The Fate of the U.S. Economy

In September 2020, as the COVID-19 Pandemic was enveloping the Earth, I wrote an article entitled “America’s Descent from Greatness.” In it, I predicted that by 2030 China would surpass the U.S. as the nation with the Earth’s strongest economy. My prediction was not based on the belief the COVID virus was going to set back the U.S. economy more than its adverse effect on the Chinese economy. Nor was it premised on the notion that an autocratic government can and would build a stronger and more durable economic system than a free-market economy. Instead, it was primarily premised on the following facts: (a) China had a population that was four times as large as that of the U.S.; (b) China was embracing industrialization with labor costs that were a small fraction of those in the U.S.; and (c) China’s primary and secondary education systems were superior to ours’s. China’s economic system was also based on a stronger foundation as our government had borrowed heavily during the preceding 40 years and had made itself vulnerable to economic problems that could be triggered by wars or natural disasters.

​ In arriving at my prediction, I found that the 19th century had begun with the two nations with largest populations (China and India) possessing the largest economies. I also learned how their economies were quickly surpassed by the colonial nations (England, France, Spain and Portugal). The economic success of these nations was achieved because they had embraced the industrial revolution and were utilizing their newly acquired mechanical and military might to seize control of countries located all around the Earth. By the end of the 19th century, however, the U.S. had built the Earth’s strongest economy surpassing those of the colonial powers. This had largely been achieved by (1) staying out of costly wars, (2) growing its population by attracting hard-working and ambitious people with the promise that they would be able to improve their lives in a society built on personal and religious freedom, (3) establishing a system of universal education and (4) embracing the industrial revolution and its ability to magnify the achievements of its individual workers.

​ To understand why and how these shifts in economic powertook place it’s important to review the changes in economic thinking that was prompting them. During the 20th century the U.S. economy was guided by three different economic theories.Until the onset of the Great Depression in 1929, like all other developed nations, the U.S. had been guided by the teachings of Adam Smith, a Scottish economist, as laid out in his 1776 treatise entitled “The Wealth of Nations.” In it, Smith asserted that a nation’s economic might should be gauged, not by its holdings in gold, but rather by the magnitude of its productive capacity which today is commonly referred to as it “gross domestic product” (or “GDP”). He went on to conclude that free-market economies would produce wealth faster than economies in which commercial activities were dictated by their governments. These two propositions largely explain why the governments of all developed nations (including that of the U.S.) eschewed most forms of business regulation up until the Great Depression which revealed that relying solely on the commercial decisions made by privately-owned enterprises could have serious economic consequences.

​ The Great Depression prompted President Franklin Roosevelt (FDR) to embark upon his New Deal in which the U.S. government took a major role in reviving economic activity. Specifically, our federal government invested heavily ininfrastructure projects like the system of damns built and managed by the Tennessee Valley Authority which would help expand economic activity throughout the southeastern portion of the nation. In doing so, it also provided gainful employment to millions of idled workers, enabling them to afford to purchase food and material items they desperately needed to keep themselves and their families alive. This was critical to our national economy because individual purchases then represented an estimated 88% of our nation’s economic activity.

Although the economic theory upon which FDR’s New Deal was based was sound, the scale of its programs was generally too small to propel our nation’s economy back to health. That problem, however, was cured a few years later when the U.S. was drawn into the Second World War and our government was compelled to incur substantial debt (through its sale of “war bonds”) to finance its war effort. That war effort required a massive increase of economic activity which lifted the nation’s economy out of the Great Depression. The Second World War also brought about three other important changes. First, it decimated the economies of Japan and the European nations, leaving the U.S. without significant competition in advancing the industrial revolution. Second, it prompted our federal government to raise corporate and individual income taxes to keep the nation’s economy on a sound footing; and lastly, it elevated women to a much greater role in building our nation’s economy, effectively expanding our nation’s workforce. 

President Johnson picked up where FDR’s New Deal had left off, declaring his “War on Poverty” and undertaking to build what he called “The Great Society.” In many respects, Johnson’s crusade to eliminate poverty was far more productive in expanding our nation’s economy than FDR’s New Deal and included the passage of the Civil Rights Act, the enactment of the Medicare and Medicaid Programs, “Project Head Start”, the Food Stamp Act and the Housing and Urban Development Act.

