← Plain English with Derek Thompson
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Foreign.
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That's Indeed.com podcast terms and conditions apply. Need a hiring hero? This is a job for Indeed. Sponsored Jobs so it's my birthday today. I'm 40 years old and birthdays like this, the ones divisible by 10, I guess, really force a person to do some existential reflection. Like how have I changed since I was 30, 20? And maybe partly because I share a birthday with my first college roommate. Shout Out Matt I was thinking about my life recently, right after I graduated from College as a 23 year old writer at the Atlantic. It was my day job to blog about economics, and in particular to blog about that famously delicious and clickbaity topic of fiscal policy that is how the US taxes and spends money. This was, believe it or not, one of the biggest stories in the country. If you don't remember at the time there was a huge debate about the US debt, how much we should worry about it. Typically, the debate broke down by ideology. It was conservatives and libertarians who told us to worry about the debt, and it was liberals who criticized conservatives and libertarians for freaking out about nothing and using debt fears as a smokescreen to cut spending on seniors and poor people. But 15 years later, something has changed as the debt has grown and grown, and as interest on the debt has eaten more of the federal budget. It's not just conservatives who are starting to worry about the trajectory of American taxing and spending anymore. It's liberal economists as well. Today's guest is Justin Wolfers, the University of Michigan economist and the head of a new media company called Platypus Economics. He's going to walk us through why debt fears have escaped containment and broken into the mainstream among even liberal economists. But before we take you into that debate, I want to dust off my old fiscal policy explainer hat and review some budget basics. And if you're watching this pod right now, we've got you covered with some very nice graphics courtesy of the Committee for a Responsible Federal Budget. Last year, the US government spent $7 trillion. Most of that spending went to Social Security, health care programs like Medicare and Medicaid, and defense spending. There is a saying among economists that I think you're going to hear from Justin in just a moment, that the US Government is an insurance company with a standing army. That is, it's all healthcare spending, retirement spending, and defense spending. For many years, for many decades, that was true. But one big thing that's changed, and if you are looking right now, that's the red sort of slice of the pie that you can see, is that interest payments on our debt have surged to become a larger share of government spending than the military. This is something that has never happened before in modern history. Moving to the revenue side now, the federal government collected $5.2 trillion in taxes last year. About half of that came through individual income taxes, the ones you file in April. And another third came from payroll taxes, which are shared between employers and employees. Most of the rest came from taxes on corporate income. You will note that there is a difference between 7 trillion and 5.2 trillion. That is equal to 1.8 trillion. And 1.8 trillion was our 2025 deficit. When you add all of the annual deficits together, that makes up our national debt. And because the gap between spending and revenue is projected to continue to rise, that means our debt will continue to rise. And there are three ways to reduce the share of debt to gdp, the relationship between debt and the size of the economy. First, you can grow GDP really, really fast, which is something that's technically possible but hard to engineer. There's no obvious magic wand for product, although I think a lot of AI boosters hope that AI is just that. Number two, you can cut spending, which is awfully hard, because if you cut the budget by $1 trillion, what you are doing is activating a $1 trillion constituency in the US economy to rise up and destroy you very politically hard. Or door number three, you can raise taxes. But good luck building a coalition to raise taxes on just about anything in the2020s, because this is the logic I see right now about taxes in America. The left says we can't tax the poor because they're poor. Okay? Liberals say we can't tax the working class because they work. All right. Service workers say we can't tax tips because that's just unfair. Businesses say we can't tax businesses because they're the ones who create work in the first place. We can't tax property because homeowners have had it hard enough. We can't tax billionaires, of course, because their contributions are so precious. And also, they might get mad or give your primary opponent $10 million. And now the Trump administration has argued that we can't tax pensioners or retired people because they've earned it. Problem is, when you line up all these excuses side by side, what you're left with is really simple. Effective tax rates have nowhere to go but down, while the budget, led by spending on seniors and health care, skyrockets year after year. It's not easy to know exactly what a debt crisis in America would look like. But many liberal economists, the Same economists who 15 years ago scoffed at the budget hawks, are now starting to sound a little bit like budget hawks themselves. And that shift was interesting enough that I knew I had to call Justin. I'm Derek Thompson, this is Planehash. Justin Wilfers, welcome to the show.
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Derek, good to see you, mate.
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It is great to see you. So it has probably been, God, at least 10 to 15 years since fiscal policy was my direct and exclusive beat. So I think what I want to do with you first is this. I want you to refresh me on some of the basics here. When people hear that the US Government is, is, quote, borrowing money, what is literally happening, like, who is the government borrowing from? How do treasury markets work? Why are people around the world buying US Debt anyway?
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Great. So to start with, why do we borrow money? Because we spend more than we take in. When that happens, everyone still wants to get paid. So you need cash. The government's not different in that. What you and I would do is if we were spending more than we were taking in, we'd go to the bank and we'd ask for a loan. The problem is the US Government talks in billions and sometimes trillions. And if you walked into Wells Fargo and asked for that, they would laugh. They just don't have that much cash in their vault. So really, what you need is a whole bunch of banks to pitch into this really big customer called the US Government. There's a simpler way of doing that. It's called a bond. Here's a bond. The U.S. government says, I have a piece of paper right here. This piece of Paper. If you give it back to me in a year's time, I'll give you $105. How much are you willing to pay for it? Right now, people might be willing to pay 100 bucks for that piece of paper. Think about that. So they're going to hand over their 100. The government gets the 100 gives over the piece of paper. What happens a year later? They give back the piece of paper and the government gives them 105 bucks. You'll notice that basically the government gets 100 bucks today and pays back 105 in the future. That's just like a bank loan. But the thing about this is, so that piece of paper is called a bond or a bill. The thing about this is you don't just walk into one bank to do business this way. You say to the whole world, I've got lots of pieces of paper, trillions of dollars of pieces of paper. Who wants to buy these pieces of paper? Which is effectively the same thing as saying, lend the US Government money. Why do people want to do that? They want to do that because they like interest and they really like lending money to folks who have a tendency to repay. And the US Government has a tendency to repay, which is why the US Government tends to pay less interest than anyone else. How's that, mate?
