Hey! Rub-a-dub-dub. Trump won!
Make a toast or say a prayer. It all depends on your political and spiritual preferences. There are times to kiss the bottle. So, too, there are times to kneel in church. Perhaps now is the time for both.
“This will truly be the golden age of America,” remarked Trump.
We wish the President-elect the best in this undertaking. There’s certainly a lot of work that needs to be done to restore America’s luster. This mainly involves cleaning up a huge pile of wreckage from the past.
There’s the real possibility that the ultimate financial reckoning, one resulting from over 110 years of expedient and reckless decisions, will happen on Trump’s watch. Maybe that’s why the Democrat party’s dealmakers installed Harris and Walz – two obvious losers – to headline the party ticket.
There needs to be a scapegoat when everything goes up in smoke. Someone the media elites can point to and say, ‘it’s all his fault.’ Trump, without question, makes the perfect fall guy.
We don’t envy him. He faces a near impossible task. He must reverse the mega debt crisis that’s already here. His track record on this matter is less than promising. The last time Trump was President the national debt increased by $8 trillion.
Maybe he’s learned a thing or two since then. Maybe Elon Musk, and a new Department of Government Efficiency, will be able to hack off $2 trillion in annual spending. If so, this could postpone the day of reckoning.
But it would also trigger a deep recession.
State of Dependence
In fiscal year 2024, the U.S. Treasury collected $4.92 trillion. However, it paid out $6.75 trillion. The difference, the deficit, was $1.83 trillion. And this difference was covered with debt.
Deficit spending, remember, involves borrowing from the future to spend today. Extreme levels of deficit spending have been going on for decades. Consequently, vast sectors of the economy have come to depend on it.
Defense, health, transportation, technology, energy, agriculture, education. These sectors of the economy, and the jobs they provide, are all dependent on government spending. But that’s not all…
There is also a massive class of society that is dependent on transfer payments. Without social security, Medicare, welfare, EBT cards, and other free money from the government, they would be in big trouble. In addition, there are armies of government workers and government contractors that are dependent on the benevolence of Washington for their daily bread.
Removing $2 trillion in annual spending, as Musk has said he could do, would reduce government spending by nearly 30 percent. How would the economy and those dependent on government spending react to this gravy train suddenly running dry? Would the economy abruptly topple over?
Musk’s plans for eliminating $2 trillion in annual spending sounds great as a campaign speech headline. But, thus far, the plans for execution have been short on details.
Here at the Economic Prism, we took a quick pass at government spending in an attempt to understand where these $2 trillion in spending cuts would come from. What follows is our quick and dirty review…
Trimming the Fat
The largest budget item, Social Security, had budget outlays of $1.46 trillion in FY 2024. So, if everyone on Social Security took a 30 percent haircut, which is highly unlikely, that amounts to a spending reduction of about $440 billion. Where will the other $1.56 trillion come from?
Next in line is Health, at $912 billion in outlays in FY2024. A 30 percent spending cut amounts to about $274 billion. Thus, between Social Security and Health, this would be a spending reduction of $714 billion. There would still be about $1.29 trillion in cuts to go to reduce spending by $2 trillion.
Next in the budget line is net interest on the debt, at $882 billion. The only way to cut net interest on the debt is to stop adding to the debt, and to also refinance the debt at lower interest rates. Unfortunately, Treasury yields are going up. So, outlays directed to paying the interest on the debt will also go up.
On and on down the budget line the opportunities for cuts become slimmer and slimmer. Medicare, National Defense, Income Security, Veterans’ Benefits & Services, Education, Transportation, Other.
These seven remaining line items amounted to $3.4 trillion in spending in FY2024. An across the board cut of 30 percent would amount to $1.02 trillion. So, with this, plus the $714 billion in spending cuts to Social Security and Health, spending would be reduced by $1.7 trillion. With an addition $300 billion in cuts, Musk could get to $2 trillion.
But is it likely?
We put the odds of Trump, with Musk’s bidding, going forward with such radical spending cuts at less than zero. Moreover, it is even less likely that Congress, having power of the purse, would even propose them to start with.
We’re not saying these spending cuts would be a bad thing. In fact, they would be good. And they should have happened over 40 years ago. If they had, we wouldn’t be in this fiscal mess to begin with.
The Road to America’s Golden Age
A healthy economy should not depend on mega deficits to function. Balancing the budget will go a long way to nurturing a healthy economy – free of inflation – at some time in the future. But the immediate consequences of taking away $2 trillion in government spending that hundreds of millions of people depend on would be brutal.
When the spending disappears, and the associated jobs vaporize, gross domestic product will go down. An abrupt decline in GDP would take the stock market down with it, which would also eat away at the capital gains taxes the Treasury depends on.
In addition, jobs that are indirectly dependent on government spending will also take a hit. For example, if a government contractor loses his job, how does he pay for his auto insurance or Saturday nights out on the town?
You can quickly imagine the countless ramifications up and down the economy that would follow the sudden loss of $2 trillion in government spending.
Similarly, as GDP declines, tax receipts also decline. So, even with spending cuts, the deficit could initially increase.
In time, however, as the economy learns to stand on its own two feet, and as the price of assets, like houses and stocks, fall in line, and as former government workers find productive jobs, a real self-sustaining economy would take shape. This would truly mean a golden age of America.
The road from here to there is full of rocks and pitfalls. But it is a road worth taking.
The alternative, of course, is the continuation of the current trajectory. Exponential debt growth. Dollar devaluation. And a mega hyperinflationary blowout.
As part of his economic plan, Trump also intends to employ massive import tariffs. This will have an inflationary effect on the cost of consumer goods. Perhaps tariffs will result in the return of some manufacturing jobs. Products Made in the USA will have an advantage over foreign manufacturers, who will be priced out of America’s consumer markets as a result of the tariffs.
Nonetheless, intervening in trade is generally a net negative for the economy. Tariffs also have the potential to create a destructive trade war, like the Smoot-Hawley Tariff Act of 1930. Tariffs and retaliatory tariffs helped make the Great Depression especially great.
Let’s hope Trump tariffs don’t trigger a repeat of those destructive mistakes from the past. If so, this would be a lengthy detour on the road to America’s golden age.
[Editor’s note: Have you ever heard of Henry Ford’s dream city of the South? Chances are you haven’t. That’s why I’ve recently published an important special report called, “Utility Payment Wealth – Profit from Henry Ford’s Dream City Business Model.” If discovering how this little-known aspect of American history can make you rich is of interest to you, then I encourage you to pick up a copy. It will cost you less than a penny.]
Sincerely,
MN Gordon
for Economic Prism
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