Brocker.Org: Trump’s budget only works ‘if you believe in tooth fairies’

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Mark Wilson

President Donald Trump rolled out his proposed
budget for the 2018 fiscal year on Tuesday
, and the
reviews are already pouring in.

Moving past the headline numbers — $1.7 trillion in spending
cuts, massive reduction in the long-term for social safety net
programs, and increased defense spending — many economists and
political analysts observed that the most striking part of the
Trump budget is just how many assumptions it makes.

A huge, sustained growth in GDP, a double count of benefits from
tax reform, and some rosy line items are just a few of the
problems with the Trump administration’s opening gambit in
the budget debate.

Rosy economic growth

One of the biggest assumptions the Trump budget makes is
that US GDP growth will hit 3% — and stay there.

Mick Mulvaney, the director of the Office of Management and
Budget, told reporters Monday that such an assumption would not
be out of reach, pointing to the long-term growth rate of
the American economy since World War II.

From Mulvaney’s comments (emphasis added):

That’s what you can do with 3% economic growth. That’s a
dynamism that used to be normal in the American economy. And
that’s what we’re trying to get back to, and that’s what this
budget is part and parcel of.  It drives our tax reform
policy, our regulatory policy, trade, energy, welfare,
infrastructure, and our government’s spending priorities.
Everything is keyed to getting us back to
3%.

But such a sustained, 3% projection is much lower than
forecasts from the Congressional Budget Office, the Federal
Reserve, the International Monetary Fund, and
others. Additionally, many economists shrugged off the idea.

Former Treasury Secretary Larry Summers, in
a Washington Post column on Tuesday
, said that the idea
was a “logical error of the kind that would justify failing
a student in an introductory economics course.”

Apparently, the budget forecasts that U.S. economic growth
will rise to 3.0 percent because of the administration’s policies
— largely its tax cuts and perhaps also its regulatory policies,”
Summer wrote. “Fair enough if you believe in tooth fairies and
ludicrous supply-side economics.”

Chris Krueger of the Cowen Washington Research Group
similarly dismissed the assumption.

There is some federal budgeting wizardry and economic
tomfoolery in the projections included in the budget — which
assumes the AHCA is law,” Krueger wrote in a note to clients on
Monday. “It also assumes 3%
GDP growth
and that the budget will ‘balance’ over 10 years.”


Mick Mulvaney
Mick Mulvaney
Chip
Somodevilla/Getty Images


The last time the US economic growth was above 3% in a year
was in 2005. The country has not had two consecutive years of GDP
growth of more than 3% since 1999 and 2000, in the midst of
the tech bubble. Mulvaney said annual GDP growth since 1948
has been 3.2%. But the average is 2.6% since 1980.

Other complications toward the 3% assumption
include the Federal Reserve hiking interest rates, labor
productivity remaining low, and structural factors such
as an aging population, which all amount to headwinds
toward economic growth.

Double counting tax cuts

The Trump administration says the 3% GDP
growth will also help to balance the federal budget
over the next 10 years. 

But that conflicts with
statements the Trump campaign has made about its plan for tax
reform.

The Trump administration has argued that its tax cut
plan would be revenue neutral because of the resulting economic
growth. It has also argued that the economic growth from tax
cuts would help balance the budget.

Put another way, say all current taxes and outlays are
set at a baseline of $0. Trump’s tax cuts, the administration
says, would nominally decrease revenue and bring the deficit from
the baseline to -$100. Based on the White House’s statements
after the tax plan was released, they would
argue the growth from the tax cuts would get the
US back to $0.

The administration is saying the tax
cuts will not only pay for themselves, but also
earn the country enough to make up the deficit.
Essentially, what they billed as a revenue-neutral tax
plan will now evidently be revenue positive.

As Summers put it this math does not work “in a world
of logic.”

“This is a mistake no serious business person would make,”
Summers said. “It appears to be the most egregious accounting
error in a presidential budget in the nearly 40 years I have been
tracking them.”

Maya MacGuineas, president of the Committee for a
Responsible Federal Budget, also took issue with the apparent
double-counting
in a statement Monday.

“The budget also uses the entirety of the dynamic revenue
from growth to pay down the debt – a move that we support but
that is inconsistent with their past statements that economic
growth would help pay for tax reform,” MacGuineas said. “The same
money cannot be used twice.”

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