The Journal. - Why Trump and Harris Aren’t Talking About the $1.8 Trillion Deficit

Episode Date: October 10, 2024

The U.S. budget deficit topped $1.8 trillion in the last fiscal year. Meanwhile, both candidates for president are proposing plans that would increase the deficit for years to come. WSJ’s Richard Rubin explains how the deficit got so large and why the candidates don’t talk about it.  Further Listening: -The Economy: Trump vs. Harris  -The Clock Is Ticking on the Debt Ceiling  Further Reading: -Federal Deficit Hit $1.8 Trillion for 2024, CBO Says  -Federal Debt Is Soaring. Here’s Why Trump and Harris Aren’t Talking About It.  Learn more about your ad choices. Visit megaphone.fm/adchoices

On the campaign trail, presidential candidates Kamala Harris and Donald Trump have been making some big promises. My administration will provide first-time home buyers with $25,000. And getting gasoline below $2 a gallon. We will be able to build our military again. The United States will provide more than $1.5 billion to address Ukraine's humanitarian and energy needs. My plan will leave the typical family

with many thousands of dollars, more than they have right now. Affordable child care, affordable elder care, and paid family leave. We will end all taxes on overtime. No tax on tips. A $50,000 tax deduction for startup businesses. All these promises cost money. More money than the U.S. brings in. So the starting place that we're at is in the red, a place where we're spending more money than we're taking in.

And both candidates are pushing in the direction of widening that gap even further. That's our colleague Richard Rubin. He's talking about the budget deficit, which currently stands at $1.8 trillion, meaning last fiscal year, the U.S. spent $1.8 trillion more than it collected in revenue. But the deficit isn't a priority for the presidential candidates. And yet, it does matter. Rich says eventually, if it keeps growing, the US is going to have to deal with it.

They're not really talking much about it, but it's kind of taking a backseat to other issues and other priorities that voters and candidates have. And so that sort of raises the question of, like, when this becomes a real problem that then outweighs some of the other things that politicians and policymakers want to do, which is lower taxes, provide benefits, give people what they want. When does this become a real and binding constraint?

Welcome to The Journal, our show about money, business, and power. I'm Jessica Mendoza. It's Thursday, October 10th. [♪ music playing on video [♪ music playing on video Coming up on the show, Harris, Trump, and the $1.8 trillion elephant in the room. [♪ music playing on video [♪ music playing on video This episode is brought to you by SIBO Global Markets.

SIBO is a global exchange operator committed to building trusted markets worldwide. SIBO delivers cutting-edge trading, clearing, and investment solutions and products in multiple asset classes, including equities, derivatives, and effects. Learn more about the exchange for the on-the-go cup. Make every morning unforgettable with Nespresso. Discover a world of possibilities, with or without milk. Visit nespresso.ca to learn more or a Nespresso boutique near you. The budget deficit is kind of a buzzkill. It's alarming, yet it also feels like some abstract economic concept.

So I asked my colleague Rich Rubin for help. So let's break this down. What even is the deficit? Okay, great, great question. The deficit is the difference in any one year between revenue, what the government takes in largely with taxes, and spending, what it spends on various programs. Social Security, Medicare, National Defense, all that. And then the difference is the deficit. That difference is that $1.8 trillion shortfall

we mentioned earlier. So imagine you're at a big economic party. You can think of it like a bag of popcorn, right? Like say like, okay, you're having popcorn at the house and you're like, all right, I'm going to like cook up a bag of popcorn and I'm going to pour it all into the bowl and that's the taxes that we collected for the year, right? We collected a whole bag of popcorn. So you've got all the kernels of revenue popping. More taxes, more popping.

Dump them into the bowl. Bowl looks nice and full. But then? Everyone reaches in and takes some popcorn. You know how that goes when you're having people over. Everyone kind of reaches in. Imagine one person is Social Security, one person is Medicare,

one person is the FDA. Another is military spending. And then there's unemployment benefits, veterans benefits, roads, infrastructure. The list goes on. Now, that bowl is looking empty, but your guests are still hungry. So you have to borrow more popcorn

from a popcorn bank or from friends. And it's extra buttery, dripping with interest. So are you are you like going to your neighbors to ask for more popcorn? Is that what's happening? Well that's what it is right? Eventually your neighbor is gonna be like yeah so you're gonna have to give me back like more popcorn next year because like I lent you that and the US government can do that. And last year, the US needed to borrow a $1.8 trillion bag of popcorn, an amount roughly equal to the GDP of Brazil. So why should the US care about deficits?

