Implications:  Homebuilding was weak in October, but not quite as bad as it looked.  Overall housing starts missed consensus expectations and declined 3.1%, entirely due to a 6.9% drop in the single-family category.  Looking at the details, construction in the South (the region with the largest share of homebuilding in the country) led the way downward with an 8.8% decline, as homebuilders in that region delayed activity in wake of hurricanes that swept through the area.  Still, housing starts appear to be stuck in low-gear, down 4.0% from a year ago, and sit at roughly the same levels as 2019.  The same cannot be said for completions.  Despite a 4.4% drop for the month, completions were at a faster pace than any month in 2021-2023 and are up 16.8% in the past year.  With strong completion activity and tepid growth in starts, the total number of homes under construction continues to fall, now down 12.7% since the start of 2024.  That type of decline is usually associated with a housing bust or recession.  The lack of new construction is why home prices have remained elevated while rents are still heading up in much of the country: we are building too few homes while lax enforcement of immigration laws mean rapid population growth.  The home building sector seems strangely slow given our population growth and the ongoing need to scrap older homes due to disasters or for knockdowns. We think government rules and regulations are likely the major hurdle for builders in much of the country, but home construction might also be facing headwinds from a low unemployment rate (which makes it hard to find workers) as well as relatively high mortgage rates.  Notably, while mortgage rates were trending lower leading up to the first rate cut announcement from the Federal Reserve in September, these rates are up more than 50bps since then. That said, there are some tailwinds for housing construction, as well.  Many owners of existing homes are hesitant to sell and give up their fixed sub-3% mortgage rates, so prospective buyers will often need new builds.  In addition, Millennials are now the largest living generation in the US and have begun to enter the housing market in force, which represents a demographic tailwind for activity.  Putting it together, we don’t see housing as a major driver of economic growth in the near term, but we’re not expecting a housing bust like the 2000s on the way, either.  In other recent housing news, the NAHB Housing Index (a measure of homebuilder sentiment) rose to 46 in November from 43 in October.  However, a reading below 50 signals a greater number of builders view conditions as poor versus good.

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In our lifetimes, the best comparison for Trump’s election win is Ronald Reagan’s in 1980.  That election, like this one, pitted big spenders and champions of government against tax cutters and critics of government.

It is pretty clear that markets approved of both winning campaigns as they were happening.  Leading up to the election in 1980, like this year, the S&P 500 rallied as it became clearer that Reagan (like Trump) was likely to win.  The market also rallied in the days following the election because markets like tax cuts, deregulation, and restrained government.  And, at the same time, the policies the markets didn’t like – such as a tax on unrealized capital gains – were now dead.

But after being euphoric at the outcome of the election in 1980, reality set in.  Paul Volcker was fighting inflation with tight money, a recession was inevitable and tax cuts took time to pass.  The S&P 500 fell in 1981 and in the first eight months of 1982 before the Reagan bull market really started.

History doesn’t repeat itself, but at times it rhymes. And while there are similarities between today and 1981, there are also some key differences.  For example, the Federal Reserve is now cutting interest rates, not raising them.  However, there are some big differences that investors need to pay attention to.  First, in October 1980, the Price-Earnings ratio of the S&P 500 was 8.6.  In October 2024, the PE ratio was 27.  In other words, while the market may appreciate better policies, it sure looks like they are already priced in.

Moreover, while Trump is selecting his cabinet rapidly and his team has likely already done the homework needed to move fast on executive orders that can boost growth, much of the real work will take time.  It appears Congress wants to move fast, but it is still Congress and that means it’s messy.

Reagan cut tax rates across the board, Trump plans to maintain most current tax rates with some small changes, and promised to eliminate taxes on tips, social security, and overtime.  These tax cuts are welcome, but they are not true supply-side tax cuts…the ones that boost entrepreneurship and innovation.

The really powerful potential of the Trump plans will come from DOGE, the Department of Government Efficiency, where Musk and Ramaswamy plan on proposing big cuts to the fourth branch of government – the Bureaucrats.  Every regulation that they can cut, every bureaucrat that they can keep from gumming up the private sector, will boost productivity.

