As President Donald Trump's economy slows, an increasing number of Wall Street analysts are saying that not only did his $1.5 trillion of tax cuts fail to spur faster long-term growth, they actually might have hurt.
Trump administration officials including Treasury Secretary Steven Mnuchin have said repeatedly that the tax cuts would put the economy on a path to long-term annual growth above 3%. But after notching one quarter of 4.2% growth earlier this year, the economy has since slowed -- to 3.5% in the third quarter and a projected 2.6% during the last three months of the year.
Economists surveyed by data provider FactSet expect a further slowdown to 2.5% in 2019 and 2% in 2020 -- below even the 2.2% long-term growth rate projected prior to the enactment of the tax cuts.
A big reason for the gloomy outlook is that now that the immediate stimulus from the tax cuts is fading, the U.S. government will have to divert more revenue to pay interest on the rapidly ballooning national debt. Instead of that money flowing into the economy, the cash will instead go to Treasury bond holders and other creditors of the U.S. government; it's effectively the opposite of fiscal stimulus -- more like a fiscal tranquilizer.
Rich Bernstein, the longtime Merrill Lynch chief strategist who now runs his own investment firm, says the economy was growing at about 3.5% per year prior to a big jump in the national debt in the 1980s. The debt surged further in the 2000s and again still under President Barack Obama during the first half of this decade -- causing noticeable declines in the average economic growth rate.
Since Trump's inauguration in January 2017, the national debt has swelled by $1.8 trillion to $21.7 trillion. The Treasury Department essentially had to borrow more to cover the U.S. government's budget deficits, which have widened rapidly because of the lost tax revenue and new spending measures passed since Trump took office.
The Congressional Budget Office predicts the national debt will jump by another $5.8 trillion over the next five years to $27.5 trillion. As Bernstein sees it, the burden of higher payments on the debt will again prove an economic millstone.
"Despite repeated rhetoric to the contrary, politicians continuously try to correct slowing growth by issuing additional debt," Bernstein wrote. Instead, "debt payments divert the economy's cash flow away from productive investment."
The problem isn't just the rising debt load; interest rates are rising, compounding the increase in the government's borrowing costs. Net interest payments on the national debt rose by 20% to $371 billion during the fiscal year that ended Sept. 30.
The Congressional Budget Office estimates that the annual amounts will nearly double in five years to $702 billion in 2023. At that point, the interest payments would eclipse not just the $493 billion of mandatory outlays for Medicaid, a health-insurance program for the poor, but the $679 billion spent on defense -- the U.S. government's largest category of non-discretionary expenditures.
Such ominous forecasts are attracting Wall Street's notice. The investment bank Goldman Sachs Group Inc. (GS) wrote Monday in a report that one risk to economic growth comes from "ballooning debt service on federal borrowings as maturing debt is refinanced at higher rates."
In other words, the debate over the national debt -- once confined to the realm of universities, economic think tanks, gold-bug chatrooms and other worrywart venues -- is becoming less academic.
The Standard & Poor's 500 Index of large U.S. stocks has fallen by 5.6% over the past three months, at least partly driven by investor concerns over a coming economic slowdown.
A Treasury Department spokeswoman declined to comment.
One reason the Trump tax cuts haven't produced a faster pace of long-term growth is that many companies simply passed the windfall along to shareholders in the form of dividends and stock buybacks. Such capital payouts came in lieu of, say, allocating the money toward new technology, factories or equipment -- investments that likely would have fostered faster economic growth in the future.
The Swiss bank UBS predicted earlier this year that stock buybacks by companies in the S&P 500 would climb by more than $1 trillion in 2018 to a record $2.5 trillion, fueled by the tax cuts.
"Part of the argument was that corporate tax cuts would lead to capital expenditures, which would have indeed been long-lived," Bernstein wrote in an e-mail. "I think the data show, however, that the cut was used more for share repurchases, which has a short-lived economic benefit. More debt for short-term gain."
Christopher Smart, head of macroeconomic and geopolitical research for Barings, a $311 billion money manager, said in a phone interview that he would primarily attribute the lower economic growth rates of recent decades to factors like the aging U.S. population and the globalization of the economy, which has exposed domestic companies to competition from elsewhere.
But the national debt burden is worrisome, he says, and could become an even bigger threat if interest rates rise quickly.
"If rates rise more quickly, or in unexpected spikes, then that's going to present a problem," Smart said. "Every investor knows what the numbers are, and they're large."