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How the next president will deal with the soaring national debt

How the next president will deal with the soaring national debt

Video Transcript

RICK NEWMAN: From Yahoo Finance, this is "Electionomics." I'm Rick Newman.

ALEXIS CHRISTOFOROUS: And I'm Alexis Christoforous. Welcome to this edition of "Electionomics." Today we are talking about the coronavirus stimulus money. How effective has it been, and what can we expect in the way of additional aid from both lawmakers and the Federal Reserve?

We are delighted to be joined today by Doug Holtz-Eakin. He is former Director of the Congressional Budget Office and also the Director of the DC think tank American Action Forum. We should also mention that he has advised Republicans throughout his career, including the late Senator John McCain during his 2008 presidential run. And, of course, my partner in crime, full with a bow tie on and everything-- once again outfitted with that bow tie, the lovely Rick Newman.

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RICK NEWMAN: I advise all the presidents. Nobody listens, though.

[LAUGHTER]

DOUG HOLTZ-EAKIN: [INAUDIBLE] listened either.

ALEXIS CHRISTOFOROUS: You know, guys, before we jump in, I just want to give the audience sort of a look at how much money has been committed so far to the COVID-19 pandemic and the ensuing economic crisis. You've got the Federal Reserve having authorized more than $5 and 1/2 trillion in economic support. Another $3.6 trillion of support has been authorized through legislation through Congress.

And not all of the money has been used yet. And, of course, at the time of this taping of this podcast, there was talk of yet another $3 trillion stimulus package, which has passed in the House but appears to be dead on arrival in the Senate.

Doug, as a former CBO director, you have a unique perspective here on sort of the nuts and bolts of federal spending. To your mind, what's your take on the stimulus we've received so far? What's working here? What isn't working?

DOUG HOLTZ-EAKIN: So I think there are a couple different angles to this. First, I think the Federal Reserve deserves tremendous amount of credit for taking what was a real crisis in the nonfinancial sector-- customers just disappeared-- airlines, hotels, restaurants, you name it-- creating an instant cash-flow crisis. And in that crisis, what do businesses do? Well, they sold anything they had to raise cash, and they roiled financial markets with a huge sell-off.

The Fed recognized this quickly and made an outstanding pledge to buy Treasurys for as long as necessary and whatever amounts necessary to provide liquidity to the markets. And they stopped this crisis in the real economy from turning into a financial-markets crisis at the same time. That was a huge move.

We still have pretty good function in our financial markets. Banks are in pretty good shape. That's a huge asset as we try to weather the rest of this. So that was doing great.

Congress then tried to replicate the same strategy, which is flood the nonfinancial sector with liquidity in this so-called CARES Act, which features the Paycheck Protection Program, loans to small businesses with the very intent that they not repay them and turn it into grants, and then a bunch of Federal Reserve facilities for larger businesses.

I'd say the PPP has been the best thing that happened out of the CARES Act. It's gotten well over $500 billion out the door in a month. That was the month of April, which will go down in history as the worst month in the history of the US economy. And it was the most effective stabilization we got.

We got about $45 billion in unemployment insurance out. We got a couple hundred billion in checks. The PPP, really, for all of the complaints people have about the design and performance, has turned out to be the best thing that happened out of the CARES Act.

Facilities that were set up by the CARES Act at the Fed haven't done anything, for all practical purposes. None of that money has been actually sent out the door. Main Street lending program hasn't even started. So I think you've got to look at the PPP as the thing that's worked the best.

RICK NEWMAN: Doug, you've seen the forecasts. You may have made your own forecasts. We are still going to lose a ton of jobs here, right?

DOUG HOLTZ-EAKIN: Oh, yes. I mean, remember, this is 10 times worse than anything we've ever seen. Most forecasts are that the economy will contract at an annual rate of 40% in the second quarter. That's a 10% loss in GDP. The worst year of the Great Depression was 12% in 1932. That's what we're experiencing in the second quarter of 2020. We lost 20 million jobs in April. The previous worst month was two. You know, we saw the unemployment rate jump by 10 percentage points. The previous worst month was one. I mean, everything here is 10 times bigger than anything we've seen, and the response has to be big for that reason.

RICK NEWMAN: So since we're talking about the 2020 election, why don't you tell us what is your best guess about what the economy is going to feel like around election day as people are deciding whom to vote for? It's still going to be a lot worse than it was the year before, but there is this question will people feel like things are rapidly getting better, or are they going to feel like they're mired in a quagmire? What do you-- what do you think?

