On Monday, President Trump submitted to the US Congress his budget proposal for the upcoming 2020 fiscal year.
The total budget comes in at a record $4.75 trillion.
The budget that is finally passed by the US Congress will not look much like the budget proposal that Mr. Trump has submitted.
The reason is that this budget for the 2020 fiscal year has very little economics in it and is basically a political document that lays out major re-election priorities that will become the focus for the next presidential election.
Given the divisions that now exist in the US Congress, the budget will not be passed as it is, but the defeat of many of the crucial provisions will be used to rally support for the re-election of the president beginning with his political base.
According to Jim Tankersley and Michael Tackett, writing in the New York Times, “the blueprint is a declaration of Mr. Trump’s re-election campaign priorities and the starting skirmish in the race for 2020, as both Republicans and Democrats try to carve out their messages to appeal to voters.”
The problem is that “the budget” will have economic impacts and will help to produce the economic environment for several years.
Most of the analysis of the proposed budget has initially focused upon three issues: first, military spending is to increase by 5 percent, more than even the Pentagon asked for; second Mr. Trump is asking for $8.6 billion to fund his plans for a border wall; and there are proposed cuts in safety net programs of $1.9 trillion.
There are, of course, other changes, but these are the ones that are gaining the most attention because of the political implications connected with them. Let the battles begin.
But, there are other consequences of the proposed budget.
For one, the budget deficit for this year and the three following years are for more than $1.0 trillion.
The treatment of the growing government debt is cavalier. The attention given to future deficits makes one wonder if anyone is really concerned about government deficits.
A token promise about balancing the budget is tossed into the discussion. We are told that it will take 15 years for the budget to be balanced. But, this breaks Mr. Trump’s 2016 campaign promise to balance the budget in 10 years.
But, any promise about balancing the budget is way beyond Mr. Trump’s potential time in office, so he really has very little concern about achieving this goal while he is the president.
Balancing the budget, however, depends upon the assumptions about economic growth used to construct the budget. Built into the Trump budget forecast is economic growth of 3.0 percent for the next decade. In 2019, the projection is for 3.2 percent growth, followed by 3.1 percent growth in 2020, and 3.0 percent growth in 2021.
As readers of my post know, I am very skeptical about this path, believing that the growth achieved over the next three years or so will be much less than this. I have provided my thinking on the subject in my post on Monday.
If the growth assumptions built into the 2020 budget proposal are not achieved, the federal deficit will be a lot worse than what is built into the current document. In fact, deficits could over the next four years or so run around $1.5 trillion or greater.
Adding so much more debt will only increase further the interest payments the government must make and if the supply of debt increases that much and interest rates rise, the deficits will only be that much greater.
Then there are two other concerns that can be added to this picture. First, the current economic expansion will reach 10 years at the end of the second quarter of this year, a new historic record, but there is some concern over whether or not this period of expansion can be maintained.
The assumptions behind the current budget proposal picture the economy growing and growing and growing. We don’t even come close to a recession in this environment. Even the slower projections I am working from do not include the possibility of a recession in the United States.
But, there are also growing clouds forming over the world economy. The European Central Bank and the OECD have both reduced their projections of world growth and the ECB has moved to reverse its policy stance for the coming year.
Markets seem to believe this darkening picture as traders have taken the yield on the 10-year German Bund down to 0.07 percent. This level is consistent with little or no expected growth.
So, what if the world tips into another recession and it brings the United States along with it? The question now becomes one of how can the world recession be fought when deficits are already so high and interest rates are so low?
Never have countries found themselves in such a position at this particular stage of the economic cycle.
The concern I have is that the politicians in Washington, D. C., are not focusing on the economic needs of the country, but are looking, short term, to the next election. This, to me, is reaching the next stage in the period I have referred to as the era of credit inflation. The drive to achieve growth and more growth and more growth has been a growing obsession in US political circles since the early 1960s.
As a consequence, the government sees to it that plenty of debt is created, that plenty of money is available, and these efforts are sustained over time. The result, as I have described many times, is an economy where most of the stimulus goes into the financial circuit of the economy and very little goes into the industrial circuit. Asset prices rise and asset bubbles are produced, but very little is produced in the way of economic growth.
Still, more and more fiscal and monetary stimulus is called for, yet, this only exacerbates the situation. Now, we shall see what comes next, what results come from this next stage.
But what worries me now is the thrust of the new budget. If the budget is to set up the fights that are to take place in the 2020 presidential election and if the politicians give very little real attention to the economy, no one is really going to look out for the future of the economy. And, if this is true, then what might really happen to the economy?
