President Donald Trump embarked on his campaign with grand promises of an economic utopia…
He vowed to tackle the pervasive issue of inflation. He aimed to negotiate better terms with global trade partners and bring manufacturing back to the United States. He also committed to providing tax cuts, putting extra money in the hands of consumers for them to spend.
Now, just four months into the second term of Trump, our boisterous 47th President is working towards what he describes as the “largest tax cuts in American history.” His legislative initiative, the One Big Beautiful Bill Act (OBBBA), encompasses a wide array of economic promises.
This includes an extension of his 2017 tax cuts, which lowered personal income and estate taxes. Additionally, there are tax breaks for tips, overtime pay, and even auto loan interest. The bill also proposes incentives for domestic research and development expenses.
Taking a forward-looking approach, the OBBBA introduces ‘Trump Accounts’ for children, each receiving a $1,000 federal deposit, alongside $500 in child tax credits. To further enhance the economic outlook, a $46.5 billion package is included to address immigration reform.
The White House asserts that these initiatives will stimulate GDP growth by a robust 2.6 to 3.2 percent over the long term. They project that median households will see an additional $5,000 annually in disposable income, and individuals earning between $30,000 and $80,000 can expect a 15 percent reduction in their tax liabilities.
Meanwhile, the administration claims this will lead to a $1.6 trillion reduction in the deficit. But can it truly be possible to shower the economy with cash while proposing no substantial spending cuts, and still manage to decrease the deficit?
Let’s delve deeper…
The Mammoth OBBBA
Trump inherited a staggering national debt of $36.2 trillion (now at $36.9 trillion), with about $8 trillion accumulated during his first presidency. Yet, he seeks to increase expenditure even further.
According to the nonpartisan Congressional Budget Office (CBO), the OBBBA would add another $3.8 trillion to the existing debt. This is in addition to the projected $22 trillion in extra debt over the next decade. The monumental debt confronting the U.S. government hampers its ability to meet its financial obligations—or even to cover interest payments.
There may come a time, as hinted in recent bond auctions, when the Treasury struggles to attract buyers for its debt. To make bonds more appealing, the government may have to raise interest rates, exacerbating the debt situation.
Alternatively, the Federal Reserve could dilute the dollar’s value through further quantitative easing, which entails creating credit out of thin air to purchase Treasuries. However, this is a troubling solution that risks expanding the debt and triggering an even larger crisis.
Team Trump is certainly aware of the massive debt looming over the nation. The President has suggested that his ‘golden visa’ program could eliminate part of the national debt, while Treasury Secretary Scott Bessent acknowledged that the debt is on an “unsustainable path.”
Unfortunately, with the audacious OBBBA, Trump is merely following in the footsteps of his predecessors over the past 50 years, postponing necessary reforms. The difference now, however, is that the scope for delay is narrowing.
Recent trends in currency valuations, gold, and interest rates underscore this urgency.
Growing Our Way Out?
There remains a persistent hope that Washington can grow its way out of debt. The idea is that GDP growth could outpace debt growth, thereby diminishing the debt-to-GDP ratio. This sounds reasonable, but after decades of attempts, success has proven elusive.
In 1981, total U.S. public debt was around 30.6 percent of GDP, while today it has soared beyond 121 percent. Instead of successfully navigating debt reduction over the past four decades, the U.S. government has burrowed deeper into the fiscal abyss.
If slashing individual and corporate taxes failed to catalyze growth out of debt in the past, what evidence suggests it will succeed now?
Let’s be clear: lower taxes are welcomed. However, without corresponding spending cuts, taxpayers will bear the brunt through the inflation tax. As the dollar loses value due to ongoing deficits, rising prices effectively act as a hidden tax on American earnings.
This phenomenon is why the median American income of around $40,000 annually feels inadequate.
It’s clear that ramping up tax rates discourages work, savings, and investment. Concurrently, rising debt levels and interest rates crowd out essential investments.
Higher borrowing costs strain businesses, making it difficult for them to invest in new ventures or expand. How can manufacturing return to American shores when the cost of loans for building factories consumes all profits?
Embracing OBBBA
Ramping up government debt while driving interest rates higher is bound to result in a stagnant, slow-growing economy. This would only inflame the debt-to-GDP ratio.
Tax increases similarly prove counterproductive, as they would restrain economic growth.
Ultimately, the solution lies in making spending cuts. The only genuine way out of this predicament is for Congress to balance the budget, eliminate the deficit, and start paying down the debt. Initially, GDP may contract as the government trims spending—which the economy has come to rely on.
Nevertheless, this is the responsible course of action. After a difficult transition period, both the economy and governmental finances would emerge healthier and more sustainable. Regrettably, rampant corruption in Washington makes this undertaking all but impossible.
Members of the House of Representatives and the Senate are beholden to their special interests and campaign financiers. They have obligations for defense contracts, infrastructure projects, public services, and everything in between, including Big Pharma and Big Tech.
The sacred cows of Social Security and Medicare, long funded by our contributions, are also draining the country’s resources. People are deeply attached to these programs and resist any changes.
Without significant cuts to Social Security, Medicare, and defense spending, a balanced budget remains unattainable. And without a balanced budget, the national debt will continue to balloon out of control, threatening the financial stability of the U.S. government.
However, the likelihood that Congress will make the hard choices needed is slim. As the spending bill moves through the Senate, expect more pork to be added than taken away. It’s a certainty.
Each congressional member, along with their special interests, aims to secure their own benefits while they still can. They operate under the assumption that they will be long gone before the eventual reckoning arrives. For many in America, going full OBBBA is working seamlessly.
For the rest of us, the path ahead is uncertain.
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Sincerely,
MN Gordon
for Economic Prism
