Trump’s debt proposal is a mix of conventional and unconventional stupidity
Over the weekend, Republican presidential candidate Donald Trump insisted that he could eliminate the national debt, which currently stands at around $19 trillion, “over a period of eight years.” Upon hearing this, most people would think that Trump planned to cut spending or hike taxes. However, Trump plans to cut taxes, which suggests that he had to be proposing enormous spending cuts. If spending cuts began rapidly enough to fulfill Trump’s promise of eliminating our $19 trillion debt, the “very massive recession” that is currently just another of Trump’s fantasies would become a very real possibility.
Trump, however, has something else in mind besides (or at least in addition to) spending cuts as a strategy for eliminating our national debt. Trump’s plan is a relatively new twist in D.C. policy debates: selling government assets.
This plan, while truly stupid, is a useful reminder about how limited and silly our budget deficit debates are in D.C. While it has received plenty of deserved scorn, we shouldn’t lose sight of the fact that about half of the ridiculousness of Trump’s overall debt plan actually just mimics pretty conventional D.C. budget wisdom. The other half brings a new kind of ridiculousness to the table, but these new proposals come with a grain of useful insight embedded in them. First, though, it will help to examine the conventional ridiculous featured in Trump’s plan.
First, there is the $19 trillion debt number that Trump references. Anybody who tells you the national debt is $19 trillion is simply fear-mongering. This $19 trillion number is the gross national debt, which includes debt issued to government accounts (in practice, this means debt held by the Social Security Trust Fund). According to the Congressional Budget Office (CBO), this debt “does not directly affect the economy and has no net effect on the budget.” What matters for future taxpayers is the net debt (i.e., the debt held by the public), which CBO’s most recent measure puts at about $13 trillion in 2015. $13 trillion should be a big-enough number to sound scary, but D.C. budget fear-mongers can never resist going for the even higher (though irrelevant) $19 trillion.
But even debt held by the public isn’t the right illustration of the state of the government’s finances. What matters is the size of this public debt relative to the size of the economy. The $13 trillion public debt is roughly 73.6 percent of U.S. gross domestic product (GDP). Greece’s debt at its recent peak was roughly $400 billion. That’s about 2 percent of U.S. GDP–lost change in the couch, essentially. Yet that $400 billion debt was big enough relative to Greek GDP (175 percent) to send creditors fleeing from Greece over the past decade, particularly when compounded by a series of policy errors.
Even more important than scaling debt to the economy’s size (which is pretty important) is realizing that simply reducing the level of public debt isn’t ever necessary. Think of everyone’s favorite deficit reduction episode: the late 1990s. From 1993–2001, the dollar value of debt held by the public slightly increased from $3.2 trillion to $3.3 trillion. However, the ratio of debt to GDP continuously fell over that period from 47.8 percent to 31.4 percent. If the rate of GDP growth is higher than interest rates, debt ratios can fall even if the country runs modest budget deficits.
This is all to say that a good chunk of Trump’s musings on debt is pretty garden-variety for D.C.: fear-mongering about the size of the debt and assuming that we need to actually retire debt rather than simply grow out of any burden it imposes. The new bit of silliness that Trump brings to the fiscal table is the insight that because the federal government has assets, not just debt, we can sell those assets to retire the debt. This is not the soundest financial reasoning, to say the least. A one-time sale of public assets doesn’t change the underlying fiscal position of the country. To use a metaphor, unloading your house to extinguish your mortgage might be a good or a bad idea depending on your specific circumstance. But it unequivocally does not mean your housing is now free.
Besides this basic flaw, many have also noted that the conventionally-assessed value of federal government assets is just a fraction of its liabilities, so the Trump asset fire-sale plan fails in this regard as well.
But there are assets and there are assets. No, the value of physical land, buildings, and equipment currently held by the federal government are not as large as the country’s liabilities. But another asset held by government is the power to tax. Given this power, the size of the U.S. economy, and how low U.S. tax rates are relative to many of our advanced country peers, it seems odd to think we need to either slash spending or unload physical assets as a strategy to reduce the onerousness of our national debt.
Odder still is that this debt is not onerous at all right now. Interest rates are at historic lows, and debt service as a share of GDP is low as well. All of this just emphasizes that there is no current debt crisis that needs some radical policy solution such as having a national garage sale of federal assets. In fact, we should actively be aiming for a larger deficit in the near-term to provide stimulus to an economy that is still below potential.
Any semblance of a debt crisis is only a worry in the long-run, and a one-off sale of public assets will not address it. In fact, Trump’s plan to cut taxes by $9.5 trillion (it’s worth noting that 40 percent of those cuts would go to the top 1 percent according to the Tax Policy Center), would just exacerbate any long-run debt problem even more.