The Great GOP Stimulus

The 2018 Trump stimulus exceeds the Obama-era stimulus package in size – will it pay off at the top of the economic cycle?

In 2010, when Barack Obama pushed for a stimulus package to help boost the American economy, it was decided by many in the GOP as wasteful spending. While there are more productive (infrastructure) and less productive (tax rebates) ways to stimulate the economy, any form of spending (or tax cut) is a form of economic stimulus – this is a point agreed by both economists and businessmen like Warren Buffet. In fact, any form of budget deficit is a form of stimulus, as the government borrows (or prints) money that it doesn’t have to spend it into the economy.

The past year has seen the GOP enact not one but two stimulus measures – first a budget which ended Obama-era budget caps and boosted spending by roughly $150B per year, and second the tax cut which reduces taxes by another $150B per year. Taken together these measures are adding roughly $300B per year in stimulus to the US economy, potentially adding 1.5% to GDP for each of the next few years. Adding this stimulus to a core GDP growth rate of 2-2.5% might thus make 4% possible in the near term, with the bill due much later. The total federal (non-central bank) stimulus under President Trump’s first will hit at least $1.2 Trillion, exceeding President Obama’s 2010 stimulus package by $350 Billion [1], but this time at the top of the economic cycle!

What does this tell us? A few key takeaways emerge:
  • While most economists agree that it’s better to do fiscal stimulus when the economy is at or near recession, democracies don’t work this way, and there’s little correlation between economic need and actual governance.
  • When either party has complete control of government, they take the opportunity to spend on favored initiatives – in Trump’s case the DoD received most of the benefit, while in Obama’s case a variety of energy efficiency, infrastructure, and other initiatives were funded.
  • Budget deficits haven’t been a major issue over the last decade, but the tax cuts in particular will layer on top of Social Security and healthcare spending trends to drive debt-to-gdp well past 100% [2].
  • The best stabilizers in the US economy (unemployment insurance) are effectively automated – extending this sort of stabilizer to infrastructure spending (spending more on transportation funding etc as unemployment rises) would not just help buffer downturns – it would also get taxpayers a better deal.

Time will tell whether the GOP’s late-cycle spending will extend the business cycle substantially, but in the long run US policy will improve if more of these decisions are put on auto-pilot, removing the uncertainty of the political winds and the desire to spend at the least opportune times.


[1] The Obama administration stimulus plan cost around $850B in the end, including only the 2010 Stimulus measure and its implementation. Extension of Bush-era tax cuts and similar are not counted here, as these were extensions of existing measures, rather than new tax cuts or new spending as in the Trump administration’s recent moves.

[2] Many charts and news reports on the debt refer only to the publicly-held portion of the US debt, but when debts to the Social Security trust fund are included as in this data from the Federal Reserve, the US debt-to-gdp ratio already exceeds 100%.

How Much Can America Borrow?

From a fiscal stability standpoint, the US can manage a national debt up to around $20 Trillion – but paying those debts off will require huge spending cuts and tax increases.

How much can the US government borrow before it becomes a bad credit risk? How much can the government borrow before it has to resort to inflating its way out of debt rather than simply paying off the bills? On the surface, the US government does not appear overly leveraged, as analysts point to the fact that public debt is only 60% of GDP. But is this a realistic way to look at America’s debt situation? Let’s look at America’s fiscal situation through the eyes of a loan officer, and see how it fares.

1. What is the US Government’s income, its current debt, and debt-to-income ratio?

Here is the US government’s revenue over the last three years: 2007: $2,568 Billion, 2008: $2,524 Billion, 2009: $2,105 Billion

The federal government’s total debt as of 03/21/2010: $12,661 Billion

The US government’s current debt-to-income ratio is 6.01. Using the US government’s best income year (2007), its debt-to-income ratio is 4.93. In the best circumstances, an individual might be able to borrow up to a ratio of 4.

2. What is the loan-to-value ratio for funds that the US government is borrowing this year?

The US government expects to borrow $1.56 Trillion this fiscal year. The majority of the money is being spent on Social Security payments, Medicare, Medicaid, and Defense. Virtually none of the expenditures will be in tangible investments of any form. If we assume (generously) that $100 Billion of the deficit spending will be invested, the LTV of this year’s borrowing is 15. Most individuals need an LTV of 0.9 or less to get a home loan.

3. What is the US Government’s Total Debt Service Ratio? What percentage of revenue is spent on interest payments?

In 2009 the government spent $187 Billion on interest payments, for a TDS of 8.9%. The government’s interest payments are extremely low because lenders are currently willing to lend the US government money at interest rates near 0%. If, hypothetically, interest rates went up to 5%, the government would have to pay $633 Billion in interest, 30% of 2009 revenue.

4. How does it add up? How much can the US borrow?

The federal government’s DTI and LTV would be unsustainable for any private borrower. However, since individuals and governments have been willing to lend the US money at close to 0%, the US has been able to comfortably cover its debt service thus far. As the federal debt balloons that may begin to change.

Let’s assume that US government debt average yield rises to 5% (closer to historical average), and that debt service should not exceed 40% of revenue. Using the government’s highest annual income ($2.57 Trillion in 2007), this means that interest payments should not exceed $1027 Billion per year. If the average interest rate is 5%, this means that total debt carried at that point would be $20.5 Trillion.

While the US might be capable of borrowing $20 Trillion, at that point only 60% of revenue would be available for government programs. Since the government is currently spending 180% of revenue on programs, it’s unlikely that it would be able to reduce spending on government programs by almost 70%. It’s most likely that a combination of taxes, spending cuts, and inflation will have to be used to keep debt at sustainable levels at that point.