Nations that don't save, don't invest and grow. Thanks to our massive, postwar Ponzi scheme, we're saving next to nothing. Foreigners are partially investing in our stead and reaping the returns.
In my view, America’s problem cannot be reduced to a low savings rate. Savings behavior is, after all, the result of hundreds of millions of individual household decisions, not something directly assigned by the state. The deeper issue lies on the production side and in capital allocation. A large share of American capital has flowed into share buybacks, real estate assets, financial engineering, healthcare rents, platform monopolies, defense contracting, private equity, and highly valued technology assets, rather than into the broad productive base: infrastructure, industrial workers, engineering diffusion, supply-chain reconstruction, and public capability.
In other words, the American state has lost much of its ability to organize capital.
This is exactly the problem I discussed in my State and Capital series. The issue with America is not the welfare state itself. The issue is that welfare promises, asset bubbles, healthcare rents, military spending, and low savings have together formed a fiscal-political structure that increasingly consumes future productive capacity.
Social Security, Medicare, and retirement systems should not be understood simply as scams. They are also part of the modern state’s social contract and risk-sharing mechanism. The real question is not whether transfer payments exist. The real question is whether those transfers rest on sustainable productive capacity, tax capacity, and intergenerational fairness.
If a country has a strong manufacturing base, high employment, rising productivity, a reasonable tax system, and controlled healthcare rents, the welfare state can become part of national capability. If a country has low savings, uncontrolled healthcare costs, large fiscal deficits, asset-price inflation, and heavy housing and education burdens on younger generations, the welfare state gradually turns into a mechanism of intergenerational compression.
Hi Leon, I agree that capital needs to be properly allocated. But the US is an open capital market and one would expect competition to get this right or close to right. There are, after all, investors, domestic and global, galore, who are placing their bets. But if we don't save as a nation, and we aren't, we are no different from the Jamaicans. The wealth formation becomes that of foreigners and we become the selfs tending to their holdings. From the perspective of typical American workers, our billionaires are no different from foreigners. best, Larry
Larry, thank you. I agree with your core point that if the United States as a nation does not save, then the ownership of future wealth formation increasingly moves elsewhere. And I also agree that, from the perspective of typical American workers, domestic billionaires can look very similar to foreign owners if the returns to capital are detached from wages, communities, and broad productive capability.
Where I would add one layer is this: open capital markets can allocate capital toward private returns, but they do not necessarily allocate capital toward national capacity. Investors, domestic or global, are making rational bets, but those bets are not designed to optimize the long-term productive base of the United States, the resilience of supply chains, the quality of infrastructure, the bargaining power of workers, or the intergenerational legitimacy of the fiscal system.
So I see the savings problem and the capital-allocation problem as connected. Low national saving means America increasingly fails to own its own future. Poor conversion from capital to capacity means that even the capital America still commands is often not translated into broad productive strength. The result is not only foreign ownership, but also a domestic structure in which asset holders, whether American or foreign, can prosper while typical workers become increasingly separated from the wealth they help support.
That is why I find your intergenerational balance-sheet framework so important. I would simply frame the next question as: how can a country restore not only saving, but also the institutional ability to convert saving, capital, and fiscal resources into productive capacity?
One way we have converted capital into productive resources is by undertaking the intermediary step of research funding. Another, if you can remember that far back, is investing in our educational system at levels other than the research university.
Leon and David, I agree entirely. As our domestic investment rate has declined, so have the absolute and, I wage, the relative share invested in public goods, be it tunnels across the Hudson, high speed rail, modernizing the grid, public education, basic R&D, ... . This Administration thinks the Arc d'Trump is a public good and NSF funding is not.
Exacerbating the above is the declining population in many developed countries (including China) that cause Bismarckian pay-as-you-go pension schemes to collapse.
It doesn’t help when politicians also raid the social security trust fund by stuffing it with IOUs, not appreciating assets.
But really, it comes back to the voters who don’t vote out bums that saddle kids with future debt. Maybe that can be traced back to a lack of civic / economic education, but I’d point to the capture of media outlets by interested parties.
The Peter Thiels of the world don’t care what happens in the US. Even if he has to flee to his hanging gardens compound in NZ and leave everything else behind, he’ll still be insanely wealthy, a citizen of NZ, and safe from whatever happens here. Ditto Zuck with his compound in HI, etc.
Bottom line, if we want to encourage more investment, wage growth has to be part of the equation. If we want that to happen, I suggest starting to close all the loopholes that allow billionaires to declare a zero federal income tax income.
The money to train, educate, etc the workforce of the future has to come from somewhere and the billionaires are not going to give it up willingly.
Thank you. I agree, especially on demographics and the pressure on pay-as-you-go pension systems. But I would frame the problem as more than aging alone.
PAYG systems become fragile when aging coincides with weak wage growth, a shrinking payroll base, high healthcare rents, low productivity growth, and a political system unwilling to rebuild the productive base underneath the social contract.
