix the budget. The bad news: it will require cuts in future spending and more tax revenue.
If we pay attention, compromise and pretend to be smart, in 15 years we can stabilize at about 22 percent of GDP for both spending and taxes, and then over another fifteen years our deficit will fall as a percentage of GDP back where it belongs, about 33 percent.
That work will be hard, closing loopholes without opening new ones, and means-testing all entitlements, payouts lower the better off you are. But these parts are easy: There are not going to be any big tax cuts or big stimulus spending. The deficit opens so fast from here that even if we tax and spend as-is that there is no wiggle.
There is no free lunch in pretending to close the deficit by cutting waste, or military spending (done that), or taxing rich people (did that). Charlatans will claim that we can cut taxes and have more revenue, but we’ve been down that silly road, and most folks are hip. Nor will we get more revenue by spending more money to heat up the economy — in a debt-heavy economy like this, for every dollar we spend on stimulus, we’ll only get about 75 cents in stimulation (old people are familiar with this phenomenon).
There will be some amusement value in watching Trump and Congress wrestle in the straightjacket, and the exercise will build character in the strugglers. They will try every imaginable rhetorical trick to escape, but they’re locked in a padded cell.
Republicans who have threatened for 20 years to shut down the government to stop growth in deficits will now try to justify deficits, and Democrats who have tried every shell game to call tax and spending increases something else (enhancements and investments) are hoisted on their own petard.
Markets sit right outside the padded cell, billy clubs in hand. Even if our leaders find some way to slip the deficit restraints, markets will punish them.
I’m sure that Mr. Trump will find other things to do, but it won’t be 4 percent economic growth and a lot of new and high-paying jobs for his base, or anyone else (we already did that, too).
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
