Balancing the Budget in Trumponomics: Short-Term Pain, Long-Term Gain?

Government layoffs, tax cuts, and AI investments: What Trumponomics could mean for the markets and the economy.

Keep it simple, stupid. I have to start with a disclaimer of sorts. President Trump No. 47 is only 2 ½ days old and he has not wasted a moment, signing hundreds of executive orders, getting a jump on things. He has some ambitious goals, which, should speak to most Americans, at some level or other. Getting some of those plans complete will take time and patience, if not raw muscle.

Now, my regular followers know my rule, “policy not politics.” It is our responsibility as investors to carefully scrutinize Government policies, agnostic of political party, and if you’ve read enough of my musings, you know that I stand fast to this rule. Good policies are lauded here, while bad ones are… well, sometimes lampooned. In the spirit of that disclaimer…

Yesterday, I was pondering the news that all US Government DEI employees were put on paid leave while, according to some reports, senior officials determine how to terminate them. Now don’t get political or social yet, this is not about DEI. It got me thinking about the bigger picture of what are sure to be Government employee layoffs in the months ahead. Now that Trump has officially taken office, it is presumed that DOGE, not the crypto token with the cute dog, but the Department Of Government Efficiency, is officially in business.

The official, unofficial Government… um, entity has been charged with, plainly, saving money. The Government currently employs about 3 million people, which means that its payroll is, well, quite likely a low hanging fruit for anyone looking to save money. In other words, similar to the private sector, which typically reduces headcount when seeking to cut expenses, the Government is likely to sack some employees. In fact, one of Trump’s executive orders already put in effect a hiring freeze, which, in the private sector, is usually the first step in a workforce reduction. Ok, so that would certainly save some money.

I would also assume that Government agencies will be charged with finding ways of becoming more efficient and spending less money. Most of us probably remember the exposé that uncovered $600 hammers being procured by the Pentagon in the 1980s… or maybe you don’t, but it was a thing, and though it may be a myth at this point, I am pretty confident that one can find plenty of… shall we say, inefficiencies within the massive organization that we collectively refer to as The Government. Stay with me, I am going someplace with this. 😉

Trump has long warned that he would even completely dissolve entire Government agencies. Entire. So, why the layoffs, expense reductions, and total gutting of Government agencies? Well, to save money! A noble cause, especially given that the Government runs on a deficit, meaning, it spends more money than it takes in. To pay for that deficit, the Government must borrow money by issuing bonds… or what we would refer to at home as taking on debt, spending on credit. You know, all the things that you tell your children NOT to do. Are you following me so far? Good, let’s continue.

This deficit and debt problem stands to worsen in coming years. Why? Well, let’s think about it. The Government’s primary source of income is… wait for it… taxes! A cornerstone in Trump’s plans is tax reductions for corporations and extending income tax cuts. That means, plainly, that the Government will have less income. What would you do if your employer suddenly cut your salary? Well, if you are smart, you would cut back on your expenses TO STAY LIQUID. It seems, therefore, and similarly, the Government expense reductions would be a smart move to cover any shortcomings caused by the tax cuts.

Let’s take a step back. If you are a tax paying citizen or you invest in the stock market, which I am pretty sure that most of you fit one or both categories, you would probably love that concept. Take home more of your hard-earned money and have your investment’s benefit from being more profitable. Oh, and if the Government spends less money, that is great! BTW, it was not just expensive hammers, it was also expensive toilet seats. $$$🚽

Let’s take a further step back. Other than to make us all happy, why would the Government cut taxes and put itself in such an ungainly position? Do you remember Reaganomics? No, that’s ok. Do you know who Economist Arthur Laffer is? Also ok, if you don’t. Perhaps you have heard about supply-side economics. The core idea of supply-side economics involves cutting taxes to corporations and high net worth individuals. The extra money from the cuts is then spent on investment and consumption. Those spent dollars will ultimately “trickle down” to all citizens and ultimately, grow GDP. That’s the simple gist of it.

The problem with that, disregarding any social concerns you may have, is that it comes at a cost. DEFICIT SPENDING and greater Government indebtedness. This has been one of the key criticisms of supply-side economics. HOWEVER, if we can figure out a way to spend less money, we might be able to minimize the deficit caused by tax cuts. Genius plan, right?

Now, this note is getting a bit long, so I will tighten it up. GDP is measured by adding Consumption (C), Investment (I), Government Spending (G), and Net Exports. Yes, it is that simple. Consumption, or money spent by you and me, makes up 2/3 of GDP, which is why I am obsessed with it. Investment, principally driven by corporations, makes up another 15%-20%, with the remainder spent by the Government.

If we suddenly cut Government spending, overall GDP will… um, decline! If those spending cuts are achieved by laying off workers, the unemployment rate will go up. Nobody wants GDP growth to slow or contract, and no one wants the unemployment rate to go up! Now, if you believe in supply-side economics, consumption and investment would increase. No worries at all. Now, we know that it doesn’t really work that way. There is a significant lag as those funds flow through the economy. In other words: we can expect a rough ride in the near term and possible benefits… in the future.

Will Trump sacrifice prosperity today for possible gains later? Can the Government really cut expenses equal to the declines in tax revenue, minimizing deficit increases? Does supply-side economics even work as advertised? Well, we are certainly going to find out. I will end by restating that the Administration is only a few days old. I think it is fair to let it get its footing before we pass judgement. One would, however, hope that as real policy does roll out, the administration will take a measured approach. Lecture over.

YESTERDAY’S MARKETS

In a 2024-style move, stock indexes closed in the green, dragged higher by tech with narrow breadth. Netflix stole the show with its strong earnings announcement the night before, setting the scene for Project Stargate, where a star-studded cast of tech overlords accompanied by the President, pledged to spend as much as $500 billion on AI. The S&P500 reach all-time highs intraday, reminding traders of the superpowers of technology shares… under the right conditions.

NEXT UP

• Initial Jobless Claims (January 18^th) is expected to come in at 220k, slightly above last week’s 217k claims.
• Kansas City Fed Manufacturing Activity (January) probably improved to 0 from -4.
• Today’s earnings: General Electric, McCormick, Freeport-McMoRan, American Airlines Group, Elevance Healthcare, Union Pacific, CSX, Intuitive Surgical, and Texas Instruments.

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