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Let's talk about a condition many people haven't heard of. and it turns out it's more common than you'd think Pyrony's disisease, or PD for short PD can happen when scar tissue builds up under the skin of the penis This can cause a curve or a bump during an erection and for some men, lead to pain during intimacy and may impact mental health It may also lead to anger and frustration, depression, lower self esteem, and even withdraw from sexual activity and physical intimacy Because of this, some men could feel embarrassed or reluctant to talk about PD The actual cause of PD isn't always known In some cases, it may be linked to a minor injury or repeated injuries during sex or other physical activity The good news is PD is treatable If you notice a curve with a bump trusted urology specialists can help diagnose it. walk you through your options, including non surgical treatment To learn more about Pyroni's disease, visit talkboutpD. com So It's my birthday today. m forty years old And birthdays like this, the ones divisible by ten, I guess, really force a person to do some existential reflection Like how have I changed since I was thirty, twenty And maybe partly because I'd share a birthday with my first college roommate, shout out Matt I was thinking about my life recently right after I graduated from college as a twenty three year old writer at the Atlantic. It was my day job to blog about economics and in particular to blog about that famously delicious and click bay topic of Fiscal policy. That is how the U.S. taxes and spends money This was, believe it or not, one of the biggest stories in the country if you don't remember At the time, there was a huge debate about the US debt, how much we should worry about it Typically, the debate broke down my ideology. It was conservatives and libertarians who told us to worry about the debt And it was liberals who criticized conservates and libertarians for freaking out about nothing and using debt fears as a smokes screen to cut spending on seniors and poor people But fifteen years later Something has changed. deebt has grown and grown and as interest on the debt has eaten more of the federal budget It's not just conservatives who are starting to worry about the trajectory of American taxing and spending anymore It's liberal economists as well Today's guest is Justin Wilfers the University of Michigan economist and the head of a new media company called Platypus Economics. He's going to walk us through why debt fears have escaped containment and broken into the mainstream among even liberal economists But before we take you into that debate, I want to dust off my old fiscal policy explainer hat and review some budget basics And if you're watching this pod right now, we've got you covered with some very nice graphics, courtesy of the commommittee for a responsible federal budget Last year, the US government spent seven trillion dollars. Most of that spending went to Social seecurity, healthcare programs like Medicare and Medicaid and defense spending There's a saying among economists that I think you're going to hear from Justin in just a moment that the U.S. government is an insurance company with a standing army That is, it's all health carere spending, retirement spending, and defense spending For many years, for many decades, that was true But one big thing that's changed. and if you are looking right now, that's the red sort of a slice of the that you can see. Is it interest payments on our debt? have surged to become a larger share of government spending than the military This is something that has never happened before in modern history Moving to the revenue side now, the federal goverment collected five point two trillion dollars in taxes last year. bout half of that came through individual income taxes, the ones you file in April. And another third came from payroll taxes, which are shared between employers and employees Most of the rest came from taxes and corporate income You will note that there is a difference between seven trillion And five point two trillion that is equal to one point eight trillion. And one point eight trillion was our twenty twenty five deficit. add all of the annual deficits together, that makes up our national debt And because the gap between spending and revenue is projected to continue to rise, that means our debt will continue to rise Now there are three ways to reduce the share of debt to GDP, the relationship between debt and the size of the economy First, you can grow GDP really, really fast, which is something that's technically possible, but hard to engineer. There's no obvious magic wand for productivity growth, although I think a lot of AI boosters hope that AI is just that Number two, you can cut spending which is awfully hard because if you cut the budget by one trillion dollars, What you're doing is activating a one trillion dollar constituency in the U.S. economy to rise up and destroy you Very politically hard or Door number three You can raise taxes Good luck building a coalition to raise taxes on just about anything in the twenty twentyies Because this is the logic I see right now about taxes in America The leftft says we can't tax the poor because they're poor. okay Liberals say we can't tax the working class because they work. all right Service workers say we can't tax tips because that's just unfair. Businesses say we can't tax businesses because they're the ones who create work in the first place We can't tax property because homeowners have had it hard enough. We can't tax billionaires, of course, because their contributions are so precious. And also they might get mad or give your primary opponent ten million dollars And now the Trump administration has argued that we can't tax pensioners or retired people because they've quote, unquote earned it The problem is when you line up all these excuses side by side, what you're left with is really simple. Effective tax rates have nowhere to go but down while the budget led by spending on seniors and health carere skyrockets year after year It's not easy to know exactly what a debt crisis in America would look like But many liberal economists, the same economists who fifteen years ago Scoffed at the budget haawks are now starting to sound a little bit Budget hawks themselves And that shift was interesting enough that I knew I had to call Justin Derek Thomps This is Pe Eish. Justin Wolfers, welcome to the show. Derry, good to see you mate. It is great to see you. So it has probably been Got at least ten to fifteen years since Fiscal policy was my direct and exclusive beat. So I think what I want to do with you first is this, I want you to refresh me on some of the basics here When people hear that the U.S government is quote, borrowing money What is literally happening? Like who is the government borrowing from? How do treasury markets work Why are people around the world buying US debt anyway So to start with, why do we borrow money? Be we spend more than we take in. When that happens, everyone still wants to get paid. So you need cash, the government's not different than that What you and I would do is if we were spending more than we were taking, we'd go to the bank and we'd ask for a loan The problem is the U.S. government talks in billions and sometimes trillions. and if you walked into Wells Fargo and asked for that, they would laugh. They just don't have that much cash in their vault So really what you need is a whole bunch of banks to pitch in this really big customer called the US goovernment There's a simple way of doing that a bond Here's a boomb. the U.S government