Jessica Riedl

Welcome to The Puck, Venture Capital and Beyond, a show that examines the changing landscape of our world. Before we dive in, a quick word about who I am and why we're here. I'm Jim Bier, corporate lawyer and restructuring professional. I've spent the last two decades helping companies navigate their toughest transitions. And about eight years ago, I found myself having fascinating conversations with clients and friends about everything from venture capital to the broader shifts happening in our economy and society.

Those discussions were simply too good, so the puck was born. Now while we started on venture capital, hence the podcast name, the Puck Venture Capital and Beyond, We've naturally evolved to focus more on the and beyond portion of the title. Today, we explore how business intersects with the bigger forces shaping our world. I still run my restructuring practice by day, but now I get to host these conversations by night. It has become one of the most rewarding parts of my life.

Today's guest continues that tradition. My concern is that I think it's easy to focus on short term economic issues and short term economic issues, but long term, if we don't get the budget under control, it's gonna swarm everything else we want to accomplish in our political system. America isn't drifting towards a fiscal crisis. It's accelerating in turn. And today on the Puck, economic policy expert, Jessica Riedel, breaks down why both parties are wrong in deficits, why Social Security and Medicare are the real drivers, and why the bond market, not politics, will ultimately force a reckoning.

The uncomfortable truth, fixing it will require choices no one wants to make. There's a lot to cover, so let's get to it. Jessica, welcome to the puck. Glad to be here. So for our listeners who may not know your writing, but not your full background, and can you maybe take a minute and talk briefly about your career, how you ended up focusing so intensely on budgets, deficits, and fiscal responsibility, and what problems you feel you're really trying to solve with your work?

Well, thank thank you for having me on here. I've been, in Washington for twenty five years working on these issues. I started for ten years at the Heritage Foundation. I ran their budget policy shop for a decade. And then after that, for about six years, I went over to Capitol Hill where I was chief economist to senator Rob Portman and a a senate subcommittee staff director.

Rob Portman is a former director of the president's office in management and budget. So I was doing budget policy and and chief economist for a budget geek. It was actually wonderful. After that, I went back to think tank land, the Manhattan Institute, and now the Brookings Institution. And the reason I focus on budget is, initially, I got into the topic because it's really the center of everything you think government should be and do.

If you think the role of government is to just protect us from force and fraud and have a military, budget policy is where you play that out. If you think the main role of government is to have a big social welfare state and and, you know, combat inequality, you play that out in budget. It's it's you really end up involved in everything because it's where government is gonna put its resources. However, in the time that I've studied budget policy, now my focus is on saving the country, to be honest. When I arrived in Washington, we had a surplus of about a $160,000,000,000 in 2001, and now we have a deficit of $1,800,000,000,000.

The national debt is set to double in the next decade. And over the next thirty years, we are barreling into a debt crisis that we're woefully unprepared for. So my focus went from kind of a nerdy philosophical approach when I was 19 years old now to a, oh my goodness, we are in deep trouble if we don't fix the the the budget, and this is gonna be bad for everybody. So it's it's kinda be it's become important to people even if they don't realize it's important to them yet. So I'm concerned about exactly the same issue.

And when you talk about our debt problem, what do you think is most often misunderstood about why the deficits keep rising? Oh, boy. I wrote a reason a cover story in Reason magazine a year ago on this topic. I think there is a lot of partisan blinders that people rely on when looking at at spending and deficits. If you talk to people on the right, they will say deficits are rising because of immigrants and foreign aid and waste, fraud, and abuse and welfare recipients.

If you talk to people on the left, they'll say deficits are rising because of defense spending and big tax cuts for the rich. These are both very partisan views where, you know, very conveniently, the deficit is entirely the fault of your political opponents. It's nothing that you care about. The reality is that both sides are mathematically, spectacularly wrong. The main reason actually, the a big driver of deficits over the past two decades has been emergencies.

The great recession, the pandemic, those added and the response added trillions. But also and moving forward, this is gonna become the biggest driver, Social Security and Medicare. And, you know, there's a myth out there, a really popular myth that Social Security and Medicare don't add to the budget deficit, that they pay for themselves and you're just getting back what you paid in. It's not only not true, it's spectacularly not true. And if you look and I'm I'm sure we'll get into this.

If you look at the budget projections moving forward, the terrible deficit projections, it's almost entirely Social Security and Medicare shortfalls, but neither conservatives nor liberals wanna talk about that. Well and and I assume they don't wanna talk about it because as a congressman that I know, Sean Kasdan from Illinois said Mhmm. When I pushed him hard and hard on this, he said, Jim, when we do polls, we see that seven out of 10 Americans want their taxes to go up I'm sorry, down. And they want seven out of 10 Americans want their social programs to go up. And so from a political perspective, it just doesn't work.

Yeah. And and this is one of the frustrations of my job. You know, I've been a lead budget policy adviser to four presidential candidates. I work with Congress repeatedly. I brief dozens of members of Congress.

There was a briefing I gave about eighteen months ago with about 20 members of the house, and I went through all of my budget charts and how bad the deficit picture is and how we're heading to a debt crisis. And they told me at the end of the presentation, we know this, and we agree with it. We understand we're headed for a crash, but I'm not gonna do anything about it because it's political suicide, and my goal is to not be in office when the crash comes. I don't wanna be the one holding the bag. Not exactly a profile in courage, from these lawmakers, but they know it.

