Optimist Q&A: The AI Bubble, the Rapture, and Free Lunch

Kathryn: Hello and welcome to Optimist Economy. I’m economist Kathryn Anne Edwards.

Robin: And I’m editor Robin Rauzi.

Kathryn: On this show, we believe the US economy can be better, and we talk about how to get there one problem and solution at a time, and on this show, we’re doing like, our work rate is going up ‘cause we’re talking about a lot of problems and solutions. It’s the question and answer episode.

Robin: We got questions from 50 to 60 people. Some of them asked many questions. In addition, people did send their considered entire tax overhaul policies. We will not be getting to those today, because we’re gonna try to get through as many of these questions as we can, and we’ll see how far we get.

Kathryn: Will say, this round was the highest rate of, like, me looking at the question and saying, “Uh, I don’t know.”

Robin: Mm-mm.

Kathryn: “Don’t know it.” Which means you guys think I’m so smart.

Robin: I actually replied to somebody and I said, “You don’t want financial advice from us.” We started a money-losing podcast. Don’t ask us when you should sell your stock. We don’t know. You should sell it now and send money to us.

Kathryn: That’ll be our only financial advice. I hear the best investment is a nonprofit money-losing enterprise called

Robin: Optimist Economy.

Kathryn: Let’s just roll it. Rip it.

AI & BIRTH RATES

Robin: Our first question is from Nava. If AI CEOs truly believe that their technology will replace human workers and everyone will need UBI, why are they also so concerned about declining birth rates? Wouldn’t fewer people be fine if machines do the work? Is this evidence that Sam Altman and his peers don’t actually believe AI will decrease demand for human labor?

Kathryn: Okay, Nava, gonna take a shot in the dark here. It’s probably unlikely that they are genuinely concerned with either. I think it really comes off as trying to position themselves as moral leaders because they make a harmful product and will face terrible, terrible liability lawsuits in the future. Meta just lost a massive lawsuit in California about liability for the product harm that it is now responsible for financially.

Kathryn: Lots more lawsuits are coming. So it really feels like they’re just trying to position themselves as the good guys so we don’t all sue them later.

Kathryn: I said we wouldn’t give financial advice, but here’s — I’m gonna say it. Let’s sue them now.

Robin: When you get that big settlement, optimisteconomy.com has a donate button.

Kathryn: That is exactly right — when you get your AI liability settlements.

Robin: Okay.

Kathryn: OK.

AI & BIRTH RATES (CONT.)

Robin: Okay, this question is from Paige of Phoenixville, Pennsylvania: “Why are governments still so concerned about declining birth rates if technology is expected to reduce the number of available jobs in the future? While common arguments suggest that we need more consumers for an ever-growing economy and more contributors to Social Security, you have previously mentioned that Social Security can be fixed demographically, and a growing number of economists expect AI to reduce labor demand in the long run. So why are people still worrying about birth rates if we have fewer people in the future? Is that necessarily a bad thing for the economy?”

Kathryn: I think there’s a couple ways to view it. I think one of the questions about falling fertility is that it’s seen as almost like an economic commentary. Like, I feel so insecure in the economy and in the world, and that the world itself is insecure, that I don’t wanna have children.

Kathryn: And that if, to the extent that bringing kids into the world represents, like, a hope and commitment to the future, a lot of people aren’t feeling it.

Kathryn: Like, that should be a concern of governments, to the extent that fertility is seen as a comment on their own lives.

Kathryn: The separate issue is, is it necessarily bad for the economy if the population falls? I think the answer is no and yes.

Kathryn: No, because the economy serves us and not the other way around. So if we wanna have smaller families and we wanna have a smaller population and do a little less damage to the Earth in the future, then the economy needs to be able to thrive under those conditions, right?

Kathryn: It needs to come to us, not the other way around. That said, more people equals bigger economy because you have more consumers. And so if you have a falling population, managing your economy through a contraction — like an actual contraction of the number of people — is tough because typically, when the economy contracts, it’s in trouble.

Kathryn: So being able to shift our expectations and our tools and our data releases and how we respond to things and what makes us scared that the economy’s in trouble, all of that has to be adjusted for a population decline.

Kathryn: That said, anything is possible. I mean, Social Security is currently only contributed to with payroll taxes. We increase wages, we change some tax coverage, we can make the program solvent. But say population declines and that’s not enough — you could always put money from, say, capital gains taxes or estate taxes or, like, an AI worker bot tax.

Kathryn: Like, there are always ways to make things work if you’re willing to do so. Like, if someone says we can’t have Social Security because the boomers are retiring, y’all, they’re not vested in Social Security, and they don’t care about the program. Because if you wanted to save Social Security, you would do it, and you would find a way to make it work.

Kathryn: This is my Tim Gunn rule of economic policy: make it work.

Kathryn: Make it work. If they cared about it, they’d make it work.

AI BUBBLE BURST

Robin: Okay, our next question is from Chris of Des Plaines, Illinois. “What are the ramifications for the labor market if/when the AI bubble bursts? Looking at the S&P 500, it’s dominated by big tech that dumps considerable money into AI. And because of AI, these companies are all in this weirdly incestuous relationship where they buy one another’s AI-related products to develop more AI-related products, and so on and so forth. I just envision this huge tech-related crater left by the bubble, and I’m curious what your thoughts are about how the average US worker will be hit or not when that bubble bursts.”

Kathryn: Worth noting that earnings reports are tracking returns in the stock market right now. So if you look at the earnings of the S&P 500 and compare that with gains in the stock market, we do have some fantastical stock valuations, but we also have a lot of companies that are earning a lot of money. And so it’s not as divorced from reality, I think, as has been purported. So on more stable ground than just pure bubble.

Kathryn: The way that this would hurt, there’s two things that would happen. One is the employment channel, and one is the consumption channel.

