This article was published by The McAlvany Intelligence Advisor on Monday, October 23, 2017:
University of Virginia professor Herbert Stein, the father of Ben Stein of Ferris Bueller fame, was known as a pragmatic conservative. But he is best known for his cryptic expression, “If something cannot go on forever, it will stop.”
Mick Mulvaney’s hopeful outlook hasn’t yet been tarnished by his experience in Washington. Serving as a member of the House of Representatives from South Carolina prior to accepting the position of President Trump’s Director of Office of Management and Budget, Mulvaney really thinks, based on his public statements, that things really can go on forever. All that is needed is a little tweaking: “We need to grow our economy again and get our fiscal house in order. We can do that through smart spending restraint, tax reform, and cutting red tape.”
A closer look at the size of that fiscal deficit, however, reveals Mr. Mulvaney’s naiveté: on Thursday the Treasury Department announced that the deficit for the fiscal year that ended on September 30 was two-thirds of a trillion dollars, the sixth highest in history. That brings the national debt to, according to the national debt clock, $20.4 trillion. That’s equal to the entire economic output of the U.S. economy in one year. The deficit represents 3.5 percent of the country’s GDP, up from 3.2 percent last year.
The usual suspects are the cause: Social Security, Medicare, Medicaid, and the interest on the national debt. Each of these is outside the reach of Congress, leaving only the military budget large enough to make an impact. But instead of cutting military spending Mr. Trump wants to increase it.
The budget resolution passed by the Senate last week (with Rand Paul being the only Republican to vote against it) clears the way for a “serious” discussion about the GOP’s tax reform bill. Although the details will remain opaque until early November, questions are being raised about the mathematical impossibility facing Mr. Mulvaney. It’s been put in terms of a footrace: the leader in the race (the government) is not only far ahead of the second place runner (the taxpayer), he is gaining speed as well, increasing the distance between them with every step.
The Treasury Department pointed out that in fiscal year 2017 the U.S. government spent $4 trillion while tax revenues were $3.3 trillion. It went further to say that government spending is growing at three percent a year while revenues grew by only one percent.
But Treasury Secretary Steven Mnuchin is as optimistic as Mulvaney: “Through a combination of tax reform and regulatory relief, this country can return to higher levels of GDP growth, helping to erase our fiscal deficit.”
If the national debt really is $20 trillion, closing the gap would take several canisters of pixie dust. But it’s really $200 trillion, according to another economist, Boston University’s Laurence Kotlikoff. Kotlikoff has long publicly criticized government statisticians for fudging the numbers – for placing into “off-balance sheet” accounts the numbers that really matter. Using his own methodology – generational accounting – he compares promises made by one generation at the expense of another and then calculates the real (inflation-adjusted) present value of those promises versus what they will cost over the next 75 years. The promises made exceed the revenues to pay for them by more than $200 trillion.
Reagan’s OMB Director, David Stockman, was equally naïve as Mulvaney: he put tissue onto the bones of something he called “Reaganomics,” using Art Laffer’s table napkin drawing of his “Laffer Curve” as its foundation. Simply put, the theory is that by reducing tax rates one would get higher, not lower, total tax revenues. Of course Laffer didn’t know then, and doesn’t apparently know even now, just how much lower those tax rates would have to go in order for the magic of increased revenues to turn into reality. It was a good guess but a guess nevertheless.
Today the guessing game continues. If government spending is growing by three percent a year, then government revenues must grow faster than that in order to have any chance of catching up. At present that revenue stream is only growing at one percent. Hence, in order to close the gap the revenue stream must grow by more than three percent, and four would be better. Hence Trump’s declaration that three percent growth is the minimum but four would be better.
There are other outcomes in case the guessing game doesn’t work out. Stockman has been watching Trump and warned the folks: “I think we are likely to have more of a fiscal bloodbath rather than fiscal stimulus.” Explained Stockman:
Unfortunately for Donald Trump, not only did the public vote the establishment out, they left on his doorstep the inheritance of 30 years of debt build-up and a fiscal policy that’s been really reckless in the extreme. People would like to think he’s the second coming of Ronald Reagan and we are going to have morning in America.
Gary North, also an economist, describes that bloodbath in no uncertain terms. He calls it the “great default.” That will occur when Washington’s checks either stop coming or they bounce. That’s when the reality of America’s fiscal condition will become clear to everyone. That’s when Herb Stein will be vindicated.
The Wall Street Journal: U.S. Ran $666 Billion Deficit In Fiscal 2017, Sixth Highest on Record
USAWatchdog.com: Giant Fiscal Bloodbath Coming Soon-David Stockman
Herbert Stein: If something cannot go on forever, it will stop.