White House Budget

Donald Trump’s budget relies on wild optimism about economic growth

To offset tax cuts, a massive military buildup, and steady Social Security and Medicare spending, the White House’s plan to balance the federal budget assumes there will be several years of 3 percent growth in the U.S. economy.

Economists — at least, ones who aren’t on the White House payroll — generally find that assumption rather fanciful.

A 10-year budget expected from the White House Tuesday is premised upon a huge acceleration of the U.S. economy’s real GDP annual growth rate from an estimated 1.6 percent in 2016 to 2.3 percent this year and, eventually, a cool 3 percent every year from 2021 to 2027. At that point, according to White House projections, the budget will be balanced.

Current projections by the Congressional Budget Office, however, are more than a full percentage point below the White House’s 3 percent target. Every administration struggles with how aggressively to project growth, but that’s still an unusually large gap; a difference of 1 percent in GDP growth translates in absolute terms to a difference of more than $180 billion a year in economic output for the $18.6 trillion U.S. economy.

Even on Wall Street, where the financial industry is eager for Trump’s proposed tax cuts and looser regulations, most observers’ expectations for GDP are more modest than those of the White House.

“The hype regarding the potential implementation of Trumponomics,” Michael Pento, president of Pento Portfolio Strategies, wrote in a recent research note to clients, “appears to be creating a trenchant gap between today’s economic reality and hope about the future.”

If anything, recent data suggests U.S. growth is slowing down, not speeding up; the Bureau of Economic Analysis, which compiles statistics for the Commerce Department, estimates that the U.S. economy grew at a rate of just 0.7 percent in the first quarter of 2017.

As former Federal Reserve Chairman Ben Bernanke pointed out on a recent CNBC appearance, there are serious structural challenges currently facing the U.S. economy, including an aging population and limited workforce growth. That said, 3 percent real GDP growth is possible, but according to data from the World Bank, such growth has happened recently only when the country was in the midst of historic bubbles — one for housing (2004-2005), and one for tech stocks (1996-2000).

The indicators related to those crises have recently hit new heights; aggregate U.S. household debt is the greatest it’s been since the 2008 meltdown (although mortgages now account for a smaller portion of it), and the Nasdaq Composite Index is back up in record territory. Since they’re seemingly already inflated, there probably isn’t a whole lot of room for those sectors to superheat growth in the broader economy.

So a bubble would likely have to come from somewhere else — not that the U.S. would even necessarily want such a thing, given the fallout following the two former bubbles.

Bernanke acknowledged that a tax cut along the lines Trump is proposing could generate a short-term “bump” in consumer spending that would boost overall growth. But when pressed about whether such a bump could help real GDP hit 3 percent growth, Bernanke lapsed into the phraseology of a Las Vegas bookie:

“I would take the under on that.”

M-F 7:30PM HBO