← Plain English with Derek Thompson
Plain English with Derek Thompson
Trump’s Big, Beautiful Bill Is Great for the "Stealthy Wealthy"
01:07:52
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- [00:03]
Nora Princioti
What's up everyone? I'm Nora Princioti. And I'm Nathan Hubbard. And we're coming in like a wrecking ball to announce a brand new series.
- [00:10]
Nathan Hubbard
That's right, it's every single album.
- [00:12]
Nora Princioti
Miley Cyrus deep dive with us into the career of one of our most creative and confounding pop stars.
- [00:19]
Nathan Hubbard
We're starting of course, with the Best of Hannah Montana and ending with her.
- [00:23]
Nora Princioti
Brand new album, Something Beautiful in June.
- [00:25]
Nathan Hubbard
And and don't forget about Miley Cyrus and her dead pets.
- [00:28]
Nora Princioti
We certainly will not be doing that. So listen now on Spotify or wherever you get your podcasts.
- [00:38]
Nathan Hubbard
This episode was brought to you by ServiceNow. We're for people doing the fulfilling work they actually want to do. That's why this was written and read by a real person and not AI. You know what people don't want to do? Boring busywork. Now with AI agents built into the ServiceNow platform, you can automate millions of repetitive tasks in every corner of your business, it HR and more. So your people can focus on the work that they want to do. That's putting AI agents to work for people. It's your turn. Tap the banner to get started or visit servicenow.comaiagents-agents this episode is brought to you by Indeed. Hiring someone new for your business can be a big move, and I understand you probably want to take your time to make sure you found the right person. But playing the waiting game could do more harm than good because that's extra work and extra stress you're putting on you and your team. It's not a healthy work environment when it comes to hiring the right people fast. Indeed is all you need. Their Sponsored Jobs Move your job posts to the top of the page, letting you stand out first to relevant candidates. It makes a massive difference. According to Indeed data, sponsored jobs have 45% more applications than non sponsored jobs. Another great thing about Sponsored Jobs is that you're only paying for results. You don't have to worry about monthly subscriptions or long term contracts. There's no need to wait any longer. Speed up your hiring right now with Indeed. Listeners of this show will get a $75 sponsored job credit to get your jobs more visibility@inn Indeed.com plane. That's Indeed.com plane right now and support our show by saying you heard about Indeed on this podcast. Indeed.com plane terms and conditions apply. Hiring Indeed is all you need. The tax and spending bill passed by the House Republicans last week is the sort of law that does so many different things that even budget experts, I think, could be forgiven for not realizing just how many different parts of the economy it's going to change. In the realm of worker compensation, this is a bill that's going to eliminate taxes on overtime pay and tips for our kids. It will create new thousand dollar savings accounts for children and give parents an extra $500 per year per child in the form of an expanded child tax. In the realm of health and culture wars, it will ban Medicaid funds for transgender care for adults and cut funding for Planned Parenthood. In the realm of climate, it will claw back half a trillion dollars in tax credits for wind, solar, geothermal batteries, nuclear power, clean hydrogen and electric vehicle purchases. In the realm of defense, it will increase spending by hundreds of billions of dollars on shipbuilding, air and missile defense, immigration enforcement, and border security. Again, this is an enormous bill that is not doing one or two things, but rather a thousand things at the same time. But if you wanted to judge this bill strictly by the sheer dollar amount of its provisions, it's really about three big things. Number one, it extends a $5 trillion tax cut on corporate and individual income. Number two, it reduces by a trillion dollars federal spending on two major government Medicaid, the government health care program for the poor, and SNAP state matching funds, that is federal spending on food stamps for the low income. And number three, because of the mismatch that I just told you about, between the tax cuts and the spending cuts, it will increase the national debt by several trillion dollars over the next 10 years. Today we have two guests. First, the University of Chicago economist Eric Zwick joins to talk about the corporate tax cut. Zwick was part of a team of economists who published the most sophisticated analysis I could find of the last Trump tax cut. So he's a great source to ask how this law is going to change the economy. And second, to understand the debt picture, I Talked to Maya McGinnis of the Committee for Responsible Federal Budget about debt crises and why I think they're so hard to think about. Maya's been rallying for years for the US to reduce its debt. And as you'll hear, I think I agree with her about the big picture, that the US Is playing a very risky game, even though I have lots of little critiques of the deficit hawk position. But the bottom line is this. We are on the brink of a multi trillion dollar tax cut that will overwhelmingly benefit the richest 1% of Americans. And that tax cut is being partially paid for by cuts to health care spending and food stamps for the low income I'm Derek Thompson, this is Plain Eng Eric Zwick. Welcome to the show.
- [06:10]
Eric Zwick
Thanks for having me.
- [06:12]
Nathan Hubbard
So I want to talk to you about the new tax and spending bill that just passed the House, the centerpiece of which is the extension of the 2017 Trump tax cut. You are one of the co authors of, of one of the best studies of what that tax cut actually did, which I think makes you one of the better people to ask what will this law actually do? So when you go back to 2017, it seems to me like there were two very strong camps debating this Trump tax cut. The proponents of the Trump tax cut said this thing is going to boost investment, it's going to raise wages, it's going to increase growth. And then there were critics, mostly Democrats, and they said, no, it's mostly just going to increase the deficit and help rich people. We'll get to the specifics in a second. We'll get as nerdy as you need to get in just a moment. But first, at a high level, who was right?
- [07:06]
Eric Zwick
Yes. So I would say 30%, 20%. The first camp felt like there was some growth and then 70, 80%. The second camp there was redistribution and deficit. And I think it comes back to separating what changed in 2017 into what happened for individuals, the individual tax code, wages and other types of income that people earn. Those tax rates went down a lot and there were a lot of changes, child tax credit, other changes there on the individual side, that was mostly the temporary stuff that has slated to expire and that was being extended and renewed in this most recent bill. That stuff was very expensive. That stuff was primarily stimulative in the same way that sending people checks is stimulative. They spend more money if it's in their pockets. And we could talk about how doing it then is different maybe from doing it now given the macro environment. And then the second part is the corporate changes which were made largely permanent, not all. And those are maybe more likely to generate growth, although at considerable expense. So there was a reduction in the income tax rate on corporate income, increases in incentives to buy equipment, machines, changes in how we treat research and experimentation expenditures, bunch of changes on the international side that we can get into in more detail. Some of those things seem to be fairly growth enhancing, some at quite low bang for buck still. So for every dollar spent on a corporate income tax cut, you get some back in growth, but it's not that big relative to the sort of direct mechanical cost. But that's where some of the growth I would say would come from.
