Trump Browbeats Fed as Tax-Cut Fizzles; CBO Sees 1.8% GDP Growth, Soaring Debt

Donald Trump's $1.4 trillion tax cut is causing government debt to soar. (Photo: CBO/Getty)

Donald Trump’s $1.4 trillion tax cut is causing government debt to soar. (Photo: CBO/Getty)

Donald Trump’s massive tax cut has run its course, leaving behind massive deficits that will weigh on the economy for years to come as growth slips to an average of 1.8 percent per year in 2020, according to new estimates.

The president promised economic growth would soar to 4 percent per year following his $1.4 trillion tax cut. He said the cut would pay for itself through higher growth.

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But both promises have failed to materialize.

Economic output is expected to grow by 2.3 percent in 2019, thanks to a strong labor market. But after this year, growth will slip to 1.8 percent per year, less than the historical average, according to the Congressional Budget Office

The federal budget deficit will hit $960 billion this year and soar to a projected average of $1.2 trillion a year between 2020 and 2029. Debt will rise to 95 percent of GDP by then, the highest level since just after World War II.

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The economy has been signalling a slowdown and a possible recession for over a year now. Trump has been browbeating the Federal Reserve to drop interest rates to zero, if necessary, to prop up the economy and his re-election chances.

As a percentage of gross domestic product, federal debt held by the public would increase from 79 percent in 2019 to 95 percent in 2029. At that point, such debt would
be the largest since 1946 and more than twice the 50-year average, the CBO report states.

Rising interest costs associated with that debt would increase interest payments to foreign debt holders and thus reduce the income of U.S. households by increasing
amounts.

“The risk of a fiscal crisis—that is, a situation in which the interest rate on federal debt rises abruptly because investors have lost confidence in the U.S. government’s fiscal position—would increase.

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“There would also be a growing likelihood of less abrupt but still significant economic and financial consequences, such as expectations of higher inflation and more
difficulty financing public and private activity in international markets,” the report states.

Meanwhile, the unemployment rate has nowhere to go but up.

It will average 3.6 percent in 2019 but start rising to 3.7 percent in 2020 and 3.8 percent in 2021.

Former Federal Reserve Chair Janet Yellen noted a lot of workers are part-time and would prefer full-time work. Also, most job growth is in low-paying retail and food service industries.

Some people have been out of work for so long that they’ll never be able to return to the high-paying jobs they used to have. Structural unemployment has increased.

The real unemployment rate, counting those who have stopped looking for work, is double the widely-reported rate.

“The unemployment rate is expected to rise steadily, reaching and surpassing its natural rate of 4.5 percent in 2023 before settling into its long-term trend in later years,” the report states.

The Federal Reserve Open Market Committee cut the fed funds rate to 2.25% on July 31, 2019. That’s the cost to banks to borrow money in the overnight market.

Most Fed watchers are expecting another rate cut this year. Trump is lobbying for a cut to 1.75% or even zero to prop up the economy.