The White House will release two documents on Monday: its much-ballyhooed infrastructure plan and its 2018 budget. Readers should file both documents under the genre of “science fiction.” The White House’s week of magical thinking.
The Washington Post reports, Trump’s big infrastructure plan has a lot of detail on everything but how to pay for it:
President Trump is poised to unveil a long-awaited plan Monday that aims to stimulate $1.5 trillion in new spending on the country’s ailing infrastructure over the coming decade, but many lawmakers in both parties say the president isn’t providing a viable way to pay for his initiative.
A year in the making, the proposal is an attempt to fulfill a marquee campaign promise and would rely heavily on states, localities and the private sector to cover the costs of new roads, bridges, waterways and other public works projects.
The plan calls for investing $200 billion in federal money over the coming decade to entice other levels of government and the private sector to raise their spending on infrastructure by more than $1 trillion to hit the administration’s goal of $1.5 trillion in new funding over 10 years. It also seeks to dramatically reduce the time required to obtain environmental permits for such projects.
For now, the White House is suggesting that lawmakers cut money from elsewhere in the budget, including some existing infrastructure programs. That prospect seems unlikely given that Congress just last week reached a bipartisan deal to spend significantly more funds over the coming two years.
“I think it’s just dead on arrival. . . . It’s not a plan that will really work,” said Rep. Daniel Lipinski (D-Ill.), a member of the House Problem Solvers Caucus that works on bipartisan solutions. “Are Republicans going to embrace any kind of funding plan besides stealing from Peter to pay Paul within the federal government?”
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In a briefing over the weekend for reporters, senior White House aides stressed that Trump’s plan is intended to be an opening bid on legislation that will require bipartisan cooperation to pass.
“This in no way, shape or form should be considered a take-it-or-leave-it proposal,” said one senior official, who requested anonymity to provide a preview of the president’s plan. “This is the start of a negotiation — bicameral, bipartisan negotiation — to find the best solution for infrastructure in the U.S.”
As crafted, the plan faces obstacles in both parties.
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The idea that $200 billion in federal money will leverage more than $1 trillion in overall infrastructure investment is “just a prayer and hope,” said Martin Klepper, who served most of last year as executive director of the Department of Transportation’s Build America Bureau.
“Who is going to come up with all that extra money? The states are broke,” said Klepper, who joined the Transportation Department in early January 2017 and resigned in November. He had hoped to help shape an infrastructure plan along the lines of what Trump promised during the campaign. However, he said, he found “a real gap between the president’s articulation and the meat of this proposal.”
In addition to his infrastructure proposal, Trump also plans to release his budget blueprint for the coming fiscal year on Monday. Trump plan will drop GOP’s traditional goal of balancing budget within 10 years:
President Trump is remaking the Republican economic playbook in his own image, abandoning ideological consistency in favor of a debt-busting strategy that will upend how Washington taxes and spends trillions of dollars each year.
On Monday, Trump is slated to announce a new budget plan that will no longer seek to eliminate the deficit over the next decade, forfeiting a major Republican goal, according to three people familiar with the document. The plan will call for a range of spending cuts that reduce the growth of the deficit by $3 trillion over 10 years, but it will not attempt to balance the federal budget, said the people, who spoke on the condition of anonymity to discuss the proposal before its official release.
The decision to relinquish the deficit goal comes after Trump pushed a $1.5 trillion tax cut through Congress late last year and signed a two-year budget deal last week that lifts federal spending limits by $500 billion, suspends for one year the ceiling on the national debt [and includes additional tax cuts] and is expected to lead to $1 trillion annual budget deficits. [So in excess of $3 trillion in deficit spending without any pay-for offsets.]
The Republican turnaround on economic policy stands in sharp contrast to the party’s opposition to President Barack Obama’s stimulus program during the Great Recession [when deficit spending is warranted.]
Now, GOP leaders are largely silent on the two issues that had preoccupied them for the past decade — total spending and the growth of federal entitlements — while Trump has signed legislation that will lavish cash upon both defense and domestic programs far beyond what he had earlier proposed.
