Remember all those times the Republicans in Congress shut down the government and threatened to default on the debt? The ostensible cause was the out of control deficit. Back in the day when President Obama was drafting the budget, these Republicans were arguing that the national debt threatened the well-being of our children and grandchildren. They claimed to view deficit reduction as a sacred cause.
Well, we're about to see a religious conversion of world historic size as the Republican Party, and its congressional leader Paul Ryan, convert from deficit hawks to big spenders. With Donald Trump in the White House, we're going to discover that they think large deficits are just fine.
The basic story is straightforward. Trump has promised both an infrastructure program and large tax cuts which will primarily benefit the rich. On some days he has also promised big increases in military spending, but it's not clear where this commitment stands.
In any case, he is talking about substantial increases in spending and a large cut in revenue. According to the analysis of the Tax Policy Center at the Brookings Institution and the Urban Institute, his tax plan will reduce revenue by more than $9 trillion (close to 4 percent of GDP) over the course of the next decade. This tax cut plan would effectively add close to $800 billion to the annual deficit when it first takes effect, with the amount increasing over time.
While the plan that gets submitted to Congress may look somewhat different than what Trump proposed in his campaign, there is no doubt that it will lead to a large increase in the size of the budget deficit. Under their former faith in balanced budgets, Speaker Ryan and his Republican caucus would be expected to strongly oppose this massive increase in budget deficits.
But there is an important difference between the origins of the Trump deficit and the deficits the Republicans fought under President Obama. While the cuts sought by the Republicans targeted programs that benefited large segments of the U.S. population, according to the Tax Policy Center, more than half of Trump's tax cuts will go to the richest one percent of the population. The richest 0.1 percent will get tax cuts that average almost $1.5 million annually.
The Trump tax cut is consistent with the fundamental principle of the Republican Party, and unfortunately many Democrats, of putting as much money as possible in the pockets of the rich. In this context, a budget deficit of any size is no big deal. We saw that under President Reagan, the second President Bush, and now under Donald Trump.
We can be sure that the Republicans will deny that their tax cuts will lead to large deficits, claiming that they will be offset by faster growth. In economics, this is called "lying". There is a massive amount of research on this point. There is no reason to believe that the incentives created by lower tax rates will have a substantial impact on savings, investment, or work.
When he was head of the Congressional Budget Office, Douglas Holtz-Eakin, a conservative economist who has advised many Republican candidates, did a study of the possible effects of tax cuts on growth. Analyzing a wide range of models he found that additional growth could at best reclaim a small fraction of the revenue lost to the tax cuts. In many of the models the tax cuts actually reduced growth, adding further to the deficit.
In addition to this sort of modeling exercise, we actually did this experiment, twice. In 1981, President Reagan cut income taxes sharply and the deficit soared. In 2001 the second President Bush sharply reduced taxes and the deficit soared.
In short, there is zero reason to think that additional growth from tax cuts will offset the lost revenue to any noticeably effect. We know this based on both careful economic research and two real world experiments. This means when our Republican deficit hawks claim that their tax cuts for the rich won't add to the deficit because of the additional growth they will produce, they know they are not telling the truth.
As I've written many times, the additional stimulus to the economy provided by Trump's tax and spending plans may actually be a good thing, even if the composition of the spending and the targeting of the tax cuts is really bad. We need larger deficits to allow the economy to reach its potential and to get closer to full employment. This is what I've argued for years.
But the Republican deficit hawks have been saying the exact opposite. When it comes to giving tax dollars to the rich, they no longer care about deficits. It would be nice if the media called attention to the incredible hypocrisy of Speaker Ryan and the Republican caucus. Maybe they could take away a little time from covering Hillary Clinton's e-mails.