Our COVID Debt

with Laurence Kotlikoff

In this conversation, my friend the economist Larry Kotlikoff walks me through his concerns about the debt we’re accruing as a nation and some recommendations for alleviating the problem. As Larry explains, despite Biden’s assurances that his massive COVID relief bills would be paid for by taxing high earners, much of it is currently financed by debt. Larry worries—and he’s not the only one—that borrowing the amount of money necessary to finance these bills will cause inflation. This could undo whatever temporary relief people and businesses initially received, and worse.

Larry also goes into how he thinks Biden should adjust his corporate tax plan in order to make the U.S. more attractive to foreign investors. It gets a bit technical, but I promise we’ve made things reader-friendly.

LARRY KOTLIKOFF: We wanted to try and restore the economy, keep people optimistic. A lot of the short run macroeconomic policy is, I think, geared toward coordinating everybody's behavior, getting everybody on the same page so that we don't all get scared and start firing our workers. And that's what all this current deficit finance has been about under COVID.

But it comes at a price. We could be taxing rich people to give to people who have been laid off, but we're not. We're taxing future kids to pay for the current COVID relief bill and the relief that was passed under Trump. So I'm concerned that we're digging a deeper hole. We had a huge hole to begin with, and through COVID, we've made that much deeper. And it's our kids that we're putting in the hole, or that are in the hole that we're digging deeper. And we're piling bigger and bigger bills on their laps.

GLENN LOURY: Again, let me underscore what's being said here for the non-economists who might be listening. We want to avoid a Keynesian-style recession/depression of the sort that we experienced in 2007, 2008, and so forth—the Great Recession—an inadequate-demand-driven recession because of COVID. And so we have to pump money into people's pockets. You're okay with that. You are concerned about doing it on the deficit instead of doing it by the taxing of the people who are relatively better off and transferring those funds aboveboard, as it were.

Yeah, people like you and me.

Watch out now, watch out. You're raising my taxes, Larry [laughs].

Raising taxes, exactly. We should be the ones who are footing the bill to help people that have lost their jobs. The ones who can use this technology and be able to keep working and in some cases do even better under COVID, they should be paying the bill for this relief.

Biden has said that nobody with incomes under, what is it, $140,000 a year or something like that …


No one with incomes under $400,000 will see their taxes go up. So isn't he doing what you advise?

Well, he just passed this huge $2 trillion package and there was no tax increase on anybody. So it wasn't like he taxed us to pay for this relief. He said, well, we're just going to borrow the money. And then the Federal Reserve is coming along and printing money to buy back the bonds. So this is the other part of the equation that we haven't talked about yet, which is the debt-to-GDP is soaring, and that's the debt in the hands of the public. But through this process, the federal reserve has been also printing money out the wazoo. The basic money supply, what we call the base money, is six times higher than it was in 2008 today. And prices have not risen. So you know, Paul and Mark [Blyth] would say, these new Modern Monetary Theorists ...


...would say. “Why are you worried about this? We've printed all this money and prices haven't risen and therefore we should just borrow more money and print more money to buy back the bonds and just basically inflationary finance all the spending and prices will never rise.” Well, I think that's extremely irresponsible, because we have the basis right now for a massive increase, like a six-fold increase in the price level. If the velocity of money went back to where it used to be, we could definitely see an increase.

You're not forecasting a 600% increase in prices over some defined period of time. I know you're not doing that, because you're a sensible guy.

I'm saying that if you look at the basics, we have the potential for high inflation. Now, if Jerome Powell—the Fed chairman—were here, he'd say, "Well, Larry, you're stupid." Well, he wouldn't say that. He's a very, very polite person. He'd say, “That's nuts, because if that started to happen, we would take our bonds and we suck back the money by selling these bonds back into the market." And the Fed has that ability, but that would lead to ...

... interest rates going up through the roof and recession.

