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Martin Wolf is Associate Editor and Chief Economics Commentator at the Financial Times, London.
In this week’s conversation, Yascha Mounk and Martin Wolf discuss Donald Trump’s “big, beautiful bill,” the impact it will have on Trump’s supporters, and whether the United States is facing a looming economic crisis.
This transcript has been condensed and lightly edited for clarity.
Yascha Mounk: We're recording this after the Senate has passed a version of the “big, beautiful bill.” It's kind of amazing how Trump manages to invent these terms that we then all dutifully use. The House, as we're speaking, has not yet passed the bill.
By the time listeners are hearing this conversation, it seems possible—perhaps likely—that the House will have passed some version of the bill as well. What does this bill tell us about the governing philosophy of Donald Trump and the nature of his coalition? And what impact is it going to have on the American economy?
Martin Wolf: So I suppose the headline—which is important—is, 1) objectively, he governs in the interests of extremely rich people. His fiscal policy, so far as it can be defined, is completely consistent with the priorities of the Republican Party since Ronald Reagan, at least—which is: to cut spending, particularly on programs that benefit the poor, and to cut taxes dramatically on the wealthy. So this is a very traditional, if you like, Republican view of the priorities of fiscal policy and is in no way populist as you would normally define it. I call—and have called—this now for two decades "plutocratic populism," or "Pluto-populism." It's pseudo-populism.
The second thing that is very clear about the fiscal priorities is that he really doesn't care about fiscal deficits. The scale of deficits they're prepared to contemplate—and this has now been consistent since the tax bill that was passed last time—is striking. One of the things they did to make that tax bill look palatable, I think it was in 2017, was to say that the big tax cuts would expire.
Now, one of the things they're doing is to extend those tax cuts. They say, well, this isn't really a tax cut, because we already committed ourselves to this tax cut, even though they promised it would expire. So not only do they not care about the deficits—they’re perfectly prepared to lie about it.
Mounk: There's a lot that's interesting in this. I think the first striking thing is that Trump was elected as part of this rather striking political coalition. It looked like his party might be starting to build a multiracial working-class coalition. The Democrats now really dominate the votes of highly educated, affluent people in the most well-to-do parts of the country. There's a famous graph going around that shows how Kamala Harris's coalition, in socioeconomic terms, resembles rather strikingly that of Bob Dole in the 1990s.
The Republicans, of course, have hugely expanded among the white working class over a number of decades. We've seen many other similar movements and parties around the democratic world. But the Republicans have also now started to increase their share of the vote among non-white working-class voters. I guess it's one of the strange things about American politics that Democrats have this coalition of very wealthy, well-to-do people but still feel, in some way, like the natural thing to do—within limits—is to actually serve the interests of working-class voters who no longer really vote for them.
Conversely, Republicans—who certainly have some support among the very rich—are now supported by a much more proletarian coalition. But when it comes time to write a budget, they default back to, as you're saying, budgetary policy that, in some ways, could have been put forward—perhaps in a less blatantly irresponsible way—by Ronald Reagan.
So help us understand where this is going to go in the long run. Do you think these political parties are always going to be at cross purposes with their coalitions? Is somebody—a successor to Donald Trump—going to realize that where their coalition lies today is rather different from where Ronald Reagan's coalition lay in the 1980s, and that they should follow through on that in public policy? It's quite a remarkable moment in that respect, I think.
Wolf: I think that's an unbelievably important question, and I have to be completely honest, I've been somewhat surprised by this. If you think of populist parties nowadays, there are quite a number, notably in Europe, that are pursuing the sort of policies you would expect: they're nationalist, they're hostile to immigrants, but they're also quite supportive of welfare policy. Perhaps the best example I know of is PiS in Poland, which seems to have exactly that combination. If you think back to the interwar period, that was pretty clear—at least to some extent—in the economic policies of the early period of Adolf Hitler and also Mussolini, who was very interventionist, very industrious about creating new industrial jobs for the economy, and so forth.
