American Action Forum President Douglas Holtz-Eakin joins Yahoo Finance Live with reaction to Adam Shapiro's interview with former President Trump on the economy, debt, and inflation.
- Douglas Holtz-Eakin is the president over at the American Action Forum and joins us now. Douglas, always good to see you here. Let me get your reaction to the former president's comments on the debt. How concerned are you about the level of debt in this country? And do you think we're at the point where it will start to impact our economy?
DOUGLAS HOLTZ-EAKIN: Well, I think the level of debt has already begun to impact the economy. And I'm more concerned about the future trajectory than the current level. We came into the pandemic with a federal budget outlook that was unsustainable. You saw debt rising relative to GDP, that carrying cost of that debt rising relative to GDP, as far as the eye could see.
And in those circumstances we know that resources are not being used in the private sector. They're being pulled into the government. And the loss in innovation, investment, training skills, ultimately slows the growth of productivity, and slows the growth of the standard of living. Those are incremental costs that occur day by day. They're not noticeable at the time, but you look back and think, gee, we aren't the economy we could have been. And the debt's going to be one of those reasons.
So it's important to get this under control. There's no appetite for it right now in Washington. You don't see anyone doing that. And I'm concerned about the fact that the Biden Administration and the Congress at the moment, are contemplating these bills, which would create a further structural deficit. I mean, they are not fully paid for. If the spending programs are put out over 10 years, the taxes don't come close to the $5.5 or $6 trillion that you need.
And so we're building in a bigger problem than the one we already had. And that doesn't seem wise to me.
ADAM SHAPIRO: Douglas, the president talked a lot about the price of gas. And AAA, just yesterday, in California, the most expensive state, it was $4.40 a gallon on average. Nationwide, it's roughly $3.19, $3.20 a gallon. The CPI numbers show that the largest increase in inflation is energy, whether they extract that from the numbers we report or not, people pay that. Is President Trump tapping into something that perhaps the Democrats are missing?
DOUGLAS HOLTZ-EAKIN: Yes. This is a politically very salient point. The inflation that people feel is the top line CPI inflation. And 50% of the CPI basket is shelter, food, and energy. And that's been up by almost 10% in the first half of this year, at an annual rate. And there's still substantial inflationary pressure in that measure.
So it's a very, very powerful piece of the political dynamic. He's tapping right into it. He showed his usual obsession with getting the details right, but you know--
DOUGLAS HOLTZ-EAKIN: [AUDIO OUT] --politics he's got exactly right.
- Doug, it always amuses me to some extent when you hear folks of President Trump's age hearken back to the Jimmy Carter era, when they talk about inflation because obviously, the trajectory is the same, but the magnitude is just nowhere near in the same ballpark as it was at that time. That said, OK, so if energy prices are going up and if that's what people are feeling, what do you do about that from a policy and legislative perspective?
DOUGLAS HOLTZ-EAKIN: So this is one where the Biden Administration has sharply changed course. I mean, there's no question about it. They have stated flatly-- the president himself said, climate is the number one priority. Their approach to climate is to demonize and/or take off the portfolio particular fuel sources, coal, natural gas, oil.
- But, Doug, that's not why oil prices are going up today because of their climate policy plans that they're making.
DOUGLAS HOLTZ-EAKIN: [AUDIO OUT] Asking OPEC to do the pumping and not do it in the US, which has the capacity to do it. So if they've set down that course, they're going to have to deal with the trade off. And one of the trade offs is the lack of access to low-cost petroleum and especially, natural gas as part of the transition. And that's going to be a tough thing politically.
ADAM SHAPIRO: The other issue that-- and this is from the Congressional Budget Office, that $1,300. They estimate that the tariffs have thrown that onto the average American family. And nobody's talking about removing those tariffs. How does that play going forward?
DOUGLAS HOLTZ-EAKIN: This is the opposite of climate. They have basically kept in place the Trump international agenda. And they are supposed to, today, reveal their trade strategy. All of the leaks that I've heard do not include getting rid of any of the tariffs that many people decried at the time then.
The National Security reason for steel and aluminum tariffs-- I mean, at the time, people thought that was ludicrous. They're still in place. The China tariffs, which was really a bilateral brinksmanship game that no one really thought would work out. But they're not changing any of that.
It'll be interesting to see how they go forward and what they call their strategy. But the nuts and bolts of it are the same as we've seen for a while.
- Douglas, the former president stopped short of saying the inflation we are seeing in the country right now, gas prices, you name it, could tip us into a recession. But if this inflation continues at current levels-- is a recession in the cards for the country over the next 18 months?
DOUGLAS HOLTZ-EAKIN: So the issue, I think, is policy errors. I think, the inflation really is a flat out policy error. The American Rescue Plan, $1.9 in stimulus in March, was at a time when the economy was growing at 6.5%. In the second quarter, it continued to grow at roughly 6.5%, but we saw inflation pick up sharply.
The question is, what kind of legs will it have? And you look at the supply chains, producer prices are going up at very high rates. And there seems to be some durability to it.
That raises the specter of the Fed having to move quicker than it intended, having to move from the taper to rates faster than intended. And in that process, there's always the chance for policy error. And I think that's the real risk.
- All right, let's leave it there. Douglas Holtz-Eakin, president at the American Action Forum, good to see you this morning. And thank you to Adam Shapiro for bringing us that exclusive interview with former president Donald Trump.