says, I have a piece of paper right here This piece of paper, if you give it back to many years' time, I'll give you one hundred and five dollars How much you willing to pay for it? Right now people might be willing to pay a hundred bucks for that piece of paper Let's think about that. So they're going to hand over their hundred. Government gets the hundred. gives over the piece of pap What happens a year later, they get back the piece of paper and the government gives them one hundred and five bucks You'll notice that basically the government gets one hundred bucks today and pays back one hundred and five in the future. That's just like a bank loan But the thing about this is, so that piece of paper is called a bond or a bill The thing about this is you don't just walk into one bank to do business this way. You say to the whole world, I've got lots of pieces of paper trillions of dollars of pieces of paper, who wants to buy these pieces of paper, which is effectively the same thing as saying, lend the US government money Why do people want to do that? They want to do that because they like interest And they really like lending money to folks who have a tendency to repay The US government has a tendency to repay, which is why the U.S. government tends to pay less interest than anyone else How's up my? That's pretty good. That's pretty good. There's always this question of why does the government Just the money that it needs. prrint being the operative verb here No one who uses the term print the money is actually referring to any kind of magical printer here. It's a bit of an old fashioned apharism. But what is this apharism pointing to and why is it relevant to this discussion of government debt Right. So It is much easy to think about it as the government printing money and the government can print money. It literally prints money and it sends it out to the bank, right? It does a bunch of this digitally as well, just like you and I do a lot of our lives on Venmo. But sometimes we still use those pieces of papers, paper with dead presents on them So if the government decides to print more pieces of paper with dead presence on them and nothing else changes, then we've got the same number of groceries at the local grocery store. put more pieces of paper, more money changing it, chasing those groceries. So when that happens, the exchange rate between groceries and pieces of paper changes Basically, you're going have to give up more dead presidents to get a cannaboons An otherwise saying that is prices for us We get inflation Okay, now, I just want to be clear about this printing money to repay the debt works. Right? You print the money, you repay a bunch of people at the lines It literally works So in the point is there are two ways of repaying our debt. One is you Um save some money and send it back to the bondholders. And the other is you print some money And you send that to the bondon holders. Both work The first way We tax people And we might use a progressive income tax that takes more from the rich than the poor. We might have a sophisticated tax system that encourages investment and discourages slovenness or whatever the values of the comping out If we do this by printing more money, you'll notice the thing that happened was when we print more money The number of pieces of paper required to buy a can of beans goes up, which is to say the value of a piece of paper falls which is to say the value of money falls which is to say someone is paying bearing the burden of that tax bearing a burden printing the money, it's the people who hold US dollars. The US dollars become worth Less And so really then the question is, would you like us to repay debt our what we owe. by texting people more and sending checks that way and sending the money that way, or by printing money, which effectively turns out to be an inflation tax taxes people in proportion to their holdings of US dollars Now you'll notice the thing about inflation taxes, you can't make it more aggressive or's more progressive. you can't hit the rich even harder. You can't do political favors for your friends. You can't design industrial policy around it. It's a one size fits all policy So you've got these two technologies, they both work. One allows you to achieve a bunch of economic gains, the other does not One step further, The problem with printing money, that's an inflation tax. is you're now telling people don't use money? because we might make it worth less And in the extreme, if you tried to repay all of our debt by printing money, you'd cause such inflation, you'd basically end up as hyperinflation Hyperinflation is when, you know you get paid at lunch, but what you can buy by dinnerime has gone down whichich means you literally have to reorganize your life around not holding ono money Chitty way of living your life All of which is to say yes, you can, literally can payad dets by printing money. We just think it's probably a bad idea So we talked about two different ways of the government can Solve for the fact of its deficits. Number one, it can create a treasury market And number two, it can so called print the money. The cost of the treasury market is that then later we have to pay interest. And the cost of printing the money is that there's inflation, which is a tax borne on everyone, even potentially a regressive tax because the poor are spending more of what they make All of that makes it sound Bad But you don't think that debt is exclusively bad. You think debt can be good. Why can debt be good Great question. And this is where we're going to move a little bit more to macroeconomics, but we never want to forget our macroeconomics One thing That kind of blows my mind a little bit, but I want you to think about debt the following way debt. is a time machine. It's a time machine that allows you to zap money across time Literally, right? So if I and this is what I say to my students, you're young and poor right now, but you're going to have a successful career in the future. wouldouldn't it be great if you could zap some money from future rich you to current po you and you can called student debt So that's why I actually think we should be less scared of student debt Okay, that's at the individual level. let's now come to the government level. Are there times where one to zap money across And the answer is yes, and I want to return actually to our relationship, Derek. I got to know you best and I think both of us were very much born as comist during the crucible of the financial crisis of two thousand nine, and honestly, we will never forget those lessons You had unemployment up around ten percent. So you had people out of work. Here's a question. We want to build a road, Are we better building it in two thousand eight when no one has any work or waiting until the economy iss booming in twenty sixteen The answer when you say it that way, the opportunity cost of that worker's time. In twenty sixteen, they're already busy. and if we wanted to build the road, we'd have to outbid the private sector to get them. In two thousand eight, they want to put food on the familyil's table And so what we want is a time machine that zaps spending from twenty sixteen back to two thousand eight. The way we do that is we go into debt. in two thousand nine. What does a healthy economy look like? Employers believe that customers are going to spend a lot of money, so employers make a lot of stuff and hire a lot of people. customers believe that employeers are going to make a lot of stuff and hire a lot of them And so therefore, they feel a lot of job security, so they spend a lot So I spend a lot because you hire