#480 — The Economics of Everything
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Summary
Noah Smith joins me to talk about the growing national debt and what it means for the economy, and why we should be worried about it. Noah is an economics writer at Slate, and he's been writing about it for a long time. He's also a frequent contributor to the Financial Times and the Wall Street Journal.
Transcript
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i'm here with noah smith noah thanks for joining me hey thanks for having me on you've got a great
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Substack, which many people will have read. It's Noah Opinion, pun on your name. Noah Opinion.
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Noah Opinion, but they can find you no doubt under your name as well over there on Substack.
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There's a lot to cover. I mean, you touch many interesting topics, but summarize your background
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first and then we'll just jump into your wheelhouse. All right. Well, background, I was
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originally a physics major in college. Then I lived in Japan for a while. Then I did a PhD in
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economics at the university of michigan worked for a couple years as a finance professor at
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stony brook in new york and then um quit to become a uh a writer yeah and so now i just write about
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economics well you're good at that and um yeah you produce these very clear articles that that
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walk people through um issues of uh of great importance to our society and uh it's a pity
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we don't spend more time thinking about some of these issues i want to raise the first one which
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you wrote about recently, and I think you've had some change of opinion on, and that's the
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national debt. I don't think I've touched the national debt at all on this podcast. I think
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maybe I asked Lloyd Blankfein one question about it, and I can't even remember why he wasn't more
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worried about it. But I really do kind of want to walk through this in almost an econ 101 way.
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But big picture, how do you think we should think about the national debt at this point in the U.S.?
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the united states is is becoming a high debt country compared to other rich countries and
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this didn't used to be true it used to be that european countries were sort of more indebted
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than us and japan was much more indebted than us and now after um the great recession and uh
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covid and sort of the lack of of spending you know fiscal restraint that we've had in the years since
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covid we are a high debt country and this carries with it dangers nobody knows exactly when debt
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starts becoming a problem there's no like hard line people have tried to define that line and
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nobody really knows. But at some point, the problems start creeping in. Private investors
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start being unwilling to buy the government's debt. So, you know, the government borrows money
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by issuing bonds, right? It sells bonds, some bonds to foreigners, but most bonds are just sold
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to like banks or regular people even, but mostly banks. And then, you know, U.S. banks, like Chase,
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you know, buy a bunch of U.S. bonds. And then, you know, they sell these bonds and then, you know,
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they pay some interest rate on the bonds. But when these private investors or other countries
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or regular people or whoever become less willing to buy the bonds, they have to offer a higher
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interest rate to get people to charge, to buy the bonds. And so the interest rates go up and up and
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up. But when the interest rates go up, the government has to roll over its whole stock of
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debt at those new higher interest rates. And when it has to roll over this debt, you know, it has to
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pay higher interest costs every month, every year out of its budget and has to pay those costs or
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else it defaults. And if there's a government default, the economy crashes and very bad things
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happen. So the government has to pay more and more interest each year. So it can do one of two
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things. It can either raise taxes and cut spending, it can exercise fiscal austerity, or it can just
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borrow more to cover the interest payments. So that's what we're doing right now. We're actually
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borrowing more and more to cover the increased interest payments because our interest rates went
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up, you know, partly because the Fed raised interest rates, partly because people are demanding
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higher interest rates for long-term bonds. The government has to pay higher interest rates now
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on its whole stock of debt as it rolls it over.
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And then, so the interest costs per month, per year
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And we're just borrowing to cover that interest too.
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And that's bad because eventually people realize like,
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wait, they're not gonna really pay this back, are they?
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And then what happens interestingly is inflation.
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So people realize that what will eventually happen,
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but more likely is that the government gets the central bank
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but it's basically that it's the central bank prints money to pay off the debt people realize
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that's going to happen they realize inflation is coming and then that becomes a self-fulfilling
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prophecy where inflation goes up everything everyone gets poorer you remember 2021 22 with
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eight percent inflation there's some of these countries that can get a lot higher than that
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and so then people get abruptly poorer people's you know bonds you know vanish like because
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because inflation devalues debt and then uh you know so so basically bad things happen with that
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surge of inflation everybody gets really really mad and the economy essentially gets bad i want
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to go over some of that ground again i just i want people to understand how this machine is working
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there's an interesting connection between interest rates as a lever and uh inflation as something
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that the government can decide to control right so inflation at a certain point is a bad thing
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and one thing that that's within the government's power to pull the brakes there is to raise the
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the borrowing rate, right? And this cools off the economy. But as you just pointed out,
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raising the rate of interest is also working against the government's ability to pay back
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its own debt, which keeps rolling over. Exactly. So you have this trap where,
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you know, like people won't buy your debt. So you need to raise the interest rate,
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you know, to pay off the debt, but then you have to roll over the debt at the new higher interest
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rate. And so then you have to pay more debt. And so you have to borrow even more. And then people
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like, wait a second, I can't lend you that much. And so you have to raise interest rates again.