Notwithstanding the extraordinary high level of government spending during the Johnson administration, our nation’s leaders remained fiscally conservative, viewing the nation’s economy as if it was just a large household budget. President Nixon best expressed the prevailing “pay-as-you-go” philosophy when he famously warned that “Every housewife in American knows that if you spend more than you earn you will soon find yourself in deep trouble.” Their fiscally conservative thinking caused the high individual tax rates that had been initiated during FDR’s administration to be maintained through the 1970s,

John Meynard Keynes, an English economist, recognized from the U.S. experience that governments could have a profound and positive effect on building a nation’s economy by investing in people, infrastructure and technology. Through most of the 1970s our nation’s economy remained strong as it continued its wartime role as the manufacturing hub of the world. That, however, began to change in the mid-1970s when foreign businesses began to recover from the damage they had sustained during the war and to increase their participation in world markets. 

The increasing foreign competition encountered by U.S. businesses set the stage for what has been called “The Reagan Revolution.” It was not the type of revolution that had been taking place throughout Europe and Central and South America; there was no armed rebellion, no attack on the U.S. Capitol and no forced removal of government officers. Nevertheless, it was a classic political revolution in the sense that it was motivated by a desire to change the political leadership of our nation. Rather than through brute force, this change was brought about via a change economic policy. Stated simply, Ronald Reagan used the slowdown in economic growth that our nation was experiencing to argue that our nation’s economy was a victim of too much government interference. In a campaign speech he succinctly summed up what he deemed to be the cause of that slowdown in the following sentence: “The nine most terrifying words in the English language are: ‘I’m from the Government and I’m here to help.’” 

Reagan’s solution to end our nation’s declining rate of economic growth was not only to cut government regulation of business activity but also to embrace “supply side” economics, a theory that economic growth can be maximized by channeling the nation’s wealth into the hands of business owners. This theory (frequently derided as “Trickle Down Economics”) would enable “the job creators” (as Republican politicians like to call them) to use the funds made available to them through reductions in their tax obligations to start and/or expand their businesses. That, in turn, would enable them to employ more workers and thereby supercharge the growth of the nation’s economy. Ronald Reagan, who had honed his sales skills as a TV pitchman for General Electric, functioned as an economic pied piper playing a tune that would lead the nation down a fifty-year road toward economic decline (if not, disaster).

The simple fact is that supply side economics was (and remains) a flawed economic theory because business owners only expand their operations when there is a growing demand for the goods and/or services they wish to sell and not when they simply became the recipients of an influx of cash. Nevertheless, supply side economics had great appeal to Republican politicians because business owners were (and continue to be) the principal sources of the funding needed for their political campaigns. A key part of Reagan’s sales pitch was that cutting the tax obligations of business owners would be revenue neutral; i.e. the reduction in the tax obligations of businesses and their owners would be wholly offset by the new tax revenues flowing from the increases in employee wages. When Reagan announced that, if elected, he would implement supply side economic theory, his then primary opponent, Geoge H.W. Bush, rightly denounced it as “Voodoo Economics.”

When Ronald Reagan became our nation’s 40th president in January 1981 the U.S. national debt was a little over $1 trillion. As he had promised, he cut income taxes twice, with both tax cuts heavily favoring those at the top of the nation’s income scale. As it turned out, those tax cuts were anything but “revenue neutral.” In fact, they caused the nation’s cumulative deficit to increase to $2.85 trillion by the time he left office.However, the increase in the nation’s deficit didn’t stop when Reagan left office; nor did it reduce the zeal of Republican politicians for supply-side economics. That’s because to them the attraction of supply side economics was not that it would make the nation’s economy grow faster (which it didn’t) or even that it would have no adverse effect on the nation’s level of indebtedness, but rather that it would increase the wealth of business owners who as a token of their gratitude would contribute to their political campaigns. This ruse on American voters is more deeply discussed in my article entitled “The Myth of Republican Economic Managerial Superiority.”

Not surprisingly, the unfavorable economic results generated by President Reagan’s embrace of supply side economics led to the Republicans’ loss of the White House in 1992 when President Clinton defeated George H.W. Bush, Reagan’s Vice President and successor. Although Clinton went on to roll back some of the Reagan’s tax cuts, most of them remained in place. Clinton’s victory in 1992 and his re-election in 1996 prompted Republican politicians to modify their political strategy to include taking advantage of every opportunity to block the Democrats from enacting legislation that would help working-class Americans.