- [08:52]
Nathan Hubbard
So let me split my follow up question into the effect of this law on companies and then the effect of the law on individuals. First with corporations, did you find that companies with larger declines in their effective tax rate, like the folks who got the biggest tax cut, did they in fact invest more?
- [09:11]
Eric Zwick
Yes, yes. I will say we also want to probably keep in mind two groups of firms there. One is like the large multinational. Think Caterpillar, think IBM, also Facebook, Google, Walmart, these types of companies, those are companies like listed companies on the stock market. And then there's like the closely held pass through businesses that are like regional, have a few owners and maybe you think an auto dealer, a beer distributor or like even a law firm also. And we were focused on that first group, the bigger companies. And we did see significant investment response to the tax cuts. Specifically firms that got larger tax cuts there did more investment. For the pass throughs. We excluded those from our analysis because we were interested in kind of thinking about multinationals. But other folks have looked at the pass throughs and generally find smaller effects. I think that's relevant for thinking about what's going on in the current reform because the past three things are slated to expire and they're going to be renewed. And if anything those are more expensive on a bank for buck basis and also even more aggressive than even corporate.
- [10:18]
Nathan Hubbard
Income tax cuts and then on wages for individuals. From your paper you said the business tax revisions increased economic growth and wages by less than advertised by the act's proponents. Why don't you just expand on that a little bit? Why did this enormous 2017 tax cut not have a particularly large effect on long run GDP or labor income?
- [10:46]
Eric Zwick
Yeah, so I think, you know, it was advertised to have a very large effect on earning on wages, like on the order of four to $9,000, which is something like depending on how you measure the median, like a 10% increase in, in income. That's like to first approximation you could think of it, they're saying that GDP is going to be 10% bigger where the economy is going to be 10% bigger because of this. And even if it generates a lot of investment, you're just not going to see that kind of change in the size of the economy from this tax cut. So our estimates suggest more like a 1% increase in income over more like 5 to 10 years. So taking a while. And that's because initially firms have to kind of grow and they do more investment, but they get bigger deductions. And until they've gotten that growth, they're not really paying people much more because they don't have the higher productivity. So it takes kind of a while to materialize. And that's still just a 1% change in GDP over that period. And that corresponds to our estimate of what happens to wages. So I think just the elasticities, basically the predicted effect on investment from this tax change that the proponents were suggesting were a bit aggressive. When you take into account the capacity constraints of the economy, take into account bidding up of interest rates or other things like that, that crowding out, and take into account the relative size of the firms that do a lot of investment, those big multinationals, the firms that do a lot less in the overall economy. It was just unlikely to see economic growth at that size.
- [12:32]
Nathan Hubbard
You're circling one of the things that I find most mysterious about the 2017 tax cut, which is that it was enormous. I mean, this was the largest business income tax cut in American history, one of the largest tax cuts period in American history. And here you are having done this whole sophisticated analysis, and you're like, oh, you know, investment went up by like 11%. And wages grew, but only a tiny little bit, and GDP grew, but only a tiny percent. Where did all the money go? Like, I know that's like probably the dumbest possible way to ask this question, but like, how do you pass a 2 to 3 trillion dollars tax cut? And the effect on the real physical, corporeal US Economy is like basically like a shrugie emoji. Where did the money go, Eric?
- [13:22]
Eric Zwick
Yeah, well, the economy is really big, you know, and so even a $2 trillion tax cut, that's over 10 years, right? So $200 billion a year, it's roughly a percent of the economy. And so, yeah, it's true. And then like, okay, some of it generates growth, fine. Some of it is just going back to shareholders in the form of dividends or share buybacks. You can see it in stock market valuations. And so we're basically saying for every dollar of profits earned by Walmart, they're going to pay a little bit less in corporate tax. And so shareholders kind of bid up those future profits more as stock prices go up. Eventually those profits materialize and they're redistributed. And yeah, Walmart was kind of doing a lot of investment, or the amount of investment it wanted to do before. It'll do a little bit more on the margin because the price is lower. But I think, yeah, just a cautionary tale in magical thinking is like, we can only get so much growth out of this thread, we keep pushing on it, we get less and less. Also, the lower the initial corporate tax rate is cutting, it is going to have a smaller effect because the distortions are smaller to begin with.
- [14:42]
Nathan Hubbard
So you studied how the 2017 law changed the US economy. Is there a reason to think that the 2025 bill that the House just passed which extends the corporate tax cut, extends many individual tax cuts? Basically when you add up all the tax cuts, this bill, it is 4, 5 trillion dollars. Is there a reason to think, Eric, that this bill will do things to the economy that the 2017 bill did not?
- [15:10]
Eric Zwick
Yes, so desired or undesired things? I think is is an important.
- [15:15]
Nathan Hubbard
Feel free to check both categories there.
- [15:17]
Eric Zwick
Yes, so desired things on the corporate side. So you know the area where our previous study is most relevant, we're extending those incentives for investing in equipment, structures and so on for another five years. And we think those are probably pretty good for growth. Although I would expect the growth effects to be smaller this time than they were last time for a couple reasons. One, like I said, as the corporate rate was coming down, the incentive on the margin is just smaller because the value of any given deduction is just lower when the tax rate is lower. But then also interest rates are higher, there's less slack in the economy. And so you might expect bidding up of certain prices like the price of investment goods, the price of labor, the price of borrowing and that's going to tend to crowd out investment. And relative to where we were in 2017 with interest rates quite low, we have bit less slack we think now. So in other words, an undesirable potential effect from this increased demand is going to be inflation. That's even more so the case I think on the individual side where I think this reform actually has a larger share of its cost on individual tax cuts, the extension of those and on these pass through tax cuts and the extension and broadening of those, that's just money in people's pockets to spend on stuff. If we're at capacity constraints in certain segments of the economy, that's going to bid up prices. So that's going to be inflationary as well. And I think we're in a more inflationary environment than we were in 2017. There's no question about that.