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At some point it stops and private demand for your debt just collapses. Chase won't buy your
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debt. Grandma won't buy your debt. China won't buy your debt. Nobody will buy your debt.
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Is there any reason to think that the U.S. is anywhere near defaulting on anything or that
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there's a perception of risk in loaning money to the U.S. government? I mean, we are the backstop
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for, you know, the global financial system on some level, right?
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I mean, everything is anchored to the dollar, or certainly most things are, that gives us
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What are the signs of that being more precarious than anyone would want it to be?
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So what you want to look at there are interest rates on long-term bonds, and you want to
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So if the strength of the dollar goes down at the same time that the interest rates on
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long-term U.S. government bonds goes up, that indicates that people are pulling their money
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out of America. And we have seen some of that recently. So if you want, I can explain why
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those two things together show that. Yeah, no, that would be great, but still
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high level. You're saying we haven't seen a kind of rush for the exits there in any way that is
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scary, or you're saying we're seeing something that should be unnerving to people who are paying
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attention it's a little unnerving because you know the the idea of the collapse of the u.s
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centric global financial system and a you know abrupt devaluation of the dollar a potential u.s
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default or inflation those are you know two forms of a similar thing the potential of that should
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scare people even if it's not imminent right it's such a bad thing that could happen it's like you
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know you're you're you get a blood test and like you know it shows a tiny bit over the level for
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some cancer marker you should be worried about that because cancer will really screw you even
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if it's only a little bit over the level and so that's where we are so is there really no
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insight into when the debt to gdp ratio goes uh malignant i mean like what what is it what is the
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history offers no real instruction there's nothing in the the theory of of economic systems that
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provides any guidance? Is this just a kind of mysticism? Well, it's not mysticism. It's highly
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specific to the country. The thing is that you can look at other time periods for our own country,
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and you can look at other countries, right? They aren't necessarily comparable, right? Because
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what matters is expectations. What matters is when Chase Bank and grandma and China stop buying the
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debt, right? What matters is when all those people stop buying the debt. And we don't know for America
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right now, when that point is going to be, we could tell you for, you know, Britain many years
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ago, or Russia many years ago, or America a hundred years ago, but those aren't necessarily
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comparable. Those aren't necessarily the same. There's no reason. There's no, like, there's no
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law of the universe here. There's no, like, you know, gravitational constant here. There's no,
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there's no law of economics. And some people tried to establish a threshold, but there's no
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threshold it's it's really you can't put a number on it when people start to get scared it's when
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it's when people start to get scared and there's not even an objective because expectations based
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right it's based on when all these people decide to stop buying the government debt and that's
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human psychology right we don't know when grandmas and chase and all these people are going to stop
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are going to decide to stop buying the debt we don't know like it's human psychology based and
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And there can be, you know, this very rapid shift in expectations where people say, okay,
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America's done, you know, like they're not going to pay their debt back.
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Where some people head for the exits and then everyone's like, well, those guys are heading
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And then everybody tries to stampede out all at once.
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There's, you know, a million econ papers on how this happens in like poor countries,
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But if it does happen, it's really catastrophic.
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what's the level of debt that's scary i i can't tell you like there's there's probably there's
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no threshold there's no tripwire if there is we can't see it because it's it's different for every
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country in every time period well how much does our status as the reserve currency for most of
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the world protect us from this kind of calamity so the reserve currency means that other countries
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hold dollars as their reserves. They hold a bunch of dollars in order to conduct trades on the
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international trading system or, you know, buy stuff, you know, from America or things like
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that, invest in America, things like that. The fact that they hold all those reserves is a big
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part of the reason why this would be such a calamity. If they didn't hold those reserves,
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it would be much less of a calamity were we to, for the world, for us to, you know, for the dollar
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to drop in value for America to have an episode of high inflation or sovereign default, right?
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But it's not itself a bulwark against a loss of confidence in U.S. debt?
