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- [00:00]
Santa Ruiz
Foreign Hi, I'm Santa Ruiz and this is a special episode of Statecraft. I've got a wonderful guest host on today.
- [00:11]
Kyla
Hey, I'm Kyla and I'm an author, the book called in this Economy and an economic commentator.
- [00:19]
Santa Ruiz
Kyla has joined me today for a couple reasons. One, I'm just a big fan of her newsletter, which is called Kyla's Newsletter on Substack about economics and it's also about a whole bunch of other things. She had a great piece recently on what we can learn from CS Lewis is the Screwtape Letters, for instance, which is a favorite book of mine. She's also on today because we're interviewing Wally Adeyemo, who was the Deputy Secretary of the treasury in the Biden administration. And we figured we each had questions we want answered.
- [00:45]
Kyla
Yeah, I've had the opportunity to interview Wally a couple of times during the Biden administration and I kind of just wanted to see where he thinks things are at now. Like he was key in implementing the inflation reduction act, financial sanctions, and a whole bunch of other things. And I just want to know, like, how he sees the world, especially as somebody on the other side of the fence.
- [01:07]
Santa Ruiz
Now, for my part, I'm really stuck on Wally's role in the IRS Direct File program. I was about to say it was a pilot program. It actually is a program currently where you can file your taxes for free directly through the IRS instead of paying TurboTax 100 odd bucks to do it. Good governance types, people who think about building and government tend to love the Direct File project. It's also under attack from this administration. Trump Admin is thinking of killing it. And I wanted to understand both how the program got rolled out, how Wally would respond to the criticisms of the program, and what he learned from building something in government which now may disappear.
- [01:43]
Kyla
Yeah, me too.
- [01:45]
Santa Ruiz
So, Kyla, you've, you've talked to Wally before and we'll link that episode in the show notes. How did that conversation go?
- [01:51]
Kyla
It was really interesting. I actually was able to go to his office in D.C. and I talked to a couple of key people in the Biden administration. Jared Bernstein, the former chair of the cea, and then Daniel Hornung, who is at the National Economic Council. And I think for me, like, it was just really interesting to understand where policy is being implemented. We're actually talking to Wally on the day that the House passed the one big beautiful bill.
- [02:17]
Santa Ruiz
Obbb.
- [02:18]
Kyla
Yeah, dig in. Beautiful. So I think for me, I'm just really curious how he thinks things are going and you know, there's so much happening financially too, with bonds, like the bond market is totally rebelling against the US Government right now. I think it's going to be a really interesting conversation in terms of understanding, you know, where this key player in the former administration thinks the current administration is.
- [02:43]
Santa Ruiz
Totally and the last thing I'll flag for listeners. You can find the transcript for this conversation and for many other Statecraft episodes at www.statecraft.pub and Kyla's newsletter is at Kyla K Y L A.substack.com let's get started. Wally Adeyemo Wally, thank you for joining us.
- [03:02]
Wally Adeyemo
It's great to be with you.
- [03:03]
Santa Ruiz
Let me kick us off, Wally. You've spent most of your career, I would say, in Democratic Party institutions. You served in the Kerry presidential campaign in 2004. You served in the Obama admin. You were the first chief of staff to the CFPB, president of the Obama foundation, and then deputy treasury secretary in the Biden administration. 30,000foot question how do you see the Democratic Party today?
- [03:23]
Wally Adeyemo
I think my view on the Democratic Party is that we continue to be the party that cares deeply about working class people, but we haven't done a good job of communicating that to people, especially when it comes to the things that matter most to them. From my standpoint, it's cost. Things in America cost too much for a working class family. When you think about working class, and I want to make sure I define this because I think we have to talk about definitions. I think about people who make under $100,000 a year, many of whom don't own a significant amount of stocks or don't own homes on the coast, which means they haven't seen the asset appreciation that's led to a great deal of wealth creation over the last several decades. And most people, when you define it that way, don't realize that represents 81% of Americans who sit in that category of people. And for them, despite the fact that they've seen their median incomes rise 5 to 10% over the last five years, they've seen the cost of the things they care about rise even faster. The cost of food, the cost of housing, the cost of health care, and if you're thinking about sending your child to college, those costs are going up faster as well. I think the challenge we've had is that we haven't had a clear cut agenda focused on standard of living, which I think is the thing that matters most to Americans today. And I think that's the debate that we're having now. What does a standard of living agenda look like going forward? Board that could address those concerns. But the truth is that we were at least having that conversation in the Democratic Party, which I think gives me hope. And the opposite's happening right now in the other party where they're working on a tax cut bill that will give tremendous breaks to those people who are above $100,000 and raise cost for Americans below that.
- [05:03]
Santa Ruiz
One of the issues you're flagging is a communication issue in the party. And I think we've heard a lot in the media recently about Dems trying to figure out how do we communicate better. But you also point to the lack of a robust agenda or at least holes in the agenda here. I'm curious, how do you think about implementation or what Wongs will call delivery in this context? Because there are folks who would say the problem for Dems wasn't that they couldn't communicate clearly or that they didn't have a governing agenda, but they couldn't execute their agenda the way they hoped to in the time available to them. From your vantage point at treasury, would you say there's truth to that claim?
