Ben Harris on the Fiscal Health of the US Government

Ben Harris served in numerous high-ranking roles as a public sector economist and is now the vice president and director of economic studies at the Brooking Institution. In Ben’s first appearance on the show, he discusses the fiscal health of the US government, including the rising primary deficient, the impact of the Big Beautiful Bill, the proposition of stablecoins and AI as a solution to our debt, his love of basketball and much more. 

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This episode was recorded on June 18th, 2025

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected]. 

David Beckworth: Welcome to Macro Musings, where each week we pull back the curtain and take a closer look at the most important macroeconomic issues of the past, present, and future. I am your host, David Beckworth, a senior research fellow with the Mercatus Center at George Mason University, and I’m glad you decided to join us.

Our guest today is Ben Harris. Ben is the vice president and director of economic studies at the Brookings Institution. Ben has also served as a Treasury official, a senior economist at the Council for Economic Advisers for President Obama, and he has served in other roles in government. Ben joins us today to discuss the fiscal outlook for the US government, how we should think about it, and what we can do about it. Ben, welcome to the show.

Ben Harris: Thanks for having me.

Beckworth: It’s great to have you on. Now, we first met at an event for the Committee for Responsible Federal Budget. We were panelists, and I learned two things about you, Ben. I think we were supposed to represent right of center, left of center, but we ended up having very similar views on the fiscal outlook, so I’m looking forward to this conversation. We also share a love of basketball, playing basketball, but we’re both getting a little too old to play it too much. In fact, I had just broken my foot. I was in a boot, and you were curious, and I learned that you, too, had concerns about playing basketball.

Harris: Yes. Basketball, I think, is one of the best things you can do in middle age, but one of the worst things you can do after you exceed middle age. For me, I was playing two or three games a week from my mid-30s to my mid-40s, and then people just kept getting younger, and I kept getting older, and I would leave games and feel like, “What am I doing?” People just ran in circles around me, so it was time to quit, I think, at least for the time being.

Beckworth:  I love it, but I can’t go through another three-, four-month ordeal where I’m in a boot, I can’t do as much. I got to get work done, and I got to be mobile, so I am very cautious about going back into basketball, so maybe we can join an old men’s basketball league.

Harris: Yes, we need to find some 70-year-olds, and we can run laps around them.

Ben’s Career

Beckworth: Yes, exactly. At that event, we talked about fiscal issues, and I want to have you here to talk more about that. You had a great paper, “Assessing the Risks and Costs of the Rising US Federal Debt.” You are a former government official. You served in Treasury. You’re a former Treasury official, so let’s start with that. Tell us about your career, because you’ve seen a lot of things, been in a lot of places.

Harris: If you want to summarize my career in one sentence, it would be, I jump back and forth between the Brookings Institution and various public sector roles. I came to Brookings for the first time in the late ’90s as a research assistant, went off to grad school, went to the House Committee on Budget to be the senior economist there, that was in the early 2000s, came back to Brookings, knocked out my PhD in the evenings because I realized I really do need a doctorate to do the things I want to do, finished my PhD.

Two weeks later, I was in the Obama White House working for Austan Goolsbee and the Council of Economic Advisers. I would have two other major public sector roles after that. One was in 2014. I went back to the White House to be then-Vice President Joe Biden’s chief economist. That was a crazy ride that lasted six years from the day I started working for him at the end of 2014 until the day he won the 2020 election.

Beckworth: Wow.

Harris: After that, he had a different role. He was president-elect, and my conversation with him stopped, but I had the good fortune of going to go work for Janet Yellen at the Treasury Department, where I was assistant secretary for economic policy and chief economist. The last thing I’ll say about my career is I have had the privilege of having these incredible bosses. Janet Yellen, Joe Biden, I worked for Bob Rubin, former Treasury secretary.

Beckworth: Wow.

Harris: I work for Cici Rouse right now. I spent a time at a hedge fund where I worked for Chris Rokos, one of the top traders in the world. I’ve had this career where I’ve been in the shadow of just true greatness, and it’s been a real privilege.

Beckworth: Fantastic. Now, you work at a think tank like I do, and one of the questions I always get is, “What do you do?” Now, you’re the vice president, so you probably do some management stuff as well as research that we’re going to talk about today. But when I go back home and I go to people who aren’t familiar with this world, it is sometimes challenging to articulate what exactly someone in the think tank world does. Have you had that encounter, and how do you deal with it?

Harris: Yes. I think it’s better to describe what think tanks do, at least as my boss, Cici Rouse, said this yesterday. I thought it was a great way to describe it, which is to say, we just solve problems. We solve policy problems. If the problem is, we’re not doing enough manufacturing in the United States, we try to solve that problem. If the problem is, the debt’s growing too high, and we’re going to talk about that today, we try to come up with solutions there. It’s both identifying and then helping to solve public policy problems.

Beckworth: Okay. Now, you also do management duties at Brookings, so tell me about that.

Harris: Yes, four out of five days, I’m doing management. I’m raising money. One of the great things is we have a terrific staff, so I’ve got Ben Bernanke on one side, former Fed chair, and Janet Yellen on the other. We have just a brilliant staff, but most of my time is spent trying to raise money for them, managing other administrative tasks. I have about a day or two a week to do actual research.

Beckworth: Wow. You get this done in your one day of research a week?

Harris: Yes.

Beckworth: Fantastic. High standard for the rest of us, so it’s great to have bosses like you who can get it all done.

Harris: That remains to be seen. I don’t know.

Fiscal Health of the United States

Beckworth: Okay. Well, let’s talk about the fiscal health of the US. I want to get to your research, but maybe paint the picture for us, where we are. What is the outlook for the health of the US government in terms of fiscal policy?

Harris: The fiscal trajectory is really not up for debate, and everyone uses the same set of facts, which is put out by the Congressional Budget Office. I think, as many people know, the Congressional Budget Office, or CBO as it’s known, has to stick to current law, so it doesn’t assume future tax cuts, it doesn’t assume future recessions. When you actually look at what CBO projects over the next 10 years or so, what you see is this fundamental mismatch between revenue and money we’re bringing in.

