AYESHA RASCOE, HOST:
For more on the GOP tax and spending bill and its possible economic effects, we turn to University of Michigan economist Justin Wolfers. Welcome to the program.
JUSTIN WOLFERS: Excited to chat, mate.
RASCOE: So the White House says, you know, very plainly that this bill does not add to the deficit. The White House Council of Economic Advisers says it will boost the GDP by as much as 5.2%. What is your take on that?
WOLFERS: Fortunately for the American people, we have an independent agency whose job is to score these things. It's called the Congressional Budget Office. Don't be worried by the fact it's got the word congressional in it. They're still independent. And they look at this, and they see trillions of dollars of tax cuts and about $1 trillion worth of savings. And so, you know, if you give away four and pull back one, you're three in the hole. That's the first thing. And the second thing is, you said this would raise GDP by 5%. There is not an economist on Earth who would agree with that assessment, not one.
RASCOE: Well, what happens, you know, economically to people's investments and income and to their pocketbooks if Congress decides to add to the national debt?
WOLFERS: The very simple mathematics of this is you can think about taxes or when we pass the hat around and everyone puts something in, and then government spending is when it decides to dole it out and who gets what. So for most of your listeners, they're putting money in the hat. And for those who are sitting in the back of a limo right now, they're scooping extra out of the hat. And so it's as simple as that. That means there's less money for many families to spend on getting by.
RASCOE: Will there be any benefits because, you know, they're talking about no taxes on tips?
WOLFERS: Yes, there are benefits, and there are costs. And the important economic question is, do the benefits exceed the costs? So let me describe the most important of the benefits, which is, if you let businesses keep more of their profits, then they might think that building another factory or investing in another store is worthwhile, and that would grow the pie. We have estimates of how big that effect is, and it's relatively small. But nonetheless, it's right to say that it'll grow the pie. The problem is, if the pie gets bigger, but your slice gets smaller, then it can mean, yes, it grows the economy, even as it hurts the individual economies of most people.
RASCOE: We have reported on the decision by Moody's to downgrade U.S. credit, but is this current moment that much different from, like, 2011, when Standard & Poor's downgraded their credit rating for the U.S., or 2023, when Fitch downgraded U.S. long-term credit?
WOLFERS: There's an underlying similarity to what these rating agencies are doing, which is they're essentially looking at the United States, and they're not just looking at the purely economic numbers you might think about. They're also looking at our political institutions. And what you've seen is we've - particularly in the last few months, you've got a president who is taking economic policy actions that most economists think are suicidal, and Congress completely unwilling to stand up to that. That's a bet that we lack checks and balances. More than any set of economic numbers you can think about, that's what worries ratings agencies.
RASCOE: Are we at a point where we're on a downward slope, like, and we're going to keep facing these sort of downgrades?
WOLFERS: Let me give you two answers, which is things got worse. We can always make them better. How did things get worse? So the very fact that we are increasing the size of the budget deficit at a moment like this, that doesn't fit with the usual norms of sock it away when you've got a little - when things are going good so you can spend extra when things are going bad. And so if things did turn down next week, we would be in a much weaker position. There'd be much less that the government could do to help us out. So to the listeners, pray that nothing goes wrong.
It's not just that. President Trump has decided that he knows how to run Harvard better than it runs Harvard. He told Tim Cook he knows how to run Apple better than Tim Cook knows how to run Apple. And if I were trying to do business right now, it's really important to know what the rules of global commerce are. As a result, if I were thinking about setting up a new factory - Trump, on Friday, said that he would put a 50% tariff on goods from Europe. You know what one of the most important imports we get from Europe is? It's precision machinery and equipment. You basically can't stand up a factory without using some of the amazing technology that Italy and Germany and other countries give us.
But all of a sudden, he's just said that'll be 50% more expensive. What that means is, literally, if I were about to break ground this afternoon, I would call my contractor and tell them to stop because this tariff policy - which we still don't know if it's on or off - but this tariff policy would suddenly sink my project and make it unworkable.
RASCOE: And does that raise the odds of a recession?
WOLFERS: Yes. So let me give some context. In January, when we didn't know what sort of economic mayhem would be foisted upon us, I would have said the odds are as low as 10%. We created an economic crisis that raised that to being extremely likely. The president backed off. That's calmed people down a little. And I guess if he follows through on 50% tariffs with Europe, you may want to raise those odds again maybe back to 50%. This is playing with fire in a very unhelpful way.
RASCOE: That's Justin Wolfers of the University of Michigan. Thank you for being with us today. I really appreciate it.
WOLFERS: I wish I had better news to share with you, mate. Let's talk about happy things next time.
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