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Dean Baker is a senior economist at the Center for Economic and Policy Research. He wrote this for InsideSources.com.
The size of the national debt has become a preoccupation across the political spectrum. Democrats have complained about the $3.4 trillion increase in the debt projected to result from President Donald Trump’s tax cut.
This represents 10 percent of the projected gross domestic product for 2035. Republicans also scream about the debt, even as they pass tax cuts to make it larger at every opportunity.
Let’s be clear: The bulk of the current deficit is the result of reduced tax revenue, not legislated increases in spending. Tax revenue peaked at 20 percent of GDP in 2000. For those who don’t remember, the economy was booming that year, with a 4 percent unemployment rate and 4.1 percent GDP growth.
The latest projections, following the passage of Trump’s tax cuts, show that tax revenue will be just over 16 percent of GDP next year. The loss of tax revenue, compared with the 2000 peak, will add $1.2 trillion to the 2026 deficit.
While spending has increased relative to the economy, most of the increase was not due to profligate government spending but rather the result of higher Social Security and Medicare spending. This rise is because the huge baby boom cohort was in their prime working years in 2000. Now they are in their 60s and 70s and mostly collecting benefits from these programs.
Stepping back from the causes of deficits and debt for a moment, we should ask: Is the debt a big problem? A debt of $35 trillion or $40 trillion can scare people and be good fodder for political rhetoric, but the real question is how it affects people’s lives.
None of us sees the debt, in the sense that it does not directly affect us in our daily lives. We do see the economy. We know whether it is creating jobs and whether wages are outpacing prices. If the economy can generate growth at a respectable pace and it is broadly shared, we can say that we, and our children, will be better off in the future than we are today. If the economy can sustain 2.5 percent growth, we will, on average, be 30 percent richer 10 years from now.
And that will be true even if the debt continues to grow as is now projected. Despite the fearmongering rhetoric, investors will not flee from holding the assets and the currency of a country with a strong, rapidly growing economy.
However, recent policy decisions should make us question whether we will have a strong, rapidly growing economy. The Trump administration has made it a top priority to sever longstanding trade relations, instead imposing tariffs and making deals that have the lifespan of one of his golf games. This will make other countries reluctant to trade with the United States. Canada, the European Union, and much of the rest of the world are rapidly looking to make trade deals that exclude the United States.
Trump is also attempting to chase out a large share of the U.S. workforce. This is most immediately the case with undocumented workers who mostly hold low-paying jobs in construction, restaurants and farming. However, the anti-immigrant policies are also chasing away highly skilled workers who are concerned about being targeted by ICE agents empowered to arrest and detain anyone they decide could be undocumented.
The Trump administration is also gutting funding for the research that has been the basis of U.S. leadership in areas like medical technology and artificial Intelligence. It has declared war on the energy revolution, removing subsidies and imposing taxes on electric vehicles and clean energy.
These policies almost seem designed to be an axe blow to the country’s economy. A year ago, the economy was growing at a healthy pace, unemployment was low and inflation was falling; we were seeing an unprecedented boom in factory construction. The future looked bright regardless of the size of the debt and deficit.
With the Trump administration’s recent policies, there is little basis for confidence that healthy growth will continue. As a result, it is reasonable to be concerned that investors — foreign and domestic — may flee government bonds and the dollar. But the problem is the economy, not the debt.