DOUG HOLTZ-EAKIN: So imagine we do fall at a 40% annual rate in the second quarter and that things like the Congressional Budget Office forecast turn out to be right for the second half of the year. Then we'll grow at 5% in the third quarter. Compared to dropping 40%, that's going to feel fantastic, and people are going to be slightly euphoric. And then it's going to tail off from that, and we're going to have relatively modest growth and a level of unemployment remains high, a level of economic activity overall that remains kind of low. And I think the electorate is going to a little bit disgruntled and unhappy with the state of affairs.

ALEXIS CHRISTOFOROUS: What do you think the next stimulus package needs to have in it to really make a difference? Because now there's talk that as different parts of the country start to reopen, is stimulus in the form we've been getting it the most effective way to get money into people's pockets? Or Republican-- some Republicans have talked about incentivizing-- sort of like incentive payments to get people back to work, to get the economy reopened. So to your mind, what does the next stimulus package look like?

DOUG HOLTZ-EAKIN: It certainly has to look different. The CARES strategy really was let's address the cash-flow crisis out there in large swaths of the economy by flooding it with money, and it wasn't really stimulus. It was let's put the economy in suspended animation for 2 and 1/2 months and we'll get to the other side. Stopping asking businesses to do nothing, which is like don't lay people off, don't shut your doors, don't do things, and instead have them do things like grow, hire, and deliver an increase in the standard of living. So it better look different, or it's not going to work.

There will be now big disagreements about what constitutes the right strategy. You have to have a strategy in the next round. How much of that will focus on demand-side stimulus, which we've seen a lot of in the Democrats' proposals, additional rounds of checks, and traditional Keynesian spending programs, or addressing some, I think, fairly predictable issues on the supply side-- continued shocks from the virus itself, regional lockdowns or a recurrence in the fall; the supply-side necessity of every employer changing their operations to accommodate the employees back in a safe manner.

How do you run a restaurant if you have to have a tiny kitchen? They can't be in there. They've got to have more space. How do you do the serving in these confined dining rooms, fewer customers? That means you have fewer customers for a much more expensive footprint. What does a restaurant look like in the fall of 2020? So they're going to need some big supply-side shocks where everybody tries to figure out how to get people back in the building safely. You might want to concentrate on helping businesses, you know, deal with that as part of a strategy for growth.

RICK NEWMAN: So these stimulus bills have actually been bipartisan at a time when we didn't think Congress could do anything bipartisan anymore. And lo and behold, Congress's approval rating skyrocketed all the way up to somewhere in the 30% range, maybe 35%. Do you feel like either party is getting more of an advantage from the stimulus than the other or nobody's getting an advantage here, which would actually be fine?

DOUG HOLTZ-EAKIN: I think nobody's gotten an advantage out of the three-- four if you count the first health bill-- acts of Congress to address the COVID-19 crisis. I think they deserve genuinely high marks for the CARES Act, which was large and was necessarily large, was done quickly on a bipartisan basis, and actually had the right stuff in it. It had stuff for the business community. It had stuff for the supply chain by keeping the airlines flying, and it had help for those individuals, the very many individuals who have been damaged by this, you know, pandemic uninsurance, sick leave, all sorts of things have been set up. So it's hard to complain about that. I think that both deserve a lot of credit.

ALEXIS CHRISTOFOROUS: Do you think that we should be worried about the deficit? I mean, it was already into the stratosphere before all this happened.

RICK NEWMAN: Ah, nobody cares about that anymore.

ALEXIS CHRISTOFOROUS: Well, apparently not--

[INTERPOSING VOICES]

DOUG HOLTZ-EAKIN: Please come to an agreement.

ALEXIS CHRISTOFOROUS: Chairman Powell said when he was asked recently, and he said that's not the priority right now. We can't be thinking about that. We have, you know, an emergency situation, in essence. I'm paraphrasing. And we need to throw this money at it and worry about the deficit later. Are you of that mindset?

DOUG HOLTZ-EAKIN: Yeah, I think that's right. If, in this moment, you decide to tidy up the books at the expense of stabilizing or helping-- supporting the economy, you've made an enormous mistake, and the economy and the people who are trying to get back to work in it have to be the top priority. The federal government has, in effect, borrowed on behalf of every entity in the United States, handed the money to businesses and individuals across the 50 states and territories, and that's what it should do.

It pains me as a former CBO director to see the numbers. They're enormous, but remember, the problem is enormous, so that's what you have to do.