- [16:57]
Nathan Hubbard
I want to try to thesis on you and tell me how this sits with you when I look at this tax and spending bill and the trillions that it's going to add to the debt. And I put that side by side with the fact that we are Also experimenting with a tariff regiment that is unlike any tariff regime America has had in the last century. And I put those two things side by side with the fact that Trump is changing America's tariff and geopolitical policy every three, four days. I feel like this is one of the most uncertain periods in modern American fiscal and financial history. I mean, a multitrillion dollar corporate tax cut, a trillion dollar tariff plan changing policy every three days, a bond and stock market that's on edge, as you said, a risk to inflation because we are stimulating an economy that isn't a slackened low interest rate economy of 2017, but a high interest rate, low unemployment economy of 2025. Just putting it all together, it makes me feel like we are running an incredibly high risk experiment on the US Economy.
- [18:14]
Eric Zwick
Yeah, I guess you call it an experiment. Makes it seem like it's designed to like, you know, for us to learn something with like, proper treatment, control groups and stuff like that. It's a little bit more in the experiment of like, let's throw some stuff at the wall and see what sticks. One concern I have, what do business executives that are thinking about investment projects, what do they love? I mean, obviously they love demand and good products and that kind of stuff. They like low taxes now, they like low taxes in the future, and they like to know that when they make an investment, those profits in the future are going to be materialized. So they like certainty. In other words, they dislike uncertainty. And I think there's some inconsistency across some of the policy landscape here where we're introducing, we're trying to cut taxes maybe on businesses at the same time that we're introducing a bunch of uncertainty about whether those future profits, which would depend on a certain supply chain, which would depend on a certain market being open for them, we're making it more uncertain whether those things can be counted on. That's going to reduce investment. So the net effect, I think, is quite unclear. Similarly, we've created in this reform, we had an international tax code that previously provided a higher rate on foreign, higher tax rate on foreign source income, but you could defer it if you left it overseas. We decided, let's get rid of that, but we'll have a minimum tax on that foreign income that's lower. We'll also create some incentives for firms to invest overseas in that calculation of how that minimum tax is applied. At the same time, now we're tariffing the purposing the importation of inputs even within a supply chain. And it seems kind of at Odds with the international tax regime that we had implemented before because we're encouraging and discouraging them to be international.
- [20:16]
Nathan Hubbard
What you're saying is we are both instituting a tax cut that specifically helps multinationals while at the same time taxing companies with multinational supply chains. And so we're sort of giving with one hand and taking with the other.
- [20:29]
Eric Zwick
That's correct. And so the net effect is I think going to be also it's going to be like very heterogeneous. Some firms maybe that have different supply chains than others will benefit a lot. Some firms will really struggle. It's going to be sort of arbitrary too, probably based on which country they're located in. And all that uncertainty and weirdness is going to create a lot of like shifting around substitution and reordering. But it might reduce the investment in growth effects because they've got to focus on reducing this tariff burden.
- [21:03]
Nathan Hubbard
I want to think a little bit about what happens to the US economy if we essentially create a new tax, that is to say tariffs that bring in $200 billion a year and then at the same time cut business income taxes by roughly the same $200 billion a year. I'm not suggesting that's exactly going to be the policy for the next two weeks, much less the next four years. But I do want to think a little bit about. It's a chaotic experiment, I understand, but a little bit about this experiment where we're essentially as you said, taking with the one hand and giving with the other, saying hey, big companies in America, we are going to make your income taxed less. But also if you ever want to take apart from another country in order to build something in America, we're going to tax that thing much more. Is there a way to think about winners and losers in this system as we sort of downshift on capital taxes and then upshift on this sort of new tariff regime.
- [22:08]
Eric Zwick
Yeah, it's a great question. There are winners that sort of use fewer inputs from abroad. So like intangible dependent winners for example, they can kind of very easily move their income around and get low taxes and basically face a lot like service providers that you know, I mean think Google, Facebook, I mean like also pharmaceutical companies. It's sort of like easy enough to move around the key income generating asset which is like the intangible, the ip, the platform, whatever those. I think they're winners likely because the tariff regime so far has largely excluded them and they're getting the lower business tax rates. The losers are going to be companies that can't benefit and have to buy inputs and like. Yeah, okay, so you think about you're making, I don't know, like, a cover for your, like, table, Right. It's like outdoor furniture season in Chicago. You see all these people replacing covers on their balconies, and it's like, where are those covers made? It's like, well, you know, we know where they're made. Not here. And we know that, like, if they were made here, it's probably going to cost like, 10 times as much. People will substitute if they can. They'll buy less if they can. If they can't substitute, it's something they really need to buy. They'll buy less of the other stuff that they were going to buy because there's a fixed amount of income they have. Maybe there's a cover manufacturer here that starts making stuff and that helps a really small slice of workers. But I think it comes at the expense of a lot of other people who are potentially consuming that stuff. I'm just not sure the total benefits are going to play out very well. But it's really also important to keep in mind there's like, proposed tariffs and proposed policy on that side. And then there's what we actually experience, which seems like so different. It changes every week. The corporate tax rules are largely implemented by Congress. Those are uncertain right now as they're debating things, but they're going to be written down. They're going to be at least relied upon for a few years, if not longer. These tariff rules seem quite arbitrary and quite subject to negotiation. So I think businesses are primarily in a wait and see on a lot of things, five, ten years down the road. Is this a transition to VAT in the US which helps us solve our fiscal pattern?
- [24:35]
Nathan Hubbard
Whoa, whoa, whoa, whoa, whoa. You got to spell out that acronym. I know where you're going, but you got to spell out that acronym and tell people what a Value added taxes.
