Does Anybody Know How to Solve an American Debt Crisis?

As a 23-year-old writer at The Atlantic, it was my day job to blog about economics, and in particular to blog about that famously delicious and clickbaity topic of fiscal policy. That is how the US taxes and spends money. This was, believe it or not, one of the biggest stories in the country, if you don't remember. At the time, there was a huge debate about the U.S. debt, how much we should worry about.

Typically, the debate broke down by ideology. It was conservatives and libertarians who told us to worry about the debt, and it was liberals who criticized conservatives and libertarians for freaking out about nothing and using debt fears as a smokescreen to cut spending on seniors and poor people. But 15 years later, something has changed.

As the debt has grown and grown, and as interest on the debt has eaten more of the federal budget, it's not just conservatives who are starting to worry about the trajectory of American taxing and spending anymore. It's liberal economists as well. Today's guest is Justin Wilfers, the University of Michigan economist and the head of a new media company called Platypus Economics.

He's going to walk us through why debt fears have escaped containment and broken into the mainstream among even liberal economists. But before we take you into that debate, I want to dust off my old fiscal policy explainer hat and review some budget basics. And if you're watching this pod right now, we've got you covered with some very nice graphics, courtesy of the Committee for a Responsible Federal Budget.

Last year, the US government spent seven trillion dollars. Most of that spending went to Social Security, healthcare programs like Medicare and Medicaid, and defense spending. There is a saying among economists that I think you're going to hear from Justin in just a moment, that the U.S. government is an insurance company with a standing army. That is, it's all healthcare spending, retirement spending, and defense spending. For many years, for many decades, that was true.

But one big thing that's changed, and if you are looking right now, that's the the red sort of a slice of the pie that you can see, is that interest payments on our debt have surged to become a larger share of government spending than the military. This is something that has never happened before in modern history. Moving to the revenue side now, the federal government collected$5.2 trillion in taxes last year.

About half of that came through individual income taxes, the ones you file in April, and another third came from payroll taxes, which are shared between employers and employees. Most of the rest came from taxes on corporate income. You will note that there is a difference between$7 trillion and$5.2 trillion that is equal to$1.8 trillion, and$1.8 trillion was our 2025 deficit.

When you add all of the annual deficits together, that makes up our national debt. And because the gap between spending and revenue is projected to continue to rise, that means our debt will continue to rise. And there are three ways to reduce the share of debt to GDP, the relationship between debt and the size of the economy.

First, you can grow GDP really, really fast, which is something that's technically possible but hard to engineer. There's no obvious magic wand for productivity growth, although I think a lot of AI boosters hope that AI is just that. Number two, you can cut spending, which is awfully hard because if you cut the budget by one trillion dollars, what you are doing is activating a one trillion dollar constituency in the US economy to rise up and destroy you. Very politically hard.

Or, door number three, you can raise tag. But good luck building a coalition to raise taxes on just about anything in the twenty twenty. Because this is the logic I see right now about taxes in America. The left says we can't tax the poor because they're poor. Okay. Liberals say we can't tax the working class because they work.

And now the Trump administration has argued that we can't tax pensioners or retired people because they've quote unquote earned it. The problem is when you line up all these excuses side by side, what you're left with is really simple. Effective tax rates have nowhere to go but down, while the budget, led by spending on seniors and healthcare, skyrockets year after year.

It's not easy to know exactly what a debt crisis in America would look like. But many liberal economists, the same economists who fifteen years ago scoffed at the budget hawk. are now starting to sound a little bit like budget hawks themselves. And that shift was interesting enough that I knew I had to call Justin.

The problem is the US government talks in billions and sometimes trillions, and if you walked into Wells Fargo and asked for that, they would laugh. They just don't have that much cash in their vault. So really what you need is a whole bunch of banks to pitch in to this really big customer called the US government.

Uh there's a simpler way of doing that. It's called a bond. Here's a bond. The US government says, I have a piece of paper right here. This piece of paper, if you give it back to me in a year's time, I'll give you$105. How much are you willing to pay for it? Right now, people might be willing to pay a hundred bucks for that piece of paper. Let's think about that. So they're going to hand over their hundred. The government gets the hundred, gives over the piece of paper.

