00:00:00
Joao Gomes: Both candidates are, at this
point, incredibly populist in
00:00:03
the sorts of things they put
forward, and none of them has a
00:00:07
plan to pay for any of this. And
at a minimum, we need that
00:00:10
fiscal discipline, that sense
that, okay, I want to accomplish
00:00:13
x, but be honest with the
citizens of this country and
00:00:16
say, I need to pay for it, and I
need to -- need x or x plus
00:00:21
something to cover those costs.
Dan Loney: Welcome
00:00:23
to the Ripple Effect, the
podcast that
00:00:25
takes you on a journey through
the minds of Wharton faculty.
00:00:28
I'm your host, Dan Loney, and in
each episode, we'll be diving
00:00:31
deep into the inspiration behind
the groundbreaking research that
00:00:35
Wharton professors have
conducted, and exploring how
00:00:38
their findings resonate with the
world today. Loney: Well, currently,
00:00:42
the national debt is probably
around $30 trillion, maybe
00:00:46
crossing that barrier. The debt
to GDP ratio is closing in on
00:00:51
100 percent but continues to grow, and
we just surpassed a plateau
00:00:56
where the interest payments on
current debt is about $1
00:00:59
trillion a year. Obviously, the
debt is a significant issue, yet
00:01:04
the candidates for President
aren't talking about it a lot.
00:01:08
We're joined here in studio by
Wharton finance professor Joao
00:01:11
Gomes, who testified earlier
this year in front of Congress
00:01:15
about the issues around the
debt, and he joins us here in
00:01:18
studio. Joao, great to talk to you
again. - Great
00:01:20
talking to you again. Thank you
for having me. - So
00:01:22
seeing the debt rise in the
manner that it has, what are the
00:01:27
larger scale impacts that we are
potentially looking at here,
00:01:31
potentially in the -- in the
relative near future? - Relative
00:01:33
near future is a little hard to
say. I think it is progressively
00:01:38
worrisome. My analogy, my
favorite analogy, it's a bit
00:01:41
like gaining weight. You go to
your doctor, and you look at the
00:01:43
data, and you know, you're
getting a little bit heavier.
00:01:45
You're getting a little heavier.
Why don't you do something about
00:01:48
it? And you say, oh, I'll do
something about it in two years,
00:01:51
in five years, in 10 years, and
I'll be fine. And you're sort of
00:01:53
probably sort of kind of fine,
but you never know, and -- but at
00:01:58
some point you're not fine
anymore. And I'm fairly sure
00:02:01
that they will come, right?
Whether it's five years from
00:02:03
now, 10 years from now, or just
next year, I can't be sure, but
00:02:06
the probabilities that you're
going to get in trouble are
00:02:09
going up all the time. So I
always say I'm not super worried
00:02:12
about the debt right now. I am
really worried about where it's
00:02:16
going to go, where it's projected
to go, and the fact that
00:02:19
politicians don't seem to care
one bit left or right. They just
00:02:22
plan to spend more. That I'm
really worried about. - So
00:02:24
take us into what the gist of
your testimony was back in
00:02:29
Congress back in March. - There
00:02:31
was a very specific hearing on
climate change and fiscal
00:02:34
policies that supported, or a
number of measures to address
00:02:38
climate change. And the point
that I tried to make there was, I
00:02:42
see the debt problem as bigger
and more urgent than the climate
00:02:45
challenge. It will come earlier.
We will face a fiscal crisis
00:02:49
anytime, I think, in the next 10
or 15 years. Ten will be almost
00:02:53
the outer bound that I would put
on that. And when it happens, it
00:02:56
will touch all of us, and I
really mean all of us. Every
00:02:59
part of the economy, from the
banking system and our bank
00:03:02
deposits there, to our paychecks,
to Social Security, Medicare.
