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Impressive victory by Trump and Republicans signaled in November that the country is desperate for change, with Americans making clear to Washington that “this is not working” for the current state of the US.
While the mandate may be clear, implementing that change will be a huge challenge. The The Biden-Harris administration he has left our fiscal house in complete disarray, limiting many of the options that will be available to Trump, as well as putting key policy proposals at odds with our fiscal reality.
Here are three of the biggest challenges the new administration will have to deal with.
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Spending cuts and deficits
With a $36 trillion debt that is over 120% of GDP and growing at a rate of about $1 trillion every 100 days and a deficit that is twice the historical average as a percentage of GDP, any spending cuts will require careful choreography.
Tools and tactics that could be used in the past must now be used much more carefully.
With disruptors Elon Musk and Vivek Ramaswamy who heads the Department of Government Efficiency (known as DOGE), they will easily be able to identify big spending and regulatory cuts. However, the execution must be to prioritize those efforts that increase GDP before reducing spending.
Huge government deficits prop up US GDP. Taking away some of that will immediately do the opposite, reduce GDP. Therefore, the growth of the private sector should be encouraged first. Otherwise, if GDP falls and we enter a recession, the US will see lower tax revenues and then we could end up with a larger deficit. This could also affect the global economy and markets.
Focus and plan are important, they just need extremely careful implementation so that the economy doesn’t go awry in the process.
Oil production
One of the three legs of Treasury nominee Scott Bessent’s “3-3-3” economic plan (along with cutting the deficit) unleashes growth by increasing our oil production by an incremental 3 million barrels or more per day.
Higher production, the theory goes, will increase ours energy independence and lower costs for almost everything. The challenge is that the oil industry needs a certain price to operate profitably and even higher prices to make investments and fill the pipeline (no pun intended) for future drilling and refining. A recent Wall Street Journal article noted that “U.S. energy companies on average say they need WTI crude prices of at least $65 a barrel to make drilling profitable and $89 a barrel to significantly increase drilling, according to the latest survey by the Federal Kansas City reserves.”
Experts believe that even with deregulation in the industry, there may not be enough cost savings to change this dynamic.
Trying to stimulate growth with oil production when there is a solid floor in oil prices is a practical conundrum.
This is a conundrum that the Trump administration will have to solve.
Tariffs against the dollar
The Trump administration has been focused on both tariffs and a weaker dollar, a dynamic that once again creates a paradoxical challenge.
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On tariff sideswhile some proposals could be Trump’s “art of the deal” to establish new trade and economic agreements globally, other tariffs could have a chilling effect on small businesses and overall economic growth.
Moreover, the tariffs are expected to strengthen the US dollar. Still, a key focus of the administration is to weaken the dollar to make it more globally competitive and affect many of the administration’s policies and goals.
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I believe that Trump, Bessent and team will have trouble with widespread tariff increases in the context of what they are trying to achieve as a whole. Perhaps more targeted tariffs where there are real national security issues will be where policy desire becomes reality.
Trump has assembled many strong individuals on his team and has an entrepreneurial vision, but his task remains economically and financially daunting. Americans will need to be patient as the goals of good policy confront the harsh fiscal realities of the US.