Kathryn: The employment channel is the value of the stock market is corrected and it goes down. Companies are worth less money than they thought they were, and they need to downsize. They lay a lot of people off and send them into unemployment. Doesn’t take that many layoffs or that much elevation in layoffs to actually create a really high unemployment rate, especially in the low hire environment that we’ve been in since the summer of 2022.

Kathryn: The other thing that could happen is the consumption effect, which is that businesses don’t necessarily lay people off, but households’ retirement accounts are now worth a lot less than they thought they were because they have so much wealth vested in the stock market through their 401(k)s and IRAs.

Kathryn: That value goes down, and now they consume less as a result, and that dip in spending and need to save in other ways leads the economy to contract.

Kathryn: Those are the two channels, and more than likely they’d happen at the same time. And bam, we are possibly in a recession.

Kathryn: So that’s how it would happen. I will say a lot has to go wrong for that to happen. I mean, we talk a lot about recessions because I’m obsessed with them, but the economy is much more stable than just one company’s value goes down and then there’s a big problem.

THE EXPERIENCE OF INFLATION

Robin: Okay. Um, this is from Alex in San Diego, California. “In April, economics journalist G. Elliott Morris wrote an essay about why consumer sentiment is so low despite strong macro indicators. One camp says that Americans are actually fine and the gap is purely psychological — it’s a product of negative news and social media. But Morris disagrees. He ran the data and found that the single best predictor of sentiment is the share of people who say high prices are hurting their household finances. His explanation is that prices have risen beyond what people expected, and standard inflation metrics don’t capture that. They measure the year-over-year change, but not the gap between where prices are and where people thought they would be. Do you buy his explanation?”

Kathryn: Follow inflation is, I would say, completely separate from how households experience it.

Robin: Mm-hmm.

Kathryn: We look at the year-over-year growth in average prices. You don’t look at that at all. You just look at the price for goods and services that you buy as it relates to your budget.

Kathryn: So I mean, this idea that prices have risen beyond what people expected — that makes perfect sense.

Kathryn: You know, another thing that would make sense is that wages aren’t rising as fast as prices, and so when price growth outpaces wage growth, people are being made worse off.

Kathryn: I mean, if you remember back to that Wall Street Journal article that we talked about — the salience of prices isn’t just about what you can afford, but what you dislike.

Robin: Mm. Right.

Kathryn: Right? So like, you know, people were like, “Oh, I mean, I make $300,000 a year, but I’m not paying $10 for coffee.”

Kathryn: The way that we think of inflation is, like, the economy’s vital sign. That is not how we would think of a household’s vital signs, and it’s not how we would think of how people would internalize prices that they see every day.

Robin: Yeah.

Kathryn: I’ve actually for a long time wanted to have more price indices produced by the Bureau of Labor Statistics that include things like a price index based on family type.

Kathryn: People consume really differently over the course of their life, so like people with young children — daycare and formula and diapers and milk, that’s all gonna hit them really hard. But then like clothes tend to hit like younger adults and teenagers, whereas like old people are like, “I haven’t bought clothes since 1974.” Like they just don’t care.

Kathryn: And so you could take what we know about the spending patterns of households by age and by type — like, are you in a house, are you in an apartment — and you can make like a portfolio of indices. I mean, think about like having 100.

Kathryn: And then one index I’ve wanted to make for a while is to come up with an index of the sticker shock goods — goods that Americans just do not like to see get expensive.

Kathryn: Things that they consume all the time, right? Those would be like coffee, milk, eggs, like chicken. So you just take like the most consumed goods in the economy and make a price index of that, because that would be most salient for inflation.

Robin: That sounds fun. Doesn’t it sound fun?

Kathryn: Um, I think economists could do a lot better, but his explanation is as good as any of the other ones.

MINIMUM WAGE & POVERTY

Robin: Okay. Next question from repeat questioner Max. “I recently saw an argument that raising the minimum wage is not a very effective tool for reducing poverty because many minimum wage workers are not in poverty — for example, teens being minimum wage workers in a family living above the poverty line. The argument puts forth that poverty is being driven more by labor force participation, which is to say not working, than by the minimum wage. And that raising the minimum wage would reduce poverty by a near zero amount. I would think that raising the minimum wage would have ripple effects throughout the income distribution and would create upward pressure on a lot more than the near bottom part of the wage distribution. What can we say about focusing the minimum wage as an effective tool for reducing poverty?”

Kathryn: Hmm. It’s interesting to think about this now because the minimum wage has eroded so much that one person working full time at the minimum wage could not get themselves out of poverty for the year, which is a pretty low bar.

Kathryn: There’s been movements in the past and currently to have a living wage, and the living wage is often defined as the wage needed to keep a family of four above the poverty line.

Kathryn: But poverty has different thresholds based on your household — so a four-person household versus a three-person, two, one. The minimum wage has basically fallen from keeping a family of three out of poverty to now it’s actually below one, where even if you work full time, you could not keep yourself above the poverty line.

Robin: Mm-hmm.

Kathryn: This question of like, is the minimum wage a good anti-poverty policy? Well, like —

Robin: Depends on how much you raise it.

Kathryn: Depends on how much you raise it and who it affects. I mean, if 15% of workers are earning a minimum wage, then it’s a really salient policy. If it’s a half percent, you know.

Robin: What if it went up and it pushed, I don’t know, everybody who’s between $7.25 and $15 above $15?

Kathryn: Yes, then I think it would have a huge impact. Maybe not a huge impact on poverty. I mean, he’s right in that the poverty rates for non-workers are higher, and the vast majority of people in poverty are non-workers. But if one’s objection to raising the minimum wage is that it wouldn’t do enough to help poverty, I don’t think they care about the minimum wage or poverty.