The concern I have, genuinely, is that we had a budget situation that was unsustainable prior to the pandemic, and Congress showed no appetite to deal with it, no capacity to come to terms with it. We're going to come out of this and roll the clock forward two, three, four-- I don't know what the right number of years is-- and look at a situation that is dramatically worse, comparably unsustainable, and what is Congress going to do? I worry about that all the time.

RICK NEWMAN: Well, this is going to get real before long because, I mean, the one place where this seems like it's going to hit first or maybe will is Medicare. So the latest annual report shows that program's starting to run short of money in 2026, but that was not accounting for anything that's happened with the coronavirus recession. So that could end up being a 2023 problem by the time we get those numbers next year.

How are we going to address problems like this? I mean, is it just going to be at the very last second when we have no choice we're just going to raise taxes by the bare minimum needed to resolve the problem, or can you foresee something more coherent than that?

DOUG HOLTZ-EAKIN: The important thing is that if Congress is going to deal with this effectively, it's going to have to be done on a bipartisan basis. So it can't be just tax increases, nor will it be just spending cuts. It'll be some combination of both of those.

I would expect, however, this will take place in the context of an economy that's not zooming along. It's growing steadily but probably at an unsatisfactory pace on the heels of the worst economic events in anyone's lifetime, and that's going to be a tough sell.

And for the Congress to be successful, it's going to require genuine White House leadership, a president who has told the American people to be ready for this. It's necessary. It's important to them, and they should be supportive of the efforts of Congress. Without that, it doesn't come together.

RICK NEWMAN: What can you cut, Doug? I mean, you understand the political realities here. What kind of things can you actually cut in the federal budget?

DOUG HOLTZ-EAKIN: You can cut anything in the federal budget, but you cannot rely on what we have relied on so far, cuts in annual discretionary spending, which are now, you know, less than a third of the budget and going south. They're a tiny, tiny piece. You have to take on the big, quote, "mandatory entitlements," the Social Securities, Medicares, Medicaids, the Affordable Care Acts of the world. And, you know, none of this involves absolute cuts. It just means slowing the growth rate so that instead of having Social Security grow at a rate of 7% a year over the next 10 years, something that no revenue stream will attain, it's growing at something like 4% a year over the next 10 years, something a revenue stream might grow at, and then you can bring things into balance.

RICK NEWMAN: I mean, you can cut defense, right? That's a lot of money, and we've cut defense before. I mean, that's politically doable, isn't it?

DOUG HOLTZ-EAKIN: It's doable to a point, but remember, the defense budget is the federal budget writ small. It's got a big retirement problem. It's got a big health-care-spending problem. It's not just, you know, armaments and men anymore. It is the personnel and the equipment and then a whole bunch of other things that support them. The other things are really expensive right now.

ALEXIS CHRISTOFOROUS: What about support for pension plans? This latest stimulus package that's trying to make its way through Congress would include some assistance at the city and state level for pensions. Some Republicans are saying, no, that's not the way this money should be used. I guess they're arguing that a lot of these pension plans had deep-seated problems well before the pandemic.

Should there be some money though earmarked? You're talking about a lot of people here who could lose benefits, lose lots of money, and hurt their retirement.

DOUG HOLTZ-EAKIN: So there are a variety of pension issues out there. The state and local pensions are one part of the problem, and those are structural problems that a lot of the states have had for a long time. Illinois is the poster child for this. And I think that the sentiment in Congress is that that's not a place where we spend pandemic-response money. That's not something that was created by the virus. That's not something that we should try to ameliorate with the money devoted to fighting the virus.

So put that aside. There's still a lot of problems out there. The cash is gone. When the customers disappeared, so did the sales taxes. When workers got laid off, so did the payroll taxes. And so, you know, the revenue's missing out there in the state and local governments. Do you want to give them some federal support for that or rely on loans? They have a facility at the Fed. You could say the same thing to them you say to America's big businesses. Go borrow at the Fed and deal with that.

And then they're also increased spending fighting the public-health battle, and the first responders and the health costs are a real cost. I think they're in the national interest, and the Congress will, in fact, support those. I think they should. But it's drawing lines in those categories, right? That all makes sense abstractly, but what dollars go where? I think that's the problem that they're struggling with.

There are also out there other private pensions that people are worried about. And those are also problems that existed prior to the pandemic, and there have been attempts to roll that in here, and so far they haven't been successful.

