Our weekly podcast on democracy in America. This week, we explore the broader impact of the country’s dismal finances

America’s national debt is huge. Does it matter?

Checks and Balance - America’s national debt is huge. Does it matter? | Podcasts | The Economist

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Checks and Balance: Bill comes due

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America’s national debt now exceeds $34 trillion. The budget deficit–inflated by having to pay interest on all that debt–has averaged 9% of GDP over the past five years. Does that spending threaten America’s economy? And why do so few politicians seem to care?

America’s national debt <a href="https://www.economist.com/briefing/2024/05/02/americas-fiscal-outlook-is-disastrous-but-forgotten">now exceeds $34 trillion</a>. The budget deficit–inflated by having to pay interest on all that debt–has averaged 9% of GDP over the past five years. Does that spending threaten America’s economy? And why do so few politicians <a href="https://www.economist.com/leaders/2024/05/02/americas-reckless-borrowing-is-a-danger-to-its-economy-and-the-worlds">seem to care</a>?

Charlotte Howard hosts with Adam O’Neal and Idrees Kahloon. Doug Elmendorf, the Dean of the Harvard Kennedy School, and The Economist’s Simon Rabinovitch also contribute.

Charlotte Howard hosts with Adam O’Neal and Idrees Kahloon. Doug Elmendorf, the Dean of the Harvard Kennedy School, and The Economist’s Simon Rabinovitch also contribute.

Checks and Balance

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This podcast transcript is generated by third-party AI. It has not been reviewed prior to publication. We make no representations or warranties in relation to the transcript, its accuracy or its completeness, and we disclaim all liability regarding its receipt, content and use. If you have any concerns about the transcript, please email us at podcasts@economist.com.<a href="https://myaccount.economist.com/s/article/How-we-handle-AI-generated-content"> Read more about how we handle AI-generated content</a>.

Charlotte Howard [00:00:09] It was October 1981, just nine months into Ronald Reagan’s presidency, when America passed an historic mark. Its debt exceeded $1 trillion. For President Reagan, it served as a useful symbol of everything that had gone wrong with America’s economy. We’ve only balanced the budget once in the last 20 years. He had cautioned $1 trillion of debt. If we as a nation need a warning, let that be it. But even in the 80s, there was debate over the debts impact. Would rising debt change patterns of investment or consumption? Would foreign ownership of American debt endanger Americans themselves? If America couldn’t balance its budget, did it matter? With 178 days to go until the 2024 election. I’m Charlotte Howard, and this is Checks and balance from The Economist. Each week we take one big theme shaping American politics and explore it in depth. Today. How ugly is America’s fiscal picture? The national debt now exceeds $34 trillion. The budget deficit, inflated by having to pay interest on all that debt, has averaged 9% of GDP over the past five years. Does the debt threaten America’s economy? And why do so few politicians seem to care? With me today are Adam O’Neil here in New York, and Idris Calhoun, who happens to be in London. So both of you have forsaken Washington, DC for all the obvious reasons. How are you, Adam?

Charlotte Howard [00:00:09] It was October 1981, just nine months into Ronald Reagan’s presidency, when America passed an historic mark. Its debt exceeded $1 trillion. For President Reagan, it served as a useful symbol of everything that had gone wrong with America’s economy. We’ve only balanced the budget once in the last 20 years. He had cautioned $1 trillion of debt. If we as a nation need a warning, let that be it. But even in the 80s, there was debate over the debts impact. Would rising debt change patterns of investment or consumption? Would foreign ownership of American debt endanger Americans themselves? If America couldn’t balance its budget, did it matter? With 178 days to go until the 2024 election. I’m Charlotte Howard, and this is Checks and balance from The Economist. Each week we take one big theme shaping American politics and explore it in depth. Today. How ugly is America’s fiscal picture? The national debt now exceeds $34 trillion. The budget deficit, inflated by having to pay interest on all that debt, has averaged 9% of GDP over the past five years. Does the debt threaten America’s economy? And why do so few politicians seem to care? With me today are Adam O’Neil here in New York, and Idris Calhoun, who happens to be in London. So both of you have forsaken Washington, DC for all the obvious reasons. How are you, Adam?

Adam O’Neal [00:02:18] I’m doing great. I just spent the morning on the SLA, where I feel most comfortable as a cosmopolitan globalist, so I really feel at home there. Back in New York.

Adam O’Neal [00:02:18] I’m doing great. I just spent the morning on the SLA, where I feel most comfortable as a cosmopolitan globalist, so I really feel at home there. Back in New York.

Charlotte Howard [00:02:27] I have to say that I find this a deeply relaxing. Idrees - how are you?

Charlotte Howard [00:02:27] I have to say that I find this a deeply relaxing. Idrees - how are you?

Idrees Kahloon [00:02:31] Just slumming it in London with no Acela to speak of. I’m doing well. You know, it’s nice to see all the colleagues here. And apparently the weather was terrible here because everyone who sees me says that I brought the good weather with me, and it’s just a normal day.

Idrees Kahloon [00:02:31] Just slumming it in London with no Acela to speak of. I’m doing well. You know, it’s nice to see all the colleagues here. And apparently the weather was terrible here because everyone who sees me says that I brought the good weather with me, and it’s just a normal day.

Charlotte Howard [00:02:43] I’m always amazed by how much of the morning news in Britain is spent discussing both the weather and allergy season. Speaking of national crises, this week we are talking about the budget deficit, which is a subject that has gotten amazingly little play in this campaign season despite its size. And perhaps it’s not so amazing when one considers the politics of what would be needed to actually shrink that deficit over time. And to get to the bottom of that, I spoke with Doug Elmendorf, who used to run the Congressional Budget Office, the nonpartisan agency that gives economic and budget advice, and who now is dean of the Harvard Kennedy School. So when I spoke to him, I started by asking him about the scale of America’s debt.

Charlotte Howard [00:02:43] I’m always amazed by how much of the morning news in Britain is spent discussing both the weather and allergy season. Speaking of national crises, this week we are talking about the budget deficit, which is a subject that has gotten amazingly little play in this campaign season despite its size. And perhaps it’s not so amazing when one considers the politics of what would be needed to actually shrink that deficit over time. And to get to the bottom of that, I spoke with Doug Elmendorf, who used to run the Congressional Budget Office, the nonpartisan agency that gives economic and budget advice, and who now is dean of the Harvard Kennedy School. So when I spoke to him, I started by asking him about the scale of America’s debt.

Doug Elmendorf [00:03:27] The debt of the US government held by the public is now about equal to our total annual output of GDP. And that’s the only time debt has been this large relative to our output, except for a few years around the end of the Second World War. So we are the United States in almost unprecedented territory in terms of the quantity of our debt that is outstanding. And on top of that, the trajectory of debt is to increase further relative to the size of our economy. That was not true at the end of the Second World War. When the war ended. The government spending fell very sharply. The government budget was essentially balanced. And then as GDP grew over time, that actually receded relative to the size of the economy. But today, we have debt nearly as high as it was at the end of the Second World War. And under our current policies, debt will rise relative to GDP for the indefinite future and rise fairly sharply over the next few decades. So we are about to move into territory that we have not seen before, and that few countries have seen and navigated successfully.

Doug Elmendorf [00:03:27] The debt of the US government held by the public is now about equal to our total annual output of GDP. And that’s the only time debt has been this large relative to our output, except for a few years around the end of the Second World War. So we are the United States in almost unprecedented territory in terms of the quantity of our debt that is outstanding. And on top of that, the trajectory of debt is to increase further relative to the size of our economy. That was not true at the end of the Second World War. When the war ended. The government spending fell very sharply. The government budget was essentially balanced. And then as GDP grew over time, that actually receded relative to the size of the economy. But today, we have debt nearly as high as it was at the end of the Second World War. And under our current policies, debt will rise relative to GDP for the indefinite future and rise fairly sharply over the next few decades. So we are about to move into territory that we have not seen before, and that few countries have seen and navigated successfully.

Charlotte Howard [00:04:38] And what are the main drivers for that historically? And then what’s responsible for that big increase that’s projected to happen in the years to come?

Charlotte Howard [00:04:38] And what are the main drivers for that historically? And then what’s responsible for that big increase that’s projected to happen in the years to come?

Doug Elmendorf [00:04:45] The big change over the last few decades has been, ageing population in the United States, which has increased spending on programs for older Americans and an increase in health care costs. The United States today, our spending for Social Security, which is our old age pension program, and for the major health care programs like Medicare and Medicaid, that bundle spending is almost half of all spending by the US government. So that’s the underlying factor for the last few decades. On top of that, we’ve had two very big economic shocks and responses to them. That’s the global financial crisis. And then the pandemic and those downturns in our economy, lower revenue. So there was more government borrowing. And then also the government stepped in with a vigorous fiscal stimulus, which made a lot of sense under those conditions. But then we had between those episodes, we’ve had two big jumps in the amount of our debt outstanding on top of the underlying factors I described.