The Clinton administration was followed by a series of tax cuts for wealthy Americans orchestrated by Republican presidents, with each succeeded by a Democratic president who was only partially successful in (a) rolling back the tax cuts instituted by his predecessor and (b) increasing spending for social safety net programs for working class Americans. Specifically, the administration of George W. Bush featured two large Reagan-style tax cuts which led to an economic meltdown dubbed the “Great Recession.” That was followed by the administration of Barack Obama which featured an effort to rescue the nation from the collapse of its banking system and auto industry as well as the enactment of the Affordable Care Act which included a minor tax increase to help pay for health insurance subsidies. President Obama was succeeded by President Trump’s first term in office which featured one large Reagan-style tax cut and which ended in yet another economic meltdown -- this one arising out of the COVID-19 pandemic which Trump had made worse by ignoring the advice of his public health advisers in a failed attempt to secure his own re-election. 

During these twenty years, while our nation’s economy continued to grow, its economic underpinnings were being badly eroded. Our national debt had grown from $5.67 trillion to $27.75 trillion, and our tilted tax system had transferred an estimated $50 trillion from American families in the bottom 90% of the income scale to those in the top 1% of the income scale. These changes left interest payments on our national debt poised to rise exponentially should interest rates increase. Equally threatening was the possibility that consumer spending, which then accounted for over two-thirds of the nation’s GDP, would stagnate as working-class Americans became increasingly economically hard-pressed. You might think of these conditionsas a cocked gun aimed at the heart of our nation’s economy with the nation’s electorate left hoping that the trigger wouldn’t be pulled.

Although President Biden tried to alleviate this precarious situation, there was little that he could do to reverse the downward momentum of our nation’s economy. Yes, he enhanced the nation’s social safety net, but this only added to the nation’s indebtedness. He also sought to keep inflation and interest rates from rising, but the COVID pandemic had so badly disrupted the complex and integrated network of world-wide supply chains which fueled their continued rise. The result was that the economic plight of working-class Americans continued to grow and the budget of our federal government was placed under increasing pressure. By the end of 2024 our national debt had grown to $36.2 trillion and annual interest payments on the nation’s indebtedness had increased from $345 billion in 2020 to $881 billion prompting rising cries for more economic austerity.

Donald Trump campaigned for the 2024 election promising that he would halt inflation and supercharge our nation’s economic growth. The reality is that he had far different plans for his second term in office. This shouldn’t have come as a shock as Trump’s public pronouncements often did not reflect his actual intentions; which, as more fully described below, weres imply designed to convey what he thought his audiences wanted to hear. What he has done during his second term as our president might be best described as trying to extinguish a fire by pouring gasoline on it. Specifically,

• First, he imposed a broad array of tariffs on the products of over 100 countries. This raised the costs of living for all Americans, particularly those at the lower end of the nation’s income scale. It also added to the inflationary pressures that were catapulting the nation’s interest payments to new heights. 

• Then, he extended his 2017 Reagan-style income tax reductions which continued the transfer of the nation’s wealth into the hands of those at the very top of the income scale. This action increased the nation’s accumulated indebtedness by another $2 trillion and raised the accumulating transfer of wealth to its wealthiest citizens to an estimated $80 trillion.

• Next, he cut the IRS budget causing the layoff of 3,600 tax examiners which is estimated to increase the federal government’s annual loss of tax revenues by almost $1 trillion.

• Because these measures reduced the federal government’s revenues and increased its expenditures, Trump went on to cut federal spending on healthcare, childcare and social safety net programs, all further aggravating the economic plight of working-class Americans and jeopardizing our nation’s economic growth. 

• Then, Trump embarked upon a campaign to rid our nation of illegal aliens which is likely to cost approximately $75 billion to implement but, more importantly, will result in a reduction of agricultural and industrial production totaling hundreds of billions of dollars.

•  Lastly, he started a war with Iran which is likely to cost the federal government as much as $100 billion and further increase the price of fertilizer and crude oil which, in turn, is going to raise the costs of food, gasoline and dozens of consumer products, all further to the detriment of working-class Americans.

All of this in less than 18 months by a man who prides himself for his business acumen.

​ President Trump also injured our nation in numerous other ways. He undermined the value of the U.S. currency by exploding our national debt, by disavowing its treaties with other nations (like Canada and Mexico, our 2nd and 3rd largest trading partners) and by unilaterally imposing his blanket of tariffs. He also alienated our allies (particularly the members of NATO) forcing the U.S. to act alone in its efforts to reopen the Strait of Hormuz and to maintain peace across the Earth. Possibly his most damaging action has been to cause the U.S. to abandon the world-wide efforts to arrest climate change which he declared a hoax.

