One clear principle runs through President Donald Trump's emerging economic policy: Debt is good.
When defending a tax plan or laying out his budget, the man who once called himself "the king of debt" is trying to persuade Americans there's no price to pay for running trillion dollar budget deficits over the next few years. Stronger economic growth will permanently follow the borrowing spree, officials argue, even as many economists and investors already warn about what could happen when the debt becomes due.
The White House budget plan released Monday is the latest example of the Trump principle. The budget proposal not only envisions soaring deficits through 2020, but it also outlines an infrastructure plan that would encourage state and local government to borrow heavily. The result, the plan suggests, would be exceptional growth that would then cause deficits to fall. The proposal assumes economic growth will climb above 3 percent and eventually settle into a solid 2.8 percent groove.
The plan amounts to a gamble that nothing can slow a high-flying U.S. economy and force a reckoning over the debt. Not higher interest rates. Not rising inflation. Not a foreign crisis. Not an aging U.S. population. Not even - based on the budget plan's own estimates - an increase in the unemployment rate. Should the economy stumble, the risk is that the gravitational pull of the debt would worsen as the government would likely borrow more to stop a downturn.
"They're assuming that the expansion lasts forever, basically," said Jim O'Sullivan, chief U.S. economist at High Frequency Economics. "You have to ask what will ultimately happen when we do go into a recession."
O'Sullivan expects that ratings agencies could downgrade the U.S. government's credit rating. He cites the $1.5 trillion higher debt after Trump signed tax cuts into law last year and the bipartisan deal reached last week to fund the government through 2019, which puts the U.S. on track to hit trillion-dollar deficits next year. Trump's willingness to embrace debt is in direct contradiction to years of Republican rhetoric on the dangers of deficits and breaks his campaign promises. As a candidate, Trump vowed not just to balance the budget but pay down the entire national debt, which is currently $20.5 trillion.
But as a businessman, Trump was anything but debt averse. Several of his companies filed for bankruptcy protection after being unable to service debt, leaving investors and contractors with losses. Trump portrayed this experience during the campaign as proof of his financial shrewdness.
"I'm the king of debt. I'm great with debt. Nobody knows debt better than me," he told CBS News in 2016, adding if he was unable to fully honor any obligations that he would tell investors that "the economy just crashed" and renegotiate the terms. But Trump has cautioned that he likes debt for his companies but not the country, saying that the government was "sitting on a time bomb" with its yearly deficits.
For now, the Trump administration is saying that the U.S. economic landscape has been overhauled over the past year. With the passage of the tax cuts, the economy is now set for a long-term acceleration, rather than a quick gain followed by a slowdown.
"It's not a sugar high," White House budget director Mick Mulvaney told Fox News on Sunday. "We have fundamentally changed the structure of the American economy to where we think we can change the long-term trends of our growth possibilities."
But investors are unconvinced. They're already starting to charge the government higher interest rates in anticipation of rising deficits. The yield on the 10-year U.S. Treasury climbed as high as 2.89 percent on Monday, up from a recent low of 2.06 percent in September.
Many forecasters assume that any economic upswing is temporary, but the Trump budget sees no end in sight.
Trump's budget overlaps with the mass retirement of baby boomers, whose use of programs such as Medicare and Social Security will likely cause government expenditures and the debt to keep increasing. Indeed, the government is borrowing more at a moment when unemployment is already at a 17-year low of 4.1 percent, a time when many economists say it should be repairing its balance sheet by borrowing less.
Even before the tax cuts and two-year spending deal, the Congressional Budget Office estimated that publicly held debt would equal more than 90 percent of the U.S. economy in 2027. The Trump budget assumes savings that would put the debt at less than 75 percent of the economy.
Trump achieves some of his debt savings by slashing Medicare by $554 billion over the next decade among other substantial cuts to programs at the Labor Department, the Environmental Protection Agency and elsewhere. But he also assumes that the entire economy will be $3.1 trillion bigger than previously forecast because of his policies.
Some of that growth would potentially come from new roadways and upgraded airports. But states appear to be increasingly hesitant to borrow more than they otherwise would for infrastructure projects, despite the financial incentives being introduced by Trump.
State budgets are already being squeezed as costs for education and programs such as Medicaid are rising faster than tax revenues, said Gabriel Petek, a managing director at Standard & Poor's Global Ratings. "The plan doesn't appear to fundamentally alter existing incentives at the state level," Petek said. "The states we have been talking to are not eager to take on more debt."