Doug Elmendorf [00:04:45] The big change over the last few decades has been, ageing population in the United States, which has increased spending on programs for older Americans and an increase in health care costs. The United States today, our spending for Social Security, which is our old age pension program, and for the major health care programs like Medicare and Medicaid, that bundle spending is almost half of all spending by the US government. So that’s the underlying factor for the last few decades. On top of that, we’ve had two very big economic shocks and responses to them. That’s the global financial crisis. And then the pandemic and those downturns in our economy, lower revenue. So there was more government borrowing. And then also the government stepped in with a vigorous fiscal stimulus, which made a lot of sense under those conditions. But then we had between those episodes, we’ve had two big jumps in the amount of our debt outstanding on top of the underlying factors I described.

Charlotte Howard [00:05:44] So it’s funny because some of what you’ve described is relatively familiar. There are people, at least a decade ago who have been talking about how problematic this is and the need for action. I’m thinking about the likes of Paul Ryan, whose reputation was built in part on calling attention to the debt. And some people may be familiar with these big debt clocks with numbers that tick up. And I think part of the challenge here is that the numbers do seem quite abstract. They’re impossibly high. And there has been a debate in recent years on whether it matters. So what is your take on what this means practically?

Charlotte Howard [00:05:44] So it’s funny because some of what you’ve described is relatively familiar. There are people, at least a decade ago who have been talking about how problematic this is and the need for action. I’m thinking about the likes of Paul Ryan, whose reputation was built in part on calling attention to the debt. And some people may be familiar with these big debt clocks with numbers that tick up. And I think part of the challenge here is that the numbers do seem quite abstract. They’re impossibly high. And there has been a debate in recent years on whether it matters. So what is your take on what this means practically?

Doug Elmendorf [00:06:22] Well, government debt matters. I think arguments to the contrary are not well founded. But how much government debt matters does depend on economic circumstances. Despite an increase in US debt and an increase in the debt of a lot of other governments as well. Global interest rates have basically fallen over the last few decades. That may be about to change, and we can talk about that. But the decline we’ve seen in interest rates means that the run up in debt has not been as severe as it would have been otherwise, because the governments are not paying as much interest on the outstanding debt. And also, as a number of economists have pointed out, the low interest rates mean that the debt has not been as big a problem as it would have been otherwise, because households and businesses have still had access to vulnerable funds at historically low interest rates.

Doug Elmendorf [00:06:22] Well, government debt matters. I think arguments to the contrary are not well founded. But how much government debt matters does depend on economic circumstances. Despite an increase in US debt and an increase in the debt of a lot of other governments as well. Global interest rates have basically fallen over the last few decades. That may be about to change, and we can talk about that. But the decline we’ve seen in interest rates means that the run up in debt has not been as severe as it would have been otherwise, because the governments are not paying as much interest on the outstanding debt. And also, as a number of economists have pointed out, the low interest rates mean that the debt has not been as big a problem as it would have been otherwise, because households and businesses have still had access to vulnerable funds at historically low interest rates.

Charlotte Howard [00:07:09] So that helps explain part of why there hasn’t been action on this to date. But that’s changing now, right? I mean, the environment is not what it was.

Charlotte Howard [00:07:09] So that helps explain part of why there hasn’t been action on this to date. But that’s changing now, right? I mean, the environment is not what it was.

Doug Elmendorf [00:07:18] Given how high interest rates are now relative to where they were before the pandemic and the fact that the economy, United States, is still humming along in many respects, more analysts and maybe soon the Federal Reserve are marking up their estimates of interest rates going forward. Now, we don’t know how far. Up, though. Interest rates came down a lot in this country and again in others over the past few decades. So even some reversal of that might still leave rates lower than they were ten, 20, 30 years ago. So I think you have to be careful to both allow for some rise in rates, but not save. Therefore, that puts us back to where we were 20 years ago, because there’s a lot of room between those numbers and we’re not sure where we’re going to end up.

Doug Elmendorf [00:07:18] Given how high interest rates are now relative to where they were before the pandemic and the fact that the economy, United States, is still humming along in many respects, more analysts and maybe soon the Federal Reserve are marking up their estimates of interest rates going forward. Now, we don’t know how far. Up, though. Interest rates came down a lot in this country and again in others over the past few decades. So even some reversal of that might still leave rates lower than they were ten, 20, 30 years ago. So I think you have to be careful to both allow for some rise in rates, but not save. Therefore, that puts us back to where we were 20 years ago, because there’s a lot of room between those numbers and we’re not sure where we’re going to end up.

Charlotte Howard [00:08:00] If interest rates provide one form of pressure, what are the other pressures that could add more urgency to trying to solve this problem? Or do you think we’ll just tick along with ever increasing levels of debt?

Charlotte Howard [00:08:00] If interest rates provide one form of pressure, what are the other pressures that could add more urgency to trying to solve this problem? Or do you think we’ll just tick along with ever increasing levels of debt?

Doug Elmendorf [00:08:11] The action forcing event in the United States for, important fiscal decision will be the expiration of much of the 2017 tax cuts at the end of 2025. So next year, there will be very important decisions made by the US Congress and whoever the president is, about whether to extend the expiring tax cuts or more specifically, what parts of them to extend and whether to try to pay for those extensions by making other changes in policy. Our public leaders are not being straight about the degree of the challenge and the nature of the challenge. And every time somebody says, well, we can just do X, we don’t have to do anything that’s going to look hard to anybody. That’s just not true. And that doesn’t help people’s understanding. It doesn’t help build over time enough of a political consensus for taking action. At the moment in this country, the Republicans have basically follow the Democrats lead and now promising not to change Social Security and Medicare. Democrats have largely followed Republican’s lead and promising not to raise taxes except on a small slice of the population. And so both parties have really boxed themselves in with commitments on both the spending and revenue side of the budget, but leave very little room for significant action. We have an economy that has a very high annual output and income. If the United States raised its tax rates even partway to where tax rates are in many European countries, we could reduce our deficit substantially. So we have the capacity economically to manage the debt that we have. I think the doubts might come from whether we have the political capacity to manage the debts, or whether we can get ourselves organised enough to do what has to be done. But that’s a particularly hard thing to predict.

Doug Elmendorf [00:08:11] The action forcing event in the United States for, important fiscal decision will be the expiration of much of the 2017 tax cuts at the end of 2025. So next year, there will be very important decisions made by the US Congress and whoever the president is, about whether to extend the expiring tax cuts or more specifically, what parts of them to extend and whether to try to pay for those extensions by making other changes in policy. Our public leaders are not being straight about the degree of the challenge and the nature of the challenge. And every time somebody says, well, we can just do X, we don’t have to do anything that’s going to look hard to anybody. That’s just not true. And that doesn’t help people’s understanding. It doesn’t help build over time enough of a political consensus for taking action. At the moment in this country, the Republicans have basically follow the Democrats lead and now promising not to change Social Security and Medicare. Democrats have largely followed Republican’s lead and promising not to raise taxes except on a small slice of the population. And so both parties have really boxed themselves in with commitments on both the spending and revenue side of the budget, but leave very little room for significant action. We have an economy that has a very high annual output and income. If the United States raised its tax rates even partway to where tax rates are in many European countries, we could reduce our deficit substantially. So we have the capacity economically to manage the debt that we have. I think the doubts might come from whether we have the political capacity to manage the debts, or whether we can get ourselves organised enough to do what has to be done. But that’s a particularly hard thing to predict.

Charlotte Howard [00:10:10] Adam, you’ve been watching this issue for a long time, and particularly through the Republican lens. I think you probably would be a self-described fiscal conservative, though I’ll let you, I think this of that title.

Charlotte Howard [00:10:10] Adam, you’ve been watching this issue for a long time, and particularly through the Republican lens. I think you probably would be a self-described fiscal conservative, though I’ll let you, I think this of that title.

Adam O’Neal [00:10:22] That’s a fair one.

Adam O’Neal [00:10:22] That’s a fair one.

Charlotte Howard [00:10:23] When did Republicans forsake the idea of fiscal conservatism and do you think they have?

Charlotte Howard [00:10:23] When did Republicans forsake the idea of fiscal conservatism and do you think they have?

Adam O’Neal [00:10:28] Well, typically it’s when a Democrat is in office, right? They’re pretty consistent rhetorically all the time saying, we want to reduce the deficit. We want to reduce the debt. As long as I’ve been reading about politics, as long as I’ve been talking about Republicans, that’s true. But in terms of when they’re willing to have those policy fights, it’s when a Democrat is the president. And when Donald Trump was president, they kind of went easy on him. Even before Covid, he had a relatively expansionary policy. There may be some token cuts here or there. Right. But the deficit didn’t disappear under Donald Trump. Same was the case under both of the bushes and even Ronald Reagan, although that was a Democratic Congress. So that’s going too far back. But it’s been a consistent feature of rhetorically always saying we’re fiscally conservative, but in practice it depends if the politics are good or not.

Adam O’Neal [00:10:28] Well, typically it’s when a Democrat is in office, right? They’re pretty consistent rhetorically all the time saying, we want to reduce the deficit. We want to reduce the debt. As long as I’ve been reading about politics, as long as I’ve been talking about Republicans, that’s true. But in terms of when they’re willing to have those policy fights, it’s when a Democrat is the president. And when Donald Trump was president, they kind of went easy on him. Even before Covid, he had a relatively expansionary policy. There may be some token cuts here or there. Right. But the deficit didn’t disappear under Donald Trump. Same was the case under both of the bushes and even Ronald Reagan, although that was a Democratic Congress. So that’s going too far back. But it’s been a consistent feature of rhetorically always saying we’re fiscally conservative, but in practice it depends if the politics are good or not.