Revenues total about 18.0% of GDP. We get about half that from individual income taxes, and the rest from payroll taxes and the estate tax, and corporate taxes. Outlays are about 20.1% of GDP. We bring in about 18% of GDP in revenues, and we spend about 20% outside of interest costs. We have what’s called a primary deficit. A primary deficit is just how much you’re bringing in after you discount interest costs, after you subtract interest costs.

Interest costs now are about 3.5% of GDP, so we’re running deficits around 6% of GDP, and about 4% of that are interest. You’re shaking your head, and you’re right to shake your head, because if you go back historically, we have run deficits. More often than not, we’ve run deficits in this country, but we have not run primary deficits. The difference now is that after we’re subtracting out the interest, we’re still deeply in debt.

We have this structural mismatch where it’s not about necessarily just paying interest on the debt, it’s just what we’re bringing in, what we’re spending in any given year, there’s a mismatch. I think that’s why you’re seeing more attention being paid to our fiscal outlook than it was before.

Beckworth: Yes. It’s one thing to run deficits during war times, recessions, pandemics, but we’re running structural deficits in peacetimes, in full employment. If I recall correctly, CBO has us running like $2 trillion deficits every year over the next decade.

Harris: Yes, this is not a problem which solves itself; this is a problem which gets worse over time. The stock of our debt, so the outstanding debt, is right around 100% debt-to-GDP right now. CBO thinks that’ll go up by about 20 percentage points over the next 10 years or so. This is a problem which is getting worse, not better. I actually think the CBO projection, as dire as it is, is overly optimistic. I’m happy to go into reasons why, but even just taking it at face value, we should all be very concerned.

Big Beautiful Bill

Beckworth: Okay. Well, let’s jump into that, and maybe tie it into the one Big, Beautiful Bill that’s now up for consideration, because that’s going to make things worse, as I read it.

Harris: Yes, there’s no, really, way to legitimately argue that it won’t make our fiscal outlook worse. We can debate things like, “Is this pro-growth or not?” I think there are elements of the bill which are pro-growth. There’s expensing for business investment. There are some other aspects of the bill I like. For example, it changes a provision of the tax code that will incentivize more childcare in the workplace, which I think is great. 

Overall, this bill, to me, is not especially pro-growth. When you look at the estimates around it, even though it’s coming out of the Congressional Budget Office, I think most forecasters agree. The bill makes our fiscal outlook that much worse. The Congressional Budget Office score came out. The bill does cut spending by $1.3 trillion, but it cuts revenues by much more, by about $3.7 trillion.

For every dollar in spending it cuts, it cuts revenues by about $3. This is a bill which just brings us to whatever fiscal reckoning we’re going to face that much faster. It is front-loaded. A lot of the deficit increases come in the first four years, where you have about $500 billion increase in deficits over the first four years. That has led people to be somewhat skeptical about the bill, because some of the tax cuts are temporary, and they’re worried that we’ll get to 2028 when they expire, and they’ll just get extended again.

Some of the spending cuts are back-loaded, and they’re worried that they won’t ever come to fruition. In many ways, if you look at this bill and you look at the score, there’s reason to be skeptical that this is it. They think that there’s probably more deficit spending coming.

Beckworth: Yes, this point you just made about the front-loaded nature of the cut in revenue, so that the deficits are going to appear really soon if we pass this bill.

Harris: Yes, this is happening next year. This is happening next year when we see the change in the tax code. There’s a big question, which is, does it even matter? You can look to financial markets. Financial markets expected a big tax cut. They expected a big tax cut even before Republicans took control of Congress and the White House, because they expected Republicans to win.

When you look at interest rates, you saw them running up in advance of the election because of this expectation that Republicans would have a sweep. Right now, interest rates are around 4.5% on a 10-year, and you can debate about whether or not that’s consistent with financial markets being worried about a crisis or not. I think it’s probably not quite yet, but if it gets much worse, I think we can start to describe it as being real fiscal pressure.

Beckworth: Yes, I wonder if the budget deficit blowing up next year, the year after that, will awaken some in the bond market even more than today.

Harris: Yes. The way that I’m looking at our fiscal outlook is that we really don’t have any safeguards for this fiscal irresponsibility other than financial markets. Financial markets are now the referee, and they will throw a flag when there’s a penalty committed, but that’s really some of our best hope because politicians haven’t stepped up into that role. Politicians, as you pointed out, have consistently had this mismatch between revenues and spending even when we’re not at war, even when we’re not in a recession. What’s going to fix it, in my mind, is ultimately going to be the financial sector, the bond market.

Beckworth: The bond market has to step up and discipline us and force some tough tradeoffs and choices that we need to make, and hopefully, Congress can step up as well.

Harris: Yes, but I think to the bond market’s credit, it’s not one person, but to the power of the bond market, you saw on the day after Liberation Day, you saw President Trump come out and reference an overnight run-up in interest rates as one of the reasons why he stepped away from those tariffs. It wasn’t the 10 percentage-point decline in the S&P, and it wasn’t economists worrying about the perils of tariffs; it was the bond market. One thing that gives me some reassurance right now is, it does seem like the White House is paying attention to the bond market, which is a good thing.

Beckworth: Yes. Later, we’ll get to your paper, where you outline that it’s unlikely we’re going to have a serious financial crisis due to the fiscal policy challenges. We’re going to slog our way through it, and there’ll be some tough choices to be made, but it’s not going to be something really dramatic or serious all at once.

Debts and Deficits

Harris: Probably not. When people talk about debt and deficits, let me just make a few points.

Beckworth: Sure.

Harris: The first is that I don’t think economists have really understood the relationship as well as we should have. Dave, if you and I were sitting here 25 years ago, we would have said, “Okay, looking at Congressional Budget Office projections, the debt is going to trend to 0 over the next 10 years. What a fantastic problem to have.” We would have said, “interest rates will spike.”

The exact opposite happened, right? Debt exploded. It’s now 100% of GDP over the past 25 years. Interest rates for the bulk of the past 25 years remained ultra low. In fact, after accounting for inflation, they were under 1% for much of that time. It’s clear that we’re still learning about the impact of debt on financial markets, on investment. That’s one point. 