It's because when they get too high, they could affect interest rates and the country's ability to spend more and borrow more. Big deficits could also erode trust in the dollar as a currency around the world. So the more the federal government spends on interest every year, the harder it is for the federal government to find money to implement a new program, even a new productive investment in infrastructure or something. Those becomes a limiting factor because so much of the money every year is, so much of the popcorn every year is pre-committed to interest.

And of course, deficit after deficit compounds. And all those deficits add up to America's national debt. Right now, the country's publicly held national debt is around $28 trillion. Can you tell us the story of how we got to years of such high deficits? Yeah. So there's one important past episode, which is World War II. Like World War II, big national emergency, we went out and borrowed a bunch of money. That was like the big burst of deficits that we had, you know, 80 years ago. After World War II, deficits declined, though they still existed.

All but seven years in the next few decades had deficits. But by the 1980s, deficits were creeping back up. And it gave rise to deficit hawks, people who made reducing the deficit a big part of their political agenda. The deficit was such an important political issue in issue at various points in the 90s. You had Ross Perot, who's this wealthy businessman from Texas, who ran his presidential campaigns and did quite well in 1992 and 1996, based in part on trade and in part on really talking a lot about reducing the federal budget deficit. We're $4.1 trillion in debt. That's a staggering burden to pass to our children.

It's unconscionable. And then what happened in the 90s really was, you know, a series of events that took us from deficits to surpluses. Then the Democrats raised taxes under President Clinton in 1993. The deficit used to have 11 zeros, now it will have no zeros. In fact, we're going to be in surplus. The government also reduced spending,

which helped bring down the deficit. And on top of that, the economy was roaring. You had baby boomers all in the workforce. You had a productivity boom from the introduction and proliferation of personal computers. Through a computer network called internet. You know, the world is more productive now. And so where you ended up is surpluses and literally to the point where right around 2000, 2001, there were projections that the US would completely pay off its debt. The U.S. Would Completely Pay Off Its Debt

Okay, so we had a budget surplus for a few years, but then budget deficits came back. What changed? I think three big things happened. One was a series of emergencies. 9-11. Good afternoon. On my orders, the United States military has begun strikes One was a series of emergencies, 9-11. Good afternoon.

On my orders, the United States military has begun strikes against Al-Qaeda terrorist training camps. The 2007 to 2009 financial crisis. With plunging home prices and rising foreclosures, the housing problem snowballed into an economic crisis that we haven't seen since the Great Depression. And the pandemic.

Breaking news concerns over the coronavirus outbreak and once again they are affecting the stock market. Look at that right there. All of those the government stepped in and spent a bunch of money, whether on defense or on sending checks out to people or propping up financial institutions. All of those were sort of deemed

worth borrowing for basically. A couple other expensive line items, social security and Medicare, because all those baby boomers who were so productive in the 90s were retiring. That spending also came with a suite of tax cuts that decreased government revenue, first under George W. Bush,

and then those cuts were extended under Barack Obama. And then Trump introduced more tax cuts, which brings us to where we are today, with a budget deficit bigger than any we've seen since World War II. And looking ahead to either a second Trump term or a Harris presidency, it's likely to get worse. That's next. Are you Dave, a claims-free hybrid driving university grad who signed up online?

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I asked Rich to parse what we know about each candidate's budget. We started with Trump, who has a lot of tax cuts planned. So you're seeing former President Trump out there saying, extend all the tax cuts that we did in 2017, and no tax on tips, no tax on overtime pay, no tax on Social Security benefits. He's got a bunch of those promises out there. At the same time, Trump is also proposing plans

that cost a lot of money. And he's talked about some spending increases on a missile defense program and his mass deportation program. So those are among the largest things that he's talking about that would increase deficits. To pay for all these programs and tax cuts, Trump says he'll make some, quote, drastic reforms, including cutting clean energy subsidies and downsizing some government agencies. But mostly, he's relying on one key idea. Actually, I consider it one of the most beautiful things I've ever seen.

