As a businessman, President-elect Donald TrumpDonald TrumpOvernight Defense & National Security — The Pentagon's deadly mistake Overnight Energy & Environment — Presented by Climate Power — Interior returns BLM HQ to Washington France pulls ambassadors to US, Australia in protest of submarine deal MORE used high amounts of debt to finance his ventures and, by so doing, undertook significant risks. For the most part, his debt-financed investments were successful. They built his business empire and personal fortune.
However, he is also no stranger to the downside of risk-taking, and has experienced business bankruptcies. How will his background in the use of debt and exposure to risk translate to his management of the federal government’s finances?
Trump will take over a federal government that has been on a “debt binge” ever since the financial collapse in 2008. Federal deficit spending during and immediately after the Great Recession was essential in blunting its pain and stimulating recovery.
However, we have now had seven years of recovery, during which the nation has added to its debt burden every year. Federal debt held by the public has climbed from 35 percent of gross domestic product (GDP) in 2007 to 74 percent at the end of 2015.
After past recessions, the recovery years were used to pay off debt, not to increase it. It is prudent—or even possible—to add to the nation’s debt burden year after year? Will the Trump administration continue on this course, which appears to be the outcome of policies announced during the campaign?
The Committee for Economic Development (CED), a nonprofit nonpartisan and business-led group, points out in a new report the growing fiscal risk facing the U.S. and how it can constrain the government’s flexibility and freedom to act.
The CED emphasizes that any deficit or debt reduction plan should be designed to encourage the long-term growth of the economy. The best and quickest way to pay down debt and restore fiscal health is through more productivity and higher growth. The group’s report endorses tax reform designed to stimulate economic growth and raise additional revenues.
The Committee’s concerns should be heeded. The Congressional Budget Office (CBO) calculates that the nation’s debt-to-GDP ratio will rise to 86 percent in 10 years under current policies. The tax cuts, higher defense and infrastructure spending, and elimination of the Affordable Care Act proposed during the Trump campaign would only worsen the situation.
The Tax Foundation has estimated that the Trump tax cuts would lower federal revenues between $2.6 trillion and $3.9 trillion by 2025, even after the positive effects on the economy. This could take the debt-to-GDP ratio to 105 percent, just about equal to the all-time high at the end of World War II.
Given the current and projected U.S. government deficits and debt, the Trump administration should quickly move to put measures in place to arrest this trend and restore the nation’s fiscal health.
There are two key questions that should be addressed by the new president and his team as they undertake this effort. The first is in regard to the tax cuts proposed during the campaign. The dramatic reductions in tax rates are designed to garner the attention of investors and corporate managers, and to stimulate economic and job growth through innovation and investment.
But in light of the fiscal situation, is it prudent to go as deep with these cuts as has been proposed? While we know the revenue loss on a static basis will be substantial, we can’t be completely sure of the offsetting gains as the tax cuts work their way through the economy. Investors and managers could be provided with positive incentives with less risk through more modest reductions in tax rates.
The second key question is whether the entitlement programs, especially Medicare and Social Security, should be off limits, as was suggested during the Trump campaign.
The real driver of the huge annual deficits projected through 2026 and beyond are the major healthcare programs. Without policy changes, the cost of these programs doubles in ten years, adding $1 trillion more to the annual deficit.
In addition to any changes to the Affordable Care Act, the incoming Administration should address the cost of Medicare to keep government debt from spiraling upward. Social Security outlays also double in the same period. There are promising proposals that can preserve the benefits of all these programs for the future at less cost, but it important to act now.
It is not easy or popular to reform the entitlement programs, but reform is necessary to insure their benefits will be available to future generations. It is also prudent to accomplish this reform as significant tax cuts are introduced to ensure that annual federal deficits and total federal debt do not become unmanageable in the future. Unlike for private business, bankruptcy is not an option for the federal government.
Joseph Kasputys is the CEO of Economic Ventures and the founder and former CEO of Global Insight, Inc.
The view by Contributors are their own and are not the views of The Hill.