AP Analysis: Trump's economic policy rooted in debt
Josh Boak, AP Economics Writer | 2/12/2018, 5:52 p.m.
WASHINGTON — One clear principle runs through President Donald Trump's emerging economic policy: Debt is good.
When defending a tax plan or laying out his budget, the man who once called himself "the king of debt" is trying to persuade Americans there's no price to pay for running trillion dollar budget deficits over the next few years. Stronger economic growth will permanently follow the borrowing spree, officials argue, even as many economists and investors already warn about what could happen when the debt becomes due.
The White House budget plan released Monday is the latest example of the Trump principle. The budget proposal not only envisions soaring deficits through 2020, but it also outlines an infrastructure plan that would encourage state and local government to borrow heavily. The result, the plan suggests, would be exceptional growth that would then cause deficits to fall. The proposal assumes economic growth will climb above 3 percent and eventually settle into a solid 2.8 percent groove.
The plan amounts to a gamble that nothing can slow a high-flying U.S. economy and force a reckoning over the debt. Not higher interest rates. Not rising inflation. Not a foreign crisis. Not an aging U.S. population. Not even — based on the budget plan's own estimates — an increase in the unemployment rate. Should the economy stumble, the risk is that the gravitational pull of the debt would worsen as the government would likely borrow more to stop a downturn.
"They're assuming that the expansion lasts forever, basically," said Jim O'Sullivan, chief U.S. economist at High Frequency Economics. "You have to ask what will ultimately happen when we do go into a recession."
O'Sullivan expects that ratings agencies could downgrade the U.S. government's credit rating. He cites the $1.5 trillion higher debt after Trump signed tax cuts into law last year and the bipartisan deal reached last week to fund the government through 2019, which puts the U.S. on track to hit trillion-dollar deficits next year.
Trump's willingness to embrace debt is in direct contradiction to years of Republican rhetoric on the dangers of deficits and breaks his campaign promises. As a candidate, Trump vowed not just to balance the budget but pay down the entire national debt, which is currently $20.5 trillion.
But as a businessman, Trump was anything but debt averse. Several of his companies filed for bankruptcy protection after being unable to service debt, leaving investors and contractors with losses. Trump portrayed this experience during the campaign as proof of his financial shrewdness.
"I'm the king of debt. I'm great with debt. Nobody knows debt better than me," he told CBS News in 2016, adding if he was unable to fully honor any obligations that he would tell investors that "the economy just crashed" and renegotiate the terms. But Trump has cautioned that he likes debt for his companies but not the country, saying that the government was "sitting on a time bomb" with its yearly deficits.
For now, the Trump administration is saying that the U.S. economic landscape has been overhauled over the past year. With the passage of the tax cuts, the economy is now set for a long-term acceleration, rather than a quick gain followed by a slowdown.