The White House unveiled its FY18 budget yesterday. It was quickly panned by the traditional media and many economists, including former Treasury Secretary Summers.
It is a short document lacking in many details. Current Treasury Secretary Mnuchin pushed back, saying it was too early in the process to evaluate it. The lack of specifics also means it is difficult to assess the impact the deficit.
That begs the question, how then can the Administration argue that it will balance the budget? Mulvaney, the head of the Office of Management and Budget, let the proverbial cat out of the bag. He said he did not know the impact, but it was easier to assume it would be balanced. At the end of the day, it does not matter what OMB says is the impact. In these matters, the Congressional Budget Office scoring is the only relevant one.
The most important point that many critics miss is that the President’s budget is rarely the framework for what comes out of Congress. It is about the aspirations of the Administration; its wishlist. As in the campaign, Trump’s critics often take him literally but not seriously. Trump does not show sensitivity to words, and the precision of language (apologies to Wittgenstein) that many in the intelligentsia value. As we have suggested many times, rather than take Trump literally, investors and policymakers may be better advised to regard everything he says as a negotiation.
Second, the budget’s growth forecasts are optimistic. US growth has averaged 2.1% of the last seven years. In the seven years before the crisis (which included the housing bubble phase, growth averaged around 3%. What has changed? Implicit in Trump’s budget and many conservatives is that it is primarily the government’s fault. Regulation and taxes are significant headwinds.
However, the more authoritative studies have placed a greater emphasis on demographics and the slowing of growth of the labor force. One of the key reasons why US demographics have not deteriorated as much as many other high income countries are the past liberal immigration. Discouraging immigration would seem to threaten the goose that has laid the golden egg. If the actual budget assumes growth that does not materialize, then the deficit and debt levels are higher than projected.
Third, the budget calls for cuts in many assistance programs. Initiatives like Low Income Energy Assistance and other programs are cut on the grounds that the social safety net should not be strong enough to discourage work. This is simply an exercise in cynicism. The costs of poverty are huge. Opportunities are fewer; life is harder and shorter. Are we as a society truly served better make making poverty even more onerous? The implicit idea is that the welfare state has created too many incentives to be poor and those incentives have to be reduced. The budget sketch and the aspirational revelations seem intent on making poverty a moral issue.
Fourth, if the budget calls for forcing greater self-reliance and creating incentives that don’t “discourage able-bodied adults from working” it is counterproductive to slash the various programs that facilitate finding employment. There are several programs that help employers and employees. Isn’t it cynical to cut these at the same time as the transfer payments are slashed? By 2028, if (and that is, of course, a big if) Trump’s budget would be implemented, Medicaid would be halved and food stamps cut by a quarter. Moreover, adding another level of cynicism, the budget calls for charging retailers a fee for accepting food stamps.
Fifth, as others have noted, the budget not only exaggerates the likely sustainable growth level, it overuses it. Stronger growth is used to offset the effect of lower tax rates and used to close the budget deficit. The way it stands now, the Trump Administration, with its penchant for conspiracies, proposes its own ‘magic bullet” or “free lunch.” Tax cuts solve all problems, boost growth and don’t cost anything. Really?
Because of the poorly developed ideas, as Mnuchin conceded, the Administration must work closer with Congress. Mnuchin warned that so-called Mnuchin rule, that there will not be net tax cuts for wealthy Americans might be violated in the compromise process. Mulvaney’s comments about how he got to a balanced budget lack seriousness. Often the President’s budget is rejected, but this particular budget sketch is more than dead-on-arrival. It appears to have been thrown together so the box can be checked. Investors are right for not taking it seriously.