Think of our record trade deficit and growing budgetary hole as dual reality gaps, twin measures of the disparity between fantasyland and the world we live in.
Those blessed with filter-free memories — and here, alas, we have to exclude a certain breed of political pachyderm — may recall that candidate Trump promised he’d deal with both.
Since it’s a much bigger long-term problem, let’s start with the budget deficit. This fiscal year, we’re headed toward a $900 billion shortfall. And unlike the big imbalance under President Obama, which came during a deep revenue-depressing recession, this deficit is occurring despite an economy at or near full employment.
Put on your memory caps again. Weren’t we told, back before President Trump and his Republican Party passed their big tax cuts, that those cuts would pay for themselves? In making that claim, of course, the Trump team wasn’t offering evidence-based economics but rather supply-side theology. That faith-based doctrine has turned on its head the old conservative adage that there’s no such thing as a free lunch. As today’s Republicans see it, the fiscal table is laden with cost-free tax cut treats, splendiferous savories that will catalyze so much growth that federal revenues won’t suffer.
Of course, we heard that back in the days of the Reagan tax cuts, and it didn’t happen then. Nor did it work with George W. Bush’s tax cuts. So there was really no reason for a rational person to expect supply-side fantasy to come true this time around.
And it hasn’t. According to new data from the US Treasury Department, the deficit increased by 77 percent in the first four months of fiscal 2019 compared with the same period of the last fiscal year, rising from $176 billion to $310 billion. One big reason: Instead of increasing, as federal tax revenues usually do in good economic times, federal revenues are falling because of the GOP tax cut. Corporate receipts were down 23 percent, income tax revenues down 3 percent.
Now, the burgeoning deficit isn’t all due to revenue loss. Spending is also up 9 percent. Recall that during the Obama years, Republicans were keen on spending restraint in the interests of deficit reduction. With the GOP in power, those concerns have evaporated. And with Republicans abandoning prudence on both sides of the fiscal ledger, Democrats have eagerly embraced more domestic dollars.
So how is the administration reacting to the federal freshet of crimson ink? Back in September, National Economic Council Director Larry Kudlowwaved concerns away: “If you grow rapidly you’re going to have lesser deficits. Growth solves a lot of problems,” he said. This week — with evidence of greater, not lesser, deficits — Kudlow remained dismissive.
Yes, the deficit has “inched up a bit,” he said, but that problem will be solved by economic growth of 3 percent a year “as far as the eye can see.”
Real-world monkey wrench: Even in 2018, during the sugar high of the tax cut, growth didn’t quite hit 3 percent. It fell from 4.2 percent in the second quarter to 3.4 percent in the third to 2.6 percent in the final quarter, to end at 2.9 percent for the year. That doesn’t portend 3 percent growth from here to the horizon.
From a budgetary standpoint, the tax cut is clearly failing to pay for itself. Economically, the jury is still out, but it’s highly unlikely to result in the “4, 5, or even 6 percent” growth Trump predicted.
The trade deficit, which isn’t the win-loss record Trump considers it, matters far less. Still, it’s worth noting that this nation recorded its biggest merchandise trade imbalance ever, $891 billion, in 2018. Our trade deficit increased even with trade-cheat China, the principal target of Trump’s tariffs.
It’s just more evidence that policy fantasies are losing their mismatched battle with economic gravity. It’s time everyone woke up to that reality.Scot Lehigh can be reached at email@example.com. Follow him on Twitter @GlobeScotLehigh.