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What Even Our Smartest Economists Get Wrong About The Debt

The $40 trillion debt point naturally prompted much griping among pundits, many of whom see their job as promoting hysteria in order to justify cuts to Social Security, Medicare, and other popular social programs. As is clear to anyone not on the payroll of the rich and very rich, the debt is overwhelmingly the result of tax cuts, mostly to high earners, put in place by Presidents Reagan, Bush II, and Trump.

Unfortunately, confusion on the debt can spread even among the sane. Paul Krugman and Jared Bernstein, two top-notch economists (also friends) had a discussion of the debt in a podcast posted on Saturday. At one point, they noted that interest rates have risen, creating a situation where the interest rate is higher than the rate of growth, which could lead to explosive debt growing ever larger as a share of GDP.

That’s all straightforward arithmetic, but the confusion stems from the reason they see interest rates as going higher. Part of the reason is Trump’s craziness, which we all recognize undermines confidence in the economy and the debt. However, part of the reason is the investment boom from building AI data centers.

While I agree that this is a big factor in pushing rates higher, the assumption motivating this investment is that there will be some massive payoff in the form of higher profits stemming from huge gains in productivity. If these gains in productivity materialize, then we will be far richer than current projections show, and growth will have far surpassed interest rates. In other words, no explosive debt problem. Also, if we grow an extra 10-20 percentage points over the next decade, it seems a bit silly to be whining about debt, a point I will come back to.

There is also the possibility (likelihood in my view) that the productivity gains do not materialize. In that scenario, the AI-related stocks will crash at some point, the boom will bust, and we will likely be looking at a serious recession. In that world, our problem will be boosting the economy back to full employment, not the deficit. And for those who care about such things, interest rates should again be very low.

It seems this is a point that Paul and Jared should have brought into their deficit/debt discussion. I’ll give them a whack on the wrist for missing this point, but come to the more general issue that is usually lost in the tirades about gigantic debt.

Government Debt Is Not a Measure of Generational Equity

It is just atrociously bad economics to imagine the debt is some sort of measure of generational equity. At the most basic level, who owns the debt? The deficit hucksters talk like we send interest on the debt to people on another planet. In fact, the vast majority of the debt is held by U.S. citizens and U.S. corporations. We pay the debt to ourselves.

It’s true that ownership of the debt hugely skews upward, so the interest is mostly paid to higher-income people. But we can tax it back. In fact, let’s take an extreme case and say we tax back 100% of the interest.^[1] In that case, is the debt a burden on future generations? We will of course not tax back 100% of the interest, but we can and should have progressive income taxes. Which, if they are actually collected, will mean that much of the money paid in interest will go right back to the government. And if we apply progressive taxes more generally, we can certainly offset any negative impact that interest payments on the debt have on income distribution.

And for trivia buffs, the rich people who will collect the interest in 30-40 years are part of future generations, the rich part. The story is again a class issue, not a generational one.

Growth and the Debt

Faster economic growth reduces the burden of the debt in the sense that it makes interest payments smaller relative to the size of the economy. But the more important point is that, in principle, faster growth makes us richer.

If the economy grows 10 percent more (in real terms) over a decade than had been expected (imagine AI actually pays off), then we would be roughly $3.9 trillion richer in 2036 than is now projected. Suppose in this story we had to pay another $500-$600 billion a year (again, in real terms) in interest compared to what we do today. Would we have done some injustice to our kids with a faster growth and higher debt story? The size of the economy is what will determine the well-being of our kids, not the amount of debt owed by the government.

But GDP growth is not everything, especially when it leads to destruction of our environment, as we are seeing now as a result of global warming. It would take some pretty batshit crazy accounting to be concerned about the debt we are passing on to our kids, but not about the environmental destruction we have caused by our use of fossil fuels.

And this is not just destruction of the lands where people like to be able to hike, fish, or hunt. It is also very much dollar-and-cents damage. The recent wildfires in Spokane are estimated to have caused over $1 billion in property damage. The damage done by the fires in Los Angeles last year may have been as high as $250 billion (0.8% of GDP). With global warming leading to more and bigger fires, as well as more frequent and severe hurricane and flooding events, we will be seriously damaging the life prospects of future generations even if we were to pay off the national debt tomorrow.

