Douglas Holtz-Eakin is one of the nation’s go-to economists if you want to get both a birds eye and down-in-the-weeds of view of the U.S. budget deficit - how it got so big, what’s driving it and most important now, what is needed to stop its growth and start reducing it.
Much of his work as an internationally recognized scholar centered on government policy issues, leading him to key roles at the President’s Council of Economic Advisers (CEA) as both a senior and chief economist. He went on to become the 6th director of the non-partisan Congressional Budget Office which provides budgetary and policy analysis to the U.S. Congress.
In 2007 and 2008, he was Director of Domestic and Economic Policy for the John McCain presidential campaign. After that, he was a Commissioner on the congressionally chartered Financial Crisis Inquiry Commission.
In short, Doug can apply both theory and practice to one of the biggest challenges facing the nation today: how to get a bloated and still-growing federal budget deficit under control.
So dive in and hear what Doug has to say. Why tariffs can’t raise enough money to turn the tide especially if they lead the economy into recession. Why DOGE may very well cut government spending substantially, a welcome and significant development, but still can’t get close to the kind of cuts needed. Why the key is still cutting entitlements like Social Security and Medicare, long known as the third rail of politics.
And why on a hopeful note why he sees that a continued, inevitable widening of the deficit will get big enough to force both Democrats and Republicans to take steps that start redefining Social Security, which could and should lead them to taking steps on Medicare too.
Tariff Skepticism 00:01:40.550
I am skeptical that they're going to make a lot of progress on the <Budget> deficit using tariffs. They've levied 25% tariffs on steel and aluminum. They have tariffs on China more in the offing. We are a couple days before the Liberation Day when the so-called reciprocal tariffs will appear. We don't really know what those are. and there are rumors of, in addition to aluminum, steel and autos which will come into effect. Drugs, chips, lumber, copper, lots of product, specific tariffs. And there have been numbers floated. The President himself just said that over the next year we'll have 600 to a trillion dollars of tariffs. And Peter Navarro said, 6 trillion over the next 10 years. That'd be 600 billion. You know, these are all wild numbers.
It’s a battle to avoid tax hikes! 00:02:51.260
Remember, we are engaged in an effort to not let the 2017 tax law sunset, because if we do, it will mean a tax increase of about 425 billion dollars next year. And most analysts think that would knock the economy sideways at best, perhaps into a recession. And this is much bigger tax increases than that. So I think if you roll out something like 500 billion to 600 billion dollars of tax increases in you know, on April second, you're going to have a negative second quarter. GDP, almost, for sure, and the First quarter may come in negative. They’ve taken an economy that was growing above 2, maybe 2.3, 2.2 (percent) somewhere in there and knocked it down to the 1% range, and the danger is knocking (it) down further ahead.
We’re not saving Private Ryan here 00:04:42.420
:Anybody who has looked at manufacturing in the United States recognizes that the share of employment manufacturing has dropped regularly from the fifties to the present …long secular decline. It doesn't coincide with any big international trade event except the entry of China, which accelerated that decline for a couple of years. But it's now 20 years in the rearview mirror. We've been saving the U.S. steel industry with tariffs in 2001, 2018, and here we are again in 2025.. It didn't work the other times. It's not going to work this time, either, so I get the logic. I don't believe it will happen. I think they're wrong about that.
Reducing tariffs: A policy mystery 00:05:50.370 -
No one has yet explained to me what the benefit of that will be. I don't see it, and I certainly don't understand the reciprocal tariffs. As a matter of economic policy there seems to be this notion that somehow this is going to eliminate trade deficits, and it won't. So I'm not a fan, I mean, I won't tend to be you know.
Employment downsizing via DOGE: not a significant enough budget event- 00:06:28.100
The President can take the lead, and has. So there have really been 2 stages of this. The first was DOGE, essentially randomly getting rid of employees and causing a lot of uproar, but in the end not really accomplishing much. The Cabinet secretaries in a really unsurprising development were offended that someone else was coming in and firing their employees. The President has given each Cabinet Secretary the primary controll of their agency. They have been asked to make strategic plans for downsizing, and the Cabinet secretaries are now doing that. If you want to reduce the footprint of the Federal Government, that's the way to do it. That's not a big budgetary event. It's something that looks like maybe 200 billion dollars a year. Now, that's real money in the real world. But the budget deficit was 1.8 trillion last year, and we're not going to balance the budget or make a significant reduction, using federal workforce reductions as the tool.
Can’t make real progress without addressing entitlements 00:08:10.790
Real budgetary progress absolutely cannot be done without taking on Social Security and Medicare, which are more than one half of all non-interest spending over the next 10 years by themselves. He's also taken off the table Medicaid, so he's taken all the money off the table, and so they're not going to make real progress.