- [05:35]
Wally Adeyemo
Yeah. And I think that you're right that most people talk about communications issue, but I don't think it's a communications issue. I really do think that to your point, there's two issues. One is an implementation issue and a second one is an actual substance and policy issues. At the Judge Department, I was the Deputy Secretary, but I was also the chief operating officer, which meant that I was in charge of execution. And the two most significant things that I had to execute on the domestic side were the American rescue plan, where the 1.9 trillion flowed through the Treasury Department. And the second one was the Inflation Reduction Act. And the challenge with execution in the government is that we don't spend a lot on our systems and on making execution as easy as possible. And I'll take for example, the Child Tax Credit, where we passed the advanced Child Tax Credit, which was intended to give people money to help with each one of their children during the pandemic. And what Congress called on us to do was to pay people on a monthly basis, a set amount, but the way they wanted to pay them was through the IRS system. And if you know anything about the irs, you pay your taxes mostly on an annual basis, which meant that most of our systems weren't set up to pay a monthly check to Americans. And it took us a great deal of work to figure out a way to recreate a system to just do that, partially because, as Kyla knows well, we've just underinvested in the systems that the IRS works on. I like to say this each time I talk about the irs, but the last time we made a significant investment in the IRS's digital infrastructure was the 1960s, before we had an ATM machine, before we sent a man to the moon, before we had a personal computer. So that meant that everything was coded in a language called Cobalt. So execution was quite hard when it came to the American rescue plan. It meant that certain people were left out and didn't feel that the government was working for them. The idea that if you called the IRS, only 13% of your calls were being answered, but when I got there was frustrating to most Americans and just showed them the government wasn't working. We, of course, got that back up to 85% before we left. But ultimately, I think part of this is an execution challenge. And the thing we often want to do in government is spend money coming up with new policies and new proposals. But we don't want to pay for execution and for the management of putting those things in place, which then means that when you get the policy passed, implementation isn't great. And I think we've got to focus, and I think Jen Palka talked about this when she was on your show. The idea that we've got to focus on what are the enablers to implementation. And I think one of the things we did in terms of direct file was one of the best examples of us taking implementation very seriously. But I also think that we had a set of policy challenges where on some of the policy issues that mattered most to Americans, we weren't advancing the types of strategies that would have helped them in terms of lowering the cost of housing and lowering the cost of medicine. We did some things there, but there's clearly more that we could have done, and there's more that we need to do going forward to demonstrate to them that we're fighting to bring down those costs. And it's everything from permitting reform and thinking about permitting reform not just at the federal level, but what can we do to incentivize it at the state and local level to thinking about what we can do on drug costs. Why does it cost so much more to get a medicine in America than in Canada is something that we can solve. We just chosen not to at the federal level. At the end of the year, we were going to take actions to go after some of the middlemen in the pharmacy industry that were taking out rents and large amounts of money. It dropped out of the bill because of the negotiations between the Republican Congress and then President Elect Trump. But there's a lot of things that we can do both on implementation, which will mean that Americans feel the programs that we're passing in a more effective way. But there's also policy solutions that we need to advance as a party that will help us as well.
- [09:07]
Kyla
Wally, I definitely want to get more into Direct Fall and kind of how you think of what has happened to it since you've worked so hard on it over the past couple of years. But I'm really curious this from a messaging perspective. You know, a lot of times people will say that Americans tend to vote against their own self interest. And so if you think about like this sort of 30,000 foot zoom out that we have on the Democratic Party right now, there's a lot of room for it to move forward and to change. How do you think we can message to people, you know, that these sorts of policies are really important and are really potentially good and life changing for them?
- [09:41]
Wally Adeyemo
I think that my view has always been to discount a bit of the this is a messaging thing because ultimately what I found is that most people just understand their self interest differently than we do. And for them, a big part of this was, even if I may not agree with them on everything, who's fighting for me on the issues that I care most about. From my standpoint, part of the problem we had with things like Direct File, which I think was an innovative solution, was that we got to implementing it so late in the administration, we didn't have the ability for it to show the impact. And one of the most important lessons that I learned, I think something that I'm hoping future administrations will think through is how do you start your implementation journey on things like Direct File sooner in the administration when you have a great deal of political capital so people can actually feel the impact over time. And the next piece of this which gets to your messaging challenge is that it's not just about the messaging, it's about the messenger. People tend to trust people who look like them, who come from the places they come from. And I learned this lesson when it came to child tax credit and also to Direct File, where the biggest innovation wasn't the technology. The technology for Direct File has been used by the Australians, the British, by other countries for decades. The biggest innovation was us joining that technology with trusted people and communities who are going out to talk to people about those programs and building those relationships was something that an agency like the IRS hadn't done a great deal of before we got there, but we invested a great deal in those community navigators who were helping us get people to trust the things the government was doing again, like the child tax credit, like direct File, so that they could use it. I think the thing that we often do is think that Washington is going to be able to give messages to the country that people are going to hear. I just think we're both in a more complicated media environment and also in a place where people are far more skeptical of things that come from people in Washington. So the best people to advocate for, celebrate the things that we're doing are people who are closer to the communities we're trying to reach and closer to people talking about. It's the same way that when you think about product advertising today, more and more companies are looking to influencers to advertise things rather than putting an ad on television, because people trust the people that they follow. And I think the same is true for the things that we do in government.
- [12:00]
Santa Ruiz
I've talked to folks who were in the last administration, colleagues of yours who will say things like, in the White House, we did not have a good enough sense of the shot clock for different reasons, and they'll point to Covid as an emergency, kind of took over in timing, different kind of bureaucratic reasons that the admin didn't do a good enough job of doing what you're talking about, prioritizing which things you start implementing from day one. From your perspective, I don't want to try to force you to criticize colleagues. I'm sure this was multifaceted. But do you think that's true, that across the administration there was a kind of missing sense of a shot clock or a missing sense of prioritization?
