The U.S. is in the Hole. Will We Stop Digging?

The U.S. is in the Hole. Will We Stop Digging?

Kathryn: Hello and welcome to Optimist Economy. I'm Kathryn.

Robin: I'm Robin.

Kathryn: On this show, we believe the U.S. economy can be better and we talk about how to get there. One problem and solution at a time.

Robin: For our newer listeners to Optimist Economy, we welcome you to the show and start by saying that you can support us, join us, be part of us at optimisteconomy.com. We have a newsletter that you can subscribe to. We absolutely take donations. We also have a Buy Me a Coffee account where you can do the same. Information on all of this at optimisteconomy.com.

Kathryn: Just a quick sidebar for our long-term listeners. Doesn't it feel like we're getting more natural at that part? Like, new listeners, we've been good at this the whole time. Old listeners, what about the journey you're witnessing here? You'll notice when I'm uncomfortable sometimes I speak incredibly quickly, like, hey, by the way, give us money. We really needed to do the show. OK, so go. Bye. Robin, what's your Retcon?

Robin: The only Retcon that I had — when I listened to our last episode — was the question about discharge of debt in bankruptcy. And we had said, for instance, that student loans were among the things that you could not get rid of by declaring bankruptcy, along with other certain things, like, apparently, the injuries you cause in drunk driving accidents and alimony and child support tax debt. So you can appeal. You have to have a special hearing.

Kathryn: Yes.

Robin: Yeah.

Kathryn: It's not easy.

Robin: It's not easy. It's not automatic.

Kathryn: Right. If you go into bankruptcy, you have to file a separate hearing to get permission to discharge your student loan debt. And if you do, they take into account, like, how hard you tried to pay it back. So it's not just you go into bankruptcy and you have debt and it goes away. Like, it's — it still comes down to their behavior, and they can say no.

Robin: Got it. OK. Retcons for you.

Kathryn: I have, like, a whole host.

Robin: I know.

Kathryn: You got, like, a list.

Robin: I see.

Kathryn: I have, like, yeah, I have a list going. Well, so just to kind of go backward in time, for past episodes, we had a listener write in about the fertility episode, saying that we weren't right in how we talked about maternal mortality rates. And I think we were using different measures. So I — maternal mortality has measures where, like, you can look how far out you look, whether or not you look at any cause of death or a cause of death related to pre- or postnatal conditions. And so the listener wrote in to say that, you know, she works in this space, and she thought that we were mischaracterizing maternal mortality. So we posted the letter and some links to how the CDC talks about how hard it is to measure maternal mortality and kind of the ways that it happens. I think her material point, which is one that we can emphasize here, is that maternal mortality is really uneven in the U.S. Rich women, white women, women in urban areas, women at large teaching hospitals in urban areas — they just have very different risk than, say, someone in rural areas, someone who goes to worse hospitals, women of color.

Robin: I think that she also pointed out that in her eyes, women are also dying from things that are not directly related to their childbirth, but things like postpartum depression, suicide, etc. And that she thinks that that's also part of the kind of maternal health question.

Kathryn: It's an acute time in people's life. Something that I didn't bring up in the fertility episode that this kind of called to mind — and was, you know, the other part of my Retcon for fertility — is we never talked about how people who can limit their fertility because they have such a hard time in pregnancy.

Robin: Right.

Kathryn: You know, and like, OK, they have a rough pregnancy, and they don't even have a rough pregnancy — rough labor and delivery, rough postnatal care. Like, you end up with some type of eclampsia. You have — I don't know what the condition is, but some people have this condition where, like, they never get over morning sickness, and their morning sickness is incredibly acute. And that would be a — I don't think I should do this again because it was so harmful to my health as a woman. That's not something that you can, that policy can fix. But we should recognize that, like, the whole conversation, there was no mention of, like, also, pregnancy blows. And if you were to say, you know what? I've had my fill, and I am not doing this again, that is another thing that policy, you know, would not change.

Robin: Not gonna change.

Kathryn: Yeah, not gonna change. The childcare episode when we were talking about how fraught friend and family care reimbursement can be, I didn't say plainly. Something that I genuinely believe to be true is that this care matters. And it's not easy to incorporate it into a federally reimbursed system, but it's often the type of care that people prefer, especially when their kids are really young. And the difficulty of it doesn't mean we shouldn't it. I think what I was overemphasizing is I'm so worried that if we get it wrong, it'll be used as, like, a justification to pull back child care investments. And so I, I, I did not, like, give as much space to just how much people like and want friend and family care. And that just because it's difficult to incorporate in the system doesn't mean that we can't. The other thing I got a comment on one of the socials about this is that someone said the biggest argument that resonates with conservatives about child care is that people don't think that they'd have a choice in whether they send their kid. Which was wild to me.

Robin: Yeah, I've heard that too.

Kathryn: Like, they won't let me stay home. They're gonna make me take my kid to some, like, communist run.

Robin: Yeah, government. Some sort of government camp. Child care.