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That's pretty good. That's pretty good. There's always this question of why does the government just print the money that it needs? Print being the operative verb here. No one who uses the term print the money is actually referring to any kind of magical printer here. That's a bit of an old fashioned aphorism. But what is this aphorism pointing to? And why is it relevant to this discussion of government debt?
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Right. So it is much easier to think about it as the government printing money. And the government can print money. It literally prints money and it sends it out to the bank. Right. It does a bunch of this digitally as well, just like you and I do a lot of our lives on Venmo. But sometimes we still use those pieces of papers. Paper with dead presidents on them. So if the government decides to print more pieces of paper with dead presidents on them and nothing else changes, then we've got the same number of groceries at the local grocery store, but more pieces of paper, more money chasing those groceries. So when that happens, the exchange rate between groceries and pieces of paper changes. Basically, you're gonna have to give up more dead presidents to get a can of beans. Another way of saying that is prices rise, we get inflation okay, now, I just wanna be clear about this. Printing money to repay the debt works, right? You print the money, you repay a bunch of people the loans. It literally works. So then the point is there are two ways of repaying our debt. One is you save some money and send it back to the bondholders. And the other is you print some money and you send that to the bondholders. Both work. The first way, we tax people, and we might use a progressive income tax that takes more from the rich than the poor. We might have a sophisticated tax system that encourages investment and discourages slovenliness or whatever the values of the government are. If we do this by printing more money, you'll notice the thing that happened was when we print more money, the number of pieces of paper required to buy a can of beans goes up, which is to say the value of a piece of paper falls, which is to say the value of money falls, which is to say someone is paying, bearing the burden of that tax, bearing the burden of printing the money. It's the people who hold US dollars, their US dollars become worth less. And so really then the question is, would you like us to repay debt what we owe by taxing people more and sending checks that way and sending the money that way, or by printing money, which effectively turns out to be an inflation tax that taxes people in proportion to their holdings of US dollars. Now you'll notice the thing about inflation tax is you can't make it more aggressive or more progressive. You can't hit the rich even harder. You can't do political favors for your friends. You can't design industrial policy around it. It's a one size fits all policy. So you've got these two technologies, they both work. One allows you to achieve a bunch of economic gains, the other does not. One step further. The problem with printing money that's an inflation tax is you're now telling people, don't use money because we might make it worth less. And in the extreme, if you tried to repay all of our debt by printing money, you'd cause such inflation. You basically end up as hyperinflation. Hyperinflation is when you get paid at lunch, but what you can buy by dinner time has gone down, which means you literally have to reorganize your life around not holding onto money. It's a shitty way of living your life. All of which is to say, yes, you can literally can repay your debts by printing money. We just think it's probably a bad idea.
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So we talked about two different ways that the government can Solve for the fact of its deficits. Number one, it can create a Treasury market, and number two, it can so called print the money. The cost of the treasury market is that then later we have to pay interest. And the cost of printing the money is that there's inflation, which is a tax borne on everyone, even potentially a regressive tax because the poor are spending more of what they make. All of that makes it sound like debt is bad. But you don't think that debt is exclusively bad. You think debt can be good. Why can debt be good?
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Yeah, great question. And this is where we're going to move a little bit more to macroeconomics. But we never want to forget our microeconomics. So one thing that kind of blows my mind a little bit, but I want you to think about debt the following way. Debt is a time machine. It's a time machine that allows you to zap money across time. Literally, right? So if I, and this is what I say to my students. You're young and poor right now, but you're gonna have a successful career in the future, wouldn't it be great if you could zap some money from future rich you to current poor you? And you can. It's called student debt. So that's why I actually think we should be less scared of student debt. Okay, that's at the individual level. Let's now come to the government level. Are there times we'll wanna zap money across time? And the answer is yes. And I wanna return actually to our relationship. Derek, I got to know you best, and I think both of us were very much Bo economists during the crucible of the financial crisis of 2008, 2009. And honestly, we will never forget those lessons. You had unemployment up around 10%. So you had people out of work. Here's a question. We want to build a road. Are we better building it in 2008 when no one has any work or waiting until the economy's booming in 2016? The answer, when you say it that way, the opportunity cost of that worker's time. In 2016, they were already busy. And if we wanted to build the road, we'd have to outbid the private sector to get in 2008. They want to put food on the family's table. And so what we want is a time machine that zaps spending from 2016 back to 2008. The way we do that is we go into debt in 2008. What does a healthy economy look like? Employers believe that customers are going to spend a lot of Money. So employers make a lot of stuff and hire a lot of people. Customers believe that employers are going to make a lot of stuff and hire a lot of them. And so therefore they feel a lot of job security. So they spend a lot. So I spend a lot because you hire a lot and you hire a lot because I spend a lot. That's a virtuous cycle. That's a happy world to live in. What happens in a recession? In a recession, the employer gets scared that no one's going to buy anything. And no one buys anything because they worry the employers are going to get scared and fire them. And so we can get stuck in a vicious cycle where no one hires because no one's spending and no one's spending because they believe no one's hiring. There are many ways in which that may be too simple of a story, but I think it's a useful story to keep in your mind. The greatest insight of John Maynard Keynes is that an economy could be in different equilibria what I just described. The virtuous cycle and the vicious cycle are both possibilities. And because I get paid more by the syllable we call possibilities equilibria. And so Keynes view was, okay, great. Let's think about what a recession is. This is. Remember this quote, We've got nothing to fear but fear itself. It's that a recession is fear feeding on itself. Well, if the government can just walk in and say, hey, guess what? We're going to keep spending and building highways until everyone's got a job, then folks are like, oh, I think I'm going to have a job. I may as well start spending now. Employers like, well, everyone's spending. I may as well hire a bunch of people. And that in itself is enough to move us from the vicious cycle to the virtuous cycle from recession to boom.