What happens a year later? They give back the piece of paper and the government gives them a hundred and five bucks. You'll notice that basically the government gets a hundred bucks today and pays back a hundred and five in the future. That's just like a bank loan. Um, but the thing about this is so that piece of paper's called a bond or a bill. The thing about this is you don't just walk into one bank to do business this way. You say to the whole world, I got lots of pieces of paper.

trillions of dollars of pieces of paper, who wants to buy these pieces of paper, which is effectively the same saying same thing as saying lend the US government money. Why do people want to do that? They want to do that because they like interest. And they really like lending money to folks who have a tendency to repay. And the US government has a tendency to repay, which is why the US government tends to pay less interest than anyone else. How's that, mate?

But sometimes we still use those pieces of papers, paper with dead presidents on them. So if the government decides to print more pieces of paper with dead presidents on them, And nothing else changes, then we've got the same number of groceries at the local grocery store, but more pieces of paper, more money changing that chasing those groceries.

So when that happens, uh the pri the exchange rate between groceries and pieces of paper changes. Basically, you're gonna have to give up more dead presidents to get a can of beans. Another way of saying that is prices rise. We get inflation. Okay. Now I just want to be clear about this. Printing money to repay the debt works. Right, you print the money, you repay a bunch of people the the loans. It literally worked.

So then the the point is there are two ways of repaying our debt. One is you um save some money and send it back to the bondholders, and the other is you print some money and you send that to the bondholders. Both ways. The first way, we tax people. And we might use a progressive income tax that takes more from the rich than the poor. We might have a sophisticated tax system that encourages investment and discourages slovenless or whatever your the values of the government are.

If we do this by printing more money, you'll notice the thing that happened was when we print more money, the number of pieces of paper required to buy a can of beans goes up, which is to say the value of a piece of paper falls. Which is to say the value of money falls. Which is to say someone is paying bearing the burden of that tax, uh bearing the burden of printing the money. It's the people who hold US dollars. Their US dollars become worth less.

And so really then the question is, would you like us to repay debt h our what we owe? by taxing people more and sending checks that way and sending the money that way, or by printing money, which effectively turns out to be an inflation tax that taxes people in proportion to their holdings of US dollars.

Now you'll notice the thing about an inflation tax is you can't make it uh more aggressive or or s more progressive. You can't hit the rich even harder. You can't do political favors for your friends, you can't design industrial policy around it. It's a one size fits all policy.

So you've got these two technologies, they both work. One allows you to achieve a bunch of economic gains, the other does not. One step further, the problem with printing money, that's an inflation tax, is you're now telling people don't use money. Because we might make it worth less. And in the extreme, if you tried to repay all of our debt by printing money, you'd cause such inflation, you basically end up as hyperinflation.

Hyperinflation is when, you know, you get paid at lunch, but what you can buy by dinner time has gone down, which means you literally have to reorganize your life around not holding on to money. It's a shitty way of living your life. Um, all of which is to say yes, you can, literally can, repay your debts by printing money. We just think it's probably a bad idea.

But you don't think that debt is exclusively bad. You think debt can be good. Why can debt be good?

Literally. Right. So if I um and this is what I say to my students, you're young and poor right now, but you're gonna have a successful career in the future, wouldn't it be great if you could zap some money from future rich you to current poor you? And you can. It's called student debt. So that's why I actually think we should be less scared of student debt.

Okay, that's at the individual level. Let's now come to the government level. Are there times we want to zap money across time? And the answer is yes. And I wanna return actually to our relationship, Derek. I got to know you best and I think both of us were very much born as economist during the crucible of the financial crisis of two thousand eight, two thousand nine. And honestly, we will never forget those lessons.

You had unemployment at up around ten percent. So you had people out of work. Here's a question. We want to build a road. Are we better building it in two thousand and eight when no one has any work or waiting until the economy's booming in twenty sixteen?

The answer when you say it that way, the opportunity cost of that workers time. In twenty sixteen they were already busy, and if we wanted to build the road, we'd have to outbid the private sector to get them. In 2008, they want to put food on the family's table. And so what we want is a time machine that zaps spending from twenty sixteen back to two thousand and eight. The way we do that is we go into debt in two thousand and eight. What does a healthy economy look like?

Employers believe that customers are going to spend a lot of money. So employers make a lot of stuff and hire a lot of people. Customers believe that employers are going to make a lot of stuff and hire a lot of them. And so therefore they feel a lot of job security, so they spend a lot. So I spend a lot because you hire a lot and you hire a lot because I spend a lot. That's a virtuous cycle. That's a happy world to live in.