The Social Security trust fund is not meaningless, but it is ultimately a claim on future tax capacity. If future tax capacity is weakened, the accounting claim becomes much harder to honor in real terms.
I also agree on billionaires. From the perspective of ordinary workers, capital detached from domestic wages, communities, infrastructure, and public capability can behave almost like foreign capital.
So yes, loopholes matter. But the deeper question is whether the U.S. can restore its ability to convert capital, taxes, and public spending into productive capacity, worker training, wage growth, and intergenerational legitimacy.
I would argue that for many years Social Security has not been treated as a pay-as-you-go system but as a "pay less and less each year if you're doing well" system--and will be, until the income cap (ratehr than just the payouts) is allowed to float up through a COLA
The distinction between savings rate and capital allocation is the right one to press. A higher savings rate flowing into share buybacks and financial engineering doesn't close the productive capacity gap — it just recirculates within the same misaligned structure. What your framing surfaces is that the mechanism connecting capital accumulation to broad productive investment has weakened independently of the savings question. Which means the fix probably requires two things simultaneously: rebuilding the savings base Kotlikoff is describing AND rebuilding the structural channel that directs accumulated capital toward the productive base rather than toward rent extraction. Right now we're debating the fuel level without addressing whether the engine is still connected to the wheels
1. Does not going to China disqualify one from determining they are a threat? If so, what qualifies one to reach that conclusion?
2. Does the average 70 year old consume more today because of rising healthcare and long term care costs, or is it changing consumer habits?
3. Do you think the President has the power to rein in fiscal irresponsibility? Even if he wanted to, wouldn’t the obligation to service our debt and pay for entitlement spending still cripple us?
Thank you. And on the third question, I do not think any president can simply “rein in” fiscal irresponsibility by willpower alone.
The president matters, of course. A president can shape tax policy, budget priorities, healthcare reform, defense spending, industrial policy, and the political narrative.
But the largest fiscal pressures are structural: debt service, Social Security, Medicare, Medicaid, defense commitments, tax expenditures, and the political difficulty of asking voters to accept either higher taxes, slower benefit growth, or lower asset-price support, in which I think probably the most controllable is defense, which is projected to reach 1.5 trillion much higher than the combined discretionary expenses of 0.7 trillion. But unfortunately the U.S. is kidnapped by the military-industrial complex, and the empire is over reached, being in a forever-war economy.
So yes, even a president who sincerely wanted fiscal discipline would face severe constraints. Much of the budget is already pre-committed. Interest expense is the cost of past decisions. Entitlement spending reflects demographics and healthcare prices. Defense spending reflects America’s global role. Tax policy reflects the political power of asset holders, corporations, and upper-income households.
That said, I do not think the United States is already at the breaking point. The dollar system, Treasury market depth, technology profits, foreign capital inflows, and America’s still-large productive base give the system enormous buffers.
The danger is more gradual: fiscal policy becomes less able to build future capacity because more of the budget is absorbed by past promises, medical rents, military commitments, and interest payments. The core question is not whether one president can fix it. The question is whether the American political system can rebuild the connection between taxes, spending, productivity, wage growth, and long-term national capacity.
Thank you for this thoughtful response as well. This question was more directed at Larry since his closing paragraph was about the book he wrote for the President. As someone who has not yet read the book, I was just curious what levers he thought the President could pull.
I think about the fact that interest payments consume 20% of annual federal tax revenue, and I think often about entitlement spending and the lack of political willpower to ask beneficiaries to sacrifice in the manners you mentioned, but I hadn’t given much thought to our kidnapping by the MIC as you put it. A ballooning defense budget from ~$950B to ~$1.5T is another significant cost we can ill afford to absorb.
I also appreciate that someone as well-versed and accomplished as yourself believes we have not reached the breaking point, and you seem cautiously optimistic that our political system can make the adjustments you mentioned.
Thank you. In addition to the dollar system I mentioned previously, there is another important reason: for now, nominal GDP growth has still been broadly able to keep pace with the expansion of federal debt and interest costs. As long as nominal income, corporate profits, household income, and the tax base continue to grow, the system can absorb a very large fiscal burden.
The U.S. debt ratio is very high, but by advanced-economy standards it is not yet the extreme case. Depending on the debt measure used, the U.S. still has more borrowing capacity than many smaller or less systemically important countries because it combines scale, monetary sovereignty, deep capital markets, reserve-currency status, and enormous private-sector wealth.
But this is not a permanent free lunch. The most important condition is that the U.S. technology sector must continue to dominate globally. Big Tech, software, semiconductors, AI infrastructure, cloud computing, digital platforms, finance, and the broader innovation ecosystem generate wealth, capital gains, high incomes, corporate taxes, and global confidence in American assets. That wealth creation is what allows the U.S. fiscal system to keep expanding without immediately hitting a wall.