And, you know, the old joke in budget world is that reducing the deficit is Americans' third fiscal priority right after cutting my taxes and hiking my benefits. And it it is frustrating from my end when I meet with these members and they understand we're headed for a crisis, but just say I'm not going to do anything about it because it's not popular. So if you look at trying to be effective, which presumably we you and I both wanna be in terms of doing this because we're passionate about our country Mhmm. Then does it really come down to educating the American people as to why this is insidious and not in their best interest and really help them better understand that things like the doubling of college tuition, the doubling of housing prices, the doubling of health care, that these these hidden inflation costs, these unintended consequences of, you know, essentially asset bubbles and asset inflation. Do you think we can do a better job of educating the American people about the insidious nature of these deficits?

Yeah. And and it's not impossible. You know? I I came of age in the nineteen eighties and nineteen nineties, and this may shock younger people today. But in the eighties and nineties, deficit reduction was actually a priority for the American people.

Back then, if you were running for president and you were putting out fiscal plans, they better be paid for. You know, that was eighty four, eighty eight, ninety two, ninety six. Presidential candidates were expected to have a plan to balance the budget. You were expected to have your plans paid for. You know, when Clinton got elected in ninety in ninety two, his first priority was on deficit reduction.

From '83 to '98, we had six major, nearly all bipartisan deficit reduction deals that took a 6% of GDP deficit to a balanced budget. It has happened before, and and I tell members this. The lawmakers managed to still get reelected back then without promising to play Santa Claus. What worries me today is there's such a misinformation bubble, and there's so many partisan lenses that when you see things like rising interest rates, rising inflation, slower economic growth, slower slower wage growth, It's so hard to get people to not look at it through a partisan lens of, well, the party in power did this, or my political opponents did this, and when my guys get in, they'll fix it. My worry is that, ultimately, after twenty five years of trying to motivate the public, giving speeches, giving national tours, writing op eds, writing articles, working with others, people aren't gonna really take it seriously probably until there's a debt crisis.

And that'll likely come from the bond market. And I hope it doesn't come to that. You you wanna you wanna address a problem before before you get to that point, but it's it's so hard to break through the partisan wall and and have people see what the problem is. So why haven't the bond vigilante showed up? They will.

To put it this way, the debt held by the public is about $30,000,000,000,000. It was 5 and a half trillion dollars when president Bush took office in 2001. Thankfully, the economy has grown somewhat too in the last twenty years. So as a share of GDP, we've gone from about 35% to a 100%. However, the deficits were not as persistently large as they are now.

We have not had situations before where deficits are going to five, six, 7% of GDP during peace and prosperity. By the end of the decade, we're headed to deficits of $4,000,000,000,000 a year, assuming peace, prosperity, and low interest rates. And here's the really scary number. Over the next thirty years, we are projected to borrow about a $150,000,000,000,000 just to maintain today's tax and spending policies. Let me repeat that.

A 150,000,000,000,000. So we have we're borrowing 30,000,000,000,000 now. It's gonna go to 180,000,000,000,000 over the next thirty years. The economy is gonna grow and absorb some of that, but even as a share of the economy, we're looking at about 250% of GDP debt under current policy. That's when the bond vigilantes are gonna come.

If you think they could absorb deficits of 1,000,000,000,000 now, wait till we have deficits going to 14% of GDP, which is the equivalent of $4,000,000,000,000 today over the next couple decades. When I talk to people on Wall Street and I see analysis from the bond market, they're already seeing interest rates rise. Bond auctions are already showing inflated interest rates higher than what the Congressional Budget Office has ever forecast even now. The bond market is already getting stretched, and I have to say at some point between now and 150,000,000,000,000 more, the bond market's gonna cry uncle. One more point on that, little side point, is some people say, well, it's okay because it's a big world economy, and we can borrow a lot of money from foreigners.

Of that $30,000,000,000,000 debt right now, only 1,000,000,000,000 is held by Japan. Only 1,000,000,000,000 is held by China, and they're trying to get rid of it. They don't have the will or capacity to make any significant dent in a $150,000,000,000,000, which means ultimately that's gonna have to come from The US, our own bond market. If you don't think a $150,000,000,000,000 in government borrowing domestically is gonna push up interest rates, hurt the economy, and and and stretch the bond market, you may be in for a rude awakening. Completely agree.

And doesn't that really mean that we're gonna have financial repression and inflation in order to deal with this? I think inflation is inevitable. Particularly, I think it's going to get worse because that seems to actually be the preferred answer for politicians right now. Right. You know, right, you can essentially either you know, I don't think we can grow our way out of this debt.

If you just take a look at the numbers, the debt's growing too fast to grow our way out of even though growth can help. So, really, you either have to raise taxes, cut spending, or inflate our way out of it. And my fear has always been fiscal dominance, which we had after during and after World War two, where the government essentially orders the Fed to keep interest rates low in order to finance our debt. This is what president Trump is doing right now. This is Trump president Trump has said a a large reason he wants the Federal Reserve to continue cutting interest rates drastically, even though the economy doesn't really need it right now, is to finance our debts.

