Understand that I'm a total novice with regard to economics. Also, while I ultimately have an axe to grind (doesn't everyone?) I'm not trying to do that honing here, I'm simply looking for a sanity check on my "logic" (such as it is). I don't propose to discuss political implications here.

President Trump is proposing a "tax reform" package that is roughly estimated (based on two separate sources I found) at about $5T over 10 years. Let's assume that the cost of this package is not significantly offset by spending cuts (at least not cuts that would exceed proposed spending increases in other programs). So it's reasonable to assume that basically the entire amount would be borrowed, through Treasury securities and similar instruments.

Here it gets a little shaky. Several sources tell me that foreign sources own about 1/3rd of the US government debt. While it's obviously difficult to predict how much of the new debt would be purchased by whom, it's a reasonable spitball estimate to assume that about a third would be sold overseas, assuming interest rates remain at least as high as they are currently, and barring any significant change in overseas perceptions of the soundness of US securities, or of the US economy in general.

This means that foreign sources must come up with about $1.7T in US currency over ten years, thus removing the ability of that much US currency to purchase goods and services from the US (or benefiting from that much US currency being paid out of the US to buy foreign goods and services).

(The objection will be made that money is, uh, fungible, and so currencies other than US currency can be used to purchase US goods. But if I spend my US dollars on T-bills then I will have to convert my rubles to dollars if I want to spend more dollars on US goods and services, and that conversion drives up the "cost" of the dollar, making US goods and services less "attractive". When it balances out the net-net is to have removed that much US money from the pool of cash available to fund US exports.)

The cost to "create" a job in the US seems to be variously estimated at between \$40K and \$100K a year. (I couldn't find any sources that were clear and explicit enough to be worth referencing, alas.) (Most such estimates appear to be orientated towards tech sector jobs, and presumably manufacturing jobs would be "cheaper".) But let's say that a job "costs" $50K/year -- we are "spitballing", after all.

So, dividing the \$1.7B by \$50K times ten years, I come up with 3.4 million jobs lost for a period of ten years, due to the proposed tax cuts.

Where is my "logic" here weakest? Is my spitball aim terribly off anywhere? Are there fatal flaws, or is it simply too fuzzy and "out there" to assess without losing your lunch?

Note: I'm trying to understand the above (presumed) effect in a vacuum of sorts, without considering any of the counterbalancing benefits of deficit spending and related issues. Basically, I'm only looking for criticisms of my "math", and a "but you forgot about ..." answer is only relevant if it somehow modifies or negates that "math". Yes, deficit spending has supposed benefits, but I'm not asking about that.


1 Answer 1


No, your logic doesn't make a ton of sense. That doesn't mean that the Trump tax cuts are a good thing.

Foreign debt isn't the same as a country removing money from the economy. The way the U.S primarily finances debt is through the sale of treasury bonds (T-bills). Essentially an agreement with a private individual (sometimes foreign) that over the course of X time period the debt will be paid back with interest.

This is the same as making a loan with your local bank. They give you money, in this case $5 trillion and after a period of time you pay off the principal loan plus interest payments. The assumption that Trump (and all American presidents since Bill Clinton when we last had a current account surplus) is making is that in the period between making the loan and paying it off the economic stimulus from the tax cuts will outweigh the loan and its payment. The U.S gets extremely favorable terms on its loans with virtually 0 interest rates meaning that the 5 trillion stimulus in decreased taxes may very will increase tax revenue through increased economic activity by more than 5 trillion dollars which is the argument that Trump is making.

Whether or not this occurs depends on where we are on the Laffer Curve which essentially states that at a certain tax rate decreasing taxes will actually increase government revenue by stimulating businesses. Personally I, and many contemporary economists believe that we are not at that point on the Laffer curve and a tax decrease would in the medium run lower output, however clearly Trump disagrees and there is no true consensus among economists as to where we currently fall on the Laffer Curve.

  • $\begingroup$ You completely miss my point. The government borrows money, and about a third of that debt is sold to overseas lenders. The money the overseas lenders pay for the debt is money that therefore cannot be used to buy US goods and services in international trade. If Trump borrows \$1.7B from overseas sources that's \$1.7B that cannot be spent for goods and services. It makes no difference what the interest rate is, and this effect is present regardless of any supposed "stimulus" due to the tax cut. In fact, it's the one effect of his tax cut that can be predicted with reasonable certainty. $\endgroup$
    – Hot Licks
    May 5, 2017 at 17:58
  • $\begingroup$ Debt =/= Money. Debt is simply the promise to repay money in the future. In the short term we haven't lost any money and only lose money years from now when we've repayed the debt. Assuming that 100% of the tax cut is payed for in debt (it's not) then the money only flows out of the economy in the future. Trump is betting that the tax cut will benefit the economy by more than the 5 trillion before the money has to be repayed. $\endgroup$ May 5, 2017 at 18:09
  • $\begingroup$ Your point is valid in an economy with a balanced budget where 1 dollar lost in tax revenue is 1 dollar lost in government spending. That isn't the case here, and if that was the case then the effect would depend on where we stand in the Laffer Curve as I mentioned. If the tax break is funded through debt then it will only have positive impacts in the short run and potentially negative impacts in the medium run. There is no scenario where a tax cut without a cut in government spending hurts the economy in the short run. $\endgroup$ May 5, 2017 at 18:12
  • $\begingroup$ To buy T-bills you need money. I don't think the Treasury is going to give them away. Real money (to the extent that any money in the banking sector is "real") changes hands. Yes, the money may eventually be repaid, and "real" money may then flow the other direction. But that won't happen for decades, at least. The money flows out much more quickly (on the safe assumption that Trump does no better than any Republican since Reagan at balancing the budget). At most I can see an argument that "float" will somewhat offset the effect. $\endgroup$
    – Hot Licks
    May 5, 2017 at 18:31
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    $\begingroup$ I'm afraid that you're the one who is arguing without explaining things. $\endgroup$
    – Hot Licks
    May 5, 2017 at 19:11

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