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Donald Trump's misleading linkage between stock gains, debt reduction
President Donald Trump raised eyebrows with comments linking stock market gains with declines in the federal debt during two appearances to tout his tax proposal in Pennsylvania.
First, in an Oct. 11 speech in an airplane hangar in Harrisburg, Trump said:
"Just in the stock market alone, we have increased our economic worth by $5.2 trillion. That's right since Election Day -- $5.2 trillion. Think about that. That's a quarter of the $20 trillion that we owe. … In the last eight years of the previous administration, the debt doubled. … But since the election on Nov. 8, I've increased the value of your U.S. assets by more than the $20 trillion that we currently owe. You haven't heard those numbers."
During a subsequent interview with Fox News’ Sean Hannity, Trump made the linkage between stock market gains and debt decreases even clearer.
"The country — we took it over and owed over 20 trillion. 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."
We decided to look into whether Trump had a point that the stock market gains on his watch effectively wiped out any of the debt incurred by his predecessor, Barack Obama. (The White House did not provide any further information to PolitiFact.)
Trump is somewhat off-base with those numbers. But the bigger problem is that the stock market gains and the debt don’t have the relationship he implies.
As of Oct. 12, the most expansive figure for the federal debt is almost $20.4 trillion. About $9.2 trillion of that came between the inaugurations of President Barack Obama and Trump. So that wasn’t "more than $10 trillion," and it wasn’t double the cumulative debt when he took office.
The increase in stock market values may also be a little high. Derek Holt, head of capital markets economics at Scotiabank, told the Financial Post that the value has risen by about $4.4 trillion since the election.
However, stock market gains accrue to stockholders; the government doesn’t get any of those increases to pay for government spending or to pay down the debt unless and until the assets are sold and taxed. (Only a communist government can seize private assets to pay down the debt.)
So gaining a $5 trillion boost in stock values doesn’t simply enable the country to write off that much of its $20 trillion debt.
"The president is conflating the stock market, which represents the wealth of private corporations, with the federal budget," said Chris Lafakis, director at Moody’s Analytics. "There is not a direct link between the two."
The taxation of such assets is delayed until the asset is sold, which could take years.
"At best, a small share of the increase in equity value will, some day, lead to higher capital gains taxes," said Steven Fazzari, an economist at Washington University in St. Louis.
And the rates at which such assets are taxed -- capital gains rates -- are relatively low compared to other forms of income taxes.
"With a tax rate on capital gains of 15 percent, even if all the stocks that have risen were sold tomorrow, the federal government would only reap at most 15 percent of the $5 trillion in asset gain," said added Bruce Bartlett, who served as deputy assistant secretary for economic policy at the Treasury Department under President George H.W. Bush.
And some of these gains may never be taxed. That could be the case if the holdings are passed on to heirs in a modestly sized estate, or if they are held institutionally, such as by a university. Other gains may have accrued to pension funds, and taxes would only be paid when the pensions are paid out and taxed by the recipient.
The actual gain to the Treasury stemming from this stock run-up "is completely out of whack" with what Trump suggests, Lafakis said.
"We’re talking about tens of billions, maybe even over $100 billion in extra revenues if you adopt very extreme assumptions," he said. "That doesn’t even stop our debt from going up, let alone pay down a meaningful portion of it."
All of this, of course, assumes that stock values, which fluctuate minute by minute, won’t fall.
Since Election Day, the Standard & Poor’s index of U.S. stocks has risen by about 19 percent -- an impressive gain. But if we put this in context, other international stock markets have done even better.
Specifically, Germany’s DAX has risen by 24 percent over the same period. France’s CAC 40 and the Netherlands’ AEX indexes have both risen by 20 percent. Japan’s Nikkei 225 index has risen by 22 percent, and both Hong Kong’s Hang Seng and South Korea’s KOSPI have risen by 24 percent.
Another nuance Trump didn’t capture: The lines between debt and wealth can be complicated.
