Trump’s economic fantasy world

The nonpartisan Congressional Budget Office just shot down Trump’s budget. It is overly optimistic about growth rate in the future. 

In the economy, we have:

  • government spending,

  • consumer spending

  • investment spending.

About 30-40% of government spending comes from money largely borrowed from outside the country. With the same tax base, cutting government spending will reduce aggregate demand or total spending. This will put brakes on the momentum of the economy. Not a bad thing if the economy is expanding too fast. Not a basis for accelerated growth. 

Cutting taxes shifts government spending to consumer and investment spending. Consumers may spend what the government previously spent with no net change in demand. If some of the tax money is shifted to investment then that is supposed to create jobs. Unfortunately, the cuts in government spending has to reduce employment. Will there be more investment with less jobs from government spending? 

Trump’s budget projections ignore these facts of economic life.