On June 21, the House Budget Committee passed a budget resolution that could make substantive, positive changes to entitlement programs such as Medicare — changes essential to reigning in the national debt. Of course, you probably didn’t notice this tidbit of news amid President Trump’s tweet calling Rep. Maxine Waters, D-Calif., an “extraordinarily low IQ person,” the focus on controversial family separations, and talk of first lady Melania Trump’s curious wardrobe choices. But this budget plan deserves more attention, because it is our national debt, not our trade deficit, that poses a significant threat to the economy.
Trump and his allies frequently claim we need tariffs to bring back jobs from overseas. Trump insists that our trade deficit is the source of our economic woes, tweeting that “jobs and wealth are being given to other countries that have taken advantage of us for years.” However, the trade deficit — the number of American products purchased by foreign consumers relative to the number of imported products purchased by U.S. consumers — does not affect true economic indicators like the unemployment rate.
Moreover, the trade deficit does not significantly impact our GDP growth, a measure that truly reflects our economic well-being. Trade deficits affect GDP in the sense that they’re subtracted during its calculation, but real GDP actually increases when the trade deficit increases because reducing trade barriers ignites prosperity.
But Trump’s tariffs may not even successfully reduce the trade deficit. Tariffs make goods and services from abroad more expensive for consumers at home, so folks in the United States will indeed buy fewer foreign-made items. But U.S. tariffs have been met with retaliatory tariffs on every front, meaning other countries will buy fewer U.S. goods and services in response. We might end up with less trade overall, but not a lower trade deficit.
Unlike trade deficits, the growing national debt will significantly harm the economy. Research from the International Monetary Fund in 2010 and a 2012 paper from the National Bureau of Economic Research found that, in countries such as the United States, increases in the debt-to-GDP ratio had a direct and significant negative effect on GDP growth. And a 2011 study from Bank of International Settlements found that government debt becomes a drag on growth when it hits 85 percent of GDP. The United States debt reached this level in late 2009, and federal debt is now 105 percent of GDP, according to FRED data. Government debt matters for GDP growth because it could crowd out private investment by increasing interest rates. An enormous national debt can also hamper GDP growth because it foretells an uncertain future; at some point we will need to raise taxes or devalue the dollar by printing loads of money to pay off our debts.
But it does not matter how much data economists produce because the Republican base still thinks Trump’s tariffs are a good idea. What’s even worse is Republicans in Congress have apparently lost any appetite for cutting government spending — the Senate was not even able to pass a miniscule spending cuts package last week.
The House Budget Committee proposal may never see a vote on the floor because congressional leaders fear giving the Democrats ammunition right before midterm elections. House Speaker Paul Ryan, R-Wis., who has long dreamt of reforming entitlements, governs as a lame duck with little support on this issue from his counterpart, Senate Majority Leader Mitch McConnell, R-Ky. Politically speaking, entitlement reform is not going to happen, even though this could be the Republicans’ last chance to actually do something about the mandatory spending problems that are driving the national debt skyward.
Republicans must stop sacrificing fiscal responsibility on the altar of politics and start taking responsibility for their actions, even in the chaotic era of Trump. If they choose to do nothing now, they risk that Democrats will steer the ship when entitlement programs run out of funding. The time to take action on the national debt is now — even if the rest of the world has their eyes fixed on Trump’s Twitter feed.
Amelia Irvine is a Young Voices Advocate studying government and economics at Georgetown University. You can follow her on Twitter here.
