Last month President Donald Trump awarded conservative economist Arthur Laffer the Presidential Medal of Freedom for creating the Laffer Curve. It posited that tax cuts pay for themselves by stimulating economic activity. In the 1970s, Laffer reportedly explained his theory, sans any documented, peer reviewed research to back it up, on a napkin to Dick Chaney. Out of this meeting Chaney is to have famously said later that deficits don’t matter. We also learned that deficits don’t matter only when Republicans are in power.
President Ronald Reagan bought into the Laffer theory at first and deficits exploded. According to economist and columnist Steven Rattner of the NYT, this led to tax increases in 1982, 1983, 1984 and 1987, which reversed about half the revenue loss. More recently, then Republican Governor Sam Brownback of Kansas convinced his legislature to eliminate state taxes for some 330,000 of the top wage earners. The state went from a surplus to a deficit quickly, devastating public education and weakening the state’s economy. Only a reversal of the tax cuts has helped to restore fiscal responsibility.
The current GDP (gross domestic product) is $19.2 trillion/year. The national debt stands at $22 trillion. Federal revenue is approximately $3.6 trillion, and federal spending is $4.6 trillion. That currently leaves us with a $1 trillion annual deficit assuming things were to stay the same going forward.
To balance the budget, assuming no spending cutbacks, revenue would have to increase by $1 trillion/year. To do that, GDP would have to increase by about $5.5 trillion, considering the average tax rate of about 18%. Using Laffer’s theory of trickledown economics, the GDP would need to grow to $24.7 trillion, or 29% growth. What are the odds of that happening? During the past 40 years the average GDP growth was 2.8%. We would need ten times the average just to break even.
One of Trump’s campaign promises in 2016 was to eliminate the national debt in eight years. To do that he would have had to pay down principal at over $2 trillion/year. Couple this with the current $1 trillion deficit---that adds up to $3 trillion/year. Based on the average tax rate, the GDP would have to increase by $16.6 trillion/year, which comes to an 86% increase! Note this would be 31 times the average growth over the past 40 years. This is what passes as Trump/Laffer/Republican economics, which could help someone pay for the Brooklyn Bridge if s/he was inclined to buy it.
Republicans defend Trump largely because the economy is doing so well and the stock market continues to roar. But there is another side to this. According to the Federal Reserve, upwards of 45 million Americans have outstanding student loans amounting to $1.47 trillion, more than credit cards or car loans. This debt prevents a lot of people from buying homes and decreases their discretionary spending, all money that is lost to the economy. I don’t have a solution for this problem, but it is one that can’t be ignored and should be wide open for discussion by both political parties.
Another dark side of the economy is the growing disparity between the top one percent, one tenth of one percent, and even those in the top five percent versus the rest of the population. School teachers, police and fire fighters, among many public servants, can’t afford to live within commuting distance of their jobs in some cities. This shouldn’t be. The American dream is becoming a nightmare despite full employment. Those who can afford a home, by the time they pay their mortgage and other loans, child care, groceries, insurance, etc. have little to nothing left over to contribute to retirement plans. And I am talking about responsible people who borrow money for things they need such as a car to commute to work, not wastrels.
There will always be those who will argue that we are wasting money on social welfare programs, but welfare to them is money that goes to the down and out. When taxpayer money is “redistributed” to farmers, to provide flood insurance for the wealthy who live on the beaches and river banks, to banks in the form of loan guarantees, it is called subsidies.
Then there are blue states like New Jersey who help to subsidize red states like Kentucky. According to Nobel Prize winning economist Paul Krugman, in 2017 Kentucky got more than $40 billion from the federal government than it paid in taxes, approximate 20% of the state’s GDP. I wonder if Senate Majority Leader Mitch McConnell (R-KY) is concerned about this?
At some point in the near future something is going to give, and the Trump believers who think the economy is the best ever will be facing some tough times. That said, there is no time better than right now for both political parties, with elections coming up, to start working on solutions without partisan bickering. The numbers are sobering. They can’t be ignored indefinitely without consequences.
(My friend and numbers savant, Jack Linder, contributed to this commentary.)