Lower taxes and higher spending have consequences

That government shutdown didn't last long. By the time I knew about it, it was over. That can happen when Congress is doing its most important work in the dead of night.

But give Congress credit for doing something. The two houses of Congress and the two political powers managed to reach an agreement that will keep the government operating for another year. This, it was emphasized, is not another "continuing resolution" that Congress has too frequently relied upon to keep the government running, despite Congress' inability to pass a budget on time, or even at all. Before we celebrate another Era of Good Feeling, we must remember that the legislation dramatically increases government spending without offering a way to pay for it.

The authorizations approved very early this morning are expected to result in a budget deficit next year of more than $1 trillion. That is a monstrous deficit, and it comes at a time when the U.S. economy is growing. Unemployment is down, job creation is up, wages are rising. This is a stimulus package for an already stimulated economy. 

It comes just weeks after the December 2017 tax cut, which is expected to add $1.5 trillion to the federal debt. Between the tax cut and the newly generous appropriations, the U.S. economy is going to be like an out-of-control motorcyclist — headed for a terrible crash.

To fully appreciate this, consider that today's federal debt is about 77% of gross domestic product, which is the highest percentage since the aftermath of World War II. With the 2017 tax cut and added spending, the debt will rise to 111% of GDP by 2027, the Committee for a Responsible Federal Budget calculates. 

President Trump had touted the rising stock market as proof that his approach to the economy was working. That was before a 3,000 point drop in the Dow Jones index. Now he will have to defend a stock market that has gone through turmoil and has arrived at a "correction," a 10 percent drop in tax values. Although still above where the market was before his election, the new reality on Wall Street is much less optimistic than it was just a month ago. 

Monday's 1,000 point drop in the Dow coincided with the swearing-in of Trump's appointee to chair the Federal Reserve Bank. Trump chose not to appoint the then-chair Janet Yellen to a second term, which had been the traditional choice. Yellen has said that she was willing to serve another term, and it looks like stock traders were more comfortable with the known Yellen than with a new Fed chair whose skills and philosophy are less known.

The new Fed chair is likely to face an economic crisis in the near future. The overheated economy will likely result in sharply higher inflation. Inflation has been a non-factor for the past two Fed chairs because changes in the economy and a tight leash by the Fed and other national banks have kept inflation at bay. But inflation has long been the greatest danger to the economy. The double-digit inflation rates of the late 1970s are reminders of how disastrous sharply rising prices can be.

The federal government will have a harder time meeting its new debt obligations when inflation causes interest rates to rise. Interest on the debt will become a larger and larger part of the federal budget. A huge tax cut coupled with more profligate spending makes an economic collapse almost inevitable.