- [24:42]
Eric Zwick
So that's like the consumption tax, right? Tax on everything that's not savings is kind of like the economist's most exciting policy tool that never has gotten a lot of serious attention in the US but it's very popular in European countries, for example, and they raise a lot of money through a value added tax. It's a sales tax, but you deduct inputs. And the difference between that and the tariff, of course, is that it's also not just on stuff that comes across the border, but stuff that you buy here. And so that would be a very large base that you would be applying that tax rate to, which means that it could raise a lot of revenue even at a quite low rate. Sort of similar to how sales taxes work in the States, but where you get the deduction for inputs. This is kind of like one leg in a tripod or a four legged stool or something. That would get us towards vat, but there's a lot of things that need to happen before we get there. But if we need to solve the deficit problem, one proposal is to shift us from income tax towards value added tax, ironically mimicking more of the European tax system than what we have done historically. I don't think politicians talk about it this way, but it invites comparison, aspirationally.
- [26:08]
Nathan Hubbard
Yeah, I'm going to be honest, I don't think that's coming to America at all. I think that I see where you're going with it and I think many economists are thinking, well, if we're going to tax imports, how many more skips and a jump do you need to just tax all consumer spending throughout the economy? I think many, many skips and many, many jumps. Because this is an administration that has, how do I put this carefully? This administration that has a long leash to punish foreigners, let me put it that way. They can punish foreigners at Harvard, they can punish foreigners at American universities, they can punish foreigners when they're illegal immigrants, and they can punish foreigners when they sell stuff to Americans. I don't think they have that same leash to raise taxes within the US and that's why they're passing one of the biggest tax cuts in American history. I want to circle back though to one of the bigger points I heard you make, which is that when we think about tax incidents, when we think about who's actually affected by this, by the simultaneous increase in tariffs and decline in corporate income taxes, it's these virtual companies that don't need to import as much stuff from overseas that seem like they're going to win out. Big tech companies, AI companies, services companies, companies that are basically fundamentally in the services or software economy and that don't need to constantly take this covering for an outdoor table in Chicago and import it from Vietnam or China. At the same time, the people who it seems like going to be hurt by this are smaller retailers with less income to start with. They may benefit less from the corporate income tax cut, who are importing more and frankly might be employing more low income workers who I think are also going to be hit by the fact that this bill includes about 600, $700 billion in Medicaid cut, another few hundred billion Dollars in snap cuts. Do you think it's an overly cheap point to say that this is the sort of bill that is likely to increase income inequality because of the benefits that it carves out for big rich companies and folks who have a lot of money in equities which tend to be benefited by corporate income taxes and seems to balance those tax cuts with some cuts to services that disproportionately help the low income.
- [28:36]
Eric Zwick
So to be clear, most of the changes that would benefit the tax changes that would benefit these multinationals were in the 2017 bill made permanent. You have these expensing and R and D elements. So I actually do think this bill is going to increase inequality through benefiting business owners. But it's actually not the big multinational corp. Like stockholders. It's like the closely held rich business owners that are mostly structured as pass throughs. And these are regional businesses. It's true, some of them depend a lot on international supply chains and they're going to have to pay higher tariffs and that might really affect their business models a lot. But a lot of them are in services, skilled services or in distribution, beer distributors, auto dealers, also blue collar trades like construction and this kind of stuff. But they're millionaires. A lot of them. They got passed through business tax cuts. That's one of the larger components of this House bill. And it's worth highlighting that there are several members of the Ways and Means Committee that are auto dealers and likely pass through business owners among them. And so I think, and because of how concentrated that income is, those closely held businesses, I think it's actually inequality exacerbating perhaps even more strongly than the 21%, 35 to 21% corporate tax cut. Because in that case you have pensioners, you have folks with 401s, you have endowments that own a lot of C Corp, you know, Walmart stock and Apple stock and so on. And they benefited from the 21% rate cut too. I should say. Foreigners own like 20 to 30% of US equities. And that's one area that we haven't, haven't been attacking foreigners it seems, but maybe they're just, you know, unintentional beneficiaries.
- [30:32]
Nathan Hubbard
Eric, before we go, I want to make sure that I really clearly understand what you're talking about here when you're discussing the tax changes to pass throughs. Make this as concrete as possible. Just like, please give me an example of a business and say this is the kind of business that is going to see a huge change between the status quo in 2024 and the status quo in 2526 if this law is signed by President Donald Trump.
- [31:02]
Eric Zwick
So pass through business is a firm that, unlike a traditional company, is not taxed at the firm level. Instead, the income flows through to the owners and is taxed at the owner level at the individual income tax rate. And so the individual income tax code is what is relevant for pass through owners. In the 2017 reform, there was a lot of focus on cutting the corporate tax rate. The pass throughs are a very powerful lobby. They advocated strongly that they also get a cut because they don't benefit from that 35% to 21% rate cut. And so they got this deduction that was scheduled to expire which basically says you get to deduct 20% of your income, which reduces your top rate from the 37% individual tax rate down to 29.6. And that was slated to expire, but it's being extended as part of this most recent legislation. In addition, it's been enhanced from 20% deduction to 23% deduction. What does that mean? That's like reducing your top individual tax rate by another percentage point. On top of that, it used to not be available to like certain types of pass through businesses because there's a ton of, as I said, auto dealers is a great example, beer distributor is a great example. But there's like more pass through businesses in different industries, almost any industry that you can think of. So law firms, doctor's offices, mid market manufacturers as well, construction companies, they're ubiquitous across the economy. And those law firms used to not get any benefit because they're in service businesses and they didn't want to give them a tax cut because they could relabel a bunch of their income to get a better rate. But now some of them get a deduction because of the way that this rule has been rewritten. It sort of phases out, but you still get thousands of dollars potentially of tax savings if you're in one of these structured as a pass through business. Service companies, and this is the most concentrated form of income, more concentrated than dividends is pass through business income. 70 cents on the dollar goes to the top 1% of the income distribution. And they're a very powerful lobby. And I think there are more folks in the top 1 and 0.1% that are passed through business owners than like any other sort of driver of income in terms of thinking about where their wealth comes from. And this is a group that we call the stealthy wealthy that we think, you know, just doesn't get enough attention because they're not in tech and finance, they're not on the coast necessarily, but they got $800 billion of the 4 to 5 trillion dollars was specifically for pass throughs in this most recent legislation.
