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The US economy saw its national debt climb above $ 38 trillion recently. But what may be even more concerning is the
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fact that it just passed 37 trillion two months prior. Part of that is higher interest rates. You have the higher
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interest payments title uh to those. It all means that we're racking up more and
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more debt at double the pace we saw at the beginning of the century. Now the bigger question, how can the problem be
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addressed and chart a new course like starting to reduce the debt? Kent Smatters is a professor of business
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economics and public policy at the Wharton School. He is also faculty director of the Penn Wharton to budget
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model. Hi Kent, how are you? >> Good to be back. Thank you. >> $ 38 trillion question right now. How do
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you address it? >> Yeah. Uh 8 trillion of that 38 is kind of the government you oweing itself. And
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so what we call the debt held by the public that did also hit a new high around $30 trillion. And so you know we
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are approaching almost World War II levels of debt relative to the size of the economy u which peaked in 1946.
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But um you know the difference relative to World War II is that um every projection given the current fiscal path
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has the debt GDP ratio going up even more. Um whereas after World War II it was you know a very punctuated spending
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and you know now uh you know spending went way down and therefore the debt GDP ratio also uh fell quite a bit. Where
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can you cut? I mean obviously there are a lot of public programs that are very important uh that you really can't do a
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whole lot with. Uh but where can you cut to try and maybe start to make an impact?
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>> Right. I mean there's a couple uh facts. It's not just potentially cutting. You
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could also potentially even get more revenue. So let's actually talk first about the revenue side. Um so two facts
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are uh important here. One, it is true that the United States has some of the lowest revenue relative to GDP amongst
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the OECD countries. But it's also true um that the United States has by far the
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most progressive income tax system rel relative to the OECD. And so um those on the left, you know, will often emphasize
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the first point, but then forget the second point and you know, conservatives will often emphasize the second and
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forget the first. And I think it's uh one of those things that's about balance. And that is you can only get so
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much out of progressive income tax system. And unless you go broadbased taxes like in Europe a value added tax
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things like that it's really hard to get more revenue um we're always squeezing
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that limit pretty tight. Um in terms of the spending side big drivers are things like growth of
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entitlement programs. Now on one hand it we knew that was coming and we didn't
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save it out for that. On the other hand, a lot of money can be achieved in terms
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of cost saving eventually by simply continuing to increase the retirement age, the normal retirement age at least,
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um, over time. And it doesn't have to be done immediately. We're talking about
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maybe for people under age, you know, 50 instead of the retirement age being 67,
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it's going to be 67 and a couple months and then gradually increase with life
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expectancy over time. And so it's really that um the fact that it's not just that
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we're going to have a lot more retirees going into uh retirement is that they
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are continuing to live longer and we don't have that adjustment in both the health care program and in social
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security. So a combination of some revenue now um and then some cost savings in the long run it can put us on
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a sustainable path. It's it just requires both parties are very far away from anything that's they're talk
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anything related to um sustainability and but there are options. >> Well and in the midst of a government
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shutdown right now they've got a few other things that they're worried about.