If that loop breaks, the fiscal picture changes fundamentally. If debt, entitlement spending, defense spending, and interest costs keep rising while America’s high-productivity sectors lose global dominance, then the U.S. would face a much harder constraint. At that point, deficits would no longer be financing future capacity or supported by rising national income. They would mainly be financing past promises, interest payments, military commitments, and political stability.
On the second question, I think the answer is probably both, but with an important qualification.
When we say average consumption by 70-year-olds is much higher today relative to 40-year-olds, that does not necessarily mean older Americans are simply buying more discretionary goods. A large part of the increase likely reflects healthcare, Medicare-financed medical consumption, long-term care, insurance-paid services, and the high price structure of the American medical system.
That matters because much of this “consumption” is not ordinary lifestyle consumption in the way people usually imagine. It is often institutional consumption paid through public programs, insurance systems, or household savings. So I would be careful not to moralize it as older people simply choosing to consume at the expense of younger people.
But the fiscal implication is still serious. If the old-age consumption structure is increasingly driven by healthcare rents, long-term care costs, asset-price wealth effects, and retirement promises, then the system places a growing claim on future tax capacity, future workers, and future public investment.
So the real issue is not “old people are bad.” The real issue is that America’s social contract has become increasingly expensive while the productive and fiscal base underneath that contract has not grown fast enough to support it.
To both of your responses, thank you. I agree the specifics beyond “China bad” are very important, and there’s a lot of nuance Larry did not have time to delve into.
With respect to elder consumption, that totally makes sense. It would seem that with an aging population that is living longer, these goods and services will only experience greater demand, leading to further price increases and greater elder consumption. In any case, as Larry has said many times, our ridiculous fiscal trajectory is unsustainable, and my generation will bear the costs.
Thank you for the thoughtful questions. On the first one: no, not going to China does not automatically disqualify someone from judging whether China poses a strategic challenge or threat. One can study military capabilities, industrial capacity, trade flows, technology policy, naval expansion, export controls, sanctions, alliance structures, and official documents from outside China.
But there is a difference between identifying a strategic challenge and understanding the system that produces it.
My concern is not that outside observers are never allowed to call China a threat. My concern is that many Western discussions jump from “China is a competitor” to a much broader civilizational or ideological caricature without understanding how Chinese industrial policy, local government competition, engineering capacity, household behavior, state-owned capital, private firms, and national security thinking actually interact.
So what qualifies someone to reach a serious conclusion? I would say: evidence, comparative knowledge, historical context, exposure to Chinese sources, some understanding of Chinese political and economic language, and ideally some direct experience with the society. Field experience is not the only qualification, but it helps prevent analytical shortcuts.
China can be a strategic competitor. It can even be a threat in certain domains. But serious analysis should specify to whom, in what domain, through what mechanism, and under what conditions. Otherwise “China is a threat” becomes a slogan rather than an analysis.
We have not continuously invested in productivity improvements in manufacturing. Name the CEO’s who take eighty to ninety percent of their retained earnings and plow them back into productivity improvements. We would rather go abroad to lowest wage countries than invest in our own workers. We would rather take scarce capital and fund stock buybacks, not new plant and new equipment.
Success in manufacturing is straightforward. You must make more with the same workforce, or make the same with a smaller workforce. Continuous productivity improvements are the key, first by maxing out your current technology and then by investing shrewdly in new technologies. It takes a lot of work, a lot of discipline, and a cast iron constitution, in order to make continuous, shrewd investments.
Visit a Nucor steel production facility. It can be done, and it is a wonder to behold. Their throughput from melt to pour to rolling out finished steel is remarkable, because their process is continuous. Their rank and file is at a whole another level. Walk into to the control room and listen to them talk about the alloy process taking place. You will think you have stumbled upon a convention of metallurgical engineers, they are that knowledgeable. And their expertise and productivity shields them from money problems. Quite the contrary. The company itself provides them with a dozen and one savings plans catering to every need. The stockholders are also pleased with their returns. Sure the company has problems, but its immense productivity renders their problems solvable.
When leaders lack vision, the people suffer. I see a dearth of vision emanating from our economic elites, who seem to have forgotten that skills in blocking and tackling must precede the Hail Mary pass of AI, whose implications are barely understood.
This is exactly the point I would emphasize: capital has to be converted into productive capability, not merely into financial returns.
Open capital markets may be good at allocating capital toward private return, but they are not automatically good at building the productive base of a country. Share buybacks, financial engineering, asset inflation, and offshore labor arbitrage may all be rational from the perspective of investors and executives. But they do not necessarily rebuild plants, train workers, improve processes, deepen supplier ecosystems, or raise the long-term productive capacity of the economy.
Your Nucor example is very important because it shows what industrial capability actually looks like on the ground. It is not an abstract slogan about manufacturing. It is continuous process improvement, accumulated shop-floor knowledge, disciplined reinvestment, worker expertise, equipment modernization, and a culture that treats productivity as a living system. That kind of capability cannot be created by one subsidy bill or one AI narrative. It has to be built continuously.