Many of the foregoing inimical actions, however, were undertaken in pursuit of Trump’s unannounced overall plan to convert the U.S. into a Putin-style oligarchy.

His initial objective in furtherance of this plan was to fortify his control of the U.S. government. That, however, hasn’t been realized because many of his individual actions (like imposing tariffs and cutting social safety net programs) have been undermining his political support. Undeterred, he has sought to circumvent this problem by further gerrymandering the House election districts in “red states.” This “fix” however, has also not been particularly effective because the Democrats have countered with their own efforts to increase their representation in the House by further gerrymandering the House election districts in the “blue states.” Trump next tried to limit the number of Americans who can vote in this Fall’s elections by restricting mail voting. That ploy, however, has failed because the Constitution empowers the states to determine how voters may cast their ballots. Unwilling to admit defeat, Trump is now twisting arms in the Congress to enact legislation that will eliminate millions of registered voters from casting their ballots. This initiative may also be doomed because Senate Republicans possess insufficient votes to pass enabling legislation and are unwilling to eliminate the filibuster rule that might facilitate the enactment of that legislation. Our undaunted president now seems to be planning some form of police action to restrict (or at least discourage) voting in heavily Democratic election districts. Even this effort is likely to fail as such tactics are an anathema to most Americans. 

President Trump is now seeking to revive his political standing by expanding the U.S.’s power over other nations. To this end, he is now seeking to increase the budget of our Department for Defense from $980 billion to $1.5 trillion, making it almost three times the size of the world’s second largest military budget, namely that of China.  This route to expanding our nation’s standing in the world faces far fewer political hurdles. Under our Constitution the president is the commander-in-chief of our armed forces, allowing him to deploy those forces as he sees fit. Still, standing in the way of this plan is Article I of our Constitution which only permits the Congress to declare war on another nation. This roadblock, however, has not deterred President Trump from repeatedly ordering attacks on Iran. 

Unfortunately, Trump’s current efforts to achieve military conquests are also not going well as Iran, with a population only about 30% of the size of the U.S. population and a GDP only 1% of that of the U.S., is seemingly winning this war. This is reminiscent of the story line of “The Mouse that Roared”, the 1959 movie in which the tiny Duchy of Grand Fenwick, led by a bungling palace guard, defeated the U.S. armed forces. The simple fact is that asymmetric warfare can be very effective; and this is also being demonstrated in Ukraine’s successful defense against Russia’s full-scale invasion.

President Trump’s final means of enhancing our nation’s standing in the world involves flexing its economic muscles. To this end, he has imposed high tariffs on the goods of literally scores of nations as a means of coercing economic concessions from our trading partners. This Constitutionally questionable undertaking also faces problems as it may not meet with the approval of our judicial system. Moreover, our nation’s trading partners are likely to delay complying with any concessions they might make while seeking alternative markets for the products they currently sell to the U.S. as well as alternative sources for the products they buy from the U.S.  In any event, this strategy is likely to cause our foreign trade to falter with a corresponding decline in U.S. employment.

A second (and conceivably more promising) facet of his effort to enhance the U.S.’s economic standing in the world is to help U.S. high tech companies dominate the development artificial intelligence systems that will revolutionize all facets of industrialized economies. While hundreds of billions of dollars are being poured into this effort, success is not assured and, in any event, will not be achieved during Trump’s remaining two+ years in office. Part of the problem is that artificial intelligence consumes a monumental amount electrical energy, and U.S. communities across the nation are resisting having the requisite power plants be located near them. Equally problematic is whether the U.S. economy, with its multiplicity of regulatory agencies, can win the race to develop AI faster than the Chinese who can make economic decisions overnight. At this point the U.S. enjoys the advantage of having the most advanced computer chips but even that advantage may not be sufficient to enable a U.S. tech companies to win this race.

​ The political and economic ramifications of the actions taken by President Trump during just the beginning of his second term in office are hard to fathom. They will unquestionably cause the U.S.’s. financial condition to continue to deteriorate and economic growth to proceed at a reduced rate. They also will likely force the U.S. to manage its economy in a more prudent fashion and cause it to diminish its attraction as the country most hospitable to foreign investment and to persons with scientific skills as well as those simply seeking to better themselves through hard work. Still, our nation’s economy will undoubtedly continue to be economically strong, but it will likely be soon surpassed by that of China. In any event our children’s (and their children’s) lives may not be as comfortable as what my generation of Americans has experienced.