Remember when t-shirts were cool? In the late 1970s and through the 1980s, high school and college kids got a kick out of wearing shirts with pithy sayings.
We’d go to the mall and have them printed with things like “He who dies with most toys wins.”
As with all trends, this one ran its course. You can tell you’ve reached the end when the late adopters jump on board. With t-shirts, it was grandparents, and shirts that said things like “I’m With Stupid.”
Before you knew it, custom shirts were out of favor with Gen X.
But there is one that everybody seemed to like: When grandparents would return from vacation, they’d bring back shirts for their grandkids that read, “My grandparents went to [insert location here] and all I got was this lousy t-shirt.”
There must be 10 billion of these shirts circulating around the planet, with most of them now sent as surplus clothing to Asia. But the sentiment lives on!
That phrase came to mind last week as I looked over some economic data.
My Congress went $1.1 trillion further in debt last week and all I got was lousy 2.1% GDP growth.
OK, it doesn’t quite roll off the tongue, but you get the point…
The Bureau of Economic Analysis reported last week that the U.S. economy expanded at a 2.1% annualized rate in the fourth quarter. I had expected growth just under 2%, but the measure was propped up a bit by weak imports, a positive for GDP. Still, 2.1% isn’t an eye-watering number.
For the year, GDP expanded by 2.3%. Another yawner.
Now compare that with the figures from the non-partisan Congressional Budget Office (CBO). The CBO announced that we ran a deficit of just over $1 trillion in the fiscal year 2019, which ended in September, and through the next decade are expected to run 13-digit deficits!
It wasn’t supposed to be this way.
When the Tax Cuts and Jobs Act (TCJA) passed in 2017, the administration told us that cutting corporate taxes from 35% to 21% would put billions of dollars into corporate coffers (which has held true), which they would then spend to grow their businesses and expand the economy (which, not so much).
Instead of pushing GDP growth to 4% or even 5%, Corporate America pocketed the cash and, in many instances, used it to buy back their outstanding shares. The markets soared, but the economy remained stuck in a low gear. Growth peaked at 3% in 2018, the first full year of the new tax regime, and then fell away.
And it gets worse.
As with most things, the tax reform passed with a simple majority in Congress as part of budget reconciliation. All of that might sound really boring, but it’s important. Anything passed through budget reconciliation must be deficit-neutral over the next decade.
To accomplish this, the administration assumed strong GDP growth that would increase tax revenue, and also higher individual taxes in 2025. Notice that 2025 is just outside the window of a second Trump term if he wins again.
When the measure passed, I didn’t think it would perform as advertised. For businesses to invest, they need to be confident in the demand. Without a significant ramp in consumption, banking on a huge increase in fixed business investment made no sense.
Tax reform supporters claimed the bill to be revenue neutral, or maybe even good for the budget, meaning that we might run lower than previously estimated deficits. Detractors said we could add another $2 trillion to the deficit over the next decade.
They were both wrong.
It looks like the TCJA will add an additional $4 trillion to the deficit over the next decade, in addition to what we would have run without it. And that’s before we deal with the likelihood that Congress won’t allow individual taxes to jump up in 2025.
We’ll reach $30 trillion in national debt before we reach 2030. And all we got was this lousy t-shirt!
There’s no doubt that corporate taxes needed reform. We weren’t competitive across developed nations in attracting international companies. And the TCJA did entice some large companies to repatriate foreign profits that were sitting overseas. But we overreached, and our expanding national debt is the price we are paying.
By digging a deeper hole in our national finances, we put ourselves at risk when interest rates turn higher.
The cost of our national debt will skyrocket, crowding out spending on other priorities. Then we’ll have to make hard decisions about prioritizing how we spend our resources and raising taxes.