A second point that I wanted to bring up has to do with it’s not just our debt that matters. I think this point is really not brought up enough. If you look across what’s happening across other advanced economies, you see that everyone else is taking on public debt similar to the way that we are. 

You can go back to the 2000s and look at what happened to advanced country debt over the past 25 years. You can see that it just exploded the same way it did in the United States. Global advanced public debt went from 76% up to 112% of GDP from 2000 to 2023. 76% of GDP to 112% of GDP. That is a massive explosion. The reason that that’s a problem is because we have the same dollars chasing the same debt, right? The same debt that’s going to buy EU sovereign debt, that’s going to buy Japan sovereign debt, the same dollars are also going to buy US sovereign debt. The fact that everyone else is taking on debt, as we are, is a real problem. 

A second reason to be concerned is, the holders of the debt are changing. Rather than having these institutional investors who tend to buy these Treasuries and sit on them, we’re seeing more buyers are hedge funds, and those that are really price-sensitive. What that means is that we have to worry about a run on Treasuries a little bit more than we did before, because they’re buying it with just really leveraged balance sheets. You could see a run on Treasuries in ways we have not seen in the past. Those are just a few points I want to make from the outset. Now, maybe get into our paper if that works.

Beckworth: Yes, absolutely.

Costs and Risks of the Rising US Debt

Harris: The impetus for the paper was, I was talking with one of my co-authors. I was going to give a talk. I was at this hotel room in Providence. I was on the phone with her, and I was lamenting the growth of debt-to-GDP. I was like, “Look, it can’t continue past, I don’t know, 150% debt-to-GDP.” She was like, “Well, why not?” I was just like, “It just can’t.” We didn’t have a good answer.

We started to try to think through why I was making that statement and what would kick off a real crisis. What we came to is that there are really two different things to be concerned about with this massive amount of debt we’ve taken on. One is, it just crowds out other good things. As economists talk about this, we talk about how when interest rates rise, people have to put money into Treasuries rather than other productive investments.

We try to quantify the cost of that crowd out. Here’s what we came to say. Between now and over the next 30 years, if we stabilize the debt, what will average Americans’ income look like relative to a situation where we just continue as we’ve been going? Scenario A, we stabilize the debt at 100% debt-to-GDP. Scenario B, we let the debt grow to 166% debt-to-GDP. In the scenario where we stabilize the debt, because we’re investing in all these productive things, the average American’s income will be $129,000 per year.

Under a scenario where we allow the debt to explode, it’ll be $123,000. Now, maybe you can say, “All right, average American’s income is still going up pretty starkly. It’s under $100,000 today. That’s just good news. Either way, we don’t need to worry about the debt.” I look at it like a $6,000 per year annual tax on everyone, that is a huge tax. That’s our debt tax.

For me, that’s a really big tax. That’s a really big cost of this debt. That’s the ongoing cost of debt. The second thing we looked at was what could kick off a fiscal crisis. If we did have a fiscal crisis where you saw interest rates shoot up overnight, and you had a type of fear like we had in 2008, where you saw a meltdown in the financial system, what would kick that off?

We brought these four different scenarios that we thought, things like big swings in the demand or supply of Treasuries. What could kick that off? Well, China owns about a trillion dollars of our debt. We’re in a trade war with China. It’s not inconceivable that China could have a shift of demand for buying US Treasuries. Second scenario, we could have missed payments due to political brinksmanship.

We’ve got a debt ceiling deadline coming up. You could imagine, it’s not inconceivable that we could miss a payment on that debt. The third scenario, loss of inflation control by the Fed. People no longer believe the Fed has a dual mandate, where not only does it need to control unemployment, but also needs to control prices. That could lead to an old fiscal crisis.

Lastly, dramatic deterioration of the long-term fiscal outlook and strategic default, where we have a Congress which says, “Things are so bad, we have no choice but to default.” Those are the scenarios that we saw as kicking off a fiscal crisis.

Beckworth: Well, let me go to one of them that you just mentioned about the Fed, because that’s something I’ve been paying a lot of attention to. That’s the notion of fiscal dominance, that at some point, the Fed’s job becomes not price stability, but keeping the US government solvent, either by lowering interest rates artificially low on the debt, or by buying up the debt, or some combination of both of those.

Just recently in the news, I’m seeing rhetoric that in my mind is suggesting fiscal dominance might be nearby. Just the fact that we’re paying so much on our debt right now has people worried. President Trump recently tweeted, or whatever you call it, on his social media channel. He went off on Powell, he called him ‘Too Late.’ He hasn’t cut rates, and it’s going to affect our debt payments.

The context was debt payments. We’re paying over a trillion dollars on the debt. If Powell would just lower the interest costs, it would help out so much. The other thing that is interesting is Ted Cruz, senator from Texas, came out and said, “Hey, let’s end interest on reserves, because you know what, that would free up close to a trillion dollars that’d come back to the government. We wouldn’t be paying banks.”

I’m not sure that all works out from a consolidated budget perspective. Even if it’s true, his motivation was fiscal pressures. The fact that we’re having these conversations really worries me. We’re getting to the precipice of something like fiscal dominance.

Harris: Yes. We bring this up in the paper, which is that having a Fed which is willing to buy tons of Treasury debt in order to address the higher costs really won’t work because then we’re going to have higher inflation. With higher inflation, investors will know that. They’ll start demanding higher rates on yields. You have to continuously surprise investors. There’s really only one opportunity to surprise investors.

That probably won’t work. Also, our debt rolls over fairly frequently. Most of our debt is going to be rolled over the next seven to 10 years. Then all those new expectations around inflation will get built in. We did some calculations in the paper, and you really can’t inflate your way out of the debt. It’s really not practical.

Beckworth: Yes. Now, we did inflate some of the debt away during the pandemic, but we can’t keep doing that, is your point. There’s a limit to how much. In fact, there’s a famous Laffer curve, I call it a Laffer curve, a curve for how much inflation tax you can get.

