Tuesday, May 23, 2017

HOT Larry Summers Blows Up Trump's Budget: Biggest Accounting Error in at Least 40 Years

Once again the Trump administration has made the Keynesian former Treasury Secretary Larry Summers look like an economic genius. This is generally very difficult to do but the Trump administration now does it regularly.

Summers writes in today's Washington Post: 
Details of President Trump’s first budget have now been released. Much can and will be said about the dire social consequences of what is in it and the ludicrously optimistic economic assumptions it embodies.  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.

Apparently, the budget forecasts that U.S. economic growth will rise to 3.0 percent because of the administration’s policies — largely its tax cuts and perhaps also its regulatory policies.  Fair enough if you believe in tooth fairies and ludicrous supply-side economics.

Then the administration asserts that it will propose revenue neutral tax cuts with the revenue neutrality coming in part because the tax cuts stimulate growth! This is an elementary double count.  You can’t use the growth benefits of tax cuts once to justify an optimistic baseline and then again to claim that the tax cuts do not cost revenue. At least you cannot do so in a world of logic.

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.
  RW  note: I believe in the end that the tax cuts themselves will not result in revenue neutrality and that we will see hidden, less obvious tax increases in other areas other than the bracket cuts. Further, Summers is correct in that the Trump administration growth projections are wildly optimistic. That growth is not going to occur and will result in a far greater government deficit than projected, which will result in significant crowding out of private sector borrowing and other funding. (with the possibility of the Fed monetizing some of the deficit which is another hidden tax).

No comments:

Post a Comment