RICK NEWMAN: Doug, I was interviewing Peter Navarro, the White House economist-- this is a few years back. And I brought up-- I don't remember exactly, something you said or maybe a study from your think tank. And he got a sour look on his face and he said, oh, Holtz-Eakin is a never Trumper. Do you consider yourself a never Trumper?

DOUG HOLTZ-EAKIN: No, I don't actually understand why he would say that. It's real simple. What we do at the American Action Forum is you get up every day and you look at the policy issues that are in play, and you ask yourself, is this big or small? important, unimportant? and is what is being proposed good or bad policy? And that doesn't have a name. It doesn't have a party.

Now, I am a Republican, and my notion of good policy tends to hew toward private-market solutions and a lot of economic freedoms, but it's not personal. That's a mischaracterization.

RICK NEWMAN: Well, let me-- I mean, I would consider you a traditional Republican, perhaps an endangered Republican at this point. There is this group of I think you could call them traditional Republicans-- the Lincoln Project. I'm sure you know about these guys. George Conway, the lawyer, is one of them. They're running-- they're running-- I mean, it's a small group, but they're pretty clever. They've got some funding. They're running ads against Trump. They want to sort of-- I think they want to have an alternative Republican convention. It's that something, like, you might join in on, you know, from the economic perspective? Why not?

DOUG HOLTZ-EAKIN: No. I mean, I think, you know, I'm a member of the Republican Party, and if the party isn't doing things that I think are correct and best for the American people, then I should work within my party to fix it, and walking out doesn't do any good.

So I am, for example, not a big fan of this administration's international trade policies. I think they have, on balance, been unsuccessful and have harmed the US economic interests in some significant ways. Walking out doesn't change that. Making the case and electing people who have a different approach, that solves the problem.

ALEXIS CHRISTOFOROUS: We know that President Trump's been talking about more tariffs on China. I mean, we had the trade war before the pandemic. Sort of was on the back burner, right, and now he's talking about tariffs again. Do you think-- do you agree with that, A, and B, could that maybe get some folks rallied around Trump as we move closer to the election, this-- as he continues to sort of double down on this anti-China sentiment?

DOUG HOLTZ-EAKIN: There's no question that I think this is a very conscious positioning prior to the election. You know, he really went in with the notion that he could run on the economy, his record. That was the key to the reelect, and the pandemic destroyed the easy version of that narrative.

The next idea was that somehow he could, you know, run on his response to the pandemic as a leader who dealt with the worst crisis in the history of this country. And I think the Democrats have very cleverly put him in a bind on both of those with their handling of this so-called reopening question. Like, we never really closed, so it's a bit much to say it's like reopening, but reopening more.

They have basically tried to characterize every attempt to reopen quickly as something the president, in a sort of a callous reelection gamble, is going to risk American lives to do. And so they make it look like he handled the crisis poorly if he pushes for reopening, but if he doesn't, there's more economic damage. So he's in a terrible place on those two issues, which he had originally thought he could own.

So what do you do? You go back to some things that were very successful-- blame China. He blames China for the pandemic. He blames China for poor US economic performance. He used tariffs in both cases. He's going back to a tried-and-true strategy. Worked four years ago. Might work again.

RICK NEWMAN: There seems to be at least a 50/50 chance that Joe Biden becomes president. And if Joe Biden becomes president, then there's a reasonable chance the Senate flips to the Democrats and we have Democratic control of the government. So just sort of the big items in Biden's economic plan-- so he started out as the moderate among the Democrats, but now he's kind of moving to the left. I mean, he's starting to adopt-- you know, it sounds like he supports Medicare for all or certainly Medicare for more.

So expanded Medicare-- I think his latest idea is lower the eligibility age from 65 to 60, and then he does have plans for some tax hikes-- raising the corporate rate, raising personal rates, things like that.

Let me just ask kind of those on a bullet-point basis. Is it plausible we could see expanded Medicare or some new federal health-care program?

DOUG HOLTZ-EAKIN: I don't think expanding Medicare-- I don't think the universal versions of these are in the cards. There is no appetite for that. There is a really serious policy issue associated with the 20 million jobs lost in April and the likely additional millions of jobs that are going to be lost in the May report. Those are people who used to have employer-sponsored insurance, by and large. Some might be in the individual market. Some might be in Medicaid.

But those ESI folks are potentially newly uninsured individuals as we go forward, and so far I haven't heard anyone really talk in any deep way about how to address that, particularly on the Republican side. And if there isn't something, a government program will be created to deal with it, right? It's a health crisis, and these individuals will be uninsured. That's unacceptable. So that's the route for an additional federal program. I think there's no question that's something to keep an eye on.