This is also why I think America’s problem is not simply low savings. It is the weakening of the institutional mechanism that converts savings, retained earnings, capital markets, and public policy into broad productive capacity. If capital is repeatedly routed into buybacks, asset prices, monopoly rents, and offshore cost reduction, then even a rich country can gradually lose the industrial muscle underneath its wealth.
The AI point is especially well taken. AI may become a major productivity tool, but it cannot substitute for the basic blocking and tackling of industrial competence: process control, skilled workers, supplier depth, plant investment, engineering discipline, and management vision. Without that foundation, AI risks becoming another financial and narrative layer placed on top of a weakened productive base.
The savings rate collapse is the right place to look, and the intergenerational transfer framing is clarifying. What strikes me about the data you've presented is that the decline from 15% to 2% didn't happen all at once — it drifted, decade by decade, without triggering any automatic correction. Which raises the structural question underneath the fiscal one: what would have had to be true about the system's design for that drift to have been visible and correctable before it compounded to where we are now? The fiscal gap accounting you're describing is essentially a belated alignment instrument — a way of making visible a misalignment between what we've promised and what our productive capacity can support. The harder problem is that we built the system without that instrument in the first place, and then spent fifty years making commitments against a balance sheet we were deliberately choosing not to read.
If you mean that Ron and Tip got the sums wrong and that lies behing a big chunk of th federal deficit, whihc in turn is a big part of the explanatio for slow US growth, I'll agree. I guess that chosing to pay Social insurance benefits wiht a age tax may have contribued to the common error of thinking those progrms are saving accounts. If so, that's an additional reson to shift to a VAT.
BTW. Don't use the "Ponzi Scheem" meme. It's clearly not the case as peopel are NOT "investing" in SS/Medicare epecting a supernormal ROI. Consequently it undremines your real criticism.
As some other commenters here have pointed out, I think the nature of the domestic investment that has occured in the US has in some ways been counterproductuve for businesses and the economy. Like for example heavy investment in static assets like property and the rise of managing for shareholder value has been great for investors but hasnt been optimal for business competition with the leaner and meaner Chinese firms.
I don’t agree. There is an entire PE asset class that has done wonders for shareholders by playing games with the tax code, creating local monopolies, and other schemes that add zero value to the economy but make their investors rich.
It’s all over. See the famous case of all anesthesiologist practices in the greater Denver area getting rolled up by one shop, then the prices are doubled. Takes a long time to set up competitors, etc.
There is a manufacturer whose 10ks indicated to me that all their net income was derived from the tax shield associated with the PPE getting revalued to 100% every five years as the assets were sold from one PE fund to the next. Over and over, we the public are taken to the cleaners as PPE goes from 0 to 100% by virtue of someone declaring it so.
No one made meaningful investments and the assembly line was installed in 1985 or so, the products designed in the early 80s, and we should be surprised the company is on a slow controlled flight into ground?
Politicians are cheap, they keep amending the tax code to help their clients out. 500k investment in lobbyists yield 200MM+ payouts via little twists here and there in the tax code that only affect one company (ie the sponsor).
Never mind looking the other way as companies keep aggregating market share in their industries and then are too big to fail when their inefficiencies make them uncompetitive?
Truly, the most remarkable phenomenon in the last 40 years is how effectively the US financial system has managed to privatize profits while socializing losses.
I think Larry, Leon, and several others in this thread are circling around a deeper production-distribution and productivity-yield problem tied to what might be called a “scale-pursuit investment spiral.”
Large corporations gain advantage through scale. But once scale becomes the dominant investment logic, firms increasingly reorganize production around labor-cost minimization and financial efficiency. Offshore labor then becomes extremely attractive, especially when collateral-based finance and underwriting naturally favor large scalable projects with predictable returns.
That process helped produce the inflation/deflation exchange structure now so visible between the U.S. and China.
China’s growth model absorbed inflationary pressure through continuous large-scale investment: infrastructure, housing, manufacturing expansion, export capacity, etc. Meanwhile the U.S. absorbed persistent deflationary pressure from inexpensive imported production by inflating assets and financial markets.
The result is a constant pressure within U.S. capital markets toward greater scale, financialization, consolidation, and offshoring — because scale itself becomes the easiest path to preserving margins and securing investment flows.
The problem is that this process gradually suppresses many smaller-scale forms of productive investment that build domestic industrial depth, manufacturing capability, labor development, and continuous process improvement.
So I suspect the issue is not simply “low savings” alone, but also the structural way modern finance preferentially channels savings toward scale-seeking systems that progressively weaken broad productive capacity over time.
Then, again, we did make a agreement with china to get money for the iraq war... and now when it's time to collect we don't have the production to meet it
In my view, America’s problem cannot be reduced to a low savings rate. Savings behavior is, after all, the result of hundreds of millions of individual household decisions, not something directly assigned by the state. The deeper issue lies on the production side and in capital allocation. A large share of American capital has flowed into share buybacks, real estate assets, financial engineering, healthcare rents, platform monopolies, defense contracting, private equity, and highly valued technology assets, rather than into the broad productive base: infrastructure, industrial workers, engineering diffusion, supply-chain reconstruction, and public capability.