What happens in a recession? In a recession, the employer gets scared that no one's gonna buy anything. But no one buys anything because they worry the employers are gonna get scared and fire them. And so we can get stuck in a vicious cycle where no one hires because no one's spending and no one's spending because they believe no one's hiring.

There are many ways in which that may be too simple of a story, but I think it's a useful story to keep in your mind. The greatest insight of John Maynard Keynes is. that an economy could be in different equilibria. What I just described, the ver virtuous cycle and the vicious cycle are both possibilities and because I get paid more by the syllable, we call possibilities equilibria.

And so Keynes' view was, okay, great, let's think about what a recession is. This is remember this quote, you've we've got nothing to fear but fear itself. It's that a recession is fear feeding on itself. Well, if the government can just walk in and say, hey, guess what? We're going to keep spending and building highways until everyone's got a job.

Then folks are like, oh, I think I'm going to have a job. I may as well start spending. Now employers are like, well, everyone's spending. I may as well hire a bunch of people. And that in itself is enough to move us from the vicious cycle to the virtuous cycle, from recession to boom.

Basically, any other non-recession, non-emergency, non-pandemic, non-war period of modern American history. Why is running a deficit of this size now more dangerous than it would be in a recession?

If I said to you the deficit is five point eight percent of GDP, which is it is right now, you would say, Holy cow, Justin, it's never been that high since World War Two. You would say in all the ups and downs of the American business cycle, it's never ever been that large. You'd say 5.8% of GDP deficit is aston is in historical perspective for the United States to 2008, Derek, crazy.

Some who've subsequently said they knew all along it was too small actually were telling the White House much smaller numbers. Totally different story for another day. But the question was the stimulus is going to be X hundred billion and we'd argue over the X. And no one had the courage to use the T word trillion.

You just use the T-word trillion. And so two things happened since young Derek met young Justin. Um, one was the financial crisis, where we discovered that 700 billion probably wasn't enough. And the other was the pandemic, which was the deepest, fastest recession since the Great Dus Great Depression. And on its worst day it may have been as deep, although this is a risk downturn we measured in weeks and months rather than years and decades.

That led to trillions all of a sudden being a word that we use.

Are you willing to err on the side of doing too much in order to keep all the jobs and the firms alive, even if that risks inflation, versus do you want to do what we did in 08, which is do too little, don't risk inflation, but keep a generation out of work?

Yes. Decisions to cut the corporate income tax rate, decisions to cut taxes on wealthy Americans, decisions also to create programs, Social Security, Medicare, that are growing faster than the US economy. Is it just our response to emergencies that have put us where we are, or is it also our peacetime decisions, so to speak, that have put us where we are?

spend time on the um on on the recent history. But the structural problems are far, far deeper. Um yes, the structural problems are that we've put in place spending programs, entitlement programs, which demographics and particularly the aging of the population play a big role in. Um, and the other side is politics, which is we simply have never put in place the revenue required to finance, pay for the government that the American people want.

And the asymmetry is that Grover Nordquist and his mates will sign anyone up for a I will never raise taxes pledge. But he won't sign him up, for I will never stop spending. Um and there's an old quote I think it's attributable to Milton Friedman, which is suspenders to tax. Because every dollar you spend someone's gonna get upset about this, so I'm gonna say parentheses, asterisk, little aside goes here, but every dollar you spend eventually gets paid back.

Which means a dollar of spending today is a either a dollar of taxation today or a dollar tax of taxation in the future. The fundamental determinant of tax rates is spending. But our politics. treats tax completely different than spending. It's super bizarre to me that Graven Nordquist does not get out there and get upset every time the president announces

more spending on stuff. I just don't understand it. But look, the underlying the the most important fundamental is we've never raised enough revenue for the quality of government that we want. then we have entitlement programs that are underfunded for a world in which we simply live a lot longer. They were invented in one world and we exist in a completely different world.

And you add in the politics of all of that stuff being basically untouchable. We saw Elon Musk decide he was going to go into the government and root out all the waste, fraud and abuse, only to discover that the federal government was not what he understood it to be.

More like Rover Norquist would like us to be taxed, with much lower rates on income taxes, much, much lower rates. on corporate income taxes and lower rates on taxes for the wealthy. And so there's this gap. We call it a deficit between how much we spend, like almost like uh sort of French social democracy in the way that we tax. You use the word unconscionable. to describe the state of America's deficit, and therefore over time its death.