- [33:54]
Nathan Hubbard
So when I think about a tax and spending bill that cuts Medicaid by $700 billion and creates a tax cut for $800 billion for folks who work at auto dealerships and beer distributors and the like, you know, that doesn't feel great to me. Maybe it doesn't feel great to me because it just objectively isn't great just to be as good faith here as possible. Eric, is there any reasonable, rational defense for a tax policy that seems explicitly designed to offer tax cuts to folks who work in pass through businesses and already earn more than $500,000 a year? Is this a piece of the economy that is understimulated at the moment and therefore would really benefit from an efficiency standpoint by just getting 7,800 billion dollars of tax cuts?
- [35:00]
Eric Zwick
I don't have a great argument for that. And what evidence we have on because of these, like their regional businesses like I described, if you lower their tax rate, it's not like they're going to do a bunch more investment. They're much more constrained by the size of the local market. Auto dealers have a turf, they have a territory. It's kind of well defined. And the way these contracts are structured, that's sort of where they can sell. They're not going to do a ton more investment. So it really largely goes into the owner's pocket, those tax cuts. And so if you think about who their workers are, another good example are like people who own like a bunch of franchises. Like say you have 10 McDonald's, you're quite rich. Probably your workers are mostly on Medicaid or depending on the franchise, there might be health insurance through the business. But a lot of them don't you think about the benefits to the owners versus the benefits to those workers. It does seem quite regressive within that firm.
- [36:06]
Nathan Hubbard
All right, Eric. Well, I think that's awfully bad, but I really appreciate you explaining it to me so carefully and so soberly. So thanks very much for this explanation.
- [36:17]
Eric Zwick
Anytime you need dismal science, I'm here for.
- [36:25]
Nathan Hubbard
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- [37:02]
Maya McGinnis
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- [38:19]
Nathan Hubbard
That was Eric Zwick, economist at the University of Chicago. Next up we have Maya McGinnis from the Committee for a Responsible Federal Budget. Maya McGinnis, welcome to the show.
- [38:30]
Nora Princioti
Thank you so much for having me.
- [38:33]
Nathan Hubbard
I want to start very high level here. The US is a big rich country. We control our own currency. We have run deficits for decades, year after year after year outside of a few years in the late 1990s. America has run a deficit practically every year since the 1970s. And today if you look at the interest rate on the 10 year treasury, it is basically the same as it was 20 years ago. So Maya, what is so scary about debt?
- [39:02]
Nora Princioti
It's one of the biggest challenges in all of this, I must say, because it is not something that people feel the direct connectivity to. They don't see it in their lives. Other than my kitchen table, I'm not sure it's the kitchen table issue of most families, but here's the reason it affects us in so many ways first, if your debt is too high, which ours is, and if it's growing faster than the economy, which ours is, and that's really a sign of a problem, it has economic effects. It has effects on our ability to budget, it has effects on our ability to be prepared for emergencies, and it has effects on our national security. So just quickly, if you're borrowing too much, it crowds out private investment. It slows the growth of the economy and their standard of living over time. Even when interest rates are low, that still happens. We can see that every dollar of borrowing pushes out, crowds out private investment, means the standard of living in the future is lower. It means that when the next emergency comes along, whether it's a pandemic or a recession, it will be relatively harder for us to borrow than if we didn't have so much debt already. The US has this great privilege where we can borrow so regularly at lower rates, even during emergencies like Covid or the great financial crisis, even when we export the emergency and we lose that if people start to worry about our debt and if we're really such a great place to park all our money means interest payments start to squeeze out other parts of the budget that is happening now. Interest is the single fastest growing part of the federal budget and it's the second largest program. The fact that it is larger than national security is a red line. Countries do not tend to do well once they reach that point. And our debt is higher than defense, higher than Medicare, higher than everything other than Social Security. But it also means, Derek, and these are the kinds of things I think you do so much thinking about this as well. But the world is changing, the economy is changing. There's so many new things we need to do to respond to the changing economy. Our social contract was made for last century, not this century. Not to mention that the two biggest trust funds are headed towards insolvency. There are new kinds of risks and insurances and investment opportunities that we need to be doing. And our budget is so ossified, pre committed promises have been made and interest payments are squeezing out other things that we aren't having the big conversations we should be. For instance, I think we should be thinking about how you remake a social contract for the world of technological innovation and the pace of change we're in the midst of. We're not having that conversation because our budget is in disastrous shape. And then just quickly, the last you see, the list is so long of all the reasons we should care. But it is a national security threat right now. We are borrowing A good deal of our budget from overseas, including from China. It becomes something that can be weaponized. It is not a vulnerability that you want to have, that as you're competing with another country, you have to borrow from that country or you realize that you may be constrained in the things that you can do. And then just finally, and this is wonky economics, but it's less of a problem when your economy is growing faster than your interest rate is. But we are now switching. You're obviously quite familiar with rng, but we could be switching at any time where the amount we're borrowing, what we're paying on that, is accumulating faster than the economy is growing. That's when you get into an ugly debt spiral. So you borrow, that pushes up interest rates, that grows your interest payments. That means you have to borrow more. And suddenly things that have really looked okay on the surface, even though they've been crumbling underneath at the foundation, suddenly things get very ugly very quickly and it's hard to turn that chip around.
