The Washington PostDemocracy Dies in Darkness

It remains unclear if Trump fully understands how the federal debt works

President Trump in the Oval Office on Jan. 31 discussed why the national debt is increasing despite his claims about strong economic indicators. (Video: Reuters)

Twice on Thursday, President Trump made comments that conveyed a remarkable lack of familiarity with basic aspects of the American economy.

It began with remarks he made to reporters during an event in the Oval Office.

“You mentioned all the economic indicators are going up,” a reporter asked. “Why, then, is the — are U.S. deficits and the financial debt increasing at a time when the economy —”

Trump jumped in.

“Well, the trade deals won’t kick in for a while,” he said. “You know, number one, the USMCA” — the revised version of NAFTA that Trump’s administration negotiated with Canada and Mexico — “hasn’t even been approved yet. It has to go before Congress and get approved. Now, it should get approved quickly.”

Before NAFTA, Trump said, “we had huge surpluses with Mexico. With NAFTA, we have huge deficits. We lose $100 billion a year on trade with Mexico. Does that sound good? And this has been going on for many years. So I stopped it. I stopped it a lot.”

You probably noticed that Trump took a question that’s obviously about the federal budget deficit and gave an answer that dealt with the country’s trade deficits. Both are deficits, sure, but they relate to each other in about the same way that a tuning fork relates to a dinner fork. The term “deficit” describes something similar in each case, and they can even share similar properties, but the two are by no means equal.

If the entirety of trade between the United States and Mexico was your buying a $20,000 car from Mexico and selling someone there a $99 piece of software, the United States would have exported far less in goods than it imported, to the tune of $19,901. If, the next year, you sold another $99 software package but purchased only one $3 avocado, suddenly the United States would be running a trade surplus — $96 worth. That’s a change of nearly $20,000 in only one year!

None of this money, though, affects what the government is doing. Your car or that avocado doesn’t go into the U.S. Treasury as a tax receipt.

We could chalk this up to Trump mishearing the question were it not for the interview he gave to the New York Times a few hours later. Trump was asked if the tariffs he had imposed on China might remain in effect indefinitely even if the United States and China reached a broader trade agreement, as Trump hoped.

“Yeah, sure,” Trump replied. “We have 25 percent now on $50 billion. And by the way . . . that’s a lot of money pouring into our Treasury, you know. We never made 5 cents with China. We’re getting, right now, 25 percent on $50 billion. And then I was putting 25 percent at a later date, which date came and went — 25 percent or $200 billion.”

Now, it is true that tariffs can generate revenue for the government. In 2017, the U.S. government generated $34.9 billion in “customs duties,” taxes paid on the import of products into the country. That made up just under 1 percent of all of the taxes collected that year. (The bulk came from income taxes.)

If you’re curious, assuming that the U.S. government collected 25 percent tariffs on $50 billion in Chinese products, that would be another $12.5 billion in revenue, but that’s probably not a fair assumption. The percentage of revenue that would constitute is about 1.3 percent.

But, as The Washington Post’s Heather Long pointed out when Trump suggested in August that tariffs would pay down the debt, it’s not the Chinese paying those tariffs — it’s the person or company doing the importing. In our example above, Trump slapping a 25 percent tariff on cars from Mexico would mean that you’d have to pay $5,000 to the government for your $20,000 Mexican car. No wonder you stuck to that avocado in year two.

Put another way: The income the country is earning from those tariffs could more directly be generated by just raising taxes. Instead, Trump cut taxes — resulting in a plunge in corporate tax payments and a surge in the deficit that then drove the debt higher. Which is why that reporter asked about deficits and the debt in the Oval Office.

All of this is admittedly better than the really bizarre comment Trump made during an interview with Fox News’s Sean Hannity in October 2017. Hannity tossed up a softball about the economy, and Trump took a swing.

“The country — we took it over and owed over $20 trillion,” Trump said, referring to the national debt. “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.”

There is no sense in which rising stock market valuations reduces the federal debt. The way the federal debt is reduced is either by cutting federal spending or increasing federal revenue, including through raising taxes. As president, Trump has made overtures at the former and rejected the latter, meaning that the nearly $20 trillion debt Trump inherited has now topped $21.5 trillion.

But, then, the trade deals won’t kick in for a while.