About one-third of the federal debt is held by foreign entities, but much of the rest is held by Americans -- and those federal bondholders count that "debt" on their own ledgers as "wealth." Meanwhile, some fraction of the stocks that produced the equity gains Trump refers to are held by foreigners.
From Obama’s inauguration through Oct. 12, 2009, the Standard & Poor’s index increased by a whopping 34 percent, outpacing Trump’s 19 percent over the same portion of his presidency. The circumstances were different, of course -- Obama started at an economic low point while Trump inherited a healthily growing economy -- but the economy went on to strengthen under Obama over the long term.
Between the first quarter of 2009 and the final quarter of 2016, Americans’ net worth increased from $55 trillion to $92 trillion. (This figure encompasses stock market values, home and property values, and changes in the indebtedness of U.S. households.) That’s an increase of two-thirds over eight years, or $37 trillion in raw dollars.
So under Obama, wealth increased by an amount four times as large as the increase in the federal debt. But, for the reasons we explained, the wealth gains could not be directly applied to reduce the debt.
"By President Trump's own reasoning, the Obama administration was an enormous success," said Gary Burtless, an economist with the Brookings Institution. "The success has continued, so far, in the first nine months of the Trump administration."
In the meantime, some argue that the creation of certain types of debt under Obama -- the deficit-financed expenditures for the fiscal stimulus during the Great Recession, for instance -- helped produce the stock-price run-up under both Obama and Trump.
"One could argue that without the 2009 American Recovery and Reinvestment Act, the economy would have been far weaker in 2009, 2010 and 2011, and stock market valuations would have been lower," Lafakis said. "So in that instance, increasing the debt helped the stock market."
Trump said the Obama administration "borrowed more than $10 trillion, right? And yet, we picked up $5.2 trillion just in the stock market. ... Maybe in a sense we’re reducing debt."
Trump seems to be signaling that the stock market gains can somehow be applied to paying down the debt. That’s not the case -- gains from a bull market accrue to stockholders, and the government doesn’t get its fractional cut until the assets are sold and taxed, if they ever are. So, whatever tax revenues from the stock-market run-up eventually flow to the government over the course of many years won’t make a dent in the debt, economists say.
We rate the statement False.
Donald Trump, speech in Harrisburg, Pa., Oct. 11, 2017
Donald Trump, interview with Sean Hannity, Oct. 11, 2017
Yahoo! Finance, historical price data for Standard & Poor’s, Germany’s DAX, France’s CAC 40, the Netherlands’ AEX, Japan’s Nikkei 225, Hong Kong’s Hang Seng, and South Korea’s KOSPI, accessed Oct. 12, 2017
Federal Reserve Board of St. Louis, net worth statistics, accessed Oct. 12, 2017
Treasury Department, major foreign holders of U.S. securities, accessed Oct. 12, 2017
Committee for a Responsible Federal Deficit, "Have Stock Market Gains Reduced the National Debt?" Oct. 12, 2017
Financial Post, "Despite Donald Trump’s claims, U.S. stock market ‘dragging rest of the world index lower,' " Oct. 11, 2017
Washington Post, "For his own good, Trump should avoid Hannity. His bizarre answer on the debt shows why," Oct. 12, 2017
CNNMoney, "No, Mr. President, a stock market rally does not reduce the national debt," Oct. 12, 2017
Email interview with Dean Baker, co-director of the Center for Economic Policy and Research, Oct. 12, 2017
Email interview with Andrew Zimbalist, Smith College economist, Oct. 12, 2017
Email interview with Bruce Bartlett, deputy assistant secretary for economic policy at the Treasury Department under President George H.W. Bush, Oct. 12, 2017
Email interview with Gary Burtless, senior fellow at the Brookings Institution, Oct. 12, 2017
Email interview with Steven Fazzari, economist at Washington University in St. Louis, Oct. 12, 2017
Email interview with Chris Lafakis, director at Moody’s Analytics, Oct. 12, 2017
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