Kathryn: She was like, be sure to tell people that this would still be voluntary. And I was, why on earth wouldn't it be voluntary? But, yeah, I guess that's something that comes up a lot is people are told kind of in the activating people against more support for child care that you wouldn't have a choice. I guess it resonates on some level of the government will make you work. I'm like, well, there's a lot of people would say that the government does make them work. So maybe that part is more intuitive than. And you'd be required to take your kid to a child care center. I wanted to make sure I got that in there. Those are two things I didn't say about child care. The last thing I'll say about this is that we like getting these comments. Like we. This is a long Retcon because I was going through a ton of comments beforehand and I think that this is one thing we like doing about the show is just it's not a one direction of conversation. And we like hearing from you, we like getting letters from you at optimist.economy@gmail.com, we like getting comments on the socials and on the Substack and it's really helpful. So we like being able to make this more of a conversation. It's not definitive or declarative.

Robin: Well, it's pretty declarative, but I mean,

Kathryn: I'm declarative, but I will listen to declarations in response. So what's that called? Dialogue? I don't know.

Robin: Conversation. Yeah.

Kathryn: Speaking of which, did you look at many Terms and Conditions?

Robin: You know, I didn't look up a term, but I did — I looked up a condition this week. I knew we were going to talk about the debt and I also knew that Moody's had in mid-May downgraded the U.S. credit rating. And I realized that I don't know anything really about bond credit ratings. So I wanted to know like, well, where are we? Like where do we stand? What happened? So we went from a AAA bond to an AA1 bond. This is in a 21-notch system that is — I'm just going to say needlessly confusing — which is AAA, AA1, AA2, AA3, and then it goes into the Bs and then the Cs. What I wanted to know was like, OK, well who else is AA? So Germany still is, Australia, Canada, Switzerland, Denmark. We are kind of in the ballpark of like Finland and Austria. Oh yes. And then also the — if you wanted to buy government bonds in the Seattle water treatment system, that is also AA1. So you know, we're right up there with cleaning sewage in Seattle.

Kathryn: Robin, this show is called Optimist Economy.

Robin: No, I mean, Finland's OK, right? Austria, these are OK places.

Kathryn: They also sound like countries.

Robin: They all sound like legit countries.

Kathryn: This is our third downgrade. There are three major — Standard & Poor's, Fitch and Moody's. And Standard & Poor's and Fitch had already both downgraded. They did it around the debt ceiling standoff of like, wow, is this a government that's supposed to pay us back money that is like, really at the fringes of functioning normally? When they did it kind of as a result of the debt ceiling standoffs that we've had, Moody's was interesting. I mean, they basically did it because of the tax bill.

Robin: And they did it and said as much.

Kathryn: And they said, like, you're about to pass a really bad piece of legislation that will add to the debt that is not fiscally responsible. And like, I mean, in the world of credit rating agencies for bonds, which admittedly isn't necessarily a rodeo — I thought that was a pretty wild report.

Robin: Yeah. And they just — I mean, it reads like an op-ed, frankly, you know? Yeah. Not exactly what you expect from a staid credit rating agency.

Kathryn: This brings us to our centerpiece today, which is we wanted to talk about the national debt.

Robin: Let's talk about the debt. Actually, I wanted to say from the start, I am impressed that on a show about optimism that you're like, let's talk about the debt.

Kathryn: Well, we did get a lot of questions about it. I think the debt instills some kind of natural sense of panic, which certainly, like debt in our personal lives is enough to leave one with like, low-grade anxiety.

Robin: Yeah. And — well, and we just talked about the bond situation and Moody's was fairly strong in its statement about the effects of the budget. Just paying interest on the debt, which gave me a little bit of a panic attack when I read it.

Kathryn: Sure. Yeah. You got to take these things head on. So let's get back to the optimism part later.

Robin: Okay.

Kathryn: We'll work our way up to it. We're going to work our way up. Got to build. Got to like break you down and build you up the U.S. debt. So this is money that people have lent to the U.S. government primarily through the sale of treasury securities, like bonds that the government promises to pay back.

Robin: Right.

Kathryn: And the occasion for borrowing mainly comes from the annual shortfall in how much the government collects in taxes and how much it spends in outlays in a given year. That if there is a difference there, that's negative, it's a deficit. So if you're going to spend $100, but you only took in $95, you've got to borrow the last five. And that is part of the debt. So one way to think of the debt is it is the accumulated deficits that the U.S. has had over many years. Then there are other things that, you know, we can also just sell bonds because people will buy them. And then like Social Security holds a lot of bonds as well as a special debt holder. But it mainly comes from accumulated deficits.

Robin: Right. I think one of the ways I knew I was an adult was when I understood the difference between deficits and the debt. I remember in the 1992 election actually was the — when Ross Perot was out there with his charts. And that was then, of course, after that election, it was the Clinton administration was the only time in my voting adult life that we had. And I am not young. Surplus. Yes. Did not run a deficit.

Kathryn: So the brief history of the U.S. debt is that it got real big in World War II. This is a technical term. Real big.

Robin: Real big.

Kathryn: Real big. It got real big. And it was over 100% of GDP. So the number for the size of the U.S. debt doesn't really make a lot of sense. It really is, how large is the debt relative to our economy?

Robin: Wait, when you say the number, you mean like the actual dollar amount of the debt? Yeah, the actual dollar amount is the relevant question. The question is it compared to how much? It's like, you know, it doesn't matter if you own a million dollar, if you owe a million dollars on your house, if you have a $23 million house.