a lot and you hire a lot because I spend a lot That's a virtous cycle. That's a happy world to live in What happens in a recession? In a recession, the employer get scared that no one's going to buy anything And no one buys anything because they worry the employers are going to get scared and find them unt so we can get stuck in a vicious cycle where no one hires because no one's spending and no one's spending because they believe no one's hiring There are many ways in which that may be too simple of a story, but I think it's a useful story to keep in your mind. The greatest inside of John Mannard Kynes is that an economy could be in different equilibria. What I just described, the virtual cycle and the vicious cycle are both possibilities. and because I get paid more by the syllable, we call possibilities equilibria. And so Kainnes's view was, okay, great, let's think about what a recession is. This is, remember this quiet. we've got nothing to fear but fear itself It's that a recession is fear feeding on itself. Well, if the government can just walk in and say, hey, guess what? We're going to keep spending Buing highways until everyone's got a job Then folks like, oh, I think I'm gonna to have a job. I might as well start spending Now, employers like, well, everyone's spending, I might as well hire a bunch of people And that in itself is enough to move us from the vicious cycle to the viruous cycle from recession to boom I wanted to cover the basics of how deficit financing worked and why it is often good for the government to go into debt even more, especially when the private sector is weak. The public sector can expand into the private sector and turn what used to be a vicious cycle into a more virtuous cycle But right now Right now The US is running a one point eight trillion dollars deficit. That's about six percent of GDP, significantly higher than we've run in basically any other non recession, non emergency, non pandemic, non war period of modern American history Why is running a deficit of this size now more dangerous than it would be in a recession Let me actually start by not answering that and getting the facts out. because I want people to understand the facts because they're astonishing. Derek, if it was you and me, I'd show you a little graph, you'd show me a graph, it would be great. But what I think the narrative way of doing this is when I first got to know you in the wake of the two thousand eight recession If I said to you The deficit is five point eight percent of GDP, which is it is right now. you would say Holy cow, Justin, it's never been that high since World War twoo You would say in all the ups and downs of the American business cycle, it's never, ever been that large You'd say five point eight percent of GDP Deficit is a is in historical perspective for the United States to two thousand eight, Derek We easy Now And if you remember those wars, people, I think, you know, Obama passed a stimulus of around about seven hundred billion. You might have remember the exact number. You know, And I remember there were memos that came out of the White House. They rang around different economists. Some people said two hundred billion, some said four hundred billion Some who've subsequently said they knew all along it was too small actually were telling the White House much smaller numbers. Totally different story for another day The question was The stimulus is going to be X hundred billion and we'd argue over the X And no one had the courage to use the T word trillion You just use the two word trillion And so two things happened since young Derek metant Young Justin One was the financial crisis where we discovered that seven hundred billion do probably wasn't enough. And now there was the pandemic, which was the deepest, fastest recession since the Great Depression. And on its worst day, it may have been as deep although this is a downturn we measured in weeks and months rather than years and decades That led to trillions all of a sudden being a word that we used . I don't know whether that was reasonable I know a lot of people say the post COVID inflation is due to that I also know that coming out of two thousand eight, one of the things I learned is you don't get to choose the economy you want. You get to choose the mistakes you're willing to make. And the question coming into COVID was Are you willing to err on the side of doing too much in order to keep all the jobs and the firms alive even if that risks inflation versus, do you want to do what we did zer eight? which is due to little risk inflation but keep a generation out of work. Justin, are we where we are? with Debt now larger than the US economy and annual deficits now is six percent of GDP, which as you said, is higher than any year between nineteen forty five and two thousand eight Are we where we are exclusively because of the way that we responded to emergencies like the COVID pandemic and the Great Recession? or are we also where we are because of decisions made in the last two decades and in the previous decades, decisions to cororporate Tax cuts Yes. Decisions to cut the corporate income tax rate, decisions to cut taxes on wealthy Americans. decisions also to create programs, social Security, Medicare are growing faster than the U.S economy. Is it just our response to emergencies that have put us where we are or is it also our peace time decisions, so to speak, that put us where we are So In twenty twenty six, in May of twenty twenty six, I want to say to you This administration should have done more to move us back towards budget balance. I think a six percent of GDP Deicits at a moment like this, which is not the midst of an emergency is unconscionable That's why I wanted to spend time on their. on the recent history The structural problems are far, far deeper. Yes, the structural problems are that we put in place spending programs, entitlement programs, which Demographics and particularly the aging of the population play a big role in And the other side is politics, which is we simply have never put in place the revenue required to finance pay for the government that the American people want And the asymmetry is that Grover Nordquist and his mates will sign anyone up. for I will never raise taxes pledge But he won't sign them up for I will never stop spending And there's an old quiite, I think it's attributable to Milton Friedman, which is to spependers to tax. because every dollar you spend Someone's going to get upset about this song. I'm going to say parentheses, asterisks littleittle aside goes here, but every dollar you spend eventually gets paid back. which means the dollar we' spending today is either a dollar of taxation today or a dollar taxation in the future fundamental determinative tax rates are spending politics ates tax completely different than spending It's super bizarre to me that Grend Quist does not get out there and get upset every time the president announces spending on stuff. I just don't understand it. But look, the underlying the most important fundamental is we've never raised enough revenue for the quality of government that we want. Then we have entitlement programs that are underfunded for a world in which we simply live a lot longer. They are invented in one world and we exist in a completely different world And You add in the politics of all of that stuff being basically untouchable We saw Elon Musk decided he was going to go into the government and root out all the waste fraud and abuse, only to discover that the federal government was not what he understood it to be. And this is where I really wanted to spend most of our time. This is the crux