RICK NEWMAN: Well, to your mind, what would be the best market-based solution to-- I mean, the whole problem here is that, you know, health insurance is connected with your job and, you know, it's not portable and so on. What's the best market-based solution to that problem?

DOUG HOLTZ-EAKIN: The John McCain proposal from 2008 which, in fact, would have provided--

RICK NEWMAN: What was it? Remind us, yeah.

DOUG HOLTZ-EAKIN: It would have provided universal financial support for health insurance, especially those who didn't have employer-sponsored insurance. They could go to an individual market, as [INAUDIBLE] now in the ACA, but which would have had much more in the way of market-driven reforms.

It was viewed as potentially too disruptive to employer-sponsored insurance and, for that reason, scared some people. And the lesson I took away from that is, number one, you should be a raging incrementalist when it comes to health-care reform. People are afraid of these big reforms. The ACA looks like that. And number two, you should be respectful of the employer-sponsored insurance, even if it's an accident of history. It came out of World War II not by intent but because it was the only way to give someone a raise. It's what people know and understand, and you have to build off it if you want to be successful covering people.

RICK NEWMAN: Well, given that what's happening right now is not at all incremental, what do you think is the likelihood that Congress could pass something that would expand health care in some fashion within the next two or three years?

DOUG HOLTZ-EAKIN: I think there's a chance that in order to cover these individuals they will invent something, but I don't see a bipartisan consensus for a new direction in coverage. It's just not happened in the past 10 years. I don't see anything about this that causes a change in that sentiment over the next two or three. There will be an appreciation that those who got laid off in the recession need some help, and they'll get it. But it'll be targeted on them. It will be temporary.

RICK NEWMAN: So just one more follow up, and then I will respectfully yield to my colleague in the blue dress. Is it plausible that Congress could pass something if Democrats have a one- or two-seat majority in the Senate and they control the House?

DOUG HOLTZ-EAKIN: It's hard to get to 60. So I don't think anything big goes through on that route. I think what we've seen recently is that the American people are wary of that sort of single-party, jam something big through. It was unpopular with the ACA and cost them control of the Congress. It was unpopular with the Tax Cuts and Jobs Act. It cost Republicans. And they want to see what they saw on the CARES Act, which is you guys got together and did something on behalf of the country. Try that again, and we'll get your approval rating in the 30s. Otherwise we're back to single digits.

ALEXIS CHRISTOFOROUS: Doug, do you think that this country's corporate income tax is headed higher regardless of who's in control of Congress? I mean, is this just one of the things we're going to have to do, you know, post this pandemic?

DOUG HOLTZ-EAKIN: In general, we're going to have to raise more revenue. That's a fait accompli in my view. So it's going to raise the question. Will we raise it in a sort of crude fashion by just jacking up rates, which will be more economically destructive than any other approach, or will we sort of take another look at the corporate tax and say, OK, we didn't try really hard to do a lot of base broadening? Let's get the revenue that way. Go to the individual tax. Do the same thing.

You know, I hope we do the latter. I hope we continue the march down the road of tax reform, which is low rates, broad base.

RICK NEWMAN: Now broaden the base basically means more people-- taxing more people, right?

DOUG HOLTZ-EAKIN: Not necessarily. We could, you know, sort of broaden the-- lower the exclusions and get more people into the income tax, but I'm talking about sort of corporate deductions for a variety of things, you know, that you could just wipe them out and, you know, get rid of the special tax treatment of a lot of different activities.

ALEXIS CHRISTOFOROUS: All right, Doug Holtz-Eakin, thanks so much. Always a pleasure to see you. Thanks for joining us on this "Electionomics" podcast.

DOUG HOLTZ-EAKIN: Thank you.

ALEXIS CHRISTOFOROUS: All right, and thank you, everyone, for joining us this week. Be sure to follow me @AlexisTVNews.

RICK NEWMAN: And me @RickJNewman. And I think Doug actually puts a poem on his Twitter account every now and then. Doug, you want to tell people where to find your poetry on Twitter?

DOUG HOLTZ-EAKIN: American Action dot-- americanactionforum.org. And someone replaced the sign outside my office with poet laureate instead of president, so that's [INAUDIBLE].

[LAUGHTER]

ALEXIS CHRISTOFOROUS: [INAUDIBLE] All right, guys, well, thanks so much. Be sure to rate and review what you just saw, and we will see you next time. Bye.