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Exclusive: Douglas Holtz-Eakin, American Action Forum: “The Federal Debt Is One Large Boomer Taking. That’s All It Is.”

Since starting PolicySphere, your correspondent spends at least an hour every day consuming the work output of pretty much every center and right-of-center think tank in Washington, DC. It’s been an…interesting experience.

One voice we’ve been consistently impressed by is Douglas Holtz-Eakin, President of the American Action Forum. If you don’t already know his impressive resume, before AAF, Holtz-Eakin, an economist by training, was notably Chief Economist at the CEA, Director of the CBO, and Director of Domestic and Economic Policy for the John McCain presidential campaign. We read his daily newsletter because of the breadth of content it covers, and always with great expertise. So we decided to reach out for an interview. Here it is. It was conducted over videoconference, transcribed, and lightly edited for clarity.

PolicySphere: We have a traditional question that we usually ask at the end of the interview. But for you, we want to ask it at the beginning, because you have such a breadth of content. That question is: what’s the most important issue that nobody talks about? 

Douglas Holtz-Eakin: I think it’s the manifest failure of the K-12 education system in the United States, and nobody is talking about fixing it.

PolicySphere: That’s a good one. One answer would be to say that there was a big wave in the 90s and 2000 of education reform. It was bipartisan. We were going to have all these technocratic fixes. What many people took the conclusion to be was that nothing worked. So perhaps nobody’s talking about it because there’s this sense that we’ve tried everything and nothing works. There’s a sort of left wing answer, which is, we can’t make kids smarter, so we’ll just trans them and turn them into social justice activists. And then there’s a sort of right wing answer, which is, we’ll just give you a check to homeschool your kids, because schools are impossible to fix.

Douglas Holtz-Eakin: So I think there’s some truth to that. You know, I’m not an education expert, so that’s part of the reason I find this very frustrating. I want someone else to solve this problem for me. I have just seen the fallout. If you look at the places that ended up being left behind and the sort of MAGA Republicans who populate them, the common characteristic is they’re poorly educated. Also all the inner city school districts are complete disaster areas. So it’s a huge social issue. It’s a huge economic issue as well because our future labor force depends on this. People always tell me, oh, we have to do better at reskilling people. I say, no, we need to get them skilled the first time.

PolicySphere: Fair enough.

Douglas Holtz-Eakin: So I, I’m sympathetic because I was in the Bush White House for No Child Left Behind and you characterized it exactly right. Everyone agreed we were going to do this stuff. And my take on No Child Left Behind is that it has allowed us to document the failure down to the principal, to the teacher, to the student. But we haven’t fixed any of it. And maybe we just don’t know how. But you know, my impression was that the conservatives liked school choice, but the Democrats were never going to let that happen. And if you looked at the Race To The Top efforts of the Obama Administration, what happened was the local districts rejected it. They said, you’re not going to, quote, “fix us.” You can’t fix bad schools. You simply have to let them fail and have A+ schools enter the market. And we don’t let that happen.

PolicySphere: Yeah, that sounds right. Because there’s such breadth to your writing, we have a long list of topics we wrote down for this interview, so let’s just take them in turn. The first one is regulation. You’ve written about the tremendous costs of Biden Administration regulations, which seems of a different scale even for a standard issue Democratic administration. And you don’t hear a lot about it, including from Republican officeholders, when you think it would be red meat. So, can you brief us on what those regulations are? What are the big buckets of new regulations and what makes them so insane?

Douglas Holtz-Eakin: So the really big ones are in the climate change area. The Administration chose a sectoral approach to attacking climate change. And so you have regulations on the power generation sector, super expensive regulations on the transportation sector. I mean, they are trying to get rid of the gas powered vehicle by regulatory fiat. They have a heavy truck rule, which is mind boggling because we’re going to get rid of every diesel truck relatively quickly if they get their way, and the technology to replace them doesn’t exist. So that’s sort of hard to believe. 

