When Donald Trump becomes president, he will attempt to fulfill many of the commitments he made to voters during the long and contentious election campaign. One of the reasons he was successful in his bid for the Presidency, was that he focused on job expansion and overall economic growth.
The Trump agenda is ambitious. It calls for major changes in federal expenditures and tax collection. The effects will be felt on both the individual and the corporate level. One has to wonder if some aspects of the plan are truly achievable.
The so called Trump rally in the stock market this week, which provided the largest weekly gain in the last five years, is seen as a very positive sign. The main exchange (Dow Jones Industrial) reached a new life time high. This post election euphoria will inevitably be short lived, as financial and economic reality sets in.
Donald Trump, the future 45th President of the United States.
The President-elect will face a number of obstacles and roadblocks, despite the facts that both houses of Congress will be under Republican control. He will also find that the massive government bureaucracy will in itself, become an impediment to the reform effort.
Many government employees, as part of the civil service system have job protection. There will be resistance towards restructuring, regardless of what the electorate voted for. The idea that a President Trump can in his words drain the swamp, will be far more complicated than one might think.
The President will only fill the top 4,000 positions, the rest of the executive branch is filled by individuals, who may have served a number of leaders. Many of them will not be supportive, given the new agenda. In fact, some of them will oppose Trump initiatives, either on political grounds or personal interest.
Barack Obama
the 44th and now outgoing U.S. President
There are a number of financial facts, that a Trump Presidency will run up against almost immediately. The national debt will hit $20 trillion USD (United States Dollar) sometime in February of 2017. His predecessor, practically doubled the amount of debt during his tenure.
In fact, President Obama accumulated more debt during his tenure than all former presidents combined. This somewhat hamstrings future presidents, in what can realistically be borrowed to pay for cherished programs.
Another $10 trillion USD of added debt is already in the pipeline, thanks to the automatic spending in entitlements and other government liabilities.
Total federal government debt in relation to GDP (Gross Domestic Product), already exceeded 100% in 2012 and was listed at 104.17% last year.
Total future federal liabilities as of today, according to various calculations range from $100 to $120 trillion USD.
Interest on this enormous debt, is rapidly becoming a point of contention for many lawmakers. Last year alone, these payments reached $223 billion USD, nearly 6% of the total federal budget outlay. These costs will be rising exponentially, as the total debt continues to climb.
U.S. Deficit and Debt Increases 2001–2016
One of the first legislative battles for Mr. Trump will therefore be, the raising of the national debt level. There are many Congressmen who are loathe to do this.
Although necessary, it is a reminder that the profligacy in government spending, has not abated in recent years.
The unstinting expenditures may have slowed somewhat since the Republican Party took control of the House of Representatives in 2011 and the Senate in 2015, but the annual deficits remain.
The budget deficit for fiscal year 2016, was $587 billion USD. It was an increase over the $438 billion USD from 2015.
The yearly deficits have dropped from well over a trillion dollars from 2009 through 2012. They had been declining again, until just recently.
One can easily forget that the deficit was only $161 billion USD in 2007, which was only 1.1% of the GDP.
With the arrival of the recession in 2008, the shortfall exploded to $458 billion USD.
Risks due to increasing entitlement spending, according to GAO’s projections of future trends
The real trouble arrived in 2009. Even as the recession was ending in June of that year, government expenditures continued to rise. The deficit that year, hit a whopping $1.413 trillion USD. That was nearly 10% of the GDP.
The projected shortfall for fiscal 2017 in contrast is $504 billion USD,which will be 2.6% of the GDP. Of course,it is not factoring in, that a recession is becoming increasingly likely.
Once a recession arrives, tax receipts will drop off and the deficit will rise precipitously.
President-elect Trump is now proposing another massive stimulus, in the form of rebuilding the infrastructure of the United States (U.S.). It is going to provide what the last stimulus failed to deliver.
Passed in early 2009, the American Recovery and Reinvestment Act (ARRA) was allocated a total of $787 billion USD (later revised to $831 billion USD) which was to be spent on education, health, renewable energy and infrastructure.
Official seal of Recovery.gov, the official site of the American Recovery and Reinvestment Act of 2009.
