Douglas Holtz-Eakin, President of the American Action Forum and former Director of the Congressional Budget Office, joins Mark and Cris to discuss vexillology, potential election outcomes, and the impact of proposed immigration and tariff policies on the economy. After a quick statistics game, Doug shared his insights on the national debt and how the government's fiscal imbalances may ultimately be resolved.
Douglas Holtz-Eakin, President of the American Action Forum and former Director of the Congressional Budget Office, joins Mark and Cris to discuss vexillology, potential election outcomes, and the impact of proposed immigration and tariff policies on the economy. After a quick statistics game, Doug shared his insights on the national debt and how the government's fiscal imbalances may ultimately be resolved.
Guest: Douglas Holtz-Eakin, President of American Action Forum
Read this week's "Week in Regulation" from the American Action Forum: Latest Cybersecurity Rule Leaves a Mark
Read Mark's Article in the Philadelphia Inquirer: Weighing the Merits of Broad-Based Tariffs
Hosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, and Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s Analytics
Follow Mark Zandi on 'X' @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn
Mark Zandi: Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics. And I'm joined by one of my two trustee co-hosts, Cris deRitis. Hey, Cris.
Cris deRitis: Hey, Mark. Always here.
Mark Zandi: And where's our other trustee co-host?
Cris deRitis: She'll be back soon.
Mark Zandi: It was good to see you in Chicago. We had our conference there. What did you think? How did that go?
Cris deRitis: Yeah, always good to see you live. Make sure you're not an AI. So, that's good. But it was a good conference. We saw a lot of people, a lot of great clients, good sessions. And I think I won the productivity debate again.
Mark Zandi: Yeah, beat up on poor Dante. And I helped you out there.
Cris deRitis: You did, you did. A little unfair. A little thumb on the scale.
Mark Zandi: Right. Right. Well, what did you learn? What's the top of the list of things that you learned? What would you call out?
Cris deRitis: We have a lot of commercial real estate folks at that conference in Chicago and I was, I guess, happily surprised that they're not as dour on the market. It's still not great, but the general sense is perhaps the very worst is behind us. We'll muddle through here and things will improve.
Mark Zandi: Yeah. But those CRE folks, they're always predisposed to be on the sunny side, aren't they? That's kind of in their DNA.
Cris deRitis: To their credit, that industry reinvents itself every time. They go through these cycles and figure things out. Yeah, there's a dark period, but then it's followed by a boom. So, yeah, it's encouraging.
Mark Zandi: Yeah. I think the principal is never underestimate the creativity of a commercial real estate developer or owner. They always figure it out. So, I was hearing these office buildings are being turned into data centers. Did I get that right?
Cris deRitis: Somebody mentioned that in Chicago, I guess, there.
Mark Zandi: Yeah. And we've got a guest. Hey, Doug. Good to see you.
Douglas Holtz-Eakin: Good to see you. Thanks for having me.
Mark Zandi: Absolutely. Doug Holtz-Eakin. You've been with us now, this is your second visit today?
Douglas Holtz-Eakin: Second time, yes. Yes. After swearing I would never come back I am here, yes.
Mark Zandi: Good to have you back. Goo to have you back. And, Sarah, our producer, was telling me that this was two years ago. It's hard to believe.
Douglas Holtz-Eakin: It is hard to believe, yeah. Wow.
Mark Zandi: Right?
Douglas Holtz-Eakin: Yes.
Mark Zandi: You haven't changed. You look great. You look fantastic.
Douglas Holtz-Eakin: I was prematurely old. It's a huge advantage.
Mark Zandi: So that's what it is. And the thing is, you're wearing a tie. I haven't seen a tie in a long time. It's good to see.
Douglas Holtz-Eakin: I [inaudible 00:02:50] my tie. I wear a tie every day.
Mark Zandi: Oh, you do?
Douglas Holtz-Eakin: Every day.
Mark Zandi: Very cool. Because why exactly?
Douglas Holtz-Eakin: Habit.
Mark Zandi: Habit.
Douglas Holtz-Eakin: I shower, I put on a suit and tie, and I go to the office. That's what I do. I also have a TV studio in my office. And so, I never know for sure if there isn't going to be the chance I'll be asked to go on TV. So, I want to look good.
Mark Zandi: Oh, there you go. That makes a lot of sense. That makes a lot of sense. And you were just telling us that, before we went on, that your office is right across from the World Bank and a lot of stuff going on out there today. Because of the World Bank-IMF meetings.
Douglas Holtz-Eakin: World Bank-IMF meetings. Just a ton of protesters. The World Bank always has protesters, but this meeting is a big deal and the streets filled with people protesting the existence of debt. They want it gone.
Mark Zandi: Good luck with that.
Douglas Holtz-Eakin: Yeah, good luck with that. But I don't know who they are. Their sign has no affiliation, so I don't know. This could be a loose coalition of anti-debt people. I don't know exactly who they are.
Mark Zandi: I didn't even know that was such a thing, anti-debt people. There is such a thing?
Douglas Holtz-Eakin: Everybody protests the World Bank. It's amazing. Honestly, it's amazing. There's something all the time. Cris, I was telling Mark that we've learned all the flags by watching the protesters. That's how I've learned the flags of the globe. I didn't know what the flag of Eritrea looked like until we got regular Eritrean protestors. You got to know this.
Mark Zandi: Okay, Doug, Doug, here's the real question. What's the capital of Eritrea?
Douglas Holtz-Eakin: I don't know what the capital is. I just do flags.
Mark Zandi: But would you be impressed if I knew it?
Douglas Holtz-Eakin: Yeah.
Mark Zandi: I think it's Asmara. Yeah, I think it's-
Douglas Holtz-Eakin: That's probably right.
Mark Zandi: It sounds right. Somehow in the deep recesses of my mind it just came out. Asmara. I think that's right. Maybe Sarah can look that up. But you were telling us there's a actual study of flags. It's like a science.
Douglas Holtz-Eakin: Vexillology.
Mark Zandi: Oh, cool.
Douglas Holtz-Eakin: Almost not say it. Vexillology. Yes.
Mark Zandi: So, you could get a master's or maybe even a PhD?
Douglas Holtz-Eakin: You can.
Mark Zandi: Okay.
Douglas Holtz-Eakin: You can get, yes.
Mark Zandi: A PhD.
Douglas Holtz-Eakin: I have thought about seeing if I can get credit for my practice and be a professor of practice in vexillology.
Mark Zandi: That's great. That's great.
Cris deRitis: Do you have a new favorite flag now?
Douglas Holtz-Eakin: I didn't know I had this on my bucket list, but suddenly I realize I do.
Mark Zandi: You were asking, Cris?
Cris deRitis: Oh, do you have a new favorite flag after learning them all?
Douglas Holtz-Eakin: No. What I have learned is that there's not a lot of creativity in the national flag business. A lot of reusing the same colors, a lot of rewriting of triangles and stripes. Every now and then you get something exotic, but more often it's the same stuff.
Mark Zandi: Pretty boring.
Cris deRitis: Yeah, yeah. I'm partial to Nepal. Right? Because they've got those triangular shaped flag.
Douglas Holtz-Eakin: Yes. Different shapes stand out. A lot of rectangles in the world.
Cris deRitis: Yeah.
Douglas Holtz-Eakin: You know?
Mark Zandi: Well, let's go back to the more mundane... Oh, and I should say you founded and are, would you say the president of the-
Douglas Holtz-Eakin: President of the American Action Forum. I started this think tank because I was the policy director in the McCain campaign, which is the same thing as being unemployed, in 2000. So, this is the result of that.
Mark Zandi: Right, right, right. And we got to know each other because you... On the McCain campaign.
Douglas Holtz-Eakin: Yes.
Mark Zandi: I don't know exactly how, I think it was Kevin Hassett who said, "Hey, I'm working on the campaign. Would you like to help out? We need some help monitoring broader economic conditions." I think he's the guy who ultimately invited me to participate. But got to know you pretty well on that campaign. And in fact, I'd say before that I was pretty under the radar screen. But after that-
Douglas Holtz-Eakin: Yes, it's true.
Mark Zandi: Yeah. It was very critical to my career I would have to say.