In other words, the American state has lost much of its ability to organize capital.
This is exactly the problem I discussed in my State and Capital series. The issue with America is not the welfare state itself. The issue is that welfare promises, asset bubbles, healthcare rents, military spending, and low savings have together formed a fiscal-political structure that increasingly consumes future productive capacity.
Social Security, Medicare, and retirement systems should not be understood simply as scams. They are also part of the modern state’s social contract and risk-sharing mechanism. The real question is not whether transfer payments exist. The real question is whether those transfers rest on sustainable productive capacity, tax capacity, and intergenerational fairness.
If a country has a strong manufacturing base, high employment, rising productivity, a reasonable tax system, and controlled healthcare rents, the welfare state can become part of national capability. If a country has low savings, uncontrolled healthcare costs, large fiscal deficits, asset-price inflation, and heavy housing and education burdens on younger generations, the welfare state gradually turns into a mechanism of intergenerational compression.
Hi Leon, I agree that capital needs to be properly allocated. But the US is an open capital market and one would expect competition to get this right or close to right. There are, after all, investors, domestic and global, galore, who are placing their bets. But if we don't save as a nation, and we aren't, we are no different from the Jamaicans. The wealth formation becomes that of foreigners and we become the selfs tending to their holdings. From the perspective of typical American workers, our billionaires are no different from foreigners. best, Larry
Larry, thank you. I agree with your core point that if the United States as a nation does not save, then the ownership of future wealth formation increasingly moves elsewhere. And I also agree that, from the perspective of typical American workers, domestic billionaires can look very similar to foreign owners if the returns to capital are detached from wages, communities, and broad productive capability.
Where I would add one layer is this: open capital markets can allocate capital toward private returns, but they do not necessarily allocate capital toward national capacity. Investors, domestic or global, are making rational bets, but those bets are not designed to optimize the long-term productive base of the United States, the resilience of supply chains, the quality of infrastructure, the bargaining power of workers, or the intergenerational legitimacy of the fiscal system.
So I see the savings problem and the capital-allocation problem as connected. Low national saving means America increasingly fails to own its own future. Poor conversion from capital to capacity means that even the capital America still commands is often not translated into broad productive strength. The result is not only foreign ownership, but also a domestic structure in which asset holders, whether American or foreign, can prosper while typical workers become increasingly separated from the wealth they help support.
That is why I find your intergenerational balance-sheet framework so important. I would simply frame the next question as: how can a country restore not only saving, but also the institutional ability to convert saving, capital, and fiscal resources into productive capacity?
One way we have converted capital into productive resources is by undertaking the intermediary step of research funding. Another, if you can remember that far back, is investing in our educational system at levels other than the research university.
Leon and David, I agree entirely. As our domestic investment rate has declined, so have the absolute and, I wage, the relative share invested in public goods, be it tunnels across the Hudson, high speed rail, modernizing the grid, public education, basic R&D, ... . This Administration thinks the Arc d'Trump is a public good and NSF funding is not.
Spot on.
Exacerbating the above is the declining population in many developed countries (including China) that cause Bismarckian pay-as-you-go pension schemes to collapse.
It doesn’t help when politicians also raid the social security trust fund by stuffing it with IOUs, not appreciating assets.
But really, it comes back to the voters who don’t vote out bums that saddle kids with future debt. Maybe that can be traced back to a lack of civic / economic education, but I’d point to the capture of media outlets by interested parties.
The Peter Thiels of the world don’t care what happens in the US. Even if he has to flee to his hanging gardens compound in NZ and leave everything else behind, he’ll still be insanely wealthy, a citizen of NZ, and safe from whatever happens here. Ditto Zuck with his compound in HI, etc.
Bottom line, if we want to encourage more investment, wage growth has to be part of the equation. If we want that to happen, I suggest starting to close all the loopholes that allow billionaires to declare a zero federal income tax income.
The money to train, educate, etc the workforce of the future has to come from somewhere and the billionaires are not going to give it up willingly.
Thank you. I agree, especially on demographics and the pressure on pay-as-you-go pension systems. But I would frame the problem as more than aging alone.
PAYG systems become fragile when aging coincides with weak wage growth, a shrinking payroll base, high healthcare rents, low productivity growth, and a political system unwilling to rebuild the productive base underneath the social contract.
The Social Security trust fund is not meaningless, but it is ultimately a claim on future tax capacity. If future tax capacity is weakened, the accounting claim becomes much harder to honor in real terms.
I also agree on billionaires. From the perspective of ordinary workers, capital detached from domestic wages, communities, infrastructure, and public capability can behave almost like foreign capital.
So yes, loopholes matter. But the deeper question is whether the U.S. can restore its ability to convert capital, taxes, and public spending into productive capacity, worker training, wage growth, and intergenerational legitimacy.