The word tariff, I love it, I think it's beautiful. Tariffs are basically taxes on imported goods. But all this, according to many economists, still doesn't come close to balancing the budget. And this week, a nonpartisan group called the Committee for a Responsible Federal Budget came out with some eye-popping estimates. Do we have a sense of how much all of his policies might cost and how much of that is going to be offset by some of the ways that he's proposing to pay for that?

This is an estimate, but it's $7.5 trillion in additional deficits over the next decade. And remember, if Congress does nothing, deficits increase by $22 trillion. So this is $22 trillion and then another $7.5 trillion on top of that. In a statement, a Trump senior advisor credited the former president's 2017 tax cuts for strong economic growth. And what about Kamala Harris? With Vice President Harris, it's a little bit different.

She's also talking about extending almost all of the tax cuts that are expiring. She's talking about providing new benefits, a new expanded child tax credit. And she's talking about, even as recently as this week, talking about expanding Medicare coverage for long-term home care. Harris is also offering breaks for first-time home buyers and small businesses. And she's pledging to deliver some relief on student and medical debt.

As for how she'd pay for all this? She's proposed higher taxes on corporations taking the corporate tax rate from 21 to 28, higher taxes on high income households, capital gains, those kinds of things. Yet again, it doesn't add up. The same nonpartisan group that studied Trump's proposal, the CRFB, also ran the numbers on Harris's plan. And they estimate that Harris's proposals

would add $3.5 trillion to the deficit over the next decade. So significantly less than where Trump is. Trump's proposals would raise deficits by $7.5 trillion, and she's less than half of what he's talking about there. But she's made a lot of promises, and if she wants to prevent the deficit from expanding, she's going to have to either pare back some of those policies or find more ways to pay for them. Harris's campaign disagreed with the CRFB's estimates. A representative said her plan would reduce the deficit.

Harris and Trump aren't talking about the deficit this year because it doesn't really score them any political points. Americans like programs like Social Security and Medicare. Many Americans like having a strong military. There's a sense that these things are good for them and for the country. Trying to slash the deficit would likely mean trims to these programs. It's called austerity, and it is not popular. Like when, you know, Trump goes out and says no tax on tips and everybody cheers and Harris goes out and says we're going to give $6,000 to, you know, for newborns.

They probably won't get the same kind of applause. Right. If you say, we're going to reduce projected deficits by $8 to $10 trillion over the next decade to stabilize our debt as the share of GDP, like, that is not an applause line. If the government is bringing in less money than it's spending, it seems like at some point something will have to give. Do we have a sense of when that might happen or how? That's the thing is we don't know.

Like when you talk to economists affiliated with both parties about this, they really frame it in terms of risk as the larger the deficit gets, the more risk we run that there's a problem, an economic burden from that that is damaging to us. But the repo man is not going to come. They're not going to like, you know, take it. Like, no one's going to come uproot the Washington Monument and take it away because we haven't paid the bills.

Right? Like, that's just not the way this works for, you know, for government. So it's just a different kind of situation. It's hard to think about what that looks like for government. So it's just a different kind of situation. It's hard to think about what that looks like for us. It's hard to notice it, but we get a lot of benefits from being as big and powerful economically as we are. And if the higher deficits lead to a point where those benefits go away, that's a real concern. One of the biggest concerns that's on the horizon is that more Americans are getting older, and that's going to put more pressure on the federal budget.

In about eight to ten years, you'll have the point where Social Security doesn't have enough money either both coming in and from accumulated funds from the past to pay full benefits and so Congress will have to decide whether it would allow benefit cuts to happen automatically or to backfill that somehow. But all of these things have trade-offs. They have trade-offs against each other, against deficit, against getting re-elected. And unless you get like magic growth that happens, anything you do to reduce the deficit, the thing you're trying to solve, you're going to cause issues someplace else.

And so that's what I just keep coming back to is there's no free popcorn. That's all for today, Thursday, October 10th. The Journal is a co-production of Spotify and the Wall Street Journal. If you like our show, follow us on Spotify or wherever you get your podcasts. We're out every weekday afternoon. Thanks for listening. See you tomorrow.