But one thing I really wanna understand from you is like what is the shape of what an American debt crisis could look like. Because I remember fifteen years ago when I I briefly I don't think you know this, I was briefly for like a year. um sort of externing at the Committee for Responsible Federal Budget. And I remember when they were talking about how they could see a debt crisis coming down the road, I told them like, you know, it sounds to me like the way you're talking about a debt crisis.

is a little bit like the way that environmentalists talk about a climate change crisis. But there are movies that are made about climate change crises, right? Like the day after tomorrow, where Um you know, uh New York City gets like dumped with like seventeen feet of snow and suddenly the waves are absolutely subsuming Miami and all this stuff that is, you know, dramatized that can make for a summer blockbuster.

Very hard to imagine a summer blockbuster about what happens to the US if like the debt to GDP ratio reaches like 171.5%. So I don't need you to give me like the log line for a movie to be directed by Christopher Nolan in twenty thirty-one about a debt crisis in America. Short of being that dramatic, what are we talking about when we talk about the possibility of a debt crisis in this country?

Now we can pay our interest because the interest rate that people charge the US is very low. So even though we have a big debt, the interest rate's low. So therefore we have low interest payments. Because we have low interest payments, we can easily pay them. Here's what a debt crisis is. Tomorrow everyone could just wake up and say, you know, I don't trust the Americans anymore. Simple as that.

Um, and they say, I'm worried they can't pay. And if they become worried that they can't that our government can't pay its debt, they'll jack up the interest rate. When you have a small debt and you jack up the interest rate, doesn't have much of an effect on your interest payments. But when you have a big debt and they jack up the interest rate, now our interest, our monthly interest payment just got really big. Might have gotten so big we can't pay it.

Now if we can't pay it, no one's gonna lend us a penny. That's a debt crisis. And I want you to understand I I want to say it's funny, we get to use this word multiple equilibrium multiple times. This is so exciting. Notice we could be stuck at a reasonable debt level, and there's two equilibria. The virtuous cycle is everyone believes we can pay, therefore rates are low, therefore we can pay.

The other equilibrium is so people don't believe we can pay, therefore they charge us a lot more, therefore we can't pay. And the thing about two equilibria, two possibilities is either could happen.

The thing that's then you might say, Well, if either could happen, why does it matter what our level of debt is? Actually it it matters critically because if our level of debt is low and we move from everyone believes we can't pay to everyone believes sorry, e everyone believes we can pay to everyone believes we can't pay.

They jack up the interest rates. And because we don't owe much money, that doesn't have much of an effect on our monthly interest payment. And therefore we can pay it. And then eventually everyone will go back to believing we can pay. The problem is when you owe a ton of money, any change in the interest rate has a huge effect on how much money you've got to send off to the folks you borrowed money from.

So it makes us the higher the debt level, the more susceptible we are to that dynamic suddenly taking hold. And if you remember or if you've ever seen a financial crisis, a financial crisis is basically everything's okay until it's not.

Either I believe that the US can't pay or I believe that Derek believes that the US can't pay. Derek in turn doesn't think the US can't pay, but he believes that Justin believes the US can't pay. Derek and I now are no longer willing to lend money to the US, even though we both believe in the US. Mm-hmm. Everyone else doesn't believe in the US. And and that can literally change in an afternoon. So that's what a debt crisis is.

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Is it an oversimplification to say that a debt crisis in America would basically, to most Americans, feel like a cost of living crisis? Because one of two things has to be true. Either Buyers of American debt don't trust America's ability to pay back the debt either in full or on time and therefore demand a higher interest rate, in which case the increase in interest rates can trickle through the US economy and make the cost of money higher. Or the US government says

These treasury markets are going terribly. We're just going to print the money, in which case you have inflation, which is yet another tax in America's cost of living. Is it an oversimplification to say that the way that both of those would cash out For Americans, just living in a day-to-day basis would be a debt crisis in America would feel like a cost of living crisis.

And so that's the choice. You either the government has to tighten right at the moment where confidence is plummeted and the government then becomes part of the recessionary spiral. Or the government just prints dollars, sends worthless dollars overseas and it's a cost of living crisis for all of us.

