Larry Kudlow's Blind Faith in Trumponomics Will Prove Costly
The federal deficit just hit a six-year high, but President Trump's fiscal policy is apparently responsible enough for Larry Kudlow, his top economic advisor. During a recent appearance on CNBC, Kudlow insisted that Trump's tax cuts would lead to higher tax revenues over the next year. Combined with a belief that Trump's next budget will actually make spending cuts, Kudlow expects the soaring deficit to come down to earth.
But the mid-December budget review from the nonpartisan Congressional Budget Office (CBO) is less optimistic. In the first two months of this fiscal year federal spending was 18 percent higher than it was over the same period last year, even though income was only three percent higher. Adjusting for some timing differences, the deficit inflated nearly 14 percent.
Even so, Kudlow believes Trump's tax cuts will raise revenues enough to cut down the deficit. He says the tax cuts will lead to the sort of tremendous economic growth that causes incomes to soar, allowing the government to collect more in tax revenue.
It’s true that the economy is strong, and jobs and earnings are indeed rising. Nonetheless, we have yet to see the federal revenue boost Kudlow predicts. According to the CBO, individual income taxes from October to November of this year were more than two percent lower than the same period last year.
Corporate tax revenue rose from 2017, but this increase came from a decrease in tax refunds granted to businesses rather than from a rise in taxes on profits. The federal government also raised more revenue from the new tariffs in Trump's trade war. Another source of 2018 funding was taxes on health insurance providers, which weren’t collected in 2017 and won't be collected this year due to a moratorium, meaning they won't help cut the deficit in 2019.
Kudlow's faith that Trump will actually reduce federal spending is just as unrealistic. In his comments to CNBC, Kudlow referenced Trump’s October proposal to cut all major cabinet agencies’ budgets by five percent. But even if the president maintains this goal, the numbers aren’t on Kudlow's side.
The CBO estimates the deficit through FY 2019 will total $970 billion — 46 percent higher than last year. But Trump's proposed shaving five percent off discretionary expenditures will save just $65 billion — hardly a dent in the deficit that Trumponomics is creating.
A strong economy does not provide limitless amounts of tax revenue, especially considering fiscal stimulus usually has a very short-term impact on economic growth. Nor does a five percent cut constitute a "very tough budget" like Kudlow suggests, if by a tough budget he means actually getting runaway spending under control.
Interestingly enough, Trump’s view of his own policy is more realistic than Kudlow's idealism. The Daily Beast reported that the president essentially shrugs off advice about the national debt. When senior officials showed Trump how current policies will cause an even greater spike in the debt soon after what could be his second term — potentially causing a fiscal crisis — Trump replied simply: "Yeah, but I won’t be here."
While many Americans view fiscal issues as boring, how we treat our national debt is really a moral decision. Greater federal debt requires the use of more taxpayer dollars to cover interest payments, pushing aside more desirable investments in welfare assistance, defense, or infrastructure. Federal debt also raises interest rates, leading to less private sector investment. Fewer investment opportunities mean less economic innovation, productivity, and wage growth.
In other words, if we do not pay for our spending now, another generation will. Even if it doesn’t make the front page, taxpayers always foot the bill for soaring interest payments. And even if the debt is an unsatisfying scapegoat for future economic woes, its damage to wages and growth is no less real.
Kudlow and the rest of Trump’s economic advisors should do everything they can to encourage the president to take fiscal responsibility seriously. The longer massive deficits go unchecked, the more quickly debt payments will spiral out of control — and all taxpayers will be on the hook for the disaster that follows.
John Kristof is a research fellow at the Sagamore Institute and a contributor for Young Voices. He writes frequently on fiscal, regulatory, and other economic issues. Follow him on Twitter.