- [12:35]
Wally Adeyemo
No, because I'm a Lakers fan. These are professionals. We're professionals. This is not our first rodeo. We know how much time's on the shot clock. We played this game. The challenge was it wasn't just Covid. You had Covid and then for me at the Treasury Department, and I think this is the coolest part of being Deputy Secretary of Treasury is you have responsibilities domestic and international. As I'm trying to modernize the irs, invest all my time in making the system work better for customers and also for us to collect more taxes of the people who owe money. Russia invades Ukraine and I have to turn a bunch of my attention to thinking about what are we going to do there? Then you have Hamas attacking Israel. So part of this was I think the idea that there was more we should have done on the domestic end, but we have to remember that part of the presidency is you get to do the things you want to do, but you also have to do the things you have to do. And we had a lot of things we had to do that we weren't planning for. That required whole of the administration responses. I think the most important lesson that I've learned about that is that it comes down to both being focused on not a bunch of things in terms of implementation agenda and execution agenda, but on focusing on the things that matter and being willing to communicate to the American people why your priorities have to change in light of the things that happen in the world. But for the people who I'm sure you've talked to, most of them work on domestic policy alone, and they probably never have been in a National Security Council meeting where you're thinking about the risks to the country and the President has to do both of those things. So I get how difficult it is to do that. Just given where I sat at the Treasury Department.
- [14:05]
Santa Ruiz
Are there things you would have done differently, looking back from an implementation perspective during your time at Treasury?
- [14:11]
Wally Adeyemo
I think the most important thing that I would have done differently was to immediately set up a permanent implementation and delivery unit in the Treasury Department. We always like to pretend like the Treasury Department is just a policy department where we make policy, we collect taxes. But in any crisis the country ever has a great deal of responsibility for execution, implementation of whatever the response is falls the treasury requirement. Think about the financial crisis, which is clearly something that's in the treasury domain. But you think about COVID The vast majority of the money for Covid flowed through the Treasury Department. Think about the ira, what you think is a climate bill. The vast majority of that money flows through the Treasury Department. And treasury doesn't have a dedicated staff that's just focused on implementation. How do we do this? Well, how do we make sure the right people are served? How do we make sure that we communicate this well? So I think the thing I would have done, and we did this to a degree by building a team that was focused on the American rescue plan, but it was only focused on the American rescue plan. If I'd started again, I would have said, oh, I want a permanent implementation structure within the Treasury Department of people who are cross cutting, who only think about how do we execute the policies that we pass through Congress, that we put together through an executive order. How do we do that? Extremely well.
- [15:25]
Kyla
What's really interesting to Me about what you're talking about is it's very people centric, right? How do we get an implementation team, and how do we make sure that the right people are doing the right jobs? Now we have doge, which is maybe pulling back, or is definitely pulling back aspects of people. So how do. How do you reconcile, like, what DOGE is, is doing relative to what you would have done differently in this role that you had?
- [15:46]
Wally Adeyemo
As you would suspect, I wasn't excited about the fact that we'd lost the election, but initially I thought DOGE could be helpful in terms of helping with technology, because I think marrying technology with people, it's the key to success, I think, for the government. And we've never really been great at doing technology in government. And part of the reason for that is a procurement process that is very, very slow because of the way the federal acquisition rules work. What we're trying to do is prevent corruption and also waste, fraud and abuse. But what that does is it leads to slowness in terms of our ability to get the technology on board that we need and then getting the right people. I was hoping that what Doge would do was bring in people who knew a great deal about technology and put us in a position where we could use that to build better products for the American people. I thought they would love Direct File and they would find ways to improve Direct File and expand it to more American Americans. My view is that any American who is in the working class or middle class should not have to pay a company to file their taxes. We have the ability in this country, and I think Direct File was proving that. And my goal, if we had more time, was to expand this to almost any American being able to use it. And I thought they'd be able to accelerate that by bringing in the right people, but also the right technology. And we were on that path before they took those two things apart. My sense is that you've got to reform the way that we hire people in the government because it's too hard to hire the right people. And in some cases, you don't need some of the people you have today, because technology is going to put you in a place where you need different talent to do different things. But it's easier to break something I found than it is to build something. I think that's what they're finding today as well as they do the work that DOGE has been tasked with.
- [17:30]
Santa Ruiz
When I talk to folks about the DOGE push, if they're more left of center, they tend to be more skeptical about the idea that that AI or modern technology can replace some of the existing federal workers. And I think some of that is a kind of natural backlash to the kind of extreme partisan coding of doge. Right. They're firing a lot of people very quickly. What's your view? I'm curious, maybe if you can drill down a little bit 10 years from now, let's say, you know, go past, you know, the, the end of Doge. What kinds of roles that are currently served filled by humans in the federal government would you like to see automated?
