Throughout the campaign of Mr. Trump, fiscal coherence was a general theme. Whether it was pleasing the deplorables with public spending cuts, tax reform, or rebuilding the American dream, the state will not stop spending. Spending is as American as apple pie. America, the largest debtor nation in the history of the world, will maintain the robbery of its citizens whether overtly or covertly.
Mr. Trump promised cuts, which can be seen in his recent budget proposal. Budget cuts in many entitlements are long overdue, but those cuts are reallocated to a $54 billion military increase. Currently, the U.S. outspends the next 10 countries in military spending combined. Donald Trump draws parallels to Reagan and his tax cuts of the 1980s. Economists will tell you that even in 1981, taxes were not cut and spending didn’t decrease, as most believe. Tax brackets for the rich were cut, but for the average person, taxes rose. Cuts in income taxes were more than offset by 2 tax increases.
Bracket creep is one method in which the government maintained the steady flow of tax receipts, which actually rose under Reagan. Essentially, bracket creep moves one into a higher tax bracket via inflation, even though the tax schedule remains the same. Additionally, Social Security taxes increased, and the cannon fodder known as fiscal stimulus was the same as it is today – not feasible. The Reagan IRS raised fees, cut loopholes, and sought out the tax evaders. All of this still led to a budget deficit of 4.2% of GDP over eight years. Keynesians who run our welfare state believe that an advanced economic model should have financial surpluses.
Is this the reason why public spending increased during the Lehman collapse of 2008? Is this why our debt-to-GDP is 105%? Government will continue to move out productive private sector capital to bail out the public sector. Bank credit creation will extend the credit cycle and defer unemployment until the debt super-cycle finally pops. Creative destruction will be prohibited and debasement will continue to keep zombie businesses alive. Inflation is — and was always — the end game.