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