- [42:35]
Nathan Hubbard
I have two reactions to that. The first is that I agree this is something to worry about now in a way that we didn't necessarily have to worry about it 10, 15 years ago, precisely because, as you said, interest payments have grown to a point where they now outmatch what we spend in defense. That is an extraordinary statistic. But I want to push back or at least scrutinize a couple of the claims that you just made. One thing you said is that America's high level of debt makes it harder for us to respond to crises like the pandemic. But during the pandemic, we spent trillions and trillions of dollars. We didn't seem particularly constrained by our debt in our response to the pandemic. And the second thing that I want to scrutinize is this idea that, that our level of debt is affecting the budget making process today. In many ways, I see the House bill and Trump's budget as being entirely unconstrained by any consideration of debt. In some ways, that's precisely the problem with their approach to budgeting. They're going to add trillions of dollars, the national debt in the last 10 years. So I wonder, what evidence do you have that America's high level of debt has actually affected the budget making process at all in the last few months or years.
- [43:57]
Nora Princioti
Okay, good questions. There's a bunch of things I want to address. Asking me for evidence on a counterfactual what would have happened otherwise is a tough little question. So we'll go into that. But it's sort of like the different paths taken, right? It's like sliding doors. It's all the different ways that things could have been. First, though, I want to point out that when we went into Covid or when we went into the Great Recession, our debt was 38% of GDP for the Great Recession and 75, 78% of GDP before COVID Now it's 100%. And that's the whole point. It's stair stepping. So our debt as a share of GDP is going higher and higher, meaning there's less fiscal space. The problem, one of the many problems and challenges with this issue is we never know when it is too much. The question I get the most often is at what point does this become a problem? And I would say this has been a problem for years. I'll go into one of your second points you made, but it's not a problem that you see until it's too late. I always liken it to the invisible fence. You don't know at what point is the problem. There's no one number until you hit it. And that's what you want to avoid, not having gotten there. But we know that we have less borrowing space than we did when we went into Covid. We might have another pandemic where we're absolutely able to borrow, no problem. But sooner or later it does become a problem. As what we've seen right now with a race, a move away from the dollar. With that, a lot of unexpected things are going on in the past couple months and they are changing the global international environment. We are in a weaker, less resilient position to respond to those things than we would have been if our debt was much lower. The second thing is people a lot of times say, you know, everyone was worrying. Everyone's been worrying about this for so long. It wasn't a problem. I actually don't think that's true. I think the story is not over. The game of musical chairs has not ended. The music hasn't stopped. Because what happened was take when Larry Summers and Jason Furman wrote their very important paper in Foreign affairs about why interest rates were so low. We should just keep worrying and not worry about things. There was a permission slip from Olivier Blanchard and those folks and a lot of other people saying rates are so low, don't worry. We've been worrying for no reason. We borrow in our own currency, keep borrowing. What that means is that now our debt is, I don't know, but like 5, 8, $10 trillion higher than it Would have been if back years and decades ago when people were warning about this, we instead had done what we used to do, which was kind of borrow and run surpluses in a more cyclical way over a business cycle, then our debt as a share of GDP would be so much lower. If I'm guessing. I look ahead and I think there are bigger risks in the coming decade than we had in last decade. I would like to have a lot more flexibility in our budget for the next 10 years than we needed for our last 10 years. But because we borrowed so much then, we have much less fiscal space than we do now. And, and this is so important when interest rates go up, which people are saying, well, they'll never go up, don't worry, rates will stay low. It's a very big bet. And it wasn't right. They haven't, you know, they're like you said, they've been much, much higher in the past, but they're a lot higher today than they were before. A 1% point increase in the interest rates above what we're Expecting leads to $300 billion a year more in interest payment spending. That's a whole program there. That's the kind of thing that we're talking about. Those are these big changes we could be talking about. One percentage rate does that and so much like a credit card teaser rate. We borrowed so much when seemed great, no problem. Let's be happy. Let's, you know, permission slip to borrowing is one that people are ready to take up on. And, and now we have a much tighter situation where we are so much more vulnerable to growing interest rates. And just finally, I guess. Oh, sorry, because your question was a great one, like, how can I say that we aren't doing all those things. We are talking about those things. One, this reconciliation bill that's going on is stunningly, gallingly, fiscally reckless. It is painful. We have a back and forth where you've got both parties always pointing to each other about how they've done so many irresponsible things and almost ramping it up. It's like when you take one page of your responsibility from the other parties. You have to do it bigger. But I don't want to get into the back and forth. I will if people think it's interesting. But you know, Republicans will say, well, Democrats did the same thing on bbb. Build back better. Too many BBB is going around, which, you know, Manchin turned into the Inflation Reduction act, which was scored as reducing the deficit. They'll point to that they'll point to the automatic growth in Social Security and Medicare, which now they protect all of these things. There's so much finger pointing going on. But what I would argue is that there is no space to do the kinds of things of the proportion that we might want to think about with changing a social contract on Social Security and Medicare. We need trillions of dollars, no matter how we craft that, to bring those programs back so that they are solvent. But above and beyond that, if we are thinking about things like lifelong learning about massive new insurances, if the industry or the area that you're in completely goes under, if we have to think about lots of different ways to deal with an economy that's going to be changed more by technology than certainly globalization or I think any major economic shift we've seen in our lifetimes. I don't know for sure if that's going to happen or not, but we should be prepared to be talking about big structural changes in how we tax, how we spend, how we insure against risk. I know you're in the middle of a very exciting conversation that you've kicked off and there's a lot of excitement there. It's kind of fun that every discussion I have, it's like, okay, well, at least your agenda can make a big difference and help there. But there's a lot of other things that those conversations aren't having, certainly at the level I think they need to be given the profound shifts that we're going to see in terms of jobs and the future of work. So I don't know. That's not proof. That's an observation. But it's something I've been saying since the Obama period, when Obama started having different ideas about changing the social contract and his budget. And they never really got the airtime and a lot of time it was sort of for fiscal reasons. And as someone who was worried about the fiscal reasons, I thought this is actually an example of why we should have addressed this so we could have these conversations.
- [50:26]
Nathan Hubbard
When you talk to people about a debt crisis, a debt crisis happening to a modern, rich country that controls its own currency, can you visualize or help people visualize what it is that we're talking about here? What does a debt crisis in a Western country look like? And is there an example that you can clearly point to some country around the world that that is currently or has recently experienced what you fear the US Will soon experience?
