As a country, our relationship with the world’s largest superpower is not managed well.
Our mainstream politicians and media tend to align with the Democrats in the US, which is a bit silly since they’re only in power half the time. The Republicans, who actually applied sanctions pressure on South Africa in the late 1980s, offered a get-to-know-you opportunity to the ANC et al that was sadly squandered. Even South African liberals swing more towards the Democrats than the Republicans. Anyway, the angst-filled hand-flapping that seizes South Africa whenever the Republicans win an election needs to give to way to cool analysis if we are ever to have a workable relationship with a Republican-run US.
The Economist of October 19 2024 featured a special report on the US economy titled “The Envy of the World”. If that were indeed so, why did the electorate turn so fiercely on the Democrats? Sadly, big headlines can be uncomfortable contrarian indicators.
I’ve previously featured top-end research services, and the one I am watching closely is strongly fixated on the inner machinations of the US economy. Danielle DiMartino-Booth is the founder of Quill Intelligence Research. Though not well known in South Africa, she has a large following in the US. She spent nine years as adviser to Federal Reserve Bank of Dallas president Richard Fisher from 2006 to 2015, with her work focused on financial stability and the efficacy of unconventional monetary policy. After that she published a book, Fed Up: An Insider’s Take on Why the Federal Reserve is Bad for America in February 2017. Feisty, much?
She was absolutely insistent throughout 2024 that employment data was wrong — and the US Federal Reserve eventually vindicated her by announcing the reduction of job numbers by 800,000, or nearly 1% of the workforce. Notwithstanding the high fluidity of the US job market, I find that a disturbing anomaly. Anyway, her broad takeaway is that the human experience of the economy is not as sunny as reported. It’s the special reports by such research houses that really showcase their work, and her note on “The Great Government and Health Care Spending Boom” is no exception. It might leave you feeling a bit nervy too.
The report examines the economic implications of the big growth in US government and health-care spending, and questions its sustainability. The expansion of the welfare state has altered the US economy, leading to increased fiscal deficits and distorted economic incentives.
Post-Covid US government spending funded by fiscal deficits has dominated GDP and job growth. The 2024 US budget deficit of $1.8-trillion barrelled 40% higher in the first quarter of 2025 to $710.9bn. The official government consumption expenditures and gross investment metric was steady at 17% of GDP vs pre-pandemic levels.
This figure skips the full extent of government influence on economic activity via transfer payments and subsidies. Social security, Medicare and Medicaid government programmes and various tax credits have fuelled personal consumption expenditures, which are about 70% of GDP. Transfer payments have surged from 10% of GDP between 1960 and early 2020 to 17% post-Covid. Medicare and Medicaid payments feed directly into health-care spending, which has become a primary (and disproportionately large) driver of economic activity.
The expansion of the welfare state has altered the US economy, leading to increased fiscal deficits and distorted economic incentives
Health-care spending attributed to Medicare and Medicaid has grown from 40% pre-Covid to more than 50%, helping to sustain employment in the health-care sector. The two largest sources of post-Covid job creation were the government and health care. Since these jobs depend on government funding rather than organic private sector growth, sustainability becomes an issue. Private sector job gains (adjusted for revisions) are below pre-Covid levels.
The report flags the long-term outcome of rising government deficits. In fiscal 2024, US interest payments were $900bn, with interest projections exceeding $1-trillion in 2025 and $1.7-trillion by 2034. This compounding of interest payments on servicing the national debt takes place in an environment where the Fed maintains a “higher for longer” interest rate policy. As $9-trillion in treasury debt matures in 2025, refinancing at higher interest rates could exacerbate fiscal pressures and lead to a negative feedback loop. The report concludes by observing that bond investors may need reassurance that the US government can finance its debt without triggering a rise in long-term yields.
The gap between income and expenditure is disturbing. Thus the fury with which Elon Musk has been attacking federal expenditure is non-optional. Productivity gains from tech spending are essential.
A long-warned-of crux in the US economy has arrived. South Africans and their political and economic leaders need to smell the coffee. South Africa is not being singled out for beatings, and there are bigger issues at play. Stop whining and start listening.
* Lucas is a portfolio manager at Vunani. These views are personal.
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