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Welcome to Inside Economics. I'm Mark Sandy, the Chief Economist of Moody's Analytics, and I'm joined by my two trusty co-hosts, Marissa DiNatale, Chris Drudis. Hi, guys. Hey, Mark. Mark. How was the week? Marissa, how was your week? It was good. I was traveling. I went to a Moody's ratings conference and spoke there.

on the economic outlook up in uh Silicon Valley it was nice did you get cheers or jeers I I would say cheers really yeah why are you surprised yeah well because I'm getting what feels like jeers you know why because I'm my speech is or talk is such a downer you know yeah buckle up

You know, there's all kinds of scenarios dead ahead. None of them are good ones. They're all an economy being diminished. And then I try to tell it kind of in a zandy way, a joke, and no one laughs. So no one actually throws stuff or boos, but, you know, it's much easier when it's a lot of happy talk, don't you think? Yeah, it's not a very uplifting talk these days. Yeah. But no, I think it went well. It went well. Chris, how was your week?

It was good. It was good. No travel, but I had some webinars. Well, pretty good. So no cheers or jeers.

Um, but it doesn't really come through in a webinar, but, uh, yeah, definitely a lot of, uh, interest and curiosity, a lot of anxiety, a lot of anxiety. Yeah. Yeah. That's what I'm channeling. And we've got, uh, Justin Begley. Justin, how are you? Justin is one of our colleagues. Have you been on before, Justin? I can't remember. Yeah. A couple of times, um, did a doge related, um, podcast a couple months ago. Um,

Talked about a couple of times on the election as well. Are those like Florida state colors you're wearing right there or? Not quite. This is a little bit of a lighter red. The official Florida state colors are garnet and gold. So a little bit darker, you know? Yeah. You're still in Tallahassee, right? You live in Tallahassee? Yes, in Tallahassee. That's where you're hailing from right now, Tallahassee. That is where I hail from. Yeah. Very good. Very good. No Southern accent though. What's that all about?

Well, I'm from Buffalo, New York, so I have that kind of quasi-Canadian, Western New York, nasally voice. Yeah, yeah, very good, very good. And we got a guest, Aaron Klein. Hey, Aaron. Hey, Mark. Good to have you back. This is number four for you, the fourth time you've been on Inside Economics in the four years that we've been on, and that's a record, Aaron. No one's been on more than four times. You're the record holder.

Well, fourth time is a charm. It's an honor and a privilege to be asked back. And it's always been fun. And I expect more of the same. Absolutely. You're a listener favorite and your senior fellow at Brookings. And how long have you been at Brookings now? So over nine years. It's actually the longest job I've had in my career. Just beat over my eight and a half years in the Senate.

It's a great place, great institution. And I've known you for many years, but I thought I should go back and take a look at your bio. And I didn't know this until I looked this time. You worked on the TARP legislation back in the financial crisis. I did both sides of the financial crisis. I did TARP. I did HERA, which was the bill that put the GSEs into conservatorship, as you mentioned.

are well aware and created the Federal Housing Finance Agency. And then we did an auto bailout bill that we actually conferenced with the White House and the House before the Senate Republicans walked away from it in December. So it was nonstop. And then I worked on the CART Act in the beginning of Dodd-Frank and then moved over to the Treasury Department with my appointment in the Obama administration in April of 2009. So there was no rest for the weary

in my financial crisis experience. Yeah, I'm surprised you survived that. Hey, I have a question on the TARP. I've always wanted to ask somebody, why $700 billion? Why not-

600 billion, why not 1.2 trillion? I don't know. Just why 700 billion? I could never figure that out. And by the way, for the listener, that's how much funding TARP came up with to kind of bail out the system. Correct. Although one of the things I always love to point out is TARP was a loan described as a grant. We lent the money to the banks to shore up their capital. They paid us back with interest and warrants. Good point.

the money given to the banks returned a profit for taxpayers, not a loss. It's interesting in COVID, you have the opposite. You have the Paycheck Protection Program, which is a grant disguised as a loan, roughly similar magnitude. Interesting. And Paycheck Protection has been wildly popular, even though it had a tremendous amount of fraud and cost taxpayers hundreds of billions of dollars. TARP was vilified.

even though it actually made a profit for the American taxpayer as it related to the banks and stabilized the financial system. But to answer your question, Mark, it was an incredible time because, again,

We passed TARP on October 3rd, and we started working on it right after Lehman and AIG. So it was just a month nonstop of work, including a failed vote in the House, which many people from that era have scarred in their mind. And in that process, though, it was...

30 days before an election when that law was passed. And so we not only put that dollar amount, we put markers as to when it would be allowed to ensure that some of it would be left over. At that point, it was pretty clear Obama was going to beat McCain. It wasn't a slam dunk, but the polling was more clear than it has been in many elections since.

The reason that we, the target of 700 was they wanted it to be large enough that there was always powder left. So the fear was if we got, if we were too small and short sellers and other folks started to lack confidence that we had enough afterwards,

So we always wanted to have a little more in reserve. And I don't think we ever used more than about 600 at any point. So it was kind of right-sized. But we also wanted to make sure that we had enough to address the immediate problem, enough for the next president, whether it be McCain or Obama. And really, I mean, it was a bipartisan situation. But we wanted to make sure the next administration, if they wanted to pivot...

The last point I'd make, Mark, that people don't realize is the, or remember, because it was such a blur. The original program was not called TARP.

to inject capital into the banks, but was called TARA, the Troubled Asset Relief Auction. I remember that. Yeah, the auction process, the reverse auction. A somewhat convoluted scheme that my friends in the Treasury Department cooked up that was an interesting theory, but we were very skeptical of it working. And we said, you know, you really have to do capital. And the second part is when you work in Congress, you have a fun thing where you're substantive, but also political. Yeah.

And, you know, if I say Tara to you guys, what's the pop culture reference that comes to your mind?