I would argue that for many years Social Security has not been treated as a pay-as-you-go system but as a "pay less and less each year if you're doing well" system--and will be, until the income cap (ratehr than just the payouts) is allowed to float up through a COLA
The distinction between savings rate and capital allocation is the right one to press. A higher savings rate flowing into share buybacks and financial engineering doesn't close the productive capacity gap — it just recirculates within the same misaligned structure. What your framing surfaces is that the mechanism connecting capital accumulation to broad productive investment has weakened independently of the savings question. Which means the fix probably requires two things simultaneously: rebuilding the savings base Kotlikoff is describing AND rebuilding the structural channel that directs accumulated capital toward the productive base rather than toward rent extraction. Right now we're debating the fuel level without addressing whether the engine is still connected to the wheels
Well written as always, sir. A few questions:
1. Does not going to China disqualify one from determining they are a threat? If so, what qualifies one to reach that conclusion?
2. Does the average 70 year old consume more today because of rising healthcare and long term care costs, or is it changing consumer habits?
3. Do you think the President has the power to rein in fiscal irresponsibility? Even if he wanted to, wouldn’t the obligation to service our debt and pay for entitlement spending still cripple us?
Thank you. And on the third question, I do not think any president can simply “rein in” fiscal irresponsibility by willpower alone.
The president matters, of course. A president can shape tax policy, budget priorities, healthcare reform, defense spending, industrial policy, and the political narrative.
But the largest fiscal pressures are structural: debt service, Social Security, Medicare, Medicaid, defense commitments, tax expenditures, and the political difficulty of asking voters to accept either higher taxes, slower benefit growth, or lower asset-price support, in which I think probably the most controllable is defense, which is projected to reach 1.5 trillion much higher than the combined discretionary expenses of 0.7 trillion. But unfortunately the U.S. is kidnapped by the military-industrial complex, and the empire is over reached, being in a forever-war economy.
So yes, even a president who sincerely wanted fiscal discipline would face severe constraints. Much of the budget is already pre-committed. Interest expense is the cost of past decisions. Entitlement spending reflects demographics and healthcare prices. Defense spending reflects America’s global role. Tax policy reflects the political power of asset holders, corporations, and upper-income households.
That said, I do not think the United States is already at the breaking point. The dollar system, Treasury market depth, technology profits, foreign capital inflows, and America’s still-large productive base give the system enormous buffers.
The danger is more gradual: fiscal policy becomes less able to build future capacity because more of the budget is absorbed by past promises, medical rents, military commitments, and interest payments. The core question is not whether one president can fix it. The question is whether the American political system can rebuild the connection between taxes, spending, productivity, wage growth, and long-term national capacity.
Thank you for this thoughtful response as well. This question was more directed at Larry since his closing paragraph was about the book he wrote for the President. As someone who has not yet read the book, I was just curious what levers he thought the President could pull.
I think about the fact that interest payments consume 20% of annual federal tax revenue, and I think often about entitlement spending and the lack of political willpower to ask beneficiaries to sacrifice in the manners you mentioned, but I hadn’t given much thought to our kidnapping by the MIC as you put it. A ballooning defense budget from ~$950B to ~$1.5T is another significant cost we can ill afford to absorb.
I also appreciate that someone as well-versed and accomplished as yourself believes we have not reached the breaking point, and you seem cautiously optimistic that our political system can make the adjustments you mentioned.
Thank you. In addition to the dollar system I mentioned previously, there is another important reason: for now, nominal GDP growth has still been broadly able to keep pace with the expansion of federal debt and interest costs. As long as nominal income, corporate profits, household income, and the tax base continue to grow, the system can absorb a very large fiscal burden.
The U.S. debt ratio is very high, but by advanced-economy standards it is not yet the extreme case. Depending on the debt measure used, the U.S. still has more borrowing capacity than many smaller or less systemically important countries because it combines scale, monetary sovereignty, deep capital markets, reserve-currency status, and enormous private-sector wealth.
But this is not a permanent free lunch. The most important condition is that the U.S. technology sector must continue to dominate globally. Big Tech, software, semiconductors, AI infrastructure, cloud computing, digital platforms, finance, and the broader innovation ecosystem generate wealth, capital gains, high incomes, corporate taxes, and global confidence in American assets. That wealth creation is what allows the U.S. fiscal system to keep expanding without immediately hitting a wall.
If that loop breaks, the fiscal picture changes fundamentally. If debt, entitlement spending, defense spending, and interest costs keep rising while America’s high-productivity sectors lose global dominance, then the U.S. would face a much harder constraint. At that point, deficits would no longer be financing future capacity or supported by rising national income. They would mainly be financing past promises, interest payments, military commitments, and political stability.
On the second question, I think the answer is probably both, but with an important qualification.