Japan, on the other hand, has a debt to GDP ratio of something like what, 190, 210%? Like just absolutely astronomical. But you know, you go to Japan, you go to Tokyo, it's not like there's suddenly some kind of absolute horrific austerity or cost of living crisis that suddenly struck when the number hit two hundred percent debt to GDP ratio. So how is how is that juxtaposition? The fact that Argentina got

wrecked with the forty five percent debt to GDP ratio. But Japan seems to be kind of gliding by with two hundred percent debt to GDP ratio. How should that juxtaposition force us to be more sophisticated in the way that we talk about the relationship between this all-important statistic, debt-to-GP ratio, and the actual fact of a debt crisis.

And so what happens is people are worried they're not going to repay. So therefore they jack up the interest rates and then they're like, Oh, I know what's gonna happen next. They're gonna inflate the whole damn thing away. See, so if I lend you a thousand dollars, but you create so much inflation that that thousand dollars is now worth only one dollar when you repay it, technically you will repay it, but I just lost nine hundred and ninety-nine dollars.

That is the sort of loss none of us ever think about or are signing up for when we decide to lend someone money. And so that makes everyone freak the hell out. Like I'm not sending another penny anywhere near those hyper-inflating bastards. Um, and so the good news is the US has relatively stable political and economic institutions relative to Argentina. The bad news is I'm not sure that's true anymore.

Um so I come from a country, Australia, where we have a two party parliamentary system where when the government wants to do something, it just does it. where we don't have one side hold up a debt ceiling and pretend until eleven fifty-eight p.m. that we're simply not going to pay, where we don't have these ongoing games of chicken, where we don't shut down our government, where we don't have a found fundamentally dysfunctional Congress.

I reckon I'd lend money to Australia far before I'd lend it to the Americans. And so I think our congressional dysfunction doesn't make us Argentina, but it moves us a couple of steps down that spectrum. Okay, so there are countries that are more susceptible than we are. Argentina is going to be more susceptible than we are for another hundred years. Just their history is too long.

Well, so then you say, Well, do we have any history of countries running large debts and being all right? And the standard story is Japan. Japan has two things go three things going on. One, they basically move from incredible economic growth to it stopped overnight. Two, they have an intensely aging population, which is a huge problem. And three, and arguably the most important one, is when people say debt to GDP in Japan is two hundred percent, they're talking about gross debt to GDP.

This is literally the point at which I bore all of your audience to tears. Okay. But it matters because folks who try to bullshit you with numbers often will give you the wrong one. Gross debt includes money the government owes itself. Net debt excludes that.

In America, just to make things even more confusing, we call net debt debt held by the public, which sounds like such a weird thing. You would never look up that number. So when people say to you, America's debt to GDP is not a hundred percent of GDP, it's a hundred and thirty six percent. They're counting money that the US government owes the US government, which is dumb. These are people who are either unsophisticated or lying.

Come back to Japan, Japan's net debt's a hundred and thirty six percent of GDP. Okay. I recently lined up all of the OECD countries and measured their net net debt to GDP and we are not the top. That's Japan. But boy, we're not far off the top.

I don't want anyone to overhear us and say Derek and Justin are predicting or forecasting a debt crisis. That's the sort of doom and gloomism that people who are not intellectually honest engage in. I suspect what you're saying and certainly what I'm saying is once we allow the debt to sneak up this high. Now we actually do have to have these conversations and be aware of these threats.

Without anything much resembling a debt crisis being on the horizon. And Jason Furman wrote this in in 2024. He said: if you would ask someone in 2000, to predict what the economy would look like in a world where the debt was 100% of GDP and the deficit was six percent of GDP, they would have likely expected extremely high interest rates and possibly even a dramatic economic crisis, end quote.

Obviously, we don't have that. There are problems in the US economy, but a dramatic economic crisis is not one of them. So how are we supposed to even know when we've crossed the line? When even experts like the redoubtable Jason Furman keep being surprised in the optimistic direction of how much the US can bear in terms of debt without these kind of storm clouds gathering.

But holy cow, I'd really like that to not happen. Um, you know, my kids, we went to the Grand Canyon a couple of weeks ago. My kids were walking near the side. As a dad, it freaked me out. My kids felt they were on solid ground. Who was right? I don't know, but I just didn't want to find out the hard way.

And that's how I feel right now. If I may, Derek, I wanna make a point about the politics of this. So debt and debt hawks have They've given the whole game a terrible reputation, which is a bunch of people who just wanted a smaller US government pretended they cared about debt for a long time.

