Even as the federal debt heads toward the highest level since World War II, Trump 2016 campaign adviser Arthur Laffer is less worried about the fiscal situation than he was in the Obama years.
Laffer, the economist widely regarded as the father of supply-side economics, said that President Trump is right to have the federal government borrow money now, while interest rates and the cost of the debt service are low, to pay for his policies.
“From my standpoint, the debt and deficits today are less worrisome than they were three or four years ago,” the 79-year-old former adviser to President Ronald Reagan told the Washington Examiner.
Laffer’s view of the federal debt is at odds with that of many mainstream economists, who warn that the government’s fiscal course is unsustainable, with federal debt held by the public at 78% of gross domestic product and annual deficits projected to exceed economic growth indefinitely. Federal Reserve Chairman Jerome Powell, for example, has said that Congress and the president should address the debt now, while unemployment is low and the economy is healthy, rather than during some future crisis.
In fact, deficit reduction was a shared bipartisan goal for most of the 2010s, even when the economy wasn’t strong. President Barack Obama backed a mix of tax hikes and spending cuts to lower deficits while the Tea Party-influenced GOP hammered him as a big spender and called for more aggressive spending cuts.
One particular influence in raising the alarm about the federal debt was a 2010 paper from Harvard economist Kenneth Rogoff and then-University of Maryland economist Carmen Reinhart in which they concluded that economic growth slows when federal debt rises above 90%.
“When you look at Ken Rogoff’s book … ‘waah, waah, waah!’ He was sitting there crying like a baby in a nursery,” said Laffer, referring to the Rogoff-Reinhart book This Time Is Different. “Debt is a tool. It’s neither a good nor a bad.”
The time to borrow, he said, is when the government can get favorable terms. In the past decade, interest rates on government debt have fallen. Consequently, the cost of servicing the debt is low despite the large amount of debt: about 1.5% of GDP, less than it was during the recession and about half what it was in the 1990s.
Laffer, who advised Trump on his 2016 campaign tax reform proposal and is a longtime collaborator with top White House economic adviser Larry Kudlow, said that the administration isn’t wrong to preside over larger deficits, although he does believe that Trump should and will cut spending.
Trump, though, regularly condemned Obama for the rising debt and ran on a platform of shrinking that debt. In fact, in early 2016, he pledged to eliminate the federal debt, then $19 trillion. Instead, the total debt has already passed $23 trillion.
But as Trump has signed more government funding bills that increase spending and deficits have risen accordingly, Kudlow and other administration officials have downplayed the necessity of addressing the debt.
Laffer argued that they are on the right course given low interest costs, just as Bill Clinton was right in the late 1990s to run surpluses when the cost of servicing the debt was high.
Many Democrats, aware that successive Republican administrations have pursued deficit-financed tax cuts, are increasingly in favor of presidents enacting major new programs without offsetting them with spending cuts or tax hikes, but with a Democrat, rather than Trump, in the Oval Office. Freshman Rep. Alexandria Ocasio-Cortez, for instance, has called for implementing a “Green New Deal” without necessarily offsetting its cost, calling it a “mistaken idea” that such a plan would have to be fully paid for in taxes.
Ocasio-Cortez subscribes to a heterodox economic theory known as Modern Monetary Theory, which posits that governments, because they can create their own money, are constrained in spending only by inflation. MMT, as it’s known, has been popularized by former adviser to Sen. Bernie Sanders Stephanie Kelton.
Some Democrats have also argued that they would put themselves at a disadvantage by not matching Republicans in adding to the deficit to pursue their policy goals. Liberals rebelled against House Speaker Nancy Pelosi’s plan to institute a “pay-as-you-go” rule for the 116th Congress that would require offsets for spending bills. Such a rule “would be a terrible policy that unilaterally disarms the incoming Democratic majority’s ability to govern,” liberal Rep. Ro Khanna of California said at the time.
Laffer, though, is happy to see Trump pursue his agenda through higher deficits, just as the Reagan administration, of which he was a part, did.
“What we did is we borrowed shitloads of money — excuse me, pooploads of money — and invested it in lower tax rates to create more incentives to produce, increase output, to sell, to produce; we put it into a strong dollar in the foreign exchanges,” he said. “We did all of that, and we then sat back and prayed that it would work.”