But in addition to cutting red tape, the US must cut the absolute size of government.  John Maynard Keynes wanted deficit spending ended after a crisis was over.  But, after both the Panic of 2008 and COVID, the US kept spending elevated.  Government spending has risen from 19.1% of GDP in 2007 to 23.4% this year.  Government is a ball and chain on the economy.  We estimate that every one percentage point increase of spending as a share of GDP reduces underlying real GDP growth by 0.2%.

Every dollar the government spends is taken from the private sector, and the government taxes and borrows nearly 5% more of GDP today than it did seventeen years ago.  From 1990 through 2007, real GDP grew 3% per year.  From 2008 through the second quarter of 2024, real GDP has only grown 2% per year.  No wonder “the economy” was the #1 factor for Americans in this election.  Two percent annual growth is stagnation.

And this shouldn’t be happening according to fans of big government.  Economists like Mark Zandi and Paul Krugman support government spending and argue that it has a positive multiplier ($1 of government spending creates more than $1 of GDP).  Add this to the fact that the US has invented unbelievably productive new technologies in the last 17 years, and the economy should be booming.  Especially with the Fed holding rates at zero for nine of those years.

But it hasn’t, and the reason is that government is just too darn big.  Cutting government spending is a double-edged sword.  Half of all job growth in the past year has been in government jobs directly, as well as healthcare which is dominated by government.  Taking away that spending will initially slow job growth, but, with a lag, eventually boost economic activity.

In other words, the Trump Administration has a chance to boost underlying economic growth rates, and that would be extremely positive for living standards and equity values over the long-term.  But initially, it may result in slower growth.  The US had a car wreck with COVID.  Easy money from the Fed and big deficits were like morphine.  The US is addicted to short-term fixes that do nothing to boost long-term growth.  Withdrawal from the pain killers hurts, but is necessary to get truly healthy.

While we are extremely positive about the long-term benefits of policy changes, like under Reagan, weaning the US from massively easy fiscal policies does not guarantee overnight success.  It will take time, and the US will come through to the other side stronger.  The entire world will benefit…with a lag.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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Implications:  Don’t get too worried about the recent weakness in industrial production; output has been held back by temporary factors that should mostly be behind us. The Federal Reserve estimates that the Boeing strike held down total IP growth by 0.2 percentage points in October, and the lingering effects of two hurricanes subtracted an additional 0.1 points, as well.  As a result, we should see some catch up growth going forward. Looking at the details in today’s report, the weakness was concentrated in manufacturing, with activity falling 0.5%.  Production in the volatile auto sector dropped 3.1% while non-auto manufacturing (which we think of as a “core” version of industrial production) posted a more modest decline of 0.3% in October.  The only bright spot in this “core” measure came from production in high-tech equipment which rose 0.6% in October, likely the result of investment in AI as well as the reshoring of semiconductor production.  High-tech manufacturing is up at a 10.0% annualized rate in the past three months and 7.6% in the past year, the fastest for any major category.  The mining sector was also healthy in October, rising 0.3%.  Higher production of oil and gas more than offset a decline in the drilling of new wells and the extraction of other minerals and metals.  Finally, the utilities sector (which is volatile and largely dependent on weather) also posted an increase in October, rising 0.7%.  In other manufacturing news this morning, the Empire State Index, which measures manufacturing sentiment in the New York region, surged unexpectedly to +31.2 in November from -11.9 in October.

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Implications:   Despite years of higher prices, consumers continue to buy.  Retail sales rose 0.4% in October versus a consensus expected increase of 0.3%, while prior months’ activity was revised higher, bringing the overall gain to 0.6%.  Looking at the details, eight out of thirteen major sales categories rose in October.  Overall activity was boosted by a 1.6% increase for autos.  Stripping this out, sales were up a meager 0.1%.  Taking out the two other often-volatile categories of gas stations and building materials, “core” sales (the most important group for measuring GDP) were unchanged for the month.  Within the core sales grouping, restaurants and bars led the way, rising 0.7% following an upwardly revised 1.2% jump in the previous month.  While healthy growth, the 4.3% increase in restaurant and bar sales in the last year represents a slowing from the 8.6% advance in the year ending in October 2023.  We will be watching this category closely since it is the only glimpse we get at services in the retail sales report, which suffered heavily during the COVID years but have since returned to the forefront of the US consumer.  Partially offsetting gains in October were declining sales for health & personal care stores (-1.1%) and miscellaneous store retailers (-1.6%).  As a whole, retail sales are up 2.8% on a year-to-year basis, barely keeping pace with inflation.  “Real” inflation-adjusted retail sales are up 0.3% in the past year and still down from the peak in early 2022.  This highlights the ugly ramifications of inflation: consumers are paying higher prices today but taking home fewer goods than they were two years ago.  And while the Fed cut interest rates by a quarter percentage point last week and looks likely to cut again in December, it is not at all clear that inflation problems are behind us.  Case in point, import prices rose 0.3% and export prices jumped 0.8% in October versus a consensus expected decline of 0.1% for both.  We hope they have the resolve to stomp out the embers of inflation even if economic troubles come.

