Trump Tax Cuts Won’t Have the Effect Reagan’s Did

David Stockman, former budget director for Ronald Reagan, appeared on Fox Business recently to discuss Donald Trump’s tax cut plans and the coming debt ceiling crisis he’s predicting this summer. Stockman doesn’t see tax cuts as a possibility given the nation’s current debt levels.

Stockman wants to dispel the myth that Donald Trump’s economic plans are analogous to Ronald Reagan’s. The two presidents are in “diametrically different positions,” Stockman believes. The biggest difference is the size of the national debt, which was relatively small at the time, provided economic cushion for exploring tax cuts and defense spending.

“In 1980 the public debt was 930 billion, or 30% of GDP. There was huge running room and an open balance sheet for the accidental Keynesian stimulus that resulted from the tax cuts, the defense increase, and the massive deficit…We don’t have an open runway, a clean balance sheet, to try some huge experiment and an unfunded tax increase that will drive us deeper.”

Peter Schiff makes a similar point when it comes to money printing and interest rates: “If the markets think we can increase the deficits the way we did under Reagan, yet result in rising interest rates that helps the dollar or a tighter monetary policy, they’re crazy.”

The former budget director sees another debt ceiling fight similar to the one Republicans waged in 2011 with Barack Obama likely happening this summer. The debt ceiling is the mechanism that limits the amount of national debt Congress can take on. In the past, raising the debt ceiling has been necessary in order for the government not to default on its loan payments.

“On March 15^th a stink bomb explodes, which is this holiday on the debt ceiling. There has been no debt ceiling since October 2015. It becomes frozen in on that date at whatever level we’re at, probably 20 trillion plus. They’ll have 200 billion of cash. It’ll take them a couple of months to…use it up. They’ll be in a debt ceiling crisis by June and all of this legislation is going to be backed up: the infrastructure, the corporate tax reform.”

Determining how to pay for Trump’s tax cuts will likely be a major political debate that’s likely to derail or postpone some of Trump’s planned stimulus measures.

Highlights from the interview:

“There’s 800 billion in new borrowing this year alone. That’s built in before one dime of Trump reform or infrastructure, all the rest of it. It’s 10 or 12 trillion over the next decade before we do anything with the Trump program.”

“Somehow the idea that Donald Trump is the second coming of Ronald Reagan has gotten in the mix. Wall Street has priced it in. It’s just completely wrong.”

“Ronald Reagan actually increased the public debt by 1.8 trillion, or 2x more than had been generated by the first 39 presidents in the first 190 years of our history. Today, we’ve used all that up. We’re at 20 trillion of debt.”

“The base case forecast is so optimistic, such a rosy scenario that they’re going to need the reflow, the extra economic growth to get back to where they started. In other words, the CBO baseline says there will be no recession through 2026…that’s 206 months. The longest one we’ve ever had is a 100 months or so in the 1990’s under a much better circumstance.”

“If you program in sober economics and then you lay on some tax cuts that are in some way paid for, you will get a better economy over time.”

“ I believe spending cuts are far better, far more important. We ought to do those first, but if we are going to have a large tax reform, it needs to pay for itself with spending cuts, or a broader base, or a tariff on imports and rebate on exports. When you cut the revenue by 100 or 200 billion, maybe you’ll get 30 or 40 billion of flow back, so make it a net 160 billion. But beyond that, that 160 has to be paid for.”

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