Noah Smith (4:58)

Hey, thanks for having me on. Wait, was I on before?

Isaac Saul (5:02)

Yeah, you came ON Once in 2021, I interviewed you. I mean, it wasn't really the pod, it wasn't the podcast. It was more. We did a transcribed interview for the newsletter, which I'm actually gonna start there. So I did this piece in 2021, it's been four years now, where I interviewed you and Jessica Riedel, both separately, about the debt and the deficit. And I basically asked you each this fundamental question, like, does it really matter? And I was trying to get these competing views from more conservative, I think, fair to say, leaning economists and more, maybe left of center leaning economists about where we were, what the risks were, et cetera. It was a very nuanced conversation. I'm not going to generalize everything, but I think your general sentiment was like, there's not a ton to worry about right now, but we'll have plenty of warning signs if things are getting bad. And in March, just as Republicans were beginning to roll out their tax and spending plans that we just saw pass in the reconciliation process, you wrote a piece titled It's Time to Start Panicking about the national debt. I'm a longtime reader of yours, big fan of your work. It struck me as a very different tone than you've taken on this issue in the past. So tell me about what's happened in the last few years and what you're seeing now that's sort of prompting this worry and concern for you, like, what are some of the big red flags you're seeing?

Noah Smith (6:28)

So, I mean, obviously interest rates and inflation, that's what's changed. If you look at 20, 21, you were seeing inflation start to go up in 21, but then you didn't. It could have been transitory, persistent inflation leads to rise in interest rates one way or another, because, so inflation, if you don't, if you don't do anything about it, if you don't raise real interest rates at the monetary policy level, if the Fed doesn't raise real interest rates to quell inflation, inflation pushes up nominal interest rates because you have to lend at rates that incorporate the expected rate of inflation so that you don't lose much money. So either way, interest rates are going to go up, nominal trades are going to go up, and that means that the number of dollars that you're government is on the hook for is going to go up because you're going to have to roll over this debt. The government has all this debt and then they have to roll it over. The debt doesn't last forever. It matures. And then as it matures, you've got to roll it over. You got to reborrow or pay it off permanently, but nobody does that. You roll it over. You understand that, right?

Isaac Saul (7:41)

Yeah.

Noah Smith (7:42)

Okay. So basically, when interest rates rise, government interest payments don't immediately rise, but they rise after a while. And so we're in that moment. And so we can see interest payments as a percentage of gdp, as a percentage of federal tax revenues, as a percentage of federal expenditures, whatever you want to call it, we see these interest payments, government interest payments rocketing up. Now what can we do about that? Well, the obvious thing to do and what Trump wants to do is cut interest rates, force the Fed to lower interest rates. Right. What happens if you just keep interest rates too low? Well, we saw this with Turkey. If you just force interest rates lower, inflation will go up. So Turkey reached, I don't remember, 55% inflation or something. Our highest was like 8, 10, maybe 8. Really?

Isaac Saul (8:31)

And it was painful.

Noah Smith (8:32)

And it was painful. People really hated that. Imagine what people would think at 55. So if you say we're going to deal with these interest payments by just forcing interest rates lower forever, well then you're probably going to get inflation. And so then everyone will be really mad about that. So basically what we're seeing now is called interest rate normalization. We had this period where interest rates just went down and down and down and down and down and down and down forever. Now we're seeing, oh no, that wasn't a permanent process. We're not just going to have zero or negative interest rates forever. That's not how the world works. Sometimes line go back up. The trend is your friend till the bend at the end. And so that's the big change.

Isaac Saul (9:25)

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Noah Smith (12:30)