Reconciliation meets irreconcilable differences…00:09:03.140
So they are engaged in an exercise known as reconciliation. They wanted to cut a trillion and a half dollars of spending over the next 10 years. Fiscal conservatives then moved that up to 2 trillion… The President said. Medicaid is off the table. The Senate said it was going to reduce it by 300 billion…, it seems quite clear that there will not be large scale spending cuts coming out of this reconciliation process. that's the Republican votes. Only route to doing this. Every other route runs through the Democrats, and they're not going to get big reductions out of Democrats in this environment
Divergent trend and spending is growing faster than revenue 00:13:10.490
The annual decisions of Congress, the so-called defense and non-defense appropriations, are 21% of spending over the next 10 years. It's increasingly, there's no money there. It's everywhere else. So you have to go to those other places, and the big ones are the: the entitlement programs. They're not just big. It's important for the listeners to know that they're growing faster than everything else as well. So social security is going to grow at 5-1/2 percent a year. Medicare, something like 7-1/2 percent per year. Revenues are going to grow roughly at the pace of the nominal economy. So if we've got 2% real growth and 2 to 2-1/2% inflation, we're going to get 4 to 4-1/2% revenue growth. It'll grow at the pace of incomes. And so that's the problem: they're diverging.
DOGE could help 00:16:58.820
I would love it if Doge actually went out on a very aggressive way to fulfill its original mandate, which is modernizing technologies and information systems. I mean, the Federal Government needs that in a in a very big way. And hopefully, that will happen. The second thing is, there is across the government, no question that there's a lot of financial mismanagement, improper payments of one type or another, not typically outright fraud, but lots and lots of of problems. And, that's true in the internal programs as well as other programs. And it all should be looked at no question about that.
Medicare: behind the eight-ball from the start 00:17:38.800
Medicare, for example, has a long history of being really easy to to actually defraud, because when Medicare was first passed, the AMA opposed it vociferously, and to get their support, they said, we are going to put an emphasis on prompt payment of providers. And so, for the entire history of Medicare, the first thing to do is cut the check and get it out the door as fast as possible. Then they start checking to see if it's a legitimate claim. And there are estimates that <fraud> could be 80 billion dollars a year. So almost a trillion dollars every 10 years.
Reform: Ho! 00:19:45.550 -
…If you are 55 right now, and you plan to retire in 10 years you don't know what your benefit will be, because 8 years from now the trust fund will go bankrupt, and if nothing happens you have to have a 21% across the board cut in benefits for people in retirement, and you and I both know the Congress is never going to let that happen, which means they are going to do social security reform of some sort somewhere in the next 8 years.
Likely steps for reform 00:20:18.120
No one wants to rely on that, but you know, probably would raise the taxable maximum and pay some more payroll taxes on the benefit side. You have to slow the growth. And so how do you do that? Well, probably give very affluent people less in the way of benefits. It's already means tested some. You could means test it much more aggressively.
Defense - another tough nut to crack 00:22:11.420
The defense budget has the same problems as the Federal budget on a smaller scale. It's got a big health care problem for the troops, veterans stuff in other areas of the budget. It's got a big retirement problem. I mean, there are. There are military retirements that are not fully funded, and so when they do the annual appropriations, a big chunk of it first goes to deal with some sort of retirement and health policy. and there has to be some money left over for weapons,
Reform: top of the List 00:23:18.530
Number one, do social security reform, do it today, and there are many details to how they can sign. I'm not invested in the details, but it's the easiest. It's just money, money in, money out. And then move on to the next big budget. Item, Medicare. And once you do those you are going to do everything because you can't just do the seniors programs and say, Oh, we're doing the seniors…why aren't we the ones balancing this budget? Everyone's got to pitch in.
Douglas Holtz-Eakins
President of the American Action Forum
Before founding AAF in 2009, Dr. Holtz-Eakin served in a variety of influential policy positions. During 2001-2002, he was the Chief Economist of the President’s Council of Economic Advisers (CEA), where he had also served during 1989-1990 as a Senior Staff Economist. At CEA he helped to formulate policies addressing the 2000-2001 recession and the aftermath of the terrorist attacks of September 11, 2001. From 2003-2005 he was the 6th Director of the non-partisan Congressional Budget Office (CBO), which provides budgetary and policy analysis to the U.S. Congress. During his tenure, CBO assisted Congress as they addressed numerous policies — notably the 2003 tax cuts (the Jobs and Growth Tax Relief Reconciliation Act), the 2003 Medicare prescription drug bill (the Medicare Modernization Act), and the 2005 push for Social Security reform.
During 2007 and 2008, he was Director of Domestic and Economic Policy for the John McCain presidential campaign. After that, he was a Commissioner on the congressionally chartered Financial Crisis Inquiry Commission.
Dr. Holtz-Eakin built an international reputation as a scholar. He began his career at Columbia University in 1985 and moved to Syracuse University from 1990 to 2001. At Syracuse, he became Trustee Professor of Economics at the Maxwell School, Chairman of the Department of Economics and Associate Director of the Center for Policy Research.
Dr. Holtz-Eakin writes a daily column in AAF’s morning newsletter, the Daily Dish, and regularly comments on current policy and political debates for a variety of news outlets.
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