Harris: No, you’re exactly right. That was surprise inflation, right? Investors weren’t demanding this extra premium on bonds because no one was expecting 7%, 8% year-over-year inflation. You can only do that once. You can only run that play once. You can’t run for 30 years on a $30-trillion portfolio.

Beckworth: It’s interesting to look at the market value of marketable Treasury securities versus the par face value. A $1 to $2-trillion loss bond bearers are now bearing because of that experience. I think, again, putting it in context, that was a big war of sorts, a public health war. We didn’t know at the time how bad it would be. You can quibble if it was a little too much.

I think the point is, it’s understandable, something like that happened during that period. It’s the question of “Why is this happening now, going forward, where we have political gridlock? No one wants to make meaningful, hard choices.” That’s what concerns me, is that I don’t see the incentives in place other than some crisis. Again, you argue we may not have a hard crisis, more of a gradual erosion of income and wealth. How do we get to a meaningful place where we can have tough choices, a combination of raising taxes, cutting benefits, and spending?

Harris: I’ve spent a lot of time in fairly political roles. For the Biden 2020 campaign, I was the economist for the campaign. I will say it doesn’t seem like people care about debt very much. People talk about debt and they worry about debt, but they don’t care about debt enough to vote based on debt. Right now, you have a Republican Congress, which came in campaigning on a big tax cut.

That’s what Americans wanted. You had a president who campaigned on a massive deficit-increasing platform, and now he’s putting it in place. I can sit here and blame President Trump for provisions that I don’t think are particularly effective, like no tax on overtime, no tax on auto loans, no tax on tips, but this is what America voted for. Until Americans start voting their values, until their values are to stabilize the debt, this is how democracy works.

Beckworth: We have to get to a place is what you’re suggesting, where the body politic, the public, can make the link between high inflation and too much spending. We’ve got to make that clear in their minds, or how does this work?

Harris: Yes. I think that we have to crystallize that $6,000 cost that we talked about a little bit. When people are paying too much money for interest costs, that has a real impact. When people are paying so much on their mortgages, that has a real impact, or their credit card. Trying to turn it into the household level in terms of the consequences.

That’s been, I think, difficult for people like you and me, I think, who care a lot about the debt and deficits, in part because interest rates were so low for so long. In 2015, I could be saying, “Look, the debt-to-GDP ratio went from, I don’t know, 30% to 75% or whatever it went through.” You could say, “Well, why does it matter? Real interest rates are still zero. Why should I care?” Now we’re starting to get the “Why should I care?” a little bit. The real answer is interest rates. The real answer is, your standard of living is going to go down over time.

Beckworth: Yes. We have to actually feel the pain before we start to change our behavior. It’s a great point. When rates were really low, all the post-Keynesians and people who wanted to argue, “Ah, supply doesn’t matter. It really doesn’t matter.” There is some threshold where it does matter, and we’re beginning to see that.

Harris: Yes. It’s interesting, Ben Bernanke gave this speech about how we have a savings glut, and that helped explain some of the patterns we’re seeing in interest rates and investment. I worry about the reverse savings glut, which is that we’ve got this borrowing glut that’s global, right? All these additional countries that have taken on this massive stock of debt that just compounds on itself. Interest rates go up because there’s such a large stock of debt, and people are worried about it, and you get the spiral effect. I worry about a reverse global savings glut. I have to come up—

Beckworth: Oh, that’s interesting.

Harris: —with a better name for it. You get the point, which is this borrowing glut over the next several decades. You’ll see higher real interest rates, and it’s going to have impacts not just on the United States, but really on every advanced country in the world.

Beckworth: That leads me to two questions. The first one is, you sent me a post on the IMF blog, which I think is tied to an article where they argued that “Global Public Debt Is Probably Worse Than It Looks.” That’s actually the title. I was like, “Thanks, Ben. That’s the last thing I wanted to hear.” It’s actually worse. Globally, I guess, if you count it up, the official stats may be understating the severity of it.

Harris: Yes, and I think when you look at all the liabilities of governments, all the promises made.

Beckworth: Oh, okay, all the unfunded liabilities.

Harris: Yes. That’s part of it. For the US, I worry a lot about shifts in demand for US Treasuries. We’ve benefited from the perfect scenario where transactions are conducted in dollars, where reserve currencies are typically US dollars, where the US has never defaulted on its loan, where economic growth has been perceived to be strong moving forward. All of those things could change over the next several years, particularly if we have a default on the debt owing to a debt ceiling impasse or something else. We’ve had strong Fed independence, which has given investors comfort in investing in Treasuries. All the reasons why US Treasuries have been able to have such low interest rates, that could be changing.

Beckworth: Yes, absolutely. Today, President Trump came out and called Powell ‘Too Late’ because he doesn’t cut rates in time. He goes, “‘Too Late.’ Just doesn’t listen to me. I threaten him. I’m nice to him. It doesn’t matter. I’ve said bad things about him.” He was very candid. I’m like, “Oh, well, Trump is actually helping Fed credibility here.”

The fact that Powell is not responding to the rhetoric one way or the other, that enhances Fed’s credibility, but then I also thought, “Well, there’s a limit to how much that credibility can do if you end up in a world of fiscal dominance. Even if you’ve got the best central banker in the world, the best FOMC members, and you’re under fiscal dominance where you have to keep the government solvent, their hands are tied.”

It’s like World War Two. Again, it’s a war setting, but the Fed had to keep rates pegged, had to buy up a bunch of debts. Eventually, after the war, price controls were released, and boom, prices take off. The difference is we’re not in a wartime economy. We’re not in a recession now, but it’s the same dynamics at work.

Harris: It is the same dynamics at work. It’s interesting. We just went through this once-in-a-generation, if not longer, inflation episode. One of the remarkable things about that was that people’s expectations remained well anchored. Even though you saw inflation rates of 7%, 8% year over year, you could ask people, “What do you think it’s going to be in three years from now?”

We looked at New York Fed surveys and other surveys, and people said, “I think it’s going to be down to 2% to 3%.” There was still that faith in the Fed, which helped prevent this spiral, this wage price spiral, which is just dreaded from a monetary policy perspective. That’s just the Fed’s credibility coming in as a real asset to us. I think people are concerned about the next appointment of a Fed chair.

