The Economy Debt and Taxes after the BBB
Image courtesy of The White House
“If you believe in magic, come along with me.
We’ll dance until morning ’til there’s just you and me.
And maybe, if the music is right,
I’ll meet you tomorrow sort of late at night.
And we’ll go dancing baby then you’ll see,
How the magic’s in the music and the music’s in me,
Yeah.
Do you believe in magic?
Yeah.
Do you believe, like I believe?
Do you believe in magic?”
So, the One Big Beautiful Bill (BBB) passed. This is an epic accomplishment for Trump, Speaker Johnson and Majority Leader Thune, given the united opposition by every Democrat and the razor thin Republican majorities in each house. During my time in Congress, I saw us (Republicans) fail to pass many bills when we had bigger majorities. I have long pointed out that Democrats come together on policy much more easily than Republicans because they are collectivists by nature and ideology. That is why they identify everyone by group rather than as individuals and why they believe unions are necessary. Republicans, on the other hand, are individualists by nature believing in the power and dignity of the individual over any group. Therefore, many Republicans revel in their independence from the “herd”. Democrats are sheep and Republicans are cats.
That makes the passage of this massive bill all the more remarkable. And you have to give much of the credit to the power of Mr. Trump, along with the parliamentary skills of the Speaker and Majority Leader.
OK, now what? What does it all mean?
It will be some time before I and anyone else goes through all the many details of the BBB. In it’s 900 pages, I’m sure I will like most of it and absolutely hate some parts of it. That will be true for almost everyone. Cobbling together the votes for a bill such as this involves putting in provisions that are very important to a few voting members, but not so offensive as to lose the votes of others. As the 19th century German Chancellor Otto Von Bismarck once said, “people who like laws and sausages should never see either one being made".
The BBB is a piece of the grand economic strategy of the Trump administration. It is an important piece, but not the only piece. The conditions that Trump inherited from Biden were terrible. Yes, the economy was still growing, but because of the stimulus of the largest peacetime deficit in history as well as rampant money printing. If you were to somehow eliminate the deficit in one or two years you would almost certainly trigger a major downturn by withdrawing all that stimulus. But, if you let the deficit keep rolling, you will almost certainly trigger debt crisis down the road.
The Trump/Bessent strategy is to nibble at all of the problems and hopefully keep the economic good times rolling while setting the country on a sustainable fiscal and economic path. Easy to say. Hard to do.
Let’s take a look at each element of the plan and how they are engineered to achieve the desired economic and fiscal results:
Deficit: The biggest part of the bill is extending all the 2017 tax cuts which were scheduled to expire at the end of this year. In DC, they call that a “cost”. But, it has no affect on the deficits as they currently exist because it neither raises nor lower taxes from where they are today. Trump’s tariffs, however, are currently expected to add $300B-$600B in new revenue, thereby reducing the deficit. Things like “no tax on tips” has a cost but is offset by other tax increases like the tax on university endowments. The best estimate I have seen of DOGE suggests that it saved $150B per year in largely waste, fraud and abuse. Bessent’s long stated goal is to reduce the deficit from 7% of GDP today to 3% of GDP by 2028. They are hoping to achieve that by some increase in revenue from tariffs, but also by increasing the denominator (GDP) through growth. Growth will also raise revenue. The CBO numbers are worthless. We will not know just how much or how quickly the deficit will go down until we see the real time numbers.
Growth Through Policy: So, where is that growth going to come from? Many business plans have been frozen waiting for some certainty on the tax rates. Now they have it. The tariffs are intended to drive more manufacturing into the U.S. There is evidence that they are beginning to do that. The Biden regulatory state was onerous and oppressive and removing that burden should fee up economic activity. Although the deficit will likely decline from the Biden years, the government is still sending out more money than it is taking in. That is stimulative, although less so than it has been. The government is no longer printing money like it was. So, that stimulative factor is now gone. The growth must come from renewed private sector activity as government stimulus declines.
Other Growth Drivers: The AI boom has been quite the driver of growth independent of government action. I was initially skeptical about just how transformative this new technology might be. I am now convinced that it is significantly transformative, along the same lines as the internet was 25 years ago. I have seen how AI can do medical diagnosis as accurately as the best human. I have seen how it can do accounting work in 10 seconds that would take an auditor hours to do. I’m sure there are many more applications in any number of industries and endeavors. One of the factors holding back growth in the 2010s was the lack of any improvement in productivity. Having people be more productive is essential to lasting non-inflationary growth. Technology has provided much of that productivity improvement over the last 200 years. AI is the next step. That is a tailwind to what the administration is doing.
