Daniel Lacalle

Trump’s Budget Blueprint Is A Real Game Changer

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IN FAVOUR:

The United States is once again approaching a debt ceiling that, as before, will likely be raised again. However, when Trump’s budget director, Mick Mulvaney, says the country’s $20 trillion debt is a “national crisis,” he is right. At a rate of more than $500 billion a year in deficits, the risk to the economy increases and the likelihood of increased taxes soars. Meanwhile, the failed policies of the past have cut potential growth, jobs and middle class wealth (read here).

The Obama administration doubled the country’s debt despite the largest monetary stimulus in history. Interestingly, in 2008, Obama himself said that having increased debt by four trillion in eight years was “irresponsible” and “unpatriotic” (see video here ). Now, the administration needs to make tough decisions. As we have already explained, Rex Tillerson is already taking measures to slash the “Deep State” (a parallel administration, almost a shadow government, created in recent years). Mulvaney’s budget plan follows the same principle, and is especially focused on cutting political spending.

What is political spending? All those programs that follow an ideological or political agenda, as well as programs that could be financed entirely by the private sector but politicians prefer to manage themselves, to accumulate power. Many of these items are hidden under “unquestionable” areas like education or healthcare. Mulvaney’s budget leaves no stone unturned and aims to cut everywhere.

If you read Mulvaney’s budget  without paying attention to the details, it would be easy -and wrong- to attack it. “It raises military spending, cuts education and environmental programs”, would be the simplistic analysis. The reality is very different.

The principles that inform this budget plan are “sound money” and “the State should take care of security, and little more”, things that the members of the current administration have always defended, even before they were appointed.

As such, in the face of another debt crisis, the Trump administration aims to carry out the largest budget cuts in US history while keeping essential services.

The 10% increase in defense is unquestionable, and some have criticized it. Nobody that understands the complex security risks faced by the US has questioned it, though. Yes, the US has an enormous defense budget. And keeping the country safe demands it. By the way, it would be smaller if the rest of the Western countries contributed their fair share, but that is a different matter. Moreover, the increase in Defense is exactly what Trump promised during his campaign. $54 billion, or a 10% increase, to combat ISIS and regain the US military position in the world. It may be debatable, but it is exactly what the electorate, military experts, the GOP and Trump supporters demand. In fact, even some Republican critics consider the increase as too small. Increasing aid to veterans by 10% ($ 5.3 billion) and national security by 6.8% is simply a matter of justice to the ones who have served, and logic, considering the threat of terrorism.

But there is something more important. Mulvaney’s budget plan seeks to meet those goals without increasing the deficit. This is a critical difference to all previous budget plans of the past thirty years.

Let us take a look at the largest cuts in US history since Ronald Reagan:

Health. The biggest cuts, $ 15.1 billion, focus on two items, the National Institute of Health and the Office of Community Services, which are not finalist expenses, and have been often criticized – even by some Democrats -. It only eliminates discretionary spending, not the mandatory items. as such, the provision of services is guaranteed.

Department of State. $10.9 billion less to finance conferences and discretionary spending on “Climate Change” which had rocketed in the last eight years, and have no real impact on clean energy or the environment. An item most would agree with is an aggressive cut of funding to the World Bank, which is often regarded as a dinosaur political entity. No one can deny that diverting taxpayer’s funds from parallel administration, doubtful initiatives on climate change and the World Bank to defense is a logical decision, considering the urgent needs of the country and the economy.

Education. Reducing 13.5% without affecting the Pell Grant program that gives scholarships to people with financial difficulties. This eliminates 20 programs and grants that can and should be funded by the private sector.

Housing and Urban Development. A 13% cut in low priority grants, which even Democrats have criticized, such as the Home Investment Partnerships Program. Again, the idea is that these programs can be financed from public-private collaboration, without resorting to taxpayer money, thanks to the forthcoming tax deductions.

Agriculture, Labor, Transportation and Energy have a cut of subsidies of 20.7%, 21%, 12.7% and 5.7% respectively. All subsidies that interfere with each State’s affairs are eliminated and those that generate excessive bureaucracy, inefficiency, or duplicity are cut off. It includes eliminating investment in transportation or energy that should be financed by the private sector via tax cuts, not with more public spending.

Commerce is reduced by 15.7% consolidating statistical agencies into other federal ones, and eliminating subsidies. Interior gets 11.7% less, including subsidies to abandoned mines, or purchase of land for public purposes. Justice gets 3.8% less in subsidies, but an increase in personnel and resources. Treasury sees a cut of 4.1% in staff, but sees an increase in resources for the Treasury secretary to eliminate public bailouts. Finally, reducing the EPA budget by 20% is essential to achieve energy independence, cut red tape and eliminate politically motivated programs.