I think people are concerned about a possible shadow Fed chair that the president has said he may appoint. That would be so confusing for markets. People are concerned about the breakdown in the firewall between the White House and the Federal Reserve. We’ve run this play before in our country. It did not turn out well.

Beckworth: Going back to the point you made earlier about the low real interest rates we had for over a decade, which allowed us to kick the can down the road. Congress didn’t face real tradeoffs because you could just refinance at close to 0% in real terms. In fact, in Europe, it was negative terms. It’s a wonderful world, right? Literally, R was less than G.

You could just go on forever. As long as you didn’t blow things up, you could keep playing this game. Now we have R higher than G, or at least close to G. Do you think that was a primary reason to kick the can down the road, that we didn’t face hard constraints, tradeoffs? Had rates been higher during that period, would we have addressed this issue sooner?

Harris: Yes, I think that was part of it because there was no crystallization of the consequences, right? If I can eat candy all day and never get fat, I am just living at 7-Eleven and just eating Hershey’s for three meals a day. Then you start to put on the pounds, and so there was no weight gain in this analogy. That led to some pretty irresponsible behavior.

Okay, I’m a Keynesian. I think that when we’re in an economic downturn, you need fiscal policy, particularly if we have a zero lower bound on interest rates. I think that there have been circumstances where we have not given enough stimulus or have not given the right type of stimulus, but more often than not, we’ve overdone it. I had my research assistant go back and I said, “Look, go back for the past 20 years, put everything in current dollars, in 2024 dollars, and tell me what was the deficit in a regular year and what was the deficit when we were in a recession or a year outside of a recession.”

Regular year deficit, all inflation adjusted, $900 billion. Recession year deficit or a year after, about $2.5 trillion. That is to say, I still think we should have higher deficits in years of recessions than not, but that is extreme. We have this poorly designed system of automatic stabilizers, or the automatic mechanisms that come in and give people more income and a little more support.

I think that because we’ve had these poorly designed systems, you see things like the CARES Act, which just came in. We panicked a little bit around COVID, which is understandable. We hadn’t seen this before, but just spent trillions of dollars after trillions of dollars. If we had a better-designed system, if we had a better-designed unemployment system, if we had a better-designed system of fiscal transfers, if we had a better-designed system for small businesses, we could have maybe spent a fraction of what we spent.

We’ve had two big recessions over the past 20 years, and we’ve spent trillions and trillions getting out of that because of poor design. I agree with your premise, which is, we haven’t had to make tough choices, but here we are.

Beckworth: I’m sympathetic to the point you’ve made. We need to have a robust counter-cyclical macroeconomic policy, which works on both sides, so be very supportive during the downturns. I think one can argue, after 2008, we didn’t have enough support, and that prolonged the recovery. That’s how I would view it. Then I think a lesson from 2020 to ’23, we had really robust support. We had a quick recovery, and we just overdid it. 

I think if you could do what we did well in the early 2020s, but not overdo it and apply that back to 2008, we wouldn’t have lost as much potential output and maybe debt-to-GDP would be lower simply because our GDP and the denominator would be higher.

Harris: Yes, exactly. We had to go so big, at least because I was sitting there, at those conversations in 2021. We had to go big because there was a notion that we only get one bite at the apple. We had to go big enough to get us on the other side of whatever this pandemic was. That was before the Omicron wave had hit, before the Delta wave had hit. We really didn’t know.

If you had a better automatic mechanism where you said, “Look, if unemployment does this, then unemployment support does that, or if national income does this, then we’ll give this level of support.” It’s like the example I give is that someone’s coming to your house and a friend of yours is saying, “We’re going to go camping,” and you’re like, “For how long?” They’re like, “Somewhere between a night and four months, pack accordingly,” right? 

Beckworth: No, that’s completely fair. The uncertainty was so high in early 2021. No vaccine yet. There’s a lot of things we didn’t know. I think I’m very sympathetic. Even though ex-post Monday morning quarterbacking, “Well, if we could just calibrate a little bit better, sure.” I say take the win in terms of, at least as a macroeconomist, I’m like, “Wow, look at that. Look, it was literally a V-shaped recession.”

We’ve gone back up to the CBO trajectory for potential real GDP. We didn’t lose anything on the potential side, whereas 2008, in fact, I posted this recently. If you take the CBO projection from early 2008 and just continue to grow it, it’s a $2 trillion real hole in the economy. That’s a lot of people not working, a lot of capital formation that’s gone, and it would have made the debt burden more manageable. I think not getting macroeconomic policy, counter-cyclical policy is an important part of the story. You’re saying that means better automatic stabilizers, better unemployment insurance triggers that kick in.

Harris: Yes, exactly. It doesn’t have to be a situation where you have to determine, as we did in 2021 and as we did in 2009. President Obama and President Biden were faced with very similar choices, which is to say, “We have one shot at a recovery bill, and we have to get the number exactly right.” It was too small in 2009, particularly with respect to aid to states and governments, and it was somewhat too big in 2021.

The very premise that you have to decide before an emergency is over, you don’t ask firemen to decide how much water they’re going to need in the middle of a fire, right? You have access to more water if you need it, and we can bring in more trucks. The very premise of you get one shot to decide what support you need at the beginning of an emergency and you don’t get another shot, that’s problematic.

Beckworth: What you’re saying is we shouldn’t rely too much on the Fed and counter-cyclical macro policy made in real time, because you’re going to get it wrong. You need to have built-in automatic stabilizers that are very sensitive to the changing underlying economic conditions.

Harris: Exactly. The Fed is frequent. The Fed, you get multiple adjustments per year, but the Fed is a crude measure. I think we’re learning just how crude that can be in addressing some of our challenges. One nice thing about fiscal policy is, it can be much more targeted. We saw, for example, in 2009 that we had a major housing crisis, and a lot of the support was targeted toward housing, probably not enough, but it can be more targeted to the crisis, whereas the Fed just has one tool. I think the system works well if we have more precise automatic stabilizers.