That is inflation. And it's always gonna be more tempting for politicians to say, why should I raise taxes or cut spending when I can just force the Fed to keep interest rates low? But, obviously, that's not a solution. It's just gonna bring inflation, which is then gonna push up interest rates. We saw this when it happened after World War two, and the Fed was required to keep interest rates low even when World War two ended.

And by 1951, inflation was at an annualized rate of 24% when the Fed was finally freed up to to set interest rates based on macroeconomic stability rather than trying to keep rates low for for government borrowers. Well, and the challenge in a democracy, I I I believe is when you have inflation, it's politically unstable because the winners and losers obviously exist. You've got people on fixed incomes that don't own assets that get hurt by. So you have a lot of unintended consequences and a lot of hurt people and a lot of anger, which I I suspect is playing into the polarization, and you you throw out whoever the bum was last in office because you know something's wrong, but nobody's fixing it. Right.

Because we continually blame inflation on that terrible, you know, president or political leader. A big reason we're gonna have inflation here is because of us. We don't wanna make the difficult decisions. And to a certain degree, politicians are following our lead. If you are worried about deficits going to $4,000,000,000,000 in the next decade and the Fed responding with lower interest rates to further push up inflation, we need to look in the mirror.

We're the ones who will not allow our benefits to be touched, will not allow our taxes to go up by a dollar, and see aren't exactly rebelling against the idea of the Fed monetizing part of the debt. And, again, there's this partisanship that, well, it's just the bad guy in the other party, but there's enough blame to go around with the debt. It's gone up under Democratic presidents. It's gone up after Republican presidents. Every combination of president and Congress, the debt has gone up, and it's because the politicians can change.

The electorate doesn't. No. That makes sense. And so I understand there's no way to know exactly how this, quote, crisis plays out or how this Yeah. Kinda materializes.

But do you think we're starting to see it materialize? And and what I mean by that is you've got the leverage coming out of crypto. You you see these wild swings in silver and gold. Yeah. You see the dollar decline.

You see that even though we're growing at, quote, unquote, 4%, the reality is that if you look at how much of that is because of the government debt as a percentage of GDP, if we were building factories with all the deficits, it would be one thing. Sure. But when it's going to current spending, it's not expanding the economy. So in a sense, we are getting poorer, but it's almost like we're boiling a frog. I mean, how do we get people to understand the insidious nature of these deficits?

Yeah. And I I think people have become somewhat normalized to economic instability. I mean, boy, my generation. We got, I came of age, I saw the big crash in 2000. I saw the great recession in 2008.

I saw the COVID recession. It's kind of become, like, we've become normalized to a crash every decade, and we've also become normalized to 1.8 to 2.2% economic growth being normal as opposed to way below what we need and way below what we should expect. We've just become immune to it. And there's even this view too that I that I talk to people that even the high interest rates now were just an anomaly, and they're gonna come back down to, you know mortgage rates are gonna be back at three or 4% at some point, and we'll be able to refinance. I don't see that happening.

I don't see inflation coming down to where the Fed's target of 2% is. I certainly don't see mortgage rates ever returning to where they were a few years ago. And unless there's a major change in in the economy or economic policy, I think about 2%, maybe two and a half percent will be the cap of economic growth, in particular because, you know, economic growth is the combination of labor force growth and productivity, and we're starving the labor force right now. Labor force growth is actually gonna start declining in the next couple years due to retiring baby boomers, low fertility, and now immigration reversing. How where is the growth gonna come from?

Is it are we gonna double or triple productivity? Is, you know, hoping for an AI miracle really what we wanna hitch the entire economy to? If AI can produce a lot of growth and productivity, that would be terrific. I don't wanna put all of our all of our chips on on AI, though. I completely agree with you, but I think, candidly, that's where we're at because I think that the holy grail is we'll grow out of it with AI, and then we'll have universal basic income for the people that are displaced by AI.

Yeah. But I don't see how any of that happens in less than ten years. And in the in the next ten years, we're gonna continue to have these challenges. And if a let let's say AI is as wonderful as we hope. The resulting AI investment boom and economic growth is gonna push up interest rates, which itself is gonna reverse some of the economic growth, and also really push up the debt.

I mean, interest rates are the time bomb right now that can blow up the debt. Additionally, if we are spending a lot of the AI revenue on you on universal basic income, that's gonna cost a lot of money. For furthermore, the faster the economy grows, that automatically increases Social Security benefits because they're tied to wages. Medicare spending goes up because health consumption rises with income. Even if AI produces what we want it to produce, I don't think it really fixes our fiscal problem because, again, you have UBI costs.

You have higher interest rates on the debt. You have Social Security and Medicare costs rising faster. I would love to see AI achieve a lot of our miracles without the major displacement, I'm not sure it will. So when you look at historical situations where we went off the British pound or even in the Roman, Republic times where they started, you know, shaving silver off their silver coins. There was a world where you you did have, you know, these these empires that had too much debt, and then they paid a price for it.

To me, what's interesting is that when you look at global debt, we are not alone in this situation. I mean, if you look at China, you look at Japan, you look at Europe, everybody's struggling with this same issue. And I don't know how that ties together in your mind, but isn't this a global issue? It it is a global issue, although it's it's gonna be significantly worse for The United States. If you take a look across the pond, across the ocean, you see the British government and the French government are in in a degrees of chaos right now because they have the same challenges we have, which is an aging population, low fertility, huge retirement benefits, and not enough workers to to actually grow the economy, pay the benefits.