Trumpian Corruption

I know I have said this before, but the point deserves to be constantly thrown in the face of the deficit hawks: Trump’s corruption poses an infinitely greater threat to economic stability than the $40 trillion debt. Trump has been given a green light by the Roberts Supreme Court to corrupt every agency in the country (except the Fed) to enhance his power and his pocketbook. As we have seen, this means having the Justice Department and FBI focus on prosecuting his political opponents. It means selling antitrust rulings to campaign contributors. It means allowing political allies to sell unsafe food and likely drugs.

Trump has also had the Office of the Comptroller of the Currency greenlight his new crypto bank and had the Securities and Exchange Commission look the other way on his insider trading. He even ordered the Census Bureau to cook up a nonsense report on non-citizen voting to claim that, somehow, he actually won the 2020 presidential election that he lost in a landslide. (That’s the Trumpian usage of the word, where he says he won the 2024 election in a “landslide.”)

Anyhow, these are the sorts of things that happen in “shithole countries,” not advanced economies expecting the trust of investors. With Trump continually pressing his corruption further and his supporters in Congress saying it’s all good, investors should fear putting their money in the United States even if we had zero debt. That might be too difficult for the deficit hawks to understand, but most of us have parents who taught us not to do business with crooks.

^[1] I know, no one would hold bonds if we taxed back all the interest, but I’m making a point. Trade economists have often assumed in their modeling that we replace tariffs with lump-sum taxes to show the benefits of trade. Unlike tariffs, lump-sum taxes don’t create economic distortions. Lump-sum taxes also don’t exist in the world, but trade economists felt it useful to assume them to make a point.

Tariff Dividend Checks For Dummies (Who Run America's Policy Debates)

I learned basic arithmetic skills in third grade. I wasn’t exceptional, everyone in my public school third grade class learned them. Of course, we all can now use computers to have calculations done for us in a fraction of a second. But still somehow, we have major national debates that show zero understanding of even the most basic arithmetic.

The latest example is the $2,000 tariff dividend check that Trump is promising us. The arithmetic here is about as simple as it gets. We have roughly 340 million people in the country. Let’s say 10 percent don’t get the check because they meet Trump’s category of “high-income.”

That leaves over 300 million people getting Trump’s $2,000 checks. That comes to more than $600 billion. Trump’s tariffs are raising around $270 billion. That means we will be paying out $330 billion more in Trump tariff dividend checks than he is raising in tariff revenue. That is adding $330 billion to the deficit. That is from the same guy who is making an obsession of paying down our national debt.

And just to be clear, we were already looking at a budget deficit for 2026 of $1.8 trillion. If we add $330 billion, the deficit for the fiscal year will be $2.1 trillion. To put this in simple language that even a reporter for a major national news outlet can understand, Trump is proposing to add $2.1 trillion to the debt in 2026, he is not paying it down.

I acknowledge not being a deficit hawk and am not terrified by a deficit of this size, which is roughly seven percent of GDP. But I suspect most of the politicians in Washington are, and certainly anyone who thinks we need to be paying down the debt should be screaming bloody murder.

But watching the reaction in major media outlets, there seems almost no appreciation of the fact that Trump was floating what would ordinarily be considered a very large increase in the deficit. In fact, if Trump were to give this tariff dividend check every year over the next decade, it would add close to $4 trillion to the debt (counting interest payments), almost as much as the big tax cut Congress approved earlier this year.

It’s also worth comparing Trump’s tariff dividends to other items in the news. The government shutdown was in large part over the $35 billion in annual payments for enhanced subsidies for people buying insurance in Obamacare exchanges. Trump and Republicans in Congress claimed that we didn’t have the money to pay for these subsidies. Trump’s tariff dividend checks would cost more than 17 times as much as the enhanced insurance subsidies.

To make another comparison, Trump saved us around $6 billion a year by shutting down PEPFAR, the program that has saved tens of millions of lives by treating people in Africa for AIDS. This means that Trump’s tariff dividend checks will cost us 100 times as much as the AIDS program that he said we couldn’t afford.

And just to throw in one more comparison, the annual appropriation for public broadcasting was $550 million. Trump’s tariff dividend checks would cost more than 1000 times as much as the government’s payments for public broadcasting.

People can differ in their views on how important it is to save lives in Africa or provide people here with healthcare. They may also differ in their assessments of how important deficits are, but it really would be good if media outlets could make knowledge of third grade arithmetic a job requirement for reporters who deal with budget issues. It should be their job to provide meaningful information to the public on the topic. Letting someone talk about $2,000 dividend checks, and also about paying down the debt, is a sick joke.

