A warning on Trump’s budget

President Donald Trump

President Donald Trump  © Getty Images

Details of President Donald Trump’s first budget have now been released. Much can and will be said about the dire social consequences about what is in it and the wildly 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 US growth will rise to 3.0 per cent by 2021 because of the Trump 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 cannot 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 not 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 revenues 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 does not 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.

Who knew what when? I have no doubt that there are civil servants in the Office of Management and Budget, the Treasury and the Council of Economic Advisers who do know better than this mistake. Were they cowed, ignored or shut out? How could the Treasury secretary, director of the OMB and director of the National Economic Council allow such an elementary error? I hope the press will ferret this out.

The president’s personal failings are now not just centre stage but whole stage. They should not blind us to the manifest failures of his economic team. Whether it is Treasury secretary Steven Mnuchin’s absurd claims about tax cuts not favoring the rich, commerce secretary Wilbur Ross’s claim that the small squib of a deal negotiated last week with China was the greatest trade result with that country in history, NEC director Gary Cohn’s ridiculous estimate of the costs of Dodd Frank, or Tuesday’s budget, the Trump administration has not yet made a significant economic pronouncement that meets a minimal standard of competence and honesty.

This post originally appeared on Financial Times

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