Charlotte Howard [00:11:14] And Idrees. Do you think it’s fair to paint Democrats as big spenders? I’m struck by the way, the Trump campaign. Every single time the Biden administration tries to tout its economic record, the RNC, the Republican National Committee, will send an email with an update on Joe Biden’s Bankrupting America tour, which has to do with a broader criticism of Biden’s handling inflation. But it’s also linked to this core idea that Biden and Democrats spending is out of control. Do you think that that’s a fair charge, given the size of some of the programs that have been passed by the Biden administration and by its allies in Congress?

Charlotte Howard [00:11:14] And Idrees. Do you think it’s fair to paint Democrats as big spenders? I’m struck by the way, the Trump campaign. Every single time the Biden administration tries to tout its economic record, the RNC, the Republican National Committee, will send an email with an update on Joe Biden’s Bankrupting America tour, which has to do with a broader criticism of Biden’s handling inflation. But it’s also linked to this core idea that Biden and Democrats spending is out of control. Do you think that that’s a fair charge, given the size of some of the programs that have been passed by the Biden administration and by its allies in Congress?

Idrees Kahloon [00:11:49] It’s definitely a fair charge. Biden came into office and passed the American Rescue Plan, which was a $2 trillion spending package at the tail end of Covid. The US government has run budget deficits of near 6% in 2022 and 2023, well after Covid. A lot of that as a result of that spending, plus new industrial policy spending. The IMF is worried that America is going to hit a fiscal deficit of 7% of GDP, which is just enormous. That’s the kind of spending you expect if there’s a war going on, or a need to pay for a Keynesian response to a big recession. And America, of course, is not facing either of those. So that part is true, where the Republicans are somewhat disingenuous in pretending that they themselves are not big spenders. Like Adam said, during the Trump years, the economy ran hot. It didn’t run as hard as under Biden. You were seeing deficits of 3.5 or 4% of GDP. But those are still significant. And Trump’s plan when he comes into office is to extend the individual tax cuts that were in his tax bill for another decade, which would add 3 to $4 trillion to the national debt. That’s all pretty serious.

Idrees Kahloon [00:11:49] It’s definitely a fair charge. Biden came into office and passed the American Rescue Plan, which was a $2 trillion spending package at the tail end of Covid. The US government has run budget deficits of near 6% in 2022 and 2023, well after Covid. A lot of that as a result of that spending, plus new industrial policy spending. The IMF is worried that America is going to hit a fiscal deficit of 7% of GDP, which is just enormous. That’s the kind of spending you expect if there’s a war going on, or a need to pay for a Keynesian response to a big recession. And America, of course, is not facing either of those. So that part is true, where the Republicans are somewhat disingenuous in pretending that they themselves are not big spenders. Like Adam said, during the Trump years, the economy ran hot. It didn’t run as hard as under Biden. You were seeing deficits of 3.5 or 4% of GDP. But those are still significant. And Trump’s plan when he comes into office is to extend the individual tax cuts that were in his tax bill for another decade, which would add 3 to $4 trillion to the national debt. That’s all pretty serious.

Charlotte Howard [00:13:03] One thing I’m struck by in speaking with our colleague Simon Rabinovitch, who covers economics for the paper and who we’re going to hear from later in the podcast, is how recent a phenomenon this is, to some extent. I mean, I think of the deficit as a perennial problem to Adam’s point. And as we discussed at the beginning of the show, it topped 1 trillion in the 1980s. And everyone was very concerned about national debt then. But the deficit itself has really opened up just in the past 20 years. So it both is a long running problem, but one that has become much more acute. And when you look at that phenomena over the past 20 years, it does seem very obvious that it’s not at all one party that’s to blame.

Charlotte Howard [00:13:03] One thing I’m struck by in speaking with our colleague Simon Rabinovitch, who covers economics for the paper and who we’re going to hear from later in the podcast, is how recent a phenomenon this is, to some extent. I mean, I think of the deficit as a perennial problem to Adam’s point. And as we discussed at the beginning of the show, it topped 1 trillion in the 1980s. And everyone was very concerned about national debt then. But the deficit itself has really opened up just in the past 20 years. So it both is a long running problem, but one that has become much more acute. And when you look at that phenomena over the past 20 years, it does seem very obvious that it’s not at all one party that’s to blame.

Adam O’Neal [00:13:42] We look at the deficit, and we blame the Republicans on the revenue side and the Democrats on the spending side. But in reality, the Democrats, when Biden promises not to tax anyone who makes less than $400,000 a year, that’s a lot of revenue being left on the table. Mr. Elmendorf makes an excellent point that there’s been a kind of tacit compromise between the other sides, rather than, all right, we’ll cut spending a bit and we’ll give you some tax increases. There’s basically saying, all right, we’re not going to increase taxes too heavily, and we’ll give you some spending. And it’s created this perfect storm where both parties are contributing and have largely surrendered to each other on the deficit and the debt.

Adam O’Neal [00:13:42] We look at the deficit, and we blame the Republicans on the revenue side and the Democrats on the spending side. But in reality, the Democrats, when Biden promises not to tax anyone who makes less than $400,000 a year, that’s a lot of revenue being left on the table. Mr. Elmendorf makes an excellent point that there’s been a kind of tacit compromise between the other sides, rather than, all right, we’ll cut spending a bit and we’ll give you some tax increases. There’s basically saying, all right, we’re not going to increase taxes too heavily, and we’ll give you some spending. And it’s created this perfect storm where both parties are contributing and have largely surrendered to each other on the deficit and the debt.

Charlotte Howard [00:14:19] Idrees, as you pointed out, that the Biden administration has passed these really big programs, it tries to cast those spending programs as investments in America’s future. And then more broadly, it is trying to insist that it’s not fiscally irresponsible, that indeed, some measures that this white House has taken to shore up America’s finances in the long term. Do you think it’s a credible argument that the Biden administration has actually been fiscally responsible?

Charlotte Howard [00:14:19] Idrees, as you pointed out, that the Biden administration has passed these really big programs, it tries to cast those spending programs as investments in America’s future. And then more broadly, it is trying to insist that it’s not fiscally irresponsible, that indeed, some measures that this white House has taken to shore up America’s finances in the long term. Do you think it’s a credible argument that the Biden administration has actually been fiscally responsible?

Idrees Kahloon [00:14:43] I don’t think you can look at a 7% of GDP deficit when there’s no war and there’s no recession, and the fed is battling inflation and say that that is peak fiscal responsibility. The Biden administration will say, and there’s some credit to this, that Republicans wouldn’t agree with the tax increases that they wanted. So there’s certainly that. But the case is that spending is really high. You could make the claim. That there is a high Keynesian multiplier on investment spending, on infrastructure spending that will materialise in greater growth somewhere down the line. There’s a lot of debate about those multipliers, and whether they materialise in the way that people expect. Sometimes they’re a bit more rosy than the planners give them credit for. But I don’t think you could say that this administration has been anything close to fiscally austere or, I think, even fiscally responsible.

Idrees Kahloon [00:14:43] I don’t think you can look at a 7% of GDP deficit when there’s no war and there’s no recession, and the fed is battling inflation and say that that is peak fiscal responsibility. The Biden administration will say, and there’s some credit to this, that Republicans wouldn’t agree with the tax increases that they wanted. So there’s certainly that. But the case is that spending is really high. You could make the claim. That there is a high Keynesian multiplier on investment spending, on infrastructure spending that will materialise in greater growth somewhere down the line. There’s a lot of debate about those multipliers, and whether they materialise in the way that people expect. Sometimes they’re a bit more rosy than the planners give them credit for. But I don’t think you could say that this administration has been anything close to fiscally austere or, I think, even fiscally responsible.

Charlotte Howard [00:15:33] Yeah. And then I think the debate becomes, does it matter? When does America and when do Americans specifically start to feel the effects of successive administrations being fiscally responsible? So we’ll get to that in a moment. But first, Adam and Idris. What have you enjoyed from The Economist’s coverage recently?

Charlotte Howard [00:15:33] Yeah. And then I think the debate becomes, does it matter? When does America and when do Americans specifically start to feel the effects of successive administrations being fiscally responsible? So we’ll get to that in a moment. But first, Adam and Idris. What have you enjoyed from The Economist’s coverage recently?

Adam O’Neal [00:15:52] We had a lovely short piece about Kristi Noem, the governor of South Dakota, and her recent media tour. It does a great job of looking at the horrible genre of political biographies, and also how disastrous her life has gone since she chose to tell the world that she executed her dog. I highly recommend reading it. It’s when The economist said it’s sarcastic best.

Adam O’Neal [00:15:52] We had a lovely short piece about Kristi Noem, the governor of South Dakota, and her recent media tour. It does a great job of looking at the horrible genre of political biographies, and also how disastrous her life has gone since she chose to tell the world that she executed her dog. I highly recommend reading it. It’s when The economist said it’s sarcastic best.