​​Mulvaney’s budget plan is that the programs that can be financed by private initiative, do so without resorting to tax increases.

It is clear that this budget’s goal is to eliminate subsidies and discretionary spending. Eliminating subsidies limits the power of politicians, who must seek other alternatives to finance such programs without assaulting the pockets of taxpayers.

This plan seeks to maintain quality and service maintaing mandatory spendings. Let us face it, after constant budget increases in the past years, a 10% cut is not massive.

During Obama’s mandate, Federal outlays increased more than $1 trillion while there were more than $1.5 trillion in new taxes. This budget plan seeks to eliminate the “parallel administration” that generates billions of dollars of spending simply from existing and perpetuating itself.

You can say that savings could also be achieved in defense, and the idea is precisely to enter into a process of savings – among others in hiring and greater competition between suppliers -, while recovering the lost ground.

Reducing bureaucracy and unnecessary regulation, limiting political power and eliminating duplicate or political expenses, to put more money into the citizen’s pocket should never be bad news.

There are many positive things in this budget plan, and the purpose of this article is to focus on them. It does not increase the deficit, seeks savings in duplicities and useless subsidies, eliminates programs with noeffective content and ends clientelistic networks of some international agencies. All this is done without reducing essential expenditure, maintaining public service.

In today’s world, there are two ways of looking at a government budget. As an ever expanding thing that constantly requires a higher tax burden, or a prioritized plan to use less tax funds. Taking money out of citizen’s pockets or allowing people to keep more of their own money.

I, personally, applaud the titanic effort made by Mick Mulvaney and his team trying to achieve a balanced budget and focus on the efficient use of taxpayer’s hard-earned money. We’ll see if they let him carry it out. Returning to money printing and massive deficit spending would only hurt the US more than it has already done.

 

Daniel Lacalle is a PhD in Economics and author of Life In The Financial Markets, The Energy World Is Flat (Wiley) and Escape from the Central Bank Trap (BEP).

THE OPPOSING VIEW:

“On Thursday morning, President Donald Trump unveiled his preliminary discretionary budget for the fiscal year of 2018. His budget director Mick Mulvaney made clear that the proposed budget does not balance the budget but merely reallocates resources in accordance to the administrations priorities.

Most striking is the $54 billion surge in defense spending already announced earlier. While it is not yet clear how these funds will be allocated, Republican lawmakers, most notable Senator John  McCain, have vented their anger with the  insufficiency of the increase. For most outside observers US defense spending has reached a simply irrational level.

Not only does the US lack immediate military threats that could not be countered with current capabilities, but it also already possesses a defense budget larger than that of the following seven countries combined (of which five are allies). Interestingly, America’s long-term adversary Russia has just announced a massive military budget cut of 25%. If the US military truly is in a bad state, it would be a matter of inefficiency and mismanagement, not of underfunding.

Throughout his campaign, President Trump has slammed past foreign interventions and prompted most of America´s allies to take on more responsibility for their own security. So what is the real purpose of this drastic increase in military expenditure?

In fact, it marks a new dimension of US military keynesianism, which has been practiced by administrations of both parties. Trump has constantly badmouthed the state of the US armed forces to suggest the necessity of a massive increase in military investments.

With this economic policy, Trump can stimulate economic demand and create jobs throughout the military complex. While the majority of Republican lawmakers oppose non-military keynesianism, military deficit spending is always approved due to the close entanglement of the GOP and the defense industry.

To finance this policy, Trump has proposed to cut positions in the budget which are both more relevant to American security and also promise higher returns in the long-run.

The World Economic Forum’s Global Risk Report 2017 for instance sees extreme weather conditions as the number one global risk in terms of likelihood and number two risk in terms of impact. Moreover, it estimates the potential costs of climate change for investors upwards of $2.5 trillion. Nevertheless, the administration has drastically eliminated funding for both national and international programs on climate research.

Global epidemics such as the Zika virus are equally considered as amongst the biggest threats to international security today. However, Trump’s proposed 19% budget cut to the National Institute of Health (NIH) as well as cuts to international health cooperation programs and health institutions could undermine the US’ capability to adequately react to an outbreak.

The NIH is also key to developing treatments for cancer, Alzheimer, obesity and other common diseases. Investing into health research rather than slashing it would be a promising policy to counter the exploding costs in the US health care system.

Notable is also the drastic cut in the state department budget, which besides foreign aid mainly affects funding for international organizations. The administration has a point when arguing that the US has disproportionately contributed to programs and the budget of the UN and related organizations. To demand a fairer burden sharing is therefore absolutely legitimate. However, simply abandoning current obligations instead of renegotiating budget contributions puts many international programs of peace-keeping and poverty reduction at risk”.

Daniel Reinhardt is a Communication and Project Manager at The Club of Rome

Image courtesy of FRED

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