Washington Update - August 24
In 1993, President Bill Clinton proposed an economic plan that would have increased the deficit to boost economic growth long-term. Treasury bond buyers scaled back their purchases, worried the plan would fail. The market reaction suggested higher interest rates and lower growth, forcing President Clinton to prioritize deficit reduction over new spending initiatives, building the foundation for bipartisan budget surpluses later in the decade.
Since 2001, Congress and the White House have increased the national debt by 600 percent, surpassing $40 trillion last week. President Donald Trump’s economic program is widening the deficit, based on the hope for long-term gain. Bond traders warned the Administration last year the plan would force higher interest rates and that prediction has been fulfilled as bond rates have steadily increased since, accelerating in recent weeks. The Trump Administration answered unseriously, announcing a plan to issue more short-term debt to replace long-term debt.
Left unaddressed, the current fiscal and economic fundamentals could cause a debt spiral, when debt growth outruns economic growth. The only surefire way to avoid a spiral is a combination of faster economic and revenue growth, combined with fiscal restraint.
The Trump Administration says a plan may be forthcoming to rebalance the fiscal equation, but its credibility is strained by exaggerated deficit claims. Congress is hardly keen to cut spending or raise taxes with an election only weeks away.
Congressional budget hawks could hold up action on spending legislation scheduled for September to win promises for future action on deficit reduction. Bond markets would view promises for future legislation skeptically with the potential for congressional majority changes next year.
The key to President Clinton’s success was bipartisan cooperation with his congressional nemesis Newt Gingrich. The key to President Trump’s success in his last two years in office may depend on an unlikely partnership with congressional Democrats he scorns.