Kathryn: Right.

Robin: But if you owe a million dollars on a $500,000 house, you're in trouble.

Kathryn: Yeah. Problem. So we kind of measure the U.S. debt as a percentage of our gross domestic product, which is the estimate of the size of the U.S. economy. And in World War II, it got over 100%. In the decades afterwards, it fell, but start off again. And it had been, it had been mainly falling since World War II. And we, you know, there's, there's ups and downs and blips in there, but the, the actual size of the U.S. debt was, was falling relative to.

Robin: Is that also because the economy is growing?

Kathryn: Because the economy is growing.

Robin: Right.

Kathryn: So it's not like the debt itself has ever gotten smaller. It's mainly that our economy has, like, relative to the economy, we're outgrowing it. I mean, we're paying it down and, and outgrowing it. Well, that lasts until around the 1980s, and debt had gotten to about 30% of GDP and then it just really started to rise again. And for the next 15 years, debt increased from like around 30% of GDP to 65. And this is like the 1992 election, Clinton's first term. Debt as a share of GDP has doubled in 15 years. And people are really worried about what is going to happen with the debt.

Robin: And this is Ross Perot, you know, showing bar charts of this exact thing.

Kathryn: Yeah. So how big the debt was getting as a size of our economy. So keep in mind that the economy was also not great during a lot of those years. And we really ramped up spending in the '80s, a lot of defense spending. So it's just like a combination of like, well, this is not like we are not seeing good income growth. That affects the bottom line. We're spending a lot of money on defense. Also affects the bottom line. And the economy is not necessarily growing the way that it would. And in the mid-'90s, not only did Congress drastically cut spending, like ending welfare and doing a bunch of other cuts to balance the budget and lead the U.S. into surplus, but we also had a super strong economy at the end of the 1990s and a lot of people went to work and started paying taxes. So we had this period of booming tax receipts, cut spending. We had a surplus and we were paying down the debt not just because we were growing, but because we were putting some of our surplus to the debt. And so when we get to 2001, the U.S. debt as a share of GDP has fallen. It's gone down like five points, but it's on a downward trajectory and the trajectory is crazy. So the Congressional Budget Office estimates in 2001, this is towards the start of the year, that within eight years on the trajectory it was on of like it was in a budget surplus, the economy was growing. Well, within eight years, the U.S. debt would be zero, which is incredible. And a lot of people would tell you. But now, spoiler that did not happen. But this was considered this like shining moment of us, like fiscal and budgetary policy that we had gotten to such a stable place. And of course this poisons politicians because then it's like, oh, you mean we have money to burn? And you wouldn't find, I mean, you're not going to find an economist that says our debt needs to be zero. And in fact, if you were to poll economists of like, what does the U.S. debt need to be to be at a stable level? Like, they wouldn't come up with a number. They couldn't even come up with a number of like what is debt relative to GDP? That's really, really bad. About 15 years ago, two economists tried to come up with that number and they were. And we were like skewered of like this makes no sense. They said 90% of GDP and people were like no.

Robin: Well, did people say no because they thought it should be higher or lower?

Kathryn: They just said like the number was a totally artificial threshold. And to say like there's some limit to how much debt can be as a share of the economy doesn't make any sense because it's not this. It's even. Even if like the number of the debt size doesn't matter as much as the size to the economy, the debt itself does not have like a clear and obvious effect on the economy in a negative way. It's really depend on how it's managed, what it's for, like what directions it's going in, how much borrowing costs are. Like there's so many things that would make debt bad that matter more than just like 90 versus 91. So even those economists who would say like, yeah, we had a threshold, but a threshold doesn't make sense. So in this moment in 2001, where we have a budget surplus, where the U.S. is paying down its debt rapidly, where we're going to be a debt-free country, we take a hard turn in the other direction. And we are now at 120% of GDP as part of our debt. And you are starting to see these downgrades in the U.S. credit which would have been unfathomable 25 years ago, that our debt has been downgraded three times and we are now on a trajectory that you can't get anyone to defend and say that we're in a good place. So we went from in a really good spot to not in a really good spot. And we did it really quickly.

Robin: And people voted for it. I mean, let's face it, George W. Bush ran on tax cuts. And he gave us two right away.

Kathryn: Yes, he did. And then they were made permanent in 2012. Now the Committee for Responsible Federal Budget, which is a nonpartisan, you know, nonprofit think tank which mainly advocates for being better about the budget, they have this really fascinating paper where they look at the increase in the debt from 2001 to 2024 and they apportion it out to like, what is the debt increase due to? And they say it's 37% tax cuts, 33% spending and 28% recession response because recessions are very expensive. It's a time when your tax receipts are going to fall because people lose their jobs, they're not hiring as much. Wage and income growth slows, investments often don't pay off. So you're going to hit the capital gains as well. And you need to send money to help people, and you need to prop up things like food stamps and unemployment insurance. You need to send money. State governments, automakers. I mean, automakers can do big things.

Robin: Yeah.

Kathryn: And state governments can't borrow. And so a lot of the times the federal government in a recession is sending money to state governments to keep them from, like, closing public schools. So it's an expensive time for the federal government's perspective. And the two worst recessions since the Great Depression happened in 2000. The 2008 financial crisis recession, and the pandemic recession.

