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Story highlights

Trump is following in the footsteps of Reagan, the most fiscally irresponsible president in modern US history, Edward Kleinbard writes

Trump is beginning his presidency with the US already in worse financial shape than under Reagan, he says

Editor’s Note: Edward D. Kleinbard is a professor at Gould School of Law at the University of Southern California and fellow at the Century Foundation. He is the former chief of staff of Congress’s Joint Committee on Taxation. The opinions expressed in this commentary are his own.

(CNN) —  

President Trump’s budget outline combines a surge in military spending with massive tax cuts, purportedly in the name of stimulating our stagnant economy. This strategy follows closely the fiscal agenda of Ronald Reagan – modern history’s most fiscally irresponsible President.

Edward D. Kleinbard
Edward D. Kleinbard

Over the past 50 years, the United States has twice endured stretches of four consecutive years where federal government deficits averaged more than 5% of GDP – the total of goods and services produced in the country. One was in 2009-2012, at the beginning of the Obama administration, the result of an economic and financial crisis not seen since the Great Depression. Budget deficits then reflected fiscal policy the government was embracing in the service of the country, mitigating the pain of the Great Recession and putting us onto a faster path to economic health.

The other was in 1983-1986, in the midst of Ronald Reagan’s presidency. Neither foreign wars nor economic crises required these earlier deficits. Instead, they were self-inflicted wounds to the fiscal health of the United States, the results of conscious policy choices to grow the military while slashing taxes.

Pundits still disagree over whether there was an overarching strategy – to deliberately precipitate a fiscal crisis that would lead to smaller government, or a naive belief that tax cuts pay for themselves – but whatever the reasoning, Reagan’s deficits were unprecedented, and set us on our long-term path of refusing to pay for the government we actually want.

Budget policy need not follow biblical precedent to the letter, but the right response to the Great Recession’s fiscal lean years now is to fatten government’s revenues up a bit, to reduce the run-up in federal debt that will become increasingly expensive to pay for over time, and to moderate deficit increases so that government has flexibility in responding to the next crisis.

But Trump’s budget would do the opposite. It calls for the federal government to increase military spending by $54 billion – about 10% more than the baseline projection for such spending. It also proposes cutting non-defense discretionary spending by a similar amount. Finally, it proposes large tax cuts. This is basically the same fiscal prescription that Ronald Reagan adopted, and which led to the extraordinary deficits of the mid-1980s.

According to Defense Department data, defense spending soared almost 50% from 1980 to 1986, in constant dollars. Today’s spending already is comparable in constant dollar terms to the biggest Reagan budgets. And this sum does not include homeland security or veterans’ benefits. Adding $54 billion to the defense budget seems to respond to nothing more substantive than a desire to appear muscular.

From the other direction, slashing non-defense discretionary spending cuts bone, not fat. The CBO estimates that all non-defense discretionary spending already is on track to fall to roughly 2.5% of GDP in 2027 – the lowest figure since record-keeping began in 1962. The claim that domestic US businesses are strangled by regulatory red tape is a convenient story for Mar-a-Lago members to tell themselves, but is belied by analyses like those of the World Economic Forum or the IMD World Competitiveness Center, both of which rank the United States as one of the three most competitive economies in the world.

As Reagan discovered, large spending reductions will not be easy to find. The EPA has an annual budget of just $8 billion, about 0.2% of total government spending of $3.9 trillion. Foreign aid, once stripped of quasi-military components (drug interdiction programs and the like) amounts only to roughly $25 billion, and of course directly serves the strategic interests of the United States.

Meanwhile, there is no basis for massive tax cuts (although we should rewrite the corporate tax code to make it more efficient). The United States already is the second lowest-taxed large economy in the world – and that includes state and local taxes. Our total tax collections are about 26% of GDP. Conservative-led Britain raises 32.5% of its GDP in tax; Germany is a highly successful developed economy that collects 37% of its GDP in tax.

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Nor will massive tax cuts unleash some slumbering economic giant. In the absence of a huge influx of young immigrants, the CBO predicts that the United States will run completely out of slack in the labor supply by 2018. Meanwhile, between now and 2046 the number of Americans over the age of 65 will increase 50% relative to younger adult Americans. For these reasons, among others, the CBO predicts that our sustainable long-term GDP growth rate is about 2%. The US economy cannot grow at record rates simply through the application of magical tax thinking.

It may be hard to accept, but Reagan was the most fiscally feckless President in modern history. Trump is on track to repeat all the same mistakes, but to do so starting from a weaker fiscal balance sheet. His budget ideas are bad for the fiscal health of the country and the welfare of all Americans.