I find most interesting, is that the U.S doesn't quite spend like a Western or central European social democracy, but we're pretty damn close. We're like seventy percent of a social democracy in terms of our spending But if you look at our taxing Americans are not taxed like the French. We are not taxed like the Spanish. We are not taxed like the Germans. We are taxed more like Rover Norquist would like us to be taxed with much lower rates on income taxes, much, much lower rates on corporate income taxes and lower rates on taxes for the wealthy. And so there's this gap. We call it a deficit between how much we spend like almost like sort of French social democracy in the way that we tax. You use the word unconscable to describe of America's deficit, and therefore, over time it's debt One thing I really want to understand from you is like what is the shape of what an American debt crisis could look like Because I remember fifteen years ago. When I briefly I don't think you know this. I was briefly for like a year sort of externing at the Cittee for Responsible Federal budget And I remember when they were talking about how they could see a debt crisis coming down the road I told them like, you know It sounds to me like the way you're talking about a debt crisis is a little bit like the way that environmentalists talk about climate change crisis There are movies that are made about climate change crises, right? L the day after tomorrow where You know, New York City gets like dumped with like seventeen feet of snow and suddenly the waves are absolutely subsuming Miami and all this stuff that is you dramatized that can make for summer blockbuster Vsery hard to imagine a summer blockbuster about what happens to the US if the debt of GDP ratio reaches like one hundred and seventy one point five percent I don't need you to give me like the logline for a movie to be directed by Christopher Nolan in twenty thirty one about a debt crisis in America. Short of being that dramatic What are we talking about when we talk about the possibility of a debt crisis in this country Yeah, um Look, it's a wonderful question. It would also be a great buddy cop film. you and I could run around trying to prevent it. It'd be great Let me try and explain it. the in the very simplest possible terms. So we owe a bunch of money right now qu a lot And we can repay it. We can pay our interest Which is all we got to do We're got to be able to make our interest payments and then you just roll over the debt, which is just another way of saying, you know you know, you borrow again and people are happy to lend your money Now we can pay our interest because the interest rate that people charge the US is very low. So even though we have a big debt The interest rates low So therefore, we have low interest payments. becausecause we have low interest payments, we can easily pay them. Here's what a debt cris is. Tomorrow, everyone could wake up and say, you know, I don't trust Americans anymore simimple as that, just Um and they say, I'm worried they can't pay They become worried that they can't that O government can't pay its debt, they'll jack up the interest rate Now When you have a small debad And you jack up the interest rate doesn't have much of an effect on your interest payments But when you have a big debt and they jack up the interest rate, now our our monthly interest payment just got really big mightight have gotten so big we can't pay it Now if we can't pay it, no one's going to lend us a penny That's a debt crisis. and I want you to understand, I want to say it's funny, we get to use this word multiple equilibriia multiple times. This is so exciting Notice We could be stuck at a reasonable debt level two equilibria. The virtuous cycle is everyone believes we can pay, therefore rates are low, therefore we can pay The other equilibrium is so people don't believe we can pay, therefore they charge us a lot more, therefore we can't pay And The thing about two equilibri two possibilities is either could happen. Dignance. Then you might say, well, if either could happen, why does it matter what our level of debt? Lually it matters critically because if our level of debt is low and removed from everyone believes we can't pay to everyoneves sorry, everyone believes we can't pay to everyone believes we can't pay They check up the interest rates And because we don't knowe much money, that doesn't have much of an effect on our monthly interest payment And therefore we can pay it And then eventually everyone will go back to believing we can pay. The probleblem is when you owe a ton of money, any change in the interest rate has a huge effect on how much money you got to send off to the folks borrow money from. So Mikex is The higher the debt level, the more susceptible we are to that dynamic suddenly taking hold. And if you remember, if you've ever seen a financial crisis, a financial crisis is basically everything's okay until it's not Either I believe that the US can't pay or I believe that Derek believes that the US can't pay. Derek in turn doesn't think the US can't pay, but he believes that Justin believes the US can't pay. Derek and I now are no longer willing to lend money to the US, even though we both believe in the US. We believe everyone else doesn't believe in the US. And that can literally change in an afternoon. So that's what a debt crisis is This episode is brought to you by Indeed. Look, I know how chaotic work it can get Sometimes you have what feels like a million projects going on. And on top of that, you need to find the time to hire someone Things can feel insurmountable For moments like those, indeed, sponsored Jobs has your back. 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This is a job for indeed sponsored jobs Let's talk about Pay Roni's disease, or PD It's not widely talked about and some men may feel reluctant to bring it up but it's more common than you'd think PD can happen when scar tissue builds up under the skin of the penis, causing a curve or the bump during an erection that for some men, may lead to pain during intimacy and impact mental health A trusted urology specialist can help diagnose PD and walk you through your options, including non surgical treatment Visit talkaboutpD. com Let's talk about a condition many people haven't heard of And it turns out, it's more common than you'd think Pyrony's disease, or PD for short PD can happen when scar tissue builds up under the skin of the penis This can cause a curve or a bump during an erection and for some men, lead to pain during intimacy and may impact mental health It may also lead to anger and frustration, depression, lower self esteem and even withdraw from sexual activity and physical intimacy Because of this, some men could feel embarrassed or reluctant to talk about PD The actual cause of PD isn't always known In some cases, it may be linked to a minor injury or repeated injuries during sex or other physical activity The good news is PD is treatable If you notice a curve with a bump trusted urology specialists can help diagnose it. walk you through your options, including non surgical treatment To learn more about Pironi's disease, visit talkaboutpD. com This episode is brought to you by Uber Did you know that Uber has a range of safety features, including in app audio recording? You can turn it on in your safety settings with the option to record all your rides or just some of them the safety doesn't stop there, Uber requires every driver to pass a thorough background check before they can start driving This consists of a multi step screening process that checks for impaired driving or criminal offenses, followed