Charlotte Howard [00:16:14] Yeah, it’s kind of funny. I mean, Mitt Romney got in a lot of trouble, right, for putting his dog on the roof of their family car on vacation. So you think that people would have learned from that, that actually shooting a dog doesn’t win votes. Idrees?

Charlotte Howard [00:16:14] Yeah, it’s kind of funny. I mean, Mitt Romney got in a lot of trouble, right, for putting his dog on the roof of their family car on vacation. So you think that people would have learned from that, that actually shooting a dog doesn’t win votes. Idrees?

Idrees Kahloon [00:16:27] I agree that was a piece of astonishing brilliance.

Idrees Kahloon [00:16:27] I agree that was a piece of astonishing brilliance.

Charlotte Howard [00:16:31] Was it written by you?

Charlotte Howard [00:16:31] Was it written by you?

Idrees Kahloon [00:16:33] It was. Yeah. Thank you. I did.

Idrees Kahloon [00:16:33] It was. Yeah. Thank you. I did.

Idrees Kahloon [00:16:37] There is an equally brilliant piece on the woeful state of American comedy, which also is full of penetrating insights that I hope that people read written by someone on this podcast.

Idrees Kahloon [00:16:37] There is an equally brilliant piece on the woeful state of American comedy, which also is full of penetrating insights that I hope that people read written by someone on this podcast.

Charlotte Howard [00:16:49] Journalistic symbiosis seems to be drifting into more of a corrupt bargain, I think, at this point. In 1998, something extraordinary happened. President Bill Clinton announced that the federal budget, after running at a deficit for decades, now, had a surplus. In 1999, Clinton was again triumphant.

Charlotte Howard [00:16:49] Journalistic symbiosis seems to be drifting into more of a corrupt bargain, I think, at this point. In 1998, something extraordinary happened. President Bill Clinton announced that the federal budget, after running at a deficit for decades, now, had a surplus. In 1999, Clinton was again triumphant.

Bill Clinton [00:17:19] According to the Office of Management and Budget. This year’s budget surplus will be at least I want to write this in joy. It at least $115 billion. This triple digit surplus is larger than projected, larger than last year, and larger, in fact, than any dollars surplus in the history of the United States. It is a landmark achievement for our economy. And when you consider where we were just seven years ago, it’s as great an American comeback as the Ryder Cup was yesterday.

Bill Clinton [00:17:19] According to the Office of Management and Budget. This year’s budget surplus will be at least I want to write this in joy. It at least $115 billion. This triple digit surplus is larger than projected, larger than last year, and larger, in fact, than any dollars surplus in the history of the United States. It is a landmark achievement for our economy. And when you consider where we were just seven years ago, it’s as great an American comeback as the Ryder Cup was yesterday.

Charlotte Howard [00:18:01] How did it happen in 1992? America’s debt to GDP ratio was close to 50%.

Charlotte Howard [00:18:01] How did it happen in 1992? America’s debt to GDP ratio was close to 50%.

Ross Perot [00:18:09] Every time higher interest rates go up 1%, that adds $28 billion to the deficit or to the debt, whichever place you want to put it. We are sitting on a ticking bomb, folks, because we have totally mismanaged our country, and we had better get it back under control.

Ross Perot [00:18:09] Every time higher interest rates go up 1%, that adds $28 billion to the deficit or to the debt, whichever place you want to put it. We are sitting on a ticking bomb, folks, because we have totally mismanaged our country, and we had better get it back under control.

Charlotte Howard [00:18:28] Third party candidate Ross Perot had helped make debt reduction a key theme of the presidential campaign, pushing the newly elected Clinton to make his own promises. This is a.

Charlotte Howard [00:18:28] Third party candidate Ross Perot had helped make debt reduction a key theme of the presidential campaign, pushing the newly elected Clinton to make his own promises. This is a.

News reader [00:18:38] Man elected with just 43% of the vote. One of Bill Clinton’s goals was to woo both Perot and his supporters, hence the president’s number one priority. Cut the deficit. The Perot war cry we are going to bring this death out. But we also have to invest.

News reader [00:18:38] Man elected with just 43% of the vote. One of Bill Clinton’s goals was to woo both Perot and his supporters, hence the president’s number one priority. Cut the deficit. The Perot war cry we are going to bring this death out. But we also have to invest.

Charlotte Howard [00:18:56] Once installed in the white House. Clinton and his advisers battled over priorities, including for new spending promised in the campaign. In the end, they advanced a plan to cut the deficit in half through a mix of spending cuts and tax increases. Republicans fervently opposed higher taxes. In 1993, Clinton’s deficit reduction bill passed without a single Republican vote. Newt Gingrich, a Republican congressman from Georgia, continued to cast the Democrats as the party of big spenders.

Charlotte Howard [00:18:56] Once installed in the white House. Clinton and his advisers battled over priorities, including for new spending promised in the campaign. In the end, they advanced a plan to cut the deficit in half through a mix of spending cuts and tax increases. Republicans fervently opposed higher taxes. In 1993, Clinton’s deficit reduction bill passed without a single Republican vote. Newt Gingrich, a Republican congressman from Georgia, continued to cast the Democrats as the party of big spenders.

Newt Gingrich [00:19:29] He said. Here’s how much we cut spending. They counted a $21 billion tax increase in Social Security recipients as a spending cut. Now, if there is any private business in America that was that dishonest with its customers, they would be faced with a lawsuit or with a criminal charge. It’s just grotesquely outrageous.

Newt Gingrich [00:19:29] He said. Here’s how much we cut spending. They counted a $21 billion tax increase in Social Security recipients as a spending cut. Now, if there is any private business in America that was that dishonest with its customers, they would be faced with a lawsuit or with a criminal charge. It’s just grotesquely outrageous.

Charlotte Howard [00:19:51] Gingrich put forward the contract with America, a blueprint for Republicans to slash the deficit and shrink the government. Americans seem to sign on. In 1994, Republicans gained control of the House of Representatives for the first time in 40 years. The following April, Newt Gingrich and Dick Armey were celebrating their success in the spring sunshine.

Charlotte Howard [00:19:51] Gingrich put forward the contract with America, a blueprint for Republicans to slash the deficit and shrink the government. Americans seem to sign on. In 1994, Republicans gained control of the House of Representatives for the first time in 40 years. The following April, Newt Gingrich and Dick Armey were celebrating their success in the spring sunshine.

Dick Armey [00:20:11] The cherry trees are in bloom. Baseball is back, and we’ve completed our contract with America. And we came in ahead of schedule and under budget.

Dick Armey [00:20:11] The cherry trees are in bloom. Baseball is back, and we’ve completed our contract with America. And we came in ahead of schedule and under budget.

Newt Gingrich [00:20:32] It says, if we break this contract, throw us out. We mean it. The editorial writers scoffed. The political pundits said it was a mistake. But the truth was, and this may be our greatest contribution to modern America, we did mean it. We did keep our word.

Newt Gingrich [00:20:32] It says, if we break this contract, throw us out. We mean it. The editorial writers scoffed. The political pundits said it was a mistake. But the truth was, and this may be our greatest contribution to modern America, we did mean it. We did keep our word.

Charlotte Howard [00:20:51] An emboldened Gingrich flexed his muscles, threatening a government shutdown if Democrats didn’t slash spending.

Charlotte Howard [00:20:51] An emboldened Gingrich flexed his muscles, threatening a government shutdown if Democrats didn’t slash spending.

Newt Gingrich [00:20:57] We are committed to getting the job done now. Not next year. Not after the election, not someday down the road. We believe the American people want a balanced budget. We believe they deserve a balanced budget. And we believe the American people support the idea of getting it done now.

Newt Gingrich [00:20:57] We are committed to getting the job done now. Not next year. Not after the election, not someday down the road. We believe the American people want a balanced budget. We believe they deserve a balanced budget. And we believe the American people support the idea of getting it done now.

Charlotte Howard [00:21:14] The resulting standoff was the longest shutdown in American history to date and hurt Republicans in the polls.

Charlotte Howard [00:21:14] The resulting standoff was the longest shutdown in American history to date and hurt Republicans in the polls.

Bill Clinton [00:21:21] I would say here that two days before Christmas, I hope some way can be found to get the the checks of the 3.5 million veterans and the aid to the 8 million children who need it just to exist. And there are almost half a million federal workers who have been working who will get everyone pay.

Bill Clinton [00:21:21] I would say here that two days before Christmas, I hope some way can be found to get the the checks of the 3.5 million veterans and the aid to the 8 million children who need it just to exist. And there are almost half a million federal workers who have been working who will get everyone pay.

Newt Gingrich [00:21:38] We feel strongly that federal employees ought to be back. We also have an obligation under the continuing resolution that was adopted about six weeks ago, to get a balanced budget by next Wednesday morning at the latest.

Newt Gingrich [00:21:38] We feel strongly that federal employees ought to be back. We also have an obligation under the continuing resolution that was adopted about six weeks ago, to get a balanced budget by next Wednesday morning at the latest.