Although still controversial, the ARRA stimulus failed in two major aspects, that was to reduce official unemployment below 9% and not add significantly to the debt.
Another criticism was that it directed a mere $83 billion USD, in actual infrastructure spending. Much of the total allocation was used to fund short term assistance to workers and targeted industries.
There is no doubt that a President Trump given his background, is better suited to direct a rebuilding of American infrastructure, than President Obama was.
It also is clear that there is a definite need for federal funds to help upgrade airports, bridges, power lines, roads, sea ports and the like.
The only question for this type of renewed spending, is where will the money come from? Mr. Trump is proposing a total of $1 trillion USD in the effort. The money will be raised he claims, through the sale of bonds.
However, these will eventually need to be paid off and there is little doubt, that it will sooner or later involve an infusion of public funds.
President Obama signing the Patient Protection and Affordable Care Act on March 23, 2010
Entitlement spending especially for Social Security, Medicare and Medicaid is expanding at a rapid rate. Major reform of these publicly popular programs is critical, yet Mr. Trump says he will not touch them.
Last year alone, Social Security absorbed 24% of the total budget at a total of $888 billion USD.
Federal spending on health programs including Medicare, Medicaid, CHIP (Children Health Insurance Program) and the ACA (Affordable Care Act) known as Obamacare,accounted for another 25% of the federal budget at $938 billion USD.
Except for Obamacare at a cost of $28 billion USD, Mr. Trump has pledged not to cut these programs.
If you add Social Security and health costs you are already at 49% of the total government expenditures, that the President-elect says will be off limits. An additional 6% must be included for interest on the debt, bringing the total to 55%.
Components of interest on the debt
At present, another 16% of the federal budget for a total of $602 billion USD, goes for defense and security related international activities. Overseas Contingency Operations totaling $74 billion USD in 2015, are included.
There will be no overall cuts made in the military under a Trump Administration. Instead, he is proposing a monumental rebuilding, of the defensive capabilities of the United States.
Mr. Trump has extensively criticized President Obama, for neglecting the military readiness of the country which he now wants to reverse.
Candidate Trump, proposed expanding the total size of all of the armed forces. In addition, he is looking to procure the latest technologically advanced weaponry for this new military. These fresh initiatives, are sure to be enormously expensive.
He also has pledged more funding for the Veterans Administration. Taking care of the medical needs of former American soldiers, is to have a high priority with the incoming president. Together with federal retirees, this spending is already consuming 8% of the national budget.
If one does the math, this makes near 80% of the federal budget clear of any real reductions in spending. In fact, costs are scheduled to rise in all of these categorizes. This is due to automatic cost of living increases and the new priorities of a Trump Administration.
Given the aforementioned data, one can safely surmise there will be no real slow down in federal expenditures. To make up for these shortfalls in spending, one necessarily then needs to look at tax collection.
A future President Trump has committed to a massive tax reduction, beginning with individual income tax rates. These new simplified rates will be 33%, 25% and 12%. Many more taxpayers will now find, they no longer owe any federal income taxes.
In comparison with 2016, individual federal tax rates had seven brackets and were listed at 10%,15%, 25%, 28%, 33%, 35%, and 39.6%.
In addition, there has been promised an above the line deduction for childcare costs, including for stay at home parents.
Mr. Trump and his economic advisers have calculated that lower taxes will stimulate new consumer spending and more investment in the overall economy. This in turn, will create more jobs.
Their intention is to double the rate of economic growth, now plodding along around 2%.
The U.S. federal effective corporate tax rate has become much lower than the nominal rate because of tax shelters such as tax havens.
The business tax rate for companies and corporations will be cut to 15% from the present 35%. The current level when combined with the state tax, works out to be 38.90%.
It is the highest in the developed world and the third highest globally. Only Chad and the United Arab Emirates, exceed the rate assessed in the United States.
Although the corporate tax rate does seem excessively high, it is not the effective rate. Generous deductions, write offs and other so called loopholes, allow actual payments to be far smaller on a percentage basis.
Mr. Trump did say he would eliminate job killing regulations as well as promoting a massive tax reform that will streamline and simplify compliance.
At the same time Mr, Trump has said he will close a number of loopholes, that allow many corporations to pay a minimum or no taxes at all.
Deferred U.S. corporate foreign earnings 2001–2010.
