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