00:03:08
There'll be damage mortgages
across the whole economy. The
00:03:11
value of the dollar. I think
that's a more urgent, a more
00:03:14
pressing concern, and I think
the way we think about some of
00:03:17
these longer term challenges,
not to minimize them, they're
00:03:20
really important, but we should --
there's only so much money we
00:03:23
can spend addressing them
without thinking that, well,
00:03:27
that's going to create a much
bigger problem in the short
00:03:29
term. - What type of approach then
do we need to look at to at
00:03:34
least start to get that train
rolling down the tracks?
00:03:36
-I think we need to first not
make any really silly mistakes.
00:03:40
I think a lot of times the debt
crisis happens because a
00:03:44
particular set of politicians,
I'm going to say, but that would
00:03:49
include a chair of the -- of the
Federal Reserve, just loses the
00:03:52
trust of financial markets. They
propose a certain set of
00:03:54
policies, or make certain types
of -- put forward some types of
00:03:58
ideas that just make people wake
up to the -- to the sense that, you
00:04:02
know, this is just not working.
This is just not somebody I can
00:04:04
trust with $2 trillion, two
more trillion dollars this year.
00:04:08
So I think that's important. But
I think people need to think
00:04:11
about, how do we pay for some of
these proposals that we make?
00:04:14
You know, whether you're on the
left, on the right on this, it
00:04:16
doesn't really matter. Both
candidates are, at this point,
00:04:18
incredibly populist in the sorts
of things they put forward, and
00:04:22
none of them has a plan to pay
for any of this. And at a
00:04:26
minimum, we need that fiscal
discipline, that sense that,
00:04:29
okay, I want to accomplish x,
but be honest with the citizens
00:04:33
of this country and say, I need
to pay for it, and I need to --
00:04:37
need x or x plus something to
cover those costs. And until we
00:04:41
do that, I think we live in this
pretend world that we can just
00:04:45
borrow more and more and more,
and for a while we can. We can
00:04:48
continue to gain weight, we can
continue to overeat, but the
00:04:52
penalty is going to be severe,
and the question is just which
00:04:55
generation and which point and
which political party is going
00:04:57
to be in power when it happens.
- So
00:04:59
you talk about the potential of
a financial crisis. To what
00:05:03
extent are we talking about,
like multiples beyond what we
00:05:07
saw in 2008?
00:05:08
- Oh, I think so. I absolutely
think so. In fact, it could work
00:05:13
in reverse. One of the things we
saw both in 2008 and 2020 with
00:05:17
Covid was both of those
episodes, it was something
00:05:20
that didn't have anything directly to
do with the government, it was
00:05:22
not a fiscal crisis, so to
speak, with the Treasury, but
00:05:26
the economic crisis that
unfolded created -- the debt might
00:05:31
have gone up 15, 20 percent of GDP in
both episodes because the
00:05:35
government felt the need to send
stimulus checks, to bail out
00:05:38
banks, to do various types of
things. And so it could work
00:05:42
that way. But if it is a pure
fiscal crisis, in the sense that
00:05:46
folks wake up one morning and
say, we just don't have
00:05:48
confidence in the US government
anymore, we will have a serious
00:05:52
economic crisis in our hands. I
mean, we would have -- in that
00:05:54
scenario, we might have to
tighten our belt by the
00:05:57
equivalent of $2 trillion. I
mean, just think about the
00:06:00
spending cuts that entails,
and with the damage that we do
00:06:03
to the economy. Nothing
else. And nothing else. If that
00:06:07
was just it. So I think it's --
it's a very scary -- and I'm
00:06:12
an optimist by nature. I mean, I
continue to hope that we'll find
00:06:16
our way out of this. But if
that scenario unfolds, it is a
00:06:20
very scary scenario.
00:06:21
- And then a variety of different
programs, thinking like
00:06:24
Medicare, Social Security, all
of these are ones that would
00:06:28
have to take a significant
haircut in order to be able to
00:06:31
keep them up and running.