That's the Gone with the Wind? Yeah, exactly. Gone with the Wind Plantation. Yeah, exactly. And I remember we set the bush. Did you guys know that, by the way? Did you guys know that? I said it, but I was on mute. Oh, you were on. Oh, okay. See, she's so competitive. See what I have to deal with, Aaron? It's like she's so competitive. Yeah, she wanted credit. Meanwhile, I think Justin had no clue. I'm not sure Gone with the Wind was. I have no clue.

- I have no idea what you're talking about. - And he lives in Tallahassee. - He's the one person who lives in the South. - Yeah, just down the road. - So we pulled the, we're like, some of our friends at Treasury, we're Southern guys, I'm like, Tara's not really the imagery that we wanna walk out to the American public with in a financial crisis. - Good point. - And the staff of the banking committee were real big baseball fans, almost all of us.

And we were thinking of analogies and we, you know, they had TAR and we thought, you know, what do you do when it rains? And it's been raining a lot here in Maryland. You roll out the tarp, you wait out the storm.

And then you pull back the tarp and you play. I never knew that that was the meaning behind why you picked tarp. So, so interesting. And, and, you know, we think kind of people get that. You bring a tarp. Yeah, sure. Not to use it. Yeah. And so we took the last A from auction and we turned it into P for program. And we rewrote the treasury proposal to provide capital allocation as opposed to just auctions. They could do either.

And even when they passed the law, they still said they were going to do auction. And then they pivoted because they came to the same position that we'd come to earlier, which was capital was the smarter of the two solutions. So the answer to the question of $700 billion, you said, okay, I think I need $500 billion, but just so in case, I'm going to say $700 billion. And it's not...

like a perfectly round number, like a trillion. So it sounds like it's real. Like we did some real calculations here. Yeah. And it was really from the treasury. I mean, that was the number they asked for. And we said, make sure that your number is big enough because we, it's going to be really hard to get Congress to pass this once. Please don't ask us to do this. Unlike the Paycheck Protection Program where they picked a small number,

It got rationed and run, and they came back, and Congress was eager to double it. It's kind of interesting similarity. Yeah, I mean, $700 billion feels so quaint in the context of $5 trillion. That's what was spent on the COVID relief, but pretty amazing. Okay, but you're so great on stuff financial system, financial market related, and we're going to come back to that. We want to talk about safe haven status and regulation, that kind of thing.

Before we get into that conversation, we had a pretty busy week that has implications for the economic outlook. I'll mention three things and maybe we can talk about them in turn. One is, and this feels like a gazillion years ago, but it was only a week ago that the U.S. struck an arrangement with China with regard to the tariffs, reducing the tariffs from

you know, stratospheric U.S. 145, China 125, down to 30 and 10, I think. So let's talk about that and what that means. And then there was the

reconciliation package, that's the tax spending legislation that's finding its way through Congress, that's kind of now becoming coming to the fore because that has to be done before the end of the fiscal year because we have the debt limit expiring and the fiscal year coming to an end. And then the data. So maybe we begin with the data. A lot of data this week, we saw inflation come out, CPI, I saw retail sales. I didn't see the University of Michigan survey. I think I just saw a clip. It's down again, no surprise.

But maybe, Justin, I'll turn to you. Maybe you can just kind of give us a quick rundown on the data broadly, CPI, retail sales, anything else you think is important. Sure. Yeah. I mean, and to comment quickly on consumer confidence, you're right. It did come down, I think, about two percentage or two points, like 53 something to about 50 or so. Is that an all-time low? It could be close to an all-time low. Is it? Close to the low. Yeah. Yeah.

Yeah, and certainly reflective of consumer angst, even despite some of the, you know, maybe even progressive movements on trade. But on CPI, just to give a broad overview, it does feel like CPI is not, we're not seeing the movement of tariffs into consumer prices just yet. And

In April, the CPI came in at 0.2% or 2.3% on a year-ago basis. This is down from 2.4% annually in March. And of course, when

When the CPI came in pretty flat in March, it was mostly because of a large decline in energy prices. Energy was up in April about 0.7% largely from energy services. Of course, it fell about 2.4% in March. Food prices came in slightly down, about negative 0.1% on the month, after rising about 0.4% in March.

And then kind of taking out food and energy, Core CPI came in at the same rate just about as the headline, about 0.2%, after rising just about 0.1% in March. But the year-ago rate stayed pretty similar at about 2.8%. There's still some stubbornness in core prices there.

Okay. So bottom line, this is consumer price inflation for the month of April. It truly doesn't reflect the tariffs, right? Because the tariffs were just being imposed in April. And of course, it's when those products come here are offloaded at the ports that

If the tariffs are in existence, that's when they get, they have to pay the tariff. And that's when you would presumably start to see the price effect. So this was still before all that has happened. So it's not surprising. I don't want to put words in your mouth, but I am. It's not surprising that inflation remained tame in the month of April. This is the calm before the storm. That's kind of how I think about it. Is that roughly right? I don't know.

I think that's right. And I'd also add there was such a huge stockpiling of inventories that went on in expectation of higher tariffs, even if firms didn't expect the April 2nd level of tariffs. So a lot of firms are able to, at the very least, forestall price hikes as they wind down their, let's call it, cheaper purchased inventories from earlier in the year.

come May and June when those excess inventory start to windle down a little bit, we will probably start to see some price hikes. I mean, Walmart is already talking about price hikes, you know, early this week, that was a big announcement. A couple other firms are thinking the same. So yeah, I think in, in coming months, we probably see some of those tariff effects, both from the timing of the tariffs and also from excess inventories getting, uh, windled down a little bit. Right. Okay. Hey, Marissa, anything to add on that or you want to call out any other, uh, economic data that came out this week? Uh,

We got jobless claims. They stayed the same. So still no movement on the layoffs front in the labor market. We got, Justin mentioned University of Michigan. Yeah, I just want to underscore that it fell to 50.8 and the all-time low is 50. So it's almost right there to an all-time low. Let's see what else. We got retail sales. Yeah.