Beckworth: Yes, okay, fair enough. I will hang on to my visions of nominal GDP level targeting, solving all the macro problems of the world, which I know, while you’re at Treasury, some of my friends there were feeding you memos about nominal GDP, I think. We can talk later about that, maybe off air. 

The second question I was going to ask you earlier, I only got to the first one, but the second question I wanted to get to, and this, again, goes to this stark IMF post that you shared with me, that “Global Public Debt Is Probably Worse Than It Looks.” That is the consequence or the implication of the aging of the planet. For a long time, many people, including myself, would say, “Ah, this means we’re going to have lower interest rates. R* is going to be lower. Because these people are living longer, they’re going to save more. It’s just going to lower rates, and therefore, we can kick the can down the road, once more.”

There’s another argument that says, “Oh, actually, it’s the other direction. They’re getting older. They want to start spending, in their retirement, their savings.” There’s another story you could tell. Where do you think this lands? Because you mentioned this debt’s growing, and there’s a limited amount of appetite for it. Should we worry positively or negatively about the aging of the planet in terms of savings? Now, I know there’s going to be growth implications as well, but just on that narrow question.

Harris: Yes, there’s all these interesting questions regarding the aging of the population. The first is to say we’re in the midpoint of about a 25-year transition where we have dramatic aging, and then we level off. We’re just halfway through this, and I think we’re still figuring it out. From a fiscal standpoint, the first thing to say is that we’re just spending a lot more because the federal government, the primary objective of the federal government, if you’re just looking at the dollars, is to ensure a healthy and comfortable retirement for Americans.

Between Medicare, Social Security, and about a third of Medicaid, we spend a massive share of the budget on aging. Then there’s also the flow of saving, as you noted. There’s going to be this massive wealth transfer. I think I’ve seen numbers in the US, $70 trillion over the next, I don’t know, 20 years.

Beckworth: Wow.

Harris: How that wealth transfer happens will dictate a lot about our standard of living. Now, maybe we’ll choose to tax it and use this one-time wealth transfer as baby boomers phase out. That’s a really awful way to say a generation dying, but I couldn’t think of a better one. So maybe that we’ll have higher estate taxes as a way of dealing with this. I think that in part, because of we’ve been talking about, this sort of reverse savings glut and real concern about who’s going to lend to these countries, that if the baby boom generation starts spending down their assets, and they’ve traditionally been savers, again, they’re just fewer dollars buying this massive explosion in sovereign debt.

Beckworth: The reverse saving glut story that you’re telling would be really supported and animated by elderly people spending out of their savings and causing all these problems that could emerge.

Harris: Either spending out of their savings or transferring it upon death, or as they lead up to their older age, transferring it to people who are more likely to spend.

Stablecoins as a Potential Solution to US Debt

Beckworth: Okay. Let me throw out another interesting development that we’re in the midst of. I just did a podcast on that. This is the emergence and growth of stablecoins. I bring this up because there’s the Treasury Borrowing Advisory Committee, TBAC, Citibank, and some others have estimated that this could really take off. Just yesterday, we had the Senate pass the GENIUS Act, which would allow stablecoins to be regulated and be a part of the financial system, and homegrown and not outside in the shadows.

The argument is, if this takes off, it could dramatically increase the demand for Treasuries because it’s a stablecoin. It’s supposed to be one to one. You put a dollar, deposit into it, and there’s a dollar of reserves or Treasury bills behind it. The TBAC report, I believe, argued or suggested up to a trillion dollars of Treasuries will be bought by these stablecoins over the next decade or so.

This could, once again, lower yields, kick the can down the road. Now maybe the effect won’t be that big. Maybe the magnitude, I’m overplaying the magnitude of stablecoins. I know, like Secretary Bessent, he’s excited about it. The senators who passed it, they’re excited about it because it’s going to help dollar dominance. As it relates to this conversation, might it also kick the can down the road?

Harris: It could kick the can down the road, but in the context of this conversation, I’m relatively optimistic about it because everything, as far as demand and supply of Treasuries, is moving in the opposite direction. I think that we have seen a very slight, not enough to call it capital flight, but a slight decline in demand for US Treasuries. My sense is that some of that is being driven by foreign central banks, who are marginally less inclined to buy Treasuries.

If I mention capital flight among people who are in the financial sector, their eyes get big and the jaws drop. I get lectured on how, well, it wouldn’t be in China’s best interest to sell off any part of their trillion dollars of Treasury securities in their portfolio. People will point to, “Look, this has been something that we’ve worried about for 25 years.” That’s true, but we also have never levied 145% tariffs on China.

We are in a new world. I’m worried about foreign demand, not just in China, but in Europe and in other countries moving away from a demand for Treasuries. I’m worried about this extra $3 to $5 trillion in debt that Commerce is about to vomit out onto the market through this Big Beautiful Bill. I am worried about a possible default on a Treasury and what that means for how people view this asset, going from risk-free, 0% risk, which is largely how investors treat Treasury, to even having a 99% chance of getting paid back. It’s just a sea change. 

We have a debt ceiling threshold coming up this summer. This could happen. We have come very, very close to defaulting on our debt. The reason why I think that stablecoins are good news is because they’re an antidote to all of these reasons why we’re worried about Treasury markets. At least it’s some good news. Someone else may want to buy them more than they’ve done before.

Beckworth: Okay. Even in the good news case, I guess the question then, is the magnitude big enough to really get us back on track?

Harris: The magnitude I’ve seen with stablecoins—I’m not an expert on this. My former Treasury colleague, Nellie Liang, knows a ton about this. It’s on the order of maybe a couple trillion. We’ve got $30 trillion in outstanding Treasuries, maybe you get $1 or $2 from stablecoin. Enough to matter a little bit, but not enough to change the trajectory.

Beckworth: Yes. Fundamentally, we still have to address the core issue, and that is the imbalance between revenues and expenditures on the federal budget.

Harris: Yes. Just to put a number on that, one thing, I had dinner the other night, a bunch of policy wonks that care about debt and deficits. We should have invited you. We sat around, and one point that I made was that, “Look, for all of us that care deeply about this issue, we’ve got to do a better job at least coming up with a target,” right? It’s not a balanced budget.