Well, Trump did a couple things. Number one, so Keynesianism says that when you're in a bust or when you're in an emergency, you should have the government borrow and you shouldn't be afraid to have the government borrow. But when you have to pay for that someday, Keynesianism doesn't say that government debt is a free lunch. It means you have to pay for it. So if you don't pay for it in the bust or in the emergency, when are you going to pay for it? You have to pay for it when times are good. Of course, times are never as good as we think, as we'd like them to be, as we'd hope them to eventually be. But at some point, you have to say, it is time to pay back what we borrowed now, or else things will just keep spiraling out of control forever. In the 90s, we did that. So we borrowed a lot in the 80s to fund cold War buildup, et cetera. And in the 90s, we started to pay it off. We cut the deficit and we even ran a surplus and we grew. So actually, if you just hold the deficit at a low rate, you can actually grow out of your debt to some degree. In the 90s, we grew out of some of our debt. And you saw the debt to GDP ratio of the United States, which is the key variable here, we saw that go down under Bill Clinton. And then after that, George W. Bush said, no, we're just going to cut taxes, even though the economy's still doing. It's pretty solid. We had a small recession, but it was over quickly. Economy's still pretty solid. We're going to cut taxes and cut taxes and run up deficits. They didn't run up deficits by a huge amount, but they missed a chance to pay off more of the debt that we had at that time. And that was an irresponsible move by the George W. Bush administration. And it was typified by Dick Cheney saying, Reagan proved that deficits don't matter. Reagan proved no such thing. Reagan proved you can get away with it for a while. And Clinton proved that paying it back can actually be pretty good. And so then during the Great Recession, we borrowed a lot to cover that, to do stimulus. Right. We bought a lot to do stimulus during the Great Recession. And then afterwards, Republicans wanted to be very harsh in terms of cutting spending. And the Tea Party. Right. And then Democrats wanted to raise tax a little bit, but weren't very avid about raising tax. Like, Obama was not a huge tax hike guy. Obama wanted lower taxes. And so, you know, he, he. And so there were, there was not nearly as much austerity as there should have been during the second Obama term when times were good. So Obama and the Republican Congress together bear some of the blame for that. Then Trump came in. Times were unambiguously. Good. Like, we know the Great Recession's over in the late 2010s, and here come Trump in cutting taxes again. Not cutting any spending, just not doing any austerity. So Obama, and so Bush, Obama and Trump all missed the opportunity to do what Bill Clinton did and what the Keynesians say you ought to do, which is to use good times to pay back the money you borrowed in bad times, or at least pay back enough of it so that your debt doesn't become unsustainable. They just failed to do that. And so in the 90s, it looked like we might have this good political equilibrium where, yes, we're willing to borrow when we need to, but we're willing to pay it back later. And then everything works out in the 2000s and 2010s. It becomes clear that we're in a new political equilibrium where no one is willing to do the work of paying back things. And one reason why did they all do this? The reason was interest rates were low. And they could kick the can down the road because the cost of carrying additional debt was low. And not only were interest rates low, but interest rates had gone down and down and down and down and down and down and down for years and years and years and years and years and years and years. Okay? And so they thought, well, you know, well, it's like spending on your credit card. It's like taking out a bunch of debt because it's low interest rate debt, so you might as well carry the debt. Your service payments are low, but it's like an adjustable rate mortgage where interest rates can go up. Man, you're going to carry that debt until interest rates go up. But nobody thought interest rates were going up. They all made this one way macroeconomic bet on interest rates never, ever, ever, ever, ever going up. And then it happened. Interest rates went up. And so here we are.

Isaac Saul (16:50)

So is there a case to be made? Or could you maybe frame the case that the fears about the debt now or the deficit now are overstated? I mean, if the Fed cuts rates once or twice before the end of the year, that could make servicing the debt less of a strain.

Noah Smith (17:07)

Or what happens if you cut rates?

Isaac Saul (17:10)

Inflation?

Noah Smith (17:11)

Does it?

Isaac Saul (17:13)

I mean, I don't know. I feel like I don't know what the hell is going to happen now.

Noah Smith (17:17)

But I think it's. You've seen a lot of cases where that does happen. In theory, that's what's supposed to happen. And you've seen cases where it does happen, like Turkey. So it seems like it might happen. It might take a while or it might take more cuts or it might happen right away. You might see inflation happen right away.

Isaac Saul (17:36)

I guess I'm just curious if you think that.

Noah Smith (17:38)

But Isaac, what do you think about that? Isaac, what do you think about that? If we cut inflation, if we cut interest rates and we get inflation, the debt gets easier to pay, but we have inflation. Is that worth it to you? What do you think about that?

Isaac Saul (17:50)

Personally, I feel like given where we are and given what a massive portion of our gdp, the debt and deficit are, and paying it off are, that yeah, it would be worth it. I think it's politically suicide. I don't think Republicans would stay in that space. Jerome Powell doesn't seem like he would tolerate much inflation. If we saw it roar back, he'd probably increase interest rates again pretty quickly. Right. So I think I would take that trade off for long term fiscal health. But I don't know that that's like a politically viable outcome, I guess is my concern. I think, like I'm convinced that the debt and deficit are a huge problem. It seems like there's nobody really arguing that it isn't. There's just people who are talking about it and people who are ignoring it.

Noah Smith (18:41)

Right.

Isaac Saul (18:41)

And I'm suppose I'm wondering if there's a case to be made that it's not as big of a problem as people like you might think.

Noah Smith (18:47)

And the not. And the case that you're saying for it not to be a big problem is that we can just cut interest rates and accept higher inflation, probably in exchange and make the debt easier to carry. And then it's not as.

Isaac Saul (18:59)

I think. I think it's a. I think it's a hard. I think it's a hard thing. Yeah, it's a hard case to make. It's not the argument I would make, but I think there are people out there who would say we still have tools, I guess, to deploy and do something about it. And I don't know if you find that viable at all or can.

