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Thursday, February 27, 2020

ANALYSIS/OPINION:

The White House Council of Economic Advisers recently released the Economic Report of the President, an annual review of the administration’s view of its successes and outline of its policy agenda for the future. The Trump administration points to economic indicators — from historically-low unemployment to GDP and some wage growth — as signs of its progress in boosting the economy through tax cuts and deregulation. 

However, none of this will work out as planned if the administration fails to address the federal budget deficit.


It would be a shame if they didn’t, because the administration predicts that in five to 10 years the economic impact of 20 of its deregulatory actions will save $220 billion and increase real income per household by more than $3,000. Already, the administration has made great strides in getting rid of burdensome regulations. It seems the White House, in some part, recognizes that regulations are often detrimental to economic growth — they limit choice, increase prices and stifle competition. Removing regulatory barriers stimulates the private sector, promotes healthy competition and increases productivity. 

In health care, the Food and Drug Administration (FDA) has set records in each of the past three years for the highest number of generic drug approval. This is excellent news, because generic drugs are less expensive alternatives to brand names and make health care more affordable for families.

The report estimates, too, that planned deregulation in housing would reduce homelessness by 31 percent on average in metropolitan areas. This would be a historic achievement, considering that housing costs America’s economy about $2 trillion in lower wages and productivity. That’s largely due to burdensome delays to development that state and local governments impose, making the process of building new homes riskier, longer and more expensive. “Removing government-imposed barriers to more affordable housing is a priority,” the administration’s report says. 

When it comes to the energy sector, the administration wants to remove further constraints on private innovation and investment — with a specific focus on reinvigorating the fossil fuel industry, particularly coal. Such deregulation can create more blue-collar jobs and encourage modernization of the industry.

Even so, an outrageous deficit stands between the president and his goals for bettering our economy.

For one thing, Mr. Trump’s 2021 budget assumes the economy will grow at a rate of 3 percent, which hasn’t happened since 2005. And even if the economy achieves this optimistic scenario, the federal government is still expecting annual budget deficits every year until 2035. Furthermore, Mr. Trump’s plans suggest annual federal spending will reach $7.5 trillion by 2030 — a whopping 63 percent increase over 2020 spending. 

These large and growing deficits would be incredibly harmful to economic growth. Most of the federal debt is public, meaning that the government owes this debt to the holders of Treasury securities (bonds, bills, notes, etc.). As the debt-to-GDP ratio increases, creditors could demand larger interest payments because of the increased risk of default. As a result, diminished demand for U.S. government obligations would increase interest rates and slow down the economy. Moreover, because the dollar’s value is tied to Treasury securities, its value to foreign holders would decline, decreasing demand for American currency and pushing investment outside of the U.S.

The Congressional Budget Office (CBO) projects an annual income reduction of anywhere between $2,000 and $6,000 per person by 2040 if the current national debt trajectory continues unabated. In addition, according to CBO, the GDP will shrink by 2 percent over the next two decades if the debt keeps growing.

The Trump administration’s planned deficit spending would increase the debt and undercut many of the goals outlined in its economic report. And any household gains projected by the administration are likely to be wiped out by the long-term consequences of its growing deficits.

Yes, the White House should be praised for its deregulation efforts spurring growth, increasing competition and fostering entrepreneurship. However, the high levels of growth expected by the administration will be hard to achieve if the U.S. deficit keeps growing. President Trump should pair up future deregulatory efforts with much-needed spending cuts. After all, nothing less than the long-term economic health of our country is at risk. 

• Jen Sidorova is a contributor to Young Voices and a policy analyst at Reason Foundation. You can find her on Twitter @Jen_Sidorova.


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