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The new Trump Administration hasn’t wasted any time since last week’s election win, with new information around economic policy and staffing appointments making news on a daily basis. In our opinion, the recent announcement of a new Department of Government Efficiency or “DOGE” headed by Elon Musk (who obviously came up with this name and acronym) and Vivek Ramaswamy, has been the most important so far.

As we mentioned in Monday’s piece, both these individuals have been making the rounds on various podcasts, before and since Election Day, speaking about plans to not only cut unnecessary regulation, but also potentially move agencies out of D.C. and downsize the headcount of the Federal bureaucracy by up to 50%. For context that would be the biggest reduction in headcount since the aftermath of WW2 as the US demobilized from the war effort.  Like everything in politics there are those who oppose these ideas.  One argument in opposition is that mass layoffs in Washington put the US economy at risk for a recession. We think this worry is misplaced.

The current Federal Government workforce (excluding the military) is roughly 3.0 million. Meanwhile, total employment in the US is around 160 million. We currently have 7 million unemployed individuals bringing the unemployment rate to 4.1%, a relatively low rate historically and one that hasn’t caused the US economy to stop growing. If the “DOGE” were successful in firing 50% of Federal employees, total unemployment would rise to 8.5 million and the unemployment rate would increase to just 5.0%.

If these job losses were all in the private sector, say in construction, it would lead to less production and a potential housing shortage. But, if these job losses are in bureaucracies that often interfere with production, then growth may actually accelerate.  Don’t get us wrong, we aren’t against stop lights and speed limits, and we don’t want to wait even longer to get our tax refund. But, a lot of government can be streamlined and automated. Moreover, these bureaucrats love to add pages to the Federal Register (a good proxy for total regulation).  Today, total pages of regulation have rebounded to near a record high.

Further, the vast majority of these workers will find work in the private sector, where free markets more efficiently allocate resources. These are well educated individuals with lots of potentially valuable skills that aren’t being fully utilized. The unemployment rate for people with a college degree or higher in the US is currently just 2.5%. These former bureaucrats would be able to find new jobs relatively quickly and this reallocation of talent would be an asset to future growth and innovation. And throughout the process, generous severances packages would give workers ample coverage while they find new work.

The reality is that the government has gotten too darn big. The Competitive Enterprise Institute estimates that regulation costs the US economy roughly $2 trillion a year. Add in Federal, State and Local spending and over 50% of the US economy is at the whim of the bureaucracy. This puts a wet blanket on innovation, with companies spending countless hours, dollars, and intellectual manpower trying to comply with rules and regulations, rather than applying those resources toward new and innovative ways to improve consumers’ quality of life. One clear example of this economic distortion, the Wall Street Journal recently reported 40% of the S&P 500 by market capitalization is being investigated by the Department of Justice, while the Department of Wildlife is interfering with the launch of rockets.  The real question is if we can afford not to address this growing problem, and we find it very encouraging that leadership is finally taking the issue seriously.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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With the election now behind us, attention turns to Trump’s campaign promises, especially the pledge to reduce the size of government. One of his newly appointed advisors, Elon Musk, has proposed the ambitious goal of cutting at least $2 trillion from the federal budget, aiming to bring greater efficiency to government operations. While Musk’s track record of innovation and cost cutting suggests he might be up to the challenge, reducing nearly a third of federal spending will neither be easy or universally popular. In this edition of “Three on Thursday”, we take a broad look at federal spending. 