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It is, but then it absolutely is. But then the thing is that what that means is that it gives
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us sort of this cushion that our leaders can abuse by pushing things farther than another
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country would have been able to push them. And then, you know, in exchange for that cushion,
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we get a more catastrophic fall if we do fall. And we being the world at this point.
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We being the world, but also the United States. So the capital flight from the United States
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would be a truly apocalyptic economic event. What are the contributions of modern monetary
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theory to this conversation? Modern monetary theory is the most poorly named idea since the
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holy roman empire which was famously neither holy nor roman nor an empire modern monetary theory is
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neither modern nor monetary nor theory it is a series of pronouncements by a small circle of
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people who will change their story on any given day led by again warren mosler and also stephanie
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kelton and these people if you ever try to pin down exactly what the mmt people believe about
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something, unless you're one of the MMT people, they will say, no, you haven't gotten it. And
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the only way to get it is not to read any papers or books or something like that. You can't,
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this isn't the kind of knowledge like a, like physics, you know, you can read a textbook and
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then you can understand physics. Even if all the physics professors in the world died, you couldn't
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go ask them questions. You could read a textbook and you could understand Newton's laws or
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electromagnetism or something like that. Economics, you know, orthodox economics, you could understand
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the models of supply and demand or whatever just by reading a textbook without asking a guru but
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with mmt there's no independent knowledge that they allow you to have you have to go ask them
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is debt too high now what will happen to interest rates and they will give you pronouncements from
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their little mountaintop oddly in 2021 2022 when people started worrying about debt warren mo you
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know before that they had spent years saying like you know debt's not a problem debt's not a problem
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inflation's not a danger blah blah blah then inflation went up and people started laughing
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at the MMT people and listening to them less. And the MMT people, then Warren Mosler, the ultimate
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guru of MMT, came out and said, oh, debt's too high now. We could get inflation. He just made
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this pronouncement. There was no system. There was no formula. There was no transparent process
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by which he made that pronouncement. But then this accelerated the loss of intellectual currency
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that MMT had in a lot of people's eyes because they realized that whether debt is good or bad
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depends entirely on the pronouncements of a few gurus. But the general slant of their contributions
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has been to not worry about debt to GDP ratio. That's right. They have done a lot of yelling
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of people to not worry about debt. I would not listen to them if I were you or anyone.
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I'm sure there's their MMT fans who are going to think I should have pushed back here, but
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truth is I don't know enough to push back intelligently. And I'm worried about debt for
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other reasons. I mean, so at the moment, the interest on the debt exceeds, I think, every
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government expenditure except Medicare and Social Security, and it's projected to exceed
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Medicare in 2028. Does that sound about right? About right, yeah.
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What are the escape routes here? I have a list of, I think, five, which I might have gotten from you.
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I'm not quite sure where I got them. I can tick them off and then we can discuss them. But my
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list here is number one, grow out of it. Two, inflate it away. Three, austerity. Four, financial
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repression. And five, default or restructuring, which does not sound good at all. So how do you
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think we get out of this situation? Just what is the situation? We have close to 40 trillion in
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debt. That sounds about right. And again, interest on the debt is growing and eclipsing more or less
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everything, including defense now. What do you think we will do and what do you think we should
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do if there's any daylight between those two things? I don't actually know what we will do
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because, you know, politics is kind of unpredictable and I'm not a specialist in predicting what we'll
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do. But what we should do is, number one, we need to, you know, once we start worrying about the
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debt, we need to enact fiscal austerity. And we did that in 1993. We did fiscal austerity after
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a few years of everybody being really worried about the debt. If you're old enough to remember
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the, which I think you are, if you're old enough to remember the 1992 election, the candidates were
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competing to say who could cut the debt more. And so it's not this idea that politics is this
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eternal goodie bag where everybody just wants infinite goodies and no one cares about debt
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is not necessarily right because I've seen the opposite. I've seen people worry about debt.
