January 12, 2024

Thought of the Week:

From Tik Tok to LinkedIn to X, social media has become ingrained in Americans’ daily routines. What’s more, social media platforms are at the heart of several companies that market analysts call the “Magnificent Seven”—Alphabet has YouTube; Meta owns Instagram, Facebook, and WhatsApp; Microsoft has LinkedIn; and Elon Musk owns both Tesla and X. I admit, I’ve developed a newfound appreciation for Facebook over the past year. I’m at this odd stage of life where some of my younger friends are getting married, several even for the first time, while some of my older friends are becoming grandparents. The dual visions they present on the platform remind me of my own time raising young children. While I was fortunate enough to have a boy and a girl born just two years apart, any parent will tell you that one of the most frustrating jobs for a mother or father is refereeing between children, especially when one is telling on the other. “Dillon did this” or “Zoe did that” were refrains my wife and I seemed to hear constantly. It’s a difficult course to navigate as a parent…you don’t want to raise a tattletale, but you also want to know if one child is doing something dangerous. At times, I’d get to the point where I’d punish them both—one for doing whatever it was they did, the other for tattling. With government shutdowns looming, the ongoing spending debates in Congress remind me of those long ago days. Democrats tattle on Republicans, saying deficits and debt are due solely to the Reagan tax cuts…the Bush tax cuts…the Trump tax cuts. The GOP tells on Democrats exclaiming deficits and debt are due to runaway spending…for healthcare, green energy, and an ever expanding welfare state. But with The Conference Board reporting that the geopolitical risk that concerns U.S. CEOs most is the escalating U.S. national debt (the increasing cost to finance deficits and debt places strain of the financial system, raises borrowing costs, limits access to capital, and lowers standards of living ), the time is now for the adults to enter the room. The Committee for a Responsible Federal Budget (CRFB) has done just that (read their full analysis). They report that in 2001, the federal government ran a $128 billion budget surplus and was projected to pay off the national debt by 2009. Since then, the government has borrowed an additional $23 trillion, bringing the national debt held by the public to a near-record 98% of GDP and transforming a surplus into a $1.7 trillion deficit. While partisans claim the fiscal deterioration was caused entirely by tax cuts or was completely due to spending growth, the reality is both spending increases and revenue reductions explain the growth in deficits and debt. A look at the policy changes enacted since the beginning of 2001 found:   

  • Debt is 37% of GDP higher due to major tax cuts, 33% higher due to major spending increases, and 28% higher due to recession responses.  
  • Most debt, 77% of GDP, can be attributed to bipartisan legislation.  
  • Absent these tax cuts and spending increases, the debt would be fully paid off.  

 Comparing spending and revenue as a share of the economy over time found:  

  • Rising spending relative to GDP explains two-thirds of the growth in annual budget deficits since 2001, while declining revenue explains one-third.   
  • Had revenue remained stable as a share of the economy, the debt would be half its size; had primary spending been stable, it would be nearly paid off.  

Under any of the counterfactuals, the deficit would be much smaller, and in some cases the budget would have been balanced or in surplus. Although showing how things have changed doesn’t offer easy solutions, knowing how we got here can be useful in determine where to go next. Any realistic plan to fix the debt will require addressing both revenue and spending. 

Thought Leadership from our Consultants, Think Tanks, and Trade Associations

Eurasia Group’s Top Geopolitical Risks for 2024

Risk 1: The United States vs. Itself: the 2024 election will test American democracy to a degree the nation has not experienced in 150 years.

Risk 2: Middle East on the Brink: the region is a tinderbox, and the number of players carrying matches makes the risk of escalation exceptionally high.

Risk 3: Partitioned Ukraine: Ukraine will be de facto partitioned this year, an unacceptable outcome for Ukraine and the West that will nevertheless become reality.

Risk 4: Ungoverned AI: breakthroughs in AI will move much faster than governance efforts.

Risk 5: Axis of Rogues: deeper alignment and mutual support between Russia, Iran, and North Korea will pose a growing threat to global stability.

Risk 6: No China Recovery: any green shoots in the Chinese economy will only raise false hopes of a recovery as economic constraints and political dynamics prevent a durable rebound.

Risk 7: The Fight for Critical Minerals: the scramble for critical minerals will heat up as importers and exporters intensify their use of industrial policies and trade restrictions.

Risk 8: No Room for Error: the global inflation shock that began in 2021 will continue to exert a powerful economic and political drag in 2024.