by annual background checks each and every year moving forward. In app audio recording and driver screenings are just a few of Uber's many safety features that put safety at every turn Learn more at Uber d. com slash safety. Annual driving history reruns do not apply in New York City Is it an oversimplification to say that a debt cris in America would basically, to most Americans feel like cost of living crisis Because one of two things has to be true either The buyers of American debt. trust America's ability to pay back the debt either in full or on time and therefore demand a higher interest rate In which case, the increase in interest rates can trickle to the U.S economy and make the cost of money higher. orr the U.S. government says These treasury markets are going terribly. We're just going to print the money in which case you have inflation, which is yet another tax in America's cost of living. It's an oversimplification to say that the way that both of those would cash out for Americans, just living in a day to day basis would be crisis in America would feel like a cost of living crisis. That's one of the paths, but there's two partaths. Okay So one path is everyone now wants really high monthly interest payments, we can't do it So what can we do? We can print dollars If we print dollars that creates inflation, that's the path you just described The other thing we can do is austerity. which is the government just stopps sending out social security checks says we can't borrow money anymore, we're not sending out social security checks And so that's the choice either the government has to tighten right at the moment where confidenceces And the government then becomes part of the recessionary spiral Or the government just prints dollars, sends worthless dollars overseas, and it's a cost of living crisis for all of us. when Economists and commentators typically talk about the danger of debt The statistic that I most commonly hear is the debt to GDP ratio The ratio between the size the debt and the size of the economy. But there's something that somewhat complicates that, which is if I look at some of the most famous debt crises in the last, let's say, twenty years Argentina had a massive fiscal crisis in two thousand one with a debt to GDP ratio of forty five percent Ours right now is over one hundred percent. Japan, on the other hand Has a Deta GDP ratio of something like what one hundred ninety per, two hundred, ten percent? like just absolutely astronomical? But you know, you go to Japan You go to Tokyo It's not like there's suddenly some kind of absolute horrific austerity or cost of living crisis that suddenly struck when the number hit two hundred percent, debt to GDP ratio So How is How is that juxtposition The fact that Argentina got Wrecked with the forty five percent de to GDP ratio Japan seems to be kind of gliding by with two hundred percent Dutch to GP ratio. How should that juxtaposition force us to be more sophisticated in the way that we talk about the relationship between this all important statistic, debt to GP ratio and the actual fact of a debt crisis. So answer number one I don't want to go into too much, which is it's not obvious that the GDP ratio is the be all and end all of how we measure problems. The real question is if something were have changed, could you meet your monthly bills and you could imagine lots of measures that would get you there. One I want to tell two stories. One is Argentina, the other is Japan. One problem with Argentina is Argentina has a long history of instability. and a long history of hyperinflations And so what happens is people are worried they're not going to repay So therefore they jack up the interest rates and then they're like, oh, I know what's going to happen next. They're going to inflate the whole damn thing away See, so if I lend you a thousand dollars, but you create so much inflation that that thousand dollars is now worth only one dollar when you repay it, technically you will repay it, but I just lost nine hundred and ninety nine dollars. That is the sort of loss none of us ever think about or a signing up for when we decide to lend someone money. And so that makes everyone freak the hell out. like I'm not sending another penny anywhere near those hyperinflating bastards And so the good news is the U. S. has relatively stable political and economic institutions relative to Argentina The Bad news is, I'm not sure that's true anymore So I come from a country Australia where we have a two party parliamentary system Wh when the government wants to do something, it just does it, where we don't have one side hold up a debt ceiling and pretend until eleven fifty eight PM that we're simply not going to pay, where we don't have these ongoing games of chicken, where we don't shut down our government, where we don't have a fundamentally dysfunctional Congress. I reckon I'd lend money to Australia far before I'd lend it to the Americans. And so I think our congressional dysfunction Doesn't make us Argentina But it moves us a couple of steps down that spectrum Okay, so There are countries that are more susceptible than we are. Argentina is going to be more susceptible than we are for another hundred years. Just their history is too long Well, so then you say, well, do we have any history of countries running large debts and being allright? And the standard story is Japan. Japan has two things three things going on. One, they basically moved from incredible economic growth to it stopped overnight. two They have an intensely aging population, which is a huge problem. And three, and arguably the most important one is when people say debt to GDP in Japan is two hundred percent, They're talking about gross debt to GDP. This is literally the point at which I bore all of your audience to tears. Okay But it matters because folks who try to bullshit you with numbers often will give you the wrong one. Gross debt includes money the government owes itself cludes that In America, just to make things even more confusing, we call net debt debt held by the public, which sounds like such a weird thing. you would never look up that number. So when people say to you, America's debt to GDP is not a one hundred percent of GDP, it's one hundred thirty six percent They're counting money that the U.S government owes the U.S. government, which is dumb. These are people who are either unsophisticated or lying Japan, Japan's net debtts one hundred and thirty six percent of GDP. Okay. I recently lined up all of the OECD countries and measured their net to GDP and we are not the top, that's Japan Boy, we're not far off the top So if Japan says, don't worry, stable democracies We learned from Japan to our unstable democracies can handle stuff like this Actually, we don't have a ton of recent experience that that is the case Um, Let me just add one thing. I just want to frame this whole thing for people You're doing something really responsible, which is educating the public on what a debt crisis is Don't want anyone to overhear us and say, Derek and Justin are predicting or forecasting a debt crisis. That's the sort of doom and gloomism that people who are not intellectually honest engage in I suspect what you're saying and certainly what I'm saying is once we allow the debt to sneak up this high Boy Now we actually do have to have these conversations and be aware of these threats I will go one step further, Justin. I am surprised how high U.S. debtor GDP ratio has gotten how large net interest payments as a share of overall government spending has gotten without anything, much resembling a debt crisis being on the horizon. And