Right? I think we did. Yeah. And those were up a tenth of a percentage point. So pretty, pretty weak. And we got the producer price index as well. Yeah, I think on the PPI, one thing I noticed, maybe I read from Economic View commentary was that it was weak. We saw actually decline and it was on wholesale trade was down and

And apparently they're eating the tariffs or something. They're not passing. Is that right, Chris? Yeah, that seems to be the case that they're at least for the time being. Right. That's where you've been all the turmoil. Yeah. They're eating the tariff. Yeah.

At least for the time being. Right. That's right. Okay. I think, you know, given the uncertainty, I think, you know, do you really want to push it through alienate a lot of customers if next week things could change? So I think that's the strategy at the moment. Yeah. Okay. And the other, you guys didn't mention it was industrial production IP, which is, I know we don't spend a whole lot of time on that, but manufacturing, which is kind of the focus of, you know, the trade and tariff war that's now in, it feels like it's,

it declined, it's starting to decline. And that feeds into our kind of GDP estimate. And Justin, I noticed

Our tracking estimate for Q2 GDP, that's the gross domestic product, is like it's zero on the nose. Is that right? It's zero, give or take a few decimal points. But yeah, basically, I should say on this, it's so early in the forecasting period. We basically have vehicle sales, which altogether a couple weeks ago were high for the month of April, but still declined from the previous month. Industrial production was flat initially.

in April. Business inventories at the end of March were pretty tepid.

Retail sales grew at a tepid pace. And then, of course, the CPI was mild. All of that getting put into our model plus momentum from the first quarter puts GDP again pretty weak. Okay. So, Chris, how would you sum? I mean, it seems like a lot of cross currents there, you know, and a little bit in the rearview mirror given everything that's going on with the tariff and the trade war. But how would you characterize the data this past week?

Yeah, I guess I would say it's great in the rear view mirror, right? It looks okay, but it's not incorporating any really of the, not substantially the tariff effects. Okay. Take solace in it, but enjoy it while it lasts, right? Hey, the other big news, Aaron, was the deal, I hesitate to use the word deal, let's say arrangement between China and the U.S. on the tariffs deal.

How big a deal is that? How big a deal is that arrangement? I mean, do you take much solace in that agreement or that deal? There's a couple overall things, right? When you say how big a deal is it, it's well, okay, I know what the deal is. What's the baseline you're comparing it to? Is it the...

you know, where we were before? Is it the Trump fantasy land reciprocal tariff, which weren't, you know, chart where he was tariffing the island of penguins? Is it the stated tweet where he got doubly mad and raised it again? Is it like, you know, what is the baseline that we're comparing this to? I try to live in the real world and not get distracted by the

gyrations of Trump. And so the tariffs never really took effect, right? Like the 100 whatever. Now, they did change decisions in corporate America. You saw the L.A. port volume go cratering because people were afraid to ship into this giant tariff thing. So I think the biggest result of the first 100 days of the Trump administration's tariff insanity has been the massive injection of uncertainty.

And, you know, you shouldn't need a PhD in economics to understand that uncertainty is bad for business. It makes consumers and producers of goods less certain about future projections, which tends to reduce current consumption and reduce investment decisions, which in the long run slow the economy, regardless of which way it goes out.

And the big news to me was that the gyrations of tariffs and Trump's penchant for capturing all of the attention and sucking up all of the oxygen in society was

laid to a massive swing in imports in the first quarter, enough to drive GDP negative. Now, we'll see with the revisions, I'm always a little nervous that we record this podcast today and then I say, the negative first quarter GDP and somebody's listening in six months and they're like, what are you talking about, Aaron? GDP was 0.5 and the swings in revisions. But at the time, what we know is the first, Trump inherited a healthy economy that had plenty of momentum

He injected tariff palooza into all of this. And it made it ironically shot up the trade deficit. People front run all of these things into imports to such a magnitude that it turned economic growth negative. It crushed consumer confidence. It injected structural uncertainty that isn't going to be unwound at each press conference where he gets a big, beautiful deal in his own language.

And that's going to have a long run negative effect. How much magnitude? Hard to tell. You know, it doesn't matter. It doesn't matter if the China's number 30 or 25 or 35. Check back in two weeks. Who the heck knows what it'll be? Right. Right. So so what you're saying is, you know, just compared to what the counterfactual seemingly was, all of this, despite this arrangement to lower the tariff from the stratospheric height to

Still leads us to an economy that's diminished, you know, compared to what it would have been. It's a higher tariff than what it was. Right. Like, you know, what Trump has set up is this is us using language like he lowered the tariff to China. That's just not true. Right. Right. Right. We are at we're going to have the highest tariff rate since Smoot-Hawley in the Great Depression. When you look through our entire level of trade and

And, you know, people can debate about the wisdom of tariffs, how much it slows the economy in the long run, how much it produces value in certain sectors, etc. And so forth, the tradeoffs and the distribution of it. But the shift, right, the shift from low tariff to much higher tariff is a short run headwind. And even Trump in his own fantasy land is out there peddling that you're going to have fewer toys for your kids for Christmas. Right.

Now, whether that's in the long run in your best interest, that's a different argument. But I find it very difficult to find anybody who will tell you that in the short run, this adjustment is good for the overall economy or for consumers or businesses. Yeah. Okay. Hey, Chris, how big a deal do you think this arrangement is? I mean, did your kind of outlook for the economy change in any way as a result of the deal?