Robin: Right.

Kathryn: They were both the most, like, catastrophic and the most expensive. So that's a hit. And that would be all the COVID response would be grouped into the pandemic recession response. 28% just comes from, like, this is the cost of doing a business. You are a big government that can borrow, and you oversee a cyclical economy. Recessions are going to affect your bottom line. The next category of 33% for spending. It's kind of wild to me how quickly things fall into the rear view. But we did fight two wars.

Robin: Yeah, we did.

Kathryn: Yeah, we did.

Robin: And then they were not cheap.

Kathryn: They weren't cheap. No. So they probably. There's not a single consensus because, like, how do you pull out, like, defense spending from, like, specific wartime spending from two different engagements, one that lasted like, 10 years and one that lasted like, 20 years, roughly. But the. I think the best estimates is that each of those wars in Iraq and Afghanistan set us back $2 trillion to $3 trillion.

Robin: Yeah.

Kathryn: And then the other big spending is that we expanded Medicaid and we created Medicare Part D. We did that in the early 2000s. So we expanded the most expensive program in the U.S. — Medicare. We fought two wars to the tune of several trillion dollars each, and we passed four tax cuts. And that is what happened to our budget.

Robin: Right. Not feeling optimistic yet.

Kathryn: Not feeling optimistic yet. Yeah. I mean, it's a little embittering of just how much money the U.S. government has burned through in two decades with not a ton to show for it. And in fact, you know, I won't say that the debt is neutral, but I think it's more neutral than people let on. Like, certainly in your life, debt is not neutral. Like, personally, you are not the U.S. federal government. You don't issue your own currency like your debt. And the government's debt is very different. And so I think people have a hard time separating that as it functions in a large economy. The U.S. debt is much more neutral than how debt functions in your life as a borrower.

Robin: OK, explain what you mean by it's neutral.

Kathryn: It's not like bad.

Robin: OK.

Kathryn: Like the U.S. is. It's not like if the debt was 10% of GDP or 20% of GDP, this would, like, the economy would be like twice as bad.

Robin: OK. So it's not linear or.

Kathryn: Yeah, it's not linear. And it's not necessarily a bad thing. I mean, like, think of a recession. The debt is amazing because it lets the federal government, quote unquote, proverbially borrow from future growth, but actually borrow from people to prop up the U.S. economy to keep it from getting smaller. That is an incredible role for debt. Like, debt is great because it gives us the ability to maneuver around these big crises. Debt is also great if I, you know, it's really hard to pay out of pocket for a highway system, but I think that system is going to pay off. So if I borrow and put a highway system on my credit card and then I get a national highway system, like, I can make that type of sweeping investment because I have the ability to borrow.

Robin: So just. Okay, so I think I misunderstand. I mean, you're saying debt as a concept or debt in general is a useful tool. It's a neutral tool as opposed to the national debt that we are facing at this moment and the size of it right now.

Kathryn: What makes this debt so concerning is that almost all of it is financing current consumption.

Robin: Yeah, it's not, it's not investing in something that we believe is going to pay, pay us dividends in the future.

Kathryn: I say this, a lot of people have grown up believing or being told that tax cuts are like the greatest economic policy. They're a salve to every wound. But truly, most tax cuts are like taking money and throwing it into the wind. And it's because they're, they're very ineffective economic policy because you can do with it whatever you want.

Robin: Meaning individuals, like the individuals pay $800 less in taxes. But we have, there's no focus for the way that money gets spent.

Kathryn: It's just, yeah, you might consume it, you might save it, you might not notice that it's there. It might go entirely to one purchase, to 10 purchases to hire. Like, it's so expensive to give 300 million people more money. And you can't tell them what to do with it. So it becomes both expensive and very untargeted ineffective economic policy. Because to be a good economic policy, you have to focus the money towards the person who's going to act or the agent that is going to act in the way that you want. If I gave you $10,000, I'm just saying I don't know what you're going to do with it. And from an economic policy perspective, that's no good. I need to know, like, if I'm giving you money, I need to know what you're going to do with it. This is why almost every program that goes to low income people isn't cash.

Robin: It's.

Kathryn: I'm not going to give you cash, I'm giving you a voucher for food, I'm not giving you cash, I'm going to give you a health insurance plan. I'm not going to give you housing. I'm going to give you a voucher for housing. Like, I need to know that you're going to spend it on the way that I want. And some of that is very paternalistic and some of it is just because I'm trying to direct the investment to a specific place. So tax cuts for 37%. I mean, I don't know how much we can really show for all the money that went to Iraq and Afghanistan, but like, man, do we not have a lot to show for the tax cuts? And I should tell you that that is the official opinion of the Congressional Research Service, which is the research agencies. Yeah, yeah. They looked at the 2017 tax cuts and they did like an eight-year retrospective that just came out that was like, look, we looked at every single paper from every economist and think tank that said this tax cut did something. And it is really, this money was absorbed into a full economy.

Robin: It was just, it's like water, water spread out over a floodplain that just. And then just didn't change anything.