A balanced budget would be catastrophic. It would put us into a recession almost immediately. Zero primary deficits outside of recessions, that’s the mantra. That’s what I think. Zero primary deficit unless we’re in the middle of a recession or a war, right? That’s what we should be at. Right now, looking over the next 10 years, we’re at about 2% of GDP, 2.1% of GDP for our primary deficit. That’s what we need to close. That’s doable. Goldman Sachs came out with a piece yesterday on this. As we wait longer, that becomes less and less doable.

Beckworth: I’m looking forward to some bumper stickers, Ben, that you will put out that say 0% primary deficits during the good times.

Harris: Yes. No. Look, if your listeners want to come up with graphics, I am all ears. Maybe just like a line through, I don’t know.

Debt Ceiling

Beckworth: Okay. Let’s talk about the debt ceiling because you brought that up. President Trump has come out saying, “Let’s get rid of it.” Elizabeth Warren had an op-ed in The New York Times that said, “I agree. It’s the one thing I agree with him on.” What are your thoughts on it? Does it serve any useful purpose, or does it make us every few months really close to defaulting on the debt?

Harris: I think, by and large, the debt ceiling is counterproductive. No other country has it. It is a judgment on spending and tax decisions we’ve already made, not as far as going forward. I worry that it’s going to be the impetus for going from a risk-free characterization for Treasuries to a risky characterization. If you told me that you looked at your crystal ball and said, “We defaulted on Treasuries in X number of years, can you guess what the situation would be?”

The only reasonable guess is that we came up with a debt ceiling impasse, and then there was a decision made by the president not to make payments on the debt in lieu of making payments on other things. I worry about it because, A, it could kick off a crisis; B, it doesn’t really seem to solve anything, right? The debt ceiling has been in place for every single day of this run-up.

Some days it’s been suspended, but the debt ceiling has basically been a characteristic of US budgeting as we went from 0% debt-to-GDP up to 100%. It didn’t really act as any sort of safeguard on higher debts and deficits. It hasn’t really been effective at what it was designed to do.

Beckworth: That’s a great point, yes.

Harris: I see it as a risk, and I see it as not particularly effective. The question is, “Well, how do you then incentivize politicians to make the right decision?” The Bipartisan Policy Center and others have come up with some bills that I think are pretty creative, where they basically say it’s the discretion of the president to go ahead and raise the debt ceiling, but the president would have to release a responsible budget.

Also, if Congress happens to release a responsible budget for 10 years, then the debt ceiling is deemed automatically to rise to accommodate that budget. That seems like a reasonable compromise to me. In general, I agree with President Trump. I agree with Elizabeth Warren that we should probably get rid of this, but I don’t think the answer is nothing in its place. We need some sort of safeguards that work.

Beckworth: I think something that would come in its place would be higher inflation, if in fact people aren’t responsible, if we continue to blow up the budget deficit, that eventually inflation becomes the discipline. Because we should not, in principle, ever default, right? There’s no reason we should default. We could literally print dollars and meet our nominal obligations.

Like you said, the only reason we should have a real, true technical default that would blow up the global financial system would be a choice. It would be a policy choice. It would not be because, “Oh, where’s the dollars? I can’t find any dollars.” We could always print the dollars, but the cost would be higher inflation.

Harris: Definitely. That was the point we made in the paper that we’ve been talking about, which is, as long as we have a credible, independent Fed and as long as we have policymakers who are committed to honoring the risk-free nature of Treasuries, we’re probably not going to have a fiscal crisis. Probably. Those are two big if’s, right? I don’t know if the Fed is going to stay independent.

Beckworth: I think you’re absolutely right, because I’ve had this conversation with other people. Could the US end up in a place like Venezuela? I say no way. It’s highly unlikely we end up in a place with really, really high inflation. We might have higher inflation. Maybe we have some uncomfortable years of 8%, 9%, maybe double-digit inflation again, and that maybe forces us to get our act together.

To get to a place where you have hyperinflation, I think in the literature, 50% is this magic number; you’d have to have a major breakdown of the US government. Something dramatic would have to happen. I suspect, maybe I want to believe optimistically, that we would do something before we get to that place.

Harris: I think we would, too. One thing we’ve learned over the past couple of years is how much Americans truly despise inflation. Even as everything else was going very well, we had almost no foreclosures, no one was in credit card debt, the unemployment rate was 3.5%, everything was great except for inflation, and people were still absolutely miserable on the economy. People hate inflation.

Beckworth: Yes. It’s great to go back and look at the Gallup poll, which I did, and you can pull out “What’s the top concern?” I pulled out inflation/cost of living and unemployment. If you go look at the 1970s, you would think there’s two recessions, and there’s a recession in the early ’80s. Unemployment’s high, but at certain points, inflation’s even higher. It’s the top concern. You’re like, “Wow, it’s a different world.”

You go through most of the ’80s and ’90s, 2000s, unemployment’s more the concern, full employment. Then you get to 2020, inflation pops up, and you hit this threshold where people start paying attention. In fact, I wrote this up. If you look at Google Trends for inflation, it’s like a flat line. If you look at the relationship between it and actual inflation, there’s no relationship. Once you get past 3.5%, 4%, it’s real strong. People are looking, they’re typing in “inflation” in Google. It’s pretty interesting. There’s a threshold effect.

Harris: I think there’s definitely a threshold effect. I think it was Jason Furman who put it this way, but for most of the past 25 years before COVID, monthly inflation in any given month was 0.1% or 0.2%. You would be right almost all the time if you just guessed it was one of those two. We got used to this very slow, gradual increase in inflation over time, which was by design. It was by design, by the Fed. I completely agree.

If I had to have another discussion about egg prices in 2022 or 2023, my head was going to explode. That was on everyone’s mind. We had the Russian invasion of Ukraine. That spiked gas prices. Yes, this is nonlinear, right? Once people start looking out for it, the same way, I don’t know, after you get in a car accident, you drive safer, right? It’s like that threat is real. It’s right in front of you. That has certainly changed. 