When we say average consumption by 70-year-olds is much higher today relative to 40-year-olds, that does not necessarily mean older Americans are simply buying more discretionary goods. A large part of the increase likely reflects healthcare, Medicare-financed medical consumption, long-term care, insurance-paid services, and the high price structure of the American medical system.
That matters because much of this “consumption” is not ordinary lifestyle consumption in the way people usually imagine. It is often institutional consumption paid through public programs, insurance systems, or household savings. So I would be careful not to moralize it as older people simply choosing to consume at the expense of younger people.
But the fiscal implication is still serious. If the old-age consumption structure is increasingly driven by healthcare rents, long-term care costs, asset-price wealth effects, and retirement promises, then the system places a growing claim on future tax capacity, future workers, and future public investment.
So the real issue is not “old people are bad.” The real issue is that America’s social contract has become increasingly expensive while the productive and fiscal base underneath that contract has not grown fast enough to support it.
To both of your responses, thank you. I agree the specifics beyond “China bad” are very important, and there’s a lot of nuance Larry did not have time to delve into.
With respect to elder consumption, that totally makes sense. It would seem that with an aging population that is living longer, these goods and services will only experience greater demand, leading to further price increases and greater elder consumption. In any case, as Larry has said many times, our ridiculous fiscal trajectory is unsustainable, and my generation will bear the costs.
Thank you for the thoughtful questions. On the first one: no, not going to China does not automatically disqualify someone from judging whether China poses a strategic challenge or threat. One can study military capabilities, industrial capacity, trade flows, technology policy, naval expansion, export controls, sanctions, alliance structures, and official documents from outside China.
But there is a difference between identifying a strategic challenge and understanding the system that produces it.
My concern is not that outside observers are never allowed to call China a threat. My concern is that many Western discussions jump from “China is a competitor” to a much broader civilizational or ideological caricature without understanding how Chinese industrial policy, local government competition, engineering capacity, household behavior, state-owned capital, private firms, and national security thinking actually interact.
So what qualifies someone to reach a serious conclusion? I would say: evidence, comparative knowledge, historical context, exposure to Chinese sources, some understanding of Chinese political and economic language, and ideally some direct experience with the society. Field experience is not the only qualification, but it helps prevent analytical shortcuts.
China can be a strategic competitor. It can even be a threat in certain domains. But serious analysis should specify to whom, in what domain, through what mechanism, and under what conditions. Otherwise “China is a threat” becomes a slogan rather than an analysis.
We have not continuously invested in productivity improvements in manufacturing. Name the CEO’s who take eighty to ninety percent of their retained earnings and plow them back into productivity improvements. We would rather go abroad to lowest wage countries than invest in our own workers. We would rather take scarce capital and fund stock buybacks, not new plant and new equipment.
Success in manufacturing is straightforward. You must make more with the same workforce, or make the same with a smaller workforce. Continuous productivity improvements are the key, first by maxing out your current technology and then by investing shrewdly in new technologies. It takes a lot of work, a lot of discipline, and a cast iron constitution, in order to make continuous, shrewd investments.
Visit a Nucor steel production facility. It can be done, and it is a wonder to behold. Their throughput from melt to pour to rolling out finished steel is remarkable, because their process is continuous. Their rank and file is at a whole another level. Walk into to the control room and listen to them talk about the alloy process taking place. You will think you have stumbled upon a convention of metallurgical engineers, they are that knowledgeable. And their expertise and productivity shields them from money problems. Quite the contrary. The company itself provides them with a dozen and one savings plans catering to every need. The stockholders are also pleased with their returns. Sure the company has problems, but its immense productivity renders their problems solvable.
When leaders lack vision, the people suffer. I see a dearth of vision emanating from our economic elites, who seem to have forgotten that skills in blocking and tackling must precede the Hail Mary pass of AI, whose implications are barely understood.
This is exactly the point I would emphasize: capital has to be converted into productive capability, not merely into financial returns.
Open capital markets may be good at allocating capital toward private return, but they are not automatically good at building the productive base of a country. Share buybacks, financial engineering, asset inflation, and offshore labor arbitrage may all be rational from the perspective of investors and executives. But they do not necessarily rebuild plants, train workers, improve processes, deepen supplier ecosystems, or raise the long-term productive capacity of the economy.
Your Nucor example is very important because it shows what industrial capability actually looks like on the ground. It is not an abstract slogan about manufacturing. It is continuous process improvement, accumulated shop-floor knowledge, disciplined reinvestment, worker expertise, equipment modernization, and a culture that treats productivity as a living system. That kind of capability cannot be created by one subsidy bill or one AI narrative. It has to be built continuously.
This is also why I think America’s problem is not simply low savings. It is the weakening of the institutional mechanism that converts savings, retained earnings, capital markets, and public policy into broad productive capacity. If capital is repeatedly routed into buybacks, asset prices, monopoly rents, and offshore cost reduction, then even a rich country can gradually lose the industrial muscle underneath its wealth.