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I wanted to cover the basics of how deficit financing worked and why it is often good for the government to go into debt even more, especially when the private sector is weak. The public sector can expand into the private sector and turn what used to be a vicious cycle into a more virtuous cycle. But right now, right now, the US is running a $1.8 trillion deficit. That's about 6% of GDP, significantly higher than we've run in basically any other non recession, non emergency, non pand, non war period of modern American history. Why is running a deficit of this size now more dangerous than it would be in a recession?
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Let me actually start by not answering that and getting the facts out, because I want People to understand the facts because they're astonishing. And Derek, if it was you or me, I'd show you a little graph. You'd show me a graph. It would be great. But I think the narrative way of doing this is when I first got to know you in the wake of the 2008 recession, if I said to you the deficit is 5.8% of GDP, which it is right now, you would say, holy cow, Justin, it's never been that high since World War II. You would say in all the ups and downs of the American business cycle, it's never ever been that large. You'd say 5.8% of GDP deficit is in historical perspective for the United States to 2008. Derek. Crazy now. And if you remember those wars, people, I think you know, Obama passed a stimulus of around about 700 billion. You might have remember the exact number, you know, and I remember there were memos that came out of the White House. They rang around different economists. Some people said 200 billion, some said 400 billion, some who've subsequently said they knew all along it was too small actually were telling the White House much smaller numbers. Totally different story for another day. But the question was the stimulus is going to be X hundred billion. And we'd argue over the X and no one had the courage to use the T word. Trillion. You just use the T word trillion. And so two things happened since young Derek met young Justin. One was the financial crisis where we discovered that 700 billion probably wasn't enough. And the other was the pandemic, which was the deepest, fastest growing recession since the Great Depression. And on its worst day it may have been as deep. Although this is a downturn we measured in weeks and months rather than years and decades that led to trillions all of a sudden being a word that we used. I don't know whether that was reasonable. I know a lot of people say the post Covid inflation is due to that. I also know that coming out of 2008, one of the things I learned is you don't get to choose the economy you want. You get to choose the mistakes you're willing to make. And the question coming into Covid was are you willing to err on the side of doing too much in order to keep all the jobs and the firms alive, even if that risks inflation versus do you want to do what we did in 08, which is do too little, don't risk inflation, but keep a generation out of work?
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Justin, are we where we are with debt now larger than the US economy and annual deficits now at 6% of GDP, which as you said, is higher than any year between 1945 and 2008. Are we where we are exclusively because of the way that we responded to emergencies like the COVID pandemic and the Great Recession? Or are we also where we are because of decisions made in the last two decades and in the previous decades? Decisions to cut corporate tax cuts.
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Yes.
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Decisions to cut the corporate income tax rate, decisions to cut taxes on wealthy Americans, decisions also to create programs, Social Security, Medicare, that are growing faster than the US Economy? Is it just our response to emergencies that have put us where we are? Or is it also our peacetime decisions, so to speak, that have put us where we are?
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So in 2026, in May of 2026, I want to say to you, this administration should have done more to move us back towards budget balance. I think a 6% of GDP deficit at a moment like this, which is not the midst of an emergency, is unconscionable. That's why I wanted to spend time on the recent history. But the structural problems are far, far deeper. Yes, the structural problems are that we've put in place programs, entitlement programs, which demographics and particularly the aging of the population play a big role in. And the other side is politics, which is we simply have never put in place the revenue required to finance pay for the government that the American people want. And the asymmetry is that Grover Nordquist and his mates will sign anyone up for a I will never raise taxes pledge, but he won't sign them up for I will never stop spending.
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Right.
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And there's an old quote. I think it's attributable to Milton Friedman, which is, to spend is to tax. Because every dollar you spend, someone's gonna get upset about this. So I'm gonna say parentheses, asterisks, little aside goes here, but every dollar you spend eventually gets paid back, which means a dollar of spending today is either a dollar of taxation today or a dollar taxation in the future. The fundamental determinant of tax rates is spending, but our politics treats tax completely different than spending. It's super bizarre to me that Graevon Ord Quist does not get out there and get upset every time the president announces more spending on stuff. I just don't understand it. But look, the underlying, the most important fundamental is we've never raised enough revenue for the quality of government that then we have entitlement programs that are underfunded for a world in which we simply live a lot longer. They were invented in one world, and we exist in a completely different world. And you add in the politics of all of that stuff being basically untouchable. We saw Elon Musk decide he was going to go into the government and root out all the waste, fraud, and abuse, only to discover that the federal government was not what he understood it to be.
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And this is where I really wanted to spend most of our time. This is the crux that I find most interesting is that the US doesn't quite spend like a Western or Central European social democracy, but we're pretty damn close. We're like 70% of a social democracy in terms of our spending. But if you look at our taxing, Americans are not taxed like the French. We are not taxed like the Spanish. We are not taxed like the Germans. We are taxed more like Grover Norquist would like us to be taxed with much lower rates on income taxes, Much, much lower rates on corporate income taxes and lower rates on taxes for the wealthy. And so there's this gap, we call it a deficit, between how much we spe. Like almost like sort of French social democracy in the way that we tax. You use the word unconscionable to describe the state of America's deficit and therefore, over time, its debt. But one thing I really want to understand from you is, like, what is the shape of what an American debt crisis could look like? Because I remember 15 years ago when I briefly. I don't think you know this. I was briefly for like a year sort of externing at the Committee for Responsible Federal Budget. And I remember when they were talking about how they could see a debt crisis coming down the road, I told them, like, you know, it sounds to me like the way you're talking about a debt crisis is a little bit like the way that environmentalists talk about a climate change crisis. But there are movies that are made about climate change crises, right? Like the Day After Tomorrow where, you know, New York City gets, like, dumped with like 17ft of snow and sudden are absolutely subsuming Miami and all this stuff that is dramatized that can make for a summer blockbuster. Very hard to imagine a summer blockbuster about what happens to the US if the debt to GDP ratio reaches 171.5%. So I don't need you to give me the log line for a movie to be directed by Christopher Nolan in 2031 about a debt crisis in America. But short of being that dramatic, what are we talking about when we talk about the possibility of a debt crisis? In this country.