Not only is what I've described—and you're describing—true. They're also scrapping all the subsidies for clean energy, which were popular. They were generating lots of investment, lots of jobs, including in red districts. So if you look at this—with the exception of the tariff issue—it's really laissez-faire. Quite brutally so. Again, if you think of Trump intellectually—which is strange—it does bring you a bit back to the period he admires and loves so much: late 19th-century America, which was laissez-faire domestically, highly protectionist—so, nationalist in that sense—and intensely anti-union. The big difference, and I've pointed this out in columns from that period, which is sui generis to him, is that in the era of William McKinley—which he loved so much—they had enormous immigration.
Now, the question, though, is as you say: can this last? Is that a sustainable coalition? I suppose economists tend to assume—and the evidence used to support this perspective, and political scientists felt the same way—that economic conditions really mattered. The story we tell about why the Biden administration was defeated—whether it was Kamala Harris or Joe Biden—was that inflation exploded. And because inflation exploded, people's real incomes were reduced for a while, and that was a terrible shock.
So economics really explained it. In the end, it's the economy, stupid—James Carville’s famous remark. That is, by and large, how we've analyzed not just American politics but the politics of most countries. Well, Trump seems to be betting on the proposition that that isn't true.
Mounk: I think he may get that wrong.
Wolf: Well, I hope so. But there is one alternative view, which seems to be out there, which is that cultural issues, racial issues, anti-immigrant, anti-woke, anti-DEI, all that stuff, the sight of ICE officials running around the country, throwing people into prison and ultimately throwing them out—is enough. With the media as it is now—largely ignoring the downsides of what's going on—and the hope that low-information voters will continue to feel loyalty to Trump, the idea is that economics doesn't matter because nobody will really understand what's going on. That would, of course, be a fascinating new possibility. But I tend to believe, in the end, that economics did play a role in leading the working class away from the Democrats towards Trump—and economics will, in the end, though I could be wrong, undermine this new coalition.
Mounk: I guess I take a somewhat middle position on this, which is to say that I do think we're in a moment where culture seems to matter more electorally than the economy in many circumstances. In particular, I think cultural issues have played a huge role in alienating large shares of the working class from left-leaning parties—whether that's the Democrats in the United States, Labour in the United Kingdom, the Social Democrats in Germany, or others. I also think cultural issues are a huge part of the appeal of somebody like Donald Trump, particularly when the other side is in office.
But I would temper this in two ways. I think the Democrats are way out of the mainstream on cultural issues—but so is Donald Trump. So when Democrats are in power, people think, I’m sick of all this stuff, I want Republicans to come in. But when someone like Donald Trump comes in and pushes policies that are also far outside the cultural mainstream, I think those things cease to be an advantage to him. There’s obviously a part of his base that is very happy with throwing trans people out of the military, with mass immigration raids—including on people who’ve been in the country for a very long time—and so on. But I think there are a lot of people in the middle who are horrified by the open border with Mexico, who are very concerned about athletes who’ve gone through male puberty participating in female competitive sports, but who also don’t want people who’ve worked hard in the United States for 30 years to be rounded up and sent to Salvadoran prisons. They also don’t want trans people thrown out of the military. Since that middle, I think, is actually quite significant, there’s a bit of a weather vane effect—where people are buffeted to and fro because they don’t feel that anybody is actually speaking to them.
Now, on economic issues, there’s a bit of a temptation at the moment to look at electoral politics and feel like nothing matters. You can say whatever you want, do whatever you want, it never seems to have an actual electoral impact. But I think that’s wrong. I think Biden lost, in part, because—as people like Jason Furman explained on this podcast and in a great article—people just weren’t doing better in 2024 than they had been in 2019, on average. There were many things in the economy that made people feel: I’m not better off than I was four years ago.
By the same token, if a lot of people lose access to medical benefits, if they suddenly have less money in their pocket at the end of the month, if they realize that all of these tax cuts are only going to the super rich, they’ll also become less likely to vote for Donald Trump’s chosen successor in 2028. I want to ask you about both, specifically, what impact this bill would—or will—have on the lives of ordinary Americans, and, in particular, on the social safety net in the United States.
More broadly, where are we actually with the social safety net? It’s a cliché that America has a much less developed safety net than Europe, that it’s a much more unequal place, that its taxation system is somehow less fair. It’s not obvious to me to what extent that’s still the case, both because European welfare states have become less generous over the last few decades in a number of ways, and because the American welfare state has in many ways expanded. The American income tax system, for example, is much more progressive than the European one. Top rates of taxation are now roughly similar in many places, and you start paying a much higher share of your income much lower down the income scale in most European countries such that, on balance, the American income tax system is actually more redistributive than the European one.