Douglas Holtz-Eakin: It was very critical to my career. So, Kevin was the policy director on the 2000 campaign, and that's why you probably heard from him first. But being policy director on the McCain campaign in 2007, 2008 changed my career.
Mark Zandi: Yeah. And of course, you were also the director of the Congressional Budget Office, CBO.
Douglas Holtz-Eakin: Yes.
Mark Zandi: And what years were you at CBO?
Douglas Holtz-Eakin: 2003 through 2005.
Mark Zandi: 2003 to... Okay. So, that was the Bush years, I guess. Right?
Douglas Holtz-Eakin: Those were Bush years. But that's where I met John McCain. He was investigating an Air Force purchase of air refueling tankers. A deal that was ultimately found to be highly corrupt, people went to jail. And he asked us to do a financial analysis of it. And it was pretty Enron-esque. You set up a company in Delaware to buy the planes and then lease them to the Air Force, and all of a sudden then it cost twice what it normally would. So, that deal went away.
Mark Zandi: Mm-hmm. Yeah, he was a great man. A wonderful man.
Douglas Holtz-Eakin: Yeah. Miss him every day.
Mark Zandi: It's kind of just wrong place, wrong time. Right? Because the financial crisis came out of nowhere and it just-
Douglas Holtz-Eakin: It was not helpful. That was very unhelpful.
Mark Zandi: Yeah. Yeah.
Douglas Holtz-Eakin: I think our only major mistake was not holding the election two days after the convention. We were ahead by five. If we just had another day we're good.
Mark Zandi: Exactly. Yeah. Well, talking about elections, we got to talk about this one. But before we get there, because obviously it's top of mind here, but before we get there let's just... An open-ended question about the economy. How are you feeling about the economy? How do you think things are going?
Douglas Holtz-Eakin: I think the economy is in remarkably good shape. So, full disclosure to the listeners, and Cris. Mark and I have been on any number of panels together over the years, and over two years ago we were at a Bipartisan Policy Center housing summit. And Mark boldly predicted there would not be a recession, that the Fed would engineer a soft landing. And I boldly predicted that Mark was wrong. And for the record, so far, I'd say Mark is ahead on that one. And I really did. If you go to last year, I'm looking at the data and what I saw was household sectors tearing the economy, business fixed investment looks very weak. Third quarter looked flat in the water, fourth quarter didn't look great.
Most, well, all but the pandemic, recessions starts with downturn in CapEx, business fixed investment. So, I was quite pessimistic that with sustained high rates, and the inflation fights and a weak CapEx outlook, we were going to dodge the bullet. I thought we're going to see a very traditional modest downturn. I didn't think it would be bad. And then the Fed would have to step in and reverse course. It didn't happen. 2024, the business investment firmed right up. And as we talk we have pretty balanced growth between the household sector and the business sector. Every reason to be confident about the near term outlook. The Fed talked about supporting the labor market, but there's no obvious cracks in the labor market. New claims keep coming in pretty good shape. Unemployment rate is at 4.1%. And inflation is coming toward two. I know you're the king of throwing out enough of the data to get it to two.
Mark Zandi: I am one to do that, for sure.
Douglas Holtz-Eakin: But it's obviously been an enormously successful disinflation effort. I think you have to say that. And so, I think the near term outlook is more about the risks to it than about the central tendency. Central tendency is fine, it's the risks. And most of the risks are policy risks. They are what's going to happen after the election. And then there's the international risks that are ever present with the conflicts around the globe, and China being a bit of a mystery to me, to be honest. I can't keep track of what exactly is happening there. But global conditions will matter as well.
Mark Zandi: One argument I hear for the economy's good performance is the deficits. The deficit to GDP ratio is high, 6%. And very uncomfortably high in the context of full employment, you're 4% unemployment.
Douglas Holtz-Eakin: Yeah. Terrible to be honest.
Mark Zandi: Do you think that's a major contributor, a meaningful contributor, to the strong economy, those large deficits?
Douglas Holtz-Eakin: The $5 trillion of fiscal stimulus over the course of the pandemic response, unquestionably. The other things that have happened since, Bipartisan Infrastructure bill that turned into law, CHIPS and Science Act, those have been appropriated. And in some cases some of the contracts have been let, but the money hasn't really gone out. So, that hasn't hit the economy. It's slow moving money and will hit later. So, I don't think there's been a, in 2023, '24, a big fiscal component at all.
It's just the household and business sectors. And as you know, I just recently saw Mark at a conference and he was talking about the revisions to the NIPA data. And one of the things that happened was they revised away my deep concerns about the fourth quarter of last year. It now looks like they were doing much better than we thought. And they certainly revised upward the amount of income that's out there, and the amount that the household saved. And so, everything looks to be in much better shape as a result.
Mark Zandi: Yeah. NIPA being National Income and Product Accounts. Kind of the GDP data was... Everything was... It was okay. It was pretty good. And then the revisions upward by the Bureau of Economic Analysis made the economy look really good. Strong growth, more income, saving rates didn't fall as much, profits were much higher. So, the whole picture changed with that.
Douglas Holtz-Eakin: As an aside, since we were in Princeton for this conference and Alan Blinder was there, Alan was one of my professors. When I was a graduate student in the 1980s and people were obsessing about the U.S. saving rate, he said that the fastest way to raise the saving rate is just revise the national common product accounts.
Mark Zandi: That's right.
Douglas Holtz-Eakin: It remains true.
Mark Zandi: And that typically happens.
Douglas Holtz-Eakin: It's true.
Mark Zandi: Yeah. Yeah. In the 35 years of my career, the saving rates are always revised.
Douglas Holtz-Eakin: It is.
Mark Zandi: They find more income. They just find more income. In fact, that was a great conference, it was on a Saturday, Friday night and a Saturday. And you gave the keynote at the end of the day at lunch. And I have to tell you, that was just a really moving... Because you were a grad and you were recounting how important Princeton was to your career, and I thought it was just fabulous. Really, really moving.
Douglas Holtz-Eakin: Yeah. I didn't know what I wanted to do. I went to graduate school because my undergraduate advisor literally said to me, "You're not ready to have a job. You better go to graduate school." So, I did. And I got into Princeton and they gave me a full ride and a stipend. So, I went there in economics because of that. And I just turned out to be very, very, very fortunate. They paid for my graduate education and it turned out I liked economics and it's very useful. And I don't know what happens if I don't go there.
Mark Zandi: Yeah. And of course Alan is great. He's such a great economist. Okay. So, you're feeling pretty good about the economy. As you pointed out, top of the list of concerns, there's others, but at the top of the list is that we could literally just screw this up because of the election, and the outcome, and what happens on the other side, we could really mess this thing up. How are you thinking about this election in terms of the possible outcomes? And this is obviously critical to economic policy on the other side, and ultimately what that means for the economy. So, how are you handicapping things? How are you framing this in your own mind?
Douglas Holtz-Eakin: Okay. So, the first set of things are essentially the calendar. And the election figures in that a little bit, but it's not everything. We'll come back to the presidentials. First thing to check is do Republicans hold the House? Republicans hold the House of Representatives, then current speaker Mike Johnson cannot agree to an omnibus spending bill and put the 2025 approach behind him. Because if he wants to run for speaker again, that's a death wish. You can't get elected speaker having signed off on an omnibus. Which means that if they hold the House we have a funding fight, somewhere between now and December 20th, which probably ends up with a temporary CR into next year. And we have a funding fight at the beginning of next year. So, we get off on what I view as an unhelpful start. Right?
Mark Zandi: Mm-hmm.
Douglas Holtz-Eakin: Then the calendar says you get-
Mark Zandi: Does that depend though if former President Trump wins and he's now president?
Douglas Holtz-Eakin: It doesn't matter.
Mark Zandi: Doesn't matter.
Douglas Holtz-Eakin: This is if Republicans hold the House he has a chance to continue being speaker, but he has to be reelected in January.
Mark Zandi: Right.
Douglas Holtz-Eakin: [inaudible 00:16:43] do that, if he's sat down with Chuck Schumer and signed off on some big omnibus spending bill, he'll lose.
Mark Zandi: Okay. So, you're saying in the lame duck [inaudible 00:16:52]. You're saying in this lame duck session that there's a problem.