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Um there is though some urgency especially on the social security point of it if
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you go by a lot of the estimates that have been out there the last few years that you know the issues of social
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security are going to come to a head in in about a decade maybe even less. >> Yeah even less. It's probably about uh 8
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years or so. We're us uh the Congressional Budget Office and the Social Security Administration are
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basically around the same uh date and we're like kind of the three groups are
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doing independent estimation of that. And so I think it's um that's definitely
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true and unfortunately the last time uh the Social Security trust fund was about
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to deplete of its assets, we waited till kind of the last minute to make changes
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and that was really unfortunate. Hopefully we, you know, we get a little bit better at it now. Um, but
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nonetheless, um, it's one of those things that I think what you're starting
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to see is some very populous measures that people are proposing right now. Um, there seems to be this kind of this myth
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that, you know, if we in fact just go after the companies and have the companies pay more, um, because, you
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know, social security taxes are split between indiv uh, workers and companies that somehow that that's better than
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just having workers contribute more. In fact, economists agree from both you the
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left like Joe Stiglets to the right like Harvey Rose and they both have textbooks
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in public economics. It it it turns out it doesn't really matter which side that
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you tax whether it's workers or companies. The net impact of who really pays in the uh is going to all of the
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adjusted in the form of wages. And as a result of that, it doesn't really matter
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which side that you tax. um it doesn't mean that one's going to bear more than
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the other. It just means it doesn't really matter. So, we have to get away from some of these populist things and
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really do serious analysis of what's the economic impact? >> Well, and and uh then the revenue from
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tariffs that we've seen the Trump administration tout recently. Uh realistically, is that kind of a
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shortterm benefit? Because I I think I don't know what the expectation is of
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what tariffs will be down the road. Obviously, the the administration wants to try and build more businesses here
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into the US, which I guess is the hope that that will help kind of build the the tax base and will, you know, help to
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uh alleviate some of those issues on the debt. But that's that's a long process
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to begin with. >> Yeah. I mean, the more immediate concern that sometimes people have is the actual
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tariff revenue itself. So, this is going of course before the Supreme Court who will release their decision likely at
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some point in December. And that is the emergency powers that Trump used during the second term, will that in fact be
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you know upheld or not? Um and so uh if in fact the court says no um that uh the
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president did not have those powers uh to enact tariffs then the government will lose about $2.8 trillion over the
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next 10 years. Having said that though, tariffs are an extremely inefficient way
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of raising revenue. they are in fact the least efficient way of raising revenue.
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So it it would actually um be progrowth even u though we would lose that revenue
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that could otherwise be used to paying down some debt it would actually be progrowth just to get rid of the tariffs
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really realize is that um 40% of all imports into the United States is not uh is is just for helping businesses
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actually produce more efficiently. >> Right. And so the fact of the matter is
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we don't want, you know, a John Deere and so forth in making their own screws
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and metal sheets and so forth. We want them to focus on the really high margin stuff and get the cheap stuff uh and
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diverting resources to making our own screws is super inefficient. And so um there really is uh
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a lot of harms caused by the tariffs, but also the it makes capital markets even more contract contracted and
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smaller. Um, and we're trying to sell more and more debt over time. So that makes that a little bit harder.
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>> How then do you deliver the message to the public at large of where we kind of
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stand with this debt issue right now and maybe how you know they can understand it better so we can have a you know a
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path we can figure out a path down the road. >> Yeah. So there's really kind of three
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barriers that we've identified porn budget model why people don't seem to be
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that concerned with it. The first is, you know, people way overestimating the potential impact of AI and really
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misunderstanding its impact on the fiscal system. I think you and I have talked about this in the past. People
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going go to our website and see that AI is not going to generate um uh that much
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deficit reduction. Um but the second um issue is that people are saying you know
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why aren't things going bad in you know interest rates and financial markets and
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so forth not realizing that mortgage rates and everything else are actually much higher than they otherwise would be
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because we actually have a lot of capital per person right now because of everybody going into retirement. Um we
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really should have precoid levels of interest rates and uh mortgage rates right now. We're a couple hundred, you
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know, maybe 150 to 200 basis points higher than where we really should be. And that's all going to get worse over
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time as baby boomers eat away some of their capital. But the third real reason is that there have been some really
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irresponsible groups out there who are pretending to have numbers and doing analysis. They're just hacking things
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away. And they've been do being the boy who cries wolf for a long time. And you
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know, the sky hasn't fallen. And so therefore, maybe this isn't such a big
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deal. It's kind of the El Gore effect. You know, we're not underwater right
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now. You know, the all all the, you know, icebergs haven't melted. So therefore, you know, the environment
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must not be that important. And so, you know, of course that's all kind of facious, but nonetheless, um, the boy
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wealth has really been very damaging. Um, and so we what we really need and what we're trying to do here is put
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things into context and really do serious analysis that's a lot more convincing than just trying to get media
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citations and bribing reporters that cover us. >> Kent, great to talk to you as always.
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Thanks very much, sir. All the best. >> Thank you. >> You got it. Kent SMEs, professor of
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business, economics, and public policy here at the Wharton School.