Noah Smith (19:21)

I mean, if you think that that's a bad case, why do you want me to make it?

Isaac Saul (19:26)

I don't necessarily want you to make it. That's like one example I could think of, which is maybe we cut interest rates and tolerate some inflation and that makes the debt easier.

Noah Smith (19:37)

I'm curious by the way inflation also erodes debt. So during the Biden years, you saw debt go down as a function of GDP simply because of inflation.

Isaac Saul (19:48)

Interesting. Yeah, I guess I'm.

Noah Smith (19:51)

Inflation increases prices, right? Prices increase dollars, like the number of dollars being paid for, you know, goods and services increases those extra dollars, get taxed at the same rate. They fill government coffers, they make inflation, makes the debt easier to pay by eroding it. And in fact, in the post war period, we did erode debt by running 4% inflation for a number of years. Right. And that's higher than the 2% target we now have. So if we did cut interest rates and we created inflation, that would both represent a slight or partial debt default and it would also make debt easier to carry. So we could erode debt. We could help get rid of debt with inflation by lowering interest rates and we could also make the debt easier to carry in the short term and reduce those interest costs. That's certainly what Trump is thinking about. The question is, are you willing to tolerate that higher inflation?

Isaac Saul (20:49)

Yeah, it seems like politically the people in power are probably not. And Americans certainly seem to have signaled that they won't because I feel like cost was such a huge part central part of the 2024 election.

Noah Smith (21:06)

Yeah. And as an aside, here, one reason why Americans were more willing to tolerate inflation in the 50s and 60s was because wages rose right alongside prices. You had a dilution in the value of the dollar itself, but you did not have that translate into decreases in real wages. But in the 70s you did and you had inflation that correspond with a decrease in real wages around the time of the oil shocks and other stuff like that. And so people got really mad. And again, in the post pandemic inflation in the Biden years, you saw decreases in real wages because prices were going up but wages weren't keeping up and that people really hate. So I think it appears to be real wages going down that people hate, not inflation per se, if that makes any sense.

Isaac Saul (22:01)

We'll be right back after this quick break.

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Download the Jerry app or visit Jerry AI Acast today. Yeah, that makes sense to me. All right, I have one last question on the inflation stuff, and then I want to, just before we wrap up, hear your thoughts on where we're at with some of the tarif and the inflationary pressures around Trump's tariffs. One of the things I feel like got kind of memory hold about Jerome Powell specifically was, you know, a couple of Years ago, maybe 2022, 2023, one of the big things everybody was talking about was the plausibility of, like, this soft landing, which I'm not an economist, I'm not even an economics reporter, so I have a rudimentary understanding of this. But my, my, I think my correct understanding of it is like getting inflation down without destroying the job market and still managing to, you know, growth and basically not making, like, an economic apocalypse while also reducing inflation. It seems to me like inflation has been steadily coming down and we continue to get fairly good economic news on jobs, on growth, on even wages. I'm wondering if, like, you feel like we've achieved this sort of soft landing, how you would describe the moment we're in? Because Trump is obviously exerting maximum pressure on Jerome Powell to do something differently than he's been doing. And it doesn't seem to me like that's particularly wise. I sort of feel like, you know, I don't know if this is like a hot take, but he's done a pretty good job, it seems like, to me. Nobody really says that. It seems like we're in that sort of soft landing territory. I'm wondering how you read the situation, if that feels right to you or not.

Noah Smith (25:10)

Hey, everybody, this is John, executive producer for Tangle. We hope you enjoyed this preview of our latest interview. If you are not currently a newsletter subscriber or or a premium podcast subscriber and you are enjoying this content and would like to finish it. You can go to readtangle.com and sign up for a newsletter subscription or you can sign up for a podcast subscription or a bundled subscription which gets you both the podcast and the newsletter and unlocks the rest of this episode as well as ad free daily podcasts, more Friday editions, Sunday editions, bonus content, interviews and so much more. Most importantly, we just to want to say thank you so much for your support. We're working hard to bring you much more content and more offerings, so stay tuned. I will join you for the daily podcast on Monday. For the rest of the crew, this is John Law signing off. Have a fantastic weekend y'. All. Peace.

Isaac Saul (26:08)

Our Executive Editor and founder is me, Isaac Saul and our Executive Producer is John Wolf. Today's episode was edited and engineered by John Law. Our editorial staff is led by Managing Editor Ari Weitzman with Senior Editor Will Kaback and Associate Editors Audrey Moorhead, Bailey Saul, Lindsay Knuth and Kendall White. Music for the podcast was produced by Diet 75 and John Law. And to learn more about Tangle and to sign up for a membership, please visit our website@readtangle.com.

Noah Smith (26:38)

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