And back when debt to GDP was thirty percent and there wasn't a hope in hell of us having a debt crisis, they were saying the sky is falling, the sky is falling. And the responsible response was stop lying to people. And that was my response and if I remember young Derek Thompson, probably it was yours at the time too, even though you were externing at the center for a responsible federal budget.

What I think is so interesting about this discussion is at the time young center left economists were saying, can you guys stop bullshitting? We're now old I don't know how you describe yourself, but I would describe you as centre left and I think people would describe me as centre left. Old centre left economists are now saying, actually pay attention. And you could say, well, maybe just old people get conservative. Could be. But actually I think what's changed is the world.

And what I like about you starting this conversation is you've created some respectability around this conversation. It used to be that only gray beards would talk about fiscal stuff. And it was always scolding and always telling us what not to do. We're now in a world that feels uncharted. And that should and does cause people, whether from the left or the right, to lose sleep.

Claimed, I think at one point that they were going to cut one trillion dollars from the annual U.S. deficit. That's 14% of U.S. spending. And you're already laughing for folks who can't see it. Um, I believe that according to Politico's most recent estimate, they cut about one billion dollars, which is one-tenth of one percent of their goal. Now, on the one hand, you can make fun of the team for being incompetent, but whether or not they were incompetent.

I do think that their failure to find more than one billion dollars of spending speaks to a real fact, which is that It is very difficult to cut federal spending without making someone scream. We can talk about waste, fraud, and abuse. I don't think we'll get that far into those three nouns today, but the point is everyone's definition of waste, fraud, and abuse takes money away from someone who's receiving.

That dollar that someone else is calling waste fraud and abuse, and they're gonna kick and scream and say it's not waste fraud and abuse, it's my mortgage payment. In the big picture, why do you think it's so hard? To cut spending.

That matters because w your zootopian norms are all about direct service provision by governments and you know, the US Postal Service, God bless it, but also geez, it can be annoying. And the D M V and the Secretary of State, all and some, you know, the Department of Education can do all sorts of things.

us backwards, but they're all state. And so the question is, what is the federal government? You need this before you can figure out how you're gonna move forward. And there's an old expression among economists that it's an insurance company with an army. Which sounds really bizarre, but it's actually three quarters correct. So insurance company is Medicare, Medicaid, Social Security is a form of insurance. It's insurance against outliving your savings.

Uh unemployment insurance and so on. So almost all of a vast majority of the US government is literally an insurance company. And then there's an army next to it and then you got about a quarter left after that. So three quarter of it's an insurance company with an army. Okay, we're not gonna cut the army because politics or because wars or because something

The rest is an insurance company. What does an insurance company look like? An insurance company is a whole bunch of us sending in our monthly premiums. And then there's a big check printer where you check prints, where you print checks that go out to the folks who lost their jobs or the folks who need Medicare or the folks who need Medicaid or Social Security. So it's not far off. to imagine the federal government as a big room with a check printer. Once you understand that.

Thinking that that there's too many guys feeding paper into the check printer, that's the waste, fraud, and abuse. I can make the government twenty percent slimmer. You can't. It's just a freaking printer. You might be able to get the toner twenty percent cheaper, but like That's not the problem. The problem is what the federal government is, is an operation that writes checks. It writes checks to people and it writes checks to state governments.

That in turn, first of all, says waste, fraud, and abuse literally cannot work. And the idea that Musk could cut a trillion dollars was absurd on its face. It's not a statement about Musk. It's a statement about naivete and about failing to understand what the federal government is.

And it then says the only way to cut revit to cut spending then is to cut checks. Who am I not going to spend a check send a check to? Th if you're gonna do it all on spending, that's the only question. I mean, you can cut the military. Fine. And then, you know, you got this other little segment, which is all sorts of stuff. You know, it's it's national parks and it's, you know. But you're not gonna get there based on that. So we have to send some people fewer checks.

That federal spending is not go like waste, fraud, and abuse sounds like it's a money pit somewhere in the middle of Nevada, right? The money isn't going into a money pit, the money isn't being shot toward Mars, the money is going to doctors and hospitals. and seniors who are opening up social security checks or whatever, checking their checking account and seeing that it's deposited there.