But there’s more, because they’re regulating across the board. They’re redoing all the Obama era labor market regulations. They’ve changed all the regs on Federal land use to try to minimize exploration and extraction activities. The Treasury continues to try to grind out regulations to implement a lot of these Inflation Reduction Act provisions. Pick a department–they’re busy. I wish it was just one agency. 

There is a deep belief by this Administration, unspoken but shared, that there is no private sector growth. We worry about them killing off the capacity of the private sector to innovate and grow. They gave up on it a long time ago. So they don’t care. They really don’t. It’s amazing.

PolicySphere: That’s an interesting way of putting it. This leads us into more of a political question, but, in that case, why is Google and Goldman Sachs giving them all their money then?

Douglas Holtz-Eakin: (Laughs) I’ve never understood this.

PolicySphere: Politically, it’s astounding to see, for someone who remembers politics in the 90s and 2000s. The Democratic Party used to say, essentially, we’re for the market, but we just want to fix this and that. But now they are for across-the-board command-and-control.

Douglas Holtz-Eakin: The open embrace of industrial policy by this administration is really quite striking. You know: “The private sector can’t even make good decisions about what to do, so we’ll have to tell it.” They really believe that. History is not their friend on this. And there is this magic that presumably happens somewhere. I have got to find out where they do this in DC. You take these incompetent private sector people and you get them into the government, and suddenly they’re brilliant and infallible. I don’t understand how it happens.

PolicySphere: In terms of industrial policy, the biggest one that everybody talks about is the CHIPS Act. People are debating that a lot, but do you have other examples of places where the Administration is just directing private sector activity?

Douglas Holtz-Eakin: Domestic content rules on the clean energy tax credits. It’s not just that everything should be a wind farm, but the wind farm has to have steel from a US plant. It has to have union labor… 

Look at how Nippon Steel tried to purchase US Steel. That’s just literally ludicrous. If that company was named Doug Steel, that deal would have been done like a year ago. It’s just the name that means somehow we’re losing the United States steel. It’s a small legacy company of another era, and Nippon could make it better than it is. But no. And so this is the industrial policy in action.

PolicySphere: Another issue we want to discuss in this “nobody talks about it” bucket, although people are talking about it more and more, is the deficit. Because we seem to be back in a high interest rate environment, which means that money is no longer magic. First of all, is it true, do you think we are back in a more constrained economic budgetary environment?

Douglas Holtz-Eakin: I think the answer is yes. I mean, the debt is so large, and even if interest rates come down, say, 200 basis points, not a terrible forecast, you still have very high interest costs. It’s hard to respond to events if you’ve got a bunch of money spoken for like that. All of the money is essentially spoken for because we’ve got interest costs and entitlements. Those are all tied up. Discretionary spending is a side show now. Yeah. I think we’re at a very important point where we have to decide to get serious about fixing the fiscal outlook. And it’s not just deficits, it’s the fact that the government has gotten extremely large. And the way it has gotten large is the entitlements get bigger. So we’re going to spend $82 trillion over the next ten years–12 will be interest. 50 is mandatory spending and entitlements. 32 of that is just Social Security and Medicare. So those are the problem. They’re big.

PolicySphere: Yeah.

Douglas Holtz-Eakin: And what do they do? They subsidize the consumption of the elderly.

PolicySphere: Yeah.

Douglas Holtz-Eakin: Most of that 50 trillion is subsidies to consumption. The federal budget is a huge headwind to growth because it takes resources from the private sector, either by taxes or borrowing, and subsidizes consumption. And if a country doesn’t save and invest, it doesn’t grow. And I think it is no accident that our growth rate has slowed dramatically in the 21st century, even as we’ve watched the debt rise steadily. And that’s been the pattern in the 21st century. We haven’t yet been able to stabilize the debt relative to GDP. It’s not just about bringing debt down, the GDP needs to rise. So those go hand in hand in my view. And they are the preeminent problem in this era.