My probability of recession certainly fell. It did. Right? So I agree with Aaron, certainly. What is your base case relative to where we were at the start of the year? Clearly, we're still worse off, right? Growth is still diminished relative to what it would have been. But relative to the 125, 145% tariff rate, obviously, that would have been catastrophic, right? That's truly an embargo on trade. With 30%,

tariffs assuming that they they go forward that's at least somewhat manageable right still hurts but um so there's a chance of things on the probability of recession in the coming year what were you and what are you now i was at 50 i'm at 40. you went down 10 percentage points yeah okay which is still high high yeah still very high can i ask were you at 50 in part because you you didn't believe he was going to go through with the 140 was that why it only fell 10

That's you. Yeah. Yeah. Go ahead. No, go ahead. That's to you. Yeah. I, I assume there would be some type of off ramp here that this, you know, this is just not a sustainable, uh, state of affairs. Um, I didn't think it would happen as quickly. That was my base case, but, uh,

but yeah i didn't think this would last how about you marissa what was the same kind of perspective and what was your probability recession and now what is it yeah i was i was at 55 and then after this deal now i'm down to 45. 45 okay yeah 45 so same kind of perspective

Yeah, I mean, this is a much better situation than going to 145. I think it remains to be seen. I think the odds of recession are still really high because, as Aaron said, even 30% tariffs on China are the highest they've been since the late 1930s, right? You're talking about an effective tariff rate that's quadruple what it was at the beginning of the year still. So I don't know how this...

is going to play out globally. But if this is where we are, I feel a lot better than 145. What about you, Justin? Do you have, I mean, I don't know if you've thought about it in this way, but have you thought about it? What's your probability? Yeah, I'm actually in line with Chris. I was around 50 and now I'm around 40. The reason being is that I kind of consistent with our baseline assumed that

eventually the Trump administration would pull back and maybe even somewhat quickly. And certainly markets have responded positively to that. One of the

Things I was concerned about was negative wealth effects from the pretty significant decline in the stock markets. The rebound has made me a little bit, you know, feel a bit better, even just personally looking at my own portfolios. But but but one of the to touch on something that Aaron had mentioned, one of the you know what you're like, you're like this stock market mogul. Is that what you're saying?

I wouldn't say that at all. But, you know, I got to think about my retirement. It's a long way off, but I got to think about it. Aaron, you know, you should know Chris is a crypto maven. And now we got a stock market mogul. Maybe we're overstating the case. I don't need any emails from people asking for stock advice. Or crypto, by the way. Happened to me once on a radio show. But I'm very curious. No, I'm only kidding. Go ahead.

But to touch on something that Aaron had said, one thing that I've been very concerned about, because I did some econometric analysis on this earlier in the year, about kind of tracing the effects on business investment from a spike in economic policy uncertainty. Basically, what I found is that like a 1% sustained spike in economic policy uncertainty can lead to a decline of about 0.1% of non-residential investment of about 0.1 percentage points.

So, you know, considering that the economic policy uncertainty index spiked about 50 or 50 percentage points in one quarter, that that could have a substantial up to eight quarter effect on investment. And I think we're seeing that already in Fed surveys and the NFIB small business survey where virtually no business wants to invest right now because they just don't know the rules of the game. And if you don't know the rules of the game, you're not going to want to play the game.

Yeah. Hey, Aaron, do you think about it in the same way in terms of probability of recession? That's kind of the shorthand way economists kind of communicate their view. I do. You know, it's also very difficult because recession is considered a binary position done by the NBER, right? And there are two metrics or two quarters of negative GDP growth and a sustained rise in the unemployment rate. And so by GDP, we're halfway there.

right by unemployment it hasn't started and so uh you I've been asking myself could we have six months of of a contracting GDP without a substantial rise in the unemployment rate uh and and you know the modeler in me says no you've never really seen that and the other part of me says the statistician in me says there have been what

11 recessions since the end of World War II, officially by this calculation, right? And something- 11? Yeah, I know there's nine since 1960. So that, yeah, probably 11. Yeah, that would make sense. Yeah. Anyways, the vast majority of them were supply shock slash interest rate, Federal Reserve driven demand recessions. You have the financial crisis.

You had COVID and you had the World War II economic demobilization shift to civilian, which caused a pretty sharp recession, I think, in 46, 47.

If you disaggregate the recessions based on their cause, you start to see different patterns emerge. The COVID recession looked a lot more like what happened at the end of World War II than any of the Federal Reserve driven recessions. And the financial crisis is kind of like a structural outlier. One of the things we got wrong in the Obama administration with many other people was we kept thinking the rebound would be stronger because the recession was stronger.

And that was true for all the other recessions since World War II, because none of them had been through the financial sector, which is a different type of recession. So part of me has me wondering, because if this is a recession, right, in a Bayesian worldview, then this is a recession caused by the shift of the U.S. from a free trade to a tariff protectionist state. And is that kind of recession structurally different from all the others? I tend to think yes.

And so long way of answering your question, Mark, which is that I think 40 to 50 percent chance is is is fair for a recession. But I think that what we may end up with when the dust is settled is a period of extremely slow to negative growth without the corresponding labor market shock, which then leads to a nomenclature debate question of whether it is or isn't a recession.

Yeah, very interesting point, especially in the context of labor supply because you have less immigration. So you may actually see unemployment stay down because there's just no labor supply. Yeah, great point. So my sense is that that arrangement we got last week with the Chinese and U.S. was an important event.

Not so much that they lowered the tariffs. We knew that they were going to do that, and that was in our baseline forecast. But it happened sooner than we expected, and the decline was bigger than anticipated. And there was no other –

aspects to the to the arrangement it was just lowering the tariff so it serves a in my view a willingness of the administration to respond to if things aren't going to script if the economy is starting to struggle if markets are down and i my guess in this case was uh the administration was hearing from retailers saying look if if you keep these tariffs on at 145

We're going to have empty store shelves. And if that happens, we got a big problem. You know, I think that's when you have, there's no doubt we'd have recession. Look, it was capitulation wrapped in victory. And I'm okay with that because it's moving in the right direction. It's moving in the right direction. So therefore, I lowered my recession odds from 60%.

to 45%. Still, you know, to your point, a 30% tariff is still very high and nothing really has gotten accomplished here. And we're not seeing any other arrangements. I'm sure we will. But, you know, even the UK arrangement, I'm not sure what was really, you know, involved there. It looked like just I needed a deal.

