Big beautiful debt

Bottom Line

Gross US federal debt has soared from $10 trillion in 2008 to $36 trillion, with interest payments to service it running at around $1 trillion per year. That’s more than we spend on Medicare and defense. US Treasury Secretary Scott Bessent crafted his “3-3-3” plan to address this unsustainable trajectory. It attempts to generate trendline GDP growth of at least 3% annually, while gradually reducing the budget deficit from 7% today to 3% by the end of 2028. 

One Big Beautiful Bill President Trump signed his signature legislative achievement into law on Independence Day. It contains two key stimulative elements. First, Trump made permanent his individual tax cuts from 2017 that would have otherwise expired at the end of 2025. Consequently, we avoided a $4.5 trillion tax hike next year, which in our view would have certainly pushed the economy into recession. Second, he introduced 100% expensing of company spending on capital goods, factories and research & development, which we believe will spark a powerful corporate capex boom to boost productivity and GDP growth.

How do we pay for this? Trump’s controversial tariffs have generated a surprisingly stronger-than-expected $100 billion in revenue since Liberation Day on April 2, according to the White House. Kevin Hassett, the director of the National Economic Council, believes that this trend is sustainable and will ultimately generate about $3 trillion in revenue over the 10-year budget window espoused by the Congressional Budget Office (CBO).

Can we grow our way out of this debt morass? Stephen Miran, the chair of the Council of Economic Advisors (CEA), is projecting an aspirational 3.5% average annual GDP growth rate over the next decade. That’s moderately above Bessent’s 3%. In contrast, the CBO is projecting average annual GDP growth of only 1.9% over the next 10 years. Hassett explains that if the economy achieves the CEA’s admittedly loftier goal, it will generate an extra $3.8 trillion in tax revenue over the CBO’s 10-year budget window.

What about altering entitlements? Congress has long viewed Medicare and Social Security as the third rail of politics. For exactly this reason, we are strong proponents of imposing 12-year term limits in Congress. We need lawmakers who will vote for better policy for the American taxpayer, rather than advancing their own careers. But in his newly passed tax law, Trump took modest steps to reduce the fraud, waste, abuse, inefficiency and mismanagement embedded in many of these entitlement programs:

• Affordable Care Act (ACA) Tightened eligibility and allowed subsidies to expire for higher-income people, reportedly about 45 million (13.2% of the US population) of whom are enrolled in the program. 
• Medicaid Added work requirements and more frequent eligibility checks. The program has more than 71 million beneficiaries (21% of the population). The Wall Street Journal reported recently that nearly three million people are illegally drawing benefits from both Medicare and Medicaid. 
• Supplemental Nutrition Assistance Program (SNAP) Added work requirements for young, able-bodied adults without children. About 42 million people (12% of the population) receive food stamp benefits.

Green rollback Henceforth, the economics of going green are going to have to stand on their own feet. Trump is allowing the expiration of renewable (solar and wind) credits and is repealing electric vehicle (EV) credits. Our research suggests the peak market share for EV’s is approximately 25% due to their significantly higher cost, lower driving range and anxiety related to finding charging stations. 

Department of Government Efficiency (DOGE) This program has been a controversial lightning rod during Trump’s second term. It targeted $2 trillion in budget cuts over a decade and created sweeping initiatives to overhaul federal entitlement programs. But Bessent has scaled back DOGE’s savings estimates to $1.5 trillion over the next 10 years. The government has long grappled with the challenge of controlling spending and improving efficiency. While DOGE’s methods are controversial, its mission reflects a recurring tension in American governance of how to deliver public services effectively without compromising fiscal responsibility. Over the last half century, five presidents put their own spin on how to save money and improved efficiency:

• President Carter’s Zero-Based Budgeting Carter required all agencies to justify spending from a “zero base” each year, rather than only explaining increases. The goal was to improve transparency, eliminate waste and prioritize spending based on program effectiveness. While its implementation initially improved internal planning and forced clear articulation of goals, it was administratively burdensome and lacked Congressional support.
• President Reagan’s Greenspan Commission Formally known as the National Commission on Social Security Reform, it was established in 1981 by Reagan and Congress to address the imminent insolvency of the Social Security trust fund, projected to run dry by mid-1983. Chaired by economist Alan Greenspan, the 15-member panel included members appointed by both parties to ensure accountability and shared sacrifice. Its recommendations became the basis for the Social Security Amendment of 1983, which gradually raised the full retirement age from 65 to 67, taxed benefits for higher-income recipients, expanded coverage to federal employees and increased payroll taxes. These reforms were enacted with strong bipartisan support and are credited with extending the solvency of the Social Security Trust Fund by approximately 50 years.
• President Clinton’s National Performance Review Launched in 1993 as Clinton's flagship initiative to modernize the federal government, this is DOGE’s closest comparable program. Vice President Gore had the helm, aiming to make government “work better and cost less” by cutting red tape, streamlining operations, enhancing service delivery, and using technology more effectively (including the early adoption of the internet). Over five years, it eliminated more than 100 programs, reduced more than 377,000 federal jobs (mostly through attrition), and consolidated more than 800 field offices. While its cost savings of $69.4 billion were not solely responsible for the budget surplus in 1999, it played a supporting role, adding sorely needed fiscal discipline to the federal government.
• President Bush’s Social Security Reform Centered around the creation of a voluntary personal retirement account for younger workers, the plan would have allowed these accounts to be managed by the government but invested in a mix of conservative stock and bond funds, generating potentially higher investment returns. Bush wanted to give Americans more control over their retirement savings and address the long-term solvency crisis facing Social Security. Despite a national campaign promoting the plan, the public was concerned about the risk of investing in the stock market, and it lacked political support in Congress.
• President Obama’s Simpson-Bowles Commission Formally known as the National Commission on Fiscal Responsibility and Reform, Simpson-Bowles was established in 2010. It tasked its bipartisan 18-member panel with reducing the federal deficit and stabilizing the national debt. Sen. Alan Simpson (R-WY) and Rep. Erskine Bowles (D-NC) proposed reforms that would have reduced the deficit by $4 trillion over 10 years, through tax reforms, spending caps, entitlement adjustments and Social Security changes. Ultimately, Obama chose not to submit the bill to Congress for a formal vote.

While critics question the accuracy of DOGE’s savings estimates and warn of unintended consequences, its supporters argue that it represents a necessary correction to decades of unchecked federal spending growth. Whether it will succeed when past efforts have stalled remains to be seen. But its ambition and scope place it firmly within the lineage of major federal reform initiatives over the past half century.

Research assistance provided by Federated Hermes summer intern Devin Clancy

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