It’s quite strange to hear someone comment anything negative about the US’s economy along the last two years. It seems as if since Trump arrived at the White House the economy had been working perfectly without interruptions, and as if Trump had magically found the legendary formula for eternal economic growth and unemployment reduction. It’s completely true that the lowest unemployment rate since 1969; at 3.7%, has been registered with Trump sitting at the Oval Office, and that the US has already registered the longest growth period in its history, with more than 121 months of continuous economic expansion, with a registered growth rate that has oscillated between 2% and around 3.5% since 2017. Recently, the US has decelerated softly and registered an annual growth of 2%/GDP in the second quarter of the year. But that seems to be insignificant to many people. Trump supporters are still euphoric with the American President’s policies and dialectic.

Obviously, not everything during Trump’s mandate is working as it should be doing. At least, in the economic field. One of the worst economic statistics coming from the other side of the Atlantic are those related to public deficit and debt levels, which have been continuously soaring for at least, the last two years. And the most surprising of all is that the majority of professional economic and political analysts haven’t commented anything at all. It’s as if they have already forgotten that Trump fervently promised to end up with the whole mountain of public debt in eight years… but he doesn’t seem to be worried about keeping his promises, as debt levels have risen by 16% since Donald Trump entered the White House. Where are those good old days when Republicans promised to keep spending controlled and a balanced budget, and accomplished it? Where have economic liberalism and fiscal responsibility flown?

Debt levels have finally gone over the $23trn benchmark, being an unsustainable amount of debt to pay back, taking into account the size of the US GDP, of around $19.5trn. Usually, this kind of economic phenomena tends to occur in scenarios of deep recession and economic disaster, not in the midst of a historical economic expansion and with the lowest unemployment levels in the last 50 years. So why is this happening? Just one word: deficit. It should actually be written in capital letters, because even though nobody seems to be speaking about it, it’s actually huge… of around 5.6% of GDP. In nominal figures, it represents nearly $1trn of yearly deficit… concretely, $984bn of excessive spending over actual tax revenues, which has even been classified as “worrying” and “unsustainable” by the Federal Reserve, making reference also to total debt levels. Deficit levels have soared by 26% since last year, and Trump has no intention to restrain it or do anything bout it. By the moment, I have just given data, not opinions, so you can realize the danger this financial situation can pose to the American economy. But where does the problem come from? From a lack of tax revenue or from an excess of public expenditure? Well, it’s actually the second, because as we’ll see next, tax revenue has risen throughout this time span, but the real problem lies in a public spending explosion of more than 8,2%. Let’s analyze each of the two sides of the coin.

First of all, we should demystify the idea that tax cuts always generate a contraction in tax revenues. I’m not speaking about the Laffer Curve, which many economists still consider scientifically unproved, but just about greater economic activity, job creation, larger flows of foreign capital, and more and better investment. Precisely, after the Tax Cuts and Jobs Act of 2017, and according to data from Tax Policy Center, total tax revenue grew by 7.4% in the fiscal year of 2018, and 5.8% in 2019 (fiscal year). These data reflect how greater economic activity can generate larger tax revenues without the need for onerous taxation. But tax cuts didn’t have the same effect on every sector, and that’s why tax revenue varied widely by revenue source. For example, income tax revenues grew by 4.5% in the fiscal year 2019, while corporate income tax revenues surged by an incredible 24% in this same fiscal year- according to Tax Policy Center- driven largely by changes in tax legislation, which incentivized internal and capital reinvestment of firms, amplifying the taxable base. In third place, the state sales and tax revenues grew by 4.7% in the fiscal year of 2019, increasing since 2018, when revenue from sales tax expanded at a pace of 4.4%.

So where does the problem come from? Well, as was mentioned before, the main issue that should be put into context, discussed and analyzed, is excessive spending. Overall spending grew by 8.2% just last year, while it is projected to complete an expansion of 16% in the three-year period of 2017-2020, mainly because of Congress internal resolutions, as a law approved in 2018 by Republican Members of Congress, which lifted previously set spending limits and disaster relief funding. Military spending has also risen dramatically under Trump’s presidency, increasing from $550bn per year to more than $700bn in 2019. But not only Republicans are guilty for this, as in exchange of voting to support the increase in military spending, Democrats asked for budget expansions in other areas. This has caused deficit levels to explode, and US debt as a percentage of GDP to register its highest level since the end of WWII, reaching 79.5%/GDP of exclusively public debt, according to the Office of Management and Budget, as reported by The Washington Post.

Deficit and debt levels could be even higher, but revenues from custom duties and tariffs, which rose by 70% compared to the previous year, represented a total revenue of $71bn… but had a much worse impact in terms of overall effects over trade. Trump’s protectionist policies turned against him and against the American economy, causing it to register the highest trade deficit in a 10-year period. The total trade deficit registered in 2018 amounted for $621bn, 12.5% larger than the previous year; representing a clear failure of his protectionist and isolationist geoeconomic policies.

In conclusion, we should remember that since 2013- when American debt levels went beyond $16.5trn- and up to 2016, Trump had been criticizing Obama for being one of the greatest deficit and debt spenders in the history of the US. I’m not trying to defend Obama here, but to show Trump’s political and economic hypocrisy. We should remember he promised to end debt during his mandate… and what has he done? He has registered deficit levels of 5.6% and increased debt levels by 16% since he arrived at the White House. But surprisingly, nobody is speaking about it.

Álvaro Martín
Socio fundador de Acción Liberal

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