Douglas Holtz-Eakin: There could potentially be a problem. We think it's gone and they'll just come back and we'll go to next year. It's not that clean. If they lose the House, then it's over. Jeffries is going to be the speaker, and that's obvious. And he can sign off on anything on his way out. That's fine. So, that's a concern. That's not a big one. We've been through funding battles before, they don't shake the economy very much. They're a nuisance. But that's political energy that can't be devoted to other things. And there are other things. Next thing up is debt limit. Right? 1st of January we're right back to that.
And so, I don't like the idea of a funding fight and a debt limit fight sucking all the energy out of a new Congress and administration, regardless of who they are, because there are other things you might want to take care of. Like the looming sunset of most of the tax provisions of the '17 Act, and some health subsidies in the Affordable Care Act markets. That's really hard work for our colleges. It would take a year of sustained effort to come to a deal on that front. And if they waste half the year fighting over keeping the government open and not defaulting, I worry about that getting done in an expeditious... And think policy too. Let's not just do something hastily that we'll regret. So, I'm concerned with that. And then you have the-
Mark Zandi: Can I ask though on, again, on that one, doesn't it really depend on who wins the presidency? And I'm just taking this as given that the Senate in almost any scenario is going to go Republican. It's going to flip over to the Republicans.
Douglas Holtz-Eakin: I think that's right.
Mark Zandi: So, if you have a Trump win, and the Senate is Republican, and the House is Republican, do you think we will have a debt limit battle? Probably not, right?
Douglas Holtz-Eakin: Probably not.
Mark Zandi: Okay. Oh, really? You really paused there. You hesitated. That's interesting.
Douglas Holtz-Eakin: Again, what I have heard is that if that's how it plays out, Trump's going to want them to take care of the debt limit, no lame duck. He doesn't even want to have it on his watch.
Mark Zandi: I see.
Douglas Holtz-Eakin: I don't think he's being realistic. Again, Johnson can't go raise the debt limit. That's one of those really, really difficult things in the House.
Mark Zandi: Okay. Interesting.
Douglas Holtz-Eakin: And so, I just don't see how that... I think they have to deal with the debt limit and we'll see what it looks like. So, just to put all my cards on the table, on the operations of the House and the Senate, yes, the Senate will be Republican. How big a margin they have matters enormously. Because Mitch McConnell is gone as leader. He has been extraordinarily successful at keeping Republicans unified, and they can vote as a bloc, and someone like that with 51 senators can do things.
I don't see any way that either John Thune or John Cornyn has the same effectiveness right out the door in keeping them together. So, they need to allow some room for defectors because on any given day, take your list, whether it's Rand Paul, or Josh Hawley, or Tom Cotton, or Mike Lee, or Ted Cruz, you run the risk of a maverick renegade saying I'm not going to vote. So, they need to have some margins to govern effectively. And that means for the debt limit and everything else. So, I just view this as all sort of, at the moment, up in the air more than most people do I think. Even if-
Mark Zandi: Oh, that's interesting.
Douglas Holtz-Eakin: [Inaudible 00:20:29] it doesn't matter.
Mark Zandi: So, of course, if Harris wins and the Senate is Republican, and again, that seems like the thing we can say with the most confidence-
Douglas Holtz-Eakin: Yes.
Mark Zandi: ... then these things you're talking about, for sure [inaudible 00:20:43]. There's going to be a problem, right?
Douglas Holtz-Eakin: It's easier to get them to unify against a Democrat in the presidency than to keep them on the same page as a Republican bloc. Suppose you want to do everything in reconciliation. You have the House, the Senate, the White House, and you've only got 51 senators. Can you keep them all happy and get it through? Yeah, you will but I bet it's not easy.
Mark Zandi: Right. Right.
Douglas Holtz-Eakin: Well, on the other end if they say, can you block the hopes and dreams of Vice President Harris? They'll be like, oh, yeah, I can do that.
Mark Zandi: It rolls off the tongue. Kind of rolls of the tongue.
Douglas Holtz-Eakin: It's a different calculus.
Mark Zandi: Yeah. So, just to paraphrase though. What you're saying is, almost regardless of how this plays out in terms of who is president, it feels like it's this battle over the debt limit, which as you say is reinstated at the start of next year. And Treasury is going to run out of cash under most scenarios by next summer. And also keeping the government open, funding the government. All of that's still going to be a heavy lift, almost regardless of... Heavier lift if Harris wins.
Douglas Holtz-Eakin: It's not automatic.
Mark Zandi: It's not automatic.
Douglas Holtz-Eakin: It's going to eat up, most importantly, time. And maybe some political capital. Suppose Trump is elected and he's got the House, the Senate, and the White House, and he wants to get on with his agenda. And they have these other things they have to do. What political capital is he going to spend getting those things done before he gets to his agenda? That'll affect what you ultimately do in that first year. The first year of a presidency is where all the action is.
Mark Zandi: Right. Right. There's obviously a lot of different scenarios here in terms of how the election plays out. This may be pushing you too much, but do you have probabilities attached to different scenarios as to what the makeup of a government will look like on the other side? Presumably you don't know who's going to win the President, do you?
Douglas Holtz-Eakin: I do not. I do not.
Mark Zandi: You do not. Oh, damn. I wish you knew the answer to that.
Douglas Holtz-Eakin: I live in a world that includes a super PAC, the Congressional Leadership Fund, and I talk to them all the time. And the most recent polling that they did showed 218 for the Republicans in the House, 217 for the Democrats. But all of those races within the margin of error practically. And so, they have no idea.
Mark Zandi: No idea.
Douglas Holtz-Eakin: And I believe they only present me with the most favorable polling. So, I don't think I'm doing the... In their heart of hearts I think they're worried, deeply worried about the House. And I think they should be. The one big change that happened with the entrance of Harris is the enthusiasm went up on the Democratic side. She's going to win the popular vote. And that drives a lot more in the House than the Senate. So, that matters a lot. Democrats are engaged in about 30% more races than they thought they'd be at this point. So, I think my biggest probability is mixed government. It really is.
Mark Zandi: Mixed government. Okay. So, that would be most likely a Harris presidency and then-
Douglas Holtz-Eakin: Harris presidency and House, Republicans in the Senate.
Mark Zandi: Uh-huh. Okay.
Douglas Holtz-Eakin: Smaller probability of Trump in the White House, in the Senate, and then Democrats still take the House. I think Republicans taking the House and the clean sweep is the lowest probability.
Mark Zandi: Oh, you do? Oh, that's interesting.
Douglas Holtz-Eakin: Oh, no, no. Democrats sweeping is the lowest.
Mark Zandi: Yeah, yeah, yeah, yeah. But you're saying highest probability is-
Douglas Holtz-Eakin: I'm putting it as zero, so I'm not even counting it.
Mark Zandi: Oh, yeah, zero. Okay, fine. Okay. Yeah.
Douglas Holtz-Eakin: But of the possible probabilities, the lowest I think is the Republican clean sweep. I think people are talking too much about that. They're getting ahead of themselves.
Mark Zandi: Oh, that's fascinating. So, you think the most likely scenario, and these scenarios probably have pretty... Probabilities are roughly equal to each other. But the one that you put at the top is Harris with divided Congress. Second would be Trump with a divided Congress. And then the third would be Trump Republican sweep.
Douglas Holtz-Eakin: And so, first two are roughly equal probabilities. And the third is half of them. So, you can figure it out.
Mark Zandi: Yeah, yeah. Okay. Interesting. So, the one that surprised me the most, and different than the probabilities that we were attaching, is the Trump divided government. Why do you think that's the case? Because the House is so close?
Douglas Holtz-Eakin: Because she'll win the popular vote. She'll win the popular vote. Even if he manages to squeak through the-
Mark Zandi: I see.
Douglas Holtz-Eakin: ... college. And the popular vote will drive the House results.
Mark Zandi: Got it. Got it.
Douglas Holtz-Eakin: Especially, think California and New York where Republicans picked up a whole bunch of seats two years ago and they'll lose them all.
Mark Zandi: Right. Right. Interesting. Okay. So, those scenarios, which of those scenarios, and again, I might be asking a question that is pushing too hard, just tell me, Mark, I'm not answering that question, but-
Douglas Holtz-Eakin: There's this little button down here that says leave if you...