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Yeah, look, it's a wonderful question. It would also be a great buddy cop film. You and I could run around watching these trying to prevent it. It would be great. Let me try and explain it in the very simplest possible terms. So we owe a bunch of money right now, quite a lot, and we can repay it. We can pay our interest, which is all we've got to do. We've got to be able to make our interest payments. And then you just roll over the debt, which is just another way of saying you borrow again and people are happy to lend you money. Now, we can pay our interest because the interest rate that people charge the US Is very low. So even though we have a big debt, the interest rate's low. So therefore we have low interest payments. Because we have low interest payments, we can easily pay them. Here's what a debt crisis is. Tomorrow everyone could just wake up and say, you know, I don't trust the Americans anymore. Simple as that. Just. And they say, I'm worried they can't pay. And if they become worried that they can't, that our government can't pay its debt, they'll jack up the interest rate. Now, when you have a small debt and you jack up the interest rate doesn't have much of an effect on your interest payments. But when you have a big debt and they jack up the interest rate. Now our interest, our monthly interest payment just got really big, Might have gotten so big we can't pay it. Now, if we can't pay it, no one's going to lend us a penny. That's a debt crisis. And I want you to understand, I want to say, it's funny, we get to use this word multiple equilibrium, multiple times. It's so exciting. Notice we could be stuck at a reasonable debt level, and there's two equilibria. The virtuous cycle is everyone believes we can pay, therefore rates are low, therefore we can pay. The other equilibrium is people don't believe we can pay, therefore they charge us a lot more, therefore we can't pay. The thing about two equilibrium, two possibilities is either could happen. The thing that's. Then you might say, well, if either could happen, why does it matter what our level of debt is? Actually, it matters critically. Because if our level of debt is low and we move from everyone believes we can't pay to everyone believes, sorry, everyone believes we can pay to everyone believes we can't pay, they jack up the interest rates. And because we don't owe much money that doesn't have much of an effect on our monthly interest payment and therefore we can pay it. And then eventually everyone will go back to believing we can pay. The problem is, when you owe a ton of money, any change in the interest rate has a huge effect on how much money you got to send off to the folks you borrowed money from. So it makes us the higher the debt level, the more susceptible we are to that dynamic suddenly taking hold. And if you remember, if you've ever seen a financial crisis, a financial crisis is basically everything's okay until it's not Either I believe that the US can't pay, or I believe that Derek believes that the US can't pay. Derek in turn doesn't think the US can't pay, but he believes that Justin believes the US can't pay. Derek and I now are no longer willing to lend money to the US Even though we both believe in the us. We just believe everyone else doesn't believe in the us and that can literally change in an afternoon. So that's what a debt crisis is
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- [30:22]
A
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- [30:51]
B
this episode is brought to you by Uber. Did you know that Uber has a range of safety features including in app audio recording, you can turn it on in your safety settings with the option to record all your rides or just some of them. But the safety doesn't stop there. Uber requires every driver to pass a thorough background check before they can start driving. This consists of a multi step screening process that checks for impaired driving or criminal offenses, followed by annual background checks each and every year. Moving forward in App audio recording and driver screenings are just a few of Uber's many safety features that put safety at every turn. Learn more@uber.com safety annual driving history reruns do not apply in New York City Is it an oversimplification to say that a debt crisis in America would basically, to most Americans, feel like a cost of living crisis? Because one of two things has to be true. Either the buyers of American debt don't trust America's ability to pay back the debt either in full or on time, and therefore demand a higher interest rate, in which case the increase in interest rates can trickle through the US Economy and make the cost of money higher. Or the US Government says these treasury markets are going terribly we're just going to print the money. In which case you have inflation, which is yet another tax on America's cost of living. It's an oversimplification to say that the way that both of those would cash out for Americans just living in a day to day basis would be a debt crisis in America would feel like a cost of living crisis.
- [32:27]
A
That's one of the paths. But there's two paths. Okay, so one path is everyone now wants really high monthly interest payments. We can't do it. So what can we do? We can print dollars. If we print dollars, that creates inflation. That's the path you just described. The other thing we can do is austerity, which is the government just stops sending out Social Security checks. It says we can't borrow money anymore. We're not sending out Social Security checks. And so that's the choice you either the government has to tighten right at the moment where confidence has plummeted and the government then becomes part of the recessionary spiral, or the government just prints dollars, sends worthless dollars overseas, and it's a cost of living crisis for all of us.
- [33:09]
B
When economists and commentators typically talk about the danger of debt, the statistic that I most commonly hear is the debt to GDP ratio, the ratio between the size of the debt and the size of the economy. But there's something that somewhat complicates that, which is if I look at some of the most famous debt crises in the last, let's say 20 years, Argentina had a massive fiscal crisis in 2001 with a debt to GDP ratio of 45%. Ours right now is over 100%. Japan, on the other hand, has a debt to GDP ratio of something like what? One hundred and ninety, two hundred and ten percent, like just absolutely astronomical. But you know, you go to Japan, you go to Tokyo, it's not like there's suddenly some kind of absolute horrific austerity or cost of living crisis that suddenly struck when the number hit 200% debt to GDP ratio. So how is that juxtaposition, the fact that Argentina got wrecked with the 45% debt to GDP ratio, but Japan seems to be kind of gliding by with 200% debt to GDP ratio. How should that juxtaposition force us to be more sophisticated in the way that we talk about the relationship between this all important statistic, debt to GP ratio, and the actual fact of a debt crisis?
