President Donald Trump campaigned on promises of economic nirvana…
He vowed to slay the dragon of inflation. He pledged to turn the tables on our trading partners and bring manufacturing back to American shores. He promised to shower tax cuts upon the populace and put fresh cash in the pockets of consumers so they could spend it.
Now, just four months into Trump 2.0, our blustering 47th President is aiming to close the deal on what he says will be the “largest tax cuts in American history.” His legislative masterpiece, the One Big Beautiful Bill Act (OBBBA), throws in everything and the kitchen sink of economic pledges.
There’s the glorious extension of his 2017 tax cuts, which reduced individual income and estate taxes. There’s a tax break for tips, overtime pay, and even interest on auto loans. There are incentives for domestic research and development expenses.
Also, because it’s never too early to start speculating on the U.S. stock index, the OBBBA includes ‘Trump Accounts’ for children, which come with a $1,000 deposit from the federal government. This is in addition to the $500 in child tax credits. To top off the economic spread, there’s a $46.5 billion package to restart immigration action.
According to the White House, these policies will propel GDP upwards by a robust 2.6 to 3.2 percent over the long term. They also foresee median income households enjoying an extra $5,000 a year in their take-home pay. What’s more, people earning between $30,000 and $80,000 per year should anticipate a pleasant 15 percent reduction in their tax burden.
At the same time, the administration claims a $1.6 trillion deficit reduction. Is it really possible to rain cash on the economy and propose no serious spending cuts, and still somehow reduce the deficit?
Let’s explore…
Colossal OBBBA
Trump inherited a massive $36.2 trillion (now $36.9 trillion) national debt. Of this, roughly $8 trillion was accrued on his watch during his first presidency. Yet he wants to spend even more.
The non-partisan bean counters at the Congressional Budget Office (CBO) found the OBBBA would add another $3.8 trillion to the debt. This is debt that’s above and beyond the $22 trillion in additional debt that will be accumulated over the next decade. The mountain of debt the U.S. government is facing will make it difficult to pay its tab – or even the interest on its tab.
There may come a day, as foreshadowed during last week’s bond auction, where the Treasury has trouble finding buyers of its debt. To sweeten the pot, the Treasury will have to accept higher interest rates. This will further blow out the overall debt.
Alternatively, the Federal Reserve could further water down the value of the dollar with more quantitative easing, which involves creating credit out of thin air and buying Treasuries. This is a very unsatisfactory solution. It would expand and increase the debt and create an even bigger crisis.
Certainly, Team Trump is well aware of the nation’s massive debt and deficit problem. Trump recently suggested his ‘golden visa’ program could magically erase some of the national debt. Treasury Secretary Scott Bessent has admitted that the debt is on an “unsustainable path.”
Alas, with his colossal OBBBA, Trump is doing what every president before him for at least the last 50 years has done. He’s kicking the can down the road. The challenge now, however, is that the road is rapidly approaching its end.
The recent reactions of the dollar, gold, and interest rates are making this evident.
Just Grow Your Way Out
There’s always the fantasy that Washington could grow its way out of debt. By this, GDP would grow at a faster rate than the growth of debt, so that the debt-to-GDP ratio comes down. This sounds logical and practical. But after many decades of trying, it has proved to be impossible.
In 1981, for example, total U.S. public debt was approximately 30.6 percent of GDP. Today it’s over 121 percent. So, instead of growing its way out of debt over the last four decades, the U.S. government has done the exact opposite. It has consistently dug a deeper hole.
If cutting individual and corporate taxes to grow the economy out of debt didn’t work in the past, why would it work now?
To be clear, we’re all for lower taxes. But if lower taxes are not also met with spending cuts, we all end up paying for them through the inflation tax. Specifically, as the dollar loses value due to persistent deficits the corresponding rise in prices acts as a hidden tax on American incomes.
This is why after many decades of continuous deficits the median American income of roughly $40,000 per year doesn’t cut it.
Obviously, raising marginal tax rates discourages people from working, saving, and investmeniting. At the same time, higher debt levels and higher interest rates crowd out investment in productive activities.
Increasing borrowing costs make it more expensive for businesses to invest in new projects or expand existing ones. How is manufacturing supposed to return to American shores when the interest on the loans to build the factories will consume all the profits?
Going Full OBBBA
Adding more government debt and compelling interest rates higher will result in a stagnant, slow growth economy. This would push the debt-to-GDP ratio higher, not lower.
Similarly, tax hikes are not the answer either. This would also stifle the economy and limit its ability to grow.
Once again, it all comes back to spending cuts. The only honest way out of this mess is for Congress to balance the budget, eliminate the deficit, and start paying down the debt. Initially, GDP would decrease as the government spending the economy is dependent on disappears.
But it’s the right thing to do. After a long and painful period of adjustment the economy and government finances would be structurally sound. Yet the gross level of corruption on Capitol Hill makes this completely unattainable.
The 435 members of the House of Representatives and 100 Senators are each beholden to their own special interests and campaign financiers. There are defense contracts to make good on. Highway expansions. Reclamation projects. Hardening of the electrical grid. Funding for local parks. Big Pharma. Big Tech. Free lunches. And everything that’s sandwiched in between the welfare and warfare state.
There are also the untouchables of Social Security and Medicare. These programs, which we’ve all paid into our entire working lives, are bankrupting the country. Yet people love them. They don’t want to see them go.
But unless serious cuts are made to Social Security, Medicare, and defense spending, balancing the budget will not happen. And without a balanced budget the debt will continue to mushroom like metastatic cancer until it completely destroys the U.S. government’s finances.
Nonetheless, there’s not a snowball’s chance in hell Congress will do the right thing. As the spending bill makes its way through the Senate they’re all going to go full OBBBA. There will be more lard added than taken out. You can count on it.
Congressional members, like their special interests and constituents, all want to get theirs while they can. They each operate with the expectation that their spirit will leave their body before the ultimate reckoning. For America’s aging fogies, going full OBBBA is working to perfection.
For the rest of us, we’ll be left to figure it out.
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Sincerely,
MN Gordon
for Economic Prism
Cut spending on overseas military bases!!! Cut UN funding. No more USAID.
Karl Denninger at marketticker.org argues convincingly that the problem is medical cartels, and if the government enforced the anti-cartel laws, they could fix the problem by clearing up Medicare, and to some extent Medicaid alone. He argues that most Medicare spending disappears into fraud. It would also lower health plan costs and therefore lower costs to American companies.
Defense spending has a similar cartel problem. Social Security is not a problem. The tax more than covered the costs until recently (it was used to fund the rest of the government), is now running at a small deficit which could be eliminated by a few adjustments, and will be in surplus again after the Baby Boomers finally die off.