Many multinationals escape higher rates by employing a deferral of tax from income earned overseas. It amounts to a indefinite delay, on paying tax on foreign profits. Companies also get a credit against their U.S. taxes, for the costs they are forced to pay in other countries.
If a company does not repatriate their profits, there is no tax owed for that year. This is why it is estimated there are $2.1 trillion USD deposited overseas, that will escape federal taxation for years to come.
This is why Mr, Trump is proposing a tax holiday, which would allow American based companies to bring these profits earned abroad back to the United States. This supposed one time offer, would be for only 10%.
It is important to note however, there is nothing to stop U.S. companies from accumulating money overseas again, waiting for some future tax holiday.
Corporate income tax as a share of GDP, 1946–2009.
If the above plan is enacted, it could be an infrequent gusher for federal tax receipts. These funds will be sorely needed, in an era of rising expenditures and at least temporary declining tax inflows.
Bringing this enormous amount of wealth back to the United States, will also provide a tremendous stimulus to the domestic economy.
There is the danger of course, that in an environment of exceptionally low interest rates, that it could well lead to a rise in the consumer price index.
It is no wonder that the Trump agenda, largely depends on increasing the rate of growth in the American economy. If there is not an acceleration in economic growth, the federal deficits necessarily will grow to previously unseen levels.
Social Security – Ratio of Covered Workers to Retirees
Once the Great Recession ended in 2009, the GDP has expanded at the slowest rate of growth for a economic recovery, since the Great Depression. There has not been a single year during the Obama Presidency, where the economy expanded by at least 3% or more.
If there is not a return to higher growth in the United States, the present federal entitlement structure becomes totally unaffordable.
If one puts aside the meaningless official unemployment level of 4.9%, there are at least 92 million Americans that should be working, if jobs were made available for them. The problem with the level of joblessness as reported by the U.S. Labor Department at 8.3 million, is that the agency only classifies people as unemployed, if they are actively looking for work.
The U6 unemployment rate is a more accurate figure. This is formulated by adding underemployed and discouraged workers, along with the regular unemployed. That rate calculated for those still marginally attached to the actual labor pool is at 9.5%.
The immediate problem for President-elect Trump is the present economic recovery. Growth already slow, is now nearing the end of its run. According to the IRS (Internal Revenue Service) tax receipts have been flat and or declining for the last five months. This could well indicate, a recession is imminent.
Another sign of trouble, is that corporate profits have been declining for five consecutive business quarters.
Worse yet, during the tenure of President Obama, more American businesses were closing than were being created. This has made job creation far more challenging.
The U.S. average median income, has yet to reach the level that existed before the Great Recession.
World map showing real GDP growth rates for 2009 (countries in brown were in recession.)
The present financial and economic plans now being formulated by the incoming Trump Administration, are not accounting for the likelihood of a recession in 2017.
Although an economic contraction is still not certain, historically this is already the third longest economic recovery in history.
There are two ways to stave off a recession. Either fiscal stimulus or an expansive monetary policy.
An increase in government spending, on the level necessary to prevent an economic downturn, is becoming progressively difficult. It is both financially and politically untenable at this point.
Unfortunately for Mr. Trump, monetary policy is also close to being exhausted as well. American interest rates are already at historic lows of 0.50%. The rate had increased from 0.25% to the present level last year. The Federal Reserve Bank (Fed) would like another hike of 0.25%, to take place in December.
It is still possible to move in the opposite direction, but zero and negative rates would then be on the horizon.
Another possibility, would be a return to the policy of quantitative easing. More than $3 trillion USD was used, to buy government bonds and mortgage backed securities, in three successive rounds of the program. It the end, it failed to provide the robust economic growth that had been promised. This largely disappointing Fed strategy, ran from November of 2008 to October of 2014.
A new purchasing of assets at this point would not only be inflationary, but would erode the value of the American dollar even further. This in turn, would lead to even more domestic and world financial instability. It would also bring forward the date, where the United States dollar ceases to be the main global reserve currency.
The difficult position the new president will face beginning in 2017, cannot be underestimated. Although a more amiable relationship with business to facilitate more jobs and long term growth is a positive development, it will not prevent the coming fiscal and economic debacle.