Kathryn: Uh, you know, the minimum wage is really about what do you think the least worker in America deserves to earn? If you don’t think the least worker in America deserves to earn above $7.25 an hour, I’m gonna take a gander that you don’t care about poor people or people who are low wage, because this measure is so much more about power and dignity than it is necessarily about, like, economic success, because it’s a minimum.

JOB LOSS AFTER 50

Robin: Okay. Uh, our next question is from Tony of Arlington Heights, Illinois. “I understand that young people in their 20s and 30s usually get steady pay increases, and they mistakenly assume that it will continue into their 40s and 50s, so they can delay saving. However, according to the Urban Institute, after age 50, the typical American worker stands a 56% chance of being displaced, and of those who are, only 10% will ever attain their previous highest salary. To your knowledge, has the Urban Institute got it right here, or has this data changed? These are relatively old statistics.”

Kathryn: Well, the data was — it’s a retrospective, so it’s accurate for the data that it’s describing, right? It might not apply anymore because our economy has evolved.

Kathryn: I mean, it is worth noting that permanent job loss in the US over a pretty long 30-year period is really about manufacturing. It’s not the only thing going on, but it is a very unique-to-this-time phenomenon.

Kathryn: And those are very hard to transition from. If you lose your job past 50 and you are a production worker, it can be very hard to become reemployed. As “Janesville” — our favorite book —

Robin: If we could just pitch “Janesville” one more time.

Kathryn: One more time. We had a listener — someone wrote on my LinkedIn —

Robin: We’ve had several people write to us to say that they’ve read “Janesville” as a result.

Kathryn: But our economy is transitioning more to service workers, and so how service workers deal with job loss is gonna be different than production workers.

Kathryn: Like, those types of transitions will always make the past slightly less relevant or predictive of the future.

Kathryn: Uh, but I think the underlying point is right, which is that if you lose your job at older ages, it can be very hard to find new ones. Ageism is rampant in our labor market. Older workers are discriminated against quite blatantly. I think some people don’t know it’s actually illegal to discriminate against older workers, and they would be surprised to learn that saying, “This guy’s too old,” is against the law.

Kathryn: The Age Employment and Discrimination Act.

Kathryn: Well, we mentioned in our — I’m sorry, our —

Robin: Non-employee, employer, non-employer business, self-employed freelancer episode — I’m trying to optimize us for Google search in real time. That older workers are more likely to be self-employed, and if you think of self-employment as a safety net for not being able to find employment, it’s reflecting not just independence and ability, but also necessity — to have it at older ages.

Kathryn: I mean, the last part of his question was savings. Like —

Robin: Yeah, people don’t save because they think they have time later.

Kathryn: They think that they have time later. I didn’t quite know if he was meaning, like, save for retirement or save for the potential for job loss.

Robin: Either one.

Robin: You need to do both.

Kathryn: Job loss is too much for someone to save for. Arguably, retirement is too much for someone to save for, and if the amount that is required to save is impossible for most people, that means saving isn’t a feasible option, and you need to have insurance. Y’all, you do not —

Robin: Save the value of your home in case a tree falls on it. You get homeowners insurance.

Kathryn: You are going to save for retirement, but you are going to pay into Social Security, and that is your old age insurance — the official name of the program. You can’t save enough to make through unemployment, which is why we have an unemployment insurance system. All of these are about managing risk that individuals cannot save for sufficiently on their own.

Kathryn: His question just makes it clear we need a long-term unemployment insurance program.

PRODUCTIVITY SQUEEZE

Robin: Okay. Sarah in Chicago, Illinois, says this: “I started in the workforce in 1998 at age 15. As the decades have gone by, it seems that employers are trying to do more and more with less and less people. I understand cutting out obsolete positions, but I am finding the workload and responsibilities assigned to each individual is ramping up more and more. I feel that this squeeze the orange and throw away the peel effect is accelerating. Is there an economic term for this, and do you think it’s accelerating?”

Kathryn: Cheap. Being cheap. I mean, that’s — sometimes the simplest explanation is the one that’s the best. Um, I mean, labor productivity has changed. What people are capable of doing, say even in an office job in 1998 versus now, is different. And that could require fewer people.

Kathryn: But I think the squeeze really comes from a lack of labor mobility, a lack of worker power, and a lack of outside options. I mean, as employers and industries become more concentrated, workers have fewer options, and so employers can basically get away with it.

Kathryn: And they should get penalized on the back end through things like overtime, but of course they don’t have to pay it for people in white-collar jobs for the most part.

Kathryn: Another labor economist might answer this differently and talk about like the effect of productivity as its adoption to the workplace and how knowledge is transferred and things like that.

Kathryn: But I mean, this to me is like, yeah, well, we don’t have unions. We don’t have good labor law. We don’t have a ton of regulation. So it turns out when you don’t make them do anything for workers, they try to extract as much as humanly possible.

Kathryn: I mean, it’s kind of crazy when you think about it. Like, let’s say you’re a white-collar worker in an office that makes $80,000 a year. What are the wage and hour laws, the labor laws that apply to you?

Kathryn: Well, you can’t be discriminated against. You’ve got civil rights and Equal Employment Opportunity Commission. You can’t be harassed.

Robin: OK. That’s about it?

Kathryn: I mean, you don’t have overtime protection. You probably don’t have any protection related to when you’re scheduling. You don’t have any type of protection of, say, like being able to clock out or get off your phone or not have to answer email.

Kathryn: They don’t have to grant it if you needed to work from home. They’re not required to pay you time off, holidays, sick days, health insurance, retirement. They’re not required to do any of those things.

Robin: They only do them because they wouldn’t have any workers if they didn’t.

Kathryn: Yeah, I mean, bare minimum. Of course they wouldn’t describe it like that, and I think what the corporate pushback would be is that paying for the compensation package has gotten more expensive.

