Trump has yet to kill the golden goose that is the U.S. economy. But he's working on it
The good news is that the American economy added 144,000 jobs in June, and the unemployment rate dropped to 4.1 per cent. U.S. President Donald Trump's tariff threats have mostly not knocked the economy off course, yet, because they are still (mostly) threats.
Even so, U.S. job gains were concentrated in local government and health care, while manufacturing employment fell for a second month. It may be a sign that tariffs are starting to bite. And as for that lower unemployment rate, it was caused by a drop in the number of Americans looking for work – also not a great sign.
On Wednesday night, Mr. Trump posted on social media that 'the USA is on track to break every record on GROWTH.' Unfortunately, the U.S. economy is not even on track to beat 'GROWTH' during the Biden years. But so far at least, economic life in the Trump era is, for the average American, not much different from six months ago. The view from the side and rear windows is moderately sunny.
And now for the clouds out the front window.
U.S. Congress just passed Trump's massive tax and spending cuts bill. Here's what to know
Trump's massive spending bill is set to become law. Now, the reckoning begins
On Thursday, the House of Representatives passed Mr. Trump's signature 'one big beautiful' budget bill. It's basically a plan for large tax cuts, which will mostly benefit higher earners, combined with cuts to social spending that will, among other things, end health insurance for several million Americans. The bill also counts on new revenue from tariffs.
Because the tax cuts are bigger than anything else, the result is an increase in the federal deficit of US$3.3-trillion over the next decade, according to the Congressional Budget Office, or US$5.5-trillion, according to the Committee for a Responsible Federal Budget.
The CRFB estimate is higher, and likely more accurate, because it ignores accounting fictions and assumes that tax cuts intended to be permanent become permanent – as the bill does for Mr. Trump's 2017 tax cuts, which were set to expire.
Even before this legislation, the U.S. budget deficit was in the stratosphere. In the last fiscal year, it weighed in at US$1.8-trillion, or 6.4 per cent of gross domestic product. Paying for tax cuts today through an IOU to the future will push U.S. deficits to new heights.
That's why Mr. Trump is badgering Federal Reserve Chair Jerome Powell to cut interest rates. Earlier this week on social media he said 'Powell, and his entire Board, should be ashamed' for having 'FAILED' Americans. 'We should be paying 1% Interest, or better!'
The reason: 'Our Country would be saving Trillions of Dollars in Interest Cost.'
Mr. Trump is right about the rising cost of carrying all that debt, though his solution – he wants Mr. Powell to resign – can't solve the problem. Washington will spend nearly US$1-trillion on interest this year, and the CRFB estimates that Mr. Trump's budget bill will raise that to US$2-trillion by 2034.
Simply ordering the Fed to lower interest rates won't work. The Fed sets short term rates, but the market gets a vote on long-term borrowing costs. And those have been rising. The yield on the U.S. 10-year bond is up three-quarters of a percentage point since last September, even though the Fed lowered short-term rates by a percentage point.
The global era of ultra-cheap debt appears to be over. The yield on the 10-year U.S. bond is back to where it was in 2007. The Great Recession triggered almost two decades of near zero-borrowing costs, but that's history.
Mr. Trump and Team MAGA are taking a very large budget deficit and pushing it higher, which will stimulate the economy in the short term but in the long-run will cause interest costs to eat away at U.S. finances. In response to this problem of his own making, Mr. Trump is demanding that the Fed take actions likely to provoke inflation and undermine investor appetite for lending to Washington. Both of these moves would put further upward pressure on interest rates.
And all of this is being done to finance tax cuts for the wealthy, paired with a dose of trade-sapping, inflation-powering, alliance-destroying tariffs, plus a side order of cuts to services for many of the blue collars who are the Republican Party's base. Happy Fourth of July, y'all.
The U.S. economy is a goose that lays golden eggs. And Mr. Trump wants to feed it rocks.
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