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A month and a half before signing the spending legislation, Trump demonstrated similar ideological flexibility with his tax cut, shelving his campaign promise to focus on the “forgotten men and women” and signing a bill whose biggest benefits flow to corporations and the wealthy.
One of the biggest flash points is likely to be his decision to no longer aim to balance the budget over 10 years. That had been a North Star for the Republican Party for several decades, and GOP lawmakers took the government to the brink of default in 2011 when they demanded a vote on an amendment to the Constitution that would prohibit the government from spending more than it takes in.
It could not be learned how large the White House projects the deficit will be after 10 years, the normal window for an administration’s budget. But the White House is expected to project that the economy will grow at a much stronger clip than many economists think will occur [magical thinking]. That means the deficit may be still larger than the White House predicts.
“This is Trump’s party right now,” Sen. Jeff Flake (R-Ariz.), a frequent critic of the president, said in a phone interview. “Everybody who’s running for reelection will tell you that. It’s primary season, and there just isn’t much talk about fiscal issues.”
But Bush cut taxes and ramped up spending when the United States had generated small budget surpluses for two consecutive years [under President Clinton] and the federal debt was less than half its current size, compared with the overall economy.
Trump’s tax and spending plan will shower the economy with hundreds of billions of additional dollars in coming years, which is expected to spur growth but risks a cycle of rising prices. Financial markets have been selling off, in part, because of inflation fears.
“The economy appears to be on the verge of overheating and arguably needs less, not more, stimulus,” economist Jim O’Sullivan of High Frequency Economics said in a research note Friday.
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The budget accord [last week] represents an emphatic end to a Republican era dominated by the anti-spending Tea Party. That grass-roots group reached its zenith in 2011 when congressional Republicans forced Obama to agree to the Budget Control Act, which established spending caps on defense and nondefense spending as the price for averting a default on government debt.
The $1 trillion annual deficits will act as rocket fuel on an economy that already is running hotter than the Federal Reserve says is sustainable. The danger is that adding demand to the economy, at a time when unemployment is low, will push wages and then prices higher and higher.
Such an inflationary spiral would force the Federal Reserve to raise interest rates to cool off the economy, which would make Washington’s spending problem even worse by increasing the interest bill on the national debt.
It also threatens to leave the United States unable to respond adequately to a recession.
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The Fed, led by new chairman Jerome H. Powell, was already expected to act this year to slow an economic expansion that — at almost nine years old — is the third-longest since 1854.
Central bank officials are expected to increase interest rates three times this year while simultaneously selling off some of the trillions of dollars of Treasury bonds the Fed bought during the financial crisis to keep rates low.
That maneuver, effectively reversing the extraordinary pump-priming known as “quantitative easing,” which was used to repair the economy after the housing crash, has never been done before. Some analysts say that the delicate exercise could shake asset prices across global stock and bond markets.
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Even before Congress passed the budget-busting measure, Wall Street analysts upgraded their economic forecasts to take account of the added stimulus. Higher government spending could add up to 0.5 percentage points to this year’s growth rate, pushing the annual figure to 2.8 percent, according to O’Sullivan, of High Frequency Economics [still missing the Trump administration’s target of 3.0 percent.]
In any event, the budget proposals of presidents are almost always dead on arrival in Congress. There is virtually no chance that the Trump budget will be enacted as he proposes.
So what about the runaway deficit spending ride that “the King of Debt” is taking the GOP on?
Economist Jared Bernstein explains, Worried about ever larger deficits? Either put new revenue on the table, or learn to love red ink.
[W]ith the combination of the deficit-financed tax cut and the similarly financed new budget deal, my morning papers are replete with articles about “ballooning deficits” and forthcoming new fights over the debt. This raises at least three interesting questions: are these higher deficits a problem, will politicians pay a political price for them, and what can be done to reduce the red ink?