Jason Ferman wrote this in twenty twenty four. He said, if you would ask someone in two thousand to predict what the economy would look like in a world where the debt was one hundred percent of GDP and the deficit was six percent of GDP, they would have likely expected extremely high interest rates and possibly even a dramatic economic crisis. quote Obviously We don't have that. There are problems in the US economy, but a dramatic economic crisis is not one of them. So How are we supposed to even know when we've crossed the line When even experts like the redoubtable Jason Furman keep being surprised in the optimistic direction of how much the US can bear in terms of debt without these kind of storm cllouds gathering So the first obvious point is there is no line There's no number, there's no magic thing that does anything. The second answer is we don't know, and we ought to be really humble So Back when debt to GDP was thirty percent I wasn't humble I said, there's almost no chance of a fiscal crisis. We've moved from, I'm not humble. it's not going to happen to I am humble and I don't have a clue But holy cow, I'd really like that to not happen U you know, my kids, we went to the Grand Canyon a couple of weeks ago, my kids were walking ne the other side Dad it freaked me out My kids felt they were on solid ground Who was right I don't know, but I just didn't want to find out the hard way And that's how I feel right now If I may, Derek, I want to make a point about the politics of this. So did Dad Hawks have given the whole Gime terrible reputation, which is a bunch of people who just want ofed the smaller US government pretended they cared about debt for a long time And back when debt to GDP was thirty percent and there wasn't a hope in hell of us having a debt crisis. They was saying the sky is falling, the sky is falling. And the responsible response was stop lying to people And that was my response. And if I remember young Derek Thompson, probably it was yours at the time too, even though you were externing at the center for a responsible federal budget. What I think is so interesting about this discussion is at the time, young cental left economists were saying, canan you guys stop bullshitting We're now old. I don't know how youd describe yourself, but I would describe you as cinenter left and I think people would describe me as ciner left. Old ciner left economists are now saying, actually pay attention And you could say, well, maybe just old people get conservative It could be, but actually, I think what's changed is the world And what I like about you starting this conversation is you've created some respectability around this conversation. It used to be that only greybeards would talk about fiscal stuff And it was always scolding and always telling us what not to do. We're now in a world that feels uncharted. And that should and does cause people whether from the left or the right to lose sleep I want to move into the category of trying to solve this problem it this is where it gets Really, really hard. becausecause there's two things that are very, very hard to do with US budget. Number one, it's hard to cut spending, and number two, it's really hard to raise revenue. Let's start with cutting spending part um Elon Musk led Doge team. They claimed I think at one point that they were going to cut one trillion dollars from the annual US deficit. That's fourteen percent of US spending. And you're already laughing for folks who can't see you. I believe that according to Politico's most recent estimate, they cut about one billion dollars, which is one tenth of one percent of their goal. Now on the one hand, you can make fun of the team for being incompetent But whether or not they were incompetent I do think that their failure to find more than one billion dollars of spending speaks to a real fact, which is that It is very difficult to cut federal spending out making someone scream. We can talk about waste fraud and abuse I don't think we'll get that far into those three nouns today, but the point is everyone's definition of waste fraud and abuse takes money away from someone who's receiving dollar that someone else is calling waste fraud and abuse. And they're going to kick and scream and say it's not waste fraud and abuse. It's my mortgage payment Um In the big picture, why do you think it's so hard to cut spending Yeah. So I think this is great because it's We Any of us who knew anything about this knew that Musk would fail But it's because you have the wrong image of the U.S government. I think most people do So look Governments are annoying and they can feel really bureaucratic and they can feel slow. What's that movie where the DMV? it's a sloth behind the counter? Oh, Zootopia. Zotopia right. Yeah My my daughter just watched it for the seventy fifth time yesterday. So it would be pretty shameful if I could not name it on site Right. And so That slot was speaking to something. The DMV literally feels that way, right? And we all have that. And then what we do is we take Zootopia as if it's a documentary and we say that's the US government is And that was the Elon Musk theory of the case The first thing to point out is the DMV iss literally run by states, not Feds. That matters because your Zootopian norms are all about direct service provision by governments. and you know the U.S Postal Svice, God bless it, but also Jesus, can be annoying and the DMV and the seecretary of State all in some, you know The Department of Education can do all sorts of things They're all state. And so the question is what is the federal government? You need this before you can fig out how you're going to move forward There's no expression. among economists that it's an insurance company with NAami whichich sounds really bizarre, but it's actually three quarters correct So insurance company is Medicare, Medicaid, Social Security is a form of insurance. It's insurance against outliving your savings unemployment insurance and so on. So Almost all of a vast majority of the US government is literally an insurance company And then there's an army next to it. and then you got about a quarter left after that So three quarter of an insurance company with an army. okay, we're not going to cut the army because politics or because wars or because something The rest is an insurance company. What does an insurance company look like An insurance companies is a whole bunch of us sending in our monthly premiums And then there's a big check printer whereere you check prints whereere you print checks to go out to the folks who lost their jobs or the folks who need Medicare or the folks who need Medicaid or social security So it's not far off to imagine the federal government as a big room with a check printer Once you understand that Thinking that there's too many guys feeding paper into the check printer, that's the waste fraud and abuse. I can make the government twenty percent slimmer. You can't. It's just a freaking printer. You might be able to get the tone at twenty percent cheaper, but like That's not the problem. The problem is what the federal government is is an operation that writes checks It writes checks to people and it writes checks to state governments That, in turn, first of all says waste fraud and abuse literally cannot work, and the idea that Musk could cut a trillion dollars was absurd on its face. It's not a statement about Musk. It's a statement about naive Tay in about failing to understand what the federal government is And it then says the only way to cutv to cut spending then is to cut checks Who am I not going to spend a check send a check to? If you're going to do it