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Inside the CBO's Crystal Ball

Irwin M. Stelzer

Seers at the Congressional Budget Office are guessing that due largely to the recent tax cuts, the economy will grow at an annual rate of 3.3 percent this year and 2.4 percent in 2019. Federal Reserve Board monetary policy gurus agree, and expect the tax cuts and the recent budget deal to give the economy “a significant boost” in the next few years.” That gives Republicans something they can shout about in this November’s elections, and the feel-good factor should last through Trump’s 2020 re-election campaign. It might not be enough to carry the day, but in his view it’s better if the economy parties now, the bills to pay coming later.

Unlike his heroes, Vladimir Putin and Xi Jinping, Trump is not president-for-life. So the long-run economic effects of the déluge of red ink après the president’s return to Trump Tower is not one of his priority concerns.

But they concern the CBO, which is projecting a run of deficits that will bring the national debt to—note the risible precision of this 10-year forecast—96.2 percent of the value of all the goods and services that we can produce in 2028. The forecasters are careful to point out that, as the law requires, they are assuming that “current laws governing taxes and spending generally remain unchanged” for the next decade. Meaning we have a forecast of the effect of a change in policy based on the assumption that for the next ten years there will be no change in policy.

There is worse. The “economic projections are even more uncertain than usual this year because they incorporate estimates of the economic effects of changes in fiscal policy and those estimates are themselves uncertain.” Translation: We can’t figure out the long-term effects of the tax cuts. To the extent that they try, history suggests they will get it wrong. Larry Lindsey, former Fed governor and now one of the few consultants who marry a technical understanding of monetary and fiscal policy with a keen awareness that our discipline is political economy, rather than merely economics, puts it this way: “CBO’s track record on economic forecasting has been pathetic. Its projections have consistently shown an ideological bias, exaggerating the effects of government spending and monetary ease . . . and underestimating the importance of supply-side issues. . . . They maintain an opaque model that is not subject to public scrutiny . . . [but] continue to be lionized by the media.”

The CBO guesses that the economy will slow to an annual growth rate of 1.9 percent in 2020. Combine that slow growth with the revenue losses from tax cuts and we get a national debt equal to almost 100 percent of GDP.

Here’s what that would mean: By 2023 the interest on the national debt would exceed what the government expects to spend on the military. Interest payments would leave little room to adapt the current social welfare system—entitlements—to the needs of an aging population, especially if the monetary authorities at the Federal Reserve Board continue to raise interest rates and sell off their holdings of bonds and mortgages. That would discourage business investment and consumer borrowing. All in our future, unless of course the CBO’s failure fully to credit the growth effects of the tax cuts makes a nonsense of their math.

Or fiscal policy takes a more prudent turn. Congress might cut social spending. Or raise taxes. And the tooth fairy might leave a large check under the pillow of the secretary of the Treasury. The most recent budget deal for the fiscal year ending on September 30, struck by both parties late last month, blew away restraints on spending, and came in at a hefty $1.3 trillion. The Republicans got $80 billion extra for the military, for which they paid a bribe to Democrats who demanded $63 billion more for social programs in order to provide the votes necessary to shore up the military. The FBI, which is leading what Trump considers a witch-hunt to unseat him, received $307 million more than Trump had requested for it—gift from Democrats. I see little sign that this sort of you-scratch-my-constituents’-backs, and I’ll scratch yours is likely to change in the foreseeable future.

Trump threatened to veto the bill, but relented when Defense Secretary James Mattis pleaded for adequate funding for a military that has been stretched so thin that, according to some experts, accidents have risen and the armed forces are under-trained and not battle-ready.

That reluctant acceptance of a compromise is why Trump is in trouble. His base, including talk radio hosts, is furious, more furious than at any other time since his election. Tax cuts have always appealed to his supporters, who associate reduced spending with a reduction in the size of government—“starving the beast.” But cuts financed by borrowing are another matter: a sign of improvidence, of interest rate and tax increases to come, not to mention inflation as the printing presses turn out the dollars needed to pay interest on the rising debt. The ranks of disgruntled Trump supporters will swell if the trade war turns from cold to hot and farmers bear its brunt (as Xi will see to it they do) and if the president can’t come up with financial offsets to placate the agricultural export industry.

A worried Trump is turning to rescission to placate deficit hawks—proposing specified spending cuts to Congress. These need only a simple majority of members in both Houses to become effective. No Democratic votes needed. Problem: With John McCain ailing and unable to attend, Trump needs the vote of every single Republican senator. But every program is the darling of at least one senator. In addition, some members of both Houses are reluctant to renege on a deal they agreed with Democrats less than a month ago.

The danger is that Trump might try to find a spectacular way to appease his angry base. And gone are many of the “adults” who support his policies but not his antics. They were counted on to prevent Trump from harkening to the bitter angels of his nature. Rex Tillerson is gone from the State Department, to be succeeded by the more bellicose Mike Pompeo. H.R. McMaster has been replaced as national security adviser by John Bolton, with a reputation of preferring war, war to jaw, jaw. Gary Cohn has been replaced as principal adviser on trade by Peter Navarro, who has never met a tariff he doesn’t like, and who is unlikely to cede his hard-won access to the presidential ear to Larry Kudlow, hired more as a television presenter than a trade-policymaker. House speaker Paul Ryan is only the latest of several centrist Republican congressmen who have decided not to resist an anti-Trump wave and retire rather than defend their seats in November.

To an uncertain economic outlook add an even less-certain political outlook. Little wonder the wild swings of mood reflected in share prices.

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