Summary of "Chicken Hawks: a Quick Note on the US Budget Reconciliation Bill" - Eye On The Market Podcast

Podcast Information:

• Title: Eye On The Market
• Host: Michael Cembalest
• Episode: Chicken Hawks: a Quick Note on the US Budget Reconciliation Bill
• Release Date: May 27, 2025

Introduction

In the May 27, 2025 episode of Eye On The Market, host Michael Cembalest delves into the intricacies of the recently passed US budget reconciliation bill. Titled "Chicken Hawks," the episode scrutinizes the role of GOP fiscal hawks in the House's narrowly secured passage of a bill that significantly impacts the nation's debt and deficit.

Understanding "Chicken Hawks"

Cembalest begins by explaining the term "Chicken Hawks," a play on the traditional notion of "hawkish" fiscal conservatives. Referencing Henry Hawk from Looney Tunes, he suggests that these individuals appear fiscally aggressive but may lack genuine commitment to their hawkish rhetoric.

"I think it's time that we retire that particular description, or at least refer to them as chicken hawks instead." (02:15)

Breakdown of the Budget Reconciliation Bill

Spending Cuts and Allocations

Cembalest provides a detailed analysis of the bill's components:

• Energy and Commerce: Nearly $1 trillion in cuts targeting Medicaid, work requirements, provider taxes, and state-directed payments.
• Student Loans: Approximately $350 billion in reductions.
• Food Stamps: About $240 billion in cuts.
• Other Areas: Close to $200 billion in miscellaneous reductions.

"Almost a trillion dollars of cuts in the energy and commerce." (04:30)

Tax Provisions

• TCJA Tax Cuts Extension: The bill seeks to extend the 2017 Tax Cuts and Jobs Act, amounting to around $3.5 trillion in tax cuts.
• Tax Offsets and Restructuring:
  • Scaling back EV credits and extensions to ITC/PCT credits for wind and solar.
  • Modifications to the premium tax credit.
  • Retaliatory taxes on foreign multinationals engaged in unfavorable practices toward the US.

"Extensions to the TCJA tax cuts from 2017 that cost you something in the neighborhood of 3.5 trillion." (07:45)

Additional Expenditures

• SALT Cap Increase: Raising the cap on State and Local Tax deductions.
• Labor Policies: Eliminating taxes on tips and overtime.
• Manufacturing Incentives: Various tax reductions aimed at the manufacturing sector.
• Defense and Homeland Security: Allocating over $200 billion to these sectors.

"Spending that and more by doing an increase in the SALT cap." (10:20)

Deficit and Debt Projections

The bill is projected to expand the budget deficit by approximately $2.5 trillion over the next decade compared to the CBO baseline. This analysis highlights that even alternative scenarios, such as policies proposed by Harris, would result in significant deficit expansions, although less severe than the current bill.

"Even when you assume that some of the budget tricks... you're still looking at a bill that is very expansionary as it relates to both the debt and the deficit." (13:50)

Critique of White House Assertions

Cembalest challenges the White House Press Secretary's claim that the bill does not add to the deficit and will save $1.6 trillion. He points out the lack of substantive evidence supporting these assertions and references ongoing issues with import prices not decreasing despite tariff implementations.

"The White House disagrees... The bill doesn't add to the deficit. It will save 1.6 trillion." (15:05)

Market and Interest Rate Implications

Discussing market reactions, Cembalest notes that the bill's expansionary nature has already influenced interest rates, which have risen from 3.5% to 4.5%. He anticipates that equilibrium interest rates may stabilize around 5% as the bill's effects materialize.

"The equilibrium level of interest rates in a normal business cycle will be higher than they otherwise would be." (16:40)

International Context

Cembalest briefly touches on global interest rate trends, mentioning:

• Europe: Rising rates due to increased defense spending and shifts in US NATO policies.
• Japan: Increased rates as the Bank of Japan reduces support for the JGB market.
• China: A rally in the bond market, reflecting weaker growth rather than improved performance.

"You could have reduced growth and tax revenue impacts." (18:25)

Potential Economic Outcomes

While the risk of a recession in the United States remains unclear, current indicators suggest modest growth or stagnation. In the event of a recession, bond yields may rally, following historical patterns.

"If we do have a recession in the United States, bond yields would rally as they typically do." (19:50)

Quote of the Week

Cembalest shares insights from a Wall Street Journal article titled "Is Trump Trying to Destroy Harvard?" highlighting concerns over policies that may deter top international talent:

"Immigrants have founded or co-founded around two-thirds of all the top AI companies in the United States." (21:10)

Additional statistics from the article include:

• 70% of full-time graduate students in AI-related fields are foreign.
• Foreign-born individuals have started over half of America's privately held startups valued at $1 billion or more.

He emphasizes the potential long-term impacts of such policies on America's innovation and economic growth.

20th Anniversary Preview

Celebrating two decades of Eye On The Market, Cembalest announces an upcoming retrospective piece featuring:

• In-depth reviews of significant topics like the financial crisis, tariff wars, and vaccine debates.
• An exclusive Lego minifigure diorama created in 2011, illustrating options for resolving the balance of payments crisis.

"We're going to include that in the piece and I look forward to sharing that with you." (23:45)

Conclusion

Michael Cembalest wraps up the episode by reiterating the substantial fiscal implications of the budget reconciliation bill and its broader effects on economic stability and policy. He extends warm wishes to listeners for Memorial Day and expresses enthusiasm for the forthcoming 20th-anniversary retrospective.

"Thanks for listening and I hope everybody had a great Memorial Day weekend." (25:00)

Note: Timestamps are illustrative and correspond to the respective sections discussed.