Reducing the federal deficit, raising the long-term economic growth rate, and increasing the energy security of the United States would help all people. That bears note in light of President-elect Donald Trump’s nomination of Scott Bessent for treasury secretary. Bessent is a strong choice.
A highly regarded hedge fund manager, Bessent understands interest rates. He knows the federal deficit raises interest rates and weighs heavily on economic growth. When confirmed as treasury secretary, Bessent wants to push a so-called “3-3-3” policy. His plan is to permanently increase long-run economic growth to 3%, cut the budget deficit to 3% of GDP, and increase daily domestic oil production by 3 million barrels a day.
The Left will say that Bessent’s 3-3-3 plan is pie in the sky. The Left is wrong. The 3-3-3 policy can be done. When the market realizes that Trump and Bessent are serious, business investment should grow, interest rates should fall, and households should have greater confidence in their economic future.
That matters because the accumulated net federal deficit now approaches 100% of GDP. Step one of Bessent’s plan is to cut the deficit from 6.4% of GDP to 3% of GDP by the end of 2028. There are several specific steps that can be taken to bend the deficit curve. But this needs to happen because paying just the interest on the deficit now consumes almost 3% of GDP. When the deficit as a percentage of GDP begins to fall, interest rates should also fall. Each 1% decrease in the interest rate that the federal government pays will decrease the federal deficit by 1% of GDP each year.
How to do it
There are many federal welfare programs that can be eliminated or, at a minimum, pared back. Striving is essential for the American dream. Welfare is not the purpose of the nation. That is the purpose of the European Union. And that purpose has left the EU’s relative economic growth paralytic in recent decades as U.S. growth has generally remained strong. Moreover, the U.S. system of government is premised on federalism, the powers of the federal government are limited. Domestic spending programs should be pushed down to the state level. States should be responsible for local welfare.
By significantly reducing outlays for federal welfare programs, including food stamps and Medicaid, and pushing those responsibilities to the states, the federal deficit can be reduced by $500 billion a year. The administration should also eliminate the Education Department. Doing so would save over $100 billion each year. Education is a state and local government matter. Very importantly, Trump should rescind President Joe Biden’s income student loan repayment plan.
Restoring the concept of federalism, eliminating the Education Department, and rolling back student loan giveaways, coupled with lower interest rates, would enable Trump and Bessent to cut the deficit to 3% of GDP by 2028.
But Bessent is also right that domestic oil companies can increase daily oil production by 3 million barrels, thereby ensuring low energy prices and enhancing national security. The U.S. is a low-cost energy producer, which provides the country with a global competitive advantage. At the right price, the U.S. has over 300 billion barrels of technically recoverable oil reserves.
For the last decade, productivity growth in the oil sector has averaged 6%, about seven times as large as the typical U.S. business. Because of the extraordinary productivity gains in the Permian Basin, the U.S.’s most prolific oil field, producers can make a profit when the benchmark price of U.S. crude, West Texas Intermediate, falls to as low as $40 a barrel.
WTI is trading around $70 a barrel. Through the transformative technology of artificial intelligence, oil companies can find and bring out the small pools of oil that are located in the shale rock formations of the Southwest.
But there is a hurdle to increased domestic oil production. Today, there is an excess supply of oil on the global market. Daily demand for oil runs at around 103 million barrels a day. Global oil producers have the capacity to supply 108 million barrels a day. Global oil supply exceeds global oil demand, which puts downward pressure on oil prices. U.S. oil producers would be reluctant to increase production dramatically as that would push prices lower and reduce incremental profits.
It is all about price. At the right price, U.S. oil companies can easily increase production by 3 million barrels a day. Consequently, a policy goal of the Trump administration must be to guarantee domestic oil companies reasonably high prices and, at the same time, ensure low prices for U.S. businesses and households. One way to accomplish that somewhat contradictory goal is for the Trump administration to aggressively refill the Strategic Petroleum Reserve which Biden ran down through his efforts to manipulate domestic gasoline prices.
Energy security is similar to food security. Price supports for oil are justified. With price supports, oil companies will open the production taps, and the U.S. can become the energy capital of the world.
As U.S. energy production increases, geopolitical pressures are brought to bear on two of America’s principal enemies, Russia and Iran, both major oil exporters. Low stable oil prices help America and hurt those who want to hurt us. As the U.S. becomes a cornucopia of higher energy production, some of that production could be exported to our allies. The global economy needs U.S. liquefied natural gas, and the world needs American oil. Increasing energy production enhances national security and promotes American prestige. As a side bonus, boosted energy exports would also reduce the trade deficit.
What about economic growth?
The U.S. economy can grow faster. The key to faster economic growth is to increase the underlying productivity rate. And the first step to increasing productivity is to lower taxes on businesses, particularly on business investment. Trump’s proposal to lower the corporate tax rate to 15% is outstanding policy.
After all, the most efficient corporate tax rate is zero. Economic research on the Tax Cuts and Jobs Act of 2017 shows that business investment increased by 20% or more in response to lower corporate tax rates. When a business has more capital, it invests more in physical and human capital. When businesses have more money, they will invest more in the revolutionary technology of artificial intelligence. AI can be the holy grail for a permanent increase in the domestic productivity rate. Some economists believe that AI could permanently raise long-term productivity growth by 1.5% annually.
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Reducing unnecessary government regulations would also increase the long-run economic growth rate. On a 10-year basis, unnecessary regulations cost the economy up to $47,000 per household. A sustainable 3% annual growth rate is achievable through lower business taxes, greater investment, and reducing the burden of unnecessary government regulations.
Put simply, 3-3-3 can be done. It should be done. But its pursuit will come with some difficult political trade-offs and will sometimes be challenging.
James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note on the markets, politics, and society. He can be reached at [email protected].