Kathryn: And I’ve wondered how much these types of on-the-ground experiences would change if employers didn’t have to pay for health insurance.

Robin: Yeah.

Kathryn: But at the same time, I think one of the reasons why employers pay for health insurance is because they can get away with the squeeze that results, and, you know, they’re your health insurance. You are beholden to them.

Robin: Mm-hmm.

Kathryn: And you don’t just have to find a new job. You have to find a new health insurance plan, and that can be really tough for a lot of people.

Kathryn: So I’d like to give employers the benefit of the doubt that they’re just trying to, you know, do what makes sense, and they have a lot of costs that we don’t see before the paycheck, like things like health insurance.

Kathryn: But at the same time, you don’t really see them out en masse saying health insurance is hurting workers, ‘cause I think it’s helping them. Anyway, that’s pure speculation.

CEO PAY RATIO CAP

Robin: This question is from Neil: “What if we kept corporate tax rates low but required corporations to cap the CEO to average worker pay ratio? Would that be more politically viable than raising taxes outright?”

Kathryn: Uh, no, because I think if you had a CEO to worker pay ratio, they would fire everyone that made below a certain amount in order to get the ratio higher, and they would hire all low-wage workers as independent contractors.

Robin: They’d also find other ways to pay them, I think — other ways to compensate CEOs.

Kathryn: Yeah. I think they would just try to get around it. I mean, according to the Economic Policy Institute — my former employer — in the 1980s, CEOs made 20 to 30 times the average worker pay. They now make 281 times average worker pay. Their CEO pay has grown 1,000% since 1978, the first year of data.

COULD THE DOLLAR COLLAPSE?

Robin: A question from Chrissy in Ann Arbor, Michigan: “I feel like I’ve been hearing a lot about possible collapse of the dollar, devaluation of the dollar, given our increasing national debt and everything else that’s been happening over the past year and a half. How realistic is this scenario, and what does it mean for our economy in the long term? Could we recover from it or at this point prevent it?”

Kathryn: Yeah, so Chrissy wants to know about the rapture. The day that our debt somehow comes due in a way that it hasn’t come due yet. Um, so federal government takes in tax money —

Robin: Yes.

Kathryn: Money. There’s a difference between them. In order to buy things without tax revenue, they have to sell Treasury bonds, and those Treasury bonds are our debt.

Kathryn: They’re basically promissory notes to say —

Robin: We’ll give you this money later.

Kathryn: We’ll give you this money later, and so you give us money now. We’ll give you money later at a certain rate, which we call the yield, and that is the US bond market and how it relates to the debt.

Kathryn: The price of bonds is basically an indicator of how much appetite there is in the bond market for US debt, and it does go up and down.

Kathryn: So what will kick the rapture off is that the bond market will see a price go up significantly because no one is willing to buy US debt.

Robin: That means the yield will go up? Is this the yield of the 10-year T-note?

Kathryn: Yes. There’s like notes and bills and bonds, and they have like slightly different names, but basically the US tries to sell debt, and it doesn’t have takers at a low price — you basically really have to pay someone to give you the debt.

Kathryn: So think of it as — in the past, the US has been so reliable people would basically give us like an interest-free loan of like, “Yeah, you can pay me 1%, 2%,” and sell the bond.

Kathryn: Um, but it could be that they need 5, 10. That number gets really high, or it becomes so expensive that we can’t take on additional bonds.

Kathryn: Now, does the bond market matter to a human? Yes, because the price of Treasury bonds is probably the biggest predictor of the price of mortgages.

Robin: Right.

Kathryn: So if the bond market says, “We’re not gonna buy US debt anymore, and you need to pay us a lot more ‘cause you’re seen as a riskier asset ‘cause you have so much debt,” that actually would have ripple effects throughout consumer markets because at the very least, probably the primarily affected good would be homes. You would have to pay a lot more for a mortgage.

Kathryn: All right, so that’s how the rapture starts. The bond market is unhappy. That means that in order for the rapture to end, we don’t actually have to get rid of all of our debt. We just have to do things to make the bond market happy.

Robin: OK.

Kathryn: Convince the bond market that the US is serious about its financial and fiscal trajectory. So that’s like a much lower bar than actually paying the debt off to a big degree — we just have to convince the bond market that we’re responsible. So when that happens, I think that they’re gonna have to do something to calm the bond market, and it will likely be raise taxes.

Kathryn: And the reason why I think it’s raise taxes is because the big portion of US spending is Social Security, Medicare, defense, and Medicaid. And massive cuts to defense or social services is not gonna make for a very good economy. So it doesn’t really make the US look like a... Like, you’d have to cut one of those four.

Kathryn: Every social program that you can think of is simply not large enough to make a difference to our debt. You really are talking about the big four or raising taxes. And in the past — one of the latest downgrades of US credit happened in the run-up to the One Big Beautiful Bill Act tax cut, which they said was fiscally irresponsible.

Kathryn: So I think pressure from the bond market would basically force Congress’s hand to say, like, “You need to raise some revenue.” And then once we get on a better revenue path and say, like, “Okay, we’re gonna do this, this, and this,” the bond market calms down, and then we keep going. So I don’t think it would actually look like a default or like a total catastrophe.

Kathryn: I think it would just look like pressure we can’t ignore that forces Congress to make good decisions.

BONDS & THE FED

Robin: Okay. This question is from Rob in Arlington, Texas. “The president has made it clear his desire for lower interest rates despite a current inflation rate above the Fed target of two percent. This seems rather counterintuitive and somewhat reckless given our current circumstance that includes an annual inflation rate of three point three percent — that was as of March — and the inflationary impacts of tariffs and the current war with Iran that will likely be with us for the foreseeable future. I’m curious as to how the bond market, and in particular the corporate bond market, potentially can serve as a check against economic policy decisions that are counter to current economic data and trends, and if there are examples where the bond market balked at economic policy decisions and an administration or the Fed has had to course-correct as a result. If so, how did this play out?”