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Implications:  While the Fed cut interest rates by a quarter percentage point last week and looks likely to cut again in December, it is not at all clear that inflation problems are behind us.  Producer prices rose 0.2% in October, despite declines in food and energy prices, which fell 0.2% and 0.3%, respectively.  These categories have played an outsized role in the slower inflation readings of recent months, but when you strip out these historically volatile components, “core” producer prices rose 0.3% in October and are up 3.1% in the past year, an acceleration from the 2.2% reading for the twelve months ending October 2023.  Diving into the details of today’s report shows service prices led the core index higher, rising 0.3% in October and up 3.5% in the past year.  The October increase in services was broad based, with all major categories showing higher prices.  Prices for goods rose 0.1% in October and are up a modest 0.2% from a year ago.  Within goods, rising costs for steel scrap, meats, and diesel fuel more than offset an 18.1% decline in liquified petroleum gas prices.  Further back in the supply chain, prices in October rose 0.5% for intermediate demand processed goods and 4.1% for unprocessed goods, but prices in both categories are down in the past year.  The direction of inflation moving forward is very likely to be dictated by 1) the services side of the economy, which suffered heavily during the COVID shutdowns but has since returned to the forefront and 2) changes in the money supply, which, after surging in 2020-21, peaked in early 2022. Although the M2 measure of money has been rising gradually since last October, it’s still down 2.3% from the peak in April 2022.  Too little growth in the money supply means continued downward pressure on both inflation and economic growth.  We will be watching the path of M2 growth closely as the Fed continues cutting rates. A sharp resurgence in M2 growth would bring with it the risk of accelerating inflation. Does the Fed have the patience to ease at a slow and steady pace, or will they overreact to any signs of economic trouble? Only time will tell, but the stakes are high, and the Fed’s record is less than pristine.  On the labor front this morning, initial jobless claims fell 4,000 last week to 217,000. Meanwhile, continuing claims declined 11,000 to 1.873 million.  These figures are consistent with continued job growth in November, but at a slower pace than earlier this year.

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Implications:   Inflation came in as expected in October but remains stubbornly above the Federal Reserve’s 2.0% mandate, warning investors that the inflation story is not over.  Headline prices rose 0.2% in October (+3.0% annualized) while the twelve-month reading rose for the first time in six months to 2.6%.  It’s worth noting that lately inflation has been held down by declining energy prices, which were unchanged in October but are down 4.9% in the last year.  Excluding energy, prices are up 3.2% in the last year. Stripping out the often-volatile category as well as food prices (+0.2% in October) to get “core” prices shows that measure rose 0.3% in October (+3.4% annualized), while the year-ago comparison remained at 3.3%.  The main driver of core inflation has been housing rents, which rose 0.4% and have shown little to no sign of slowing.  Some analysts – including those at the Fed – have argued that housing rents have artificially boosted the inflation picture due to the way it’s measured and the lags at which those changes are reflected in the monthly reports.  But a subset category of prices the Fed used to tell investors to watch closely but no longer seems to mention – known as the “Supercore” – which excludes food, energy, other goods, and housing rents, rose 0.3% in October and are up 4.4% in the last year, worse than the 3.7% reading in the year ending in October 2023.  No matter which way you cut it, inflation is still running above the Fed’s 2.0% target, now for the 44th consecutive month.  We have said for some time that easing in inflation will come should the Fed have the resolve to let the lagged effects of tighter monetary policy do its work.  But the Fed has now cut rates a total of 75bps since September.  And yet the embers of inflation continue burning.  Since we have yet to see a significant or prolonged slowdown in growth, much less a recession, it remains to be seen whether inflation will reach 2.0% or less on a consistent basis.  This month’s report did no favors proving that.

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The Federal Reserve cut short-term rates by a quarter percentage point last week, like pretty much everyone expected.  In addition, the Fed didn’t push back hard against market expectations of another quarter-point cut in mid-December, so unless the economic or financial news changes dramatically by then, expect a repeat at the next meeting.

