The Trump 2.0 economy is starting to come into focus. Three key factors paint a picture of where he intends to go.
They are: (1) Trump’s pick for Treasury secretary, Scott Bessent, is a deficit hawk. (2) A key Trump legislative priority is extending, even expanding, his tax cuts. (3) Trump recruited Elon Musk and Vivek Ramaswamy, both tech billionaires, to come up with spending cuts.
A “deficit hawk” is someone who wants to reduce or eliminate budget deficits. It’s fiercely debated whether deficits matter. At some point they do, but there’s no bond market crisis yet. Still, Wall Street, where Bessent hails from (he’s a hedge fund manager), applauded his selection. But what does it mean for the rest of us? It’s complicated.
Let’s start here: To reduce deficits, you have to raise taxes, cut spending, or both.
A strong case can be made for reducing deficits. But it’s nearly impossible without raising taxes because an aging population will put more demands on Social Security and Medicare in coming years. In addition, the government’s interest expense on its debt has increased.
Because Trump’s 2017 tax cuts contribute to larger deficits, the most logical and fairest way to reduce deficits is to restore the previous status quo by letting those tax cuts expire. But Trump won’t hear of it.
Republicans claim tax cuts bring in more revenue by stimulating the economy. But the Reagan, Bush, and Trump tax cuts all resulted in higher deficits. I doubt Bessent believes in this “voodoo economics.” More likely, like Trump and Musk, he’s thinking about pairing Trump’s planned tax cuts with gargantuan spending cuts.
What about tariffs? Experts say tariffs won’t come close to replacing the lost revenue. And tariffs raise prices for consumers; in effect, they’re a hidden sales tax. Relying on tariffs for revenue represents a shift from taxing income to taxing consumption. This results in people lower on the income scale paying more of the tax burden.
But Trump’s tariffs can’t even make up for his tax cuts. Consequently, without spending cuts, Trump’s fiscal plans will increase deficits. Of course, he knows this, otherwise he wouldn’t have tasked Musk and Ramaswamy with identifying spending cuts.
How much spending cuts are needed? Trump’s planned tax cuts are estimated to cost $7.75 trillion over 10 years. Let’s average that to $775 billion a year. That’s how much you have to cut spending just to pay for his tax cuts, before getting deficit reduction.
Musk claims spending can “easily” be cut by $2 trillion a year. In reality, his catalogue of “wasteful” spending is a joke (see tweet here).
This graphic shows the federal budget with outlays of $6.1 trillion and revenues of $4.4 trillion, resulting in a deficit of $1.7 trillion. To totally eliminate deficits after Trump’s tax cuts, you’d have to cut expenses by $2.475 trillion, less whatever tariffs bring in.
Social Security, Medicare, debt interest, and defense add up to $3.86 trillion. If you don’t cut those, that leaves $2.24 trillion of spending on everything else: Federal employee salaries, civilian and military retirement benefits, veterans benefits and health care, Medicaid (which provides health to the poor), food stamps and child nutrition programs, unemployment benefits, agricultural subsidies, NASA (from which Musk gets billions in contracts for his space company), federal highways, air traffic control, national parks, federal lands management, FEMA, and a vast array of other activities.
It’s obvious where the budget cutters will go first. Health care is the low-hanging fruit. Republicans don’t believe in a right to health care. They see health care as a privilege earned by those who succeed in the economy. They want to eliminate government-funded health care, regardless of the impact on deficits, based on ideology. Because government pays for half of U.S. health care, the impact would be enormous.
Of course, other programs they don’t like wouldn’t be spared, either. Every thread of the social safety net will be targeted. Underlying this is Republicans’ desire to impose their Social Darwinist philosophy on the American people. To do it, they intend to shred the social safety net. They don’t care if people are hurt.
Making speeches about the dire need to reduce deficits while cutting taxes for the rich is the same old wolf in the same old sheep’s clothing. At the end of the day, it’s an just another attack against social programs they’ve never liked. Where other Republican administrations have failed, Trump thinks he can succeed. He’s going to try.