Desperately Seeking Ross Perot

As I write this, the US budget bill for the coming fiscal year, in its Senate-modified form, has been passed by the House of Representatives by a narrow margin and was signed into law by the president. Just a few days earlier, the Congressional Budget Office came out with its most recent estimate of how much the spending bill will add to the federal deficit: $3.4 trillion over ten years. Just like the Tax Cuts and Jobs Act before it, the tax cuts in this bill will not pay for themselves – and part of that is because they largely go to higher-income households, which has historically resulted in a lower multiplier effect.

This is a sobering number to add to the already-heavy US debt load in a rather short period of time. I expect the yield on long-dated US Treasury bonds will move higher from here, even if it is a gradual move. Nothing in this legislation suggests the US is being fiscally prudent. And, as I’ve said before, the dramatic reduction in the size of the IRS will likely indicate to bondholders that the US is not serious about collecting the tax revenues it is legally due.

1992 nostalgia

The passage of this legislation made me quite nostalgic for one of my personal heroes, Ross Perot. Side note: Yes, while others were worshipping action heroes like Arnold Schwarzenegger and Bruce Willis, I was a fan of Perot, who unfortunately never had an action hero doll made of him – though who knows what Hasbro may yet come up with...

Perot was a successful businessman who unsuccessfully ran for president in 1992 as a third-party candidate. Untethered to either major political party and a self-made multi-millionaire, Perot was beholden to no one. He was a blunt straight talker who was focused on returning the United States to fiscal prudence. He paid out of his own pocket for thirty minutes of airtime on the major TV stations in order to broadcast an ‘infomercial’ on the US’s fiscal situation, which he followed up with another thirty-minute infomercial with better graphics and more plain talk. Out of a sense of wistful recollection, I watched his second infomercial again this week - I highly encourage you to take a look at it for yourself if you have a little time.

The US’s problems seemed so minor back then. As Mr. Perot explained, “We are $4.1 trillion in debt…just this year we ran up $341 billion in new debt.” That’s right – in 1992 US debt totaled just $4.1 trillion. I had to pinch myself to believe the US just passed legislation that is estimated to add $3.4 trillion to a debt mountain of $36.2 trillion.

Back in 1992, Perot warned about the vicious circle of debt begetting more debt because of the costs to service that debt: “Every time the interest rates go up 1%, the 70% of the national debt that is five years or less goes up $28 billion.” He also talked about the “net effect” of how the US has been run: a widening of after-tax income inequality. (The richest 20% of households was the only cohort that saw after-tax incomes rise from 1977 to 1992. The top 5% saw their after-tax incomes rise by 60%; the top 1% saw their after-tax incomes improve by 138%.)  He also criticized the widening gap in the US between corporate executive compensation and worker compensation, which was much higher than in Japan and Europe. He extolled the virtues of public investment programs but lamented how little the US invested per capita relative to Germany, Taiwan and Japan. I should add that Perot used a ‘voodoo stick’ as a pointer to walk through his charts, which he thought was appropriate since he labeled his opponents’ economic ideas as “voodoo economics.”

Perot repeated over and over the mantra, “Trickle-down economics doesn’t trickle down.”

I found his words to be very compelling – and applicable even today: “We have 19th century capitalism in this country, our successful international competitors are practicing modern-day capitalism and we need to practice 21st century capitalism.”

In terms of solutions, he talked about the importance of balancing the budget. He talked about the savings from interest costs that will be generated by cutting other areas of spending – a virtuous circle. The US could learn a lot by simply watching one of his infomercials and, even better, reading his book, United We Stand.

Now, there are some components of the One Big Beautiful Bill Act (OBBBA) that I think Perot would like. In particular, the full expensing of domestic research and experimental expenditures (Section 174A) should encourage increased research and development. In addition, I think he would like the 100% bonus depreciation for new factories and improvements, which should encourage the construction of domestic manufacturing plants. And I think he would be happy that Section 899, which I believe would have deterred foreign investment in the US, was pulled from the final version of the bill. But overall, I suspect Mr. Perot would be very unhappy with the outlook for US finances in coming years.

Rachel Reeves budget

The US isn’t the only country with greater budget woes. There is concern there could be a very significant budget shortfall for the UK given the ‘watering down’ of the welfare bill in the House of Commons and an earlier backtracking on pensioners’ fuel bills. This has left an estimated shortfall of 5.5 billion pounds that the government must plug. The gilt market had a ‘mini Truss moment’ last week when Prime Minister Keir Starmer did not explicitly confirm that Ms. Reeves would stay on as Chancellor. This sent gilt yields materially higher on concerns there would be instability in the Chancellor’s Office – and, in my opinion, that a focus on fiscal discipline might be lost.

It’s no secret that the UK government is under substantial fiscal pressure. In June, Reeves announced her first multi-year spending review, which includes some projects the government believes will have a material positive impact on economic growth: research and development (£86 billion), affordable housing (£49 billion), a cash investment in the National Health Service (£29 billion), and transportation projects (£15.6 billion). Reeves only planned to increase defense spending to 2.7% of GDP by 2027 but then the UK agreed with other NATO members to spend 5% of GDP on defense and defense-adjacent spending (including infrastructure) by 2035.

All this means that the UK is being squeezed. The need to plug this budget shortfall is critically important but not easy. Reeves created the fiscal rules, which she then affirmed were “non-negotiable.” I think her fiscal rules and affirmation that they were “iron clad” is prudent. It would be easy for the UK bond market to become the target of bond vigilantes, which could drive up borrowing costs.  However, Reeves will likely be forced to raise taxes in order to shore up the budget. In my desperate search for Ross Perot in the modern day, I have yet to find anyone. But perhaps Reeve’s ‘spirit animal’ is a diminutive Texan named Ross Perot.

Looking Ahead

This will be a busy week as we gear up for the resumption of tariff drama. As of this writing, the US only has deals with two countries, the UK and Vietnam, leaving a lot of room for uncertainty and the rattling of markets. We will also need to gauge markets’ reaction to the passage of the OBBBA as well as to the UK budget issues..

I expect that we will hear more this week about the potential impact of different components of this enormous piece of US legislation. One area that I’m watching closely – and particularly concerned about – is the legislation’s potential negative impact on nursing homes and rural hospitals. In the June release of the US jobs report, of those jobs created by the private sector, a large portion came from healthcare. And in more localized, rural economies, hospitals and nursing homes are often major employers for those communities, meaning that the economic headwinds created by this legislation could be significant.

I also worry about educational institutions, some of whom are already under serious fiscal pressure and can also be significant employers in rural communities. Changes to student loan policies and a relatively low cap on total student loans may deter students from attending college or graduate school. In particular, I worry about how many doctors the United States will produce if medical students aren’t able to take out the loans they need to attend medical school.  I plan to share more thoughts and analysis on the impact of the OBBBA in coming weeks.

The Week Ahead

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