Kathryn: Yeah. Okay, so Trump does listen to the stock market. I think he follows it every day. And there’s been a lot of reporting that he is very sensitive to how the stock market is doing and sees it as, I think, really the only performance measure that he cares about.

Kathryn: I mean, he said on the record inflation doesn’t matter, cost of living doesn’t matter, the price of gas doesn’t matter, but he follows the stock market, and the stock market can be spooked by the bond market, as I previously mentioned.

Kathryn: Although I probably shouldn’t be quite so insulting about the stock market. It’s just easy and fun, so — like, why? We only live once.

Kathryn: So I mean, we’ve seen this to some degree in the Fed pick, where you had, like, betting markets that were trying to predict who Trump was gonna pick to replace Jerome Powell as the next chairman of the Board of Governors.

Robin: You mean like Polymarket? Like those kinds of —

Kathryn: Well, and also the stock market — well, they had like prediction markets, like Kalshi —

Robin: Prediction markets? Yeah.

Kathryn: The stock market itself would respond badly to news of like Kevin Hassett is in the lead, and they would be like, “No, no, no, no, no, no, no, no, no.” And Warsh was someone that the market responded favorably to, because he was seen as like an actual — an actual choice.

Kathryn: And he’s not an economist.

Robin: Sorry. Okay. A legitimate choice.

Kathryn: A legitimate choice. I mean, he served on the board before. The first Rose Garden announcement of the tariffs — like they’re all gonna be this crazy percentage — the stock market kind of immediately responded with displeasure, and a lot of those were walked back almost immediately.

Robin: The tariffs were walked back.

Kathryn: Yeah — I apologize. Yeah. So like he announces like, “We’re gonna have all these tariffs on every country in the world, and they’re gonna be —”

Robin: And they’re gonna be 38% and they’re — yeah, yeah.

Kathryn: Yeah.

DEBT CEILING FIX

Robin: Okay. Next question is from Dustin, who says he is currently residing in Bowling Green, Kentucky. “Could the debt ceiling be set permanently to be a percentage of GDP or a percentage of annual federal revenue so that Congress would never have to deal with it again? I guess the one economic problem I’m trying to solve is the one of ballooning federal debt being out of control by putting Congress on a borrowing budget. Could that work?”

Kathryn: We wouldn’t want it. You know, what happens when there’s a recession — the economy shrinks, and the government needs to borrow a lot. I mean, those are the years our deficits are the largest, bar none. Income tax revenue falls, corporate income tax revenue falls, spending on automatic stabilizers and means-tested programs increases, and you’ve got to send a lot of money out the door quickly that you’re mostly borrowing.

Kathryn: And since the economy’s gotten smaller, the deficit as a percentage of GDP also spikes. So we wouldn’t ever want to hamstring the ability of the federal government to spend beyond its means when the economy desperately needs it. That said, to get the debt under control, we don’t need a budget surplus.

Robin: What?

Kathryn: Yeah. Think of both of these as the size of the debt relative to the size of the economy.

Robin: OK.

Kathryn: The US saw the size of the debt relative to the size of the economy fall for almost 40 years after World War II, even though within those years there was almost no — I think there was only one or two years in which the budget was actually in surplus.

Robin: Oh, but the debt just got smaller because the economy got bigger.

Kathryn: Right, all that matters is the debt relative to the size of the economy.

Robin: Mm-hmm.

Kathryn: So you just need the economy to grow faster than debt. But we have a debt growth rate — it’s the deficit.

Kathryn: So in order for the debt as the share of the economy to fall, you just need economic growth to be higher than the deficit as a share of GDP. So if the economy grows at 2% a year, the deficit needs to be under 2% of GDP.

Robin: OK.

Kathryn: Now we have a separate problem that we do have a lot of debt interest payments, and those do crowd out spending because we have such a large debt now. But again, that’s an absolute problem, not a relative problem. The relative problem is the one that we want to solve.

Kathryn: So the tail end of the debt questions is that I think the bar for dealing with the debt is much lower than people realize. We’ve just gotta grow the economy faster than we grow the debt.

Robin: Okay.

Kathryn: OK.

Robin: We’re now gonna move into our block on savings, investing, and retirement.

Kathryn: No, this is when all the people are like, “What should I do with this?” Invest it in Optimist Economy, baby. It’s gold.

TRUMP ACCOUNTS VS. 401(K)

Robin: This is a question from Rebecca in Connecticut: “I particularly loved the Trump account episode. It made me feel comfortable opening one for my daughter. For a brief moment, I thought maybe he did something pretty okay for once. But now I’ve been hearing more talk about these accounts as laying the framework to replace 401(k)s in the future for this generation. Is even the semi-good thing he did actually awful and he’s just done it to help companies?”

Kathryn: Okay. Now, I assume she’s talking about the child accounts and not the savings —

Robin: She said she opened one for her daughter, yeah.

Kathryn: Yeah, okay. So we have the child saving account, and we have the worker saving — the auto IRA. Hold on. Let’s just come up with names for these. This is so confusing.

Kathryn: We’re gonna call the one intended for children the child account, and the one that’s intended for workers who don’t have access to a 401(k) —

Robin: Auto IRA.

Kathryn: Auto IRA.

Kathryn: Okay, two versions of the world.

Kathryn: One version — the version we have now — in which we have employer-sponsored retirement accounts that we can contribute to as workers, but we need them to set up.

Robin: Mm-hmm.

Kathryn: And we can contribute to an IRA that we open up on our own, but there’s nothing automatic about it.

Robin: Mm-hmm.

Kathryn: Another version of the world — we have a savings account that we’re started at birth as children, that our family, and hopefully the government, contributes to.

