Nothing Stops This Train
House Budget Committee advances resolution that will INCREASE deficits
Over the weekend, I wrote a post on our politics being economics that we don’t understand and just today we have all kinds of political theatre around the Republican budget resolution that just passed. So politically, now that the budget resolution has passed and the back and forth in the political arena begins, nothing that comes our way in the next few months should surprise anyone. Republicans will talk about growing the economy, Democrats will bemoan the cuts and the details will be lost along with the big picture. But we have a friend in markets and economic signals that separate the noise from the true signals. I am not going to analyze much in this post but just rant a little about the details that Rep Thomas Massie highlights in this video.
As Massie says, “If the Republican plan passes...we're going to add $328 billion to the deficit this year. We're going to add $295 billion to the deficit the year after that...why would I vote for that?!?". For all the bluster of budgetary cuts, it’s the same old gravy train. Even though, deficits themselves do not provide the complete picture - it really is about growth - it is abundantly clear that the US government is very much on declining returns to scale. It stands to reason that the more it spends, the worse the outcomes will get. Here’s what I wrote on declining returns to scale of the government:
“lurking beneath this imperative is a troubling phenomenon that undermines even the best-laid plans: the creeping onset of diseconomies of scale, a dynamic where the government’s escalating debt-to-GDP ratio—surging from a modest 32% in 1980 to an eye-watering 130% today—delivers diminishing returns for every dollar borrowed, a trend starkly illustrated by the gradual descent of annual GDP growth from a robust 3.2% in the 1980s to a more anemic 2.2% in the pre-COVID years…
In education, for instance, spending per pupil—when adjusted for inflation—has soared threefold since 1970, yet the National Assessment of Educational Progress reveals reading and math scores that have languished in near-stagnation, offering scant evidence of progress to justify the outlay. Healthcare presents an even more glaring disparity: the United States now devotes 18% of its GDP to medical care—double Japan’s leaner 8%—and still finds its life expectancy trailing behind that of its more frugal peer, a sobering reminder that throwing money at a problem doesn’t guarantee a solution. Infrastructure spending similarly piles up year after year, yet the American Society of Civil Engineers’ 2021 report card awards roads and bridges a persistent C-, a grade that mocks the notion of improvement despite the cash flow. Even military expenditures—clocking in at $800 billion annually—raise questions of efficacy if we define their purpose as maintaining peace rather than perpetuating endless conflicts, suggesting that each dollar spent buys less tangible security in a world of shifting threats.”
The economics of it all is that in the post-2008 financial crisis world, growth is hard to come by and that is a hard message to convey to the people for any politician. Politicians are creatures of habit and irrespective of their ideologies, they are incentivized to get re-elected first and govern second. In that, there is a fundamental conflict - politics (in the US at least) works on a two-year cycle but the economy works on multi-decade cycles. Not surprising then politicians have a list of problems they want to address and all will be addressed if we vote for them. Be it the “winning” of Trump or “I have a plan” of Warren, it’s all the same.
So here we are, in the promised land of DOGE and deregulation and deglobalization, doing what we have always done - increase spending. And remember what that spending does - it debases the currency and provides liquidity to the markets, further raising asset prices. The true measure of wealth inequality is not how much wealth is concentrated in the hands of the few. It is how many paychecks will it take you to buy one share of S&P 500. Or how many years of savings will it take for you to buy a home. Trust me, you don’t want to do that calculation because it will radicalize you. And no one wants that.
A recent study found that 49.5% of all consumer spending comes from the top 10%, who are all heavily dependent on their stock portfolio doing well to continue their spending. That’s the spending that drives the economy and creates jobs. My laziness is a poor bloke’s economic opportunity to earn $10 in tips for delivering my groceries. And trust me, you want my stock portfolio to keep rising because you don’t want me to start shopping for my own groceries. So that’s the economic regime we are in and it does not matter if you’re a Democrat or a Republican. This is the preferred choice of our politicians because it is the path of least resistance. The markets, the innovation, and the growth and prosperity that flows from it, will simply have to find a way around it. Because…