Mark Zandi: Yeah, right. Right. Okay. So, which of those scenarios results in, for lack of a better term, the best economic policy on the other side? And I say that in the context of resulting in the best economic outcome. Which of those scenarios would you feel most comfortable with in terms of the economic result?
Douglas Holtz-Eakin: I guess probably Harris and mixed government.
Mark Zandi: Is that right? Interesting.
Douglas Holtz-Eakin: Yeah. Look, the very big threat is the Trump tariff proposals. And those can be done by executive action. And so, the way you reduce that outcome is not have him in office. That's the key. It's not a deep insight. Mixed government produces the worst fiscal outcome, because they'll go back to bribing each other. So, I'm not happy about that aspect of it. So, we're going to have two groups just blow out deficits. And then we don't know what.
Mark Zandi: Although a sweep would also...
Douglas Holtz-Eakin: I'm not super happy about... A sweep, no, there will be no good fiscal outcomes. Don't get me wrong.
Mark Zandi: Okay, no good fiscal... Right. Right.
Douglas Holtz-Eakin: It's a ranking of bad ones.
Mark Zandi: Yeah. And we'll come back to that later because I do want to talk about deficits and debt and the economic implications of that.
Douglas Holtz-Eakin: I think of Harris as a status quo candidate. She's going to continue [inaudible 00:27:37] Biden. The proposals that you can point to most dramatically are going to be higher taxes on capital for high income individuals. I'm not a big fan of that. The Senate will stop that. So, we'll just get sort of more of the same.
Mark Zandi: Yeah. It almost feels like the tax cuts will just be extended. Right? As you said, I think you used the word status quo.
Douglas Holtz-Eakin: Yeah.
Mark Zandi: It just feels like the status quo. Okay. So, that's the best outcome of all the possible outcomes here. And you're saying you're more uncomfortable with President Trump, either in the divided government or in a sweep, because of his proposal to significantly increase tariffs.
Douglas Holtz-Eakin: Across the board, 10 or 20. I don't know exactly what he will do, but he will do something. And that's the one thing I believe. And the other thing will be on the immigration part, I know we'll talk about that later. So, I saw an interesting analysis done by a friend of mine, who I'll leave nameless so that...
Mark Zandi: Okay.
Douglas Holtz-Eakin: But there is a repository of all Trump's campaign speeches, which you could search. And with the magic of AI he went through and checked for any sentence that said, on my first day, in my first week, in the first 100 days, he looks for all the firsts.
Mark Zandi: Yeah, okay. Right.
Douglas Holtz-Eakin: And then what came next? So, what is it... Because the only way to understand what Trump policy is, is to listen to him talk. There's no real documentation, no platform or anything. So, what does he say? And it turns out that the thing he talks about most is immigration. On my first day. So, it's either the deportation, or I'm going to close the border, it's immigration related. Tariffs are like sixth.
Mark Zandi: Oh, is that right?
Douglas Holtz-Eakin: Yeah. Surprised me. He gets to that later in his rallies. But it is the one thing he's believed his whole career, and I'm thoroughly convinced he's going to do something. And I'm quite worried about it. And I'd love you guys' reaction to this. So, there's obviously a lot of thought being given to potential retaliation, global fallout, international relations, kerfuffles that are going to result. That's what everyone here at the World Bank and IMF meetings wants to talk about. I want to know how you think about the Fed. Because if I'm the Fed and I've got the potential that this guy is going to come in and have this say 10% tariff across the board on all imports, what do you do?
Mark Zandi: Right, right. I've got a view, but I'll turn to Cris. Cris, how would you answer that question? What do you think-
Cris deRitis: You mean preemptively, or after the fact?
Douglas Holtz-Eakin: No, I mean, if you could do something preemptively, do you?
Cris deRitis: I don't think you do.
Douglas Holtz-Eakin: Okay. So, that's step one. But policy risks are the big thing in my view, and this is a big part of it. Right? You've had a very successful disinflation, they are where they are, what happens?
Mark Zandi: Yeah. I think it's a negative supply shock. Right?
Douglas Holtz-Eakin: No question there.
Mark Zandi: So, you're stuck in between, if you're the Fed, do I respond to the slower growth? Because tariffs will result in higher inflation, higher and weaker growth, so what do I do? Do I respond to the weaker growth, or do I respond to the higher inflation? I think the instinct will be to freeze in place. I'm going to stop cutting interest rates, because I've told everyone I'm cutting rates, I'm on a path to cut rates. Now I'm not going to do that. I'm going to freeze and just see which of these countervailing forces prevail, the inflation or the impacts on growth, and stall rate cuts. I don't know that they start raising rates, they only start raising rates if it feels like the higher tariffs and the resulting inflation is becoming more entrenched again into wage price dynamics. Does that sound like a reasonable strategy?
Douglas Holtz-Eakin: I think that's the right analysis. Right?
Mark Zandi: Yeah. Yeah. But it is a great question. Great question. You say you're convinced-
Douglas Holtz-Eakin: So, the other thing I just want to throw out there is I think the Fed at this point is hypersensitive to its credibility. And so, do you raise rates and look like you had to do a U-turn in fighting inflation? Now, we all know it's the tariffs, and if they're smart they do it preemptively so it doesn't turn into inflationary tendency. But now it looks like you're doing a U-turn, so you got it wrong again. I don't think they want to look like that. I think it puts them in a terrible mess.
Mark Zandi: Yeah. Well, while we're on the topic, before I forget, President Trump has also talked about the president having input into the decision-making process of the Federal Reserve. Do you think he really means that, or can he act on that? Should we be worried about that as an issue?
Douglas Holtz-Eakin: I don't think that's a real threat.
Mark Zandi: You don't. Okay.
Douglas Holtz-Eakin: No. I think that's him, some bluster. He will publicly question the Fed in ways that I don't like and which are not the tradition. He did that when he was in office before. But everything else, he has a lot of influence on the Fed. Right? He'll appoint people, subject to Senate confirmation, that the Fed chairman has lunch with the Secretary of Treasury and they can tell the Fed chairman that he or she is an idiot and is endangering their boss's job. That goes on all the time. And a good Fed chairman then just ignores them and goes back and does their job. So, that'll all go on. The only difference will be he'll be badgering them publicly. And they'll just have to develop a thick skin about it.
Mark Zandi: Okay. Okay. So, on that one, probably not on tariffs, he's going to do something.
Douglas Holtz-Eakin: I think.
Mark Zandi: Probably not 10% across the board, 60% on China, but something that amounts to significant increase in tariffs.
Douglas Holtz-Eakin: And I think it's the character of the tariff that matters too. I mean, 60% on China, actually it doesn't keep me awake at night. We've seen the China tariff, we've seen the trade diversion that resulted in the accommodation by our companies that were affected. I think they can run that playbook again. It didn't change China's behavior one bit, so it's kind of pointless. But that'll happen. And it's across the board. It's a tariff wall, we want to have a unified protectionist view. And they do. And I think that's the difference. And that raises a whole slew of issues about what happens to Canada and Mexico. USMCA is up for renegotiation in 2026. There's a lot that would come out of that kind of a move. And I just think it's a negative risk that we don't need to take, but he seems dead set on pursuing.
Mark Zandi: One argument-
Cris deRitis: I was going to say...
Mark Zandi: Oh, sorry. Go ahead, Cris. Go ahead.
Cris deRitis: Just a quick question. If there's a violent stock market reaction as a result of tariffs going in, do you see them backing off or-
Douglas Holtz-Eakin: He might.
Cris deRitis: ... reversing course pretty quickly?
Douglas Holtz-Eakin: He reacts to the stock market. He does. And so, that's a good observation. It's funny, I forget that sometimes. I actually don't pay any attention to the stock market. I know I'm supposed to [inaudible 00:35:11] economists and equities are somehow important. I've read that. But when I'm tracking the economy I'm looking at the real side and I'm focused on that. I don't pay too much attention for near term outlook kind of things on the stock market. But he clearly does.
Cris deRitis: Right.
