Donald Trump inherits an economy that is somewhere between healthy and booming, although nevertheless with some looming problems. It is growing at what seems to be a three per cent annual rate, available jobs equal the number of unemployed, unemployment is low, real wages are rising, CEOs are optimistic that replacing the Biden team with the Trump bunch means another year of hefty profits, consumers continue to spend.
But if Trump implements many of his campaign promises, he will threaten his inheritance. No, not the one he got from his father, Fred, and used to his advantage, but the one he got from predecessor, Joe, presumably to use for the nation’s advantage.
Debt And Deficits
The national debt is at $36.3 trillion and rising. The deficit is already running at about six-to-seven per cent of GDP, prompting investors who fear being repaid in depreciated dollars to demand ever-higher interest rates. A continuation of that trend would eventually stifle private-sector investment, reduce consumer spending and produce stagflation.
Annual interest payments on the debt, now running at around $1 trillion, are rising, as the government pays off debt incurred when interest rates were around two percent, with money it is now borrowing at around twice that rate. If current policies remain in place, net interest costs will consume about 20 per cent of government revenues by the time Trump leaves office, and surpass social security (pension) costs in 2051.
The bond vigilantes are already saddled up and prepared to drive borrowing costs higher and higher again, slowing the economy, unless Trump gets the fiscal house in order.
Inflation and Deportations
Add to rising debt the persistent refusal of inflation to drop to the Fed’s two per cent target. Trump’s plan for massive deportations well might exacerbate the problem. A still-tight labor market will be made tighter if those deportations sweep up the illegal aliens that make up 13 per cent of the nation’s construction workers and perhaps an even larger portion of its agricultural workers, putting pressure on wages.
Tax Cuts
Then there are Trump’s plans to cut taxes for waiters, old folks, horny-handed sons of toil who work overtime, corporations. Along with planned new spending – remember the wall? – including an increase in our military spending from its current anemic 3.5 per cent of GDP to Trump’s new 5 per cent target – much needed and, if money follows mouth, a basis for reclaiming leadership of the free world. Plans for Elon Musk to win congressional approval for new efficiencies and offsetting savings in government spending represent the triumph of hope over experience, to borrow from Samuel Johnson’s view of second marriages.
Tariffs
Lest the inflationary flames flicker, there are to be tariffs and more tariffs. Some are punitive, aimed at EU countries that don’t buy our oil and gas. Some are aimed at reducing imports that Trump believes destroy good-paying American jobs, most especially by diverting the products of China’s massive excess production capacity to other countries that retain a belief in good old freer trade. With tariffs raising the prices of imported stuff, by how much we can’t be sure, competitive pressures on US manufacturers will be reduced, permitting them to add to inflationary pressures by raising their prices.
But as with so many things, we won’t know much until we see what Trump actually does. He is already talking about using tariffs to wring “reciprocity” from errant trading partners, so let the negotiations begin.
The Fed
The inflationary consequences of Trump’s tariffs will be exacerbated by, of all people, none other than Fed chairman Jerome Powell and his monetary policy colleagues. Seeing the economy grow, spending rise, unemployment low, inflation persistent, and knowing that fiscal policy is about to become looser still, they have announced that in the new year they intend to reduce – yes, reduce – the Bank’s benchmark interest rate in the coming year. Twice. For reasons Powell notably proved unable to explain at his last press conference of 2024.
Bluster Has Its Uses
But all is not lost. Donald Trump is not one to keep old promises in the face of new realities. He has been blooded in the New York City real estate market where a threat is the opening bid in a protracted negotiation. He has seen his bullying yield results. Four of the 28 Nato member-countries other than the US were meeting their financial commitments when then-President Trump threatened to pull the US out; 23 of the now-32 are paying their dues. And Canadian prime minister Justin Trudeau has hied to Mar-a-Lago bearing promises of tighter border controls to stave off Trump’s threatened tariffs, and been well received, although Trump’s jest about making Canada the 51st state did not sit well with our northern neighbor – only 10 per cent tell pollsters they favor accepting the offer.
Constraints on Trump And 2016-2020
Besides, even if Trump decides to convert campaign promises to real-world policies, he will be unable to do so. Standing between him and promises kept is a congress that will require concessions if it is to ease the ceiling on more debt, a hurdle Trump tried but failed to have eliminated in the recent negotiations that almost closed down the government.
It is important to remember when last in the Oval Office our past and future President produced a prosperous America that avoided new wars in a turbulent world. He soon will be eliminating the worst of the cultural excesses of the liberal elites, the costly excesses of climate-change extremists, stanching the flood of illegal immigrants, and tearing the web of regulations in which Biden has ensnared America’s innovators and entrepreneurs. If he can grow the economy enough, and cut spending enough to halve our seven per cent deficit to his treasury secretary’s stated goal of around three per cent of GDP, when he emulates Ike and trades the Presidential pen for the golfers’ putter, our economy will remain the envy of the world.
But, as President Biden was so fond of saying when he studied the economy after some tug to the left, “There is still work to do.” So, too, with righting the boat.
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To those of you who have followed these comments during this tempestuous year, most especially subscribers, many thanks, and to all best wishes for a healthy and happy 2025.