Dean Baker is a senior economist at the Center for Economic and Policy Research and the author of the 2016 book Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer. Please consider subscribing to his Substack.

Reprinted with permission from Dean Baker.

Suddenly, MAGA Is Feeling Doubt About Trump's 'Big Beautiful Bill'

With House Republicans narrowly passing President Donald Trump’s One Big Beautiful Bill Act—which is designed to blow up the national debt, cut taxes for the rich, and partially pay for that by gutting programs for the poor and working class—you’d think MAGA conservatives would be cheering. But many of them aren’t.

Let’s back up.

Trump defied historic voting patterns in 2024 by winning voters making under $50,000 a year, 50 percent to Democratic nominee Kamala Harris’ 48 percent. He tied her among voters making over $50,000, at 49 percent. And when the threshold was raised to $100,000, the income divide got starker: Trump won the under-$100K crowd, 51 to 47 percent, while Harris won the over-$100K vote, 51 to 47 percent.

That flipped the old partisan narrative. In general, Republicans were the party of the working class, and Democrats the party of those with more money.

While culture-war hysteria around transgender people and immigrants drove much of Trump’s support, his promise to lower prices “on Day 1” clearly resonated with economically desperate voters. Exit polls back this up. He won 76 percent of those who had faced “severe hardship” from inflation in the previous year, and 52 percent of those who’d faced “moderate hardship.” Meanwhile, Harris dominated among those who said they’d faced “no hardship,” winning 78 percent of them.

As former Daily Kos reporter Kerry Eleveld once said in our old podcast, “Democrats are the party of voters who don’t have to look at prices when grocery shopping.”

That’s why we see so many variations of “this isn’t what we voted for” in all these “Leopards Ate Faces” stories. Yes, we could scream, “IT WAS ALL THERE IN PROJECT 2025!” But let’s be honest: Most voters aren’t policy wonks. For those doing price math in the grocery aisle, politics isn’t a priority. Trump’s promise may have been absurd, but it was simple and seductive.

But falling for those lies has a cost. On the economic front, Trump and the Republican Party are governing like they always have—for the ultrawealthy, connected, and powerful, at the direct expense of their own voters. As I’ve written repeatedly, it’s like Trump is trying to hurt his base.

Early Thursday morning, House Republicans voted to gut Medicaid, which disproportionately helps rural Americans. Their tax cuts for billionaires effectively raise taxes on low-income voters—i.e., their core voters in last year’s election. MarketWatch, reporting on a University of Pennsylvania analysis of a close-to-final draft of the GOP tax bill, noted:

The top 0.1 percent of households would rake in over $390,000 in after-tax income.
The top 1 percent would gain $44,190.
Households making $51,000 to $92,999 a year would get an additional $815.
The lowest-income households, though, will see their after-tax income shrink by $940.

Yes, that voter making under $50,000, they get to deal with Trump’s price-raising tariffs and a tax hike.

On Reddit’s r/conservative subreddit, the reactions to the House passing the bill were surprisingly muted.

Some echoed traditional deficit concerns, such as the commenter who noted, “Conservatives are supposed to want less government spending and less debt. This bill will add trillions of dollars of debt over the next 10 years. We're not even kind of moving in the right direction.”

But a surprising number took umbrage at the gutting of Medicaid and the Supplemental Nutrition Assistance Program, also known as food stamps.

One top commenter the subreddit—i.e., not a troll—wrote, “I'm all for cutting waste fraud and abuse on Medicaid and SNAP, but … I think if the medicaid/SNAP changes go through as is, GOP will get mauled in the mid-terms.”

Another top commenter noted, “[I]t's not that I like high taxes, it's that I think high taxes on the lower, middle, and upper-middle-class are much more damaging than high taxes on the ultra-rich. It's both about keeping taxes low on most people, and about preventing the concentration of wealth in the hands of a tiny number of people. It's also frustrating because Trump has repeatedly spoken out in favor of such tax hikes on the richest taxpayers as a way of making budgets and tax breaks work.”

This commenter also called the Medicaid provisions “cruel,” and on SNAP, they said, “[I]t's going to deny benefits to some people we would probably prefer have them. for example the people who are going to be hit hardest are the people who live in areas where jobs are scarce, who have difficult lives with a lot of barriers to getting anything done, and who have other life responsibilities like caring for family members or doing something else important in their community that they don't get paid for.”