Debt: More and more non-political economists are suggesting that we are getting perilously close to a national debt crisis, where the US government fails to find buyers for it’s debt. This would lead to a cascading economic disaster. Still, as of right now, there are no signs of it being imminent. All of the recent auctions of Treasury bills, notes and bonds have sold without incident and the demand in some cases has been quite strong. Treasury Secretary Bessent was very critical of his predecessor’s decision to issue more short term Treasury debt and less long term debt in order to control long term rates and increase general liquidity. Now that he is in the chair, he is doing the exact same thing. The bond markets will likely keep buying and give time to Treasury if they think the debt as a percentage of GDP is on a glide slope down. This will also aid general liquidity, without which investment that funds growth is difficult.
Interest Rates: The Borrower-in-Chief, Donald Trump, who has never seen an interest rate he didn’t want lower, is screaming at the Fed to lower short term interest rates. He believes that will stimulate the economy. I am not so sure. The income of many seniors on their savings will decline and they will spend less. Admittedly, rates on things like car loans will decline which will help that industry. When the Fed lowered short term interest rates last September, long term rates actually went dramatically up. It is long term rates (the 10 year Treasury rate specifically) that determine 30 year mortgage rates. So, if those went up, the impact on house prices could be quite negative.
Put It All Together: The objective here is to slowly reduce the deficit as a percentage of GDP while slowly enhancing growth and lowering interest rates and doing it all in a way that is not significantly inflationary. I say significantly because one of the ways to deal with debt is to inflate it away. If inflation is 3% or even 4%, but never gets higher than that, it will slowly help them achieve the overall objectives without creating the sort of political firestorm that the Biden 10% inflation did. They never say it out loud, but I suspect that that sort of moderate inflation is part of the plan. If Joe and Jane Lunchbucket see their take-home pay increase by 7-8% as a result of lower taxes, productivity increases, and some general inflation but their costs only go up by 3%, the economy will be good, people will be happy and the Trump team will win in 2026 and 2028.
And by the way, The BBB is not the end of this. Republicans can do 2 more reconciliation bills in the next 6 months to further improve the economy and lower the deficit. If there’s one thing we know for sure, it is that the Trump administration never sleeps.
What Could Go Wrong? There’s a reason I picked the song, Do You Believe in Magic, this week (which I still have on a 45 I bought in 1965) . Doing all this may not quite be magic, but it is going to be hard to pull off. So, any of the policies and plans I described above could fail to deliver the desired outcome.
In my opinion, the biggest risk is the housing market. Housing is an enormous part of the US economy and people’s psyche. If you bought your house for $500K and it goes up in value to $800K, you are $300K richer. “Honey, let’s buy a car and go on a trip!” Then, if it goes down to $600K, even though it is still worth more than you paid for it and you aren’t planning on selling, the “wealth affect” changes behavior. “Honey, fix up the old car and get rid of the timeshare!”.
Trump can strong arm the Fed into lowering short term interest rates next year. But the market determines longer term rates. It’s hard for me to see those long term rates coming down any time soon. The cost of a house today is just out of reach for too many people. If interest rates don’t drop, the only way for that to reconcile is for the price of houses to come down. It is already doing so in many markets around the country.
What’s the optimistic outcome in housing? Assuming no dramatic reduction in interest rates, housing prices could remain relatively stable while incomes rise to solve the affordability problem. So much of all of this rests upon the idea of incomes of the average American rising faster than inflation in goods or assets. The opposite of what has happened since the pandemic.
There are other bubbles in assets out there. If they burst one at a time in serial order, no problem. If they all burst at once, problem.
Complicated stuff. Difficult stuff. But there is a plan. The plan makes sense. The plan is rational if you want to avoid fixing the problem through a collapse. And Trump has a team of very, very smart people working on this.
So, do I believe in magic? On balance, yes I do. No bet is ever a sure thing, but I will bet on this team to make it work.
And I will pray that I am right. A lot more than our financial bottom line depends on it.
I remain respectfully,
Congressman John Campbell
Drive Fast & Live Free
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