The Deficit Debate: A Messy, Necessary Conversation

Cutting the deficit is a noble goal, but who’s really willing to pay the price? Let’s break down the real cost of government spending cuts.

KEY TAKEAWAYS

• High deficits weaken international confidence in the dollar and increase debt burdens.
• Raising taxes is unpopular and could harm economic growth, especially for corporations, so it is an unlikely option.
• Cutting spending sounds good in theory, but every cut has consequences.
• Smart deficit spending can be beneficial if it funds future investments like infrastructure and education.
• The challenge is not just cutting the deficit but doing it in a way that doesn’t cripple economic growth.

MY TAKE

• Deficit reduction is necessary but incredibly difficult to implement without serious trade-offs.
• Cutting corporate taxes makes US companies more competitive and may help with GDP growth.
• Cutting government spending sounds simple until you realize every cut affects someone—hopefully it’s not you.
• Smart deficit spending on growth-oriented investments is better than cuts that hurt economic growth.
• The political debate around the deficit is messy with no clear solution—everyone pays the price ultimately.

No free lunch on Wall Street… or DC. Ok, let’s DO cut the deficit. The spending has to stop. Deficits decrease international support for the Dollar. No one wants to bet their money on a debt-ridden, spend-happy nation. The Dollar is a fiat currency, not backed by anything other than a handshake promise from the Government. A Government that is perceived as being strong and healthy can support a strong fiat currency, and… er, vice versa. High deficits mean big debt, and debt costs taxpayers… worse yet, it begets further indebtedness. All the debt needed to support the deficit adds supply to the market causing yields to climb. At some point investors may be reticent to lend money (buy bonds) to countries that carry too much, as the risk of foreclosure increases. Economic growth will suffer as more and more Federal funds are spent on debt maintenance and less on investment.

Sweating yet? Yeah, that was intentional. Those were just some very real reasons to keep the Federal deficit in check. If you asked 10 people on the street—10 people who know what the deficit is—I am going to guess that 100% of them would agree that the deficit should be reduced. I mean, it is, after all, a core value not to spend more than one has. Cutting the deficit, as we all know, is no trivial task. It’s not like the Government can just freeze its credit card in a block of ice. No. In order to cut the deficit, the Government either needs to make more money or spend less money.

For the record, making more money for the Government means collecting more taxes. Who wants to pay more taxes? No one that I know except maybe Bill Gates, Warren Buffett, and a few of their closest-friend Billionaires. So, let’s just say that tax hikes are not the first choice of most Americans, though there are plenty of folks who think that wealthy, successful, citizens and companies should pay more taxes so the masses can go on living the good life without any consequences. Unfortunately, taxing successful companies weakens economic growth and makes them less competitive on the international stage. Can you see why this never goes anywhere?

So, now that we established that raising taxes is not a great option, that leaves us with only one way to decrease the deficit: spend less money. So, how do we do that? Well, we can start with running the ship more efficiently. Maybe we don’t need two people to do the job that one person could do in the private sector. Or maybe we should be more aggressive in negotiations with vendors to avoid overpriced toilet seats and hammers. That makes some sense, and surely some money can be saved. But will it be enough to have a meaningful impact on the deficit? Probably not, but at least things will be more efficient.

Beyond those efficiencies, where else could we save some money? Just like you and me, if we are trying to tighten up the budget, we must ask ourselves, “do we need ALL these paid streaming services?” “Could we get away with less?” For sure! So, let’s cancel some. Let’s see, there is Hulu, Netflix, Disney+, Discovery+, Paramount, ESPN+, Max, Amazon Prime, Apple TV… and that is just some of them. Why not cut Disney+? Well, if you cut that, your daughter will be upset, because she likes Marvel and Star Wars. True, let’s not. How about Hulu, then? Oh no, that would upset your son who likes The Bear. Netflix? Not negotiable—we all love Netflix. SO, who gets hit? That is why we ultimately keep it all. Can you see the analogy to government spending cuts? Cutting something will always upset one stakeholder or another. Which one to upset?

Of course, I am greatly oversimplifying the problem, and it does not necessarily have to be all-or-nothing. At this point, you are probably asking yourself, “why is Mark taking us through a twisted journey of stress?” Tax increases, budget cuts… No one likes those discussions, but we all know that they must be had. AND those very discussions are being had right now in Washington.

Now, to continue this seemingly rudderless exposition, I want to take a step back and say something controversial. Deficit spending isn’t bad if it is done properly. If the money is being used for investment in the future, then it is clearly justified. Innovation, infrastructure, education, defense, etc.? These are all things that are worthwhile expenditures, ensuring safety and growth for future generations. Obviously, these investments must be made judiciously. Assuming that they are, then we need to tone down the rhetoric.

However, if a deficit increase is made to enable tax cuts, the argument starts to get dicey. Who gets the tax cuts and who gets the spending cuts? Well, I guess I am going to have to make another controversial statement. Cutting corporate taxes will allow American companies to be more profitable and competitive with their international rivals. It will also enable corporations to invest more. Traditional supply-side economics extends that argument to individuals, assuming that they will spend more on consuming goods and services, allowing those dollars to trickle down through the economy. These seem reasonable, but the case for corporate taxes is an easier one to make, especially considering that corporate taxes only make up a small portion of the Government’s tax revenues.

So, where does all this leave us. Well, I intentionally organized this in a disorganized fashion to mimic the confusion that we all have right now. We are being bombarded by lots of information from both sides of an age-old argument. No one wants to cut expenditure, but we all agree that cuts may be necessary, and we are OK with it—as long as it doesn't affect us. However, someone must pay the butcher’s bill at the end of the day, and right now, as we speak, someone is paying that bill. Cuts are being made; efficiencies are being sought. It is an investment in the future, but don’t forget, someone is paying for it.

Not worried because you don’t work for the government? Did you know when the Government spends less money, GDP declines? Did you know that all of these shuttering government agencies, whether you like them or not, will raise unemployment? More workers out of work means labor force slackening, which means lower wages. Folks who are out of work, spend less money; consumption is the biggest contributor to GDP growth. Higher unemployment means lower consumer confidence, which causes even employed folks to consume less.

At the end of the day, cutting the deficit is a noble cause. The challenge is cutting spending smartly. Can the administration be successful where so many have failed in the past? Hopefully, but don’t forget, everything has a cost in this game.

YESTERDAY’S MARKETS

Stocks had a mixed close yesterday as traders prepared for today’s important employment data. Analysts spent some cycles trying to interpret messages from Trump’s new Treasury Secretary, who had a lot to say. Fed members are increasingly making a case for higher rates—signaling that it’s time to move on from hopes of immediate and sharp rate cuts.

NEXT UP

• Nonfarm Payrolls (January) came in at a lower-than-expected 143k and the prior month was revised significantly upward to 307k from 256k. Though this minimizes this month’s miss, the stark decline month over month is noteworthy, and not a positive development from a labor market perspective. The seemingly large revisions come from a reconciliation between two different surveys.
• Unemployment Rate (January) slipped to 4.0% from 4.1%.
• University of Michigan Sentiment (February) may have increased to 71.8 from 71.1.
• Fed speakers today: Kashkari, Bowman, Goolsbee, and Kugler.
• Next week: More important earnings in addition to Consumer Price Index / CPI, Producer Price Index / PPI, Retail Sales, and Industrial Production. Check back in on Monday to download weekly economic and earnings calendars to be the bird that gets the worm.

DOWNLOAD MY DAILY CHARTBOOK HERE📊