If only there was a party that worked to protect such people …

All over social media, Trump voters are realizing they’re the ones being labeled as “fraud and waste.” Like this gem on Threads:

Again, we can point to Project 2025—the Heritage Foundation’s agenda for a second Trump administration—and note how it promised to gut SNAP and Medicaid. Yes, we warned them. But pointing fingers now isn’t useful.

What is useful? Turning this betrayal into motivation.

No, we won’t win over all Trump voters. Many are too far gone. It’s a cult.

But we don’t need all of them. We don’t even need most. We just need a small shift.

In Pennsylvania, Trump won last year by 120,266 votes. In Michigan, it was 80,103. And in Wisconsin, 29,397. Altogether, that makes for just 229,766 votes in an election where 155,512,532 were cast—or just 0.15 percent of all ballots. That’s how small of a shift we’re talking about, though obviously, the bigger the better.

I can’t recall ever seeing a party so eagerly swing a baseball bat at its own voters—many of them new to the Republican coalition.

The pain is real. And yes, most of us are impacted in some way. But if we can turn that pain into political clarity for even a slice of those voters, we can begin to reverse the damage—and take back our future.

Reprinted with permission from Daily Kos.

Trump Threatens The Stability Of Social Security

Donald Trump's tax and spending plans would add enormous amounts to the national debt, with some estimates as high as $15 trillion over a decade. But some of his tax cuts stand apart in threatening one of America's most revered programs, Social Security. They would essentially bankrupt it by 2031.

This is not some far-off worry. We're talking like six years from now. And the source of this scary news is the reliable and nonpartisan Committee for a Responsible Federal Budget.

How would Trump pull the legs out from under it? Start with his vow to stop taxing Social Security benefits. That sounds nice, but these taxes help fund the program. Add to that his call to exempt taxes for overtime pay and tips, further eating into Social Security payroll tax collections.

Seemingly unrelated stances would also speed up cuts in scheduled benefits. Trump's tariffs would unleash inflation, thus raising the program's cost-of-living adjustment. And his immigration plans would remove workers who pay into the system.

What a lot of people don't understand about Social Security is that there is no magical pile of government money to back up its promises. Social Security is largely self-funding by law. (Medicare is another story.) Social Security must pay for itself. Unlike the Treasury, it's not allowed to borrow.

This is how it works: Social Security payroll tax collections go into a trust fund. Any surplus funds left after benefits are disbursed get invested in special U.S. Treasury securities. These are loans to the federal government. Like other bonds, they collect interest and have to be paid back.

Foes of Social Security have long complained that general revenues are used to make good on these special Treasuries. True, but let us repeat. These securities represent loans to the government, not some new kind of spending. The Treasury must repay this debt just as it must back Treasury bonds held by China, Japan and investors all over the world. (Some on the right make the ludicrous tough-luck claim that the dough is already gone.)

The point here is that monkeying around with the flow of money going into the Social Security program is a way of deep-sixing public support for it. As president, Trump applied the same sneaky tactics in his attempt to kill the Affordable Care Act. Recall how he went repeatedly after its funding.

Shoring up Social Security will be necessary even without Trump's sabotage. The program is still forecast to be unable to meet promised payouts in 2035. But this is fixable with some overdue changes. One obvious step is raising the income level at which payroll taxes are charged. The maximum is now $168,600.

The Heritage Foundation, author of Project 2025, has an alternative plan: reduce benefits. It calls for raising the age, already hiked to 67, for collecting full benefits. So much for Americans worn out from years of hard physical labor.

Heritage also proposes lowering benefits to higher-income retirees. Two problems here. One is that, as noted, benefits to wealthier retirees are already taxed. The other is that reducing the program's value to better-off participants turns what was conceived as an earned benefit into something resembling welfare.

And there's Heritage's perennial plan to privatize the program, that is, expose beneficiaries to the whims of the stock market and other investments. Of course, no one is stopping future retirees from putting their money in stocks, crypto or trading cards. Social Security is best kept dull and simple.

Without changes in how Social Security is currently funded, benefits would be cut 23% by 2035. With Trump's tax plans, benefits would be slashed 33 percent. No two ways about it. Trump is threatening Social Security's stability.

Reprinted with permission from Creators.

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Smart. Sharp. Funny. Fearless

What Even Our Smartest Economists Get Wrong About The Debt

Government Debt Is Not a Measure of Generational Equity

Growth and the Debt

Trumpian Corruption

Tariff Dividend Checks For Dummies (Who Run America's Policy Debates)

Suddenly, MAGA Is Feeling Doubt About Trump's 'Big Beautiful Bill'

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