Mark Zandi: One argument you hear from President Trump and some of those advisors is around tariffs. Is he goes, "Hey, look, I imposed tariffs in my first term. Nothing bad happened. In fact, I got China to relent and I got the USMCA deal done. So, I got stuff done without any economic fallout." What do you think of that argument? How would you think about that?
Douglas Holtz-Eakin: So, what did we accomplish with the tariffs? So, I was in the Bush White House, 2001. We imposed steel tariffs to save the U.S. steel industry. Oh, my goodness, here we are 20 years later doing the same thing. Still needs saving. Maybe this isn't the solution. So, I don't think he changed the trajectory of the U.S. steel industry, or the aluminum industry. The Biden administration did a serious review of the China tariffs and concluded that they did not accomplish their intent, which is to change their behavior. But they kept them. I didn't like that. They kept them. I don't see what he got for it. I really don't. So, I don't buy that.
And the USMCA I think was dragged across the finish line by the U.S. business community despite his lack of leadership to get it done. That was a hard, hard thing to get done. Things I want to point out, just to give you my biases on him. He doesn't have any legislative accomplishments from his time in office. The tax reform was started by Republicans prior to him-
Mark Zandi: Oh, interesting.
Douglas Holtz-Eakin: That was Dave Camp, and Paul Ryan, and Kevin Brady, they led that effort in the House for years. And House Republicans and Senate Republicans got it done almost despite what the White House was doing. And so, I can't think of a single thing where he stood up and said this is important to the country, I'm going to ask Congress to do it, and it went through.
Mark Zandi: Mm-hmm.
Douglas Holtz-Eakin: He doesn't do that. So, that's why the executive actions are so important. They're not good at working the Congress. I don't think he has the mindset for it. He views them as 6,000 little emperors who are just dealing with his desires. And so, he doesn't have the patience to work that system.
Mark Zandi: And of course, tax policy is very complicated.
Douglas Holtz-Eakin: That's why the... I think you're right. Among the really high probability outcomes is they just throw up their hands in exhaustion and say, okay, let's extend it to pass the next presidential and try again.
Mark Zandi: Right. Or maybe in the 2026 election. Just see how Congress-
Douglas Holtz-Eakin: Yeah.
Mark Zandi: Yeah. Okay. So, tariffs can be done to a significant degree under executive order. They might be challenged in the courts, but who knows?
Douglas Holtz-Eakin: I think he'd welcome that.
Mark Zandi: He'll welcome that. Yeah. Yeah.
Douglas Holtz-Eakin: I'll do it and then-
Mark Zandi: See how it goes.
Douglas Holtz-Eakin: ... we'll get them in place and they're going to have to make me take them down. And that'll take a long time.
Mark Zandi: Yeah. The other policy, which you pointed out was at the top of the things he's talking about, is immigration policy. That must drive you crazy as well, right? Because this is an area that you do a lot of work. I know you've done over the years.
Douglas Holtz-Eakin: So, it's real clear, if you look at the demography and the longer term outlook, immigration is everything. The native born population has sub-replacement fertility. We only grow in the aggregates through our immigration decisions. We also then get to pick the composition of the population in the labor force. That is an enormously powerful tool of economic policy if it's deployed effectively. And we've chosen to not. And he wants to go the other way and have less immigration. And that's a recipe to be a bad old Japan. Getting old, small, and having a less vibrant economy. I don't see that as a good idea at all. So, I am worried about that.
And that's on the legal immigration. How many and what kind of visas do you grant? Nobody should support illegal immigration. And how you deal with that is a whole separate bucket of policy issues. But that legal immigration system is a big deal. And I would say this, this is my view of one of the things that went on in 2023. We get this enormously beneficial set of supply shocks. One of which was 4.1 million immigrants, who were not the mental image that I think a lot of people have. This isn't 2001, 2002, 2003 when it's Mexicans coming across the border temporarily and then going back. That was the Bush era immigration issue. Then in Obama it turned into caravans starting in Central and South America and coming up. Very low skilled, often refugee and asylum seekers.
This is a broad-based source of immigration of all sorts of skill classes. This is folks... The DHS report said that we've got like 25,000 people fleeing Putin. They're Russians, they want to be here. Another 25,000 fleeing Xi. They're Chinese, they don't want to be in China. They don't like what they're seeing there. A whole bunch of Africans coming through South America up. Many of whom are college graduates. They want to work in the U.S. And then many low income and asylum seekers as well, no question. But we got this really beneficial supply shock. We had a labor force with all skills rolled in, in 2023. And productivity went from negative to positive. The biggest jump in 10 years, the second biggest in the 21st century. That was hugely helpful to the Fed for disinflation. You got to love that. And you would think, given the pressure on the Trump guys to deal with inflation's legacy and to have good growth, that they'd at least do the numbers and figure this out. Going the other way doesn't seem wise.
Mark Zandi: Yeah. And of course the most contentious aspect of what Trump is talking about with regard to his immigration policy is deportation. Right? You've got a wide range of estimates of how many unauthorized immigrants are in the country. Say anywhere from 10, 11 million to 15 million. He's talking about... I don't think there's any way he can deport all those folks, but he's going to go down the path of trying to deport as many as he can. I guess, two questions. One, do you think he can do that? Is he logistically able to do anything along the lines he's talking about? And secondly, what does that mean for the economy?
Douglas Holtz-Eakin: So, I don't know whether to take him at his word on that or not. So, he said the same thing in 2016.
Mark Zandi: Right.
Douglas Holtz-Eakin: He did. And we took him seriously. You can go back and find it on our website. We actually did a serious scrub of how many ICE employees would you have to hire to actually go find everyone here illegally. How many detention centers would you have to build to house them. How many administrative law judges would you need to see their cases and get them deportation orders. How many charter buses and chartered airplanes and things it would take to return them to their country of origin. And it was our honest best estimate at that time, it would cost something like 4 to $600 billion and take about 15 years to get rid of the 11 million immigrants. That was the estimate at the time.
And in the process you would take out 6% of the labor force and probably have a big recession. So, it didn't seem like a winner. And he didn't do it. So, we have not repeated the calculation. I've decided it's not worth it. That tells you something. Maybe there will be some symbolic deportations to say I followed through, but I don't buy the large scale deportation story at all. It is incredibly disruptive. Those numbers I just gave you tell you it's expensive, it takes a long time. It's not only disruptive, it also destroys the social fabric of the country. It does. So, I'm not putting a lot of weight on that.
Mark Zandi: Okay. Did you see the New York Times piece yesterday on this issue? Stephen Miller spearheading the former-
Douglas Holtz-Eakin: I missed it, no.
Mark Zandi: You might want to take a look. It might change your thinking just a little bit when you listen to that.
Douglas Holtz-Eakin: Stephen and I often don't agree. Let's just say that.
Mark Zandi: Yeah. Well, understandable. Understandable. So, can he do these things he's talking about under executive order? Or is it just like tariffs, maybe, probably not, he'll get sued, he'll go into the courts and get adjudicated, but that could take time, same kind of deal? Or is there more legal constraints on his ability to execute on the immigration policy he's talking about?
Douglas Holtz-Eakin: An informal survey of the trade lawyers, D.C. is full of them, puts it at about fifty-fifty. Half of the people think, yeah, he can do it.
Mark Zandi: Oh, wow. Okay.
Douglas Holtz-Eakin: Half think, no, not quite. All of them think that he can do it temporarily under some emergency powers. He could declare emergency and get temporary across the board tariffs that would last a year or something. Congress has delegated to the president an enormous amount of authority in the trade area. They might want to think about that.
Mark Zandi: Okay. Okay. I want to move on. I want to play the stats game, because you agreed to play it.
Douglas Holtz-Eakin: Oh, oh.
Mark Zandi: Yeah. Yeah, yeah.
Douglas Holtz-Eakin: I remember this. I got killed.
Mark Zandi: Did you? I don't remember that. You shouldn't have told us.
Douglas Holtz-Eakin: Yeah, I was horrible at this.