Kathryn: Yeah. I mean, it was pouring down rain and you, you know, we're firing the hose off your roof.

Robin: Yeah.

Kathryn: The role of the national debt is that it gives the federal government wiggle room to do all kinds of economic investments, things that we need to do and that we need to do. There's no like, number or threshold where debt goes from good to bad based on its size.

Robin: Really? So you don't think that this situation with the, with the interest rate payments is, I mean, that's what's concerning to me.

Kathryn: Yeah, yeah. So what Robin is explaining is that what Moody's brought up in their downgrade is that the interest payment on the debt, so you loan money to the federal government, it's at an interest rate that was determined at sale, and then they have to pay you back interest on that debt, just like you have to pay interest on your mortgage or on your car or on your student loan. Well, those interest payments that the federal government has to pay are becoming a larger and larger share of total spending. Right. Where at the pace that we're at now, by 2035, interest payments will be a third of U.S. government spending.

Robin: Yeah. And isn't it already $1 out of every $7 now? Something like that.

Kathryn: I thought the last I checked, it was like 15%.

Robin: Yeah. That would be about $1 out of every $7.

Kathryn: Yeah. Oh, look at us.

Robin: Look at me doing the math in my head.

Kathryn: Look at you. Yeah. I mean, we pay a lot in interest, and that number is getting higher. And so this is the difference of, did we spend it on the right things? Did it lead to economic growth, and what is the trajectory? I think that's what makes the conversation about debt much more nuanced than I think people realize, is that it is a multidimensional positionality.

Robin: 3D chess.

Kathryn: It's totally 3D chess, because on the one hand, it's what we spent it on. Right. Saving the U.S. economy during crippling recessions. Very good. Lowering the estate tax, I would say, not getting a lot of bang for your buck there, if anything at all. So it's what we spent it on. It is what we were able to sell it for in the bond market. And then it's kind of where the relative position of the U.S. is going from more debt or less debt. So each of those areas have problems, with the exception being that the bond market has basically always been in support of U.S. debt, and we do not have a hard time selling it.

Robin: Didn't yields just go shoot up like a half point in a month up until January of this year?

Kathryn: Like, we go and sell debt, we don't even really have to sell it for that much. Like, if it was — if people really didn't trust the U.S. government, the bond would get more and more and more expensive because people are like, yeah, too risky. U.S. gotta pay at least 10% before I invest in you. That's not been the case for the most part. People have always given us really good rates, and the U.S. is seen as a really safe place to put your money. So what's happened over the past couple of months is that the combination of tariffs and this tax bill have shaken a lot of the bond market, which you should read as people are starting to need more money to take on U.S. debt. Like, you need to pay me a higher percentage interest for me to lend the government a small amount of money via a bond. But that poses an incredible unsustainability in the future because most of these are on fixed terms. And so when they come due, if you want to sell more debt, you're going to have to sell it at whatever the current going rate is. Yes. So right now, and remember that you live in America and all this information is public — you live in a transparent economy. So right now, I mean, you can look up the average debt interest rate in the U.S. and it's just over 3%. I think it's like 3.3. Last year it was around 3.2. But like, I mean, one thing about borrowing our debt is like the interest that we currently owe is not that high relative to.

Robin: But treasury yields now are above 5%.

Kathryn: Right. So that means that, like, we've borrowed more cheaply in the past than we will in the future. Yeah. I mean, this 3D chess of debt and how people feel about it is what gives a lot of credence to things like modern monetary theory, also known as MMT.

Robin: Oh, I didn't know. I didn't see this coming. Yeah, you're gonna want to sneak that in.

Kathryn: Yeah. Well, I mean, the idea that the debt being too high would become problematic is something that is at the core of MMT theory, that there is no point to reach. MMT has a lot of implications. It has a lot of followers, it has a lot of fans, and its chief advocate right now, Stephanie Kelton, is a very smart economist who has an answer for anything that I might say about it. So if you've read her, you'll like — she would say this. I know she would say it. But the central idea of modern monetary theory is that the U.S. can't default on its debt. It issues its own currency and it borrows in its own currency, the U.S. dollar. So if it ever had a debt situation that it couldn't face, it would just print more money and pay off the debt.

Robin: Wouldn't that devalue our current currency?

Kathryn: It would increase inflation. So if you take that as like the central anchor, it makes deficits a lot less problematic. And so it's become, I think, something that a lot of liberals have gathered around because it gives kind of a macroeconomic support for having big government spending. And what's interesting is I think that if you look at recessions, this is exactly the type of intuition we apply during recessions, that investing in the economy is more important than paying off our debt, especially when the economy goes south. And so you give the economy preference over deficits during a recession. MMT is kind of like giving the economy preference over deficits with a broader brush. The problem with that is that it could lead to inflation. And the kind of pushback from MMTers would say if there is inflation, you would just have more fiscal control. Like you would raise taxes, which is the fiscal policy for dealing with inflation. I get asked all the time, what do I think about MMT and do I think MMT is good? And I think my biggest problem with it — and I think it's something that might not be obvious to a lot of people — is that MMT kind of replaces our current monetary policy in the role of the Federal Reserve with a lot of fiscal policy in the role of president and/or Congress. And I just think that you can't look at the past 20 years and make any kind of argument for Congress and the president being good fiscal stewards. That's probably like my biggest hesitation with MMT — like, I mean, I love big government policy, but I don't think that changing monetary policy to be fiscal policy, to remove — kind of downplay what the Federal Reserve can do and put it all in the hands of Congress — will lead us to a good place. Because I just don't think Congress is very good, especially at long-term things.