You take the money away, you cut the spending, and someone's going to get poorer. And that's one of the big reasons why it's very, very hard to advocate for the politics of cutting spending. Um, moving to the other side of the ledger, I I I I want to frame the question about revenue this way. Um I wonder if you see things the way I see things, which is that s in the last

maybe twenty to forty years, America's developed a really interesting aversion to all taxes. I mean, we're talking about no tax on social security, no tax on TIP. The one big beautiful bill was a huge tax cut for small businesses, a huge tax cut for big businesses. You've got progressives saying that we need

To make everyone who earns less than$100,000 completely tax-free. And so they only want to tax billionaires. But of course the billionaires are saying, we're the ones who create value in this country. We should be taxed less than anybody. It feels like We are in a political environment where there's basically an extant argument that nobody deserves to be taxed. And that really makes

the deficit reduction problem a lot harder. How do you see this sort of evolving politics of taxation where almost everyone now seems like a kind of Grover Norquist?

Why is it so hard to raise taxes? So it's pretty clear why it's hard to cut social security. Literally millions of seniors who are grandmas and grandpas of people throughout the country are there. Taxes actually are a lot more concentrated. And so maybe this is something about the concentration of political power that what should be the easier side to adjust, because it's more concentrated, um, turns out Not to be at all.

Two other things I want to call out. So that's sort of you sort of said, what if everyone's taking things sincerely? What if this is a real debate? Where we're coming forward with full hearts, full minds and telling the truth. Um, one is the rise of magical thinking and the political acceptability of magical thinking is just off the charts. Um

The most extreme example of course is now to be qualified for higher office in the United States, you have to be willing to lie about the twenty twenty election. So thinking that we have literally a lie is the qualification test. So I used to find it frustrating that politicians would say tax cuts pay for themselves even a a generation after it became clear that that's not true. Trump didn't even have to say that. He just didn't even talk about it.

Um, so magical thinking I think is profoundly problematic. But then actually I think there's a very, very and this is a fear that I have more deeply than you, I think, um, which is the political system's broken in a very fundamental way. Let's fast forward to the day after the election in 2028 and the president-elect calls, if not me, then one of my friends and says, what should we do? Debt to GDP is 100%. Uh I'm really worried about this.

The story of the last fifty years of American politics beginning with Reagan. It may be that Reagan believed that tax cuts pay for themselves, but it may have actually just been a strategy, which is if we spend all the money, there's less for the next bloke to spend.

And so we're always engaged in this game. You know, it's like me and my brothers growing up. We only had I was one of six kids. There was only so much ice cream. And so you'd always take more ice cream, partly'cause you wanted to get your brother back. So there'd be less left for him. I should have been in a more loving household. That's a different problem. Um but what you've got here is two brothers who hate each other.

And if we leave any ice cream in the bowl, in the in the what do you call an ice cream container, in the container, then they're gonna get get it. And they're gonna spend it on their stuff. And you've now seen you you went through a round of this with Clinton, you went through another round of it with Obama, which is Democrats came in and moved towards fiscal sustainability after the previous guys blew

Everything. Arguably Biden didn't really. But then the question is should Democrats do it again or should they blow through it and wait for the Republicans to clean up? And at this point after fifty years of this game, I don't think I could look a president in the eye and say, You should give up on your priorities so the next bloke gets all the ice cream and he can invest in his priorities.

In which case it's quite possible as a matter of political advice. And I I I feel so torn saying this, Derek. But as a matter of political advice, political economic advice. I'm not sure that I could say in good faith fix the debt. I might actually say blow it out. You know, let's give poor people some money because they've gotten so screwed for so long. We're not going to ask them to tighten their belts to pay for these tax cuts for the rich. Now we're screwed.

Right, if both sides end up with a genuine commitment to spending more than we take in, a debt crisis is minutes away.

No Democrat is going to want to run on shaving the rate of spending growth in Social Security or Medicare or Medicaid that seems incredibly unprogressive. They're certainly not going to get their way through the Democratic primary if that's their principal message. So I guess it raises this question of like what kind of a problem

Is America's debt? Is it a problem that is worth talking about, but not worth solving? Or is it a problem that's actually worth solving, in which case we should probably put together some kind of plan to solve it?

I I fear that I'm gonna depress you even more. Um and I don't wanna take us too far astray, but maybe the problem here is actually even more fundamental. Yes, we should solve problems that would cause enormous economic strife. There's no question about that. But it may be that American political institutions are just not fit for the purpose. And so maybe and so this is terrible because it sort of punts, but literally democr small D, democratic reform.

where we end up with more functional political uh institutions is the most important order of business in the United States. And so this is a story that says That's important partly because it fixes the debt, but also it fixes inequality, it fixes, you know, a whole range of things. But I have come to be deeply distressed by the type and quality of our politics and therefore economic policy.