PolicySphere: One question, related to this, is if you look at the way the Republican coalition is changing, it used to be this alliance of different people, and one of the glues that kept them together was tax cuts, because everybody loves tax cuts, and they prevent you from having to make hard choices. And that’s going away. Middle class families have already got their taxes cut. Taxes are actually higher for entrepreneurs and high income individuals. It’s actually getting scary close to European levels. But there is no longer that effect where Republicans can say: we’re cutting everybody’s taxes, so middle class people are fine with high income tax cuts because they’re getting a tax cut too. So politically it doesn’t work. Budget-wise it doesn’t work. So, what happens now? Are the Republicans just going to keep cutting taxes off the cliff? If not, then what? Because to 90% of Americans who don’t live inside Washington, to them, Republicans equal tax cuts.

Douglas Holtz-Eakin: So it’s a really good question and a really hard question. We’ve got one party that doesn’t believe we should raise taxes on anyone, and we should cut taxes if anything. Then we have the other party which says we don’t want to tax 98% of Americans, but we’re willing to eviscerate the top 2%. And we want to raise spending. So those are the politics. The policy is unsustainable. And so something has to change.  The question is: how will it change? I can tell stories, but I don’t know. There are a bunch of different dynamics going on. You have the financial fragility that comes with these large debts and interest costs. You have the slow growth that’s unsatisfying to people. People sense it; they get the feeling they can’t do what their parents did and they don’t like it. You have a whole generation of voters who have some idea what they like the federal government to do, but they can’t do it because the money’s all spoken for because of something done in 1965. Voters are going to want to get something forward. Discretionary spending is getting squeezed out of the budget. So there are forces that are going to push for some sort of different strategy on the structure of the budget. But none of it is in the next four years because the two geezers we have running for office don’t have the wherewithal to do anything interesting or significant. I mean, Biden’s greatest accomplishment is convincing Democrats to spend $1 trillion on tax credits. Wow. That was not exactly a big lift. 

PolicySphere: People talked about this on and off since forever. And there are several ideas out there of how the budget rebalancing could go. One idea is the grand bargain; Republicans and Democrats are going to come to some agreement, it’s going to be equally unpleasant for everyone, therefore it’s going to be politically sustainable. But that already proved impossible in the era of bipartisanship, so why would it be possible in the era of hyper-partisanship? So that’s option number one. Option number two is Greece, right? Which is: there’s a debt crisis, and we just have to slash and burn everything. So option one looks to be impossible, and option two is extremely painful. Is there an option three?

Douglas Holtz-Eakin: I think option three really is the next generations of voters revolting and saying: “Look, this government is not responsive to our wishes.” So I’ll take my kids’ example. My daughter thinks there should be a paid family leave program. Okay. There’s been a lot of proposals to make it happen; and it always falls apart because there’s no money. So I just think it’s going to be untenable for the government to continue to do things that the previous generations wanted to. But this generation will ask: “What’s in this for us?” That leads to a different set of people going to Washington. They get different people elected. You get some changes in what’s viewed as important versus less important. And these dynamics, as a result, can change the game. How long this takes is what worries me, because that’s not a quick thing. I think I said this out loud, to my eternal shame, that the best thing about the Hillary Clinton-Donald Trump presidential election was that it was the last time you see some goddamn boomer running for President. 

PolicySphere: (Laughs.)

Douglas Holtz-Eakin: That generation needs to exit. Like, go.

PolicySphere: Maybe that’s the answer. Tax the boomers’ wealth. Take all their homes.

Douglas Holtz-Eakin: The federal debt is one large boomer taking. That’s all it is. This is an extraordinarily selfish generation.

PolicySphere: They are also an extremely numerous generation. And a very high turnout generation.

Douglas Holtz-Eakin: I’m aware. And for the record, I’m a boomer. I’m the tail end of the baby boom.

PolicySphere: That’s why we didn’t want to say anything about boomers until you brought it up.

Douglas Holtz-Eakin: It’s just–there is no record of American values where you sacrifice the security and prosperity of future generations for one generation. It’s not there.

