Former Treasury Secretary Larry Summers, among many others, says that the Trump administration has made a $2 trillion accounting mistake in its budget and tax plan. That’s an oopsie half the size of the federal budget. Treasury Secretary Steve Mnuchin tried to defend it on CNBC, in an epic tap dance.
To understand the error, you need to ask this question: how can you cut taxes without creating a correspondingly sized shortfall in the federal deficit? The answer, for the Trump administration, is growth. Most economists predict at best a 2% growth rate for the U.S. economy; Trump says his tax cuts will get us to 3%. More growth means more revenue and therefore more taxes, and that solves the deficit problem.
This is already a questionable assumption. Here’s how Howard Gleckman of the nonpartisan Tax Policy Center explains it:
[W]hile tax policy can affect the economy on the margins, the biggest drivers are labor force growth and productivity. Trump can’t do much to boost the number of US workers short of, say, raising the age of Social Security eligibility or opening the borders to immigrants (neither idea is in his budget). And productivity growth is largely a result of new technology and businesses processes, which are notoriously hard to predict and mostly immune from tax policy.
Without an explosion of workers or new tech, it is hard to see how Trump could get the economy growing at a sustainable rate of 3 percent even with the best of policy choices.
But Trump’s people would say, we have our experts, you have yours. So let’s assume that tax cuts can magically increase revenue, just as Trump’s tax plan does. So we have generated about $2 trillion in revenues from a recharged economy over ten years.
Next, let’s turn to Trump’s recent budget, which features increases in military spending and cuts in just about everything else, from Medicaid to Education to the National Endowment for the Arts. But that budget, now in deficit, is going to balance in ten years. And the same growth miracle is going to make that happen. We’re not only counting that $2 trillion in additional revenue, we’re counting it twice. Here’s how Larry Summers, former Treasury Secretary under Bill Clinton, lays it out in the Washington Post:
My observation is that there appears to be a logical error of the kind that would justify failing a student in an introductory economics course. . . .
The Trump team prides itself on its business background. This error is akin to buying a company assuming that you can make investments that will raise profits, but then, in calculating the increased profits, counting the higher revenue while failing to account for the fact that the investments would actually cost some money to make. The revenue generated by the investments might exceed their cost (though the same is almost never true of tax cuts), but that doesn’t change the fact that the investment has a cost that must be included in the accounting.
This is a mistake no serious business person would make. It appears to be the most egregious accounting error in a presidential budget in the nearly 40 years I have been tracking them.
Summers is not the only one pointing out the error (although he is the most colorful). For example, there is a clear tutorial from Keith Hennessey, who worked in the George W. Bush white house. And here it is in Time Magazine.
How Mnuchin, Trump’s Treasury Secretary, explains the magical $2 trillion
No matter who else is doing what in the government, the Treasury Secretary must be straight as a plumb line. Investors’ faith in the security of our bonds and the state of our economy depends on a sober, honest Treasury Secretary. This is why, among all cabinet officers, Treasury appointees tend to be more in control of facts and less subject to politics.
So what Steve Mnuchin said to John Harwood on CNBC about the shortfall matters. Here’s a portion of the transcript:
Harwood: [T]he administration assumes that $2 trillion revenue boost that you talked about, but does not reflect at all the cost of the tax cut itself, which has been estimated by the Committee for Responsible Federal Budget in a median range of about $5.5 trillion. He said that you are double-counting the effects of the tax cuts in ways that he would flunk a freshman economic student for.
Mnuchin: I can assure you that when we come out with the details of the tax plan, we are not going to propose something that costs anything like $4 or $5 trillion. People who have estimated that, in my mind, are just not responsible because they don’t know the details. Now as it relates to the president’s budget, the president proposes a budget. There will be many changes to this budget made by Congress. Congress controls the purse strings. We felt it was premature to put in any changes to the budget as a result of taxes, since we’re not far enough along to estimate what that impact will be.
So the budget was built on, what is the administration’s economic plans, and economic numbers which we’ve talked about, which are getting to 3 percent growth. So I think Larry, I think in all fairness to him, the issue is more of this is a preliminary document that will be refined, as we go through a process with Congress determining how money is spent. And as we go through the process of working with the House and the Senate on taxes, the numbers will be completely transparent. It will be scored by the joint tax group. It will be scored by outside groups. It will be scored by the Treasury department. We have over 100 people working on this, and it will be a completely transparent process.
Here’s a translation:
Our one-page tax “plan” is going to be Cuisinarted by Congress. Our budget is a fantasy that will have nothing to do with what actually passes. So the numbers in them don’t matter. Our internal consistency doesn’t matter. Whatever the Republicans in congress pass, we’ll sign and take credit for. We call this leadership. Get with the program.
This administration already has a tenuous relationship with truth. But the one place in the administration where truth, math, and reality have be rock-solid is the Treasury department.
It isn’t. This is going to cause damage that will take decades to recover from.