- [17:59]
Wally Adeyemo
So let me say I disagree with that view that like a DOGE and technology can't replace some of the things that federal workers do today. But my view is that productivity enhancing, it's not just that it's going to make the employees who are currently doing the job more productive. It's going to mean you're going to need fewer employees. We have to be honest about that. Let me go to treasury, for example, a place I know well in the irs. When I got there, we had a huge paper backlog at the irs because despite most people think, millions of people still file their taxes by paper and they send them to the irs. And during the pandemic, the commissioner who was then working President Trump, decided to shut down the IRS for, for public health reasons, to make sure that employees didn't have to risk getting Covid. What that meant was that there was just piles and piles of paper backing up. So much so that they had filled cafeterias at the IRS facilities with just huge piles of paper. And the problem, of course, was unlike modern systems, you couldn't just machine read those papers and put them into our system. Much of that required humans to take those papers, to code them into the system by hand. There's no need in the 21st century for that to happen. So one of the things that we started to do was introduce this simple thing called scanning, where you would scan the papers. And I know it sounds like a novel idea, put it in the system through scanning, and then you'd be able to machine read it. It would both help you get people's tax returns faster into the system, but also get checks out quickly, but also allow us to see if people are underpaying their taxes where other schemes are going on, because we could use that data with a modern system, but over time, what would that mean? We'd need fewer people to enter the data from those forms. When we get money for the IRS from Congress, it actually is seen as revenue raising because they see it as being In a position where it's going to bring down the debt and deficit, which is completely true. But the model they use to do that is reliant on the number of FTEs we hire. So one of the challenges we have with the irs, and I think it's in government systems in general, is that you don't get credit for technology investments in terms of the way they improve your return on investment. So whenever we did the ROI calculations for the irs, when it came to Congressional Budget Office, calculating how much revenue we'd bring in the Office of Management and Budget, it was always based on the number of people you had doing enforcement work would lead to certain dollars coming in. So we got no credit for the technology investments, which was absolutely the opposite of what we knew would be true. The more you invested in technology, the more likely you were to bring in more revenue and he be able to cut the cost of employees. So I think part of this is just that the way the models were built in the 20th century and weren't built in the 21st century in a way that would make sense.
- [20:42]
Santa Ruiz
Is that just real quick, is that a Congressional Budget Office or a CBO issue? Is it just that if the CBO changed the way it scored it, you think more Congress people would be interested in funding technology?
- [20:53]
Wally Adeyemo
Yeah, it is just a CBO issue, and it's one we've tried to talk to them about over the last several years, but just one where they've been unwilling to move. But my view is that unlocking this will unlock greater investment in technology in a place like the irs, because every dollar you invest in technology, I think would earn back $10 in terms of additional tax revenue that we'd be able to collect from people who are skipping out on paying their taxes a day. And it's far more valuable to invest in that technology than just to grow the number of employees who are working in enforcement in the irs. You need both. But you can't say that a person is worth revenues of $5 and technology is worth zero. That makes no sense.
- [21:36]
Kyla
So with regards to Direct File and like the technology that was created there, when we spoke about it many months ago, the people in my comment section were super excited. Like, they were like, I can't wait for this to happen. You know, I just want the government to tell me how much money I owe. And so, like, when you think about the implementation of Direct File. Right. And what do you think about how it's sort of evolved since then?
- [22:01]
Wally Adeyemo
Yeah, and I think the thing that went right was we proved that we could build something that people could use that was quite easy. And unlike many technology projects in government, we built this ourself. We didn't go out and hire a bunch of consultants and contractors to do it. We did it with people at the IRS, but also people from 18F and from GSA who worked in the government. And we did it in partnership with a number of stakeholders outside the government who give us advice. But the build was done by us. And the reason that was important, and the reason it's important to build more things internally in government, rather than hiring consulting firms or other people to build it, is that you then have the intellectual capital from building that can be used to build other things. So this was one product. But my view was that if you think about the IRS, and you think about the IRS homepage in the same way you think about, I'd want it to one day look a lot more like the screen on your iPhone than anything else. So that you, depending on what your issue is, you can click on the app on the IRS homepage that can help you if it's Direct File that you need, if it's a tax transcript. And by building that know how internally, we were getting closer to that. So from the technology building piece, I felt really good about the fact that the team was able to do something like this. And the user scores on the effectiveness of the tool and the ability to use it were through the roof. Even for a private inspector company, it would have been seen as a great success. In the first year, we launched what I would call late in the filing season, mostly just to test the product to see if it worked and how well it worked, but also to build stakeholder support for it. And then in a limited release, 140,000 people used it. And the average person said that before Direct File, it took them about 13 hours to file their taxes. And with Direct File, it took them just over an hour to file their taxes, which is remarkable just in terms of time. But the other thing you have to think about is how much money the average American spends about $200 filing their taxes. That's $200 for that family making under $100,000 that they could invest in their kids in paying some bills rather than in filing their taxes on a regular basis. So from the standpoint of the technology build, it was, I think, an impressive show from our. For our ability to do something internally and to learn from it from the standpoint of user experience, we got great and excellent scores year with no advertising by the Trump administration. Of Direct File, we had more than 300,000 people use it, and the user scores were also really above 85% in terms of the product. The challenge, of course, is that instead of DOGE investing in improving the product, which I thought was a place where you could have seen real intellectual capital go to work and make something that worked for all Americans, they've decided to discontinue Direct File. And the sad part is that when you think about where we are as a country, this is a tool that could both save people money and save people time, improve our ability to collect taxes, and something that exists in almost every other major developed economy. So it makes no sense to me why you would end something like this rather than continue to develop it.
