Weekly Wrap: The Best Part of Trump’s Tax Reform? Agreement That Deficits Don’t Matter

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Welcome to the 12th edition of the Weekly Wrap, where our deficit of gratitude for your reading this is bottomless.

Tax Reform And Shifting Opinions

Tax reform got one step closer this week as the Senate voted 51-49 in favor of a 2018 budget. This will allow Republicans to pass a tax bill without 60 votes in the Senate. Of course, this means tax policy will be in place for a maximum of 10 years, but we’ll look past that for now.

This is great news on one particular point. Policymakers are finally realizing that deficits don’t matter. As White House Budget Director Mick Mulvaney noted (via Bloomberg),

“I’ve been very candid about this. We need to have new deficits because of that. We need to have the growth… If we simply look at this as being deficit-neutral, 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.”

The tax package “The tax measure could add as much as $1.5 trillion to budget deficits over a decade,” according to the New York Times. The massive tax cuts are being paid for (or at least somewhat offset) by eliminating or capping some popular items, like state and local taxes and retirement savings tax breaks. These mostly impact the wealthiest of taxpayers, though many middle income earners will still see tax hikes.

But getting back to debts and deficits. The United States can borrow effectively endlessly from the rest of the world. That’s why bond yields are still so low by historical standards, even though the national debt is at an all-time high and still growing. The U.S. government simply having the ability to tax the wealthiest population on earth is enough for U.S. Treasury bonds to be the ultimate safe haven. Thus, deficits and debts don’t matter.

What would be a big deal is threatening the world’s confidence in the U.S. Treasury and the dollar. Exorbitant privilege is the term economists use to describe the dollar as the world’s reserve currency (here’s former Federal Reserve Chair Ben Bernanke on Exorbitant Privilege).

Oil is denominated for in dollars across the globe. Foreign nations borrow in dollars because it adds an air of stability to investors. Borrowing in dollars forces budgetary discipline on those governments. After all, if they have to devalue their home currency, the debts in U.S. dollars become more unsustainable.

The dollar as the world’s reserve currency is an inherent subsidy by the rest of the world to citizens of the United States. If misguided foreign policy, trade policy, or simply upsetting the apple cart just to create chaos were to threaten the dollar’s global status, Americans would feel the pinch big time.

What We Wrote This Week

The Growing Chasm Between Barcelona and Madrid: Checking in on the Catalonia Independence Referendum

“If there’s an impasse, or Puigdemont demands a hard Catalonia exit, or there are more riots in the streets between Catalonian nationalists and integrated Spanish supporters, that yield could shoot right back up.”

What Do Trump Stock Market Tweets Mean for the Fed Chair Decision?

“Trump likes to tweet about stock market milestones. But Trump also has a decision to make about who will lead the Federal Reserve. A hawkish pick for the Fed chief could increase the chances of a stock market correction.”

Why a Brexit Deal Remains a Leap of Faith: Theresa May’s Big Week of Negotiations

“Theresa May is finding out that Brexit negotiations are producing no winners. She herself, with a tenuous grip on the Prime Ministership, is feeling the burn the most.”