- [34:28]
A
Great. So answer number one. I don't want to go into too much, which is it's not obvious that debt to GDP ratio is the be all and end all of how we measure problems. The real question is, if something were to change, could you meet your monthly bills and you could imagine lots of measures that would get you there. I want to tell two stories. One is Argentina, the other is Japan. One problem with Argentina is Argentina has a long history of instability and a long history of hyperinflations. And so what happens is people are worried they're not gonna repay. So therefore they jack up the interest rates and then they're like, oh, I know what's gonna happen next. They're gonna inflate the whole damn thing away. See, so if I lend you $1,000, but you create so much inflation that that thousand dollars is now worth only $1 when you repay it. Technically you will repay it, but I just lost $999. That is the sort of loss none of us ever think about or are signing up for when we decide to leave. And so that makes everyone freak the hell out, like, I'm not sending another penny anywhere near those hyperinflating bastards. And so the good news is the US has relatively stable political and economic institutions relative to Argentina. The bad news is I'm not sure that's true anymore. So I come from a country, Australia, where we have a two party parliamentary system where when the government wants to do something, it just does it. Where we don't have one side hold up a debt ceiling and pretend until 11:58pm that we're simply not going to pay, where we don't have these ongoing games of chicken, where we don't shut down our government, where we don't have a fundamentally dysfunctional Congress. I reckon I'd lend money to Australia far before I'd lend it to the Americans. And so I think our congressional dysfunction doesn't make us Argentina, but it moves us a couple of steps down that spectrum. Okay, so there are countries that are more susceptible than we are. Argentina is going to be more susceptible than we are for another hundred years. Just their history is too long. Well, so then you say, well, do we have any history of countries running large debts and being. All right? And the standard story is Japan. Japan has three things going on. One, they basically move from incredible economic growth to it stopped overnight. Two, they have an intensely aging population, which is a huge problem. And three, and arguably the most important one is when people say debt to GDP in Japan is 200%, they're talking about gross debt to GDP. This is literally the point at which I bore all of your audience to tears, okay? But it matters because folks who try to bullshit you with numbers often will give you the wrong one. Gross debt includes money the government owes itself. Net debt excludes that. In America, just to make things even more confusing, we call net debt debt held by the public, which sounds like such a weird thing, you would never look up that number. So when people say to you, America's debt to GDP is not 100% of GDP, it's 136%. They're counting money that the US government owes the US government, which is dumb. These are people who are either unsophisticated or lying. Come back to Japan. Japan's net debt's 136% of GDP.
- [37:39]
B
Okay?
- [37:39]
A
I recently lined up all of the OECD countries and measured their net debt to GDP, and we are not the top. That's Japan. But boy, we're not far off the top. So if Japan says, don't worry, stable democracies, we learn from Japan. Don't worry. Stable democracies can handle stuff like this. Actually, we don't have a ton of recent experience that that is the case. Let me just add one thing. I just want to frame this whole thing for people.
- [38:05]
B
Sure.
- [38:06]
A
You're doing something really responsible, which is educating the public on what a debt crisis is. I don't want anyone to overhear us and say Derek and Justin are predicting or forecasting a debt crisis. That's the sort of doom and gloomism that people who are not intellectually honest engage in. I suspect what you're saying, and certainly what I'm saying is once we allow the debt to sneak up this high, boy, now we actually do have to have these conversations and be aware of these threats.
- [38:33]
B
I will go one step further, Justin. I am surprised how high US debt to GDP ratio has gotten, how large net interest payments as a share of overall government spending has gotten without anything much resembling a debt crisis being on the horizon. And Jason Furman wrote this in 2024. He said, if you would ask someone in 2000 to predict what the economy would look like in a world where the debt was 100% of GDP and the deficit was 6% of GDP, they would have likely expected extremely high interest rates and possibly even a dramatic economic crisis, end quote. Obviously, we don't have that. There are problems in the US economy, but a dramatic economic crisis is not one of them. So how are we supposed to even know when we've crossed the line? When even experts like the redoubtable Jason Furman keep being surprised in the optimistic direction of how much the US can bear in terms of debt without these kind of storm clouds gathering.
- [39:33]
A
Right. So the first obvious point is there is no line. There's no number. There's no magic thing that does anything. The second answer is we don't know and we ought to be really humble. So back when debt to GDP was 30%, I wasn't humbled. I said, there's almost no chance of a fiscal crisis. We've moved from, I'm not humble. It's not gonna happen to I am humble and I don't have a clue. But holy cow, I'd really like that to not happen. You know, my kids, we went to the Grand Canyon a couple of weeks ago. My kids were walking the other side. As a dad, it freaked me out. My kids felt they were on solid ground. Who was right? I don't know, but I just didn't want to find out the hard way. And that's how I feel right now. If I may, Derek, I want to make a point about the politics of this. So debt and debt hawks have. They've given the whole game a terrible reputation, which is a bunch of people who just wanted a smaller US government pretended they cared about debt for a long time. And back when debt to GDP was 30% and there wasn't a hope in hell of us having a debt crisis, they were saying the sky is falling, the sky is falling. And the responsible response was stop lying to people. And that was my response. And if I remember young Derek Thompson, probably it was yours at the time too, even though you were externing at the center for a Responsible Federal Budget. What I think is so interesting about this discussion is at the time young centre left economists were saying, can you guys stop bullshitting? We're now old. I don't know how you describe yourself, but I would describe you as centre left and I think people would describe me as centre left. Old centre left economists are now saying actually pay attention. And you could say, well maybe just old people get conservative. Could be. But actually I think what's changed is the world. And what I like about you starting this conversation is you've created some respectability around this conversation. It used to be that only greybeards would talk about fiscal stuff and it was always scolding and always telling us what not to do. We now, in a world that feels uncharted and that should and does cause people, whether from the left or the right, to lose sleep.