Robin: Can you explain the difference between fiscal control and monetary control?

Kathryn: Monetary policy is interest rate and money supply policy that comes from the Federal Reserve, an independent central bank that the president doesn't really have a lot of control over. And you kind of know it because Trump is pretty pissed off. He doesn't have a lot of control over it. Fiscal policy is policy that comes from the federal government, mostly Congress, because Congress has the power to tax and spend. So in a recession you would have monetary policy that the Fed lowers interest rates and it kind of puts money into the economy to get people to spend it. And then fiscal policy would be Congress sends you a check. Congress increases unemployment benefits, increases SNAP benefits, makes SNAP easier to get so more people can buy food. Congress sends money to state governments. When Congress does something, that's fiscal policy. When the Fed does something, that's monetary policy — it's really about the actors. So MMT kind of switches a lot of the action to the fiscal side. Yeah, the Congress side. What is the 535-person clown car side. Exactly.

Robin: Versus the guy who won't even crack a smile during a press conference side.

Kathryn: Yeah, to be fair, MMT really took off as like a very appealing theory for dealing with the world right after the Great Recession when the financial crisis really shattered faith in institutions, including central banks. When the policymaking ability of the central bank was limited by just how awful the economy was doing. There was so much concern with our banking system that this approach of like, we should just put control back in the hands of government and we should use all this money to like give everybody a job had much more appeal than it does right now. When the central bank is now seen as like a stalwart of our economy and is like holding up integrity. And it's Congress where you're like, oh my God, what are you doing? If the risk to MMT really comes down to inflation, how well do you think Congress will be able to handle it versus how well do you think the central bank will be able to handle it? I mean, I think this last bout of inflation that we had has shown that the central bank had nerves of steel relative to Congress and the president. But I understand the appeal of MMT. I guess on some level when people bring up MMT to me, I say I don't think we need an alternative theory for dealing with the macroeconomy and borrowing and currency or anything like that. Our current system supports amazing investments. We have not chosen to make them. MMT would have more appeal to me if I thought our system didn't support the investments that I think are necessary. Our system absolutely supports it. We just do not have people in Congress doing them, which is very different.

Robin: All right, so to get back to the question of the debt and how you're going to make me optimistic about our situation and standing to the debt. Debt?

Kathryn: Yeah.

Robin: I have lived with growing debts, national debt, my entire adult life, but only recently really did start to feel, I mean, by recently I would say the last 10 years where it just seemed like the tax cuts just keep coming in and the revenues don't. And I just wonder like, well, what would be the downsides or what would be the risks or the harmful effects of just continuing to grow the debt?

Kathryn: At some point our borrowing cost would get so high it would crowd out spending on other things and it would force drastic cuts to Social Security and Medicare. Medicare first.

Robin: Yeah.

Kathryn: So the consequences accumulate the more we are spending on our debt.

Robin: Right.

Kathryn: You can grow your way out of this problem. Some people will tell you that you can kind of inflate your way out of not all debt, but you can. Inflation actually makes the debt cheaper. So some people will say, like, you know, we've had such low inflation for the past 25 years — this recent episode notwithstanding. That's one reason why the debt is getting so high. And it's been easy to borrow. I mean, interest rates have been so low. The debt we acquired when it really went high was also really cheap.

Robin: So nobody was terribly worried about it because it was so cheap to borrow.

Kathryn: It was so cheap. Like, I mean, that's the thing. Debt as a share of GDP is one measure, but debt relative to the interest rates you're paying on it is another. And a lot of this debt was accumulated during periods when the interest rate was so low that, you know, it wasn't free money, but it was a lot closer to free than like 5%. So yeah, there are nuances here. What I would stress about the national debt kind of as a basis for optimism is that it doesn't afford a lot of room for bright lines or blanket statements. And I think some of the optimism has to come from knowing that the nuanced picture has a lot more light than the black-and-white one. Like, if you just looked at debt to GDP and what our debt looks like, you would be like, our country is over, had a nice run, but blew it all on tax cuts in the end. Like, we just couldn't do it. But which I think would be really disheartening. But if you think, all you have to do is be like, OK, hang on a second, a lot of this debt was really cheap and we can pay it off. And also, like, we've voluntarily reduced our income to an incredible degree. I mean, the 2017 tax cut was really unpopular and the one that they're passing now in the middle of the night in closed-door hearings that people fall asleep in, also really unpopular. So keep in mind that a lot of the debt represents the country being taken to a place it doesn't want to go.

Robin: Yeah.

Kathryn: And then, yeah, we can be blamed for voting for short-sighted politicians. But like, it's not as if America doesn't have a sense of like, I don't like this, like, this is where the money is going. And so I take optimism from the nuance, I take optimism from the potential. I'm sorry, I mean, look, we raised so much money. I mean, yes, our debt is crazy high at, you know, 30. If I tell you debt is $36 trillion, it's like, okay. And then also, like, be sure to call 911 if you're having — if you're feeling heart palpitations. Like, I understand that that's a scary number, but of course, like, our economy is $30 trillion. Like, it's a big world and we make a lot of money, and I would be so worried if the U.S. economy had not grown consistently for 50 years or 100 years for that.