PolicySphere: Time to pivot to something else. Another very interesting issue you’ve been writing about is drug pricing. The narrative around drug pricing feels deeply unsatisfying to me because you have a confrontation of two ideologies. One side, there is the left wing ideology of “These greedy pharma companies are ripping us off, and we need to have price controls,” which seems obviously wrong. The idea that just price controls would fix it doesn’t pass the smell test. And then there’s the right-wing version which is to say “Oh, it’s just a free market.” But healthcare is not a free market in the United States, hasn’t been for 60 years and never will be. So it feels like both narratives are deeply unsatisfying. Can you give us some clarity?

Douglas Holtz-Eakin: It’s a really hard problem. A great disservice has been to essentially say: “There’s a thing called ‘a drug’ and it gets priced.” In fact, there are many drugs, right? And most of them are priced just fine. And we aren’t deeply concerned about them. Lots of over the counter drugs. Generics are cheaper in the US than anywhere, by and large. And then we have on-patent brand drugs. So there you have to ask yourself: okay, what is the problem? Is the problem that the price is high, or is the problem that insurance doesn’t spread that cost among the unaffected the way it’s supposed to? And so I think looking at drugs in isolation gets this wrong. It’s the combination of the drug pricing and the insurance coverage that it exposes to many people, like copays on very high-price drugs or drugs that don’t get covered. And so all these things like the Inflation Reduction Act or these price controls don’t touch the insurance part of it at all. 

And so I think a big problem has been to have this sort of simplistic understanding, that we have this thing called drug. All of them have a pricing problem. All of them have to be dealt with one way or another. The right says “Free market!” The left says: “Price controls!” Neither is correct. We have something very complicated going on and I do worry about the innovation, perhaps more than most people. I am alive in a tribute to American medical innovation, I had an aneurysm on my right renal artery. They rearranged and rebuilt me for the 21st century. I didn’t die. I think we have the finest medical science on the planet in the US. We may not have the finest health care system, but we do have the best medical science, and drugs are part of that. And that’s not a God given right. It used to be in Germany, and they killed it. And it’s here now. And if you have bad policy, it could go somewhere else. I have watched policymakers in action, and they believe somehow that Pharma’s always going to be there, and all they know how to do is make drugs, so they’ll make drugs no matter what they do. They’re missing the fact that venture capitalists are not going to give them a dime if they can’t actually make money on this stuff. So we have to be more careful with the kinds of things we do, we need more thoughtful policy responses.

PolicySphere: Like what?

Douglas Holtz-Eakin: When there is something super expensive that an insurance policy can’t handle, usually you do reinsurance. We need a medicine reinsurance product that spreads the costs of super expensive specialty medicines and oncology drugs. But they’re going to be other things as we go forward, because drugs are going to be so personalized. A lot of these cancer drugs that look at genetic markers are very specialized. But that medical reinsurance product doesn’t exist right now. And that’s what I think people should be thinking about.

PolicySphere: So to be clear, when talking about reinsurance, do you mean the private sector or the government?

Douglas Holtz-Eakin: I mean, I’d prefer to have a private sector product that does this. 

PolicySphere: So why isn’t there a medical reinsurer now? Reinsurance is already a huge industry.

Douglas Holtz-Eakin: I don’t know. It’s a good question. I have to think a little bit more about it. Usually the problem is that insurance is for an event, where you can identify the event and write a contract on it. For a long time we thought we’d have better contracts for drug prices. The basic idea is: if the drug works, I pay you; if it doesn’t, I don’t. Or, for example: the longer I stay in remission, the more you get. The problem is you need a clean experiment to be able to monitor the patient and see what the drug is doing. But if you have someone with multiple comorbidities taking tons of meds, you don’t know what worked and what failed. So drug price contracts never turned out to be the savior that we thought it might be.

PolicySphere: The reason why this issue is so important is because health care costs are the biggest driver of the deficit. We always seem to be circling around the same set of issues. Of course, one way to lower the deficit is higher growth.