So they've all been coasting on cheap debt to make up the gap, and now the interest rate is rising on the debt. That's the final shoe to drop when the benefits outweigh the economy and what you can produce. For about ten or fifteen years, The United States and Western Europe were able to coast on cheap debt to make up the gap, but it's because interest rates are rising to twenty and thirty year highs in Western Europe and in The United States. Well, now there's really no way out, and they're in trouble. In Western Europe, debt is rising across Europe.

Although, at this point, our situation is looking so much more perilous. I I believe that our debt right now is on pace to, at least at the end of this decade, become higher than everybody in Europe, I wanna say, except Italy, Greece, and possibly Portugal. Japan has a very large debt. They're at about 230% of GDP, but they're also an economic basket case. Their economy has been stagnant for thirty years, and, additionally, they have tools we don't have, like a huge savings rate and corporate retained earnings that equal about 96% of GDP that help finance their debt.

What scares me about The United States' debt is not only is our debt set to exceed, as a share of GDP, the countries in Europe and Japan, but who's gonna bail us out? You know, when Greece goes under, the EU can bail out Greece. When The United States has a debt crisis, as I mentioned earlier, the rest of the world does isn't gonna have the resources to bail us out. So on the one hand, we do have advantages being the reserve currency and all of that, but we have disadvantages in that we're too we're too big to be bailed out by anyone else, unlike, say, Greece. So you talk about, you know, the the The West or The US have these worse problems.

Do you feel that China doesn't have the same problem we have? I mean, they have an aging population. They have population shrinking. They have large deficits as well. Mhmm.

Do you think that they're better equipped to manage their debt than we are? I mean, China has the I'm I'm gonna put advantage if you're, in air quotes. China has the advantage of not being a democracy here in that Right. They can make fiscal consolidations and shifts that can get themselves out of a crisis probably a little quicker than we can because they don't really have to care what the people think. You know, in China, if if they have to make some, economic reforms that cause significant poverty for ten, twenty years, but get their fiscal house in order, China will do it.

We have a little bit of a harder time doing that. I'm not saying the China system is better because I actually you know, I want the well-being of the Americans that matter more than they sometimes do in China. But I do think that even if China is facing, you know, particularly demographic challenges and huge needs, there's a lot more policy flexibility over there than than there is in The United States. Yeah. And I I completely agree.

So then going with this kind of theme of where we're going, one of the things I've wondered is when you look at what's going on with Venezuela, when you look at what's going on with oil with Iran, when you look at what's going on with the discussion about Canada and Greenland, I wonder if one of the unintended consequences of this kind of situation we're in is that we really are trying to grab up resources and expand the empire, so to speak, because it's it's kind of the unintended consequence of being overextended. And so we have to kinda gobble things up in order to kind of mask the o the problems that we're having. Yeah. I think this is we're we're in kind of the stage of a of a economically declining empire. I mean, you you know, you you know history.

So many economically not not even empires, but even just countries that powerful countries with large militaries and economies that find themselves struggling with resources have historically looked abroad. This goes back to the Roman Empire, and we've seen it again and again and again, you know, even all the way through the twentieth century. And and and that is that is a fear of mine, But, ultimately, it's not gonna solve the problem, and it's just going to it's what it's doing is it's destabilizing our economy, and it's also cutting us off from the rest of the world. You know, what I see is a lot of other countries now opening markets to China because The United States isn't the reliable ally or trade partner. So instead, I you know, of actually getting the resources from the rest of the world, ironically, we're cutting ourselves off essentially from the free world and the ability to trade to attract investment and pushing that it towards China.

So it it's interesting that you put it that way of of trying to to acquire their resources. We're acquiring the resources of countries that we're going after, but we're losing resources from the free world that doesn't see us as a reliable trading partner anymore or a reliable investment destination. Could not agree with you more. And, again, it comes back to how do we get the public? How do we get states people to show up?

We had Ross Perot at one point. Right? We had we've had these discussions in the past. I mean, we've got people like Rand Paul. We've got Ray Dalio.

We've we've got Jim Bear at the Puck Venture Capital One. We have you. But how do we create more of a community of people Yeah. That really come together and start putting a pack or other, you know, assets together to really start creating a narrative that starts to bring accountability to Washington. Here's why it's one reason it's harder today.

I mentioned earlier that there is just polarization, that we don't get our information from the same place. If you go into a right wing echo chamber and a left wing echo chamber, they both have their completely fake narrative of where the debt is coming from and what the solution is. But the other problem that makes it significantly harder today is the cause of the debt moving forward and the reforms that are necessary. In the eighties and nineties, we can kinda tweak our way out of the deficit. If you go back to the those six deficit reduction reforms we had between '83 and '98 that fixed the budget, most of the savings came from things like discretionary spending caps, and most of those savings came from the military drawdown at the end of the Cold War.

We we capped appropriation growth, things like education, health research, infrastructure. We capped that at about 1%. We drastically scaled down military spending after the end of the cold war, and we did some modest tax hikes and tweaks. It was actually doable. It was a situation where the public saw the benefit of a balanced budget being worth those policies.

Today, it's so much worse. The deficit is 1,800,000,000,000 now heading to 4,000,000,000,000, and Social Security and Medicare are the whole ballgame. Social Security and Medicare this year will run a cash shortfall of $800,000,000,000. A decade from now, they will run an annual cash shortfall of $2,400,000,000,000. By 2054, these two programs alone will be running a a shortfall of 10% of GDP per year.