Robin: I know. And it's still growing.

Kathryn: And it's still growing. And, like, if we have a recession, it'll be a blip. And, like, we'll go back to growing again. And so we have all the conditions necessary to pay down our debts if we choose to. And we have the policies in place to pay down our debt if we choose to. And I think that the world in which we do pay down our debt is not even paid off to zero. But remember, it's not just where you are, but what direction you're going. I think that we could pretty easily change the trajectory of the U.S. fiscal situation so that the debt is falling as a share of GDP. We're not living in the world of $2 trillion deficits. And we have all the nice things that I want, like childcare and school lunches and Social Security for — I don't think.

Robin: I mean, so we don't have to pay — you're kind of saying we don't have to pay off $36 trillion in order to get childcare before we get — OK, now, that's — yeah, that's optimistic. OK.

Kathryn: Yeah. It's not like we have to get — it's not like it's like, hey, guys, so this sucks, but we actually can't have universal school meals until the debt gets to, like, 25. Like, it doesn't work like that. As long as we're in a place where we're moving in the right direction — right now, we're moving in the wrong direction. That is the most concerned. We are moving in the wrong direction. If we're moving in the right direction, we get to have nice things.

Robin: Right?

Kathryn: And the right direction is fundamentally and frankly, easily achievable with a few different policy decisions. And I think what, in some ways, this whole circus of this tax bill, the big beautiful bill — I didn't realize that's its official name in the House, is the big, beautiful bill. I saw an amazing Onion article about, like, Republicans come to blows about whether or not the bill is beautiful or handsome. I was like, yeah, y'all. Like, part of me is like, let them do this. Like, it's almost like children who are, like, screaming for ice cream before they go to bed. And on some level, it's like, you know what? I told you, if you have ice cream at 11 p.m. after crying for 45 minutes, you're going to throw up. But you know what? You don't believe me. And I have told you this. And so you know what? Take your sixth scoop of ice cream and throw up and, like, then we will move on, because you don't seem willing to listen to me, that you can't have any more without making yourself sick. So by all means, have it. Make yourself sick. And then, like, then we can move on with our lives. So this tax cut, like, y'all, it can't exist in 10 years. In 2035, a third of U.S. spending goes to interest payments on the debt. That will not happen. Something will have to change. So this tax bill is like, them being like, well, we're not gonna. And it's just like, okay, well, when the adults take over.

Robin: I guess you're much more optimistic that there are adults to take over.

Kathryn: I think so.

Robin: Do the adults want to run for office? I don't know that they do.

Kathryn: America wants to be in a different place. Our leaders, our currently elected leaders are not taking us there. But they don't last forever. And you have, like, y'all, we got, like, just more than a year before we get a chance to do this again. And, like, I don't know. I think people lose faith in the electorate. They lose faith in their leaders. And there are parts of this process that are really broken. But Americans don't want debt to be in a bad place. They don't want U.S. credit to be downgraded. They want to be more responsible. And I do think that this is an area where Americans are much more passionate than you probably realize. And so we have the money, we have the big economy, and we know what we need to do. And, yeah, you could say that possibly the electorate is fighting it like a toddler as much as Congress is. But we will get there. We have to. The alternative is that we cut Social Security and Medicare and don't have a Department of Defense. So we will get there. I don't think we'll get there early. I think we'll get there close enough to on time that we tell people — don't say technically we're late. I call it pediatrician on time, meaning that I showed up at all. You know, like, I got a 3-year-old and a 1-year-old in a car and got here on the day you wanted me to come, so I came on time. This is where America is right now. We have the appointment. Children are crying. Somebody has decided they don't want shoes. Somebody else got water on their shirt. They're taking their shirt off. However, there are cars in the car. There are car seats in the car. The go bag is packed. I have diapers with me. We are gonna f------ get there. I don't care how many shoes I have to put on. We will get there. So that there just be — it could be so much worse. You know, it could be so much worse is all I'm saying. Hi.

Robin: This economy, it could be so much worse.

Kathryn: Hey, you know what? You gotta take it. Sometimes, people, that's as — the debt is large, so it could be worse, and we want to be better. Is optimistic. But, man, I put on like a clip on social media. We deserve to be optimistic. And I mean, y'all. The first 10 responses were like, nope. Rich people own this country. There's no hope. I'd believe you if they didn't require, like, prison slave labor. And I was like, why do you follow me? I put up something that says, let's be optimistic. And the first comment's like, shit's bleak. OK, maybe, maybe, maybe you're not clear about what we're trying to do here. Oh, man. Oh, man. One of the more common comments we get, not just, you know, shit's bleak, don't be optimistic, is y'all sound like a superhero team. I think because we sound like Batman and Robin, because we're Kathryn and Robin. And so that's the other thing we get on TikTok. So those are the two things you're missing from TikTok.

Robin: Oh, Jesus. Yeah, thanks, thanks.