Beckworth: I wrote a post on my Substack called “Once Bitten, Twice Shy,” where I reported some of these measures. Inflation is still pretty high on top concerns. I think people are just more sensitive now. My point was that the tariffs, we need to be real careful, President Trump, because those tariffs aren’t the same as they were in 2018, 2019. People are much more price-sensitive. If we do get higher prices—and so far we haven’t seen big price push-throughs or pass-throughs, but I suspect we will—I think there’s going to be some reaction from the public to it.

Harris: I think there’s got to be. You’re seeing it impact consumer sentiment in ways that are really unpredictable. The Michigan Survey right now looks like the same level of sentiment that we had in 2009. It’s very similar, which is crazy. That was like a once in 100-year recession. Things are actually pretty good right now. You can either attribute that to sort of political forces, and maybe consumer sentiment is more about politics than it is about actual sentiment.

You can attribute it to the outsized impact of inflation, or some people attribute it to economic inequality. I’ve done work with a bunch of Stanford economists. We’ve tried to sort of decompose this gap between where you think people would be based on the economy and where they are. We find it’s a mixture of a bunch of different factors. It’s probably the outsized role of inflation.

Even if someone’s salary goes up by 10%, but prices only go up by 8%, they’re still angry about it. It’s also probably misinformation. The pessimism in the press has really accelerated over the past 10, 15, 20 years, both at the local level and at the national level. People get their news from different places. If you tend to get it from social media, and I don’t know about the causation here, but if you tell me where someone gets their news from, I can pretty much tell you how pessimistic or optimistic they’re going to be. If they get it from The Wall Street Journal, they’re going to be much more optimistic than if they get it from Facebook.

Beckworth: It’s interesting to look at the decomposition between Republicans and Democrats on the Michigan Survey because it flips as soon as an election happens. It flips like magically, the economy is much better or much worse, which is crazy, which also suggests that a lot of us are living in silos in terms of our information consumption. That’s unfortunate. Maybe we have to contend with that. 

AI and the Economy

We’ve been talking about some of the more dire prospects for the fiscal outlook for the US economy, things that need to happen. One positive development is AI. Maybe there’s a lot of hyperbole. Maybe we’re overstating it, but it potentially could be a big boost to growth, which would maybe lower debt-to-GDP. It could also have effects on that big part of our spending, entitlements. You have a paper on that. Tell us about this paper. What can we learn from it?

Harris: I wrote this paper with another economist named Eric So, who’s at MIT Sloan, and Neil Mehrotra, who is one of my deputies, a brilliant economist who’s been at the Minneapolis Fed. The point of the paper was to ask, will this technological shock look like past technological shocks? In the late 1990s, we had the penetration of the internet. Everyone started doing business differently. We had email, this big efficiency gain. 

Just eyeballing the increase in revenues, there’s about a 1.5% of GDP increase in revenue surprise due to that productivity shock. When I would talk about the forthcoming productivity shock in terms of AI with economists, they would say, “Oh, is this going to look like it did in the late ’90s? We’ll get more revenue. Wages will go up. We’ll have more capital income because there’s more corporate profits, and we’ll just get more revenues.”

We wanted to test that assumption. We started digging into the literature on AI, and my takeaway from AI is that it has almost certainly already impacted the healthcare sector. We’re getting personalized medicine. Radiology has become much more efficient and accessible. You’re getting tests back faster. It’s easier to get tested. There’s some studies that show I can just take a picture of my mouth in order to diagnose whether or not I have oral cancer that’s probably more effective. You can go down the line, everything from eye scans to diagnosing breast cancer. 

We have papers that are four, five, six years old, written with data, which is eight to 10 years old, already showing the impact of AI on healthcare delivery. Now, what we asked was if these advances in healthcare delivery lead to longer life expectancies, but also change the way that healthcare is delivered to people, and also the pricing, what will be the net impact on the deficit?

We tried to guess the impact on mortality rates due to AI. We found that under pretty reasonable assumptions, the population of people aged older than 65, 20 years out, would go from around 72 million up to 83 million, so a pretty big increase. People are living longer. That is great news for humanity. Longer life expectancy, while great news for humanity, is terrible news for the federal budget.

In our worst-case scenario, worst case from a budget perspective, we found that if you get these extra 11 million people who are aged older than 65, even with declines in healthcare pricing, we could see the annual deficit go up by about 1.6% of GDP. Now, remember that the primary deficit, which has been a theme of this discussion, is at 2.1% now. That’s like an approximate doubling of the problem.

I don’t want to be all doom and gloom. AI could solve a lot of problems. I’m optimistic about it in certain circumstances. If people start living that much longer and start drawing on Social Security that much more, and are drawing on Medicare and Medicaid to a lesser extent, that’s awful news from a fiscal perspective.

Beckworth: Now, your analysis, was it narrowly looking just at life expectancy and medical costs? Did it consider the possibility that maybe real incomes grow faster under different scenarios?

Harris: We wanted to just focus on entitlements. We didn’t look at a more wholesome look. It is true that maybe you do get this boost in spending. It’s a really good question, David, because I just said that we got this 1.5% of GDP boost in the late ’90s. I just said we could be 1.6% of GDP worse. Maybe there’s some offsetting factors. I think that’s probably there. Also, there may be other spending increases that we didn’t consider. We do have a follow-up paper we’re going to try to take account of all of this. 

Beckworth: Yes, that’s the thing. Your point is, just taking a narrow look, there are going to be greater costs, no doubt. If we live longer, we have to acknowledge that. We need to be mature about this and say, “Look, are we going to make the tough choices to help fund that going forward?” Even if we are richer or more productive, we need to be able to tap into those income flows and use them to pay the added costs we’re going to face.

Harris: Yes, we might be richer and more productive, but we’ll also be relying on the public sector that much more.

Beckworth: Yes. Okay. With that, our time is up. Our guest today is Ben Harris. Ben, thank you so much for coming on the program.

Harris: Thanks for having me. I really enjoyed it.

Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. Dive deeper into our research at mercatus.org/monetarypolicy. You can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. If you like this podcast, please consider giving us a rating and leaving a review. This helps other thoughtful people like you find the show. Find me on Twitter @DavidBeckworth and follow the show @Macro_Musings.