That brings up a whole more difficult complication for deficit reduction. We're not talking about defense cuts when the war ends. We're not talking about, okay, let's grow discretionary spending a little slower. It's the most popular sacrosanct programs, Social Security and Medicare, are the only way you're gonna fix this with reforms or and some combination of middle class taxes, because taxing the rich, you could tax them at a 100%. It wouldn't make a difference.

So for politicians today, it's harder to motivate people for reforms that are so much tougher. Social Security, Medicare, middle class taxes. When you talk about that, people are furious. Doors get slammed. I've learned every new swear word on Twitter when I talk about this stuff.

It's so much harder to motivate people. Well and when you look at the deficit, and I and I think you said, like, 1,800,000,000,000 right now. Mhmm. In terms of how it's accounted for, is the debt does the deficit include the 800,000,000,000 of Social Security? It does.

Okay. Yes. So we really as distasteful as it is, until we make Medicare and social security actuarially sound, we can't get there. That's the bottom line. Let me put it this way.

The shortfall for social security and Medicare is so large, you could zero out the defense budget. You could zero out most anti poverty programs. It still wouldn't be enough long term. On the tax side, you could tax the rich at a 100% and seize every dollar billionaires own. It wouldn't be enough.

Realistically, if you were if you wanted to solve Social Security and Medicare shortfall without without benefit cuts, you would either have to raise the payroll tax to from 15% to about 35%, or you would need to create a value added tax of about 33%. That and and that is across the board for everybody. That's what it would take if you're not gonna do benefit changes. And, again, like, you could you could zero off the Pentagon. You could zero out the welfare state.

Social Security and Medicare shortfalls are swallowing everything. Again, a decade from now, it's a $2,400,000,000,000 annual shortfall. There isn't a spending cutter tax hike of $2,400,000,000,000 per year that's gonna close that. Well, when when you look at a, you know, bell curve, or you look at the number of young people versus old people in this country, you know, if people are not having three babies, so to speak, if if the boomers are aging out, coming up, and you don't have as many kids at the bottom of the pyramid, you just the math just doesn't work, and it it's gonna continue to enrage young people. And when you look at the voting changes, the demographic changes within the parties, you know, when you look at again, keeping politics out of it, if you look at what's going on in New York, if you look at what's going on with young people voting for Trump and then switching back, The young people are the real problem here because they're angry.

Right? They they don't see a future for themselves. And so at the end of the day, the numbers, the way our economy is structured, we we've got this real imbalance. Yeah. I mean, to start with the Social Security and Medicare ratios, in 1960, you had five workers paying the benefits of each retiree.

Today, it's three to one. By the middle of next decade, it's gonna be two to one. That means that in about ten or twelve years, every married couple is gonna have to support themselves, their children, and the Social Security and Medicare benefits of their own retiree, Every single married couple. Think of it. You're trying to pay your student loan, childcare.

You wanna buy your first home. Housing prices seem out of reach. And now you're on the hook for the living expenses and health care of your own senior. It doesn't work. And it did part of it too is, of course, benefits keep rising every generation.

Benefits for Social Security and Medicare grow faster than inflation each generation, and lifespans are longer. That means somebody retiring today at 66 who lives until age 90 will spend one third of their adult life collecting Social Security and Medicare. With rising benefits and costs, it doesn't work. And you mentioned the effect on young people. That's actually the one of the reports I'm writing right now is how if you're a young progressive and you want family leave, childcare, more government spending on climate, health care, infrastructure, education, your worry should not be Republicans in the defense budget.

Your worry should be Social Security and Medicare because it that money right now is not going to the military. It's going to your grandparents. I mean, that is that is the driver right now, and it they're not going to be able to have a government that can pay progressive benefits or give us the European system they want. They're gonna have European taxes, but they're not gonna get European social benefits because Social Security and Medicare are squeezing all of it. And it's interesting that, again, like, they're they're they're so focused so much on, like, defense.

Defense is nothing compared to this. This is where the money is going. This is where they should be concerned. So have you run numbers where there are sustainable paths here? In other words Mhmm.

If you look at I mean, when you look at medical care in this country and you go back fifty years, a hundred years, we didn't have the kind of expensive drugs and the and the the expensive medical care that we now have. We're living in a different universe from that perspective. When you look at the math, is there a way to make the math work in I mean, obviously, there's a way to make the work math work. But is there a way to make the math work in in a way that you think is would be acceptable to the American people? I released a report about a year and a half ago called a comprehensive federal budget plan to avert a debt crisis.

What I did in this report was I I worked with Republicans and Democrats on the Hill to try to come up with not a partisan dream, if I was king for a day, here's how I would fix everything proposal. I came up with a, if Republicans and Democrats were locked in a room tomorrow and told that you had to stabilize the debt at a 100% of GDP and you can't let it go up, what would be the most reasonable, well done way that could be plausible to both sides and that respects both sides' red lines, and that's what I did. The plan is also totally specific and totally score fully scored, fully specific, no gimmicks, no empty targets. But, ultimately, you do have to do things that are going to be unpopular. Social Security, I raise the age from 67 to 69 gradually.