Mark Zandi: So, we'll play that. And then I want to come back and talk about deficits and debt in a broader context. Because clearly we're off and running here on deficits and debt, and it doesn't feel like under any scenario we're going to make any progress addressing our long-term fiscal situation. So, let's play the game. The game is we each put forward a stat. The rest of the group tries to figure it out through clues, deductive reasoning, questioning. And the best stat is one that's not so easy we get it immediately, one that's not so hard we never get it. If it's apropos to the topic at hand, all the better. But Marissa generally goes first so I'm a little bit at a loss. So, Cris, would you mind stepping up, be number one?
Cris deRitis: I'll try. I'll try.
Mark Zandi: Okay.
Cris deRitis: It's been a busy week, so I may violate your first rule. This one might be pretty easy.
Mark Zandi: Pretty easy. Okay.
Cris deRitis: 738,000.
Mark Zandi: I know what that is.
Cris deRitis: I knew you would.
Mark Zandi: Yeah. Should I go ahead and show you my prowess?
Douglas Holtz-Eakin: Existing home sales?
Mark Zandi: Oh, what did you say?
Douglas Holtz-Eakin: Existing home sales.
Mark Zandi: No, not existing.
Cris deRitis: Not existing.
Douglas Holtz-Eakin: New home sales.
Mark Zandi: New home sales.
Cris deRitis: New home sales.
Mark Zandi: Yeah.
Cris deRitis: There you go.
Mark Zandi: That's very good. That's great. Yeah. We also got existing home sales. 3.8 million or something.
Douglas Holtz-Eakin: It was down a lot.
Cris deRitis: Yeah. Existing, 3.8. Right?
Mark Zandi: Yeah, 3.8 million. Why did you pick that, Cris?
Cris deRitis: That's a strong number for new home sales. It's above pre-pandemic levels. Right? Sales had shot up early on in the pandemic, then they fell, and now they're climbing back up and they remain robust in contrast to the existing home sales, which remain depressed. So, you do have builders who are being very creative with financing. And you have buyers who can't find another home, so they're going to the new market. So, I see this as certainly a positive in terms of your overall assessment of the economy.
Douglas Holtz-Eakin: Yes. And certainly affordable housing is a big deal.
Cris deRitis: Absolutely.
Douglas Holtz-Eakin: I don't know if you saw these numbers, these were in a Bloomberg article. These are stunning numbers. Fannie and Freddie did calculations that basically used the National Association of Realtors affordability index and said if we want to get back to affordability as it was on average between 2016 and '19, house prices have to fall by 38%.
Cris deRitis: Really?
Douglas Holtz-Eakin: Median income has to go up by 60%, or mortgage rates need to go to 2.35% or something like that. I could have those wrong. These are mind-bogglingly big moves. It was a very sobering calculation.
Mark Zandi: Wow. Boy, I knew it was [inaudible 00:48:14] but I didn't realize it was that [inaudible 00:48:15]. Wow. Wow. Hey, going from housing back to immigration policy, the Trump campaign has talked about easing the pressure on the housing market by deportation. If I deport all these immigrants, presumably that reduces the demand for housing because the immigrants have to live somewhere, and that will make housing more affordable for native born Americans. That's the strategy for addressing the housing crisis. What do you think about that?
Douglas Holtz-Eakin: This assumes of course-
Mark Zandi: Did I get that right? I got that right, Cris. Didn't I get that right?
Cris deRitis: Yeah.
Mark Zandi: That's the theory. That's the theory.
Douglas Holtz-Eakin: Only native born Americans do housing construction. That's the key. Right?
Mark Zandi: Yeah.
Douglas Holtz-Eakin: There are two sides to this market. Supply and demand. And just looking at one side never gets you very far. I don't think that's going to work.
Mark Zandi: Yeah. Well, here's a stat. 30% of construction workers are foreign born. Are foreign born. 30%. The highest of any industry, construction. So, if you're kicking out immigrants, you're kicking out the guys and women who are going to be building the homes.
Douglas Holtz-Eakin: Yeah.
Mark Zandi: Yeah. Okay. All right. Gotcha. 738. Oh, I thought, Cris, the one reason, at least in my mind, why we've seen new home sales hang in better than existing is because new home sale prices have actually effectively been cut. That builders are offering interest rate buy-down deals. So, effectively we've seen a 10 to 15% price cut on new homes. Is that right?
Cris deRitis: That's right. So, builders can offer better financial terms, they can buy down the interest rates. And you've also seen the builders responding. They're building more affordable homes. They're not sticking with the multimillion dollar homes certainly, they're cheaper. They are building more town homes, or trying to address the affordability in other ways.
Mark Zandi: Mm-hmm. Mm-hmm. Okay. Good one. Doug, you want to go next?
Douglas Holtz-Eakin: Sure. 1.7 trillion.
Mark Zandi: It's not the deficit, is it? No, because that's 1.83 trillion. Is it related to budget? The 1.7 trillion.
Douglas Holtz-Eakin: No.
Mark Zandi: No. No. Is that the... Oh, it's not related to the tax cuts, the cost of the tax?
Douglas Holtz-Eakin: No.
Mark Zandi: No? Okay. We're back to the economy then. The real economy.
Douglas Holtz-Eakin: It matters for the economy. The hint I'll give you is it's something that we at AAF spend a lot of time tracking.
Mark Zandi: Oh, wow. Is it trade related?
Douglas Holtz-Eakin: No.
Mark Zandi: Is it immigration related?
Douglas Holtz-Eakin: No.
Mark Zandi: Ah. It's not budget related. It's not tax related.
Douglas Holtz-Eakin: Here's the other tip. It is probably the biggest difference between the two candidates for president.
Cris deRitis: Spending related?
Douglas Holtz-Eakin: Not spending.
Cris deRitis: Oh.
Mark Zandi: The biggest difference between the two candidates. I keep coming back to tax policy. It's not related to tax policy.
Douglas Holtz-Eakin: No.
Mark Zandi: Put us out of our misery, Doug. What is it? We should know, I'm sure.
Douglas Holtz-Eakin: 1.7 trillion is the total to date of regulatory costs imposed on the economy by the Biden administration.
Mark Zandi: Oh. How did you calculate that? That's interesting.
Douglas Holtz-Eakin: Keep track of every regulation issued by the federal government. And the agency, if it's a major regulation, the agency is responsible for delivering an estimate of the burden imposed on the private sector. The burden costs. And you add them up. So, Obama in eight years did $190 billion of regulatory costs.
Mark Zandi: How much?
Douglas Holtz-Eakin: 890. 100 billion a year.
Mark Zandi: Okay.
Douglas Holtz-Eakin: The Biden administration has done 1.7 trillion already.
Mark Zandi: Interesting. And is that-
Douglas Holtz-Eakin: And Trump did, in four years, 40. And all of that was in response to the pandemic. He was at zero net after three years.
Mark Zandi: Oh, now that's interesting.
Douglas Holtz-Eakin: When he talks about regulations and deregulating stuff, that's a real difference. The way they ran things. And it's one of the least, I think, appreciated features of the economic landscape that's at play in the election.
Mark Zandi: Well, totally.
Cris deRitis: What's the cost of the [inaudible 00:52:50]?
Mark Zandi: That wasn't on my radar screen. Yeah. Is it one set of regulations or is it just under... Biden's a broad set of [inaudible 00:52:59].
Douglas Holtz-Eakin: They're across the board. They've been busy everywhere. So, it's not any single thing. But climate stuff is a big chunk.
Cris deRitis: Climate.
Douglas Holtz-Eakin: No question. So, they have, for example, a cafe rule that is designed to drive gasoline powered cars into extinction. That turns out to be expensive. So, that one jumps out. You know about that, but it's a lot of stuff.
Mark Zandi: Financial services, banking, because I know after the banking-
Douglas Holtz-Eakin: [inaudible 00:53:26] been busy, they've been busy with [inaudible 00:53:28]. Obama had that big number, but it was really two things. It was implementation of Dodd-Frank and the Affordable Care Act.
Mark Zandi: Right.
Douglas Holtz-Eakin: It was all concentrated in those two. So, he had to do that. This isn't that. There's not a lot of regulatory cost to implement the Infrastructure bill or the CHIPS and Science bill. It's just their desire to change the rules of the road.
Mark Zandi: And can I ask, is that a net estimate? Because there are costs but there's also presumably benefit. I'm reducing CO2 emissions. So, there's got to be-
Douglas Holtz-Eakin: It's not a rigorous net benefit. It's a cost estimate.