It's not hard to see why the Fed has been cutting rates.  The consumer price index is up 2.4% in the past year versus a 3.7% gain in the year-ending in September 2023.  Meanwhile, the PCE deflator, which the Fed uses for its official 2.0% inflation target, is only up 2.1% in the past year while it was up 3.4% in the year ending in September 2023.

However, in spite of getting into the Red Zone versus inflation, the Fed isn’t yet in the End Zone, and it looks like progress has recently stalled.  According to the Atlanta Fed, the CPI is projected to be up 2.7% in the year ending this November while PCE prices should be up 2.5%.

It's also important to recognize that a few years ago the Fed itself devised a measure it called Supercore inflation, which excludes food, energy, all other goods, and housing.  That measure of prices is still up 4.3% versus a year ago, which is probably why the Fed has stopped talking about it.

Moreover, it’s important to recognize that there’s a huge gulf between the policy implications of the Fed reaching its 2.0% inflation goal and the public’s perception of inflation no longer being a problem.  Right or wrong, for now, the public seems to think that for inflation to no longer be a problem prices would have to go back down to where they were pre-COVID.

But that’s not going to happen.  The federal government spent like drunken sailors during COVID and the Fed helped accommodate that spending by allowing the M2 measure of the money supply to soar.  M2 is off the peak it hit in early 2022, but it would take a much greater reduction than so far experienced to restore prices as they were almost five years ago.

Instead, getting to 2.0% inflation means eventually accepting not only that prices aren’t going back to where they were but they’re going to keep rising, albeit at a slower pace.

And remember, even that goal has so far remained elusive.  The embers of inflation continue burning.  And since we have yet to see a significant or prolonged slowdown in growth, much less a recession, it remains to be seen whether inflation will reach 2.0% or less on a consistent basis.

The bottom line is that the Fed’s inflation goal remains elusive.  In turn, that means don’t be surprised if the Fed pauses rate cuts early next year.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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The red wave finally happened.  A vast majority of counties – and most voter demographics – moved to the right, becoming more red.  The result was a landslide electoral college victory for Donald Trump, who will become the 47th president of the United States.

Republicans will control the Senate with 53 or 54 members.  The House will likely be narrowly controlled by Republicans as well.  Put it all together, and this election was a clear mandate for the returning president.

A mandate for common sense and transparency, for less intrusive government, and one that makes personal opportunity a reality.  Vice President Harris promised money for houses and new business starts, threatened the wealthy with higher taxes, and promised to attack “price gouging,” which is code for price controls.

Charles Payne, host of Making Money on Fox Business Network, posited that trying to buy votes with government money backfired because voters were offended.  They believe they can make it on their own, and don’t need or want government involved so deeply in their lives.  We certainly hope this is true.

The US has spent trillions on welfare, and all we are left with are collapsing inner-cities and dependent people.  Government has become too large. It’s nearly impossible to find a nook or cranny of human activity not impacted by government money, taxes and regulations.

In the first 219 years of its history the federal government grew from nothing to a budget of $3 trillion.  In the 16 years since then, because of the Financial Panic of 2008 and COVID, government spending more than doubled to $6.75 trillion.  These were emergencies (and we disagreed with all that spending), but after an emergency you’d expect spending to return to pre-emergency levels.  But history shows politicians never let a crisis go to waste, and their power and spending just rachets higher.  Instead of going toward new innovations, those resources have been building bigger bureaucracies and have pushed hundreds of billions into Green New Deal initiatives.

The insanity of spending this much to force the economy in a direction picked by politicians isn’t lost on businesses.  When Google, Microsoft, and Meta need electricity for their new AI factories, where do they go?  Nuclear power, which the government has ignored.  Government doesn’t treat taxpayer resources well.  It never has and it never will.  Only when it is their own money do people care how it is spent.

And all this spending has created an insatiable desire to tax at the federal, state and local levels.  Combine taxes with inflation and no wonder savings rates are so low and 70% of those polled say the economy is not working for them.  Hearing President Trump support tax cuts for tips, social security and overtime is music to hard-working-American’s ears.

Given all this, and the fact that there is a mandate for action, many are wondering what is likely to happen.  First, it is clear that if the Trump team goes in with a milquetoast agenda, tweaking spending here, tax rates there, and gets involved with political horse trading, the victory will be wasted.  The Trump team needs to take a page from the Javier Milei playbook.  Go fast and go big.  But it needs to be done with the understanding that some things will pay off quickly and others will take time.

