They're back! And yes, they are just as scary as the ghosts in the movie Poltergeist, where the phrase was made famous. What am I talking about? Trillion-dollar deficits that could spook markets and devour the economy.
The Trump administration released its fiscal year budget for 2019, which goes into effect October 1st. The budget sets out spending priorities and describes how they will be funded.
What is eye-opening are the size of the projected budget deficits since, over the past fifty years, the United States ran surpluses between 1998 and 2002. Granted, many more years of deficits were expected, but not at the level forecasted.
Until recently, fiscal restraint dominated Washington. Since the peak of the Great Recession, when the deficit reached $1.4 trillion, the gap has narrowed sharply. By fiscal year 2015, it had shrunk to "only" $438 billion. But it has resumed its rise and is projected to hit $873 billion this fiscal year.
Clearly, the days of fiscal responsibility are over. Indeed, the president's own budget has the deficit approaching $1 trillion in next two fiscal years.
The reality is that the deficit will likely crack the trillion-dollar barrier, possibly next year, and stay there.
As is typically the case with presidential budgets, the assumptions underpinning the Trump estimates are as optimistic as possible.
Consider the key projection that growth will average 3% over the next decade. Sounds great, but is it realistic? Hardly.
There are three nonpartisan or nonpolitical groups whose forecasts are typically compared to the president's: The Congressional Budget Office (CBO), which is the official referee of legislative numbers, the Federal Reserve, and the Blue Chip Forecasting panel, which is made up of about fifty of the top private-sector economists in the country. (Full disclosure: I am a member of the Blue Chip panel.)
So, how do the "outsiders" view growth over the next decade? The CBO thinks the economy will expand at an annual average of 2 percent. The Fed's number is roughly 2 percent as well. Meanwhile, the Blue Chip economists put the rate at 2.1 percent. In other words, the president's 3 percent assumption looks to be extremely optimistic, to say the least.
Unfortunately, if you don't get anything near the administration's assumed growth pace, there will be a large shortfall in tax revenues. That would drive up the deficits significantly.
The nonpartisan Committee for a Responsible Federal Budget, a group that would like to see balanced budgets, not totally out-of-whack budgets, estimates that by using the "outsider" growth estimates, the budget deficits would be higher by over $800 billion over the ten-year period. And the recent spending bills, which are not part of the analysis, would raise the deficit further.
But the problem gets even worse. The president's budget projects that, despite robust growth, the unemployment rate will rise nearly one full percentage point over the 10-year horizon. In comparison, just about every economist who has a forecasting model thinks 3 percent growth would drive down the unemployment rate.
Why does that matter? The administration needs an unemployment rate increase to defend its assumptions of low inflation and low interest rates.
However, the strong growth postulated in the budget is more likely to cause even greater labor shortages than currently exist. That would trigger higher wage, price, and interest rate increases than were previously projected.
A sharper-than-forecasted rise in interest rates would greatly increase the costs of funding a national debt that could be pushing $30 trillion by the end of the 10-year period. And those interest payment are made first, which could crowd out other spending.
Last, but hardly least, the budget proposes a variety of spending cuts. Obamacare is to be repealed and replaced, saving $675 billion. Cuts in Medicare, Medicaid, and other health care-related programs would reduce spending by over $1 trillion. Reducing the food stamp program is expected to save $215 billion, while reforming the student loan program, including raising interest rates, would cut expenditures by over $200 billion.
Will all these cuts actually occur? The battle lines have already been drawn as the bulk of the cutbacks, which are needed to fund increased defense and infrastructure spending, come from health care and programs for the poor.
When Obama was president, Republicans demanded fiscal responsibility. They required new spending to be paid for. They refused to pass budgets that caused the deficit to rise. The Democrats accepted bigger deficits.
Republicans now control Congress and the presidency. They are spending like crazy and the deficit is swelling. Meanwhile, Democrats support fiscal responsibility.