- [25:08]
Santa Ruiz
Wally One of the reasons directfile is rolled out in phases, because people had a memory of the failure of healthcare.gov, which was rolled out all at once. They opened the portal to everybody in the country and the website crashed. It was kind of an embarrassing episode for then the Obama administration. And if you talk to folks like Jen Palka or people who are interested in building software and government, they'll cite this example a lot. This is where we learned, okay, we have to pilot things and roll them out in phases. Does that instinct to test things slowly, to roll them out, to sell out group of users and then to add group users on top in following cycles? Does that instinct cut against the. Is there a tension there between that and trying to implement quickly so that people see the benefit of the work you're doing? What's the tension there?
- [25:50]
Wally Adeyemo
It's a great question. And one of my bosses in the Obama administration was Jeff Zients, the person who was brought in to helpdarek.gov and I'd say literally beat into me was this relentless focus on execution. He always made the point that it's easy to come up with a strategy to some degree. You can figure out what the policy solution is, but the difference between good and great is how you execute against it. And from my standpoint, I think there is some tension there, but not as much as you would think, because once we were able to show that the pilot was a success, I got invited to states in the country like Maryland and all over the country to roll out that they were joining Direct File the next year. So these members of Congress, these governors, these treasurers, they wanted to do Direct File events telling their people in their state, this product that's worked so well elsewhere is coming to us next. So it gave us the ability to celebrate the Success. And I also learned the lesson not just from Jeff, but also from then Professor Elizabeth Warren, who I worked for as her chief of staff at the cfpb. And one of the challenges we had at the CFPB was we had to build at that point mostly a phone operated complaint hotline for people who were suffering. I know it's crazy to think that it was by phone. I am that old old to complain about consumer financial product issues. And when we talked to the team, they said it would take us at least a year to build out all the product functions we need. It's going to take forever to be able to put the system in place. We're going to have to test it. We're not going to be able to do anything. And what we decided to do was to take a modular approach and say how long would it take for us to build the system for one product? Let's try that first and see how that works. We'll do it a test, we'll do it slowly. But we did that. It was a success. And what we did was we were able to use that and tell the story of that to talk about the CFP BE and what it would do not just for mortgages but for all these other products. And we built user interest in the complaint hotline in a way that we wouldn't have been able to if we'd waited to build the whole thing at once. So while I think you're right that there is some tension between getting everyone to feel it right away and piloting it, if the pilot is successful and you have the right messaging around the pilot, it also gives you the opportunity to go out and resell this thing to the people who hadn't been able to participate in the pilot. And so say here's what people who did the pilot are saying about this product. I remember one of the people being in Texas who was willing to do a direct to camera and just talk about the ways that direct file was so easy for them to use. And it gets back to my point on message and Messenger. Meanwhile, Adeyama, the Deputy Secretary of Treasury telling you that this thing the government did is great is one thing, but an American who looks like you, who's a nurse, who's a mom of two kids telling you that this product actually worked for her, that's something that more people identify with potentially. So I think there's a way to do both to Test and maybe healthcare.gov taught us the lesson of piloting and doing things in the macho way. This is what companies have been doing for decades. So if it's worked for them, I think it can work for the government too.
- [28:42]
Santa Ruiz
Kyla, do you want to pivot? I've got more questions on Direct File, but I know we have a hard stop, so we can.
- [28:47]
Kyla
I really want you to ask this question about Estonia. Yeah.
- [28:50]
Santa Ruiz
Okay. Wow. Estonia Nerd here. Okay, well, to preface, I'm a big fan of the Direct File concept. I like it. I would like the admin not to kill it.
- [28:59]
Kyla
Me too.
- [28:59]
Santa Ruiz
But I was looking through some of the criticisms that Direct File got, and some of them, I think were more on base than others. I mean, there's criticism about it rivaling the IRS Free File program, which was a kind of a partnership with nonprofits to, to help certain folks file the taxes for free. And then there's this kind of broader philosophical criticism that I think was pretty interesting. Just the, the incentives are all wrong, that I don't want the federal government telling me how, what taxes I owe. The government's not incentivized to tell me the truth and, you know, not to squeeze every dollar out of me they can. I'm curious what you make of, of that in part because I just recorded conversation with somebody. It'll probably come out after this one. But an American who worked on building e government systems for the Estonian government and one of the things that has allowed Estonia to build out like a really kind of cutting edge set of digital systems for the government, it's just, it's a small and very high trust society. Everybody's one degree of separation from everybody else. You play sports with a kid of your legislator, you know, et cetera. And for better or worse, we don't, we don't have that kind of high trust society. And we're much more diverse and much bigger society. How much do you think that affects, affects federal government's ability to build tools like Direct File?
