U.S. Economic Recovery and Rising Deficits: A Complex Landscape

Economic Growth and Fiscal Challenges in the Post-COVID Era

The U.S. economy has shown remarkable resilience since its recovery began in mid-2020, outperforming most industrial economies. This strong rebound is largely attributed to unprecedented federal spending, with the government allocating five times more relief payments than during the 2008 financial crisis. The Biden administration further augmented this with significant investments in infrastructure and climate change initiatives. These efforts pushed federal net outlays well above the historical average of 20% of GDP, while revenues remained close to their traditional levels. However, this fiscal expansion has come at a cost: the federal budget deficit has surged, exceeding 6% of GDP in 2024, roughly double the average since the 1980s. The Congressional Budget Office warns that without policy changes, these deficits are likely to remain abnormally high, raising concerns about long-term fiscal sustainability.

The Trump Administration’s Push for Fiscal Restraint

In response to these rising deficits, the Trump administration and Congressional Republicans have made deficit reduction a key priority. They are drafting proposals to curb federal spending, but the path to meaningful progress appears fraught with challenges. A significant hurdle is the composition of federal outlays: mandatory programs, such as Social Security, Medicare, and Medicaid, account for 60% of total spending. When including net interest payments and defense spending, only about 15% of outlays fall under nondefense discretionary spending, which totaled around $1 trillion in 2024. To achieve their goal of cutting spending by approximately $2 trillion, Republicans would need to address these entitlement programs, which have historically been difficult to reform. While President Trump has exempted Social Security, Medicare, and Medicaid from cuts, he recently endorsed a House Republican plan to scale back Medicaid, a $550 billion program representing 8% of total spending. This move could set a precedent for whether mandatory programs can be modified to align with budget goals.

Elon Musk and the Quest for Government Efficiency

Another pillar of the Trump administration’s deficit reduction strategy is improving government efficiency. To this end, President Trump established the Department of Government Efficiency (DOGE), led by Elon Musk. Musk has stated that DOGE’s mission is to reduce the U.S. national debt, which currently stands at $36 trillion. Initially, Musk aimed to save up to $2 trillion annually, though he later revised this target downward. DOGE has faced pressure to disclose the specifics of its cost-saving measures. As of mid-February, the department claimed to have achieved $55 billion in savings, though some of these figures have been disputed by news agencies. DOGE’s actions, including the elimination of USAID, buyout offers to two million government employees, and efforts to combat "fraud and abuse" and "woke" policies, have sparked significant controversy. Critics argue that these measures disproportionately target agencies whose missions align with Democratic priorities rather than addressing systemic inefficiencies.

The "Contractor State" and the Limits of Musk’s Approach

Despite Musk’s efforts, experts have highlighted a critical oversight in his strategy: the focus on federal employees overlooks the far larger "contractor state." John J. Dilulio Jr., a professor at the University of Pennsylvania, points out that the number of individuals paid by the federal government but employed by private businesses and nonprofits is more than three times larger than the federal payroll. Contractors, particularly large corporations and nonprofits, receive billions of dollars in government funding, with nonprofits alone securing about 30% of their $2 trillion annual revenues from federal sources. Dilulio argues that the potential for abuse in this system is high, as contractors have weakened federal oversight over decades. He suggests that requiring contractors and their executives to disclose all political donations and contributions could help reduce corruption and improper payments. Dilulio concludes that for Musk to truly make a meaningful impact, he must confront the realities of the contractor state and prioritize transparency and accountability.

The Inadequacy of Current Deficit Reduction Plans

While the Trump administration and Congressional Republicans are making efforts to rein in spending, their plans fall short of achieving meaningful deficit reduction. The House Republican budget proposal, for instance, is projected to add at least $2.8 trillion to the public debt over the next decade, according to the Committee for a Responsible Budget. The Cato Institute, a proponent of limited government, has criticized the plan for combining "wishful thinking with modest fiscal restraints." One major obstacle to deficit reduction is the potential extension of the Tax Cuts and Jobs Act, which could reduce federal revenues by an estimated $4.5 trillion over 10 years. This figure could rise to nearly $8 trillion if additional tax cuts proposed by Trump during his presidential campaign—such as those affecting Social Security, tips, and overtime work—are implemented. These tax policies, combined with the lack of significant spending cuts, make it unlikely that the federal budget will be brought under control anytime soon.

Lessons from Clinton’s Fiscal Legacy and the Path Forward

To restore fiscal responsibility, Republicans would do well to study the playbook of former President Bill Clinton, who achieved a budgetary surplus in the late 1990s. Clinton reduced federal spending as a share of GDP from 22.2% in 1992 to 18% in 2000, while also increasing taxes on high-income earners to boost revenues. His administration emphasized saving budget surpluses to ensure the solvency of Social Security. In contrast, the current approach of relying on spending cuts alone, without addressing tax policy or entitlement reform, is insufficient to address the deficit challenge. If policymakers fail to adopt a more comprehensive strategy, bond yields are likely to remain elevated, and budget imbalances will persist. For investors and the broader economy, this scenario signals a continued era of fiscal uncertainty, with no clear end in sight.