I mean the one big beautiful bill is one multi-trillion dollar tax cut that overwhelmingly benefits the people who have already won from the way that America's political economy is set up. People in the top 0.1 percent don't need that extra$300,000. They're gonna literally be the exact same level of happy with or without it. And if it would moderately reduce the odds of a debt crisis in America, that certainly seems like a good place to start.

My problem is I'm not sure where to go besides undoing the one big beautiful bill and allowing the corporate tax cuts and the S Corp tax cuts to expire. I don't feel comfortable suggesting it cut to Social Security or Medicare or Medicaid at the moment. Maybe I'd be could I could be convinced by a great argument, but I'm certainly not ready to say so uh on a mic. I don't know exactly.

how we should raise taxes in a way that would make a dent. Like sure, maybe you could raise I I I believe that billionaires should probably pay some kind of alternative minimum tax so that you don't have billionaires that are paying effective tax rates that are lower than their secretaries. Like I think that's a good idea.

But I'm also realistic. Like that might raise a hundred billion dollars or something. It's not gonna raise one point eight trillion. It's it's gonna it's gonna fix, you know, one tenth maybe of of the annual deficit. W- Is there any low-hanging fruit here, Justin? Like other than waiting for the crisis to present itself and therefore forcing

Some kind of action on the part of the federal government, as if this is essentially like a pandemic. You have to wait for the exponential growth to start before anyone actually has a public health reaction. I mean, what would be the first thing that you would do here?

And I think we move the ball in the right direction. We just probably don't move it anywhere near far enough. Um, okay, here's a cra you know, you said I'm not willing to sign on to uh cutting social security or raising social security taxes. What if there were 90% of the house who voted in favor of it? Would you sign on to it?

Um anyway, the point that I want to make was whatever Bowl Simpson is for the whatever the package is, so you can do a bunch of these tweaks, right? And you can actually get a lot of the way there, but it's because you're doing what Elon Musk didn't, which is you're going where the money is. And the money's social security, Medicare, Medicaid. Um, if you need to get some left-wing votes, it's also defense. Um, or you do it on the revenue side where it's taxes. Um

If there were a package that could get a ninety percent you know, ch some of us say the pro some people say the problem is the filibuster with the sixty percent rule, but actually all fiscal policy's been done by reconciliation for the past decade. So it's all been by the fifty-first

Senator, which is why we get these wacky things where left wing guys go for left wing stuff, right wing guys go for right wing stuff, and probably in the long run no one's gonna do anything about the budget. What if we had a fiscal filibuster that required eighty eighty votes? So basically the Democrats can say to the Republicans, We'll fix it if you will and they'll say We'll fix it if you will, and nothing passes otherwise.

That changes the game now from I'm going to steal all the ice cream now so there's none left for you, to look, we got two choices here. It's either fix the problem or not. And we share the burden either way. Mate, I'm just spitballing. I'm making it up. I like to be host.

to gradually raise taxable minimum, maximum earnings so that 90% of all covered earnings are subject to the tax by 2050. So essentially just tax more and more and more of the money that rich people are making. Look, I I this is one of those situations where typically I love to end podcasts on like a really, really clear solution to the problem.

I am more certain about the shape of the problem itself than I am certain about the shape of a solution here. I think that I like the term that you use about magical thinking. I think what we have here right now is an extraordinary amount of magical thinking about how much we can spend and how many people and how much income we can exempt from taxation. And these two things are are progressing along parallel tracks.

without people recognizing that they do intersect and they intersect here at the question of deficit and debt. It's it's my basic prediction. And maybe you'd agree that this is a crisis that's going to have to begin to show its face before either party really acts on it. Because for one party to act and say, I wanna cut social security or I wanna raise broad taxes on Americans to cover a one trillion dollar uh gap in uh in the in the deficit.

that is so political kryptonite that I think you need the cover of a crisis in order to justify the unpopularity of the solution. Um so Justin, I don't know. The last time we spoke, um For this long, I believe it was the COVID crisis. Hopefully I don't speak to you hopefully I speak to you before uh there's a a a debt crisis um on our shores. But thank you very much for your patient explanation. I really appreciate it.