Robin: Mm-hmm.

Kathryn: And then when we get our first job, we get an IRA that is automatically contributed to from our government and us and hopefully our employer. And so now, instead of having an employer-linked account and a private market for IRAs, you essentially have two accounts — a savings account and a retirement account — that are automatic and given to everyone at birth and at their first job.

Kathryn: And the real policy question becomes how much do employers and families and workers contribute to these two accounts that everybody has?

Robin: OK.

Kathryn: You know, maybe the 401(k) is going away. There’s a lot of evidence that employers are trying to walk away from 401(k)s because it’s expensive, and they’re trying to contribute less.

Kathryn: But I think that second version of the world is fine — nobody’s retirement savings is dependent on what their employer decides to do. That’s what Social Security looks like. Social Security is the version that’s a cash payout annuity that’s inflation-adjusted until you die.

Kathryn: But you could have one that’s in, like, an indexed fund that’s just really a defined contribution plan that is not linked to your employer. That’s —

Robin: What I sense in her question is the concern that companies currently contribute to people’s 401(k)s the way they used to pay pensions, and that eventually employers won’t contribute to workers’ retirement savings at all.

Kathryn: I think we should assume that employers will try to contribute as little as possible to retirement unless they are legally compelled to. And this transition from defined benefit to defined contribution kind of tells you all that you need to know. If they can save money on retirement without losing their entire workforce, that is what they will do.

Robin: Mm-hmm.

Kathryn: If 401(k)s are no longer a thing, we can just extract from them the lessons that were good. Like, we know how to get people to save a lot for retirement. It’s auto-enrollment, auto-contribution into low-risk funds. That doesn’t require a 401(k), and it doesn’t require an employer.

Kathryn: If we want employers to be part of the retirement solution, we have another model of how to do that well, and it’s called Social Security.

TAX DOLLAR WASTE MYTH

Robin: This question is from Josh from Charlotte, Vermont. “I recently listened to an interview with Jason Calacanis and Bradley Tusk, which claimed that for every tax dollar paid into a government program to help the poor, 60 to 70 cents is wasted. This sounds like BS, but is it? Do they really mean that for every tax dollar paid to the government, 60 to 70 cents goes to supporting civil servants and administering programs that benefit all of us, and that the remainder is paid out in benefits?”

Kathryn: I’ve never heard that. It sounds like it could’ve been based on a statistic that was, like, horribly distorted over time, but that doesn’t make any sense.

Robin: Mm-hmm.

Kathryn: Now, what would be wild is if they’re making this claim after they put on work requirements.

Robin: Yeah.

Kathryn: So, like, we’ve made the program impossibly hard to administer, and it’s wasted on administration.

Kathryn: Like, well, all right, well, here’s your cake and eat it too, I guess. Um, the idea that, like, money is just thrown out the door and we don’t know where it goes — I mean, these programs are heavily monitored and regulated.

Kathryn: Their fraud rates are reported, their improper payment rates are reported.

Kathryn: I’ve never seen anything like sixty to seventy percent. Now, there is one very special program — the Temporary Assistance to Needy Families — which in fact is not assistance to needy families. It’s a block grant that goes to states that they can spend on whatever they want. Now, I could see them having sixty to seventy percent wasted rates.

Kathryn: I mean, it’s got, like, a massive embezzlement problem — see Mississippi.

Robin: Hmm.

Kathryn: That’s not actually a poor person’s program ‘cause it’s not required to be spent on poor people.

Robin: Which is why it’s wasted.

Kathryn: Which is why it’s wasted, so that’s the only one I can think of — is that they’re thinking about some kind of TANF scandal. But what makes TANF a scandal is that it just doesn’t go to poor people.

Kathryn: Brett Favre got it, used through a series of nonprofits to build a volleyball center that his daughter could play at.

Robin: Yeah.

Kathryn: He’s the welfare queen, y’all.

UNIVERSAL SCHOOL MEALS

Robin: Okay, Carrie in Princeton, New Jersey says: “When I had a conversation with my more conservative aunt, she said she agrees with free school lunch, but only for low-income students. I went back to listen to the episode on this, but I’m not sure I could make a good argument in return for it to be universal. Can you please help me explain why it would be a good thing for all students, not just low-income students?”

Kathryn: Mm-hmm. Okay. So I think her insistence on low income kind of comes from the idea that if a parent could support a kid, then the government shouldn’t have to, and it’s only kids that come from needy households that should get help.

Kathryn: This is lunch. Typically it’s breakfast, too, but like, this is a measurement of need that you have to hit three times a day.

Kathryn: So I think the question I would ask back to your aunt is how good do you think a government income test is going to be at finding hungry children two times a day, five times a week —

Robin: I don’t know, something like that.

Kathryn: — a year?

Kathryn: I mean, income varies. Household situations vary, and they vary within a school year. They vary within a month. They vary within a week. They vary within a day.

Kathryn: And the reason why you make school lunch universal is because it’s too easy to miss people if the only ones who you think are needy are the ones that can prove it on an income test at a certain point in the calendar year.

Robin: Mm-hmm.

Kathryn: The target is too high, too frequent, and too high stakes to really err on the side of stingy.

Robin: And it’s also expensive to be that kind of — it’s expensive to be stingy in that way.

Kathryn: It’s administratively expensive.

Robin: Yeah.

Kathryn: I think, Carrie, what you wanna stress is hunger is a target that has to be hit three times a day, and one miss is a problem, right?

Kathryn: Hungry kids do worse in their classes. They do worse on tests. They have more behavioral problems. It is absolutely a problem that we know how to solve. Saying that we wanna restrict it to low-income kids is just a way of saying we don’t feel like solving it. Because we know low income is not a predictor of never going hungry over a year.

