Government spending and regulatory reform

From: allin

Scott Bessent, the 79th Secretary of the Treasury, outlines a comprehensive plan focusing on government spending reduction and regulatory reform to address current economic challenges and restore the American Dream [00:02:17]. This strategy aims to foster sustainable economic growth and address affordability issues for American families [00:27:07].

Economic Diagnosis

Bessent expresses alarm over the Biden administration’s approach to the debt and deficit, characterized by “endless stimulus, endless spending” even during periods of solid economic territory or peace [00:12:06]. He views this as cynical, believing it would lead to an inescapable equilibrium requiring tax increases and transforming the U.S. into a “European-style social democracy” [00:12:31].

A significant concern is the “Main Street versus Wall Street” dichotomy, where endless money supply fueled equity markets and benefited asset holders, while those without assets suffered from rising inflation and stagnant wages [00:13:35]. The costs of essential goods and services for the average American, such as used cars, car insurance, rent, and groceries, inflated much faster than the Consumer Price Index (CPI), leading to “unstable and great civil societal issues” [00:14:41]. Bessent states that the Biden administration’s large spending bills, labeled as “rescue size packages,” were unnecessary as the economy was already in recovery by March 2021 [00:15:31]. This contributed to the “American dream” becoming unattainable for many, as house prices soared and credit card debt rose [00:16:33].

Furthermore, Bessent questions the reliability of government economic data, such as GDP numbers and non-farm payrolls, suggesting they are subject to significant revisions and were used by the previous administration to justify actions rather than reflect public sentiment [00:20:01].

Three-Pronged Approach to Economic Recovery

The administration’s plan rests on three core pillars aimed at achieving a non-inflationary, sustainable economic recovery that restores the American Dream [00:27:07].

1. Fiscal Deleveraging

The primary goal is to bring down the massive federal debt by cutting spending in a controlled manner to avoid a recession [00:22:21]. The objective is to return the deficit to GDP ratio to the long-term average of 3-3.5% by 2028 [00:23:05]. Bessent asserts that the U.S. does not have a revenue problem but a spending problem, with federal government spending reaching 25% of GDP under the Biden administration, compared to a normal 21-21.5% and Singapore’s 18% [00:23:24].

The increasing interest payments on the nearly $30trillionnationaldebt,currently$1.2 trillion annually, complicate this effort by consuming more of the federal budget and necessitating deeper cuts [00:24:43]. The plan includes:

• Deleveraging government spending: A controlled reduction to avoid economic shock [00:22:21].
• Shedding excess government labor: Transitioning government employees to the more productive private sector [00:26:16].
• Waste, fraud, and abuse: Identifying and quantifying inefficiencies within government operations to gain public and market confidence [00:40:27]. Initiatives like the “Doge” project, led by business leaders like Elon Musk, aim to identify cost-saving opportunities [00:42:13]. The administration emphasizes government efficiency and regulations rather than elimination of services [00:45:07]. An example of inefficiency cited is an IRS help desk fully staffed 24/7, 365 days a year, even on Christmas Eve [00:48:28]. There is also a focus on reducing reliance on contractors who have had long-standing, repeated six-month contracts, indicating potential “grift” [00:45:49].

2. Regulatory Reform

The administration intends to substantially deregulate the financial system, which has been described as a “regulatory corset” [00:26:21]. This deregulation is expected to allow the private sector to “relever,” with displaced government employees finding jobs in the more productive private economy [00:26:35].

Key areas of regulatory reform include:

• Bank regulations: Re-examining why banks must hold significant capital for Treasury bills and why small community banks face the same capital requirements as large institutions like JP Morgan [00:33:08]. The Supplementary Leverage Ratio (SLR) is a specific regulation under review; removing it could lower Treasury bill yields [00:38:26].
• Incentives for regulators: Addressing the tendency for regulators to prioritize tightening controls over fostering economic growth [00:34:13].
• Measuring impact: Success will be measured by the velocity of lending by private lenders, especially small and community banks, which are crucial for Main Street businesses [00:35:39].
• Federal Reserve: While supporting the Fed’s autonomy in monetary policy, Bessent believes their expansion into areas like climate, DEI, and non-standard monetary policy threatens their independence [00:36:53]. He will use his position as chair of the Financial Stability Oversight Council (FSOC) and the President’s Working Group to push for “safe, sound, and smart deregulation” [00:37:51].