Mark Zandi: Oh, it's just one side of it. Okay. Okay.
Douglas Holtz-Eakin: Because if you say this, what they'll say is, yeah, but it's worth it because the benefits are bigger.
Mark Zandi: Right.
Douglas Holtz-Eakin: And that can be true.
Mark Zandi: Right. Right.
Douglas Holtz-Eakin: But often the benefits are non marketed and the costs are borne by market participants, largely firms. And that's a real compliance cost for small businesses. That especially.
Mark Zandi: Yeah. Got it. On regulation, the one thing I've always had a difficult time doing is connecting the dots back to the macroeconomy. I've never seen any research that connects those dots. We've done a little bit of work I saw-
Douglas Holtz-Eakin: I agree...
Mark Zandi: Yeah.
Douglas Holtz-Eakin: I agree with you. So, I always do things as a tax analogy. I was trained as a tax economist. So, the tax has both the cost, the revenue you raised, but also the incentive effects. And it's the deadweight loss you care about from tax purposes. You want to keep that. Seems true of regulations. Right? We're measuring essentially the equivalent to the tax revenue, that sort of cost, but we're not capturing the deadweight loss. How much have you changed the way people configure their businesses in response to the regulations that are out there? And what do we give up in productivity as a result? Things like that. That would be really good to know.
Mark Zandi: When you say you track this, is this on your website?
Douglas Holtz-Eakin: Yeah.
Mark Zandi: Oh, I need to look. This is kind of cool.
Douglas Holtz-Eakin: And we have a weekly email, the Week in Regulation, very cleverly named. And we do running totals.
Mark Zandi: Well, maybe we can get your link and we'll link it to the notes to the podcast so that people can go get that. Because that sounds very interesting. I didn't even know that we were doing that. That's great.
Douglas Holtz-Eakin: Yeah. It's something we've done since I started it. I thought it was important to keep track of tax spending and regulation. Because what I've observed, and we've seen this, if you get big budget deficits, or some concern about spending more money, there are other ways to implement your policy desires. And they go right to the regulatory front. So, it's a substitute in the sort of policymaking world.
Mark Zandi: Well, that's a good one. I'll give you mine. And this will be, as a hint, a segue into the next conversation around deficits and debt. 3.39%. It is an interest rate. 3.39%. It's related to-
Douglas Holtz-Eakin: That's the average on the treasury portfolio?
Mark Zandi: Yes. Yes. You said you didn't do well. You're killing it, man. You're killing it. I thought that was going to be a really hard one too. Cris, you should have seen Cris's face. He was 1,000 years from getting that one.
Cris deRitis: [inaudible 00:56:44] on that one.
Mark Zandi: Yeah, that's exactly right.
Douglas Holtz-Eakin: Sounds right.
Mark Zandi: You take the average interest payments and divide by the amount of debt outstanding. And the effective interest rate is 3.39. And of course it's now rising here pretty quickly. That's right. It's still low. It's still below the nominal growth rate of the economy G, the R versus G, which is a good thing.
Douglas Holtz-Eakin: That's a good thing.
Mark Zandi: It's a good thing. But we're definitely moving in the wrong direction here with interest rates as high as they are. That was great, fantastic.
Douglas Holtz-Eakin: We have a huge amount of debt outstanding. That's the problem.
Mark Zandi: Right.
Douglas Holtz-Eakin: So, think about this. Deficit for 2024 was $1.8 trillion, 6.3% of GDP. For the first time net interest costs exceeded a trillion dollars in a fiscal year. So, the primary deficit is 800 billion. And if you actually go forward and start looking at the actual projections by the CBO, the deficits are just interest costs. The primary deficits are not particularly large.
Mark Zandi: Yeah. The primary deficit being the deficit X the interest payments that we're making on that debt.
Douglas Holtz-Eakin: Taxes raised, spending done. Excluding [inaudible 00:58:07]. But among the things that would be great to do would be to get the base down a little bit and not have so much debt.
Mark Zandi: Yeah. Particularly in the context of, again, we're at full employment. When you're at full employment there's nowhere for the economy to go but lower, so weaker. We could get lucky. We could get lucky. You mentioned if we got good immigration policy, for example, that could change the picture. Or we get lucky with AI generates more productivity growth. And that could be helpful potentially, if it's not too dystopic.
Douglas Holtz-Eakin: Not yet on AI.
Mark Zandi: Not yet. Not yet.
Douglas Holtz-Eakin: So, this is what I remember from my professional youth. So, in the '80s, basically all of CapEx was IT equipment? That was the invention of computers and a bunch of other things. And off we went. But we didn't get any great productivity growth out until the '90s. I think AI is going to be the same way. We're going to sink a lot of money into this, and after five or six years we're going to be like, what do we get for that? And after 15 years we're going to be like, wow.
Mark Zandi: Yeah.
Douglas Holtz-Eakin: That's how it feels to me. It's super expensive.
Mark Zandi: Yeah. The only difference, and I am on board with your perspective, it's kind of sort of how we're thinking about it. And that's the way we have it in our forecast. But it takes a while, it takes time for the technology to diffuse. In fact, it's really only through business formation. When new businesses optimize around the new technology when really things start to take off. And that takes time. So, I'm on board with that. But I listen to the AI proselytizers, and there's a bunch of them, and they're really smart people. They look at you like you're an idiot. You have no idea what's going to happen. And it makes me very nervous I've got this wrong. But we'll see.
Douglas Holtz-Eakin: I'm wrong all the time. And people call me an idiot, so I guess that has stopped bothering me as much.
Mark Zandi: It makes me very nervous. Okay. Deficits and debt. So, just to frame it, the Congressional Budget Office, CBO, the nonperson group that you ran a couple of decades ago. Say if we stick to current law, which includes the end of the tax cuts for individuals under the TCGA, the Trump tax cuts, the debt to GDP ratio, I'm rounding, goes from 100 % today, which by the way is double what it was before the financial crisis. So, we were at 50, we're now at 100. And that's going to go to 160 or 170 over the next 30 years. I think that's the end of their forecast. But you can do your own forecast after that. It's just parabolic, right? It keeps on going.
Douglas Holtz-Eakin: Yeah.
Mark Zandi: Is it fair to think that that's not sustainable?
Douglas Holtz-Eakin: It's not sustainable.
Mark Zandi: It's not sustainable.
Douglas Holtz-Eakin: You're borrowing just to pay interest on previous borrowing. That's what we're doing. And that blows up. And so, yeah, that's absolutely not sustainable. We absolutely have to change course at some point. People always ask when we have to change course. And I would emphasize that I don't know and I don't want to find out. There's [inaudible 01:01:28] running the experiment. How bad can we make it before global capital markets give up? I don't want to know. That's not an interesting experiment to run. Let's try putting it on a... So, my terms of... If you want to have a discipline policy, when I talk to master's students, I always say look at the Fed. They made a mistake I think in 2021. Inflation got out of control. Fine.
What have they done? They said, here's our target. We're going to get back to 2% target. Here are the instruments we're going to use. We have a strategy. We have nothing like that in fiscal policy. Like nothing. So, what is the target? What instruments do we use? Taxes or spending? There's no agreement. We're just lost as a nation. So, I think the target, the near-term target should be stabilize debt relative to GDP and point it south. Just a little bit. It doesn't have to fall dramatically. But take off the table any fears of sovereign debt crisis, loss of faith in the dollar, all those things you hear so much chatter about. Do that.
And then you have just a serious value judgment of how far do you want to go back. Because it's just an intergenerational equity issue at that point. You're going south and do you take it back to 30%, which is where we were when we entered the 21st century? My answer would be yes, I think we should do that. But that's a long way off. It would take a long time to get there. Maybe you stop at 60%, or 50%, get back to where it was before the financial crisis. That's a fair debate and people have lots of different views in that. But I think we should quickly do the thing where you can stabilize it and point it south. And that will take both taxes spending efforts, and it will be great if it grew faster. It'd be great.