So I think the recession risks are still very, very high, but they've come in. I think one other point I want to make, in our baseline forecast, our official forecast that we provide to clients where we put pen to paper, we never had a recession because we never felt confident enough. Even my 60%, I wasn't confident enough to adopt a full-blown, as you say, NBER recession. So we never had that. But nonetheless, the risks are very, very high.

Okay, let's turn to policy and the reconciliation legislation that's making its way through Congress. And I thought, Justin is doing a lot of work in this area. We have a webinar next week on this on Thursday, right, Justin? I think it's on Thursday, right? I think that's right, yes. Yeah, webinar on what's going on in Congress around this legislation, so-called reconciliation legislation. Can you just give a quick synopsis of what's going on there?

and kind of where we're landing in terms of what it means for the macro impact, Justin? Sure. So this week, a lot of the House committees that are putting together each of their individual budgets are taking a look at some of the key proposals that the Trump administration wants to see passed.

Cheap among those are kind of coming out of the House Ways and Means, which covers all things taxes, and then the Energy and Commerce Committee, which is responsible for the Medicaid program.

And there's some other stuff going on too, but those are kind of the ones that have grabbed the headlines. Now, in the House Ways and Means Bill, we have, there's a lot going on there. Some of the headline stuff that I think is important to mention is a full extension of all the personal income tax brackets that were passed as part of the TCJA in 2017. Those are going to get fully extended at their current rates.

Also, some of the business provisions that were also set to expire at the end of 2025 are going to get a temporary extension. We're talking like interest deductibility, 100% bonus depreciation, stuff like that. But those are actually going to end up sunsetting in 2028 to create some cost savings, which is an interesting measure in and of itself.

Also, we're seeing some deductibility for tip income, for auto loan interest, for overtime pay, and then also a increased standard deduction for those above the age of 65 years old.

And then kind of finally, there is a slight increase in the state and local tax deduction cap from the current $10,000 for everybody to $30,000 for everyone making less than $400,000 a year. And then after that, it kind of phases down to 10%.

And included in that bill, I'll mention just there's some offsets like we're kind of pulling back a lot of the tax credits associated with Biden's Inflation Reduction Act and then also some ending some some social benefits for undocumented immigrants and such and such.

Anything on the tax bill that you want to call it before I move to Medicaid? No, there just seems like a lot of moving parts there. There is. Lots of provisions and lots of sun setting to kind of make it, gerrymander it into the reconciliation kind of restrictions. By the end of the 10-year budget horizon-

this all has to net out to zero impact on deficits. Right. It's just kind of a bit of chicanery because as we can see, based on President Trump's TCGA tax cuts, it feels like once you get tax cuts in legislation, pretty hard to get them out. It feels like they're going to... Right. I should mention that those kind of more populist portions of the bill...

No tax on tips, overtime, auto loan interest, and increased deduction on seniors. It was also all sunset in 2028. And so what we end up getting at the end of this is about $3.8 trillion expansion in the budget deficit on a current law basis. So current law assuming, of course, that the TCJA does expire by the end of 2025. And then you kind of compare it to that baseline. But working out the math, as far as I can tell, the...

the cost on a current policy basis where we kind of assume business as usual going forward where nothing expires, we're getting about $230 billion increase in the budget deficit, which means this is only kind of marginally stimulatory over 10 years. But a lot of that is front-loaded to the first four or so years because, again, many of these tax cuts, including the most pro-growth tax cuts being those business deductions, are

Those are all sunsetting at the end of 2028, kind of kicking it to the next president and whoever is in control of Congress at the time to go and deal with those. And so I think I've seen estimates where if we assume everything continues going and nothing sunsets, we're looking at about a $5.3 trillion increase to the budget deficit just from the taxes over 10 years. And that's relative to current law. That's current law.

Yes.

It's kind of netting out to close to zero, no deficit effects, and therefore the macroeconomic consequence of it is very modest, abstracting from what the deficits in debt mean for interest or potentially mean for interest rates in the bond market. Is that roughly right?

I think that's exactly right. And then you add in, you know, the 400 or so billion dollar increase for the judiciary and Homeland Security and defense, and then you take out some spending for Medicaid and other and other programs. And yeah, you basically it feels like everything is a wash at the end at the end of it, in which case,

it doesn't move the needle on the macro economy. Right. Hey, Aaron, I know you follow these things, you know, carefully. You heard what Justin had to say. Is there anything you disagree with or you want to push back on or have a different perspective with regard to? Let me offer a couple of different perspectives. Yeah. Right. The high watermark by some people in bipartisan tax systems

Grand Bargains is often referred to as the 86 Tax Act.

where Reagan and a Democratic Congress came together, they lowered the rates, and they eliminated a lot of deductions. So lower the rate, expand the base, supposed to be revenue neutral, but growth enhancing, right? That's kind of what the textbook says. And for folks who say, you know, I want to go back to the way things were, where everybody got something out of it. And, you know, largely economists across the political spectrum hold that up as a gold standard for policy.

The 86 tax reform legislation. Yeah, right. So what were some of the carve-outs that were eliminated? Deduction on auto interest. Right, right. You know, capital gains taxation. Capital gains was taxed as ordinary income with a low top marginal rate. Now we're going to create...

A different type for capital gains tax, a different type for taxes on tips as opposed to earned income. You know, I don't get paid for these appearances, but, you know, in the past, if I had, I would say, don't give me an honoraria, but a tip would be appreciated. You know, there's now all sorts of different gaming of these types of systems, which will make accountants rich, lawyers rich, etc.