- [50:59]
Nora Princioti
Yes and no. So not only can I visualize it, I have gone to California twice now to try to convince some folks that they should do a Netflix documentary on the debt crisis. And believe it or not, I have not had any takers. But I do think that visualizing this actually really is important. And I slept under my dining room table when I saw the Morning after on the nuclear, Nuclear risks and all sorts of things. Like, I do think visualizing it's really important. I don't know if it would make a good movie because there are two different major ways that one could see this happening. The first is what I talked about a little bit, which is suddenly we have not just one, but we have multiple treasury auctions that don't go well and interest rates start to go up, and they go up fast. One third of our debt is short term, under a year. So sometimes people say, like, oh, inflation, you can inflate your way out of the debt. Not if one third of your debt is in one year or less, because that turnover is really fast. So we are not just issuing treasuries for the $2 trillion in deficits we're running every year. We're issuing 10 trillion of treasuries a year and just turnover. And so if we have a problematic auction a couple of them and suddenly rates bump up. So that is very quickly changing the interest payments, the amount that we are paying on our debt. And once there's a sensitivity, again, this is, this is like, think about financial or housing or bubbles. When bubbles pop, there are times when everybody knows that the fundamentals of something don't make sense. Fundamentals of the US don't make sense. We have $2 trillion in structural borrowing every year, not because of downturns, not because of problems. That's how much we're. We just don't raise that much. And it's growing. But so if that happens, if that happens abruptly, this can really unfold very quickly. And suddenly you have inflation and interest rates and you can't get out of it. And we had 9.1% inflation just a little while ago, and that was rough. And we saw that. What happens is if you get anchored where, if you keep assuming it will stay, things get worse very quickly. The scenario I think is more likely, though, is the one we've actually been in for years. And that scenario is. It's sort of what we just talked about, which I'm not sure I convinced you is happening, but our slow ruining of our budget. I mean, if you look at our budget and where our money goes $6 per senior on every one for people under 18 at the federal level, if you look at A budget as a reflection of values. And I don't know what different people's values are, but I would say there's a big value in national security on the new kinds of risks that are out there. Cyber. There's a huge value for me on investing in young people. I think they face an incredibly turbulent and dangerous time, like, let's make basic R and D and human capital absolutely as rich and robust as we can so that they are more prepared for what they face. But whatever your values are, if somebody looks at them and then they look at our federal budget, it's really hard to say that this reflects what somebody's values are. I can promise you we have a bunch of interactive tools. Talk about how you think the budget should be allocated and then go look how it is. You'll think like, well, this isn't right. A lot of that is because we've been stuck in these things for so long that we haven't been able to change up the budget and make the big shifts that I think we need to. And that's one of the big concerns that I have. As the interest continues to crowd out things, we will fight about tax cuts versus spending increases till we're blue in the face. There are very few of us as fiscal diehards who believe we should raise taxes and cut spending. But if you look at our fiscal situation, that is exactly what we should do. It's not fun, it's not politically popular. I wish we hadn't gotten to this point, but that's what we should do. But it is really hard to link the fact that it is going to be harder to do those things for all the borrowing in the past, because again, you don't know the counterfactual. We don't know what would have happened otherwise. But we are already in a place where one, if not both, hands are kind of tied when we're thinking about how to meet the moments, the opportunities and the risks. And then when you ask something, what have we seen in other countries? We've never had the reserve currency in a modern economy, in a globalized modern economy, we're the reserve currency. We have the exorbitant privilege. We seem to be doing our best to squander it, but we have had that. So it's been very different. But there's been an argument that I've always thought was sort of absurd, which is, don't worry, we print our own money. The places where this has happened is countries that borrow in other currencies, right? We're not Greece, we're not Argentina. But the fact is that just because you borrow in your own money doesn't mean that printing is a good solution. It's a terrible, terrible thing to do. And that will lead to strong high levels of inflation or you start to compromise the integrity of the Fed. The Fed starts to get itself stuck in a situation, especially if the Fed becomes over politicized and you are purchasing that debt and leading to very, very sluggish growth, like we've seen in say, Japan, where their debt is higher than ours, but they have to buy all that debt domestically. There is no robust, there is no credible path of borrowing towards prosperity to get you to prosperity at the level that we are currently at. It's something we could have contemplated when we had more fiscal freedom. Perhaps I wouldn't have advised it then.
- [56:25]
Nathan Hubbard
So, Maya, I want to suggest a visual metaphor that helps me make sense of the threat of debt accumulation in the US But I also want to draw out what I think might be a difference between me and some of the deficit hawks that I know you work with. I hear you making the argument that America is at times constrained by our deficit or shaped by our debt. But in many ways I see the bigger problem being that we aren't constrained by our debt and deficit at all, that Trump isn't thinking about the debt or deficit, Republicans aren't thinking about the debt or deficit. We're basically going to pass a bill that adds 3, 4, 5 trillion dollars to the debt and no one in the ruling party is essentially talking about it. That, to me, feels like we are unconstrained by the fact that debt is 100% of GDP, rather than a scenario in which rising debt is constraining the policy making process. So that's just a point that I want to hold out. And if you'd like to respond to it, that's great. One visual metaphor that occurs to me is that I think, it seems to me that rising debt isn't so much like an acute disease. It's not like a sudden guillotine falling down. It's more like an inflammatory disease. Right. The threat that you are raising seems to me to be a threat of America's debt grows, demand for American debt declines, therefore interest rises. And Americans simply have to live in a world where interest rates are painfully high for a long period of time. And maybe that's a world in which policymakers like Trump or maybe like the next Democrat won't feel particularly constrained by the debt. They'll simply say, okay, well, this is the Temperature of the water that we simply have to swim in interest rates at 4, 5, 6%. And it's just a world in which the future of the country has higher borrowing costs, higher capital costs, more expensive mortgages, more expensive car loans. And all these things are downstream of America's higher debt to GDP ratio. But there isn't like an inciting crisis. Does that prediction seem plausible to you that we're not actually heading for an acute crisis so much as we're heading into a new paradigm where interest rates are going to be high as demand for American debt shifts, as our debt to GDP ratio continues to grow?