The stock market has soared since the election results were finalized, suggesting that investors believe a Trump presidency is good for the economy.  However, it could also be that the market is reacting to the fact that the worst policies of a Harris presidency, like taxes on unrealized gains, or interfering with large tech companies and maybe Elon Musk directly, won’t happen.  It’s probably a little bit of both, and if Trump follows the right policies, he can help the market build on these gains.

Below is a list of things we would suggest the Trump team focus on and attempt to legislate.  None of this is easy…but, from our point of view all of it would be positive for America.

1.     We’ve never met a tax cut we didn’t like.  The Trump tax cuts from 2017 should be extended permanently and cutting taxes on tips, social security, and overtime all sound like great ideas to us.

2.     Close DEI offices in every government agency and office, most importantly the military.  Follow the lead of Boeing, the University of North Carolina, the University of Florida, Tractor Supply, and many others who found that DEI goals undermine their institutions.  Go woke and go broke.  Believe in meritocracy and win.  The biggest problem is that failures by government bureaucracies aren’t as visible as they are in companies that compete in a market.  There is no profit and loss statement for government.  But getting rid of DEI will immediately improve these agencies.  The military may finally hit its recruitment goals.

3.     Put universities and colleges on the hook for 50% of every student loan.  If a student can’t/won’t repay after getting a degree from an institution of higher learning, it needs to be responsible for at least half of it.  Just watch how quickly schools start pushing students toward degrees that are actually valuable in the real world.  Student loans pay activist professors to train more activists.  What a massive waste of resources it is to train people to play politics.

4.     Build a wall.  Close the border.  Deport criminals.  But, also, create a system for making legal immigration easier.  Make certain that new immigrants get a job and are not allowed to sign up for welfare, or any government handouts, for five years.  In America’s great immigration of the late 1800s and early 1900s, we put our arms around people and said, “welcome to America, good luck.”  We didn’t say, “welcome to America, here’s a check.”

5.     Deregulate, deregulate, deregulate.  Cut, cut, cut.  Evidently Elon Musk may be named the head of DOGE.  Department of Government Efficiency.  Musk fired 80% of the staff at Twitter when he bought it, and it operates better than ever.  Why? Because those people he fired were there to use Twitter as a political weapon, not to build the best news platform in the world.  It is highly likely that years of lousy productivity growth in government has created a situation where at least 50% of the three million government employees are unnecessary.  Musk shared an idea with Joe Rogan on his podcast that maybe we just send people home and, yet, still pay them.  Total government payroll is likely around $300 billion per year.  Spending $150 billion (half the payroll) to pay 50% of all bureaucrats to not come to work, and not cause problems for Americans who are just trying to get ahead, would likely increase productivity by way more than $150 billion per year.  So, if it becomes hard to slim down bureaucracies because of union work rules, don’t fire them, just have them turn in their credentials, computer, and phone.  Send them home.

6.     Asset managers should no longer be able to vote shares in the companies that their clients actually own.  Centralized power, in the hands of asset managers, should not be able to be used to bully other companies into behaving in a way that only a few people think is appropriate.  Give voting power back to the actual owners of the shares.  Decentralize and put the days of ESG behind us.

7.     Drill, baby, drill.

8.     Cut spending.  Start with Green New Deal subsidies.  When companies like Google, Microsoft and Meta choose nuclear, it’s a sign.  Let all these clean industries compete in a fair and balanced marketplace and see who the winner is.  If solar and wind are so fantastic…prove it by taking away the subsidies.  Stop subsidizing primary education from Washington DC.  Primary education is a local issue, and funding from DC is used to prop up teachers’ unions which fought to keep schools closed during COVID and constantly impede attempts to get vouchers.  These fund transfers from the federal government to state governments are propping up bankrupt cities and states.  These states need to face reality, and not be bailed out.