Risk 9: El Nino Returns: a powerful El Nino climate pattern will bring extreme weather that causes food insecurity, water stress, disruptions in logistics, disease to spread, fuel migration, and political instability.

Risk 10: Risky Business: companies caught in the crossfire of U.S. culture wars will see their decision-making autonomy limited and their cost of doing business rise.

Inside EPA Reports November Election to Offer High Stakes for Climate, Environment Policy. Amid hardening battle lines between the Biden administration and its GOP opponents, who have vowed to roll back major initiatives that officials are racing to finalize, the 2024 election will launch a fight over control of the White House and Congress with significant stakes for climate and environmental policy. The Biden administration is already touting a list of climate-related accomplishments, even as officials continue to roll out programs created by the 2022 Inflation Reduction Act (IRA). But Republican lawmakers, conservative groups, and GOP presidential favorite Trump are either criticizing the basic premise of the initiatives or vowing to repeal them, pointing to the possibility of a significant swing in environment and energy policy should the GOP prevail in November. The ramp up to the election comes as environmental issues will compete for attention with a variety of issues, including abortion access, immigration policy, and the lingering effects of inflation. Despite the broad backdrop, last year offered a preview of looming political debates over environmental issues, with the House GOP repeatedly teeing up votes on measures that would repeal Biden administration climate and environmental measures. Administration allies have cited this as evidence of the policy sea change that would come with another Trump presidency, including a variety of proposed rollbacks to several clean energy incentives in the IRA.

National Association of Manufacturers (NAM) Sees Consumer Prices Rise. Consumers paid more for goods and services last month than economists expected. In fact, the consumer price index (CPI) rose 0.3% in December after nudging up just 0.1% in November, with the cost of shelter accounting for more than half of the CPI’s increase. In the year through December, the CPI increased 3.4% after rising 3.1% in November; economists had predicted a 0.2% gain on the month and a 3.2% increase on a year-on-year basis. So-called core CPI—consumer prices excluding volatile food and energy prices—increased 0.3% in December, the same amount it did in November, and year-over-year core CPI rose 3.9% in December, down slightly from 4.0% in November. ​​​​​​​The data comes on the heels of last week’s jobs report, which showed a better-than-expected addition of 216,000 positions in the overall economy and 6,000 jobs in manufacturing. According to the NAM, the meaning behind the data is mixed. On the one hand, core inflation continues to moderate, albeit at rates that remain higher than preferred. On the other hand, the uptick in costs in the latest data shows how stubborn prices can be, even with progress over the past year. At present, the Federal Reserve is likely to hold interest rates steady at its meeting this month, but may start cutting them as soon as March. 

“Off the Record” 

The Federal Reserve’s Communications Strategy in Light of Market Pricing. Observatory Group analysts say the Fed is confident that inflation is on the decline, but it is not yet comfortable that it has been conquered and solidly on track to a sustainable 2%. This lack of confidence is what separates the central bank’s outlook from current market pricing. Therefore, expect the Fed to try to move market pricing away from the odds of a March rate cut. While policymakers want to see evidence that the market sees a reasonable risk of no move in March, the shift does not have to be completed by the January FOMC meeting. Plenty of talk is likely from the Fed that cuts against the idea of a March move being a done deal, and policymakers will argue that rates need to remain where they are ‘for some time’ and that rate cuts are for ‘later,’ when there is more confidence inflation can get to a sustainable 2%. The Fed will sound encouraged about recent inflation but suggest the data supports rate cuts at a later date. Expect Fed officials to also push back against the notion that once rates start to fall, a cut will come at each meeting.  

In Other Words

“Don’t stay home, just please…the polls are showing we’re going to win by a lot. The worst thing you can do is say, ‘Let’s just stay home, Alice. Let’s watch it on television,’” former president Trump imploring his supporters to turn out to caucus in Iowa on Monday.

“She’s gonna get smoked, and you and I both know it,” Chris Christie, referring to Nikki Hayley, on a hot mic before his campaign exit speech, and leaving little question of his view that there is no candidate with a clear pathway to unseating former president Trump.  

Did You Know

Connecticut, Georgia, and Massachusetts did not ratify the constitutional amendments known as the Bill of Rights until 1939. 

Graph of the Week

Public trust in core institutions—such as the Congress, the judiciary, and the media—is at a historic low. While polarization and partisanship are at historic highs, U.S. confidence in political and social institutions continues to decline. When algorithmically amplified disinformation is added to the mix, the U.S. is reaching the point where Americans no longer believe in a common set of settled facts about the nation and the world.

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