Mark Zandi: Is that possible though, Doug? Without a crisis? It just doesn't feel like lawmakers can generate the political will to... Because those are tough things you're talking about. Spending restraint, maybe even cuts, and tax increases. That takes a lot of political courage and will. And how can we do that unless there's some forcing mechanism? What's the forcing mechanism for going down that path?
Douglas Holtz-Eakin: So, first of all, it's got to include social security and Medicare. And currently those have been taken off the table. So, we are not... You're correct. In the current political environment there's no way we get this done. Because if you look at the 10-year projections at CBO, social security and Medicare are more than half of non-interest spending. They're $36 trillion out of 71 trillion in non-interest spending. So, they're the whole game. And they're growing faster than everything else. Social security grows at 5.5% a year, Medicare at 7. And revenues are going to grow at the pace of nominal GDP.
So, if we get 4% nominal GDP growth on average every 10 years, I think that would be great. They're still diverging. So, the whole game, the whole game is get social security and Medicare to grow more slowly, closer to the nominal economy. And what you hear is people having these, I'm going to pick one thing or another. So, when you hear Trump talk, he says, "We're just going to grow. We're going to grow fast." Well, you're not going to move that four to seven. Okay. I'm sorry, not going to happen. And you hear other people say, "We're just going to raise taxes." And that's true, you can raise taxes. I think we're going to have to. But if you just raise the level of taxes you close the gap and then it begins diverging again.
You have to do those things and slow the growth of those programs. That's it. And that will do it. But you're right. We are not in the political position to do that. And most of the parlor game is telling yourself stories about how we will develop the political will to do that. And I have a vast array of such tales. 1,001 Arabian Nights for economists. But I think the key is that just as there will be forcing action on the tax cuts next year, there is forcing action on Medicare at trust fund exhaust, on social security at trust fund exhaust. And so, something has to happen in the next decade. And given that something has to happen you can now make the case for doing things which are better versus worse. And I think that's how we stand a chance of getting this done.
Mark Zandi: Oh, interesting. So, you actually think the exhaustion of the trust funds is a forcing mechanism, it's not just an accounting exercise?
Douglas Holtz-Eakin: Economically it's an accounting exercise, but legally they can't pay benefits if the trust fund exhaust. They have to cut it back to the level of the payroll taxes. That's a 21% across the board cut. So, they have to change the law, which is the social security law. And you can't change the social security law on reconciliation, so they have to do it in regular order with both parties signing off. And that means they have to agree to hold hands and jump off the cliff. And that's what we need. And I tell people this, if you think about it, we know that they're never going to let the cut happen. So, even if they wait until late, they're not going to let it actually happen.
That means they will do social security reform somewhere in the next 10 years. And that means that if you're 55 and want to retire in 10 years, you don't know what your benefit is. Because you don't know what the Congress is actually going to do. And that's a terrible way to run a pension program. And I think as you march toward the exhaustion date, and more and more people are in the position of saying I would like to retire and I don't know what I'm going to get, they're going to start hearing that. And when the town hall is, you're going to lose your job if you don't fix social security, that's completely different than you're going to lose your job if you touch social security. And that's what have to have happen. You have to have something change on the ground.
Mark Zandi: Mm-hmm. Actually, that's a hopeful kind of-
Douglas Holtz-Eakin: Oh, I'm a optimistic.
Mark Zandi: It feels like that's a way to address the fundamental issues. Right?
Douglas Holtz-Eakin: We have a lot of deficits, but social security is $3 trillion of cashflow deficits over the next 10 years. It's a real issue.
Mark Zandi: Yeah. Right. Right. Well, I wanted to try one other... And when we talk about crises, correct me if I'm wrong, but what you're talking about is bond investors, the folks that are buying this debt, blow up. They say, look, you guys, I don't think you're going to be in a position to pay me, at least not pay me on time at some point down the road, particularly in the context of all the governance problems you got, debt limits, and budget battles, and government shutdowns, you're going to mess up at some point. I'm not going to get a check when you told me I'm going to get a check, therefore you got to pay me a much higher interest rate. And then that starts to feed on itself, as you say, or rises above G, then this becomes a real... Things start to explode. That's the crisis you're talking about.
Douglas Holtz-Eakin: Right. Right.
Mark Zandi: Okay.
Douglas Holtz-Eakin: I would prefer to not have that.
Mark Zandi: Prefer not to have that.
Douglas Holtz-Eakin: I think the appropriate crisis to have is the loss of some congressman's job. That's a real crisis in some congressman's...
Mark Zandi: Got it.
Douglas Holtz-Eakin: Let's do it that way.
Mark Zandi: Got it. Let me just, because I've got you and very much value your perspective, paint a scenario where this could all play out sooner rather than later. Let's say we go back to the initial most likely scenario for the election. Harris wins, divided Congress. We get into next year, the debt limit's reinstated. We get into a pitch battle over the debt limit. The Treasury can't issue debt until limits are reinstated or increased. At the same time, the Fed's exiting out of the bond market, Treasury market, because of quantitative tightening. And other central banks are not coming in. The Chinese definitely are not coming in. The Japanese are pulling away because they've got now a positive interest rate on their own debt.
Those are the two big players globally. Banks are kind of out of the game because of the problems they had last year, and their security portfolios were upside down. So, hedge funds are coming in and filling the void. And they're very price sensitive. They're there when times are good, they're out of there en masse when times are bad. When they throw up on something, markets freeze. So, you've got this confluence of things that are coming together by the summer of next year when the Treasury is going to run out of cash. And I have no inside information here, but not inconceivably you see more rating downgrades. And that could become more of an issue because-
Douglas Holtz-Eakin: I think that's highly possible.
Mark Zandi: Yeah. Again, I have no inside information, I'm just saying, look, given what's going on here and the budget trajectory, we could have that crisis. Oh, here's the other thing. In all likelihood the lawmakers will ultimately agree to something on the debt limit before we go over presumably. But when that happens the Treasury is going to come into the market with trillions of dollars of-
Douglas Holtz-Eakin: They have a whole bunch to roll over early next year.
Mark Zandi: Oh, yes. That's how they got out of the last debt limit. They pulled everything to short-term maturities to get out of it. But this case, they can only take that road once. So, here you are, the bond market is a complete mess at that point. Does that sound like a plausible scenario?
Douglas Holtz-Eakin: Yeah. So, the scenarios that I laid out are political scenarios. And the political pressure is going to build slowly. Anything that's going to happen quicker is going to have to involve sharp economic pain. And I hate to say that out loud, but it's probably true. And so, it's going to be some sort of bond market reaction that makes it harder to carry the debt that we have, rates are higher, makes the roll over a nightmare, impacts the real economy and scares people and sends them to their representative to say fix this.
And that was part of the recipe in the '80s and '90s. That was there. They paid attention to financial market reactions and they fixed things. So, yeah, I don't think you get the genuine sovereign debt meltdown, right? Because it's still too soon, they have nowhere else to go. They need the Treasury. So, you don't get the complete thing, but you could get some real stress in the bond market that forces them to move. And then the downgrade is over our ability to manage our finances, which is downgrading us on our politics. Well, that seems like a real likelihood going forward.
Mark Zandi: No-brainer. Yeah. Okay. All right. Well, I've kept you long enough, covered a boatload of ground. I really appreciate it. Anything I missed, Cris, that you want to bring up with Doug? I kind of monopolized the conversation. I apologize. But anything?
Cris deRitis: No, I think you covered it.
Mark Zandi: Covered it all. Hey, Doug, anything you want to say that I just-
Douglas Holtz-Eakin: I just want to say thanks for having me. I appreciate it, honestly.
Mark Zandi: You're great. You're the best.
Douglas Holtz-Eakin: Fun to have a reasoned and in-depth conversation about the things that we do every day. Because not every conversation is that way.
Mark Zandi: Oh, you're so kind. I really appreciate it. And I really appreciate our friendship and our collaboration over the years. So, thank you so much for that.
Douglas Holtz-Eakin: Likewise. And this Cris guy seems okay too. So, hold him.
Mark Zandi: Yeah, he's not bad. He's not bad. He's not bad. And Marissa wasn't here, but next time.
Douglas Holtz-Eakin: Okay.
Mark Zandi: Absolutely. And with that dear listener, we're going to call this a podcast. We'll talk to you next week. Take care now.