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I've seen the whole nation worry about debt. I mean, I was a little kid at the time, right? But
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I still remember that was sort of my first glimmer of politics. And I started, you know,
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understanding that like everyone's scared about debt. So when I was, you know, 10 years old or
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whatever, I thought debt was bad because I saw people on the TV talking about a lot. And so
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we can do that. And so, so we'll have to. Cutting the deficit is one thing. Cutting,
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actually making a meaningful cut to the debt would require, it's got to require growth,
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right? I mean, we're not going to just, you know, keep the plane flying at 30,000 feet and whittle
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away on this $40 trillion debt. Yeah. So growth happens. I mean, you know, growth isn't grinding
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to a halt. In fact, if, if anything, I'd say that, that growth will accelerate a little bit
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due to the AI boom, but that doesn't, you know, when I say accelerate, I don't mean we're going
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to grow at like 20% or whatever the AI, you know, boosters say, I think, you know, maybe the
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standard forecast, maybe we'll grow at two and a half percent or maybe even 3%. That would be
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amazing. But like, but we will continue to grow, right? Our economy will continue to grow. There
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are things we can do to make it grow more. One thing is, you know, we normally talk about growth
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in terms of per capita living standards, but we can also grow the total size of the economy by
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bringing in immigrants. And that's exactly the opposite, of course, of Trump's strategy,
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especially high skilled immigrants that pay lots of taxes. So we can bring in like, you know,
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millions of smart people from India and we can do that. And then, you know, but Trump doesn't
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want to do that. So that's a sidetrack, but we can do that in terms of, so that's one thing we
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can do is, is to simply lower the deficit and let growth erode the debt over time. That's one thing
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that, that, that that's the most important and best thing we can do is fiscal austerity, by which
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I mean, a combination of tax increases and spending cuts and then allowing growth to
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That will take, you know, a decade, two decades of that.
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But that will that will definitely fix a lot of this problem.
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And we can't inflate it away because, as we've just said, the debt rolls over and we have
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to pay the consequences of inflation while paying the debt.
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And so, in fact, our debt to GDP ratio fell during Biden's presidency for exactly this
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reason, because inflation was higher. So actually we did inflate away a little bit of the debt,
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but it took, you know, despite all the lack of fiscal restraint, despite all the money we were
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spending, despite all the taxes that we cut, we did inflate away a little tiny bit of the debt.
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But remember how mad people were, you know, people suddenly got much poorer. They couldn't
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buy gas, they couldn't buy food, they couldn't buy, you know, rent went up and all these things
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went up. People were just, you know, it resulted in people electing Trump who didn't help the
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problem, but it resulted, even though that inflation lasted mainly for about a year and
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a half, two years, it got people really mad and in an enduring way. And people are still saying
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the cost of living is way too high. They still vividly remember that experience of inflation
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that we had. If you're going to meaningfully inflate the debt away, you're going to need
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that sort of inflation for years and years and years. And I don't think like you're going to
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have people revolting in the street. So you can inflate it away. You can do that, but it's going
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to make people really, really, really, really mad, more mad than fiscal austerity.
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What about the risk of hyperinflation under those conditions?
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It's real. I mean, hyperinflation happens. There's a lot we don't know about hyperinflation,
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but our best guess, okay, is that hyperinflation, when you get inflation, not of like 8%, but of
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like 1,000% or something, you know, this hyperinflation, our best guess is that it happens
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when the central bank just starts printing money to buy however much, you know, debt the government
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wants to issue. So when you start issuing government essentially a blank check from
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money printing, that's when hyperinflation happens. I think Trump's instinct is probably
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to do something like that, to simply start the printing presses, you know, have the central
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bank buy infinite government debt that he can then use for populist goodies. And by the time
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it catches up with us and we screw ourselves, he'll be dead. You know, and this is what happened
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with Venezuela. Hugo Chavez started this process. And then by the time it really caught up with
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them and destroyed their economy, he was dead. And so Trump is an old man. You know, he's not
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going to live that long. And so I think maybe this is what he would want to do, but I think
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everyone else sort of understands like J.D. Vance would then be the American Maduro. He has stuck
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with this, uh, you know, rapidly expanding inflation, uh, from monetary financing of the
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debt. And I don't think he wants that. Is this the kind of thing that can happen to some degree
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surreptitiously, or is there full transparency with respect to, uh, money printing in all its
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forms? Well, so the first thing that they do is to cut interest rates. So you can see that
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happening, right? So when the Fed prints money, quote unquote, it uses it first and foremost to
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buy bonds. And you can see that happening and you can see interest rates go down from Fed actions.
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So you can see quantitative easing. I'm sorry, quantitative easing. Qualitative easing actually
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does exist, but it's another thing. So quantitative easing, QE, you see the Fed printing money to buy
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longer term bonds. Usually when the Fed prints money, it just buys short term bonds like T-bills
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or you know whatever but then um it can also it can and sometimes does print money to buy longer
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term bonds to push down those longer term interest rates and if it does that if it does qe will
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basically know that that's a that's a really good sign that this is happening so what the word
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austerity is a um certainly not a pleasant word in this context and yet i'm not sure people have
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intuitions about what it means in its totality what are we talking about when we talk about
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austerity as being one of the levers we can get in hand here. Right. So austerity got a bad name
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years ago in the Great Recession when people were like, we need to spend to stop this,
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to get out of this recession. They were probably right about that, assuming we could have done
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fiscal restraint and austerity during the boom that came after the Great Recession.
