The idea that tax cuts can fund themselves through economic growth, a staple of Republican policy since Reagan, is being rebranded with AI as the new economic engine. Despite historical failures, the narrative persists, with Bessent citing AI-driven growth to tackle a $40 trillion federal debt. However, financial markets are unconvinced, with 10-year treasury yields hitting a 25-year high, signaling rising concerns over the US's fiscal health.
The surge in bond yields is driven by both inflationary pressures from Trump's Iran policy and the nation's growing budget deficit. With interest payments on the debt consuming 3.3% of GDP, the financial strain is mounting. The US now relies heavily on private investors, competing with tech giants that are also borrowing heavily to fund AI infrastructure. This creates a negative spiral, as higher bond yields increase the cost of borrowing for the government.
Analysts warn that even with AI-driven productivity gains, the fiscal challenges remain daunting. To stabilize the debt, the economy would need to grow at 4.4% annually, a feat that seems unlikely. The shift in economic benefits from labor to capital further complicates matters, as capital is taxed at a lower rate than labor. Additionally, the massive investments required by AI firms could strain the economy, pushing interest rates higher and making government financing more expensive.
While some economists entertain the possibility of AI boosting growth to 15% annually, most believe such scenarios are improbable. The real challenge lies in balancing growth with fiscal responsibility, a task made more difficult by Trump's proposed tax cuts and the looming threat of a $5,000 dividend for voters. The path to fiscal stability remains uncertain, with the US's financial health hanging in the balance.