Yes. The Fed is in a tough bind here, because if you sell bonds, you're going to lower their price and raise interest rates. So, we have engaged in irresponsible monetary policy as well as irresponsible fiscal policy. And this stuff can go on for a while, but at some point when you start acting like a third-world country in terms of your fiscal and monetary policy, it catches up with you. That's what I'm ultimately concerned about, that we're on a slow path to Argentina. It seems to me we're kind of mimicking their behavior. It hasn't quite bit us in the tush yet, but I think it will.

Okay. Well, I hope you're wrong, but I actually, if I was a betting man, I'd not bet against you. What about the Biden administration's larger philosophy for tax policy? They want to tax the rich. So do you. They also want to raise corporate income taxes. And I didn't think you were in favor of that. I thought you thought if Trump got anything right in that tax reform that they got through the Congress when he was president, it was that he was getting closer to correct about the corporate income tax. Did I read you accurately in that? Not that you want to say anything positive about Trump. We talked about taxes, though.

Yeah. Fair enough. Well, that reform in the corporate tax wasn't originally designed by Trump. Not that he didn't understand it, but it actually was a proposal that Alan Auerbach came up with. He leans Democratic.

This is the professor of economics at UC-Berkeley who writes papers with Larry Kotlikoff from time to time.

Yeah. Alan came up with a proposal, which then got watered down. So the final tax cut and jobs act, corporate tax reform, wasn't what it should have been. But it was better than nothing, for sure.

Please tell us why it was better than nothing and why you might have a problem with Biden going in the opposite direction on corporate taxes.

Well, we want to make sure that people have an incentive to invest in the U.S. And if we have a very high marginal corporate tax, which means that at the margin every dollar of profits I earn, I have to lose, let's say, 35 cents on the dollar, I'm going to be less interested in investing here than in Ireland where it's a 12% marginal tax rate. So having one of the highest marginal tax rates on investing in the U.S. wasn't a good idea.

Trump brought this down in that bill that got passed, and Biden would like to raise the nominal corporate tax rate back up. And I would say, look, we want to keep the incentive to invest here where it is or even lower it. But why don't you do this, President Biden: Raise the corporate tax rate—the nominal rate—but also expand what's called expensing. So do something else which will keep the marginal effective tax rate low at the same time.

Wait a minute, hold on. You're the guy who said words can be fooled with any way you want, but all that matters is the bottom line. And it looks like you want a bottom-line lower corporate tax rate, you just want to call it something other than that.

No, no, actually this is this is raising the average corporate tax, but lowering the marginal corporate tax.

Okay. That's an important distinction.

So the way this would work is you would raise the corporate tax from, I think it's now 21% or around 22 % up to I think he wants to put it up at 28%. But at the same time you would expand expensing. Now, if you're an investor and you're putting new money into the economy, new investment, if you buy a computer, you can write it off. If you buy a building, you have to depreciate it. So I'm saying let's let people write off investment in structures as well. And this will keep the effective corporate tax rate—the marginal rate—down.

This is a break that new investors get for new investment. But for old investment, if I have a company and I built a building 10 years ago, or bought a building, I'm not going to get any break. So my profits are going to be taxed at this 28% number. The investors at the margin will say, “Those folks will get a tax break for investing. They'll get the expensing.” So that's where you get more revenue without affecting the incentive to invest in the U.S. It's called intelligent design of fiscal policy.

And we also have to worry about ... you know, I'm not for taxing the rich and putting them into a 70% tax bracket or 65% tax bracket, which could happen if we did what Biden is proposing on taxing social security of people. It's applying the FICA tax—that 15 or the 12-point social security FICA tax—to people earning more than $400,000. That's part of his original campaign proposal.

God help us.

Yeah. This would put high earners, people earning more than $400,000, very productive people ... well, we think they're productive. Some are getting it by luck. But this would put them in a 65% marginal tax bracket. It could be even 70% in California if you add all the things together. We don't want a lot. We don't want to induce them not to work.

So whatever Biden does, he needs to fix incentives to work. We need to get more taxes, but we do it in an intelligent way, just like with a corporate tax. Get higher tax revenue without affecting the incentives to invest in the U.S. Get higher tax revenues from labor income while also lowering the distortions on labor supply. So raise the average tax, but lower the marginal tax across the board.