- [30:02]
Wally Adeyemo
I think it affects it a lot. And it gets back to my point. And I think the point I keep coming back to about not just the message, but the messenger. I saw this during not just Direct File, but also the Advanced Child Tax Credit. So it was intended to help kids who are living in poverty, but families overall. But what we found initially in the data was for families that didn't have to file taxes because they made too little. Many of them were unwilling to take advantage of the Advanced Child Tax Credit because they couldn't believe the government was doing something to just help them and that in some way this would reverberate. So something That I did was engage with unlikely partners for a deputy secretary to try and get messages to them. I spent a lot of time with priests, pastors and other community leaders in many of the communities where people were under filing to try and get them on Sunday, on Saturday, whenever, in their houses of worship, in their community centers, to talk about this program and why it was something that they should apply for. So I do think that one of the challenges we suffer from right now in America overall is a lack of trust in institutions. Not just government institutions, but institutions in general. And my view on this, especially now that I'm out of government, is that you've got to really go local to try and rebuild that trust. And that also speaks to why taking pilot approach and an approach that goes slower in some cases makes sense. So, for example, I think some of the criticism we got was, why don't you just fill out this form for us, then just send it to us so that Direct File is just me pressing a button so I can pay my taxes. Part of the challenge for us in doing that is a technology challenge in terms of we're not there technologically. In terms of. As I explained, our system was built before the ATM machine. But the other problem I think is a trust problem. If I were to just fill out your taxes for you and send them to you, people I think at this stage would not only distrust the government, distrust the technology, Direct File had to be on a journey with people in terms of showing people that if I put in this information, it accurately sends me back my check. And as people develop more trust, we can also add more features to it that I think people will trust. But the key has got to be how do you earn that trust over time? And we can't expect that if we put out a product that looks like something that the Estonian government would put out, or that Australia even will put out at this point, that people would trust it. So my view is that part of this is that we've got to realize that we are on a journey to regain the trust of the American people. The government can and will work for them. And Direct File was a part of of that. And I think we started to demonstrate that with that product, because the people, again, who used it, who were in these communities, became the spokespeople for it in a better way than I ever could be, than the secretary could be, than the president could be, because they were people who live in your community. And the same was true of just the IRS in general, where everyone knows that they need to pay their taxes because it's part of their responsibility living in this country. The things that make people the most upset about that is the fact that there are people who don't pay their taxes. And we committed that we were going to go out them. And the second part was like, why do you make it so hard for me to pay my taxes? Why can't I get through to you on the phone line? Why do I have to pay somebody else to do my taxes? And our goal was to solve those two problems by investing money and going after the people who just decided they weren't going to pay, but also making it as easy as possible for you to pay your taxes and to, for most people, get that tax refund as quickly as possible. But doing that was about going on a journey with people, about regaining their trust in an institution that mattered to them a great deal, because 90 something percent of the money that funds our government comes in through the irs.
- [33:33]
Kyla
So, Wally, you have a piece out in Foreign affairs called Make Moscow Pay. And what I found most interesting about that piece is you were essentially like, hey, Europe, you have to step it up because the United States won't. So could you talk through, you know, the role of the treasury in financial sanctions, number one, and then number two, what was the, the reason behind writing this piece beyond the fact that it needed to be written?
- [34:01]
Wally Adeyemo
Yeah, and I think the reality is that people often think about the Treasury Department as doing a few things. One is working with Wall street, another one is collecting your taxes. And for most people, they don't think about the fact that Treasury Department is a major part of the national security community because we have these tools called financial sanctions. And what they do is they use the power of the dollar to try and change the behavior of foreign actors taking steps that aren't consistent with our national security interest. So a great example of this is what we did with regard to Russia saying that we're going to cut off Russian banks from the US financial system, which means that you can't transact in US dollars. The problem for any bank that can transact in dollars is that the backbone of most of the financial system throughout the world is built on the US dollar. It increases their cost, it makes it more difficult for them to transact, it makes it harder for them to be part of the global economy to nearly impossible. And that's what we' lots of cases when it comes to Russia, we have financial sanctions programs that touch all over the world. The situation in Venezuela to Afghanistan, the US government, since basically the terrorist attacks on 911 have used sanctions as one of their primary tools of impacting foreign policy, some of which I think has gone well, some of which I think hasn't gone as well. And I think that there's a need for us to think through how we use those policies. Policies.
- [35:26]
Santa Ruiz
When you say that sanctions have a mixed track record as a tool of American foreign policy, I'm curious, what makes sanctions an effective tool, in what context? Positions on sanctions don't line up neatly across the partisan line. You'll have Republicans who will say sanctions have failed in some places. You'll have Democrats say sanctions have really been an effective tool and vice versa. And it's not been a kind of consistent partisan divide over at least my political experience.
- [35:50]
Wally Adeyemo
Yeah, I think the way I. I think the way I think about sanctions is they are intended to bring about behavior change. And the only way that they work is if they're part of a overarching foreign policy strategy. And the type of behavior change, for example, was what we saw when Iran came to the table and wanted to negotiate a way to reduce sanctions in exchange for limits on their nuclear program. That's the type of behavior change you're trying to accomplish with sanctions. But you can't do it with sanctions alone. You need a foreign policy strategy. So we didn't do it by the United States in confronting Iran, but we got our allies and partners to work together with us. And when I came into office in 2021, Secretary Yellen asked me to do a review of our sanctions policies. What's worked, what hasn't, because it was 20 years since the 911 attacks to try and figure out where we go from there. And the most important lesson I learned was that the sanctions programs that were the most effective were the ones did on a multilateral basis. So we did it with our friends and allies. And part of the reason for this is that while the dollar is the most dominant currency around the world, oftentimes if you can't do something in dollars, you do it in a euro, or you do it in the Japanese yen, or you do it in a pound sterling. The benefit we have of having our allies all over the world is that the dominant convertible currencies in the world are controlled by our allies and partners. So when we acted together with them, we were more effective in curtailing the economic activ our adversary, and we're putting pressure on them that would be more likely to lead to them changing their behavior. The other thing that we focused on was the idea that we had to be Very cautious about collateral damage. So you might be targeting an individual, but by targeting that individual, you might make it harder for a company they're affiliated with to continue to do business or for a country that they're in to get access to banking services. Because let's say that you're a huge bank in America and you're worried about sanctions risk in a small country where you do little business, why not pull out rather than having to deal with the fact that you had to put in place a huge compliance program? One of the challenges that we have is that the people who make the decisions about whether to extend sanctions, and oftentimes from Treasuries around the table, don't necessarily spend a lot of time thinking about some of these economic consequences of the sanctions approach. I know that whenever I was around the table and we were making a decision about using weapons, there was a process that was very elaborate that ended up with something going to the President. And you'd often think about kinetic force very seriously because you were going to have to get the President to make a decision. We didn't always take that kind of rigor when it came to thinking about using our sanctions policy, but the impact on the lives of people in these countries was just as significant in terms of their access to not only money, but to food and to the resources they needed to live.
