The paradox of Trump's trillion-dollar deficit

Donald Trump is officially the One Trillion Dollar President.

One trillion dollars in deficit spending, that is.

The annual gap between the U.S. government's spending and its tax revenue officially crossed the thirteen-figure mark in 2019, according to Treasury Department data released Monday, reaching $1.02 trillion over the January-to-December period. It hasn't gotten that high since 2012.

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Of course, expressing the size of the deficit in dollar terms is less meaningful than as a percentage of economic output — i.e. of gross domestic product (GDP). By that measure, 2019's deficit is close to 5 percent of GDP. And since the economy grew in size over the last decade, that's still well below the 8-to-10 percent of GDP we saw in 2010, 2011 and 2012, under President Obama.

Still, there's no getting around the fact that, under either measure, deficit spending has gone up dramatically under Trump.

That's striking for a couple reasons. First, we're in a relative economic boom right now, but you usually expect to see deficit spending rise during downturns — like the Great Recession that confronted Obama when he entered office. There's also the fact that Trump criticized Obama for his deficits and promised to eliminate the government's debt burden.

Since Trump's deficits are relatively unusual, it raises the further question: Where are these deficits going? Any time the U.S. government deficit spends, it’s adding to the total amount of money circulating in the economy. So where is the money going in the economy, and who's benefiting?

The first thing to note is that deficits actually started rising in 2015, before Trump took office. The gap was set to grow even before anything Trump signed into law. That's due to several factors, including the pre-Trump makeup of U.S. tax policy, and the growing costs of big entitlements like Social Security and Medicare — which is mostly due to the rising share of elderly people in the population, and the growing prices of health care. Discretionary spending, which excludes the big entitlement programs, but includes military and most other public investment, has been relatively stable over the last decade.

But Trump did pass three changes in particular that added to the gap.

The first was the Bipartisan Budget Act of 2018, which increased those aforementioned discretionary spending levels by about $300 billion in total, spread over 2018 and 2019. (Trump just signed an even bigger increase with the Bipartisan Budget Act of 2019, but its effects are still in the future.) Much of that 2018 spending increase went to the military, and defense expenditures can be useful to the broader economy: you're spending money that employs soldiers and defense contractors, and their incomes then go on to spur more economic activity. That said, the boost is probably modest compared to what you'd get from, say, more spending on food stamps or public infrastructure. That's because defense is also often a capital-intensive industry, and a lot of that spending goes into expensive technologies and big profits for contractors.

Second, Trump has also signed a few disaster relief bills and emergency measures during his first term, which added another $165 billion to deficit spending.

The third big change Trump passed was, of course, the Tax Cuts and Jobs Act (TCJA) in 2017. Determining exactly how much that law added to deficit spending since its passage is more difficult. But estimates like these figures from the Committee for Responsible Federal Budget suggest the TCJA accounts for half or more of Trump's contributions to the budget gap.

Unlike the Bipartisan Budget Act, the TCJA's tax cuts have done much less for the economy. The vast majority of the tax revenue they gave up went into the pockets of wealthy shareholders and business owners, through massive reductions in taxes on business and corporate profits. A modest portion of the tax cuts benefited everyday people as well, who turned around and spent that money back into the economy, but not enough to create much of a boost. The theory was that juicing corporate profits would lead to more investment, and thus more jobs and higher wages. But none of those predictions panned out, and it should've been obvious at the time that lackluster profits were not holding back investment.

Now, the other question is, should we care about these trillion-dollar deficits? A lot of mainstream economists, experts and lawmakers (like the folks at the the Committee for Responsible Federal Budget cited above) certainly think we should.

The mainstream theory is that, by soaking up savings that could go elsewhere in the economy, the federal government's borrowing drives up interest rates and thus constricts growth over the long-term. This ignores the fact that the U.S. government is the creator of all dollars in the economy. Via the Federal Reserve, the government can always create enough money to buy up its own debt and bring its interest rates down. Nor can the national debt — the sum total of all past annual deficits — ever become so big that the government can't meet its obligations.

The tradeoff is that creating that money to hold down interest rates might also increase inflation. But inflation doesn't happen simply because the government adds money to the economy. It happens when that money employs real resources — people, materials, etc — that were going unused. Eventually, all the real resources in the economy can be employed, and if money keeps chasing those resources at that point, prices will start to rise.

This is where the question of who Trump's deficits are helping becomes crucial. Yes, some of the additional money went to activate real resources, like the emergency measures and the investments in the Bipartisan Budget Act. But a ton of it went to rich people, via the tax cuts, who already have more money to spend than they could possibly need. That money isn't chasing real resources; it's just sitting in their portfolios.

The paradox is that deficits have to be useful to risk driving up inflation or interest rates. But a large portion of Trump's deficits weren't useful, which is why neither has risen.

The deficits are still bad: They increased inequality, they gave the wealthy even more power in politics and society, and they took a lot of people and materials that could've been used for more productive endeavors and turned them to producing guns and bombs and missiles instead. But one thing Trump's deficits haven't done is make the federal budget any less "sustainable."

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