Exciting times are upon us—Trump is back!
Whether you celebrate with a toast or reflect in prayer, the moment is significant depending on your perspectives. There are moments when one might find solace in a drink, just as there are times to seek guidance in quiet contemplation. Perhaps this is one of those moments.
“This will truly be the golden age of America,” proclaimed Trump.
We extend our best wishes to the President-elect as he embarks on this monumental task. Much work lies ahead to rejuvenate America’s reputation, primarily involving the cleanup of considerable challenges rooted in the past.
There’s a real likelihood that the long-awaited financial reckoning, a consequence of over a century of questionable decisions, may transpire during Trump’s administration. Perhaps that’s why the Democratic Party has fielded Harris and Walz—strategically chosen figures to lead a losing ticket.
A scapegoat is often sought when circumstances deteriorate. Someone the mainstream media can readily blame, someone like Trump, indeed fits that narrative perfectly.
We don’t envy his position. He faces an arduous challenge ahead; reversing the current mega debt crisis is no small feat. His previous record on this issue leaves much to be desired, as the national debt surged by $8 trillion during his last term.
However, perhaps he has gleaned insights since then. If innovative leaders, like Elon Musk, alongside a new Department of Government Efficiency, can manage to eliminate $2 trillion in annual expenditures, it might delay the inevitable crisis.
Yet, that could also plunge us into a significant recession.
State of Dependence
In the fiscal year 2024, the U.S. Treasury accumulated $4.92 trillion but disbursed $6.75 trillion, resulting in a deficit of $1.83 trillion, funded by debt.
Deficit spending signifies borrowing from the future for present expenses. This trend has persisted for decades, leading various sectors of the economy to become reliant on it.
Key areas—including defense, health, transportation, technology, energy, agriculture, and education—thrive on government funding. Additionally, many citizens rely on transfer payments; without social security, Medicare, welfare, EBT cards, and other government aids, they would face severe hardship. Furthermore, numerous government employees and contractors also depend on Washington’s financial support.
The potential withdrawal of $2 trillion in annual expenditures, as proposed by Musk, could reduce government spending by almost 30 percent. The fallout from such a decline would be profound. Would the economy withstand the abrupt cessation of vital funding?
Although Musk’s ambition to cut $2 trillion sounds appealing in theory, concrete plans remain scarce.
At Economic Prism, we conducted a preliminary analysis of government spending to explore the sources of these anticipated cuts. Below is our succinct review…
Trimming the Fat
The largest expenditure, Social Security, accounted for $1.46 trillion in FY 2024. If every beneficiary faced a 30 percent reduction (an unlikely scenario), it would amount to a $440 billion decrease. That still leaves $1.56 trillion unaccounted for.
Following Social Security, health expenditures totaled $912 billion in FY 2024. A 30 percent cut here would yield approximately $274 billion. Combined, these reductions from Social Security and Health would lead to a total of $714 billion, still leaving $1.29 trillion needing to be cut.
The next largest item on the budget is net interest on the debt, which stood at $882 billion. The only way to decrease this figure is to halt further borrowing and refinance existing debt at more favorable rates. Unfortunately, Treasury yields are rising, indicating higher interest payments ahead.
As we move further down the budget, the options for cuts become increasingly slim. Subsequent categories include Medicare, National Defense, Income Security, Veterans’ Benefits and Services, Education, Transportation, and Other. Together, these seven categories encompassed $3.4 trillion in FY 2024. A 30 percent cut would yield $1.02 trillion, bringing the total savings from cuts in Social Security and Health to $1.7 trillion. Achieving an additional $300 billion in reductions could lead to the $2 trillion Musk envisions.
However, how feasible is this really?
We assess the likelihood of Trump, under Musk’s influence, successfully implementing such sweeping cuts to be low. It is even more improbable that Congress would consider such measures.
We aren’t suggesting that these cuts would be detrimental; in fact, they would be beneficial and should have been enacted decades ago. Had they been, we might not find ourselves in this fiscal predicament today.
The Road to America’s Golden Age
An efficient economy should not be reliant on massive deficits for sustainability. Achieving a balanced budget would significantly contribute to nurturing a stable economy devoid of inflation in the future. Nevertheless, the immediate repercussions of withdrawing $2 trillion in government spending, which millions rely upon, would be catastrophic.
As funding vanishes and related jobs disappear, gross domestic product (GDP) would plummet. A sudden GDP decline would likely lead to a slump in the stock market, eroding the capital gains taxes on which the Treasury relies.
Moreover, jobs indirectly reliant on governmental financial dispersions would also suffer. For instance, if a government contractor loses employment, how will they pay for essential expenses like auto insurance or leisure activities?
The cascade of effects resulting from the withdrawal of $2 trillion in government spending is difficult to fathom.
Equally, as GDP declines, tax revenues would shrink. Hence, the deficit could initially rise despite spending reductions.
Over time, however, as the economy stabilizes and individuals return to productive roles, a genuinely self-sustaining economy might emerge, paving the way towards America’s golden age.
The journey from current circumstances to that bright future is fraught with challenges. Yet, it is a path worth pursuing.
The alternative is to persist on the same path: spiraling debts, diminishing dollar values, and an explosive hyperinflationary crisis.
As a component of his economic strategy, Trump aims to implement significant import tariffs. While this could impact consumer goods prices, it might also lead to the resurgence of domestic manufacturing jobs. ‘Made in the USA’ products could gain an advantage over foreign competitors, who may find themselves priced out of the market due to these tariffs.
However, such trade interventions usually produce more harm than good. Tariffs could instigate a damaging trade war reminiscent of the Smoot-Hawley Tariff Act of 1930. This legislation and the resulting retaliatory tariffs contributed significantly to the severity of the Great Depression.
It’s crucial that Trump’s approach does not replicate such historical blunders; otherwise, we may face an extensive detour on the pathway toward America’s golden age.
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Sincerely,
MN Gordon
for Economic Prism
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