Democrats will come back and want to hire more auditors because it'll, you know, incentivize some level of tax fraud. And keep in mind, part of this whole thing is cutting the IRS's budget, which actually increases the deficit. So, you know, one way I see this is further unraveling, and it'll probably be an only Republican passed bill, right, of kind of their end of the grand bargain of 86, right?

which was that in exchange for lower marginal rates, we'll tax broader income separately. And when you go back and you add up the Bush tax cuts of 01, the Bush tax cuts of 03,

Trump tax cut of 2017, you know, and you take that as a long narrative arc and whatever this giant tax cut is going to be. And then you compare that to the narrative arc of the 86 Tax Reform Act, the Bush 43 tax hike in, you know,

Was it 91? The Clinton tax hike of 93. That was the era where we got our fiscal house in order. That was the era where we had a long sustained economic recovery. We really rose wages down the income spectrum and we created a budget surplus. We actually started paying down our deficit.

And then that's now all been unwound with a series of tax cuts under Republican presidents and basically unwound that deal and kept the very low marginal rates, but brought back in all the loopholes.

Yeah. I hadn't thought about it that way. I forgot about the auto loan interest. Justin, is that sunset or is that- In 2028. In 2028. None of these. I mean, these are all fake gimmicky sunset. I hear you. I hear you. I hear you. That's certainly the experience. To do scoring things. And some people have said that one of the issues, that ending auto loan deduction created a massive refi boom.

So it's structurally increased since the only consumer interest that was deductible was mortgage. It created all these incentives to take money out of your house to buy your car.

on an equity basis, if you could afford to. And then that's coupled in '86 with the advent of automatic underwriting, which radically lowers the cost of doing a cash out refi for a variety of back office things. I don't think policymakers appreciated those two things occurred much like in 2007 with the financial crisis. One of those unintended consequences. Yeah, for sure. These two things came together at the same time.

So one question I kind of wonder is if you do bring back that, presumably the incentive to take money out of your home decreases because for most people, the second largest purchase in their life, if you're a homeowner is your car. And if you're a renter, often auto is your largest purchase. I'll hold aside student loans as a separate type of consumption. But there aren't that many things more expensive for the average American family than a car.

Yeah, very true. And actually, folks haven't been really using home equity loans since the financial crisis for a bunch of different reasons. Okay, I guess one other question maybe to you, Aaron, given that you're sitting in Washington, is there a possibility that this gets...

This doesn't happen or really gets scrambled. It's going to happen, even with the thin majority that the Republicans have in Congress. Look, a couple of years ago, I joked when the media said the Republicans won the House in the Biden midterm. And I said I would joke and I would say, no, the Democrats lost the House, but the Republicans didn't win it.

Right. There wasn't a stable majority within the Republican Party. And you saw that with the ouster of Speaker McCarthy. And frankly, the Trump administration has been marked by the first hundred days, the fewest bills passed by Congress in the first hundred days of a presidency. I think going back multiple generations, FDR made 100 days a marker really wasn't as much of a deal for that.

This is an administration that's just doing things through executive order and letting people sue. And I think there's only been five laws passed in the first hundred days. There's not much Congress is doing legislatively. Thus, the pressure to get the one thing that holds the modern Republican Party together, all the different fractions of the Republican Party seem to be unified by one concept, which is cutting taxes.

That seems to be the only strong tenant that holds them all together. And between that and the pressure of Trump demanding this bill, because in his mind, he can do a lot of things without Congress, more than presidents and courts have believed the president can do in the past. The one thing he can't do is change the marginal tax rate.

Right. And so I think this, what gets in it at the end, little bit unclear how much the salt caucus for state and local for Republicans from New York and California and blue state in the presidential, but Republicans that give them the majority in the house, how much they get versus other things, TBD. But it would be in my mind, shocking if they don't get this passed. Absolutely. Absolutely shocking. And it might need something like, uh, you know, uh, uh,

a problem with the number of seats they have in the house where you know unexpected deaths or things like that create a problem but absent that i can't imagine that they don't get something through yeah okay and that's what we're assuming as well um so i think this is probably a good time to move to the topic of the safe haven status of the us and of course this has come to the fore

Recently, during kind of the risk-off, what I call the risk-off environment related to the tariffs and the trade war, historically when things feel like they're going off the rails and there's a lot of uncertainty and markets are under a lot of stress, that risk-off environment, capital comes flowing into the United States. The value of the dollar rises, interest rates tend to move lower, long-term rates move lower.

We've seen just the opposite in this kind of period. The dollar is down. I think it's down close to 10% against the euro, and interest rates have risen. The 10-year treasury yield, it's bouncing around all over the place, but last I looked, it was close to 4.5%, kind of on the high end of the range that we've come to see. And that seems odd, again, in the context of this crisis. So it's raised this

And there's a lot of things to be kind of nervous about whether global investors are, you know, reviewing how stable the U.S. is and what it means for, you know, the safe haven status.

Do you think that's a legitimate concern, Aaron, about the safe haven status? And maybe, you know, I think it would be, if you're up for it, just a little bit of commentary around why this is important. You know, why is the safe haven status so important? So I think it's a huge question and it's incredibly important. Look, the U.S. dollar has become the de facto currency of the world. And the U.S. investing in the U.S.,

has been viewed historically as the safest place you can have your money from a political risk standpoint. I worked for Senator Dodd, of Dodd-Frank fame for many years, and I always remember him saying

When I talk to, I'm bullish about America in the long term because when I talk to people from all over the world, they all say the same thing. I've never lost a night's sleep wondering if my investment in the United States is going to be there in the morning.

