The Economics of Detoxing the American Economy
The American economy has been living on borrowed time and borrowed money.
For years, Washington pumped out cheap credit, printed trillions, and propped up an economy that looked strong on paper but was rotting underneath. Under Joe Biden, nearly 85 percent of job growth was tied to government spending. One-third of all economic activity was fueled by federal dollars. The national debt ballooned. The regulatory state tightened its grip.
Now, the economy is undergoing what Treasury Secretary Scott Bessent calls a “detox”—a transition away from artificial expansion and toward a more sustainable, private-sector-driven foundation. In a recent note for clients, Jared Woodard of Bank of America's Research Investment Committee echoes this assessment, describing the moment as a “correction from an economy propped up by public-sector largesse.”
U.S. Secretary of Treasury Scott Bessent stands behind President Donald Trump as he speaks to reporters in the Oval Office on February 3, 2025, in Washington, DC. (Anna Moneymaker/Getty Images)
For years, federal deficits ran at 6–7 percent of GDP, favoring industries that depended on government contracts and subsidies rather than genuine market demand. The private sector—especially capital-intensive industries—was increasingly constrained by fiscal policy and regulatory expansion. The consequences were predictable: businesses optimized for short-term survival, misallocated capital, and relied on government stimulus rather than organic growth.
That model is now being unwound. The administration’s plan, as outlined by Bessent, is not about sudden austerity but about allowing private investment to take a larger role in economic growth while shifting public spending toward strategic priorities.
The Reshuffling of Capital and Market Expectations
Markets are already responding. Woodard notes that industries closely tied to government subsidies—such as healthcare administration and renewable energy—are showing signs of contraction, while infrastructure, industrial manufacturing, and defense-related industries are attracting renewed investment.
The defense sector, in particular, has seen a 23 percent increase in stock value this year, reflecting shifting federal budget priorities. This isn’t an example of private-sector expansion—it’s a recognition that national security-related expenditures are expected to rise even as other areas of federal spending contract. The same trend is playing out in other countries, as governments shift resources away from consumption-driven stimulus toward defense, infrastructure, and industrial self-sufficiency.
A Global Shift Toward Economic Rebalancing
Woodard places Trump’s economic transition in a broader global context. The United States is not alone in reconsidering the role of government in economic activity. Around the world, countries are moving away from deficit-driven stimulus and attempting to restore private-sector leadership in economic growth while focusing public investment on national priorities.
- Japan has begun unlocking nearly ¥206 trillion (33 percent of GDP) in corporate cash reserves through corporate reforms, aiming to stimulate private investment rather than relying on government intervention.
- Germany is expanding defense and infrastructure spending while cutting domestic subsidies, pivoting toward fiscal discipline after years of reliance on public-sector-driven growth.
- Argentina has enacted aggressive fiscal cuts, which have already stabilized its currency and reduced inflation by 25 percentage points, a stark reversal from its previous dependence on deficit spending.
The RIC Report makes clear that the post-pandemic economic model of heavy government stimulus and expansive social spending is no longer seen as sustainable. Europe’s long-running strategy of relying on U.S. trade deficits and defense spending to fund its welfare state is coming to an end.
President Donald Trump delivers remarks on the jobs report from the Oval Office on March 7, 2025, in Washington, DC. (Anna Moneymaker/Getty Images)
What makes Trump’s approach distinct is that he is not simply cutting spending—he is reallocating it toward economic security and industrial competitiveness. While some sectors are seeing a decline in federal support, others—such as defense and strategic infrastructure—are receiving increased investment, reflecting a shift in priorities rather than across-the-board reductions.
Rebalancing Trade and Domestic Production
Another critical aspect of this transition is the administration’s restructuring of trade policy. For decades, the U.S. absorbed the excess production of foreign economies that suppressed domestic consumption in favor of exports. China, Germany, and Japan all pursued economic models that relied on large trade surpluses, using America as a consumer market to sustain their industries.
Bessent has been clear that this model no longer works. “The international trading system consists of a web of relationships—military, economic, political. One cannot take a single aspect in isolation," he said in a speech in New York last week.
Trump’s tariffs on China, Mexico, and Canada are not just about protectionism but about forcing a realignment in global trade relationships. Woodard argues in his RIC Report that these policies are already leading to shifts in supply chains, with businesses adjusting sourcing strategies to reduce reliance on tariff-affected imports.
The report highlights that the success of these policies will depend on how quickly domestic production can scale up. Early indicators suggest that investment is beginning to shift toward U.S. manufacturing, though the pace of expansion remains an open question.
Housing, Interest Rates, and Inflation
Beyond trade, the administration is also focused on restoring homeownership affordability. Under Biden, rising mortgage rates and soaring home prices pushed ownership further out of reach for millions of Americans.
The challenge now is to stabilize interest rates while ensuring that affordability improves through market-driven adjustments rather than artificial interventions. One of the potential benefits of reducing deficit-driven spending is lower inflationary pressures, which could help ease borrowing costs over time.
The Market’s Adjustment: A Recalibration, Not a Crisis
The RIC Report concludes that recent market volatility should be seen as a recalibration, not a crisis. Markets are adjusting to a world where government spending is no longer the primary economic driver.
Industries that depended on federal support are contracting, while others are expanding based on real demand. Trade realignment will take time, and its success will hinge on how efficiently domestic production can ramp up. Investors are watching closely to see whether the administration maintains its policy direction or makes unexpected adjustments.
In short, the U.S. economy is shifting. The transition away from government-driven growth was always going to be disruptive, but it is necessary for long-term stability.
The fundamentals are moving toward a structure that fosters sustainable investment, stronger market discipline, and an economy built on real production rather than financial manipulation and government intervention. It's a vision of an economy that works for all Americans and not just those laboring in the narrow corners favored by politicians.
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