Kathryn: So on that note, the debt will be better one day and none of us will understand it even then. But you'll be less scared of it, I promise to you.

Robin: No, I feel like, okay, you know, I have a slightly different perspective on the debt now that if we can get it going in the right direction, you know, if we stop burning through our home equity line of credit and just start making regular payments on our mortgage, we can buy a car.

Kathryn: 100%.

Robin: I know that personal finance is not the best metaphor for this, but it does kind of help me, you know, think about, like, what it really takes just to turn the ship around a little bit and get it just going in the right direction.

Kathryn: Direction is like 75% of the problem, and so that means it's 75% of the solution, which is great, because changing direction is a lot easier than paying off our debt.

Robin: Yeah.

Kathryn: OK, great. I'm glad you feel a little bit better.

Robin: I do.

Kathryn: All right, so executive.

Robin: Yeah.

Kathryn: Yes. Palate cleanser executive orders. Although I don't know if it's actually going to be a palate cleanser for me, so you go first.

Robin: I don't know that mine's a palate cleanser either.

Kathryn: Yeah, yours is quite serious. Why don't — OK, why don't you go first?

Robin: All right. So my executive order comes from Aaron in Portland, Oregon. I thought this was actually really smart. He says all homes must include — when you sell a house, you have to include earthquake, wildfire, flooding, hurricane, et cetera, risk disclosures. He says, you know, home risk disclosures are all over the place. They are required in some states and not others. And even then, when you get a disclosure, it's really about whether you're in a hazard zone and some sort of defined hazard zone. It doesn't take into account maybe things that people have done to a house to make it less prone to risk anyway. So this is all insane. People really need to know what they're buying in terms of not just four walls, but what the actual risk to it is. Yeah, I'm for it.

Kathryn: I love it. Good job. Good job, Aaron.

Robin: Nice job, Aaron.

Kathryn: My executive order is, I just consider my optimist audience to be a safe space. I think that everyone's social media comments should be entered into a repository and printed out and sent to their neighbors every year. And if you are the type of person that will casually trash someone on Instagram, like your friends and family, and you know what, maybe even your employer deserve to know it. I've been on social media for a while. I find it incredible to talk to people and hear from them and talk in and explain things and hear their reactions to it. You know, one being like, this show is totally an outgrowth of me going on TikTok and people on TikTok saying, you should have a podcast. Like, I've been so changed for the better by it. But, like, it will never cease to amaze me, the casually cruel things people will drop into a comment.

Robin: Yeah.

Kathryn: Part of me is like, would you say this in front of your mom? Like, if your wife was sitting right next to you, would you make this comment? One that I got recently — I always get worse comments on the Bloomberg post — but one that I got recently was, you know, typical Ivy Leaguer. And I was like, my brother, I went to so much public school. I mean, from kindergarten through basically grade 21, which is the end of the Ph.D., I was at a public school, public university, public Ph.D. Like, public all the way. Like, you can say, you can throw a lot of shade my way if you disagree with me, but do not accuse me of going to private school. I find this, like, you know, insulting to my core. And he's like, well, if you're a big government liberal, you're the same thing. And I just, like, had to put down the phone. And to all the people who make nice comments, I appreciate it. To the people who make hurtful, misogynistic comments or Jesus accuse me of going to private school.

Robin: No, Ivy League.

Kathryn: Specifically Ivy League. I mean, I guess on some level I was like, all right, I'm giving off — I paid half a million dollars for my education, so I don't know if that's good or bad, but I guess I seem smart. I guess this is going against the optimism where we left the show earlier. We did say it was a hard week. It's a hard week. OK, let's get to the actual palate cleanser of spiritual sauce sponsors.

Robin: OK. You want to go?

Kathryn: As you know, on this show, if you've been listening for a while, we don't have actual sponsors, but we do have spiritual sponsors that keep us going even in the hard weeks, like this one. Robin, who is your spiritual sponsor?

Robin: Well, I wanted to say that this week we got three spiritual sponsors through Substack.

Kathryn: Oh, my God.

Robin: So I have reached out to all of them, but I heard back from one who said that I could use her name. So our spiritual sponsor this week is Shannon Key of Huntsville, Alabama, who sponsored us on substackoptimisteconomy.com.

Kathryn: Aw, thank you, Shannon. My spiritual sponsor this week is really fun. Friend group chats. Like, not all group chats. Yeah, not all of them end up in a good place. You know, they — maybe they go dormant or maybe like, someone says, like, we should plan a vacation, and then like, no one ever responds to the chat again.

Robin: Did you read that story?

Kathryn: Yeah, I did. Yeah. I mean, I think — I think — I think you got to use it judiciously. But I — I have had a friend group chat going since the pandemic. And it is just, it is such a delight. So that group chat is my spiritual sponsor this week and anybody out there who has a really good friend group chat. That wraps it up for this week. And we — we struggle sometimes to be optimistic too. But honestly, I feel better after recording, so I do too.

Robin: Thanks for always for listening. And you can always reach us at optimisteconomy.com or email us at optimisteconomy@gmail.com. We always love hearing from you.

Kathryn: And we close our show by thanking our producers and audio engineer, Sofi LaLonde, and our producer and video engineer, Andy Robinson.