Charlotte Howard [00:21:51] For the fiercest budget hawks. The fight had clipped their wings. The Balanced Budget Act of 1997 included some cuts to health spending, but also created a new health insurance program for kids. Many of the cuts in that bill were eventually reversed just a few years later, and Clinton successor George W Bush saw deficits swell as he cut taxes, expanded drug benefits for the elderly, and went to war in Iraq. America’s surplus had peaked in 2000 at $236 billion, and the country has run a budget deficit ever since. With little political will to shrink it. Idrees, when you look back to the 90s and that rare big surplus that Bill Clinton was touting. Who do you give credit to?

Charlotte Howard [00:21:51] For the fiercest budget hawks. The fight had clipped their wings. The Balanced Budget Act of 1997 included some cuts to health spending, but also created a new health insurance program for kids. Many of the cuts in that bill were eventually reversed just a few years later, and Clinton successor George W Bush saw deficits swell as he cut taxes, expanded drug benefits for the elderly, and went to war in Iraq. America’s surplus had peaked in 2000 at $236 billion, and the country has run a budget deficit ever since. With little political will to shrink it. Idrees, when you look back to the 90s and that rare big surplus that Bill Clinton was touting. Who do you give credit to?

Idrees Kahloon [00:22:43] I think both Bill Clinton and Gingrich can take some credit for the budget surplus that America briefly and beautifully had. There were other things at play. The economy overall was doing very well. That obviously helped swell budgets. America had just won the Cold War. This was the period that people were wistfully remembering as the end of history, and the idea that America would need to spend gobs of money on its military didn’t seem necessary. America just seemed like the sole hegemon at that time. China was not really considered a threat at all. So it was also a time when divided government meant that the compromise was lower spending and higher tax revenue. And what we see now is that divided government yields higher spending and often less tax revenue. That’s the kind of compromise that people have worked out. So I think that there is a lot of credit that could be apportioned around.

Idrees Kahloon [00:22:43] I think both Bill Clinton and Gingrich can take some credit for the budget surplus that America briefly and beautifully had. There were other things at play. The economy overall was doing very well. That obviously helped swell budgets. America had just won the Cold War. This was the period that people were wistfully remembering as the end of history, and the idea that America would need to spend gobs of money on its military didn’t seem necessary. America just seemed like the sole hegemon at that time. China was not really considered a threat at all. So it was also a time when divided government meant that the compromise was lower spending and higher tax revenue. And what we see now is that divided government yields higher spending and often less tax revenue. That’s the kind of compromise that people have worked out. So I think that there is a lot of credit that could be apportioned around.

Charlotte Howard [00:23:37] There was also pressure in the 1990s from the markets and from traders themselves. Right. So bond yields, which determine the rate that the government has to pay to borrow in capital markets. In the 90s, there was this huge surge driven in part by these traders, that the bond yields jumped by more than 50%, and that provided some pressure on the government. James Carville famously pointed to the bond market as being a source of power and influence over actors in Washington. That’s not at all happening today, in part because the fed has been buying American treasuries very aggressively. Also, America looks like a better place for many people who are buying treasuries compared with Europe. But is there a risk to the broader economy? There’s still this open question about how problematic it actually is. Adam, what do you make of that question?

Charlotte Howard [00:23:37] There was also pressure in the 1990s from the markets and from traders themselves. Right. So bond yields, which determine the rate that the government has to pay to borrow in capital markets. In the 90s, there was this huge surge driven in part by these traders, that the bond yields jumped by more than 50%, and that provided some pressure on the government. James Carville famously pointed to the bond market as being a source of power and influence over actors in Washington. That’s not at all happening today, in part because the fed has been buying American treasuries very aggressively. Also, America looks like a better place for many people who are buying treasuries compared with Europe. But is there a risk to the broader economy? There’s still this open question about how problematic it actually is. Adam, what do you make of that question?

Adam O’Neal [00:24:25] I think it’s not a problem until it is. Right. And that’s really the danger. If you talk to European heads of state or government, they’re quite envious of the United States being the world reserve currency. Things that we can get away with the desirability of purchasing our bonds. But eventually, you see, the desirability of the United States becomes a little more dubious. And now, with the ratings agencies starting to slightly downgrade our debt, I think two of them have so far already. You’re still a long way from the United States turning into Argentina, which may never happen. But you can recall that 100 years ago, if you were an Italian immigrant, you’d look at Buenos Aires or New York, and they both looked about equally appealing, and you’d go check it out. And so when we think about the US is dead and how markets can’t react, we really can’t think about next year or two years, but across decades. And we’ve been doing this for decades now. And that’s when you start to see those storm clouds on the horizon.

Adam O’Neal [00:24:25] I think it’s not a problem until it is. Right. And that’s really the danger. If you talk to European heads of state or government, they’re quite envious of the United States being the world reserve currency. Things that we can get away with the desirability of purchasing our bonds. But eventually, you see, the desirability of the United States becomes a little more dubious. And now, with the ratings agencies starting to slightly downgrade our debt, I think two of them have so far already. You’re still a long way from the United States turning into Argentina, which may never happen. But you can recall that 100 years ago, if you were an Italian immigrant, you’d look at Buenos Aires or New York, and they both looked about equally appealing, and you’d go check it out. And so when we think about the US is dead and how markets can’t react, we really can’t think about next year or two years, but across decades. And we’ve been doing this for decades now. And that’s when you start to see those storm clouds on the horizon.

Idrees Kahloon [00:25:17] You know, I think that even if there isn’t a kind of cataclysmic Weimar Germany like crisis, which is, you know, the end point of a of a debt spiral, there are still reasons to worry about it now. So first, in terms of sheer outlays, the US government is on track to spend about $1 trillion on servicing its debt this year, which is more than it spends on the military in America. Doesn’t spend a little bit of money on the military. There is the opportunity cost of that expenditure, which in this case, I think is serious. And you also have to think about what is happening with the spending itself. Is the spending that the government is doing. Is it hastening inflation, which I think you could make an argument that it hasn’t helped inflation. What is it being spent towards if it is actually producing investments in innovations that boost productivity, that could be good for growth in a couple of decades time, if it is subsidising sclerotic industries and protecting industries that Joe Biden, for domestic reasons, wants to keep protected, that will not result in productivity growth and therefore not economic growth. So I think short of a crisis, there are still reasons to take a hard look at this.

Idrees Kahloon [00:25:17] You know, I think that even if there isn’t a kind of cataclysmic Weimar Germany like crisis, which is, you know, the end point of a of a debt spiral, there are still reasons to worry about it now. So first, in terms of sheer outlays, the US government is on track to spend about $1 trillion on servicing its debt this year, which is more than it spends on the military in America. Doesn’t spend a little bit of money on the military. There is the opportunity cost of that expenditure, which in this case, I think is serious. And you also have to think about what is happening with the spending itself. Is the spending that the government is doing. Is it hastening inflation, which I think you could make an argument that it hasn’t helped inflation. What is it being spent towards if it is actually producing investments in innovations that boost productivity, that could be good for growth in a couple of decades time, if it is subsidising sclerotic industries and protecting industries that Joe Biden, for domestic reasons, wants to keep protected, that will not result in productivity growth and therefore not economic growth. So I think short of a crisis, there are still reasons to take a hard look at this.

Charlotte Howard [00:26:31] One of the things that political reporters read carefully are these periodic trustee reports that look at the health of the Medicare and Social Security programs, these giant entitlement programs for America’s elderly. Those are pretty worrisome. One that came out earlier this week that put more of a clock on how severe this problem might be and when it might have an impact.

Charlotte Howard [00:26:31] One of the things that political reporters read carefully are these periodic trustee reports that look at the health of the Medicare and Social Security programs, these giant entitlement programs for America’s elderly. Those are pretty worrisome. One that came out earlier this week that put more of a clock on how severe this problem might be and when it might have an impact.

Adam O’Neal [00:26:56] Essentially, the way that these entitlements are funded are through trust funds. And the idea is that eventually those trust funds will run out, because you used to have a lot of really young people and not a lot of old people, and that ratio has flipped or in the slight oversimplification, but that’s the problem. And so, for example, if you look at Social Security that runs out in 2035 and then you’re forced into a decision as policymakers do, you cut benefits, do you hike taxes, or do you use deficit spending to cover the gap between what’s coming in and what’s going out? And if you choose the final option, that means that you’re probably crowding out other spending and investment, and that gets very unfair. It for other possible productive uses of government spending. That Idrees was alluding to like infrastructure and investments in science, research and development, that sort of thing.

Adam O’Neal [00:26:56] Essentially, the way that these entitlements are funded are through trust funds. And the idea is that eventually those trust funds will run out, because you used to have a lot of really young people and not a lot of old people, and that ratio has flipped or in the slight oversimplification, but that’s the problem. And so, for example, if you look at Social Security that runs out in 2035 and then you’re forced into a decision as policymakers do, you cut benefits, do you hike taxes, or do you use deficit spending to cover the gap between what’s coming in and what’s going out? And if you choose the final option, that means that you’re probably crowding out other spending and investment, and that gets very unfair. It for other possible productive uses of government spending. That Idrees was alluding to like infrastructure and investments in science, research and development, that sort of thing.