The AI point is especially well taken. AI may become a major productivity tool, but it cannot substitute for the basic blocking and tackling of industrial competence: process control, skilled workers, supplier depth, plant investment, engineering discipline, and management vision. Without that foundation, AI risks becoming another financial and narrative layer placed on top of a weakened productive base.
I don’t need write word’s,I just say with my heart and just do what I want.
35 years ago I told my kids they would someday be hunting my generation with dogs. They 'disowned' me, and likely they're voting for DSA
I do not know much of Economics but to me while this might be right, I don't think this is all of America's problem.
The savings rate collapse is the right place to look, and the intergenerational transfer framing is clarifying. What strikes me about the data you've presented is that the decline from 15% to 2% didn't happen all at once — it drifted, decade by decade, without triggering any automatic correction. Which raises the structural question underneath the fiscal one: what would have had to be true about the system's design for that drift to have been visible and correctable before it compounded to where we are now? The fiscal gap accounting you're describing is essentially a belated alignment instrument — a way of making visible a misalignment between what we've promised and what our productive capacity can support. The harder problem is that we built the system without that instrument in the first place, and then spent fifty years making commitments against a balance sheet we were deliberately choosing not to read.
When financilisations makes more sense than making things, are we surprised that the tail wags the dog
https://manojchawla.substack.com/p/the-real-question-nobody-asks?r=2dmsxb&utm_medium=ios
If you mean that Ron and Tip got the sums wrong and that lies behing a big chunk of th federal deficit, whihc in turn is a big part of the explanatio for slow US growth, I'll agree. I guess that chosing to pay Social insurance benefits wiht a age tax may have contribued to the common error of thinking those progrms are saving accounts. If so, that's an additional reson to shift to a VAT.
BTW. Don't use the "Ponzi Scheem" meme. It's clearly not the case as peopel are NOT "investing" in SS/Medicare epecting a supernormal ROI. Consequently it undremines your real criticism.
You mean MMT is all BS?? I'm shocked 😲
As some other commenters here have pointed out, I think the nature of the domestic investment that has occured in the US has in some ways been counterproductuve for businesses and the economy. Like for example heavy investment in static assets like property and the rise of managing for shareholder value has been great for investors but hasnt been optimal for business competition with the leaner and meaner Chinese firms.
I don’t agree. There is an entire PE asset class that has done wonders for shareholders by playing games with the tax code, creating local monopolies, and other schemes that add zero value to the economy but make their investors rich.
It’s all over. See the famous case of all anesthesiologist practices in the greater Denver area getting rolled up by one shop, then the prices are doubled. Takes a long time to set up competitors, etc.
There is a manufacturer whose 10ks indicated to me that all their net income was derived from the tax shield associated with the PPE getting revalued to 100% every five years as the assets were sold from one PE fund to the next. Over and over, we the public are taken to the cleaners as PPE goes from 0 to 100% by virtue of someone declaring it so.
No one made meaningful investments and the assembly line was installed in 1985 or so, the products designed in the early 80s, and we should be surprised the company is on a slow controlled flight into ground?
Politicians are cheap, they keep amending the tax code to help their clients out. 500k investment in lobbyists yield 200MM+ payouts via little twists here and there in the tax code that only affect one company (ie the sponsor).
Never mind looking the other way as companies keep aggregating market share in their industries and then are too big to fail when their inefficiencies make them uncompetitive?
Truly, the most remarkable phenomenon in the last 40 years is how effectively the US financial system has managed to privatize profits while socializing losses.
I think Larry, Leon, and several others in this thread are circling around a deeper production-distribution and productivity-yield problem tied to what might be called a “scale-pursuit investment spiral.”
Large corporations gain advantage through scale. But once scale becomes the dominant investment logic, firms increasingly reorganize production around labor-cost minimization and financial efficiency. Offshore labor then becomes extremely attractive, especially when collateral-based finance and underwriting naturally favor large scalable projects with predictable returns.
That process helped produce the inflation/deflation exchange structure now so visible between the U.S. and China.
China’s growth model absorbed inflationary pressure through continuous large-scale investment: infrastructure, housing, manufacturing expansion, export capacity, etc. Meanwhile the U.S. absorbed persistent deflationary pressure from inexpensive imported production by inflating assets and financial markets.
The result is a constant pressure within U.S. capital markets toward greater scale, financialization, consolidation, and offshoring — because scale itself becomes the easiest path to preserving margins and securing investment flows.
The problem is that this process gradually suppresses many smaller-scale forms of productive investment that build domestic industrial depth, manufacturing capability, labor development, and continuous process improvement.
So I suspect the issue is not simply “low savings” alone, but also the structural way modern finance preferentially channels savings toward scale-seeking systems that progressively weaken broad productive capacity over time.
if only Trump could understand this.
better yet ... if only Trump voters could understand this. then they probably wouldn't be Trump voters.
wouldn't fix everything, but it would be a helluva good start.
Then, again, we did make a agreement with china to get money for the iraq war... and now when it's time to collect we don't have the production to meet it