I start trimming benefits pretty drastically at the top. On the Medicare side, you have to bring in more choice and competition into the system, more of a premium support style system where people can better shop around for private plans and try to get some efficiencies there, because I don't think you can just do provider cuts to get the cost of health care down. I think you need to bring in more of the Medicare d model of choice and competition. Also on Medicare, you're gonna have to raise Medicare part b and d premiums, which are not pre Medicare b and d are not prefunded with payroll taxes. They're just welfare payments, essentially.

I'm fine with that for low income seniors, but not high earners. Even after that, you still have to make changes to Medicaid, discretionary spending, and raise taxes, and my plan does raise taxes as well. If you start to phase it in in the next year or two, you could do it gradually over ten years while protecting low income seniors, while protecting the poor, and while minimizing tax hikes. If you do it in the next couple years, you get five, ten years from now, it's it's it becomes impossible. Well, and is that because just the interest alone on the debt just gets greater and greater, and so you just have less and less efficiency and room to make the changes?

There's less fiscal room to phase in reforms because the debts gotten larger, interest rates have gotten higher, and, additionally, and this is where we're really coming up against the wall, the boomers are the retirees are older. You know, I remember, and I'm sure you do too, back in the nineties and early two thousands when we talked about Social Security reform, we said, don't worry. No one over 50 will be affected. We're gonna grandfather out everybody 50. We can't do that anymore.

That was that was the case for doing reform twenty five years ago. That's why we talked about reform 25 ago, so that we could grandfather out people who are older. Well, now, two thirds of the baby boomers have already retired, and the final third will be retired in five years. It's too late to grandfather out the baby boomers. You can't you can't grandfather out the 74,000,000 seniors whose costs are driving the problem.

And the longer we wait for reform, you can't pull the rug out from people who are 80 years old and poor. So, obviously, you have to move quickly, and you have to try to address only the higher earning retirees. That that's where we're really up against the wall, not just debt and interest rates, but people who get too old for the eligibility age doesn't matter anymore when you're 73. You know, time time is of the essence. When you say time is of the essence, when you look at the people in the Trump administration working on things like tariffs and the budget and their priorities, is there anything to be optimistic about in terms of the direction they're taking us?

No. I'm I'm sorry to say this, but, I mean, the Trump administration has done a tax cut that would cost $5,000,000,000,000 over the decade if extended. They there was ways to pay for a lot of the extensions. They didn't do it. They're drastically expanding spending.

The tariffs are raising very little money, but they're hurting the economy and hurting growth. And president Trump has said, I will veto any reforms to Social Security and Medicare. They're not giving fiscal hawks like me much to work with. And when I talk to Republicans in congress, a lot of them say, look. The Social Security shortfall is going under in about six or seven years.

We would love to start moving on this at least quietly with Democrats, but president Trump will hang us out to dry if we do it. So even even the lawmakers who wanna do the right thing, there aren't that many of them, but there are some, even the lawmakers who wanna do the right thing. The problem is at 1600 Pennsylvania Avenue and president Trump refusing to use any of his power and persuasion with conservatives and retirees to put reform on the table. Well, not an optimistic spin. And, again, when you look at, you know, what our deficit is, in other words, this at at a 100% or more of GDP, and then you look at some people saying, well, if Japan's at 200% of GDP, we can be at 200% of GDP.

I mean, until the the bond vigilantes show up, and and as long as we're able to continue to finance our deficit with these short term borrowings I mean, we're borrowing short term you know, we're buying short term we're selling short term treasuries. We're not selling as many long term bonds. I mean, you know, everyone criticized the Biden administration for, you know, going short term when they should have gone long term. Mhmm. And now we're doing the exact same thing.

So there doesn't seem to be any political will on either side of the aisle, as you say, to deal with this. And so, essentially, we're gonna drift and drift and drift until what? We have a black swan event? It it's always tough to say what a debt crisis will exactly look like because it's as much a matter of market psychology as it is economic fundamentals. The bond market can be spooked by let's say we go into a recession, and the recession pushes up the deficit even higher, and then the bond market starts to look more at at the economic fundamentals and get spooked.

It could be any sort of black swan event. It can be just hitting a certain number. A certain big round number can spook the bond market. But even without that, we're already starting to see it. You know, the scary ticking time bomb is interest rates.

The CBO projects out deficits that under a current policy baseline I'm sorry, a debt that will go to about 240% of GDP over the next thirty years. But CBO also assumes that the interest rate on the government debt will never exceed 3.6% ever again. Well, we're having bond auctions right now that are 4.2, 4.3, 4.4. The scary thing about this is if interest rates are one point higher than the CBO assumes, that's $40,000,000,000,000 in interest over thirty years. That's as much as we're gonna spend on the defense department.

That's one point. So if interest rates are two points higher than the CBO assumes, now you're now you're looking at a debt heading to about 330% of GDP. You're looking at at the cost of adding two defense departments. It doesn't take a large increase in interest rates. You know, to put it in shorter terms, each point rates rise would add about $500,000,000,000 to the deficit a decade from now.

So when I say we're heading to 4,000,000,000,000, we could be headed to 5,000,000,000,000. It doesn't take much for interest rates to rise enough to really, again, get into that spiral where the interest rates rise, so the deficit goes up, which in turn spooks the bond market more as the government has to borrow more. And, you know, the old line, how did you go bankrupt gradually and then quickly? Yeah. No.