- [38:39]
Santa Ruiz
What do you make of the effectiveness of the initial sanctions on Russia after the invasion of Ukraine? I've heard mixed reviews from folks in the administration and Russia outside.
- [38:50]
Wally Adeyemo
So I do think that sanctions, again, to my point, is only a tool. They've got to be part of a larger strategy. And I think those sanctions were quite effective. I think the saving grace for the Russians has been the fact that China has largely been able and willing to give them access to the things they need to continue to perpetuate their war of choice in Ukraine. But when you think about Russia's economy today versus Russia's economy before the sanctions were put in place, it's vastly different. Inflation in Russia still runs far higher than inflation anywhere else in the world. If you were to be a Russian citizen, you would feel the economic impacts of sanctions. The challenge, of course, is that it hasn't changed Vladimir Putin's behavior or the behavior of the Kremlin, largely because they've had access to the goods and supplies they need from China, from Iran, and from North Korea. But over time, it is meaning that Russia's economy is becoming less competitive, they have less access to resources, and they're going to struggle. I think everyone hoped that sanctions would immediately change the calculus of the Kremlin, but we've never seen that to be the case. When sanctions are effective, they take time because the economic consequences continue to compound over time. And they've got to be part of a larger strategy for isolating the behavior of the individual. And that's why to Kyla's initial question, I wrote the article because while the Kremlin and Russia is under pressure, their view is that ultimately the west is going to become tired of supporting Ukraine financially, politically, because the economic consequences for us, while not as significant as Moscow or for Kyiv, have been quite significant. When you think about the cost, the cost of living issues it's raised in Europe. That's why getting Russia to pay for the support of Kyiv at this point is important. Even if it's the money doesn't flow today. The idea that the Kremlin knows that Europe is going to use this money will change their calculus in terms of recognizing that the west is not going to stop providing financial support to Ukraine in the near term. Writing the article now at a moment where it appears that Russia is stalling on negotiations I think is important because ultimately the US's financial support is waning. We just know that the Trump administration is not willing to put more money into Ukraine. So Europe is going to have to do more at a time when their economic situation is quite complicated as well. They've got to invest, invest more in Europe. They've got a lot to do in terms of building their economy and building up their military industrialized base. And asking them to also increase their support for Ukraine at the same time is going to be quite difficult. So using this money that Russia owes to Ukraine because they owe them compensation at this moment can be quite influential in helping support the Ukrainians, but also changing Russia's calculus with regard to the ability of Ukraine to sustain itself when.
- [41:41]
Kyla
We think about the U.S. domestically. You were on CNBC about a month ago and you said that if we ever have a recession over the next couple of months or in the next year or so, it would be a self inflicted one. Everything is changing so rapidly all the time. So do you still resonate with that idea that like if we have a recession it would be because we did it to ourselves?
- [42:04]
Wally Adeyemo
Yeah. And to build out on the point I was making there, the economy has done quite well over the course of the first few months of the year, largely because of the strength of the consumer, where our balance sheets are still quite strong, and because companies in America have done well the biggest headwind the US Economy faces has been self inflicted by the tariffs the President has put on. Part of what I still do is talk to CEOs of companies, big and small. Small businesses feel the impact of this even more than the big businesses. What they tell me is that it's not just the tariffs and the fact that they are making it more expensive for them to get the goods that they need, but it's the uncertainty created by the off again, on again nature of those tariffs that makes it impossible for them to plan for what supplies they're going to get the next quarter, how they're going to fulfill their orders, what employees they're going to need. And it's having a real impact in terms of the performance of these companies, but their ability to also hire people and to plan for the future. And if you're, if you go to the grocery store, if you go to the store, you're going to start seeing and you're starting to see already price increases. And the thing that Americans care most about is to get to where we started is the cost of living is just too high. And you're the, at the grocery store, as you're shopping for your kids for the summer, you're going to see costs go up because of a self imposed tax we've put in place. So I still do think that if we do find ourselves in a recession, it's going to be because of the tariffs we put in place. But even if you don't go into what is a technical recession, I do think that it's what we're seeing now is that those tariffs are going to raise the cost for people when they go out to buy things. And it's going to raise the cost of building homes which is going to make it harder for people to get houses, which is ultimately going to have impact on the economy. Isn't what I think the President or anyone wants at this point.
- [43:55]
Kyla
Wally, is there anything that you want to be asked about that we haven't asked you about?