all on spending, that's the only question. I mean, you can cut the military And then, you know, you got this other little segment, which is all sorts of stuff, you know, it's national parks and it's, you know But you're not going to get the adved on that. So we have to send some people fewer checks. Right, Which essentially means the politics of what's going to be described as austerity, right? If you cut social security, That's aerity. If you cut Medicare. There's going to be a huge constituency that fights back against that. So I'm not defending or calling for any particular cut I'm highlighting or zeroing in on your point that federal spending is not like waste fraud and abuse sounds like it's a money pit somewhere in the middle of Nevada, right? The money isn't going into a money pit. The money isn't being shot toward Mars. The money is going to doctors and hospitals and seniors who are opening up social seecurity checks or whatever, checking their checking account and seeing that it's deposited there You take the money away, you cut the spending, and someone's going to get poorer. And that's one of the big reasons why it's very, very hard to advocate for the politics of cutting spending. Moving to the other side of the ledger. I want to frame the question about revenue this way I wonder if you see things the way I see things, which is that in the last twenty to forty years. America's developed a really interesting aversion Tw All taxes. I mean, we're talking about no tax on social seecurity, no tax on tips One big, beautiful bill was a huge tax cut for small businesses, a huge tax cut for big businesses. You've got progressives saying that we need to make everyone who earns less than one hundred thousand dollars completely tax free. and so they only want to tax billionaires. But of course, the billionaires are saying, we're the ones who create value in this country. We should be taxed less than anybody. It feels like We are in a political environment where there's basically an extant argument that nobody deserves to be taxed. and that really makes the deficit reduction problem a lot harder How do you see this sort of evolving politics of taxation where almost everyone now seems like a kind of Grover Norquist I mean, I think you're right. I'm struck time and again that Democrats always go to elections saying, well, we're not going to raise taxes on anybody, which then means they're saying We're going to take this revenue that isn't enough to provide what we believe ought to be provided and we'll see what we can do. Um I'm struck by the ismmetry that Why is it so hard to raise taxes? P'ret pretty clear why it's hard to cut social security. literally millions of seniors who are grandmas and grandpires of people throughout the country are there Taxes actually are a lot more concentrated. and So maybe this is something about the concentration of political power that what should be the easiest side to adjust because it's more concentrated. turnurns out not to be at all is Two other things I want to call out And so that sort of you sort of said, what if everyone's taking things sincerely What if this a real debate? We're coming forward with full hearts, full minds and telling the truth One is the rise of magical thinking. And the political acceptability of magical thinking is just off the charts The most extreme example, of course, is now to be qualified for higher office in the United States, you have to be willing to lie about the twenty twenty election. So thinking that we have literally a lie as the qualification test So I used to find it frustrating that politicians would say tax cuts pay for themselves even a generation after it became clear that that's not true. Trump didn't even have to say that. He just didn't even talk about it So magical thinking I think is profoundly problematic But then actually I think there's a very very and this is a fear that I have more deeply than you I think which is the political systems broken in a very fundamental way. Let's fast forward to the day after the election in twenty twenty eight. And the president elect calls, if not me, then one of my friends and says, what should we do? Dbt to GDP is one hundred percent. I'm really worried about this. The story of the last fifty years of American politics beginning with Reagan It may be that Reagan believed that tax cuts pay for themselves, but it may have actually just been a strategy, which is if we spend all the money, there's less for the next bloke to spend And so we're always engaged in this game You know, it's like me and my brothers growing up. we only had I was one of six kids. There was only so much ice cream And so you'd always take more ice cream Partly because you wanted to get your brother back, so there'd be less left for him I should have been in a more loving household, that's a different problem What you've got here is two brothers who hate each other And if we leave any ice cream in the bowl in the What do you call an on cream container? in the container then they're going to get get it And they're going to spend it on their stuff. And you've now seen you went through a round of this with Clinton. you went through another round of it with Obama, which is Democrats came in and moveved towards fiscal sustainability after the previous guys blew everything Arguably Biden didn't really then the question is, should Democrats do it again or should they blow through it and wait for the Republicans to clean up At this point after fifty years of this game, I don't think I could look a president in the eye and say, You should give up on your priorities so the next bloke gets all the ice cream and he can invest in his priorities In which case, it's quite possible as a matter of political advice. and I feel so torn saying this, Derek But as a matter of political advice, political economic advice I'm not sure that I could say in good faith fix the debt. I might actually say blow it out D for it You know, let's give poor people some money because they've gotten so screwed for so long We're not going to ask them to tighten their belts to pay for these tax cuts for the rich Now we're screwed Both sides end up with a genuine commitment to spending more than we take in. A debt crisis is minutes away I wonder what you think is the wise path forward here because No Democratic nominee for president is going to go into October and November of twenty twenty eight talking about the need to dramatically increase taxes on a large enough group Americans so that we can afford our French like social democratic spending with a French like, broad based taxation. No Democrats want to do that No Democrat is going to want to run on Saving the rate of spending growth in Social seecurity or Medicare or Medicaid that seems incredibly unprogressive. they're certainly not going to get their way through the Democratic primary if that's there Pincipleal mess So I guess it raises this question of like, what kind of a problem? is America's debt? problem that is worth talking about, but not worth solving Or is it a problem that's actually worth solving? in which case we should probably put together some kind of plan to solve it. So I think the argument that I was just making is one that says Standard partisan warfare. won't solve it Each the optimal strategy for each side is to leve it up to the other side to fix it Now, the world's most boring thing is then to say therefore we need a bipartisan something blah, blah, blah And you and I grew up at a period where every three months they'd announce a new bipartisan something, blah, blah, blah. Hey pour went out for Simpson Bowls. Yeah. As an ex at the committee