President Donald Trump achieved a major legislative victory with the passage of his One Big Beautiful Bill Act. Treasury Secretary Scott Bessent asserts that the law will provide the foundation for the economy to grow GDP at a sustainable 3% rate. If the economy can expand at a 3% plus growth rate, then the debt-to-GDP ratio of the U.S. economy can be stabilized. Today, the ratio is roughly 100% of GDP, an ominous level because a 1% change in Treasury yields over a year can either increase or decrease the federal deficit by 1% of GDP.
The federal deficit is currently about 6.7% of GDP on an annual basis. A 1% increase in Treasury yields would raise the deficit to 7.7% of GDP. The direction of interest rates is important for the health of the economy.
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There are provisions of the big, beautiful bill that could increase the rate of long-run GDP growth. Making permanent the business deduction for research and development expenses in the year the monies are spent is positive for economic growth, as is the legislative language that provides for 100% bonus depreciation for investment in equipment and in facilities. This will reduce business taxes and increase free cash flow. Capital investment is the oxygen of long-run productivity growth. Since 1980, assets invested in U.S. corporations have generated annual returns of 9% to 11%.
Unfortunately, private capital investment is not the driver of the U.S. economy. Personal consumption accounts for almost 70% of GDP, while private investment makes up only 19%. So, increases in private investment are positive, but will not move the needle to sustained 3% growth.
To achieve sustained long-run growth of 3%, business investment must increase, interest rates on U.S. Treasuries must fall, and the size of the U.S. labor force must increase. As noted, the big, beautiful bill will stimulate business investment. However, according to multiple nonpartisan studies, the legislation will increase the deficit by between $3 trillion and $4 trillion over a 10-year period. Higher deficits raise interest rates, crowding out productive private investment. Higher rates make business investment more expensive.
Perhaps, most importantly, the One Big Beautiful Bill Act, coupled with Trump’s aggressive policies on illegal immigrants, will decrease the domestic labor force. Over the long run, GDP growth is a function of productivity increases and increases in the labor force. More workers means more output. The big, beautiful bill dramatically increases funding to find and expel illegal migrants. The bill reduces the labor force. Already, businesses in the agricultural, leisure, and construction industries are struggling to find workers. Crops are literally withering on the vine. Hotels are inadequately staffed, and construction projects are experiencing delays.
The Trump administration argues that as illegal migrants are expelled, wages will rise, enticing the 4 million nondisabled Americans who have dropped out to enter the labor force. This will not happen. Americans are not going to harvest crops in the heat of the summer. Moreover, the manufacturing sector already has 400,000 openings for well-paying jobs that cannot be filled. America needs more labor. The country needs more legal immigrants. However, the big, beautiful bill reduces the supply of labor.
On one hand, the bill increases the potential growth rate with the pro-growth business tax provisions, but on the other, it reduces potential growth by raising interest rates and reducing the supply of labor.
TWO REASONS THE US AND IRAN LOOK SET TO FIGHT AGAIN
What makes the outlook so frustrating is that the United States is experiencing long-run increases in productivity growth. Sustained 2% productivity growth is in sight, arguably because of the artificial intelligence revolution. The combination of the business tax cut provisions, coupled with the productivity-enhancing aspects of the AI revolution, puts the U.S. on the cusp of long-run 3% economic growth. However, the Trump administration’s migration policies and the extension of the Tax Cuts and Jobs Act of 2017 will push the goal of 3% growth further out of sight.
The risk? The Trump administration snatches defeat from the mouth of economic prosperity.