The CBO isn’ t buying MAGAnomics.
We already knew Donald Trump broke a lot of promises by including trillions of dollars in spending cuts in his first presidential budget. The Congressional Budget Office said today, in its official analysis of that budget, that he appears to have broken an even bigger one: his promise to balance the budget in 10 years.
Trump’s fiscal year 2018 budget proposed a 50 percent reduction in Medicaid outlays (even though candidate Trump promised not to cut Medicaid) and a huge cut in the Social Security Disability Insurance fund (candidate Trump promised not to cut Social Security) . He also offered about $250 billion in additional cuts to programs for the poor (food assistance, earned income tax credit, child tax credit) and huge reductions in almost every federal agency’s budget.
The CBO says that all adds up to … a continued budget deficit of around 2.9 percent of GDP by 2028. Even that number is probably too small.
The CBO has agreed to follow the stipulation of Trump’s budget submission that his tax reform plan would be revenue-neutral. This is an odd thing to stipulate, since analysis of the details of his proposal indicates that it would reduce revenue by $4 trillion to $8 trillion over a 10-year span.
If you plugged in the real tax cut numbers, the deficit would be much higher. But even with the fake tax numbers, the CBO sees about $3.6 trillion more in deficits over the next 10 years than Trump is projecting.
A key difference here is that when preparing its budget, the White House argues that the rate of annual GDP growth will rise rather rapidly to 3 percent and then stay there. Growth that fast — or even a little faster — would certainly have been realistic and quite desirable two or three or four or five years ago when the unemployment rate was very high and there were lots of idle workers who could have been rapidly reemployed. But going forward, a sustained rate of 3 percent is way out of line with what forecasting experts in the private sector, at central banks, and at international institutions think will happen.
The CBO’s analysis expects the economy to settle into a pattern of growing at about 1.9 percent per year by 2021.
That lower growth rate reduces tax revenues, because it means fewer people will be working, their incomes will be in lower tax brackets, and corporate profits and wealthy individuals’ investment returns will be lower. It also increases spending slightly by assuming that more people will be eligible for social assistance programs.
Those factors both mechanically increase the budget deficit relative to what Trump projects. But they also make the deficit as a share of the economy larger because they make the denominator smaller. Last but by no means least, the larger deficits compound over time because they lead to more borrowing and thus more debt service payments.
Office of Management and Budget Director Mick Mulvaney, coincidentally enough, this morning published a defense of Trump’s aggressive growth forecasts, dubbing them “MAGAnomics” but not actually wrestling with the serious structural barriers to what Trump claims he will achieve.
For people over the age of 35 broadly familiar with the contours of American economic growth in the 20th century, the goal of 3 percent annual growth doesn’ t sound outlandish because it’s something the country used to achieve regularly. Unlike Jeb Bush’s campaign promise of 4 percent growth, there’s nothing particularly unusual about a sustained period of 3 percent GDP growth. So aiming for a return to that level has a veneer of surface plausibility.
Unfortunately, as an excellent report released earlier this year by the Committee for a Responsible Federal Budget shows, it’s much less plausible than it sounds.
Their exercise lets you assume that productivity growth, labor force participation, and growth of capital (machines and business equipment) all return to 1990s levels and shows that even under that rosy scenario, growth doesn’ t quite reach 3 percent.
The reason is demographics. It’s true that productivity growth has slowed since the 1990s. And it’s true that the labor force participation rate has fallen, and business investment in capital goods has fallen. But over and above all that, the growth rate of the working-age population is slower. The very large baby boom cohort is aging out of its prime working years. The also-large “millennial” generation is already big enough to be in the workforce.
To get above 3 percent, you would not only need 1990s levels of productivity growth, labor force participation, and capital investment — you’ d also need to go back in time and make sure more babies were born between 1992 and 2002.
These differences would be a big deal in a hypothetical universe where Congress was hard at work on trying to turn Trump’s budget into law. Congress needs to use Congressional Budget Office numbers when doing its budgets, so the large gap between the two estimates would be highly relevant.
In the real world, however, congressional Republicans are having their own set of internal disagreements that have relatively little to do with the Trump framework.
Beyond that, Republicans — and Trump, too — would like to pass an actual tax cut at some point. Indeed, the main substantive purpose of passing a budget would be to set up the possibility of reconciliation instructions for a tax reform bill. Stipulating that the tax reform has to be strictly revenue-neutral — which Trump’s budget plan does but his tax plan doesn’ t — would significantly tie Republicans’ hands when it comes to tax cutting. So they aren’ t likely to go in that direction, which makes the whole discussion largely irrelevant anyway.
Still, Mulvaney’s op-ed implicitly deriding CBO growth forecasts is part of an escalating battle between the White House and Congress. The White House released a video on Wednesday lambasting the accuracy of the CBO’s health insurance modeling only to find themselves needing to delete it because it misspelled “inaccurate.” The revised video was purged of spelling errors and released a few hours later but still substantially misrepresented the CBO’s work .
That the Trump White House sometimes says things that aren’ t true is hardly a huge scoop at this point, but the spat with the CBO — and the insistence on putting a fake tax plan into its budget proposal — indicates that there’s no portion of the administration that’s isolating from the basic approach that led them to publicly contradict photographic evidence of Inauguration Day crowd sizes.