9.     The Financial Panic of 2008 and COVID pushed federal spending from 19% of GDP to nearly 24% of GDP.  The US has never balanced its federal budget with spending over 18.5% of GDP no matter what tax rates are put in place.  Even John Maynard Keynes – father of deficit spending – would argue that once the crisis is over, deficit spending needs to stop.  The US should make every attempt it can to take spending back to 2007 levels.  Not in actual dollar terms (we have experienced a lot of inflation), but in percentage of GDP terms.  So, how is that done? One way is what we referred to in Point 8 above, but spending cuts are easily demagogued and are often unpopular…so let’s propose a “freeze” on spending at 2024 overall levels.  If the US froze spending for seven years, the budget would be balanced.  In other words, the US could put in place a process by which we could actually see surpluses in 2031…which will be necessary because that is just about the time Social Security starts running red ink.

10.     The Federal Reserve has a classic bureaucratic mission creep problem going on.  For example, the Federal Reserve Bank of Chicago has a Community Development Department that highlights “childcare” and “lead water pipes” on its website.  Economics encompasses every part of life, so the Fed argues all of this is within its purview.  It also believes it should be involved in fighting “climate change,” by saying weather issues could turn into financial, economic, and banking issues.  But the Fed has only one job and that is maintaining the sanctity and value of the US dollar, and 40-year highs in inflation are proof that it has failed.  The Fed needs to stop the activism.  Moreover, the Federal Reserve, because of its move to abundant reserves, is losing about $100 billion dollars per year.  So, how does it pay its employees?  It appears that it is borrowing money from the Treasury. And to do this it uses an absurd accounting gimmick called a “deferred asset” – basically a promise to make profits in the future.  We do not believe Congress approved this use of taxpayer funds to pay for Fed employees (especially ones that are behaving more like activists than monetary policy experts).  There is a potential court case here using the Loper decision (repeal of Chevron) as its basis.  The Treasury should not be paying for Fed losses.  In the United Kingdom, the same issue has occurred with the Bank of England, but the UK counts this loss and the resulting spending as part of its deficit.  That is the right way to do it, but accounting gimmicks in the US hide this from the public, and Congress.

11.     Without going into all the details, the Trump Administration should push the Fed to return to a “scarce reserve” model.  The Fed’s balance sheet has grown from roughly $800 billion in 2007 to over $7 trillion today, 90% added in just 17 years.  Government entities across the board used 2008 and COVID to expand their power, reach, and control in alarming ways.  This all needs to be pushed back.  Government should never be this big and powerful.  The 2008 panic started with about $400 billion in losses on subprime loans.  Today, banks have over half a trillion in losses on their books because of the way the Fed responded to those crises.  In other words, the Fed has made the system less secure and stable, not more.  End Quantitative Easing and roll back the Fed.
 

12.     Tariffs.  China is fair game.  It doesn’t respect intellectual property rights, human rights or fair trade.  China is in the developed world category now…no need to support it with beneficial trade agreements.  But, we need to be careful of broad-based tariffs.  Yes, we can produce many things in the US, but not overnight.  And we can never produce French Bordeaux … so why make people who like it pay more for it?  The division of labor makes everyone more productive, and sometimes that crosses borders.

13.     Do not, for any reason, get rid of the debt ceiling.  Congress put it on hold until January 1, 2025 (after the 2024 elections), and the US has been running the most irresponsible government budgets in US history.  Government must be made to justify its deficit spending, and voting on the debt ceiling makes it a public event.  It’s a necessary check on out-of-control spending.

This is just a partial list of the things that could be done.  We could list hundreds of wasteful programs and burdensome rules that hold back productivity, investment, and growth in US standards of living.

The government has grown massively.  The Fed has grown massively.  New technology in recent decades brought incredible potential, yet real GDP growth in the past 20 years has averaged just 2.1% per year.  Many economists try to argue that new technologies aren’t really productive, or that other flaws in the free markets system are why the economy is growing so slowly.

If government spending actually improved the economy, things should be much better.  But, they aren’t.  Why?  Because big government is an impediment to growth.  The bigger it gets, the slower we grow.  Just look at Western Europe…stagnant for decades…underperforming stock markets…little entrepreneurship.  If we really want to Make America Great Again, the US must Make American People Free From Government Burdens Again.  This means “going back” to a time when government was much smaller.  A smaller government means a bigger private sector, and more opportunity for individuals to create, serve and grow.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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