3. Fostering Economic Growth and Affordability

The administration aims to increase real wages for working people and tackle the affordability crisis by:

• Reordering international trade: Using tariffs to bring other countries “into line” and create economic incentives for reshoring manufacturing jobs to the U.S., thereby invigorating the middle class [00:27:47].
• Low and predictable taxes: Renewing current tax regimes to promote private investment [00:31:08].
• Substantial deregulation: Slashing regulations that act as a “tax on investment” [00:28:33]. Bessent highlights that CBO scoring, which evaluates the fiscal impact of legislation, is “gameable” because it assumes tax cuts reduce revenue but doesn’t require spending to be renewed [00:30:52]. The theory is that lower taxes combined with reduced government spending and deregulation will accelerate economic growth, ultimately increasing overall government revenue even with lower tax rates [00:30:10]. This approach directly addresses the impact of regulations on GDP growth [00:28:37].
• Cheap energy: Recognizing that cheap energy is critical for manufacturing competitiveness, energy security, and lowering overall costs, particularly for food transportation and petroleum-derived products [00:28:45]. The administration seeks to ensure long-term energy investment by mitigating “student body left, student body right” policy shifts between administrations [00:57:30]. This includes addressing regulatory and permitting challenges, particularly for fossil fuels, while also considering nuclear power as a long-term solution [00:58:40].
• Housing affordability: Addressing the housing shortage by streamlining building codes (some dating back to the Chicago fire) and encouraging factory-built or modular housing [01:04:26]. The federal government may provide guidance to standardize building practices across different municipalities [01:05:07]. Exploring solutions to issues like high homeowners’ insurance in California, possibly through a federal reinsurance layer linked to mandated hygiene changes and building codes [01:07:12]. An “affordability czar” will be appointed to identify quick fixes for supply chains [01:08:46].

Sovereign Wealth Fund

A novel aspect of the plan involves mobilizing the asset side of the government’s balance sheet to create assets for the American people, rather than just accumulating debt [01:1:18]. This involves exploring the creation of a sovereign wealth fund, similar to those in North Dakota and Alaska, which benefit from natural resource money [00:53:52]. This fund could potentially invest in assets like government stakes in Fannie Mae and Freddie Mac once they exit conservatorship, and even federal lands for housing [00:54:39]. The goal is to generate returns higher than the current interest rate on 10-year Treasuries (4.28%) [00:55:14].

The idea contrasts with simply paying down debt, as a sovereign wealth fund could drive up returns and allow all Americans to participate in the economy, rather than their retirement funds merely lending to the federal government [00:52:30]. It’s envisioned as a “legacy event” [00:56:01].

Political Will and Challenges

Bessent notes that despite media narratives of disarray, congressional Republicans have shown discipline, with Speaker Mike Johnson successfully passing reconciliation instructions and a clean Continuing Resolution (CR) [00:41:14]. He believes Congress is engaged and recognizes the necessity of addressing the debt, framing inaction as the “biggest tax hike in history” [00:41:56].

A major challenge is the “quicksand” of vested interests and lobbyists in Washington D.C., where 25% of U.S. GDP pulsates through a 10-mile radius [00:43:22]. Every dollar of government spending inefficiencies and infrastructure bills goes into someone’s pocket, and those beneficiaries will fight to maintain that flow [00:44:02]. The public often perceives cuts as reductions in government services, rather than improvements in government efficiency and regulations [00:45:00]. Bessent anticipates that the biggest savings will come from reducing contractor costs and addressing systemic “grift” [00:45:47]. He also highlights transparency into these issues, believing taxpayers should see the extent of the “grift” [00:46:40].

Despite potential resistance from certain areas, particularly the Northeast Corridor, polling data suggests the rest of the country supports these changes, and the administration is committed to not stopping [00:47:31]. Bessent emphasizes the need for speed to overcome entrenched interests [00:43:19].