00:06:31
- Exactly. A real possibility. Another
possibility is a very sharp
00:06:35
increase in taxes, which, again --
and I say, you know, we always
00:06:39
talk about, at the end of the
day, to cover a deficit of one
00:06:43
or $2 trillion, it's taxes on
everyone. I mean, it would have
00:06:47
a substantial tax increase on
every single person. It can't
00:06:49
just be concentrated on the top
one or two percent. There's just not
00:06:52
enough revenue there. It would
be an adjustment that, I think we
00:06:56
don't want to go through this.
And to be fair, that's the
00:06:59
reason no candidate right now
has a huge incentive to do
00:07:02
much about it, unfortunately.
- Just kick the can down the road more.
00:07:07
- Just kick the can down the road and
hope the next person will take
00:07:09
care of it.
00:07:09
- An interesting point in
reading your notes before you
00:07:13
went and spoke before Congress about
how the debt could have the
00:07:17
potential to be more stubborn.
When you think about, you know,
00:07:21
where we are in terms of our
population, using that as an
00:07:25
example, our aging population
could actually help us prevent
00:07:29
growth in the country. - Oh,
00:07:31
it does, I mean, currently. And
that is, again, some the best
00:07:35
scenario we can hope for to get
out of this is -- and I think it
00:07:39
should be an obsession for us,
economies, policymakers and so
00:07:41
on, is, how can we grow our tax
base? Let's just accept that
00:07:46
Social Security -- we have an aging
population. We want to take care
00:07:49
of them. And cutting benefits
there is going to be difficult.
00:07:52
Let's just accept that's just a
challenge. The only way out of
00:07:55
this is to have a bigger tax
base, to increase the revenues
00:07:58
for the government. The best
scenario there is to increase
00:08:01
the pie, the size of the pie.
That's the best scenario
00:08:04
we can have for -- so things like,
you know, more people, more
00:08:07
people in the workforce, people
working longer, more
00:08:10
productivity, more
entrepreneurship. Those things
00:08:12
should be basic priorities for
us. That's the -- that's the one
00:08:16
hope that we have. And there would
have to still be a significant
00:08:18
amount of growth. Absent that,
the demographic pressures make
00:08:23
our problems incredible. Very,
very challenging. In the past 10
00:08:28
years or so -- Social Security
trust fund runs out in 2033.
00:08:31
That's the latest that I would
envision this conversation
00:08:34
taking place. At that point, it's
not a conversation for bankers,
00:08:37
for hedge funds, for fund
managers. It's a conversation
00:08:39
for 50 million people that are
going to think about, what
00:08:42
happens to my check? We
may have -- we have that
00:08:46
conversation earlier, but it
absolutely -- I think no more than
00:08:49
10 years from now. - One
00:08:50
of the other things then I
guess you also have to factor
00:08:53
in when you think about the
level of debt is the interest
00:08:56
in buying off the debt by other
countries around the globe. - That
00:09:00
is true. - And the components of
some of the relationships that
00:09:03
we have or don't have. - Or don't
have, yes. with some of these
00:09:05
- With some of these countries that are
used to buying the debt, how that could
00:09:09
factor against us as
00:09:10
well. - Exactly. That's a really
good point. And I think it is
00:09:13
something -- talking about America
becomes self-sufficient, also
00:09:17
means become self-sufficient in
terms of we can fund our debt
00:09:20
ourselves, or more, or
increasingly more. That is
00:09:24
challenging. I mean, right now,
40 percent of the US debt gets sold to
00:09:30
different -- ultimately placed in
the balance sheets of different --
00:09:33
different agencies, different
countries. Becoming self-
00:09:35
sufficient forces the US
consumers, the US businesses, to
00:09:38
buy more of that debt, the US
banks to do it. I mean, if I
00:09:42
force you to buy paper, because
that's what I'm doing, you
00:09:44
cannot use the money to turn
around and eat, buy a house, go
00:09:48
shopping, take care of your
kids. It could be really
00:09:52
challenging. In an environment in
which we want to become a little
00:09:55
bit more close, a little more
self-reliant, it will be a lot
00:09:59
more challenging to
fund this government without
00:10:02
imposing significant penalties
on our standard of living. - Take
00:10:05
a moment and talk about the
importance of having these
00:10:09
countries buy that debt and what
it has meant for us, as
00:10:13
ourselves, for our economy, in
the last many years.
