Presidential Politics And The Use Of Debt To Finance Spending

Donald Trump and his Republican colleagues plan to cut taxes and make large investments in infrastructure.  That raises a question of how the government can pay for the tax cuts and infrastructure investment without increasing the federal budget deficit.  The answer is to this question is simple.  They will have to borrow the money to pay for tax cuts and infrastructure investments.  That raises a second question.  Should we believe that Republican's are really fiscal conservatives who care about the size of the federal budget deficit?  This article, by a Republican economist, tells us that Ronald Reagan and George Bush did exactly what Trump and the Republican Congress plan to do.  The result will be be the same.  Federal budget deficits increased dramatically under both Reagan and Bush and they will also rise under Trump's plan.  Democrats become fiscal conservatives when a Republican is in the White House and Republican's assume the role of fiscal conservatives during Democratic administrations.  Neither political party wants the other political party to use fiscal policy to their advantage.  Republicans are generally willing to accept budget deficits to reward their large donors with tax cuts.  Democrats are generally willing to run budget deficits in order to provide public welfare programs to their base.

The bottom line is fiscal conservatism is a function presidential politics.  On the other hand, we should be concerned about the likely consequences of fiscal policy under Donald Trump.  His policies will require the US treasury to increase its borrowing to pay for his tax cuts and infrastructure investment.  At present the government can borrow money short term at very low interest rates.  Therefore,  Trump's policies will be relatively easy to manage by the Treasury.  The real danger in Trump's policies, and the use of short term debt to fund his deficits,  is that interest rates are likely to increase in the near term.  Interest payments as percent of federal spending are likely to increase substantially.  That will make it more difficult to finance federal spending without increasing taxes or cutting back on popular programs.