That GOP Aversion to Debt? It’s Gone for Now

PF 3By Greg Ip

Donald Trump’s rise marks the demise of Paul Ryan’s fiscally conservative approach to government spending and debt

Paul Ryan became a Republican icon in 2011 with an ambitious budget devoted to lower tax rates, slowing the growth of social entitlements and, above all, “lifting the crushing burden of debt.” It became his party’s economic mission statement.

In Donald Trump, Republicans now have a presidential candidate who rejects virtually every element of that vision. He is erratic on taxes, won’t touch entitlements, and proudly calls himself “the king of debt.”

Mr. Ryan, now speaker of the House, has withheld support from Mr. Trump. He will meet with him Thursday in Washington to try and bridge their considerable differences, which span immigration, trade and attitudes toward Muslims.

But one consequence of their split is already clear. Mr. Trump’s rise shows that austerity and debt are spent as political forces in both parties. In a world of rock-bottom interest rates, big debts don’t matter like they used to. But those conditions could change in coming years, setting up a potential collision course between a Trump administration and financial markets.

At the time, deficits were still near post-World War II highs, the national debt was soaring, and a new entitlement, the Affordable Care Act, had just been enacted. Mr. Ryan warned in apocalyptic terms of “relentless government spending, taxing and borrowing…leading America, right at this moment, toward a debt-fueled crisis.” He drew heavily on conservative, market-oriented policy ideas for fixing the tax code, Medicare and Medicaid. His plan would balance the budget by 2040 and reduce the publicly held debt, then headed over 100% of gross domestic product, to 10% by 2050.

NA-CK136_CAPACC_16U_20160511113907The plan had drawbacks. Mr. Ryan didn’t detail how, even by closing loopholes, he could both cut tax rates and balance the budget. Economically, the timing was off: Austerity was not what an economy with 9% unemployment needed. Interest rates didn’t spike, as he warned; they fell to new lows.

But the biggest flaw was political. Voters said they were worried about debt but not enough to accept less generous Medicare or Social Security, even in the future. In 2012, when Mr. Ryan ran as Mitt Romney’s presidential running mate, Democratic attack ads accused them of pushing granny off a cliff in a wheelchair.

Mr. Trump is the antithesis of Mr. Ryan, not because he has a different economic philosophy, but because he doesn’t have any. He does, however, have a keen sense of what voters want. Earlier this year, he blamed Mr. Romney’s loss on his choice of Mr. Ryan as running mate, “because he represented cutting entitlements.” Mr. Trump early on distinguished himself from other Republican candidates by promising to leave Medicare and Social Security alone.

The publicly held federal debt is now 74% of GDP and, the Congressional Budget Office says it will hit 86% in 2026 with current policies in place. Mr. Trump claims to be worried about the debt. Yet he’s promised to slash taxes, keep entitlements as they are, spend more on infrastructure and defense and deport 11 million illegal immigrants. Mr. Trump’s agenda is simply not compatible with stabilizing, much less reducing, the debt. By one estimate, Mr. Trump’s plans (including his tax cuts, which he says are negotiable) would boost debt to 129% of GDP by 2026.

But more debt probably wouldn’t bother him. While Mr. Ryan considers debt almost immoral, Mr. Trump sees it as useful. In business, he has exploited leverage to finance takeovers and construction projects so as to maximize his returns and minimize dilution of his own equity. “I probably understand debt better than anybody,” Mr. Trump told CNN this week. “You have to be careful and you have to know what you’re doing.” In the political world, it’s not so different: Borrowing enables a president to finance big promises without using up political capital by raising taxes or cutting spending.

Creditors served as the main constraint on Mr. Trump’s borrowing as a businessman. He was adept at keeping them at bay, but some of his properties still ended up in bankruptcy. No such constraint exists on the U.S. since, as Mr. Trump notes, the government can simply “print the money” to repay whatever it borrows.

The constraint comes later—when all that borrowing pushes up inflation and bond investors demand higher interest rates. That hasn’t been true for a long time: Rates today are the lowest in memory. But with unemployment down to 5%, borrowing as much as Mr. Trump’s proposals require could fuel inflation pressure.

At that point, Mr. Trump would have to decide whether to change his plans—or pressure the Federal Reserve to ignore the inflation threat and keep rates low. That’s the sort of political interference that might finally rattle bond investors and prompt Mr. Ryan to say, “I told you so.”

Greg Ip is hte Chief Economics Commentator for  The Wall Street Journal.

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