Economic Policy and the Inflation Trap
High prices remain a central feature of the American economy. Voters reacted to this reality in 2024 by removing Democrats from the White House. Persistent inflation currently drags down approval ratings for President Donald Trump. It also creates a difficult environment for the upcoming midterm elections where control of Congress sits on the line. One might expect political leaders to focus on price stability. Instead, they pursue policies that keep inflation high.
Populist economics now finds support across the political spectrum. Both major parties embrace high spending and trade tariffs. These choices are hard to reverse because the logical counter-measures are unpopular. Cutting government spending or raising taxes risks slowing down the economy. Politicians prefer growth over austerity even when price levels remain above the Federal Reserve target of 2%. The bond market reflects this anxiety as Treasury yields rise to account for the risk of devalued currency.
The Impact of Fiscal Decisions
Expansionary fiscal policy continues to drive economic activity despite high inflation. The One Big Beautiful Bill Act decreased taxes while increasing federal spending. Defense costs have also risen as the war in Iran adds billions to the annual budget. These choices contribute to a state where employment is strong and stock markets reach record levels. Tech companies alone expect to spend $1 trillion on AI infrastructure this year. Prosperity for some segments hides the pressure on the cost of living for others.
Joe Brusuelas, the chief economist at RSM US, notes the mismatch in current policy. He argues that using expansionary fiscal tools while the economy operates at full employment is inappropriate. The government previously used massive stimulus during the 2020 pandemic to support employment. That emergency response successfully lowered unemployment but triggered the highest inflation in 40 years. Economists like Brusuelas viewed that as a necessary tradeoff at the time. Applying that same logic today brings more risk than reward.
Historical Context and Political Realities
The last time Washington effectively balanced the federal budget occurred in 1998. That effort involved President Bill Clinton and Treasury Secretary Robert Rubin. It was the final period where government spending remained lower than revenue. Since 2001, deficits have become a standard feature of federal operations. The Republican Party has largely moved away from its traditional stance of prioritizing budget cuts. This shift is particularly evident during the second term of the current administration.
President Trump previously promised to eliminate the national debt. He has instead presided over a rapid accumulation of new obligations. The Department of Government Efficiency, led by Elon Musk, failed to meet its stated savings targets according to recent government reports. New immigration and tax laws signed by the administration will add an estimated $4.7 trillion to the debt over the next decade. Meanwhile, the White House proposed a 40% increase in defense spending to $1.5 trillion annually. Even as national debt crossed the $40 trillion mark, legislative leaders offered little resistance to this trajectory.
The Role of the Federal Reserve
Fed Chairman Kevin Warsh aims to lower inflation through rate adjustments. His tools are blunt and often produce side effects for employment. Monetary policy cannot succeed if fiscal policy works in the opposite direction. The current spending spree effectively forces the Fed to maintain high interest rates. This environment keeps borrowing costs high for consumers and businesses alike.
No immediate collapse of the financial system appears likely. US Treasury bonds remain a desirable asset for global investors. The economy stays productive and sectors like technology continue to report growth. Still, the long-term sustainability of this policy remains in question. Brusuelas warns that if expansionary fiscal habits continue indefinitely, the risk of a currency or banking crisis grows. At some stage, the government must choose between higher taxes or reduced spending. The current path leads to a situation where painful corrections become inevitable.