All In

The Big Beautiful Bill is a very big economic bet. We will leave the dissection of the bill and the various pros and cons and who wins and who loses to others. The big economic picture is that in order for debt relative ro GDP to decline, GDP growth needs to outpace growth of the federal debt. The headlines have focused on the increase in debt, but the primary problem is that most estimate that it will add little to GDP growth over the next ten years.

The libertarian Cato group estimates that the federal debt will ballon by $6 trillion over the next ten years. That implies an annual growth rate of 1.5% from the $36.2 trillion as of the first quarter of 2025. By contrast, trendline GDP growth has been around 2% annually. On that basis, debt to GDP would actually decline modestly over the next 10 years.

The big picture mathematics look good from a distance, however, the devil is in the details. The debt estimates that are published do not consider the probability of a recession in the next ten years. The cost of responding to a recession would drive the debt level higher, and, of course, GDP growth would decline, which throws a monkey wrench into the basic mathematics.

The Trump policy is based on a proposition that a combination of tax cuts, tariffs, and deregulation will promote above trend economic growth which will offset the higher debt levels (that is, it will lower the debt to GDP relationship). The key economic risk to that policy is inflation, potentially derived from the impact of tariffs, and/or the global adjustment of supply chains and/or the general impact of trillions of dollars in additional deficit spending.

Donald Trump’s economic policy is making a high-stakes bet on the idea that a combination of broad tax cuts, aggressive tariffs, and deregulation will generate enough economic growth and government revenue to offset the risks of higher debt, inflation, and potential disruptions to trade and labor markets. It’s a very big bet and one that the U.S. can ill-afford to get wrong.

Tariffs: The tariff levels for most countries have yet to be determined with the July 9 deadline looming. The optimistic statements regarding deals are quickly fading and it is far from clear if this administration can pull a rabbit out of its hat. If they can’t, then significantly higher tariffs are a distinct possibility. We note that the July 4 holiday festivities in Washington included some tariff saber rattling as the Administration started notifying countries of the new US tariff on their exports effective Aug. 1, unless a deal is signed.

The economic rationale for the tariffs is that they will protect U.S. industries, encourage domestic manufacturing, raise substantial government revenue, and reduce the trade deficit. Higher tariffs should serve to protect domestic manufacturing and further encourage on-shoring. The problem is that onshoring generally increases manufacturing costs; reasonable tariffs are unlikely to make a material dent in the national debt, and if very high tariffs are imposed, inflation is more likely to become a real problem. This is not going to be easy.

A critical unknown in the tariff policy is how the cost of tariffs will be divided by manufacturers, suppliers and consumers. A 10% tariff is unlikely to produce a 10% price increase to consumers. Manufacturers will pressure suppliers to cut costs and the manufacturers themselves will cut costs in an effort to minimize consumer rice increases. However, if a 30% tariff is imposed, it is extremely difficult for the supply chain to absorb those costs and consumer prices are more likely to rise. This is why it is so critical that trade deals are struck and we avoid massive tariffs with key trading partners.

Tax Cuts: Trump is pushing to extend and deepen the 2017 Tax Cuts and Jobs Act, lower corporate taxes (especially for domestic manufacturers), and eliminate or reduce taxes on tips, overtime, and Social Security benefits. The administration argues that these cuts will stimulate investment, productivity, and economic growth, with the hope that the resulting growth will eventually pay for the lost revenue. However, independent estimates suggest these policies could reduce federal revenue by $5–11 trillion over 10 years and increase the debt-to-GDP ratio to as high as 149% by 2035, unless offset by spending cuts or unexpected growth.

To offset lost revenue, the policy includes major cuts to social programs such as Medicaid and SNAP (food assistance), potentially leaving millions without benefits or insurance. The bet is that these cuts, while controversial, will help stabilize federal finances and encourage work (shades of Ronald Reagan).

Deregulation: Trump’s administration is pursuing deregulation and government downsizing, aiming to boost business efficiency and reduce costs. To the extent this is possible, it should provide a boost to domestic growth, but that is extremely difficult to quantify.

Trump’s policy framework assumes that growth from tax cuts, deregulation, and protected domestic industries will be strong enough to overcome the negative impacts of higher tariffs, social spending cuts, and rising federal debt. Supporters believe this will lead to a more robust, self-sufficient U.S. economy. Critics argue it could result in higher prices, slower growth, increased inequality, and fiscal instability if the growth does not materialize as the Trump Administration expects.

Hope you are having a happy 4th of July!

 

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The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

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All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.

The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

Past performance is no guarantee of future returns.

 

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By: Adam