- [58:59]
Nora Princioti
Okay, so let me answer your first question, your first comment too, which is we're not constrained enough versus we are constrained. And then that scenario, because that scenario is sort of what I was trying to describe and probably didn't do a clear enough job of it. One, I agree. The problem is that we're not constrained by the deficit or the debt enough. The problem is that we're not until we are. This is the double curse of being the reserve currency. It's like, it's just, it's. I have weird analogies in my head. I almost think it's like meritocracy where the people at the top think it's all because they were so great, but, right. Our interest rates stay really low and we're just like, look at this. Interest rates will be low forever. Nothing to worry about, keep on borrowing. But it's because we have the privilege of being the reserve currency and the safe haven. And the quickest way to lose that is to abuse that. And that's what we're doing. You get to be that because you have sound fiscal policies and a politically reliable government. Well, as the third downgrade should remind us, we are squandering that role in the world. People cannot think about, you know, get to diversifying away from the US Fast enough right now so we're not constrained politically or financially yet until we are. The other thing with that is we are painfully out of practice of being constrained. We think of ourselves as having an unlimited budget. And we did have people, people running around saying, don't worry, printing press, printing press. None of these things are helpful for the norms right now. We have a general sense of like, if something's really important, we shouldn't pay for it, which is completely backwards. If something's really important and there are a lot of really important things, we should pay for them. There are lots of things we should be doing, almost anything we want to do. If you want to cut taxes. If you want to extend tcja, you want to do no tax on tips, by all means, if there's a political desire to do that, and that's what people want, do it. But you have to offset it with spending cuts or base broadeners. If you want to do green new deals or build back betters or massive spending bills, do them. But you have to pay for them. The question isn't whether we can do these things or not. It's whether we should offset the costs or borrow and push on the future. And the only point I'm making, it's not about the size or shape of government. It's about the fact that if we want to do something, we need to offset those costs. In your scenario, which doesn't make a very good Netflix movie, I think you've missed the final chapter, which is inflation. That scenario doesn't go on without inflation kicking in. And so this is when suddenly a lot of things that people had and had saved for that entire situation becomes much more frightening when inflation can take off and you can't control it once it starts. So that's why that piece is so worrisome.
- [61:43]
Nathan Hubbard
You and I spoke a lot back in 2009, 2010, when folks around the Obama administration and in Congress were debating various deficit reduction bills. And the warning then was that if we don't do anything, the wolf will be at the door. And now it's 2025. And while it's possible, it's possible that the wolf is at the door, the wolf wasn't at the door in the 2010s.
- [62:05]
Eric Zwick
Right.
- [62:05]
Nathan Hubbard
10 year treasury rates mostly declined between 2010 and 2020. And I look at the 10 year treasury interest rate right now and it's still roughly about as high as it was last November. And I wonder, when you think about the last 15 years and when you think about your warnings about the debt, are you just frankly and sincerely surprised that the bond market hasn't proved you more right? Are you surprised that interest rates are as low as they are considering that American debt has basically been skyrocketing for a decade and a half? Yeah.
- [62:45]
Nora Princioti
So I was absolutely surprised that interest rates stayed so low. And do not think that it was the wrong thing to be worrying about fiscal policy then. So what I think was, I mean, there was a lot of factors that went into that, but I think the main factor that was certainly not on the minds of anybody I knew was just how much the central banks were going to buy. And the fact that not only Were we having quantitative easing? Quantitative easing was going on and on and on. And I was worried, what will quantitative tightening look like? Well, we're not really finding out because it doesn't really like there's a struggle there. Right. So the central bank has backed off from selling as many assets as the plan was to. Shedding those assets off of the balance sheet is not proving to be as easy. So nobody, I think, was predicting that the central bank would pull play the role that it did in keeping rates low. But the point I would make, Derek, is that that enabled us, that enabled us to borrow more. And I think you see this in the economy right now. We find ways to like enable people to keep borrowing more. Like whether it's their credit cards, like, I don't know. I mean, anybody out there who has a teenage son knows that the world of gambling for young men online is very like, here's tempt you, here's, you know, it's like it's not a high level article in foreign affairs saying don't worry, borrow more. It's a much more kind of devious way to get people to borrow more and gamble. But it's not that different. It all feels okay when there's no problem until there's a problem. And if we had not borrowed the additional and 10 trillion is not the right number, just who knows how much we would have borrowed. We borrowed much more because people said, don't worry, be happy, borrow. I don't think the situation that we are facing now would be nearly as bad. And what I want to reiterate is the past 10 years were pretty good years. There was a lot going on. There were not a lot of huge crises. The world has changed. It is riskier. And we know that the effects of technology, which are both going to be tremendously powerful and positive and have a dark underbelly which is going to be very costly. All of these things are creating huge moments where what you need is a fiscally flexible budget. We don't need the budget of 10 years or 25 years ago. We need a budget that's made for the current moment. And those interest payments and those promises to big intergenerational programs that are underfunded have us locked in in a way that our adversaries are delighted by our debt levels. Right. All you have to think about is somebody who is not wanting the best for the U.S. do they look at the U.S. fiscal situation, say there's no problem. I've never seen a problem. They can just print more. This is one of our big vulnerabilities on the global stage right now.
- [65:29]
Nathan Hubbard
Maya McGinnis, thank you very much.
- [65:31]
Nora Princioti
Thanks, Derek.
- [65:34]
Nathan Hubbard
Many thanks to Eric zwick and Maya McGinnis. My big takeaway here is again that Donald Trump won this election because enough working class Americans, enough low income Americans, disproportionately non white, shifted from the Democratic to the Republican column. And he is responding to that shift of working class voters by being on the verge of signing a tax cut that will overwhelmingly benefit Americans making more than $500,000. Americans that, as Wick said, are disproportionately likely to be millionaires who own small businesses across the country and benefit from regional monopolies. And we are offsetting those benefits by cutting support from Medicaid and food stamps. The Republican Party may very well be a modern working class coalition, but this is a very strange working class build. We'll talk to you later this week.
- [67:05]
Eric Zwick
Sam.