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After the Great Recession, we had a long boom and we could have fixed the government's finances
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during that long boom the way we did in the 90s. Instead, we did not because interest rates were
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low. And so we just rolled over the debt and we never fixed, we never removed the debt that we
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built up to fight the Great Recession. Well, was there a huge mistake there? I remember some people
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advocating for when interest rates were at their lowest, you're kind of repricing U.S. debt. Did
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we miss an opportunity there to lock in super long-term loans to the government? Yes, we did.
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The average maturity of U.S. debt is something like 4.3 years. That's way too short. We should
00:21:25.080
have locked in 20-year debt at super low interest rates. We would have given ourselves a lot more
00:21:29.940
runway politically to solve this problem. We did not. If that was so obvious, what was the
00:21:34.660
impediment there? I don't actually know. It could have been some worries about spooking financial
00:21:38.820
markets because if you do that, maybe financial markets will take it as a signal that you intend
00:21:42.960
to do, borrow more and not stop. So maybe the short maturity that we kept it at was some sort
00:21:49.200
of credibility signal. But I'm just hand-waving here. I don't actually know. Your guess is kind
00:21:53.920
of as good as mine here. We did miss an opportunity. Okay. So I interrupted you about
00:21:57.880
austerity. Oh yeah. Austerity. So austerity just means cut spending, raise taxes, you know,
00:22:03.000
and there's lots of ways we can do both. There's a, we can reverse all the Trump tax cuts. We can
00:22:06.980
tax, you know, a higher corporate tax probably isn't going to hurt us. Uh, we can do higher
00:22:11.420
capital gains tax and we need to raise taxes, not just on the rich, but on the upper middle class,
00:22:15.720
you know, like people making, you know, $150,000 a year need to be paying more taxes. It's not just
00:22:20.520
of people making a billion dollars. Obviously we should raise taxes on people making billions of
00:22:24.200
dollars. And I'm in favor of raising taxes in a progressive manner where billionaires get their
00:22:28.000
taxes raised more than regular people, but regular people need their taxes raised to regular people
00:22:33.140
need to pay more taxes because that's how they do it in Europe. You know, there's, it's, it's
00:22:38.360
like we need, we could have a VAT, we could have higher income taxes, things like that. We need to
00:22:44.220
do it in addition to corporate taxes and capital gains taxes and, you know, higher taxes on the
00:22:48.620
very rich people. We need to raise taxes across the board. The American people have to be in this
00:22:54.780
altogether. We can't, you know, we shouldn't raise taxes on the poor because like, A, they're poor
00:22:58.920
and B, they don't have any, like, it's not going to raise much money. But on the, on the middle
00:23:02.540
class, we need to raise taxes on the middle class. And that's, Democrats are pledging not to do it.
00:23:06.600
Republicans are, of course, never going to do it. We need to raise taxes on the middle class. In
0.98
00:23:10.460
addition, I want to raise taxes on the billionaires more, but we need to raise taxes on the middle
00:23:14.200
class too. We need to, I'll pay higher taxes. We need to all be in this together. So that's the
00:23:19.220
tax side of it. We can't just do it with taxes. We need to have spending cuts. We need to restrain
00:23:24.160
the growth of spending. We need to, you know, actually cutting spending is actually less
00:23:31.020
powerful than simply restraining growth rates. If you simply say this now, instead of growing at
00:23:35.760
4% a year, we'll grow at 1% a year, that adds up to a huge amount. So all kinds of things,
00:23:40.540
especially health spending. We need to have the government buy people less health care. And I'm
1.00
00:23:46.260
sorry. Members can hear the full conversation by subscribing at SamHarris.org. Subscribers get a
00:23:52.240
private RSS feed you can use with your favorite podcast player. Phones have done three things to
00:23:58.220
break our society, three huge things, and we haven't dealt with any of those things yet.
00:24:02.420
Number one, made people unhappy by replacing in-person interactions with online interactions
00:24:14.080
by privileging the input of the worst people in the world.
0.91
00:24:22.160
is phones are accelerating the fertility decline.