My answers, which I fear may not be very satisfying: it depends, I doubt it, and higher taxes.
Are higher deficits a problem? Because deficits tend to be countercyclical — they go down when the economy goes up — our current fiscal policy is highly unusual. The deficit as a share of gross domestic product is expected to be around 4 percent to 6 percent over the next few years. In the past, when the unemployment rate has been as low as it is now (4.1 percent), that deficit ratio has been close to zero. It’s not unusual for the deficit to be the same as the unemployment rate in a downturn — they both got up to around 10 percent in the last recession. That’s very much as it should be, as extra government spending is need to offset the private sector demand contraction. But it’s very unusual at this stage of the expansion.
But “unusual” isn’t necessary bad. Brand-new estimates from Alec Phillips at Goldman Sachs finds that the impact on growth from ﬁscal policy should be about an extra 0.7 percentage points in 2018 and 0.6 points in 2019. Those are not huge numbers in this context, and if, as I believe to be the case, there’s still slack in the job market — some people and places that have yet to be reached by the recovery, now in its ninth year — then this new “fiscal impulse” could push the unemployment rate down even further. If unemployment falls to the mid-3’s by the end of this year, I strongly suspect the benefits of growth will find their way to those who’ve been left behind.
However, if we’re already at full employment — if the economy’s resources are essentially already fully utilized — instead of generating real activity (more jobs, higher real wages), we’ll just get more inflation and higher interest rates, which will slow growth. If inflation starts climbing quickly, the Federal Reserve will move from brake-tapping to brake-slamming, raising the benchmark interest rate it controls a lot faster than currently planned.
In other words, the answer to this first question is it depends on how full the economy water glass is. If it’s already at the brim, we’re just going to end up with spillage (inflation). If there’s room for more water, we’ll reach some people who deserve a slice of the pie (whoops — mixed metaphor overload! . . . my bad!).
Will politicians pay a cost for voting for higher debt? Typically, they haven’t, and I can’t see why this time should be different. If the economics turns out badly — glass is full, water spills out, etc. — perhaps, but I’d be surprised. Most polls show that people have learned to live with historically high debt levels, and who can blame them? Warnings of deficit doom have never come to pass. To the contrary, as noted, we’re currently living with high deficits and low unemployment.
But there’s another way that these deficits are unequivocally bad: I’ve had it with politicians telling us, in so many words, “You can have everything you want folks, and you never have to pay for it!” I’m afraid others fail to share my disgust, so again, there’s probably no political fallout from that construct.
The reason, of course, circles right back to the deficit, but with an important detour through tax policy. Most politicians’ basic understanding of fiscal policy these days comes down to this: They’re convinced their constituents don’t want to pay higher taxes, nor do they want to lose what the government currently provides for them. What policymakers intuit from this is that if you want to keep the people happy, just put everything on the debt. As long as the economy keeps growing faster than the cost of servicing the debt, we’ll be fine.
Until it all breaks down and we can no longer pay for the things we want and need given current revenue intake. Which raises the final point.
How do we get out of this jam? By ending the implicit ban on raising taxes. As Paul Van de Water points out here, and this is obvious based on our aging population alone, simply maintaining current services is going to require more revenue, not less. Add in our infrastructure needs, geopolitical risk, recessionary risks (it’s out there somewhere, folks!), climate, and more, and at some point, the current construct of “you can have X while paying for but a fraction of X” will mean either higher taxes or a lot less X.
On that point, you may be thinking: Why raise more tax revenue? Why not just cut spending? Don’t we have mandatory budget caps in place to do just that?!
Allow me to refer you to the new budget plan, which, for the record, is not all bad — there’s some useful spending in there. But almost every time we hit one of these budget impasses, they break through the caps and put the new spending on the deficit. The evidence is unequivocal: The political dynamics are such that cutting spending will not get us out of our fiscal quandary.
Dress it up any way you like, but here’s the reality: We either put new revenue on the table, or resign ourselves to ever larger deficits and debt.