- [41:52]
B
I want to move into the category of trying to solve this problem.
- [41:55]
A
Do it.
- [41:56]
B
But this is where it gets really, really hard. Because there's two things that are very, very hard to do with US budget. Number one, it's hard to cut spending and number two, it's really hard to raise revenue. Now let's start with the cutting spending part. The Elon Musk led Doge team claimed, I think at one point that they were going to cut $1 trillion from the annual U.S. deficit. That's 14% of U.S. spending. And you're already laughing for folks who can't see you. I believe that according to Politico's most recent estimate, they cut about $1 billion, which is 1/10 of 1% of their goal. Now on the one hand you can make fun of the team for being incompetent, but whether or not they were incompetent. But I do think that their failure to find more than $1 billion of spending speaks to a real fact, which is that it is very difficult to cut federal spending without making someone scream. We can talk about waste, fraud and abuse. I don't think we'll get that far into those three nouns today. But the point is, everyone's definition of waste, fraud and abuse takes money away from someone who's receiving that dollar that someone else is calling waste, fraud and abuse. And they're gonna kick and scream and say, it's not waste, fraud and abuse, it's my mortgage payment in the big picture, why do you think it's so hard to cut spending?
- [43:16]
A
Yeah, so I think this is great because we, any of us who knew anything about this knew that Musk would fail. But it's because he had the wrong image of the US government. And I think most people do. So look, governments are annoying and they can feel really bureaucratic and they can feel slow. What's that movie where the dmv, it's a sloth behind the counter.
- [43:37]
B
Oh, Zootopia.
- [43:38]
A
Zootopia, right.
- [43:39]
B
Yeah. My daughter just watched it for the 75th time yesterday. So it would be pretty shameful if I could not name it on site.
- [43:45]
A
Right. And so that slot was speaking to something. The DMV literally feels that way. Right. And we all have that. And then what we do is we take Zootopia as if it's a documentary and we say that's what the US Government is. And that was the Elon Musk theory of the case. Now the first thing to point out is the DMV's literally run by states, not Feds. That matters because your Zootopia norms are all about direct service provision by governments and the US Postal Service, God bless it. But also, geez, it can be annoying. And the DMV and the Secretary of State and some, the Department of Education can do all sorts of things us backwards, but they're all state. And so the question is, what is the federal government? You need this before you can figure out how you're going to move forward. And there's an old expression among economists that it's an insurance company with NAMI, which sounds really bizarre, but it's actually 3/4 correct. So insurance company is Medicare, Medicaid, Social Security is a form of insurance. It's insurance against outliving your savings, unemployment insurance and so on. So almost all of a vast majority of the US government is literally an insurance company. And then there's an army next to it. And then you got about a quarter left after that. So three quarter of it's an Insurance company with an army, okay? We're not gonna cut the army because politics or because wars or because something. The rest is an insurance company. What does an insurance company look like? An insurance company is a whole bunch of us sending in our monthly premiums. And then there's a big check printer where you check print, where you print checks that go out to the folks who lost their jobs or the folks who need Medicare or the folks who need Medicaid or Social Security. So it's not far off to imagine the federal government as a big room with a check printer. Once you understand that thinking that there's too many guys feeding paper into the check printer, that's the waste, fraud and abuse. I can make the government 20% slimmer. You can't. It's just a freaking printer. You might be able to get the toner 20% cheaper, but, like, that's not the problem. The problem is what the federal government is, is an operation that writes checks. It writes checks to people, and it writes checks to state governments that in turn, first of all, says waste, fraud and abuse literally cannot work. And the idea that Musk could cut a trillion dollars was absurd on its face. It's not a statement about Musk. It's a statement about naivete and about failing to understand what the federal government is. And it then says, the only way to cut spending then is to cut checks. Who am I not going to spend a check, send a check to if you're gonna do it all on spending? That's the only question. I mean, you can cut the military, fine. And then, you know, you got this other little segment which is all sorts of stuff. You know, it's national parks and it's, you know, but you're not gonna get there based on that. So we have to send some people fewer checks, right?
- [46:36]
B
Which essentially means the politics of what's going to be described as austerity, right? If you cut Social Security, that's austerity. If you cut Medicare, like, there's gonna be a huge constituency that fights back against that. So I'm not defending or calling for any particular cut, right? I'm highlighting or zeroing in on your point that federal spending is not, like waste, fraud and abuse. Sounds like it's a money pit somewhere in the middle of Nevada, right? The money isn't going into a money pit. The money isn't being shot toward Mars. The money is going to doctors and hospitals and seniors who are opening up Social Security checks or whatever, checking their checking account, and seeing that it's deposited there's. You take the money away, you cut the spending, and someone's going to get poorer. And that's one of the big reasons why it's very, very hard to advocate for the politics of cutting spending. Moving to the other side of the ledger, I want to frame the question about revenue this way. I wonder if you see things the way I see things, which is that in the last maybe 20 to 40 years, America's developed a really interesting aversion to all taxes. I mean, we're talking about no tax on Social Security, no tax on tips. The one big beautiful bill was a huge tax cut for small businesses. A huge tax cut for big businesses. You've got progressives saying that we need to make everyone who earns less than $100,000 completely tax free. And so they only want to tax billionaires. But of course, the billionaires are saying, we're the ones who create value in this country. We should be taxed less than anybody. It feels like we are in a political environment where there's basically an extant argument that nobody deserves to be taxed. And that really makes the deficit reduction problem a lot harder. How do you see this sort of evolving politics of taxation where almost everyone now seems like a kind of Grover Norquist?