- [43:59]
Wally Adeyemo
I think the place where we continue as a country to struggle school is that given the federalist system we have, many of these problems aren't just in Washington, they're in state and local governments as well. And one that I know we've talked about is housing. When you think about the challenges to building more housing in this country, you can't just solve it by doing things at the federal government. You've got to get state and local governments unified in taking a proactive approach there. So from my standpoint, Part of this has got to be not just a financial one from the federal government, not just a regulatory one from the federal government, but we've got to do more things that force state and local governments to get out of the way of people being able to build more housing. Our biggest constraint right now is supply. So that's a place where I think that the conversations that you've had on your show, but the conversations we're having, government need to move past our regular policy conversations of should we do more on lihtc, should we try and fix nepa? Those to me, are table stakes. And we're in the middle of what I'd say is a generational crisis when it comes to housing. And we have to be willing to treat it like a crisis crisis, rather than what I think we've done so far, which is take incremental steps at different levels to try and solve this. Until we deal with housing, all the cost of living issues that we are talking about cannot be solved because it's the biggest part of anyone's wallet. So it's a place where I think not Democrats, not Republicans, but Americans need to be focused on what we can do from a policy standpoint. So that's one thing that I wanted to make sure that I said, because I think it's the most important thing that we can do at the moment.
- [45:33]
Kyla
Absolutely, yeah. The treasury during your time was doing so much with zoning reform, with, you know, some elements of financial incentives. And what I really liked about our conversation then was you talked about, like, how important it is that workers can live close to work. This is not just about, you know, the financial aspect of honing a home. It's like about living life, like making sure you can go to your kids, you know, little league game. So are you optimistic that we're going to be able to address the problem or are you kind of like we're, you know, sinking into quick sand?
- [46:03]
Wally Adeyemo
I take a little bit of both. And the thing that I'm doing now is getting hyperlocal. So one of the projects I'm working on in my post administration life is I'm working with 15 churches in D.C. where they have vacant land and what they want to use that vacant land to do is build affordable housing and trying to get that done as quickly as possible. And I think the thing that I'm learning from that is that even when you have the land donated, donated for free, and you're willing to work as quickly as possible, it's still quite hard because you have regulation and you have financial issues that get in the way often of building things. So from my standpoint, part of what we have to do now is just launch as many natural experiments as possible to see what works. And what I've learned already from this lived experience is that even cities that are trying to get out of the way and make it easier to build higher housing struggle because of what you all know to be true, which is the local politics of this is quite complicated. And oftentimes the way that you get them to get over the line is by creating incentives or disincentives. In the past, I think I talked a lot about incentives in terms of giving people money to do things. I'm now in favor of not giving people money who don't do things. If you don't take steps to fix your zoning, some of the federal money that you get on a regular basis is not going to come to your drip jurisdiction. I'm going to reallocate that money to places that are doing this activity. I think we've got to get to a place where you're taking those type of radical steps. It's kind of what we did with the emergency rental assistance program, where if you didn't spend your money, we could take your money back and then reallocate to people who are giving away emergency rental assistance money. That motivates people a lot when they feel like something's going to be taken away from them rather than they're going to just get something on top of it. I'm of the view that we've got to find more radical things that we can do to get housing built, because if we don't, we're going to end up in a place where we're just going to continue to see cost rise faster than people's incomes.
- [47:59]
Santa Ruiz
Wally, I have to ask after that last point you made, did you read the paper by my colleague Chris Elmendorf on using LI Tech funds and reallocating them away from big expensive cities into other places in the state if they don't commit to basic zoning reforms. You guys sound very similar on this point.
- [48:16]
Wally Adeyemo
I completely agree with him. And I think I would go even further than just lihtec money. I would do none housing money as well to reallocate, because from my standpoint, if you think about the most important issue for a family, for a person, it's being able to find housing that is affordable near their place of work and where their kids go to school. I said that on purpose. I didn't say affordable housing. I said housing that is Affordable, because affordable housing is in lots of ways targeted towards a population of people who need it the most. But for even people who are middle income in this country, the idea that your housing costs continue to creep higher is crowding out your ability to pay for other things. The only way we solve that problem is if you get rid of restrictive zoning covenants, you fix permitting reform. The natural thing that every city and state are thinking about right now is throwing more money at the problem. And there's going to need to be money here just in light of some of the headwinds, but it's going to be more costly and less effective if we don't fix the underlying issues that are making it hard to build housing where we want it. Right now in California, we're having huge debate over what do we do in terms of infill housing in urban areas. For example, example, a simple solution of like you don't have to do another environmental review if one was already done in this area, is taking months to work through the California legislature, which just demonstrates that we're going too slow. California is seeing an exodus of people because I just talked to the CEO who said that I'm moving my business because the people who work for me can't afford to live in California anymore. And this is the kind of problem that you can solve. And I think that state legislatures, Congress, executives, we've got to get together and take some rest medical steps to make it easier to build housing. I appreciate what you said about what we're doing at Treasury, Kyla, but from my standpoint, this is one of those places where I wish we had done more earlier to focus on this issue. We had a lot going on. But fundamentally the most important thing on housing is that taking a step to try and build housing today is going to have an impact on the economy 10, 20, 30 years from now. But we've just got to start doing that as soon as possible.
- [50:17]
Santa Ruiz
Wally, this is music to my ears and I have a feeling it's music to Kyla's as well.
- [50:21]
Kyla
Oh yeah, definitely.
- [50:23]
Santa Ruiz
Wally and Kyla, it's been a real pleasure to talk to both of you. We should do this again sometime.
- [50:28]
Wally Adeyemo
Well, thank you for what you guys do. I think this is a great show because every time I listen to it, I learn something and I can't say that's true of many things that I do in life. So I appreciate you taking the time to have serious conversations about things that matter and allow the rest of us to listen in on them.
- [50:42]
Santa Ruiz
Well, thank you for joining. And Kyla, thanks for making this happen. Sam.