Right. We are viewed as a country that pays its debts. We are viewed as a country that abides by the rule of law and a country that can be counted on for domestic security and for global integration. And I think Churchill said in the end, you can always count on America to do the right thing in May.

use all it may it may take what was it churchill i think they try everything and then ultimately do the right thing i'm butchering it too but that's kind of roughly what he said i think and so the u.s has this special safe haven space and that reduces our interest rate right that reduces our rate it also makes business life a lot easier because deals are done in dollars

Right. I, you know, the global market for oil is in dollars. So when I'm running an airline, I don't have to worry about what's going to happen to my currency when I try to put out a price for a flight home for Christmas. Right. The rest of the world, when they're putting their flights home for Christmas, in the back of their mind, they're trying to do a currency calculation to hedge what the price of oil will mean in there, you know, for Ryanair and in the euro or the pound or whatever. Right.

our executives don't have to do that dollar goes up now you know it's just the price of oil so it's a huge value I mean it keeps interest rates low it makes businesses and global trade work there are a bunch of other factors that it has not all of which are positive I might add but net net it's a massive positive one kind of argument uh for why the U.S safe Haven status reserve currency status is safe

is that, well, where will investors actually go? I mean, maybe a little bit to the euro, maybe to the pound, maybe to the yen. Hard to see them going to the yuan. Maybe. I've seen gold prices are up a little bit. Obviously, they're up a lot, but that's not a place a lot of investors can go.

crypto, I guess. So the argument is, well, you know, maybe the U.S. has its problems, but it still looks like I get that. Right. Like fundamentally, your argument there is we can degrade our global status because nobody's closer to us.

Right. So it's like, you know, if you're the best, you can do worse for a while because people aren't going to go to second place. Well, why do you want to do worse? Right. Even if people aren't going to make a match. So there's a tipping point phenomenon. I've studied global reserve currencies. I went back and looked at World War One and what happened to the British pound. Right. Like you can look at various points and it's a tipping point. And you can say we can keep getting closer and closer to that and not trigger it. And you're right. Right.

But the problem with tipping points is they're often hard to spot ahead of time. The straw that breaks the camel back.

So, you know, you're right, Mark. But, you know, New York could be the you know, the reason that all the gold is in the basement of the New York Fed more than any other building on Earth. Right. Was it got moved there because the gold in London was considered unsafe when England was at risk of falling in the World Wars. Right. It wasn't because New York was somehow viewed as a better financial system. But once everybody moved their gold there, it's a pain to move it back.

Right. You know, could you move it to Toronto? Probably don't want to. Right. Right. But like, you know, and certainly Trump is, you know, trying to make Canadian independence seem less stable and plausible. But when you have this, you know, maybe you spread it around. Maybe the answer is that you don't do any one country, but you spread it around to different things. And there's a structural cost to that, much like there's a structural cost to uncertainty, as Justin tried to quantify. Right.

But you just don't put your eggs in one basket. Chris, do you have a perspective on this? Anything you want to add? No, I largely agree with that. I think the one comment, of course, is that I think there's a little bit of hysteria in terms of how quickly could the US dollar degrade. But nonetheless, I think it is a real risk that investors are pricing in. So yeah, I'd largely agree. But I don't think it's not going to happen tomorrow.

in terms of the US losing its reserve currency status, but certainly something to watch for. Something to watch for, right. When you talk about tipping points, I mean, I wonder about the treasury debt limit. That's up again. And I guess that can, correct me if I'm wrong, Justin, I think that can be folded into the reconciliation package. As long as it's an increase, I don't think you can suspend

the debt limit or you can't revoke the debt limit in reconciliation, but you, if you raise the debt limit, you can do that in reconciliation. So it feels like that's going to be part of the package. But, uh, you know, the one thing that happened back in the 23, 2023 debt limit, uh, drama was, uh,

That was resolved, but because the Treasury hadn't been able to issue a lot of debt during that period, they went to market with a lot of debt when it was resolved. It caused long-term interest rates to jump. The Treasury responded by shifting its issuance to shorter-term securities.

to try to help calm the long-term bond market and it worked. But the result is now we have all the short-term debt that's adjusting higher because the Fed's keeping rates higher for longer and it's adding to our interest expense and interest payments are rising rapidly now greater than defense. So I'm not sure you can go down that path again. So I wonder whether that might not be a catalyst for continued angst around the safe haven status just because of the dislocations all that creates. But any thoughts on that?

Chris, Aaron, anybody? I'd jump in and say we've been playing with fire for a long time and we haven't gotten burned.

So one thing that people didn't appreciate is when you get to this debt ceiling issue, there's actually a window where the debt ceiling has been hit. And then the government uses these things called extraordinary measures, which were invented basically in the nineties during a prior debt ceiling fight between Gingrich and Clinton. And they involve a lot of strange behind the scenes machinations that the lawyers have signed off on that let the treasury department do this. Well,

The last time we were in, or a time we were in extraordinary measures was when Silicon Valley Bank collapsed. And Silicon Valley Bank collapsed and the government decided to bail out the insured and uninsured depositors. And we can debate the wisdom of that separately. It's not a point. What I'm making is the deposit insurance fund that protects all of our banks is invested in treasuries, non-marketable treasuries. And when they went to redeem them for cash, because you needed cash,

The government couldn't issue new treasury debt because they were at their limit and they couldn't take non-marketable for marketable. And they didn't have the cash because when you're doing all this extraordinary measure thing, you're expecting, you know, you're looking at what governments, nobody was expecting that we were going to pay out these hundreds of billions of dollars to crypto and VC funds and make Bill Ackman's wallet whole in SVB.

And so the FDIC did something really weird and really quiet. They went to the Federal Reserve, who has the right to print money in a crisis. And the Fed charged the FDIC a bunch of interest, which we can discuss like the logic of the left and right hand there.

