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Trump Muddles Economic Indicators

In a news interview and a speech in Pennsylvania, President Donald Trump misleadingly suggested that rising stock value could reduce the national debt. One budget expert told us that notion was “just silly.”

In an interview with Sean Hannity of Fox News, Trump noted that the country’s debt rose by $10 trillion under President Barack Obama and that since he took office, stock values have increased by $5.2 trillion. So, he said, “maybe in a sense we’re reducing debt.”

Trump on Fox News, Oct. 11: The country — we took it over and owed over 20 trillion. As you know the last eight years, they borrowed more than it did in the whole history of our country. So they borrowed more than $10 trillion, right? And yet, we picked up 5.2 trillion just in the stock market. Possibly picked up the whole thing in terms of the first nine months, in terms of value. So you could say, in one sense, we’re really increasing values. And maybe in a sense we’re reducing debt. But we’re very honored by it. And we’re very, very happy with what’s happening on Wall Street.

Trump made similar comments during a speech on tax reform in Harrisburg, Pennsylvania, that same day.

Trump in Harrisburg, Oct. 11: And very proudly, just in the stock market alone, we have increased our economic worth by $5.2 trillion dollars. That’s right since Election Day — $5.2 trillion.

Think about that. That’s a quarter of the $20 trillion that we owe. So we’ve already — but listen to this because we’ve doubled — in the last eight years of the previous administration, the debt doubled, so that in eight years our debt — literally hundreds of years of debt — doubled in eight years to $20 trillion.

But since the election on November 8th, I’ve increased the value of your U.S. assets by more than the $20 trillion that we currently owe. You haven’t heard those numbers.

Trump is right that the federal debt increased under Obama.

Total public debt outstanding rose from $10.6 trillion to $19.9 trillion, an increase of $9.3 trillion. That includes all the money that the government owes to itself, including the Social Security trust funds. Under Obama, the federal debt held by the public grew from $6.3 trillion to $14.4 trillion, an $8.1 trillion increase, or a little more than 128 percent over Obama’s eight years.

The debt continues to rise under Trump. The debt held by the public is now at $14.7 trillion, and the total debt is at $20.4 trillion.

It’s also true that the stock market has been making steady gains.

Since Trump took office, the Dow Jones Industrial Average has climbed 15.9 percent to 22,872 at the close on Oct. 11. Trump takes credit for the rise in the stock market dating back to his election last November — and an argument can be made for a “Trump Rally” that many attribute at least partly to investor optimism that the president-elect would, once in office, cut taxes and regulation as promised. The Standard & Poor’s 500-stock average rose nearly 6 percent between Election Day and Obama’s last day in office.

The White House said Trump arrived at the $5.2 trillion figure by looking at the Wilshire 5000 Total Market Index. (A single point in the Wilshire 5000 represents about $1.15 billion in index market value, and the Wilshire index grew by 4,439 between Nov. 8, 2016, and Oct. 12. That translates to $5.1 trillion growth in market value since Election Day.)

But Trump’s suggestion that stock value somehow reduces the national debt is misleading.

“It’s nonsense,” Marc Goldwein, senior policy director at the Committee for a Responsible Federal Government, told us.

“There is no relationship between the national debt and the value of the stock market, which is the total value of a selection of stocks owned by individuals and being held abroad,” Goldwein said. “It’s just silly. They are totally different economic indicators.”

Those sentiments were echoed by political economist Greg Valliere of Horizon Investments to CNNMoney.

“The stock market’s gains have virtually nothing to do with the size of the national debt, which continues to rise because government spending far exceeds government receipts,” Valliere said. “A higher stock market encourages consumers and companies to spend more, which helps the overall economy. But it’s absurd to contend that the national debt has fallen because of this.”

Indeed, if Trump’s premise were accurate, the debt would have fallen significantly under Obama — because the rise in stock market value didn’t start with Trump’s election.

The S&P 500 index more than doubled — rising by 166 percent — under Obama. The Dow Jones Industrial Average rose 138 percent. And yet, as we said earlier, debt soared under Obama.

The White House referred us to an Oct. 12 interview that White House Legislative Director Marc Short gave to CNN’s Wolf Blitzer.

Short was asked whether a booming stock market would reduce the national debt, as the president suggested. He said it would, because a “booming stock market means that people are continuing to pay more taxes and dividends, so there are additional resources coming in to the Treasury.”

Short added that the country needs to “address its spending habit” but that “the booming stock market does help generate more revenue that can help pay down the debt.”

High stock values can be an indicator of faster economic growth, Goldwein of the Committee for a Responsible Federal Budget told us, but not always.

And higher stock value should translate to moderately higher revenues from capital gains taxes and retirement account withdrawals, he said, but those increased revenues would never be equivalent to the debt. For starters, only 20 to 25 cents of every dollar from capital gains is taxed, Goldwein said. And, it is only taxed when the stocks are sold, not when they are held. So the amount of tax revenue the government gets from that is a tiny fraction of the overall value of stocks.

In its own fact-check of Trump’s comments, the Committee for a Responsible Federal Budget notes: “Last year, capital gains taxes accounted for only 4 percent of total federal revenue – even a record jump in capital gains next year would only reduce further borrowing by about $50 billion, which is less than a tenth of what we are projected to borrow next year.”

And, Goldwein said, those increased revenues are already accounted for in the Congressional Budget Office’s deficit projections.

The CBO reported that the federal government ran a budget deficit of $668 billion in fiscal year 2017, which ended Sept. 30. That was about $25 billion less than the CBO projected in June, “largely because outlays were less than CBO anticipated.”

A CBO analysis of Trump’s proposed budget for fiscal year 2018 estimated that while Trump proposed significant spending cuts, the cumulative deficit over the 2018 to 2027 period would total $6.8 trillion (even as the deficits would decline as a percentage of GDP from 3.6 percent in 2017 to 2.6 percent at the end of the period).

In other words, the debt under Trump’s proposed budget would not be as high as projected under current law, but it would still grow. (We should note that Congress has not yet passed a spending plan for fiscal 2018.)

That Trump budget plan includes $1.9 trillion less in spending on health care in anticipation of a repeal and replace of the Affordable Care Act — which hasn’t happened yet.

The president’s budget also assumes deficit neutral tax reform, which the Trump administration and Republican leaders are not proposing. An analysis by the Committee for a Responsible Federal Budget, for example, concluded the latest iteration of the tax plan would add $2.2 trillion to the debt.

White House budget chief Mick Mulvaney told CNN, “If we simply look at this as being deficit-neutral [tax plan], you’re never going to get the type of tax reform and tax reductions that you need to get to sustain 3 percent economic growth.”

Trump is right that the stock market has been soaring — a trend that began several years ago, but that has been even more pronounced since Trump’s election. But those stock gains are not reducing the ever-growing national debt. At best, the additional tax revenues may contribute to slowing the debt’s growth.

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2017-10-18 13:38:01 UTC

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“We’re really increasing [stock] values. And maybe in a sense we’re reducing debt.”
Donald Trump
President of the United States

Fox News interview
Wednesday, October 11, 2017