Kathryn: I mean, I post about school lunch all the time on TikTok and Instagram, and I’m always overwhelmed by the stories I hear back in return. People who say that when their dad lost a job, their family hid it from the community because they didn’t wanna know — they didn’t want anyone to know that they didn’t have any money, and so, like, they weren’t allowed to apply for school lunch because then people would know that they were on free and reduced lunch.

Kathryn: And here’s another question — I mean, how good do you think the income test is at predicting abusive parenting?

Kathryn: When I write about school meals or talk about school meals, people will tell me, like, some parents will withhold food as a punishment. Like, “You didn’t get your shoes on fast enough. I’m taking your lunch out of your bag.” And they use hunger as a behavioral mechanism, as a way to punish kids.

Kathryn: Do you think an income test would find that? I mean, kids just deserve to not be hungry because nobody should be better off than their peers because their parents got them food and other people’s didn’t.

Kathryn: So if she wants an income test, I’ll ask her — is that what she really wants? Or does she actually want kids to not be hungry? Because if she actually wants kids to not be hungry, then just err on the side of give all kids meals. I don’t know what she’s gaining by being stingy. Certainly kids aren’t gaining.

Robin: OK.

PART-TIME FOR NEW PARENTS

Robin: Okay, this question is from Ashley. “I had my first child about six months ago. My spouse and I are some of the lucky ones who got paid leave and were able to stretch it out to about five months each. Now our kiddo is in daycare, and between bouts of tears, I’ve become a woman obsessed with this pet idea that we should both have the option to flex down to part-time for some period of time — maybe a year, maybe 18 months.”

Kathryn: Yeah. Okay, so I think the short answer to her question would be, we can have a paid leave program that pays for some amount of time, and then if people wanna have more time at home, we can have a labor market regulation that says you are allowed to request part-time work from your full-time job.

Kathryn: So you work for a company, you go back on paid leave, and then labor law says if a worker who has been with you for a certain amount of time says, “I would like to be half-time,” you have to let them be half-time for, you know, however long we want.

Kathryn: They have them in Europe. You’re allowed to request part-time and flexible arrangements, and the way that they’re written is really like — they don’t have to say yes, but if they say no, they have to show to the government why they said no.

Kathryn: Um, but yeah, the policy mechanism is a labor regulatory scheme. So you would have a paid leave program that’s part of Social Security.

Kathryn: You get a universal benefit for all workers contributing to, whether they’re self-employed or not. And then at the end of that paid leave period, for a period of time after the birth, you get to request a half-time position.

Robin: Okay.

Kathryn: Didn’t say what happens to health insurance. Sorry, that’s actually the sticky wicket there, so —

Robin: It really is.

Kathryn: Yeah, so I mean, the only problem with any version of — like, whatever paid leave you are dreaming of in your head is employer-sponsored health insurance.

Robin: Yeah.

Kathryn: It is one thing to tell an employer that for 12 to 14 to 16 weeks, you need to pay for one of your employees who’s going through a medical event, and you’re adding someone to the bill.

Kathryn: But to say that, like, they’re gonna have a year where they work for you half-time and you still have to pay for their health insurance — that gets really — I mean, that gets hard to justify from an employer’s perspective and makes it a lot more onerous.

Kathryn: So the thing that is standing in the way of the glorious paid leave that you want is health insurance.

Kathryn: And as long as we have employer-sponsored health insurance, paid leave will be so hard to be generous in the United States. What another great reason to knock down that system we have.

FIGHTING MONOPOLIES

Robin: Next question is from Ross in Wisconsin: “I was wondering what both of your thoughts were around the following hypothetical. If you could wave a magic wand to keep market concentration at bay via policy, how would you do it? Revisions to current legislation, like updates to the Sherman, Clayton, or FTC Act, a simple increase in resource allocation toward antitrust enforcement, or something brand new?”

Kathryn: I don’t know. I’m not as much of an expert at antitrust law. I generally operate with the philosophy that people have a way of showing their hand, and the fact that Sherman and Clayton and FTC have been under such a ruthless attack is kind of — well, I guess they work really well.

Kathryn: If they didn’t work well, they wouldn’t bother trying to dismantle them.

Kathryn: So my sense is that we have excellent antitrust laws that need to be beefed up. Labor regulation’s the same. Like, these laws have been weakened because they were really good at what they did. You know, we just beef back up what we have.

Kathryn: But I feel like you could get creative. Like, a corporate income tax rate that varies with the HHI index. So if you’re in a really concentrated industry, you have to pay a much higher corporate income tax rate — so you basically have, like, the monopoly tax or, like, the concentration tax.

Kathryn: You could have it go, like, remunerate back to workers in the industry of, like, if you are in a concentrated industry, your employers have to pay a tax that gets distributed back to you. I don’t know. I could think of — honestly, I think I am the Republican nightmare. The number of crazy tax ideas and how we could spend it — I’m like their...

Kathryn: And no wonder they put me in black and white on Twitter of, like, “You need to raise taxes.” Like, “Look at her — she is the nightmare.” I’m like, I’m not the nightmare. But am I the nightmare, actually?

Robin: Might be.

Kathryn: I could be. I could be, ‘cause you tell me something tax, I think of a really fun way to do it.

POLICY IDEAS FOR TEXAS

Robin: Yeah. Okay. Flora in Texas says: “What are two to three economic policy ideas or programs that would help the economy of Texas work for every Texan? What would be the best bang for the buck? What could get broad bipartisan support even in the Texas legislature? But in a more general way, what local or state programs are promising as models for federal policy?”

Kathryn: What could Texas do? I mean, the sad answer is not much without the permission of the national Republican Party.

Kathryn: I feel like one of the biggest lessons I’ve ever learned about state policymaking was during the Great Recession. So Obama’s elected, and he passes the American Recovery and Reinvestment Act — but everyone refers to it as the stimulus — and the stimulus is hated by Republicans.