But it was a structural issue in which the government couldn't fulfill one of its basic obligations and had to do a very creative financing thing because we were caught. And we tend to ignore these extraordinary measures. Everyone's just focused on breaching the ceiling. And we live in this extraordinary, you know, it's like driving on a donut after a flat tire, right? Like your car can go for a while, but you're at a greater risk if you hit something. And, you know, we've now just routinized this.

and uh you know it'll work till it does it right right okay um that tipping point so you know we're running out of time uh but i can't resist because i ask anyone who's in the financial markets and system and i view you as being in the financial markets system

You know, what out there could do us in? You know, you keep saying the tipping point. Well, what, you know, what do you view as a potential threat? And I'll preface this by saying, I sent you an email saying, hey, this, I might bring this up. And you said, well,

Maybe I don't want to – I don't know that folks in think tanks like me have something to say about this. If I did, I'd be in the financial system. And I take the exact opposite perspective. If you're in the financial system, you will never figure out what's going to do you in. It's only folks like you who have perspective and can take a step back and not in the middle of it who can kind of give us a sense of what possibly could go wrong. Yeah.

I know that this is unfair because you said, maybe I don't want to go down this path, but I'm going to make it down the path. What out there is making you nervous? We talked about safe haven status. Maybe that's it. Is there anything else you want to put a stake in the ground and say, hey, think about this. Take a closer look at this. This may be something that is the black swan that could do the financial system in. Yeah.

One of the reasons I like coming on here is that you're unfair and that makes it interesting. Like I've done these podcasts where, you know, you get the questions ahead of time and it's, you know, running through a script and, and you know, if I could read lines like an actor and look like one, I'd be in Hollywood. If I knew how to make an investment ahead of time, I'd be, you know, in a, you know, in Greenwich, Connecticut. Right. Right.

A couple of thoughts I have, right? One of the one of the in May and Aaron, you can say, hey, Mark, no, I'm not. I'll never forget that when in February of 2007, one of the first hearings then new chairman Chris Dodd held on the Senate Banking Committee was about subprime mortgages. Hmm.

And we had a witness, Martin Eaks, who's a true genius, a MacArthur Award winner, who founded the Self-Help Credit Union Center for Responsible Lending in North Carolina. And Martin predicted a tsunami of 2 million foreclosures. I remember this. It would devastate. And he was laughed out of the room. The Federal Reserve said, this is a joke. No way. Worst case, it's a small number of people.

And of course, Martin was wrong, right? It was 5 million foreclosures, not 2 million. And so here you had this guy waving his hand, screaming about this and all the, you know, respectable people, quote unquote, laughing him off. And, you know, I can't imagine if we'd done this podcast in 2019, I would have talked about a virus shutting down the global economy from the Spanish influenza, right? Yeah.

You know, so, I mean, there's some big black swan events like cybercrime, like issues with our power grid, right? That we've not had these giant blackouts, these giant losses of data as we've digitized it. There's a clear and growing present danger of the erratic behavior of this administration and the breakdown of rule of law, right? And the political gridlock in the United States, right?

And, you know, a Chinese invasion of Taiwan as something like that type of structure. I mean, I'm not going to give much credit to a U.S. invasion of Greenland, although I think that would create a lot of problems. And, you know, you can laugh it off, but the president of the United States is actively floating it around and sending his vice president on a scouting mission there. So, you know, it's funny till it isn't.

In that type of world, you know, the other thing is you've seen a... I tend not to think the next recession will be a financial crisis. I think it'll come from something else. I mean, this trade thing we discussed earlier. But if you look at a financial crisis, they tend to... I wrote a paper on this for the Yale Journal of Financial Stability. And my core finding was that you need two things for a financial crisis. You need the fundamental mispricing of an asset and you need leverage.

So if you have the fundamental mispricing of an asset, the value of a dot-com click, but you don't have leverage, then you get a bubble, right? That's clearly what happened in 1999, 2000, right? How you got a financial crisis was you had massive leverage in the mortgage, subprime mortgage market. The crypto crashes that we've seen from here and now on what is the fundamental value of a Bitcoin, right?

there hasn't been any real leverage. So the value of a Bitcoin has gone up and down pretty radically, although structurally it's risen, right? These meme coins have gone up and down radically, but there hasn't really been leverage in that system. And I wonder, are we moving to a system where there's going to be leverage in crypto? And what is the fundamental long-term value of this new asset?

And I'm not saying that to be pro or anti crypto. I know that gets people's hearts racing and you can have a fun conversation if you take a provocative position. I mean, the fundamental value of a click was very unclear, right? In 2000, Amazon was $100 a share and in 2001 it was $10 a share. And if you bought at the peak in 2000 and held, you did really, really well.

But the market had no idea. And so what is the fundamental value of a Bitcoin? What's it good for?

I don't know. You know, I did an event a few months ago with the chairman of the Commodities Future Trading Commission, Ross Benham. And at the time we were doing the event, Farccoin had been the best producing asset for the last three months. And I think the market capitalization of that, which I think is a tricky concept in crypto, it's often cited, but I think poorly understood. But at the time was higher than Papa John's.

And I said, you know, I know what Papa John's pizza does. I don't like it. My kids love it. But I pay them money and they bring pizza to my house and we can debate whether it's good or bad pizza. What the hell does Farc coin do? Right. And how is this? How is this worth more than Papa John's pizza, which is everywhere? Bringing your pizza.

Right. Well, that gives a lot of food for thought there. A lot of little stakes in the ground. So can you do me a favor, though? If you're going to make a big risk prediction, spread as many things out there as you can and then hope that one of them comes through and then you're a genius. Yeah. And just do me a favor. When you do discover something out there that really makes you nervous, knock on the door and say, hey, I

I want to come back on Inside Economics and let you know about it because we're all ears. We're all ears. We're constantly thinking about the risks that are presented and what could do us in. So that would be very helpful. But I want to thank you. Number four, as I said, that's a record number of appearances. Really do appreciate that. And you're sorry. I'm excited, by the way. Coffee mug is blank here.

You know, you could. OK, there you go. I was just going to say. Yeah, I was just going to say Moody's has a gift policy. That's why, you know, there's but we certainly can do something on that on that mug. So we'll be we'll be in touch on that one. But thanks so much for joining us. Really do appreciate that. It's a pleasure. Thank you, guys. And dear listener, I hope you enjoyed that conversation and we'll be back next week. Talk to you soon. Take care now.