That's true. And I know you're not, you know, a big fan of talking about quantitative easing, but is there a universe where we continue to stall this out another few years because we're buying our own debt and keeping interest rates artificially low by buying the ten year? Yeah. I think and I think that's what we're trying to do right now. I think the the strategy in Washington on the debt and deficit right now is to buy time until the next people are in office.

And what will determine how much time we can buy, frankly, is inflation. That's what I'm looking at right now. If if the Fed can do quantitative easing, and I know, Kevin Warsh wants to reverse some of the quantitative easing, but if the Fed keeps more of an open monetary policy, If they can muddle along with lower inflation for a little while, that will buy them a few years. The question is, can they do that, though, when you have an inflationary immigration policy, an inflationary federal reserve policy, an inflationary tariff policy, and an and an inflationary tax and spending policy. But, eventually, again, even if inflation is held in check for a little while, you still hit supply and demand walls with Wall Street, where when you're borrowing $4,000,000,000,000 additionally per year in ten years instead of 2,000,000,000,000 now, you're gonna see interest rates rise just based on supply and demand.

The Fed can't fix that. So humor me with the hypothetical. I believe, and I asked Larry Summers this about a year and a half ago, that the non bank shadow bank problem is much worse than people think. And the reason I say that is I restructure companies for a living, and I deal with a lot of family offices. And I've watched from 2001 till today how much money is now the trillions of dollars in what we call non banks, non regulated parts of the economy?

When you look at BlackRock and its publicly traded fund that is a non bank essentially lender, it was down 19%. Mhmm. When you look at the losses that these nonbanks are taking and reporting, it kinda confirms my hypothesis, which is the nonbanks that are privately held and the family offices that have a ton of this debt, it's much, much more unstable than people realize. So the SVB was kind of a little bit of a wake up call, but I believe you're gonna see over the next twenty four months a lot of these closed end funds and a lot of withdrawals in real estate and other things start to continue to inch up, meaning withdrawals have already gone up to, like, 5%. People want their money back.

Yeah. As the non banks liquidity starts to kind of, you know, the balloon, the air starts coming out of it. Right? I think we're headed for more of a crisis. You see what's going on with the repos and lending at the window right now.

I think it's already starting to happen. So let's say that accelerates on a worldwide basis. Then how does that figure into what the central banks have to deal with? I mean, I I clearly puts more pressure on the central banks. You know, I I haven't looked in this as in as much detail as you, but I do know that that the SVP crashed last year.

It is gonna put more pressure on the Fed to essentially open its window to keep interest rates down, provide more emergency lending, and that that's going to push instability. It's gonna push interest rates up, and it's gonna push it's it's gonna be it can be absolutely one of the factors that can create almost, what we saw in the big short. If you see if you saw in the big short, these are the cracks where it slowly begins. And yeah. I mean, again, we had this play out in the housing crisis where we had all this syndication of the housing loans.

Yeah. We've now got syndication of all this non bank debt, which is spread out along our economy. And in private equity and venture capital, we've got a lot of zombie companies out there that basically we've been doing extend and pretend on. Mhmm. You've got commercial real estate where we've done extend and pretend.

You've got in multifamily, you've got some extend and pretend. So, I mean, there is a lot of nongovernment Right. Debt that is struggling right now that I do think figures into this, and I don't see a lot of people talking about it. No. And as interest rates rise, this is so much of the of of them are they're gonna get exposed.

There's so many situations out there where the entire fiscal model has been based on interest rates remaining low to maintain the liquidity, maintain the the refis. As rates inch up, and I think they're going to continue inching up even if with the Federal Reserve trying to be more expansionary, I still think you're gonna see medium and long term rates probably continue to inch up. There's gonna be so much more exposure in in these parts of the economy, and that's gonna push the Fed to be more open and more expansionary. And, again, I think I think this probably ends with some instability, some inflation, a degree of a credit crunch, and some interest rate hikes. So if you're looking at things that can make a difference, if, and it's a big if, if we figure out a way to get our health care to be more under control, whether or not there's more intervention, whether it's not, as you said, we move more to the private sector, and we have more competition.

If there's if there are things that we could do structurally to make changes, is health care really the area you'd attack? Yes. Because when I talk about the the size of the debt over the borrowing over the next thirty years, Social Security faces a shortfall of $37,000,000,000,000. Medicare faces a shortfall of $87,000,000,000,000 because it has the same demographic problems and also rising health care costs. You also have Medicare costs rising rapidly, particularly for aging individuals.

The number one problem and the number one way to get our fiscal house under control would be to fix health care. The problem is nobody really knows exactly how to do it. We have ideas that can help somewhat. I have a proposal that can help somewhat, but it it doesn't help enough. It is extraordinarily hard to turn to turn the ship around this much.

And I'm I'm working with a congressman from Arizona, David Schweickart, on these issues, who's really focusing heavily on health IT and the ability to diagnose and treat, you know, especially elderly chronic illnesses earlier and faster and more efficiently as a way to cut Medicare cost growth. And I think that we have to keep exploring that too because there are certain, you know, dialysis costs are an enormous part of Medicare. And so the numbers are are brutal no matter what you look at it, but if you were picking one area, health care will bankrupt us if we do not fix it. And it's not just for Medicare and Medicaid. It's for the private sector too.

