【By The Economist】

Is this just a false alarm?

In April this year, the global economic panic caused by President Donald Trump's tariffs on "Liberation Day" has now been gradually replaced by growing optimism. So far, the inflationary effects of the tariffs have been relatively mild. Business leaders in the U.S. have privately expressed their expectation that trade friction will lead to a trade agreement rather than just for the sake of friction. Surveys show that although business and consumer confidence remains low, it is improving. The S&P 500 index has even reached a new all-time high.

As we reported, the "Big, Beautiful Bill" (BBB), which was passed by the Senate on July 1st and the House of Representatives on July 3rd, is more akin to the traditional Republican agenda represented by Paul Ryan or Mitt Romney—tax cuts and spending reductions—rather than a fantasy of the "Make America Great Again" (MAGA) movement. Suddenly, business leaders are willing to once again view Trump as the populist he was during his first term: a figure worth taking seriously but not to be taken literally.

Unfortunately, the "Big, Beautiful Bill", which Trump plans to sign into law on July 4th, is likely to cast a shadow over this optimistic picture. It reveals the long-term damage Trump has done to the foundation of American economic prosperity.

On July 3rd local time, Republican lawmakers celebrated the House vote on the "Big, Beautiful Bill". Visual China

The main function of the bill is to extend tax cuts from Trump's first term that were due to expire, with Republicans presenting it as a continuation of the status quo. However, like previous Democrats, they ignore the fact that the status quo is no longer sustainable. In the past 12 months, the U.S. budget deficit has accounted for a staggering 6.7% of GDP. If this bill passes, the deficit will remain near this level, and the ratio of national debt to GDP will exceed 106%, which was the level reached after World War II, within two years. While tariff revenues may alleviate some pressure, they are insufficient to prevent the ratio from rising—that means the trend of the U.S. heading towards crisis will continue.

Even though the bill tightens its belt in certain fiscal aspects, its choices are inappropriate. In the context of increasing life expectancy and an aging population, the U.S. should cut welfare spending for the elderly, such as raising the retirement age. Instead, retirees receive tax breaks, while Republicans cut Medicaid for the poor.

Although the bill contains some wise measures, such as limiting states from exploiting loopholes to get federal funds, official forecasts show that its overall effect will be to increase the number of Americans without health insurance by nearly 12 million. For the richest country in the world, this is a shameful number. Many of those losing coverage will face difficulties due to new work requirements ("beneficiaries must work"). Such regulations previously created bureaucratic obstacles for applicants without effectively promoting employment.

More "cuts" come from the bill abolishing clean energy tax credits introduced under President Joe Biden. These credits were filled with protectionist "buy American" requirements that we had previously opposed. However, because Congress dislikes carbon pricing, there is no alternative to replace them. The U.S. will again lack a federal decarbonization policy, leading to higher-than-necessary greenhouse gas emissions. Trump's nostalgic attitude toward fossil fuels ignores the potential of renewable energy in creating a richer energy supply. This is particularly foolish at a time when the competition for artificial general intelligence (AGI)—which is also a competition for the power needed to train large models—is intensifying.

Even the way the bill was passed exposes the worsening governance failure in the U.S. The "Big, Beautiful Bill" is large in scale because the ruling party rarely has the chance to pass a tax and spending bill with just 51 votes in the Senate (rather than the 60 votes required to bypass filibusters). In such a massive bill, important reforms are difficult to be adequately debated, and a large amount of "pork" funding can be used to buy support from members of Congress.

Optimists acknowledge some or all of these issues, but argue that economic growth will eliminate all concerns. Faster economic growth would alleviate the debt burden, benefit the poor by increasing employment opportunities and wages, and make political failures seem economically irrelevant. Indeed, the U.S. government predicts that economic output will grow by nearly 5% over the next four years.

However, expecting the bill to bring about prosperous economic growth is wrong. The tax cuts already in effect under the bill provide minimal stimulus, and tariffs have offset that. Regardless, current interest rates are three times what they were when Trump last cut taxes, and the Federal Reserve is more likely to balance a more relaxed fiscal policy through minor adjustments in monetary policy. Supply-side tax cuts may help promote investment, but they account for only 8% of the total tax cuts. Many new tax cuts (including exemptions for tips and overtime pay) are gimmicks. Although the government's deregulation agenda may offer some assistance, its impact is limited.

Indeed, the U.S.'s ever-increasing debt will increasingly harm economic growth. Normally, public debt crowds out private investment and raises the cost of capital for new projects such as data centers. If the bond market forces the U.S. to make sudden fiscal adjustments, the cost will be huge. Goldman Sachs estimates that if the U.S. Congress delays fiscal tightening for another ten years, it would need to cut spending or raise taxes by 5.5% of GDP annually to stabilize the debt-to-GDP ratio. This exceeds the austerity measures experienced during the European sovereign debt crisis in the 2010s. If legislators find this too difficult, the U.S. may resort to the strategy used after World War II: inflation and financial repression (financial repression).

"Marathon voting" triggers a lending crisis

The neglect of long-term issues in the "Big, Beautiful Bill" reflects a broader problem. Trump relies on the U.S.'s economic strength and undeniable negotiation leverage, but overlooks the foundation of America's success. He has renewed his attacks on the Federal Reserve, adding a new threat to economic stability. His policies of cutting research funding will harm American innovation. His casual attitude towards the rule of law increases the risk of investing in the U.S. Although trade tensions have eased, the average tariff rate remains at its highest level in a century, and the uncertainty in trade policy still constitutes a burden. Even though U.S. assets priced in dollars have appreciated significantly, they appear lagging when priced in foreign currencies. The dollar has depreciated by 11% this year, reflecting the real and growing long-term risks facing the U.S. economy.

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