- [48:27]
A
I mean, I think you're right. I'm struck time and again that Democrats always go to elections saying, well, we're not going to raise taxes on anybody. Which then means they're saying, we're gonna take this revenue that isn't enough to provide what we believe ought to be provided, and we'll see what we can do. I'm struck by the asymmetry that why is it so hard to raise taxes? So it's pretty clear why it's hard to cut Social Security. Literally millions of seniors who are grandmas and grandpas of people throughout the country are there. Taxes actually are a lot more concentrated. And so maybe this is something about the concentration of political power that what should be the easiest side to adjust because it's more concentrated, turns out not to be at all. There's two other things I wanna call out. So that's sort of. You sort of said, what if everyone's taking things sincerely? What if this is a real debate where we're coming forward with full hearts, full minds, and telling the truth? One is the rise of magical thinking. And the political acceptability of magical thinking is just off the charts. The most extreme example, of course, is now to be qualified for higher office in the United States, you have to be willing to lie about the 2020 election. So thinking that we have literally a lie as the qualification test. So I used to find it frustrating that politicians would say tax cuts pay for themselves, even a generation after it became clear that that's not true. Trump didn't even have to say that. He just didn't even talk about it. So magical thinking, I think, is profoundly problematic. But then actually, I think there's a very, very. And this is a fear that I have more deeply than you, I think, which is the political system's broken in a very fundamental way. Let's fast forward to the day after the election in 2028, and the president elect calls, if not me, then one of my friends and says, what should we do? Debt to GDP is 100%. I'm really worried about this. The story of the last 50 years of American politics, beginning with Reagan. It may be that Reagan believed that tax cuts pay for themselves, but it may have actually just been a strategy, which is if we spend all the money, there's less for the next bloke to spend. And so we're always engaged in this game. You know, it's like me and my brothers growing up. We only had. I was one of six kids. There was only so much ice cream. And so you'd always take more ice cream, partly. Cause you wanted to get your brother back so there'd be less left for him. I should have been in a more loving household. That's a different problem. But what you've got here is two brothers who hate each other. And if we leave any ice cream in the bowl, in the. What do you call an ice cream container in the container, then they're gonna get it and they're gonna spend it on their stuff. And you've now seen, you went through a round of this with Clinton, you went through another round of it with Obama, which is Democrats came in and moved towards fiscal sust after the previous guys blew everything. Arguably Biden didn't really. But then the question is, should Democrats do it again or should they blow through it and wait for the Republicans to clean up? And at this point, after 50 years of this game, I don't think I could look at President Ngai and say, you should give up on your priorities so the next bloke gets all the ice cream and he can invest in his priorities, in which case it's quite possible. As a matter of political advice. And I feel so torn saying this, Derek, but as a matter of political advice, political economic advice, I'm not sure that I could say in good Faith, fix the debt. I might actually say blow it out, go for it. You know, let's give poor people some money because they've gotten so screwed for so long. We're not going to ask them to tighten their belts to pay for these tax cuts for the rich. Now we're screwed, right? If both sides end up with a genuine commitment to spending more than we take in, a debt crisis is minutes away.
- [52:24]
B
I wonder what you think is the wise path forward here. Because no Democratic nominee for president is gonna go into October and November of 2028 talking about the need to dramatically increase taxes on a large enough group of Americans so that we can afford our French like Social Democratic spending with a French like broad based taxation. No Democrats wanna do that. No Democrat is gonna wanna run on shaving the rate of spending growth in Social Security or Medicare or Medicaid. That seems incredibly unprogressive. They're certainly not going to get their way through the Democratic primary if that's their principal message. So I guess it raises this question of like, what kind of a problem is America's debt? Is it a problem that is worth talking about but not worth solving? Or is it a problem that's actually worth solving, in which case we should probably put together some kind of plan to solve it.
- [53:21]
A
Right. So I think the argument that I was just making is one that says standard partisan warfare won't solve it. The optimal strategy for each side is to leave it up to the other side to fix it. Now, the world's most boring thing is then to say, therefore we need a bipartisan something, blah, blah, blah. And you and I grew up in a period where every three months they'd announce a new bipartisan something, blah, blah, blah.
- [53:45]
B
Hey, pour one out for Simpson Bowles.
- [53:48]
A
Yeah.
- [53:48]
B
As an external at the Committee for a Responsible Federal Budget, I poured a lot of ones out for Simpson Bowles.
- [53:53]
A
Yeah. And all of the, you know, and you know, there was Simpson Bowles light and Simpson Bowles heavy and Simpson Bowles the spring edition.
- [54:01]
B
This, by the way, for folks who aren't unbelievably deep budget nerds from the 2009 era. This was a bipartisan commission to raise taxes and cut entitlement spending under Barack Obama that, that, if memory recalls, went absolutely nowhere but still dominated the A1 pages of the New York Times and the Washington Post for several months. So that's the brief definition from the top of mind.
- [54:22]
A
Someone's tried this let's all be bipartisan thing. But I mean, one thing that would force the Issue is, back then, everyone believed Democrats would fix the mess if Republicans didn't. And so maybe it's time for Democrats to be sufficiently irresponsible that Democrats want to meet them at Bowles Simpson the Rerun for some sort of bipartisan thing. I fear that I'm gonna depress you even more. And I don't want to take us too far astray. But maybe the problem here is actually even more fundamental. Yes, we should solve problems that would cause enormous economic strife. There's no question about that. But it may be that American political institutions are just not fit for the purpose. And so maybe. And so this is terrible. Cause it sort of punts. But literally small D Democratic reform, where we end up with more functional political institutions, is the most important order of business in the United States. And so this is a story that says that's important partly because it fixes the debt, but also it fixes inequality. It fixes a whole range of things. But I have come to be deeply distressed by the type and quality of our politics and therefore economic policy.