It's for families. Health care can bankrupt us. So in terms of the in the last few minutes we have, in terms of Mhmm. Kind of getting some type of consensus, as you say, you know, the politicians, you know, each side is blaming the other. When you look at economists today, I know MMT was a theory that was out there for a while that was popularized.

But when you look at your colleagues on the left and on the right, is there any consensus emerging that this is a crisis that needs to be dealt with? Or is there still a large block of economists that think, like Paul Krugman, that somehow we can continue to just point our way or or manage this? I mean, at at the end of the day, if it's he said, she said, you got one thing. But if everybody came together and said, look. This just is a problem.

Is there any hope there to bring the economists together on this? The economists, I think, are pretty mostly united right now. And I will say, I was very lonely talking about these issues during the 2015, 2018, 2020 era because I was told by particularly liberal, but also a lot of conservative economists, that low interest rates were going to bail us out. That was the idea. In fact, I I had a good debate that somewhere, I'm sure, on on the Internet right now with my good friend, Jason Furman, on whether or not low interest rates can bail us out long term.

And the idea back then was, hey. Interest rates right now are 2%. If anything, we need to spend more money and have more debt to stimulate the economy. We're fine. What's happened is interest rates the interest rate party ended, and now economists are increasingly united that the fiscal situation is not sustainable, that the I that last shoe to drop, that that last hope that even if we have fiscal imbalances, we can borrow cheap.

That dream is over right now, and I am seeing you know, Jason writes about deficit concerns. Larry Summers is writing about deficit concerns. A lot of the people who had talked for years, five, six, seven years ago about, you know, interest the interest rate is slower than the rate of economic growth, so we're okay. You don't hear much of that anymore. And as for Paul Krugman, I mean, his his issue on debt is often based on who's in the White House.

I could say that he's my former professor. His his debt concerns are often a little more partisan based, but I'm seeing more unanimity among economists that I have seen in years, particularly as interest rates rise, that this is not sustainable. People who used to call me names are now repeating the same refrain, in the econ community. Well, and I think when the worldwide economy was growing faster propped up by China and India and globalization was really in full swing, I think you could kind of buy into that narrative, you know, and there's an expression, you know, that which you most fervently desire, you most easily believe. I I think what's replaced globalization is AI, and that's the holy grail.

Yeah. There are people that think, you know, we're gonna grow so fast that in the next few years, we're gonna be fine. And, you know, it seems to me that is unbelievable wishful full thinking. Yeah. Little like Pharaoh in Egypt thinking that, you know, his magicians could magically grow out of the problems that Egypt was happening.

So I I mean, I do think we're heading for that perfect storm, and I think people like you are gonna have your day in the spotlight because the issue is I told you so. And we're then the then the question is how do we, in a sense, dig out of it in a way that doesn't blow up the republic? Yeah. I mean, the thing again with AI is I remember when the Internet revolution was gonna change the economy forever and make us all rich and solve the problem. I remember all of that in the late late eighties, early nineties, and we got about a 1% bump for the productivity rate for about thirteen years.

From about '92 to o five, productivity great. Productivity growth bumped up by 1% per year, was great, and then it went back down. Hopefully, AI can do better than that, but we've been disappointed before, and I hope AI can can lighten the load, but hope is not a strategy. And if I'm in the government, there you know, the expression hope for the best, budget for the worst, either you gotta have a backup plan and not we're just gonna hope that either AI solves it or that as the as the budget forecasters assume, we're just gonna assume that interest rates stay low forever. That's not a plan.

That's that's a hope. So why aren't there more business leaders, and even the billionaire class, talking about this? Because they do have the ability to move government. And if anybody should be worried about political instability, it should be wealthy people. Yeah.

Roosevelt was pretty successful at going to the wealthy business people and getting them to say, look, we we if we don't compromise, right, we're gonna end up with communism like in Russia. Right. Why isn't there more of a movement from the business community focusing on this? I think in the current political age, business is pulling back from political commentary as much as they can. I don't think as much as this affects them, even during the Biden administration, there was there's been such a backlash against businesses going too far out on political issues that CEOs have basically decided, broadly speaking, to pull back, not just on woke issues, that that created a lot of the backlash, but even on economic issues.

And I agree with you. Like, this is a problem. This affects their bottom line. This affects their shareholders. But when I talk to business leaders, what I see is a a lot of hesitancy to really stick their neck out on anything right now that has a political side to it.

Yeah. I mean, although it's interesting because you would think people that are billionaires that economically are insulated, you you know, you would think that there'd be more of them that would be, quote, patriots concerned about this. Absolutely. But, again, we're seeing that with with Trump right now where billionaires who have what they, you know, call blank you money are still out there, you know, making kind of embarrassing public proclamations and movements in order to curry favor with the White House. Even though you would think that they should have enough money that they could afford to absorb the cost of any convictions, they're not doing it.

Yeah. So I think that there's a timidity out there that I will say frustrates me. Yeah. Jessica, it frustrates me as well. My concern is that I think it's easy to to focus on short term economic issues and short term economic debates.

But long term, if we don't get the budget under control, it's gonna swarm everything else we we want to accomplish in our political system. From your mouth to God's ears, Jessica. Thank you so much for joining us today in the Puck and really look forward to our continuing discussions as as we go on. This was a great discussion. I look forward to doing it again.

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