Trump can’t be both the president of growth and the president of debt, by Daniel Horowitz

The US economy is well beyond the point where debt and debt service are impeding growth, which means the more we go into debt, the less the economy will grow. From Daniel Horowitz at

With the unemployment rate below 4 percent for 16 consecutive months, one would expect economic growth to be soaring. Yet even as we experience the best job market since the late 1960s, this is the first time in modern history that we have not experienced a year of 3 percent GDP growth. What gives?

Earlier today, the Bureau of Economic Analysis announced that the economy had grown just 2.1 percent during the second quarter of this year (ending June 30). It also revised Q4 of 2018 down to just 1.1 percent, which now means that growth during the 12 months ending Q4 of 2018 was only 2.5 percent, not 3 percent as previously thought. This means that the U.S. economy has now gone 14 years without a year-over-year growth of 3 percent.  It’s been 19 years since we’ve hit 4 percent, which was during 1997-2000.

While the numbers don’t portend a coming recession, it is highly unusual for us to go for 16 consecutive months with unemployment below 4 percent and 43 months below 5 percent, yet never attain 3 or 4 percent annual GDP growth. In fact, that has never happened before. During the late 1990s, the unemployment rate ranged from 5.3 percent to 3.9 percent – not even as good as today’s 3.7 percent – yet GDP growth was over 4 percent. Ditto for the late 1960s, when we saw years of 6 percent growth. During the mid 1980s, we saw this growth even with higher unemployment rates.

The debt is not just a problem for future generations in terms of a fiscal cost that will be borne by taxpayers. The exclusive focus on the future is what has fostered the Louis XV mentality of “after me, the deluge.” Let’s face it, we are a nation that doesn’t care about the future of our children. What is missing from the discussion is that the debt is permanently weighing down economic growth now.

Let’s peek into the numbers behind today’s topline GDP report. GDP comprises personal consumption expenditures, gross private domestic investment, government spending, and net exports. Seventy percent of the equation is consumption, and the robust 4.3 percent growth in consumption this quarter is a big part of what is keeping us even at 2.1 percent growth. This is not artificial and is good news. Consumption is a sign of a healthy job market, with more people earning money, as well as the tax cuts putting more cash in people’s pockets to spend. No matter whether our economy is fully free market or quasi-socialist, whenever there is more money in people’s pockets, these numbers will go up. We are now in a boom period, and the numbers are good.

But what else is propping up the number? Government spending! Gross government spending, which accounts for about 17.5 percent of the GDP pie, spiked 5 percent. Non-defense spending rose by 15.9 percent!

Thus, without the spending binge, which will be accelerated by the budget betrayal promoted by the president and backed by more Democrats than Republicans in the House, the topline number would have been lower.

But here’s the problem. While government spending juices up the economy in the short run, the debt that we must incur to continue that spending is permanently weighing down the economy in the long run.

Which leads us to the third component – gross private domestic investment. That is the engine of a supply side economy. Those numbers contracted by 5.5 percent this past quarter, the worst showing since 2015. Investment in non-residential structures plummeted by 10.8 percent, highly unusual with such a good job market.

Then, of course, there is the final component: exports. Net exports were down 5.2 percent because of the tariffs.

Here’s the reality: Our economy is nothing like it was in the 1980s or 1990s. We have a huge misallocation of resources, with all sorts of capital going into government-mandated schemes that increase dependency programs or debt, rather than the most efficient investments.

Then the debt itself is hurting us. So much money is now spent on paying off interest. As interest rates are pushed higher, more private money is used to purchase higher-interest Treasury securities rather than invest in capital goods, such as factories and plants. The more government is desperate to service this debt, the more it will drive up interest rates, which in turn will divert and misallocate more investors into Treasury bonds. This further makes interest on the debt even more expensive, constantly reinforcing itself in a vicious cycle of debt and higher rates.

At some point over the past decade, we crossed the Rubicon of irrevocable lethargic growth because of debt. Interest on the debt is the fastest-growing expenditure of government. That is a problem now. So, we can create jobs and wages even in a centrally planned economy, but the debt and market distortions are creating so much inefficiency and waste that they are permanently capping our growth. I don’t believe we will ever achieve protracted 3 percent growth until the debt crisis is solved.

The president has been convinced that we can grow our way out of the debt. The problem is the debt itself is weighing us down from growing!

With two months left until the budget deadline, the president could have spent the entire summer recess building the case for a better debt deal. Instead, he chose to support a bill nearly unanimously supported by House Democrats that will add almost $2 trillion more in debt over the next 10 years.

If Trump wants to be the president of growth, he can’t have it both ways and be the president of debt.


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