Larry Kudlow, the Reagan administration economist who advised the Trump campaign, said the U.S. economy can handle the trillion-dollar deficits that are forecast to result from President Trump’s budget proposal released on Monday.
“The deficit is going to be 5.5 percent of GDP for fiscal 2019. Over 10 years, it’s going to average about 3.5 percent,” Kudlow said on business channel CNBC, which pointed out that the deficit’s portion of economic output will be smaller than it was during the financial crisis and parts of the Reagan era. “In the Reagan years, we ran 6 percent to finance tax cuts and military spending. I wouldn’t panic over that.”
Traditionally, Republicans have claimed to be the party of fiscal discipline that thwarts the big-spending ways of the Democrats. But that budgetary rectitude appears lost in Trump’s $4.4 trillion budget that as much over 10 years as any budget offered by President Barack Obama, The New York Times reported.
Deficits are project to grow $7 trillion over the next decade as the United States keeps borrowing record sums of money. That number could double if the economy is weaker than forecast, which is possible given the above-average length of the current recovery, or if the $3 trillion in spending cuts the White House seeks don’t materialize in Congress.
“There’s a lot of tough stuff in the Trump budget that’s probably not going to pass. They are going after large and small entitlements,” Kudlow said, pointing to food stamps programs that are intended to help poor families. “The worst part of this was the two-year deal. The Trump budget’s not so bad, but has to incorporate the two-year deal which was very bad. That was $300 billion, broke the caps, broke the sequester and all the rest of it.”
One concern about the deficits is the effect on interest rates, especially if bond markets are flooded with a massive supply of new debt that can't find ready buyers. The supply may pressure bond prices, which has the inverse effect of pushing up interest rates.
In addition, the U.S. Treasury won’t be able to depend on the Federal Reserve to buy up that debt on the open market, as it did with its quantitative easing programs after the 2008 financial crisis. The central bank bought trillions of dollars in government and mortgage debt to lower borrowing costs and urge businesses and consumers to spend.
It also remains to be seen whether China and Japan will keep on buying U.S. debt to support the dollar and give American consumers more spending power on exports from their countries. China may seek to use its Treasury holdings as leverage in trade negotiations with the U.S.
“I don’t think deficits have much impact at all on interest rates. I don’t think that’s ever been proven,” Kudlow said. “You’re talking about a global economy with $200 trillion in savings floating around.”
Kudlow forecasts that rates will go up, mostly because the U.S. economy is going to get stronger following Trump’s tax reforms that were intended to promote growth. The yield on the 10-year Treasury note like will rise to 3.5 percent to 4 percent from the current level of 2.83 percent, he said.
“One way of looking at it is this: You’re investing in the economy,” Kudlow said. “The tax cut is an enormous investment in a stronger economy. The military investment is also an investment in our national security, which we need. In that sense, growth is going to rise, and over time, this whole deficit picture is going to look much, much better.”
© 2023 Newsmax Finance. All rights reserved.