for a responsible federal budget, I poured a lot of ones out for Simpson Bowls. Yeah. And all of the, you know, and you know, that there was Simpson Bowls light and Simpson Bowls heavy and Simpson Bowls the Spring edition This, by the way, for folks who aren't unbelievably deep budget nerds from the two thousand nine era, was this was a bipartisan commission to raised taxes and cut entitlement spending under Barack Obama that, if memory recalls, went absolutely nowhere, but still dominated the A one pages of the New York Times and the Washington Post for several months. So that's the brief definition from the T. someone's tried this let's all be bipartisan thing But I mean, one thing that would force the issue is back then Everyone believed Democrats would fix the mass if Republicans didn't And so maybe it's time for Democrats to be sufficiently irresponsible. Democrats want to meet them at Bl Simpson The rerun for some sort of bipartisan thing. I fear that I'm going to depress you even more And I don't want to take us too far astray. Maybe the problem here is actually even more fundamental. Yes, we should solve problems that would cause enormous economic strife. There's no question about that But it may be that American political institutions are just not fit for the purpose And so maybe and so this is terrible because it sort of punts. literally democr small day democratic reform where we end up with more functional political institutions is the most important order of business in the United States. And so this is a story that says That's important partly because it fixes the debt, but also it fixes inequality, it fixes, you know a whole range of things. but I have come to deeply distressed by the type and quality of our politics and therefore economic policy I feel like if someomeone called me, mayaybe they call me, they call you, they call a couple of other people who have memories of two thousand eight, two thousand nine ne thing I would say is You have to start undoing the unnecessary bad that was done by the Trump administration I mean, the one big beautiful bill is what multirillion dollar tax cut that overwhelmingly benefits the people who've already won from the way that America's political economy is set up. People in the top zero point one percent don't need that extra three hundred thousand dollars. They're gonna to literally be the exact same level of happy with or without it. And if it would moderately reduce the odds of a debt crisis in America, that certainly seems like a good place to start My problem is I'm not sure where to go besides undoing the one big beautiful bill and allowing the corporate tax cuts and the S cororporp tax cuts to expire donon't feel comfortable suggesting it cut to Social Security or Medicare or Medicaid at the moment. Maybe I could be convinced by a great argument, but I'm certainly not ready to say so on a mic. I don't know exactly. how we should raise taxes in a way that would make a dent. Like, sure, maybe you could raise I believe that billionaires should probably pay some kind of alternative minimum tax so that you don't have billionaires that are paying effective tax rates that are lower than their secretaries. I think that's a good idea. but I'm also realistic. like that might raise one hundred billion dollars or something, It's not going to raise one point eight trillion. It's going to fix, you one tenth, maybe of the annual deficit Is there any low hanging fruit here Justin. likeike other than waiting for the crisis to present itself, and therefore force some kind of action on the part of the federal government, as if this is essentially like a pandemic. You have to wait for the exponential growth to start before anyone actually has a public health reaction What would be the first thing that you would do here Actually, you're part of the solution, brother So the lowest hanging fruit is economic literacy. You understand the issues and Despite or because of being a center left economics commentator, you think this is a deeply important issue and you think it's one that any responsible government should address. And so look, I'm not going to say you and I are going to solve it, but this is why Guys like you and I devote our lives to economic literacy because the stakes matter And I think we move the ball in the right direction We just probably don't move it anywhere near far enough. Okay, here's a cr You know you said I'm not willing to sign on to cutting social security or raising social security taxes What if there were ninety percent of the House who voted in favor of it? Would you sign ont to it ninety percent of the House is voting on a plan to do what exactly? too raise the social security cap and then maybe shave the degree to which the richest Americans get sort of repaid for their income under social seecurity, like something like that. Yeah, Think about whatever Simpson Pols looks like for twenty twenty six, which is U less of a cap on social security taxes, you get it a little bit later It basically made social security I may should look this up. It made social security a little bit more progressive, right? Because it increased the payroll taxes on richer Americans and also, I think slowed the rate of growth of um Social seecurity payments over time so that' let's just simplify this because I think follow people are going to hate me for the following, but it's also true Social security was set up when ' sixty five was old but now sixty five is young And nowhere in between did we say have an adult conversation to say, should we have a social security system that covers a third of people's lives Um Let's have that conversation Anyway, the point that I want to make was Whatever Bowl Simpson is for the whatever the package is, so you can do a bunch of these tweaks, right? can actually get a lot of the way there, but it's because you're doing what Elon Musk didn't, which is you're going where the money is and the money Social Security, Medicare, Medicaid Um If you need to get some left wing votes, it's also defense U or you do it on the revenue side where it's taxes there were a package that could get a ninety percent, you know, someome of us say the problem some people say the problem is the filibuster with the sixty percent rule, but actually all fiscal policy has been done by reconciliation for the past decade. So it's all been by the fifty first Senator. whichich is why we get these wacky things where left wing guys go for left wing stuff, right wing guys go for right wing stuff and probably in the long run, no one's going to do anything about the budget. What if we had a fisal filibuster that required eighty Ey votes basically the Democrats consider the Republicans, We'll fix it if you will. and they'll say We'll fix it if you will, and nothing passes otherwise That changes the game now from I'm gonna steal all the ice crebe now so there's none left for you to look, we've got two choices here Its e to fix the problem or not. And we share the burden either way Mate, I'm just spitbull and I' making it up. I like to be. Fortunately, a quick Google reveals that we're basically right about the Simpson Bowl's Social seecurity recommendations, raaising the retirement age, which was your reference, changing benefit calculations to slow cost of living adjustments, which leads to slower payments or smaller payments over time, and expanding the payroll tax cut. excuse me, expanding the payroll tax to gradually raise taxable minimum maximum earnings so that ninety percent of all covered earnings are subject to tax by twenty fifty. So essentially just tax more and more and more of the money that rich people are making