Lynn Alden: Death by Deficit Spending

Published

September 29, 2025

Goal

Summarize the episode with the focus on the current status of the economy and economic data.

The provided notes are a fragmented collection of thoughts on U.S. fiscal policy, tariffs, and the economy. The goal of this revision is to synthesize these points into a clear and cohesive summary.

U.S. Fiscal Policy and Economic Outlook

The U.S. is facing a significant and growing fiscal deficit, largely driven by spending that is difficult to cut. The current deficit spending is stimulatory, meaning it injects money into the economy and boosts demand. However, this trend is leading to a growing national debt and significant long-term challenges.

The notes highlight several key issues:

  • Fiscal Dominance: There’s a sense that the government’s spending trajectory is unstoppable. This is referred to as fiscal dominance, a situation where a government’s fiscal policy overrides monetary policy, making it difficult to control inflation or manage the national debt.
  • Failed Efficiency Efforts: A government-wide focus on efficiency, symbolized by the “Department of Government Efficiency (DOGE),” often fails. This is because the largest drivers of spending—Social Security, Medicare, defense, and interest payments—are politically untouchable or legally mandated.
  • The Debt Challenge: The projected $2 trillion deficit in 2025 is massive. A significant portion of this is not considered “waste” but rather stems from popular programs and unavoidable expenses like interest on the national debt.

The Debate Over Tariffs

Tariffs are being considered as a tool to address some of these economic challenges, but they come with significant trade-offs.

Arguments for Tariffs

  • Revenue Generation: Tariffs generate revenue for the government. However, the notes point out that the estimated $360 billion in annual tariff revenue is a small fraction of the projected $2 trillion deficit, so it’s not a solution for the debt problem.
  • Global Trade Reordering: Proponents argue that tariffs are necessary to reorder a global trade system that they believe is unsustainable for the U.S., particularly concerning the trade deficit.
  • Bringing Manufacturing Back: Tariffs are seen as a way to incentivize and protect domestic industries, encouraging companies to bring manufacturing back to the U.S.

Arguments Against Tariffs

  • A Tax on Americans: Tariffs are essentially a tax on consumers and businesses. Evidence suggests they don’t lower import prices, meaning the cost is passed on to American importer and/or buyers, not foreign exporters.
  • Economic Uncertainty: The unpredictability of tariff policy creates significant uncertainty for businesses. Companies are hesitant to make long-term capital allocation decisions—like building factories in the U.S.—if they fear the tariffs may be reversed.
  • Alienating Allies: The use of tariffs can strain diplomatic relations and alienate key trade partners.

Broader Economic Indicators

  • Labor Market: The labor market is in “decent shape,” despite a slight uptick in initial jobless claims.
  • Purchasing Managers’ Index (PMI): A weak PMI indicates a slowdown in the manufacturing and service sectors.
  • The 80/20 Rule: Government efforts to cut spending are often an application of the 80/20 rule—focusing on the easy, but less impactful, 20% of the problem while avoiding the most significant, politically difficult 80% (i.e., social security, defense, and healthcare).