Charlotte Howard [00:27:44] Are there examples Idrees of other countries where this phenomenon has proved particularly damaging, or which provide a model for how to weather it? Or is America just so big that these comparisons don’t really add up too much?

Charlotte Howard [00:27:44] Are there examples Idrees of other countries where this phenomenon has proved particularly damaging, or which provide a model for how to weather it? Or is America just so big that these comparisons don’t really add up too much?

Idrees Kahloon [00:27:57] I think there are two examples to think about. And of course, America’s going to be different because it has the dollar, which is still the world’s reserve currency and underlies the global financial system for the moment. But the counter example of the situation America wants to avoid is what Britain went through. Liz Truss, who was only in office for 49 days, managed to record Premiership by trying to put through an unfunded tax cut. And on the other end, you have Japan, which has a headline debt to GDP ratio of something like 250%. If you subtract out government assets, you get something like 160% of GDP, which is still very high, a lot higher than America has at the moment. And yet things are trundling along just fine. The yield on Japanese debt is not very high. Investors are not skittish about the ability of the Japanese government to pay them back. So what lessons can you extract from the two of them? One is that mechanics actually matter a lot. So one of the reasons that Liz Truss faced the rebellion that she did was that she skipped the kind of budgetary analysis that usually accompanies, these sorts of proposals and that spooked the markets out. So the manner in which you conduct economic policy can affect how markets react, sometimes even more than the aggregate amount that’s been borrowed. And so that matters, I think, a lot. What do you think about the presidential election. And Donald Trump is probably going to be a high spending president. Joe Biden will probably continue to spend money. But if Donald Trump goes about it by rejecting CBO analyses and appointing someone who the markets don’t trust to be head of the Federal Reserve, that’s a very different scenario from what we have now, and I think it could be materially important.

Idrees Kahloon [00:27:57] I think there are two examples to think about. And of course, America’s going to be different because it has the dollar, which is still the world’s reserve currency and underlies the global financial system for the moment. But the counter example of the situation America wants to avoid is what Britain went through. Liz Truss, who was only in office for 49 days, managed to record Premiership by trying to put through an unfunded tax cut. And on the other end, you have Japan, which has a headline debt to GDP ratio of something like 250%. If you subtract out government assets, you get something like 160% of GDP, which is still very high, a lot higher than America has at the moment. And yet things are trundling along just fine. The yield on Japanese debt is not very high. Investors are not skittish about the ability of the Japanese government to pay them back. So what lessons can you extract from the two of them? One is that mechanics actually matter a lot. So one of the reasons that Liz Truss faced the rebellion that she did was that she skipped the kind of budgetary analysis that usually accompanies, these sorts of proposals and that spooked the markets out. So the manner in which you conduct economic policy can affect how markets react, sometimes even more than the aggregate amount that’s been borrowed. And so that matters, I think, a lot. What do you think about the presidential election. And Donald Trump is probably going to be a high spending president. Joe Biden will probably continue to spend money. But if Donald Trump goes about it by rejecting CBO analyses and appointing someone who the markets don’t trust to be head of the Federal Reserve, that’s a very different scenario from what we have now, and I think it could be materially important.

Charlotte Howard [00:29:44] Yeah, I think that underlines why this election is very important and also is a reminder of how strange it is that the debt isn’t really coming up at all in campaign stops. We’ll be back in a moment to talk about how America’s debt is being discussed or not, and this year’s election, and whether politicians might ever take action to shrink it. Simon Rabinovich is our U.S. economics editor and the author of a briefing that ran in last week’s issue of The Economist. When we spoke, I asked him about the events that might turn what he calls a risk into a crisis.

Charlotte Howard [00:29:44] Yeah, I think that underlines why this election is very important and also is a reminder of how strange it is that the debt isn’t really coming up at all in campaign stops. We’ll be back in a moment to talk about how America’s debt is being discussed or not, and this year’s election, and whether politicians might ever take action to shrink it. Simon Rabinovich is our U.S. economics editor and the author of a briefing that ran in last week’s issue of The Economist. When we spoke, I asked him about the events that might turn what he calls a risk into a crisis.

Simon Rabinovitch [00:30:31] You know, you look at the scale of Treasury issuance basically every single year in terms of both rollover of existing debt plus issuance of new debt. To cover the deficit, the Treasury has to sell roughly $10 trillion worth of bonds to the market. That’s a vast amount of bond sales. Any given sale, it’s conceivable that investors might get a little bit nervous, might baulk at the sale, might not want to buy, might demand much higher rates. We’ve kind of seen inklings of that last autumn, when the Treasury indicated how much was going to sell in the coming months. There was a slight panic in bond markets, and rates on U.S. government debt went up by about one percentage point quite quickly. That was quite alarming. I think events like that, we might begin to see more of them in the future, and that would be an indication that the scale of debt increase is, if not unsustainable. It’s approaching levels where sustainability is being called into question.

Simon Rabinovitch [00:30:31] You know, you look at the scale of Treasury issuance basically every single year in terms of both rollover of existing debt plus issuance of new debt. To cover the deficit, the Treasury has to sell roughly $10 trillion worth of bonds to the market. That’s a vast amount of bond sales. Any given sale, it’s conceivable that investors might get a little bit nervous, might baulk at the sale, might not want to buy, might demand much higher rates. We’ve kind of seen inklings of that last autumn, when the Treasury indicated how much was going to sell in the coming months. There was a slight panic in bond markets, and rates on U.S. government debt went up by about one percentage point quite quickly. That was quite alarming. I think events like that, we might begin to see more of them in the future, and that would be an indication that the scale of debt increase is, if not unsustainable. It’s approaching levels where sustainability is being called into question.

Charlotte Howard [00:31:29] One thing that hawks often refer to are the trust funds for entitlement programs, Social Security and Medicare, and the deadline for when these trust funds might run out of money. And that is not a phenomenon that seems to have inspired much action. Is that because we shouldn’t take that risk? Seriously, it’s less important than the risk you just outlined, or because it’s just a problem that no one has an answer to, and so they choose to ignore.

Charlotte Howard [00:31:29] One thing that hawks often refer to are the trust funds for entitlement programs, Social Security and Medicare, and the deadline for when these trust funds might run out of money. And that is not a phenomenon that seems to have inspired much action. Is that because we shouldn’t take that risk? Seriously, it’s less important than the risk you just outlined, or because it’s just a problem that no one has an answer to, and so they choose to ignore.

Simon Rabinovitch [00:31:55] Right now, they are on a trajectory that in the early 2030s, both trust funds for Medicare and Social Security will run out of cash. What then will happen is somewhat uncertain. One possibility, theoretically, is that the government will have to turn around and say to beneficiaries, we only have so much money. Therefore you’re benefits are going to be cut by 25%. That, of course, politically would be untenable. So I think what’s much more likely is that in the early 2030s, if the problem is not resolved, if entitlement spending is not capped, if there’s not new funding delivered, is that you simply would have the government having to allocate much more of its funding to making these entitlement programs whole. So you’d have a scenario where in the early 2030s, the government budget, instead of going to things like transportation and education and science, you basically would have a massive funding vehicle to one pay off interest on existing debt and two, to cover entitlements for retirees. And that basically would be what the government does, which is a very limited form of government, and certainly not at all what America ought to be doing for its people.

Simon Rabinovitch [00:31:55] Right now, they are on a trajectory that in the early 2030s, both trust funds for Medicare and Social Security will run out of cash. What then will happen is somewhat uncertain. One possibility, theoretically, is that the government will have to turn around and say to beneficiaries, we only have so much money. Therefore you’re benefits are going to be cut by 25%. That, of course, politically would be untenable. So I think what’s much more likely is that in the early 2030s, if the problem is not resolved, if entitlement spending is not capped, if there’s not new funding delivered, is that you simply would have the government having to allocate much more of its funding to making these entitlement programs whole. So you’d have a scenario where in the early 2030s, the government budget, instead of going to things like transportation and education and science, you basically would have a massive funding vehicle to one pay off interest on existing debt and two, to cover entitlements for retirees. And that basically would be what the government does, which is a very limited form of government, and certainly not at all what America ought to be doing for its people.

Charlotte Howard [00:33:07] So by your description, that’s a pretty grim future for the early 2030s. The reality today in 2024 is that no one is discussing entitlement reform. And indeed, the two presidential candidates are pursuing policies, some of which are sensible, right? And some of which are less so. That would exacerbate the deficit.

Charlotte Howard [00:33:07] So by your description, that’s a pretty grim future for the early 2030s. The reality today in 2024 is that no one is discussing entitlement reform. And indeed, the two presidential candidates are pursuing policies, some of which are sensible, right? And some of which are less so. That would exacerbate the deficit.

