Who’s Watching the Piggy Bank?

Each month we receive a budget statement from the US Treasury Department. These reports let us know how much our government is spending relative to the money it takes in. While the figures can vary widely from month to month, the trend is clear: the government is spending well beyond its means, and this has pretty much been the case since the turn of the millennium.   This trend has also spanned the past three presidential administrations, both Democrat and Republican.
In President Bush’s first year in office, the government actually reported its fourth straight annual budget surplus (the first three under President Clinton). However, the fiscal situation deteriorated thereafter as the government had to contend with three big challenges: the bursting of the dot.com bubble, a recession in 2001, and the attacks of September 11, 2001. Two rounds of tax cuts in 2001 and 2003 were effective in boosting the economy, but these actions also contributed to a sharp rise in federal budget deficits. Upon leaving office, the Bush administration had presided over a total of $2.5 trillion in cumulative budget deficits over eight years.
President Obama, faced with the worst economic downturn since the Great Depression, turned on the spigot in earnest. A combination of lower tax revenue, surging transfer payments, stimulus spending, and tax cuts caused federal budget deficits to balloon beyond any in history. And the deficits continued throughout his presidency as the economy could never really achieve escape velocity without heavy fiscal and monetary support. By the end of his eight years in office, President Obama had racked up $7.0 trillion in cumulative deficits – a massive sum.
Budget deficits over President Trump’s first two years in office are on a trajectory more similar to that under President Obama than President Bush. Since his inauguration in January, 2017, the Trump administration has already presided over a cumulative $2.0 trillion in budget deficits. These deficits are mostly attributable to the passage of the Tax Cuts & Jobs Act in December, 2017, as well as a large surge in government spending, particularly on defense. Unlike the Bush and Obama presidencies, however, the deficits incurred during the Trump years have not resulted from a response to any crisis. In fact, the economy had been growing at a steady pace of about 2% and the employment rate was 4.1% when the TCJA was passed in December, 2017.
Renowned economist John Maynard Keynes postulated that the federal government should boost spending during periods of economic weakness in order to support economic recovery. However, he also said that government largesse should be avoided during times of prosperity so that there will be resources available when the economy inevitably deteriorates. If Keynes’ widely accepted theories are correct, we have veered fairly significantly off course. The capacity to respond to the next crisis or economic downturn may be significantly impaired by the large deficits we are currently running.
The cumulative deficit over the past three presidencies is $11.5 trillion. You will see in the chart below that the Trump presidency is off to an ominous start from a budget perspective. Is it possible that the tax cuts will ignite the animal spirits and faster growth will more than make up for the lost tax revenue? Sure, I guess. But it’s not happening so far.

 Source: US Department of Treasury
 
We are left with a domestic economy that is growing slowly in a world of slow-growing economies, debt that is increasing significantly faster than the rate of GDP growth, low interest rates, low inflation, and low unemployment. And so it goes, “Tomorrow, and tomorrow, and tomorrow, Creeps in this petty pace from day to day, To the last syllable of recorded time.” Well, probably not to the last syllable, but it kind of feels that way. In fact, we have hope in the recent increases in wages. This growth promises to put more money in the hands of a larger swath of Americans and thereby might empower a demand-driven expansion. It is a green shoot in an early economic spring that hopes to avoid a late frost and the lopping shears of a too enthusiastic Federal Reserve. We fervently hope that the cooler, data-dependent heads at the Fed will be patient with our fledgling growth. They know how to tame inflation but have heretofore been impotent at its generation. This is not a time for venturing into the thin branches of risk. Good earnings, reasonable debt levels, strong cash flows, and experienced management teams are most attractive.