Kathryn: One of the stimulus’s components was money to state governments to work on infrastructure projects, like transportation infrastructure projects. And Republican governors made this big show of turning the money down. So Wisconsin, Scott Walker turned down money for the train from Madison to Milwaukee. I think Chris Christie turned down money — I think it was for either a tunnel or a bridge into New York — he just didn’t want it.

Kathryn: So this Democratic legislator in Louisiana put in a bill to take some extra money from the federal government through ARRA funds, and it passes, right?

Kathryn: Like, they take the money, and then they realize that they’ve just accepted the stimulus. They just didn’t know that ARRA stood for American Recovery and Reinvestment Act, and then of course, they changed their minds.

Kathryn: And this was really formative to me about how so much pressure is on state political party representatives to posture to whatever the national party wants, no matter what their state needs. And it drove it home in such a big way — it doesn’t matter what we need.

Kathryn: It matters what we’re allowed to say we want. Texas is the largest Republican state. They can’t do anything without the national party’s approval. Like, they don’t get to be creative. They can’t do anything.

Kathryn: They have to be the most red place. So that means that any policy that would be, you know, proven to be good and helpful, they’re not gonna do it.

Kathryn: I mean, we had cities pass heat laws about worker safety, and the state government preempted it to say, “No, you can’t have protection for people working in the heat outside in Texas in the summer,” right?

Kathryn: Like, it doesn’t matter if the policy’s good. It’s if the federal party wants it. So I think that doesn’t leave much. I do think there are ways to position policy that hasn’t happened other places to be a leader on. I don’t know — I mean, it’s kind of a stretch, but I do think something like sectoral bargaining — rather than have more power for collective bargaining closed-shop units, you could have a sectoral bargaining arrangement where employers are at the table with workers hammering out terms with a representative from, say, the Texas Workforce Commission. Like, here’s a sectoral bargaining arrangement for all steel workers in Texas, right?

Kathryn: And then see what they — see, like, I think the idea of being special, first, and in control really hits for Texas, so I think there’s ways to do that. Following policy that is truly bipartisan and hasn’t happened yet.

MAMDANI GOES FEDERAL?

Robin: Okay. We have another Texan. This is Victoria from San Antonio. “My question is around Mamdani’s economic policies, some of which you’ve broadly touched on, like investments in childcare, raising corporate or wealth taxes. But I’m curious — do you think elements of his economic policy could scale to a federal level? What would implementation look like? Are there other economic initiatives you think he could do that would be more effective to help the working class, particularly as the wealth gap widens in New York City and other large US cities?”

Kathryn: Hmm. Okay. I think most of what he’s proposing would be better at the federal level because the feds have more money. And they have more consistent access to money.

Kathryn: I mean, I feel in some ways, like, so scarred by the state and local budget cuts coming out of the Great Recession and the financial crisis because — I mean, if you build a childcare system on state funds and we have another bad recession, like, are you gonna cut those funds? Are you gonna cut the number of centers? Are you gonna cut their pay? Are you gonna cut the quality requirements? Like, where — how are you going to cut when you have to cut? I mean, the federal government, for all our talk of debt, has proved positive they don’t have to cut.

Kathryn: They have a very different resource scale. So this is gonna go back to my Texas answer, too.

Kathryn: I don’t like how much is put on states to do basic things. Childcare is a basic thing. The minimum wage is a basic thing, and the reason why you have states with so much variation is because the federal government has walked away from the basics.

Kathryn: So a lot of what Mamdani proposes is just filling a vacuum that federal leadership and action has created.

Robin: Mm-hmm.

Kathryn: I mean, great for New York City if they can get it off the ground. Horrible for New York City if something hits the city and they have to pull back services because they don’t have the strength or the resilience or the borrowing power of the federal government.

Kathryn: So most of what a lot of these leaders — not just Mamdani, but leaders across the country even 25 years ago — were doing are things that would be better at the federal level.

Kathryn: And maybe to go back to my Texas point — you know, I think one of the reasons why I struggle with what is something that Texas can do is because in my heart, I’m just like, Texas shouldn’t have to do this.

Kathryn: Like, this is not a Texas problem. Like, we should just have a decent minimum wage, and I shouldn’t have to convince Republican legislatures in Texas to raise the minimum wage of this massive economy. Like, we should have a better federal government, and then states get to do stuff that states actually should be good at.

Kathryn: I understand that there are local employers and that matters, but really, like, states should be left to do the on-the-ground work. Like, the federal government is gonna give you a massive check, and then you get to implement childcare, and it shouldn’t be your job to finance it or pay for it.

Kathryn: It should be your job to implement it. And I feel very strongly about states doing the things that they do best.

Kathryn: So yeah, I mean, Mamdani and New York City and the Republicans in the Texas legislature — they’re two sides of the same coin. What do you do when the federal government abdicates responsibility for economic policy?

Kathryn: You either double down on abdication as well, or you decide you’re going to fight it. And either way, we’re in worse case scenarios than having just better federal economic policy in the first place.

TOP 1% WEALTH MYTH

Robin: Okay, from Bry: “I always hear libertarian types say that the total wealth of the richest 1% in America would only fund three months of US government budget. Can you help debunk that?”

Kathryn: Why, certainly, Bry. I’d love to, ‘cause it is categorically false. The Federal Reserve tracks the assets of the top 1%. About one-third of all wealth in the United States is held by the top 1%. Their assets are valued at roughly $56 trillion.

Kathryn: The federal government spends $7 trillion a year, including programs that are not paid for via income taxes, like Social Security and Medicare. So actually, they have enough money to fund the government for eight years, including paying for Social Security, and if they weren’t paying for Social Security and Medicare, it would probably be closer to 12 or 15 years. Plenty of time.