That economic growth came at a pretty severe cost though.
The budget deficit blew out by 17% in 2018 as a result of the tax cuts.
The budget deficit blew out by 17% in 2018 as a result of the tax cuts.
The defecit just keeps ballooning but the only thing stopping the US government from running are self imposed restrictions on debt (the "debt ceiling"). The US is not a company, and it's not a normal household, why does the budget matter?
Well, why can't we just print money? We can, but it runs the risk of inflation. Inflation is historically low, so yes -- we could totally just print a bunch of money to pay back our debts with relatively little risk of inflation in the short term.
Essentially, debt doesn't matter, except that we have to pay interest. Interest doesn't matter because we print money, except that it might cause inflation. Taxes "destroy" money to dampen inflation. Thus, we can pay off our loans, but that might cause inflation, which might require us to raise taxes not to repay the loans, but to prevent inflation.
Of course there are some head-scratching rationalizations going around about why gargantuan deficits are good now, a decade into one of the longest economic expansions in living memory, but would have been bad to do when proposed in response to one of the deepest recessions in living memory.
There has been lots of ink spilled with respect to lagging productivity gains and I think the at this point concern about the budget may be a factor. There are enough big problems that can be addressed (infrastructure, health care, homes, etc.) if there was enough government spending to spark to investment and growth.
I'm starting to believe that the real balancing act is a matter of controlling inflation rather than controlling the defecit.
But how would those creditors respond? They would refuse to lend in US dollars in future, and the US government and private companies would be forced to borrow in a foreign currency. Net result is that the US loses a valuable asset - the ability to borrow in its own currency - and becomes more like Turkey or Argentina.
And that's not considering that the same would happen with any alternative investments, nor the fact that risk is an important part of an investment calculation, and US debt is considered "risk-free".
On the one hand, you are very correct to point out that the US is not a company or household, and that the US is a superpower that prints currency. Too many people ignore this. Another point, shared with less-sovereign governments, is that the US can impose tariffs and fees and other taxes.
On the other hand, the deficit leads to interest payments on debt. Defaulting crashes the economy, as does going to extremes printing money.
Correct me if I’m wrong.
The current administration cuts the tax rate and borrows to make up for the shortfall in tax revenue.
All this is in hopes that the economy grows enough such that the reduce tax rate can support government spending and pay back the debt + interest.
If the economy goes south for whatever reason (e.g. China imploding, another bubble pops) ...
Plus other countries always need to borrow dollars because it's what oil is sold in, which is one of the things that makes US Government debt considered the baseline or "risk-free" investment, with any other investment having increased risk, and accordingly increased reward.
Also, there's the question of who owns all that debt that the US relies on for its continued existence. For example, China owns a big chunk of it, like ~$1.2 trillion. They buy tons of US Treasury bonds because they're considered a safe investment. China gives the US a bunch of money up front, and the US has to give China a bunch more money back in the future, like over the course of 10 years. A lot of Americans also own US bonds, which help fund the debt, but they own them because they're a safe investment, not because they want to lend the government money.
So, as long as the US is in debt, it's forced to rely on other countries and its own credit rating to keep it going. That's a problem. And at some point, the sheer amount of debt will lower that credit rating, making those US bonds less of a safe investment, and that would be the tipping point at which everything starts falling apart. It will be much harder to fund deficit spending, which could snowball into printing money, then fast forward 5 years and boom, zombie apocalypse (or at least a potential Venezuela or Weimar Republic type situation).
TL;DR: the deficit is an existential threat the US if it's not kept under control.
China owns just 5.3% of US debt, only slightly more than Japan, which owns 4.8% of it. Most US debt is owned by government programmes such as Social Security.
I'm not sure a deflation is good for us.
It's obvious to the economic world. That's the reason BOJ keeps buying Japanese stocks and bonds (to keep asset prices high when others have stopped buying) and Japanese people have stopped investing in Nikkei (because holding cash == increasing value)
That's also the reason Japan (notoriously closed society) is admitting defeat and letting in immigrants to work.
Your comment also doesn’t link the deficit to the deflation, only speculates on the effects of and policy response to that deflation.
You need to understand the sequence of events in Japan. They had a massive debt problem (national, local and corporate). That triggered a recession causing asset prices to drop. The caused deflation.
The only way to not have asset prices drop and some inflation was printing money. So they printed. Their population and economic investment dropped further while they kept printing money (two opposite pulls). This kept them going until today. It's a wonder they didn't hyperinflate. They pulled it off. But the expense of this is no GDP growth. Infact, whatever GDP growth they have is because of BOJ selling assets to BOJ who sells assets to BOJ. It's a mirage.
So, yeah, their real economic activity (thus, investments, wages, innovation) has dropped from zero to negative because for the average individual, holding money = gold!
McConnell is demanding that the Democrats work with Republicans to cut entitlement programs.
Even though they control all three branches and are the ones who passed the very expensive tax cuts.
Aside from cultural issues like abortion the Republican agenda seems so far removed from what their constitancy needs it's hard to fathom.
The next time Democrats are in control you'll be sure to see GOP complaints that the defecit is a problem and entitlements should be on the chopping block.
They are actually doing that right now, even though they created the massive deficit increase.
That's because to them, entitlements are the problem, and the deficit is just the standard excuse.
The real question would be "inflation adjusted per-capita tax receipts over time" but a mid-work googling didn't turn up anything promising; that being said from the above graph _and_ the knowledge that inflation is increasing, your statement doesn't seem to mesh. Feel free to point out if I was really thick and got the wrong data or something.
This is a false equivalence because the government and the private sector spend money on very different things. If the tax cuts end up being funded by reductions in entitlement spending, for example, the private sector won't funnel money into Social Security and Medicare to offset those reductions.
>If the Republicans are right, they'll spur enough economic growth to be a net gain across the board in both new economic activity (wealth)
CBO projections imply that the nearly all of the long-term gains from the tax cuts will flow to foreign investors [0], so it certainly won't be a net gain for the US as a whole.
[0] https://www.brookings.edu/blog/up-front/2018/05/10/cbo-estim...
Voodoo Economics
During full employment. During what can reasonably be called boomed times. Historic deficits.
This isn't normal.
And I am more concerned whether the tax cuts delivered an effective ROI.