Trumponomics 2.0 will erode the foundations of America's prosperity

Business Times

a day ago

Was it just a false alarm? The panic about the world economy that followed US President Donald Trump's 'Liberation Day' tariffs in April has given way to growing optimism. Tariffs' inflationary effect has so far been muted. In private, bosses say they now expect trade fights to produce trade deals, not to be an end in themselves. Surveys show that business and consumer confidence, though low, is improving. The S&P 500 index of stocks has hit a record high.
And as we report, the One Big Beautiful Bill Act (BBB) that passed the Senate on Jul 1 looks more like traditional tax-cutting, spending-slashing Republicanism worthy of Paul Ryan or Mitt Romney than it does a Maga (Make America Great Again) fantasy. Suddenly, business leaders are again willing to see Trump as the populist from his first term: a man to be taken seriously, but not literally.
Unfortunately, the BBB is likely to cast a shadow over this sunny picture. It illustrates the long-term damage Trump is doing to the foundations of America's economy.
Unsustainable
The Bill's main effect is to extend the tax cuts from Trump's first term which were due to expire. Republicans paint this as an extension of the status quo. Yet they, like the Democrats before them, ignore the fact that the status quo is unsustainable.
Over the past 12 months America's budget deficit has been an astonishing 6.7 per cent of gross domestic product. If the Bill passes, the deficit will remain around that level and the country's debt-to-GDP ratio will, in about two years, exceed the 106 per cent reached after World War II. Revenue from tariffs will help, but not enough to stop the ratio rising – meaning that the drift towards crisis will continue.
To the extent the Bill tightens the belt, it does so in the wrong places.
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As life expectancies rise and the population ages, America should trim handouts to the old, for example by raising the retirement age. Instead, pensioners are getting a tax break and Republicans are cutting Medicaid, health insurance for the hard-up. Some sensible measures include reducing the ability of states to game the system for more federal cash.
Yet according to official projections, the overall effect will be to add nearly 12 million to the number of Americans without health insurance. That is a scandalous number for the world's richest big country. Many of those who lose coverage will fall foul of new requirements that recipients must work. Such rules have in the past created an obstacle course of paperwork for claimants, while failing to boost employment.
More savings come from repealing tax credits for clean energy passed under former president Joe Biden. The credits were littered with protectionist 'buy American' requirements. But because Congress abhors carbon-pricing, nothing will replace them. The country will once again lack a federal policy for decarbonisation, and its greenhouse gas emissions will be greater than they would have been. Trump's nostalgia for fossil fuels ignores the potential of renewables to make energy much more abundant. That is foolish when the race for artificial general intelligence is in part a race for the electricity necessary to train massive models.
Even the way the Bill was passed reveals America's creeping dysfunction. The BBB is gargantuan because governing parties very rarely get more than one chance a year to pass a tax-and-spending Bill with just 51 votes in the Senate, rather than the 60 needed to circumvent the filibuster. In such a big Bill, important reforms are poorly scrutinised, and a lot of pork can be used to buy the support of congressmen.
Optimists acknowledge some or all of this, but argue that economic growth will wipe out all these worries. Faster growth would ease the burden of debt, benefit the poor through more jobs and higher wages, and make political dysfunction seem economically irrelevant. Sure enough, the administration projects nearly 5 per cent more output over the next four years.
Yet it is wrong to expect this Bill to create a growth boom.
The tax cuts in the BBB that are already in effect offer little fresh stimulus, and tariffs are an offsetting force. In any case, interest rates are three times their level when Trump last cut taxes and the Federal Reserve is more likely to balance looser fiscal policy with tweaks to its monetary stance. Supply-side tax cuts will help boost investment, but account for just 8 per cent of the total, by cost. Many new tax cuts, including exemptions for tips and overtime, are gimmicks. The administration's deregulation agenda could help, but only on the margins.
In fact, America's geyser of debt issuance will increasingly harm growth. In normal times, public debt crowds out private investment, raising the cost of capital for new projects such as data centres. And the costs of a sudden fiscal adjustment, forced on the US by bond markets, would be vast.
Goldman Sachs, a bank, reckons that if Congress postpones fiscal tightening for another decade, it may then need to cut spending or raise taxes by an annual 5.5 per cent of GDP to stabilise debt-to-GDP. That is more than the austerity endured by the eurozone after its sovereign-debt crisis in the 2010s. If that proved too hard for legislators, America might resort to tactics used after World War II: inflation and financial repression.
Vote-a-rama leads to borrower-drama
The BBB's neglect of the long term is part of a wider malaise. Riding high on America's economic might and undoubted negotiating leverage, Trump ignores the foundations of the country's success. He has renewed his attacks on the Fed, adding another threat to economic stability. His defunding of scientific research will harm American innovation. His cavalier approach to the rule of law makes the US a riskier place to invest. And despite the moderation of his trade war, the average tariff rate is still its highest in a century and trade-policy uncertainty is a burden.
Even as American assets boom in dollar terms, they have fallen behind when priced in foreign currencies. An 11 per cent fall in the dollar this year reflects long-term risks to the American economy that are real, and growing.
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