Douglas Holtz-Eakin: Yes. I’ve been worried for 20 years about the pace of trend economic growth. The notion that somehow it’s not malleable and that we haven’t chosen to grow poorly I think is wrong. So what do you do for that? Well, the trouble is there’s no one thing. And politics likes simple solutions. It requires some discipline. And we just haven’t seen either the discipline nor the public education on the need for it. So a different way to say it is, why do we have such a big problem controlling our deficits and debt in the 21st century? We did it at the end of the 20th century. Clinton! A Democrat. And he managed to balance the budget four times. And the answer is that if you go back to the old maxim that budget is policy, in the Bush Administration, if you look at those budgets, the policy is we’re going to win the war against global terror at all costs. And in the Obama era, what did they say about the budget? “As long as the rich pay their fair share, we’re fine. We can do an ACA. We can do whatever we want.” And then the Trump era. What did they say during the Trump era? They said nothing. And then Biden says, “Let’s do a lot of everything. We’ll just do more.” And so if you’re the average American who’s not reading PolicySphere interviews you have no idea that we have a problem. Nobody has run for the highest office in the land and said, “Hey, you know, we might be a little concerned about this.” That’s the public discussion that needs to happen. And then people can decide to fix it however they want. That’s democracy. But let’s at least have some recognition that there is a choice being made and it’s not being discussed.

PolicySphere: So to be clear, which way do you think the causation goes? Some people say we have less growth than expected because we’ve got so much deficit and debt, which is a drag on growth. Others say we have so much deficit and debt because we don’t have the growth that we thought we would have.

Douglas Holtz-Eakin: It’s a great question. This is the opening question in my Senate testimony a little while back. And the answer to the growth and budget link is if we had grown in the 21st century at the same rate as the 20th, everyone in the US would have $19,000 more in real GDP. I don’t know about you, but I’d like my $19,000. And we’d have $1.2 trillion more per year in revenue, and that would put a big, big dent in the deficit. So the causal arrows go both ways. So you have to be disciplined about the budget in a pro-growth fashion. And that’s the hard part.

PolicySphere: That sounds like squaring the circle.

Douglas Holtz-Eakin: I mean, it’s genuinely having a tax code that doesn’t pick winners and losers, rewards investment and growth and raises the money in an efficient fashion. We know what they look like. They look like progressive consumption taxes and things like that. We’re not willing to go there yet. And on the spending side. The problem with Social Security, Medicare is not just that they’re big. They are. It’s that they grow faster than any plausible revenue source will grow. So you raise taxes and catch up for a little while. But they grow, and pretty soon you’re back in the same problem. Until you deal with those programs, you’re not making any progress.

PolicySphere: Which leads us to a more political question, which is: how do you touch Social Security and Medicare?

Douglas Holtz-Eakin: You explain to people that it’s wrong that a person who is 55 and trying to plan their retirement doesn’t know what they’re going to get in Social Security. It should be fixed already, right? If the trust fund exhausts, that means Congress is going to act somewhere in the next ten years. And I’m 55 and I want to retire. I don’t know what I’m going to get. It’s a terrible way to run a pension program, right? Terrible. Medicare is the same way. You can get more than you would if you do nothing. Less than you were originally promised. Absolutely true. But it’s worth it for the country as a whole. That’s what the Democrats did in the 90s. People forget that. Bob Rubin said: “We have to do this. We have to control the spending or the bond market vigilantes are going to get us. And by the way, if we do, we’re going to grow really well.” And they did, and they got the payoff. So you have to connect all the dots.

PolicySphere: We have our two traditional concluding questions. We’ve already done one twice. The other traditional question is: who’s the smartest person we should interview next? Preferably somebody who disagrees with you.

Douglas Holtz-Eakin: Someone who disagrees with me there. Oh, man, that’s a long list.

PolicySphere: Preferably.

Douglas Holtz-Eakin: Who would be a good interview? Who disagrees with me? Hmm. Stephanie Kelton. If you can get her to be understandable in English to people, I will give you an award. She’s serious about what she does, but no one can understand exactly how she’s thinking about the problem. And so I would like to hear again what she’s up to. So that’s an obvious choice.

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