Simon Rabinovitch [00:33:25] I think the Democrats, to their credit, when you see their budget proposals, they are trying to cost things out. So Biden does have a whole range of tax proposals that he would like to institute, you know, from the billionaire minimum tax to a higher capital gains tax on the wealthy as far as renewing Trump’s tax cuts. Biden would want to have higher income taxes on people earning more than $400,000 a year. He’d like to have a slightly higher corporate tax rate. So there are a series of fairly serious revenue raisers that the Democrats are proposing. I think the problem with the Democrats is that even if they do manage to pass these tax increases and to raise more revenues, there would be a huge amount of pressure on them to turn around and increase spending to do things like a much more generous child tax credit. I think the Democrat base would be somewhat exasperated by the example of the 1990s, where Bill Clinton helped to get the budget in order, but all that did was pave the way for very aggressive tax cuts by George Bush in the early 2000s on the Republican side. There is some talk about revenue raisers as well. Trump talks about wanting to have a lot more drilling for oil that that would help to pay down the national debt, which is a completely bonkers claim. But at least he’s talking about the idea of trying to pay down the national debt and equally instituting tariffs. Implementing a 10% universal tariff, as Trump had suggested, would actually generate hundreds of billions of dollars of revenue for the federal government. So that is also kind of a real tax increase to consider. But then when you look at what they would do in terms of making the 2017 tax cuts permanent, that would be remarkably deleterious for the federal budget. But I think more to the point, it’s less about the individual fiscal policies that Trump is proposing and more about the range of things that he wants to do or potentially wants to do. If you look at the talk of his advisers, so things like making the Federal Reserve less independent, potentially forcing it to consult with President Trump if he’s elected before cutting or raising interest rates, blocking immigrants, instituting tariffs, which will lead to higher and. All of these kinds of policies are ones that would, one lead to structurally higher inflation, which would force the fed to have higher interest rates, raise the cost of servicing the debt for the federal government. And two, I think they would just fundamentally lead to concerns in financial markets about how the US economy is being managed. The US is the world’s greatest safe haven. But if you begin to have the US going down the path of making the fed not independent, I think some of that safe haven premium that the US benefits from would begin to dissipate. That would raise the cost of financing debt in America, that would drive up inflation, that would make the national debt much more difficult to manage. So purely, you know, attitude only if you look at what Trump would like to do or potentially would like to do. I think it’s a much more dangerous path fiscally for the US.

Simon Rabinovitch [00:33:25] I think the Democrats, to their credit, when you see their budget proposals, they are trying to cost things out. So Biden does have a whole range of tax proposals that he would like to institute, you know, from the billionaire minimum tax to a higher capital gains tax on the wealthy as far as renewing Trump’s tax cuts. Biden would want to have higher income taxes on people earning more than $400,000 a year. He’d like to have a slightly higher corporate tax rate. So there are a series of fairly serious revenue raisers that the Democrats are proposing. I think the problem with the Democrats is that even if they do manage to pass these tax increases and to raise more revenues, there would be a huge amount of pressure on them to turn around and increase spending to do things like a much more generous child tax credit. I think the Democrat base would be somewhat exasperated by the example of the 1990s, where Bill Clinton helped to get the budget in order, but all that did was pave the way for very aggressive tax cuts by George Bush in the early 2000s on the Republican side. There is some talk about revenue raisers as well. Trump talks about wanting to have a lot more drilling for oil that that would help to pay down the national debt, which is a completely bonkers claim. But at least he’s talking about the idea of trying to pay down the national debt and equally instituting tariffs. Implementing a 10% universal tariff, as Trump had suggested, would actually generate hundreds of billions of dollars of revenue for the federal government. So that is also kind of a real tax increase to consider. But then when you look at what they would do in terms of making the 2017 tax cuts permanent, that would be remarkably deleterious for the federal budget. But I think more to the point, it’s less about the individual fiscal policies that Trump is proposing and more about the range of things that he wants to do or potentially wants to do. If you look at the talk of his advisers, so things like making the Federal Reserve less independent, potentially forcing it to consult with President Trump if he’s elected before cutting or raising interest rates, blocking immigrants, instituting tariffs, which will lead to higher and. All of these kinds of policies are ones that would, one lead to structurally higher inflation, which would force the fed to have higher interest rates, raise the cost of servicing the debt for the federal government. And two, I think they would just fundamentally lead to concerns in financial markets about how the US economy is being managed. The US is the world’s greatest safe haven. But if you begin to have the US going down the path of making the fed not independent, I think some of that safe haven premium that the US benefits from would begin to dissipate. That would raise the cost of financing debt in America, that would drive up inflation, that would make the national debt much more difficult to manage. So purely, you know, attitude only if you look at what Trump would like to do or potentially would like to do. I think it’s a much more dangerous path fiscally for the US.

Charlotte Howard [00:36:32] One thing I think is really worth exploring is why there’s no political will to deal with this. Whether that might change and what sensible reforms might look like. Adam, the contrast between the gravity of the issues that Simon outlined and the political complacency about them in Washington is really quite striking. And I’m wondering when you think that really set in.

Charlotte Howard [00:36:32] One thing I think is really worth exploring is why there’s no political will to deal with this. Whether that might change and what sensible reforms might look like. Adam, the contrast between the gravity of the issues that Simon outlined and the political complacency about them in Washington is really quite striking. And I’m wondering when you think that really set in.

Adam O’Neal [00:36:57] When Obama came into office in 2009, a lot of Republicans, fiscal conservatives, libertarians, whoever they were, genuinely concerned of a repeat of the 1970s and massive inflation sparked by Obama’s stimulus package and other spending priorities in response to the Great Recession. The financial crisis didn’t happen. Inflation stayed. Perfectly fine. I think it was basically more or less on target throughout the Obama administration and also through the Trump administration. And I think a lot of folks felt like they’d been not necessarily burned, but they’d sort of lost some credibility as being overly concerned about inflation. But a lot of the worst concerns now is the situation grows more serious and we’re actually having inflation. We’re having to jack up interest rates. The deficit and the debt situation has grown significantly more serious. But no one wants to talk about it. Right. And I talked to someone close to the Trump campaign recently. And he said, look, we’re not going to run on fixing entitlements. Obviously, they need to be fixed. It’s just reality. He’s like, but what’s the point in getting beaten up? They’re just going to demagogue us and say that we want to kill grandma and we want to starve poor people. He’s like, we’re going to shut up about it. And if a crisis comes, yeah, we’re going to have to fix it. But there’s just no victory for us. There’s no upside for us in actually talking about this right now.

Adam O’Neal [00:36:57] When Obama came into office in 2009, a lot of Republicans, fiscal conservatives, libertarians, whoever they were, genuinely concerned of a repeat of the 1970s and massive inflation sparked by Obama’s stimulus package and other spending priorities in response to the Great Recession. The financial crisis didn’t happen. Inflation stayed. Perfectly fine. I think it was basically more or less on target throughout the Obama administration and also through the Trump administration. And I think a lot of folks felt like they’d been not necessarily burned, but they’d sort of lost some credibility as being overly concerned about inflation. But a lot of the worst concerns now is the situation grows more serious and we’re actually having inflation. We’re having to jack up interest rates. The deficit and the debt situation has grown significantly more serious. But no one wants to talk about it. Right. And I talked to someone close to the Trump campaign recently. And he said, look, we’re not going to run on fixing entitlements. Obviously, they need to be fixed. It’s just reality. He’s like, but what’s the point in getting beaten up? They’re just going to demagogue us and say that we want to kill grandma and we want to starve poor people. He’s like, we’re going to shut up about it. And if a crisis comes, yeah, we’re going to have to fix it. But there’s just no victory for us. There’s no upside for us in actually talking about this right now.

Charlotte Howard [00:38:14] Part of the reason that Clinton paid attention to the deficit is because Ross Perot won 19% of the popular vote. I mean, that’s a very, very big number by calling attention to this issue. And now these days, to the extent there is any attention on the government’s finances, it’s really around the debt ceiling standoffs. Is there any substantive impact that you see from those Idrees on not just the theatrics of Washington, but on the substance of the government’s finances?

Charlotte Howard [00:38:14] Part of the reason that Clinton paid attention to the deficit is because Ross Perot won 19% of the popular vote. I mean, that’s a very, very big number by calling attention to this issue. And now these days, to the extent there is any attention on the government’s finances, it’s really around the debt ceiling standoffs. Is there any substantive impact that you see from those Idrees on not just the theatrics of Washington, but on the substance of the government’s finances?

Idrees Kahloon [00:38:46] The debt ceiling debates aren’t substantive. That is a debate about whether or not America should pay the debts that it has already incurred, which it obviously should. That’s a bit like saying you’re going to start spending less money by refusing to pay your mortgage. It’s just not economically sensible. But what Adam points to is, I think, right, which is that both campaigns have intuited that discussing any sort of entitlement reform or spending cuts is very unpopular. So even though Americans on the whole, like the idea of reducing deficit spending, they also really don’t like the idea of having to face the fact that entitlement commitments are not sustainable. And so everyone has the incentive to kick the can down the road. And they do. And the irony is that they are doing at a time when interest rates on the debt are close to 5%, when the incursion is actually significant. Whereas during the Obama years, interest rates were low and it actually didn’t matter as much.