- [55:41]
B
I feel like if someone called me, maybe they call me. They call you. They call a couple other people who have memories of 2008, 2009. One thing I would say is you have to start by undoing the unnecessary bad that was done by the Trump administration. I mean, the one big beautiful bill is what multi trillion dollar tax cut that overwhelmingly benefits the people who have already won. From the way that America's political economy is set up, people in the top 0.1% don't need extra $300,000. They're gonna literally be the exact same level of happy with or without it. And if it would moderately reduce the odds of a debt crisis in America, that certainly seems like a good place to start. My problem is I'm not sure where to go. Besides undoing the one big beautiful bill and allowing the corporate tax cuts and the S Corp tax cuts to expire, I don't feel comfortable suggesting a cut to Social Security or Medicare or Medicaid at the moment. Maybe I could be convinced by a great argument, but I'm certainly not ready to say so. Mike, I don't know exactly how we should raise taxes in a way that would make a dent. Like, sure, maybe you could raise. I believe that billionaires should probably pay some kind of alternative minimum tax so that you don't have billionaires that are paying effective tax rates that are lower than their secretaries. I think that's a good idea. But I'm also realistic that might raise $100 billion or something. It's not gonna raise 1.8 trillion. It's gonna fix 1/10 maybe of the annual deficit. Is there any low hanging fruit here, Justin, like other than waiting for the crisis to present itself and therefore force some kind of action on the part of the federal government, as if this is essentially like a pandemic. You have to wait for the exponential growth to start before anyone actually has a public health reaction. What would be the first thing that you would do here?
- [57:33]
A
Actually, you're part of the solution, brother. So the lowest hanging fruit is economic literacy. Right. You understand the issues. And despite or because of being a center left economics commentator, you think this is a deeply important issue and you think it's one that any responsible government should address. And so, look, I'm not going to say you and I are going to solve it, but this is why guys like you and I devote our lives to economic literacy. Because the stakes matter. And I think we move the ball in the right direction. We just probably don't move it anywhere near far enough. Okay, here's a cra. You know, you said, I'm not willing to sign on to cutting Social Security or raising Social Security taxes. What if there were 90% of the house who voted in favor of it? Would you sign onto it?
- [58:19]
B
90% of the house is voting on a plan to do what exactly? To raise the Social Security cap and then maybe shave the degree to which the richest Americans get sort of repaid for their income under Social Security. Like something like that?
- [58:32]
A
Yeah. Think about whatever Simpson Bowles looks like for 20, 26, which is less of a cap on Social Security taxes. You get it a little bit later.
- [58:43]
B
It basically made Social Security. Maybe I should look this up. It made Social Security a little bit more progressive, Right. Because it increased the payroll taxes on richer Americans and also I think slowed the rate of growth of Social Security payments over time. So that.
- [59:00]
A
Let's just simplify this because I think people are going to hate me for the following. But it's also true. Social Security was set up when 65 was old and now 65 is young. And nowhere in between did we say have an adult conversation to say, should we have a Social Security system that covers a third of people's lives? Let's have that conversation. Anyway, the point that I wanted to make was whatever Bowles Simpson is for the. Whatever the package is. So you can do a bunch of these tweaks, right? And you can actually get a lot of the way there. But it's because you're doing what Elon Musk didn't, which is you're going where the money is and the money's Social Security, Medicare, Medicaid. If you need to get some left wing votes, it's also defense. Or you do it on the revenue side where it's taxes. If there were a package that could get a 90%. Some people say the problem is the filibuster with the 60% rule, but actually all fiscal policy's been done by reconciliation for the past decade. So it's all been by the 51st senator. Which is why we get these wacky things where left wing guys go for left wing stuff, right wing guys go for right wing stuff, and probably in the long run, no one's going to do anything about the budget. What if we had a fiscal filibuster that required 80 votes? So basically the Democrats can say, the Republicans, we'll fix it if you will, and they'll say we'll fix it if you will, and nothing passes. Otherwise that changes the game. Now from I'm going to steal all the ice cream now so there's none left for you to look, we got two choices here. It's either fix the problem or not, and we share the burden either way. Mate, I'm just spitballing. I'm making it up. I like to be hopeful.
- [60:47]
B
Fortunately, a quick Google reveals that we were basically right about the Simpson bull's Social Security recommendations. Raising the retirement age, which was your reference. Changing benefit calculations to slow cost of living adjustments, which leads to slower payments or smaller payments over time. And expanding the payroll tax cut. Excuse me, expanding the payroll tax to gradually raise taxable minimum maximum earnings so that 90% of all covered earnings are subject to the tax by 2050. So essentially just tax more and more and more of the money that rich people are making. Look, this is one of those situations where typically I love to end podcasts on a really, really clear solution to the problem. I am more certain about the shape of the problem itself than I am certain about the shape of a solution here. I think that I like the term that you use about magical thinking. I think what we have here right now is an extraordinary amount of magical thinking about how much we can spend and how many people and how much income we can exempt from taxation. And these two things are progressing along parallel tracks without people recognizing that they do intersect. And they intersect here at the question of deficit and debt. It's my basic prediction. And maybe you'd agree that this is a crisis that's going to have to begin to show its face before either party really acts on it. Because for one party to act and say I want to cut Social Security or I want to raise broad taxes on Americans to cover a $1 trillion gap in the deficit, that is so political kryptonite that I think you need the COVID of a crisis in order to justify the unpopularity of the solution. So, Justin, I don't know. The last time we spoke for this long, I believe it was the COVID crisis. Hopefully I don't speak to you. Hopefully I speak to you before there's a debt crisis on our shores. But thank you very much for your patient explanation.
- [62:42]
A
I really appreciate it, mate. And thank you for helping a big audience out there understand really important issues, even if it feels uncomfortable.