00:10:16
- Lower rates and less -- and less --
and more money. That's lower
00:10:21
interest rates, I mean, lower
mortgage rates for the average
00:10:24
person in the US. Lower mortgage
rates. That's just it. There's
00:10:27
just more money coming in. And
as a result, banks don't need to
00:10:31
buy government debt. They can
turn around and provide
00:10:33
mortgages at cheaper rates.
That's a really -- that's probably
00:10:36
the most common thing they do.
It's not the only thing they do,
00:10:38
but that's really the
most common thing they do. It's
00:10:40
been really valuable to us that
various parts of the world,
00:10:45
people there just have saved a
lot, and they view US government
00:10:49
debt and the dollar as a place
to really store their wealth.
00:10:52
They prefer to do that than buy
local houses, then invest in the
00:10:55
local stock market and start the
business there. They just have
00:10:58
that enormous trust in our
federal government. And the
00:11:03
moment they don't, our federal
government loses one very
00:11:06
reliable, cheap source of funds
and is going to have to replace
00:11:10
that in some other way, or is
going to have to cut. - Have
00:11:13
your comments that you made in
front of Congress in March -- have
00:11:17
you heard back? Have they
resonated with some?
00:11:20
- I hope they've resonated. We
will see. I've heard back. We've
00:11:23
had some -- we have some
interactions. But I think we
00:11:27
both know at this point, and I
knew this going into that
00:11:30
conversation, going into the
election, you just -- you just see
00:11:34
that the themes right now are
really, what can we propose that
00:11:39
makes people feel like my
administration is going to do
00:11:43
more for them? And so they're
not really interested in a
00:11:46
conversation about that. Nobody
is. I am being very -- at this
00:11:49
point, nobody is. I think that
conversation will be scary,
00:11:51
would be difficult, would be
uncomfortable, would raise
00:11:53
concerns about, okay, so which
taxes need to go up? Nobody
00:11:57
wants to have that conversation
right now. So I think either
00:12:01
that conversation is going to be
forced on the next
00:12:04
administration, or there will be
some luminaries there that
00:12:08
actually think -- have a forward
looking attitude and think this
00:12:12
is -- this is something we want to
think proactively about, and we
00:12:14
want to address it. So what -- I
was surprised how aware people
00:12:18
are of the problem.
They're just not willing to
00:12:22
tackle it.
00:12:23
- What's unique is the dynamics
that we have on Capitol Hill
00:12:27
with our political system right
now and the division that we
00:12:30
have, and it doesn't even matter
that it -- this really is -- it's a
00:12:34
solution that would
require both parties,
00:12:37
that neither even is calling the
other out about the problem.
00:12:40
- I think that's exactly right.
Neither one is, and both of them
00:12:44
are very comfortable in this
world of, okay, I'll see your two
00:12:48
and I'll raise you two more. And
you know, it's going to be
00:12:52
something we deal in the future.
It's very unfortunate. I don't
00:12:55
know exactly how we got here,
but I know it could end in an
00:13:00
instant. And the UK in 2022, and
I know people always say the US
00:13:04
is not UK and so on, but this
could end in an instant. This
00:13:07
could end very quickly and very
painfully. - Joao, great to
00:13:10
talk to you. Thanks very much.
- Thank
00:13:11
you, Dan. Thanks for having me.
- You
00:13:13
got it. Joao Gomes, Professor
of Finance here at the Wharton
00:13:16
School. - Thank you for listening
to the Ripple Effect. We hope
00:13:19
you found this episode
informative and engaging. Don't
00:13:22
forget to subscribe and leave us
a review so that we can continue
00:13:25
to bring you the best insight
from the Wharton School.