Idrees Kahloon [00:38:46] The debt ceiling debates aren’t substantive. That is a debate about whether or not America should pay the debts that it has already incurred, which it obviously should. That’s a bit like saying you’re going to start spending less money by refusing to pay your mortgage. It’s just not economically sensible. But what Adam points to is, I think, right, which is that both campaigns have intuited that discussing any sort of entitlement reform or spending cuts is very unpopular. So even though Americans on the whole, like the idea of reducing deficit spending, they also really don’t like the idea of having to face the fact that entitlement commitments are not sustainable. And so everyone has the incentive to kick the can down the road. And they do. And the irony is that they are doing at a time when interest rates on the debt are close to 5%, when the incursion is actually significant. Whereas during the Obama years, interest rates were low and it actually didn’t matter as much.

Charlotte Howard [00:39:50] Of the ideas that are bandied about from time to time and which are still presented in Washington. There’s a Republican study committee in the House that proposed, for example, increasing the retirement age very quietly and reducing benefits for Social Security. Biden talks about raising taxes of those earning $400,000 or more, as we alluded to earlier. So there are these kind of nods to changes that might start to address the problem. How much room do politicians actually have to kerb spending? Because there’s not that much that’s actually discretionary. If you look at the total sum right.

Charlotte Howard [00:39:50] Of the ideas that are bandied about from time to time and which are still presented in Washington. There’s a Republican study committee in the House that proposed, for example, increasing the retirement age very quietly and reducing benefits for Social Security. Biden talks about raising taxes of those earning $400,000 or more, as we alluded to earlier. So there are these kind of nods to changes that might start to address the problem. How much room do politicians actually have to kerb spending? Because there’s not that much that’s actually discretionary. If you look at the total sum right.

Adam O’Neal [00:40:23] This is the fun thing about all of these high intensity debates. And the debt ceiling is a great example of this, because we’re talking about defaulting on the debt and the numbers that they’re fighting about or this isn’t exactly, but it’s really something like, okay, in ten years, the debt will be 40.1 trillion instead of 40.3 trillion. These are the discretionary numbers that they’re fighting over a $50 billion cut here, a $60 billion cut here. The RSC will put out a study that maybe could actually move trillions of dollars, but it’s dead on arrival. Right. President Biden’s plan to increase cap gains taxes to like 45% and tax unrealised cap gains for people with, I think, 100 million more in assets, that’s never going to get through Congress. But when you get down to it and they negotiate things that could actually pass, it’s just peanuts compared to what the problem is. Until there is a crisis, of course, and they’re forced to do something.

Adam O’Neal [00:40:23] This is the fun thing about all of these high intensity debates. And the debt ceiling is a great example of this, because we’re talking about defaulting on the debt and the numbers that they’re fighting about or this isn’t exactly, but it’s really something like, okay, in ten years, the debt will be 40.1 trillion instead of 40.3 trillion. These are the discretionary numbers that they’re fighting over a $50 billion cut here, a $60 billion cut here. The RSC will put out a study that maybe could actually move trillions of dollars, but it’s dead on arrival. Right. President Biden’s plan to increase cap gains taxes to like 45% and tax unrealised cap gains for people with, I think, 100 million more in assets, that’s never going to get through Congress. But when you get down to it and they negotiate things that could actually pass, it’s just peanuts compared to what the problem is. Until there is a crisis, of course, and they’re forced to do something.

Charlotte Howard [00:41:17] I think that’s the big question. This came up in one of our editorial meetings recently, which is this can’t go on forever, but when exactly is the deadline and no one has a precise date. And so, yes, people will act once there’s a crisis, but if you don’t know when it will come. Why act now? Idrees of the various proposals that you have heard to help tackle this problem. If you were a benevolent dictator of the United States, what would you do to bring the government’s finances into order?

Charlotte Howard [00:41:17] I think that’s the big question. This came up in one of our editorial meetings recently, which is this can’t go on forever, but when exactly is the deadline and no one has a precise date. And so, yes, people will act once there’s a crisis, but if you don’t know when it will come. Why act now? Idrees of the various proposals that you have heard to help tackle this problem. If you were a benevolent dictator of the United States, what would you do to bring the government’s finances into order?

Idrees Kahloon [00:41:45] There are a couple of things you can do if you want European style welfare states, which I think Americans do, then you need European style taxes, which are not just born on people making more than $400,000. They’re equivalent. There’s a saying by the middle class, so you would need probably value added taxes, which are more broad based. You would need carbon tax, I think, both for its good effects on emissions reductions but also for its increase in revenues. I think that would do a lot. And you would need to reform entitlements, which only a dictator could really do, because the politics of it are so hard. There are things you could do to make this easier. You can, for example, hold people who are near retirement age harmless in terms of their commitments and probably screw over my generation in the process. It’s all hard. There’s no single magic bullet, but it would be something in that panoply of solutions.

Idrees Kahloon [00:41:45] There are a couple of things you can do if you want European style welfare states, which I think Americans do, then you need European style taxes, which are not just born on people making more than $400,000. They’re equivalent. There’s a saying by the middle class, so you would need probably value added taxes, which are more broad based. You would need carbon tax, I think, both for its good effects on emissions reductions but also for its increase in revenues. I think that would do a lot. And you would need to reform entitlements, which only a dictator could really do, because the politics of it are so hard. There are things you could do to make this easier. You can, for example, hold people who are near retirement age harmless in terms of their commitments and probably screw over my generation in the process. It’s all hard. There’s no single magic bullet, but it would be something in that panoply of solutions.

Charlotte Howard [00:42:40] Something in that panoply of solutions feels like a great bumper sticker for your future campaign Idrees. And 20 something whenever you decide to run 2040.

Charlotte Howard [00:42:40] Something in that panoply of solutions feels like a great bumper sticker for your future campaign Idrees. And 20 something whenever you decide to run 2040.

Charlotte Howard [00:42:50] Okay, now that we’ve solved America’s debt crisis, I’m going to ask you if you can provide answers to this quiz. There’s a financial theme this week we heard a little bit about the bond traders of the 1990s and their impact. You’re going to hear a clip now, which is a speaker describing a visit to a Wall Street trading floor in the 1980s. In the pre-internet era, the traders weren’t tapping at keyboards, but they were making lots of noise.

Charlotte Howard [00:42:50] Okay, now that we’ve solved America’s debt crisis, I’m going to ask you if you can provide answers to this quiz. There’s a financial theme this week we heard a little bit about the bond traders of the 1990s and their impact. You’re going to hear a clip now, which is a speaker describing a visit to a Wall Street trading floor in the 1980s. In the pre-internet era, the traders weren’t tapping at keyboards, but they were making lots of noise.

Quiz [00:43:17] One of the things that moved me most resonated in my gizzard, like a powerful church organ, was to get off the elevator for the first time and one of these big investment banking houses in New York, up almost 50 floors and one of these glass spires and hear an ungodly roar, such as the roar that you hear if you’re outside a football stadium and the last moments of some bloodthirsty match. And this roar rises up from the state, and you say, what in the name of God is that? That same Sam.

Quiz [00:43:17] One of the things that moved me most resonated in my gizzard, like a powerful church organ, was to get off the elevator for the first time and one of these big investment banking houses in New York, up almost 50 floors and one of these glass spires and hear an ungodly roar, such as the roar that you hear if you’re outside a football stadium and the last moments of some bloodthirsty match. And this roar rises up from the state, and you say, what in the name of God is that? That same Sam.

Charlotte Howard [00:43:46] Who? Who was that? Can you name the speaker?

Charlotte Howard [00:43:46] Who? Who was that? Can you name the speaker?

Idrees Kahloon [00:43:51] So you want random banking dude from the 80s?

Idrees Kahloon [00:43:51] So you want random banking dude from the 80s?

Charlotte Howard [00:43:57] I do not want a random banging dude from the 80s. The answer is the writer, Tom Wolfe. That was a very hard question. Which of his novels, though, features the born trader Sherman McCoy? You might get this one.

Charlotte Howard [00:43:57] I do not want a random banging dude from the 80s. The answer is the writer, Tom Wolfe. That was a very hard question. Which of his novels, though, features the born trader Sherman McCoy? You might get this one.

Idrees Kahloon [00:44:09] Bonfire of the vanities.

Idrees Kahloon [00:44:09] Bonfire of the vanities.

Charlotte Howard [00:44:12] Indeed. Okay, the third question and final one, the Martin Scorsese film The Wolf of Wall Street was based on the memoir of a former Wall Street stockbroker. Can you name him.

Charlotte Howard [00:44:12] Indeed. Okay, the third question and final one, the Martin Scorsese film The Wolf of Wall Street was based on the memoir of a former Wall Street stockbroker. Can you name him.

Adam O’Neal [00:44:24] Jordan Belfort?

Charlotte Howard [00:44:30] Very good. All right, a tie. Did you plan this in advance also?

Charlotte Howard [00:44:30] Very good. All right, a tie. Did you plan this in advance also?

Adam O’Neal [00:44:35] No, I got the movie one. The more bookish Idrees got the literary one.

Adam O’Neal [00:44:35] No, I got the movie one. The more bookish Idrees got the literary one.

America’s national debt is huge. Does it matter?

Our weekly podcast on democracy in America. This week, we explore the broader impact of the country’s dismal finances

Transcript

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