So, how dissimilar are American and European welfare states at this stage, and how much of a difference to the overall structure of the welfare state is this "big, beautiful bill" going to make in the United States?
Wolf: Well, that's a complicated set of questions, and there are some areas here where I wouldn't regard myself as the definitive expert. But I think we can say a few things that are pretty clear.
First of all, the overall share of GDP spent by the government—counting both federal and state—is much lower in the United States than in Europe. At its extreme, it's something like two to one. Angela Merkel once said, I believe, that Europe accounts for more than half of global welfare spending. That was true. And the United States is no exception to the broader contrast. Now, what's important here is this, as I understand it: there's a basic social safety net in America for the elderly. Medicare and Social Security provide reasonable—though not comparable to, say, Germany—support for old people. That was the achievement of FDR and LBJ, going back to the 1960s and even earlier. That system hasn't been fundamentally eroded.
There was a period in the early 2000s when George W. Bush considered privatizing Social Security but got nowhere with it. But benefits for younger people—those under 65, or whatever the current threshold is—are much more generous in Europe, particularly family benefits and health benefits, which are universal. And that's a pretty big deal, given the expense of healthcare in the United States. If you don't have a job that provides health insurance, you're really in trouble in America—which is not the case elsewhere. So the safety net clearly applies to the elderly, but it's much thinner for the rest of the population with one important exception, which I believe was implicit in your question: they have actually ended up giving quite a lot to the poor.
If you look at household income distribution among non-retired people, they've actually lifted the bottom somewhat. One consequence of that, which I think is important, is that it’s squeezed the differential in household income between the poor—who benefit from targeted welfare—and the middle class, who do not benefit from either the elderly programs or the programs for the very poor.
Medicaid was a really important part of that, as was the food program, both of which are targeted in this budget. But they did help raise the living standards of the poor. I think one of the resentments among so-called hardworking working-class people—the broadly defined middle class in the United States—is the perception that the "idle poor," as they might see it, are doing too well. That’s very much part of the focus of the Medicaid cuts. What Republicans in Congress are arguing is that these people should go out, get a job, and then earn their healthcare. Now, Paul Krugman has just written about this very recently—and the evidence that people are not working because of Medicaid is basically nonexistent. But there’s still this feeling, particularly among middle, non-retired people: nobody’s doing much for us.
Mounk: I want to shift to the second set of issues we mentioned about the bill: the extent to which it's going to drive up the deficit, and what kind of long-term consequences that might have. It's interesting—in a way, there seems to be an elective affinity here between some fashionable theories on the left that aren't taken seriously by most economists, like Modern Monetary Theory—or "magic money tree" theory—and the attitude on the right among Republicans. Both now basically seem to agree on the idea that America has so much power in the global financial system that it can do what it wants. It can try to influence, politically, the decisions of the Federal Reserve Bank. It can rack up enormous debts. It can run a very significant budget deficit. And none of this is ever going to have truly negative consequences.
The concern is not just that America is running such a serious deficit—that it's now so high—but that it’s unclear where, in the political system, the actors are who are going to turn the ship around. It feels a little like a game of chicken, where each party is saying, well, the other party’s not going to try to rein in the debt so why should we be the stupid ones who do it on our watch and then reap the negative electoral consequences? Why is it that all of this has not, so far, led to serious adverse consequences for the United States, particularly in terms of its ability to refinance its debt and related risks? Do you think there’s a serious danger that that might change, with potentially disastrous consequences, not just for the United States, but for the world economy?
Wolf: Well, the first question you asked was about the similarities between the left and the right. And I think the similarity is this: the extremes of the political system share one thing—they would like to believe in magical alternatives. Because contemplating the possibility that you actually have to pay for things is rather depressing if you want to do some big, system-shaking things without inflicting any pain on anybody who really matters. So there, I think, they share something. That’s very clear.
The second point I’d make is that over the last 35 to 40 years, the Democrats were actually the more responsible party. I won’t go further back, it gets more complicated then. But I do think the Reagan moment was decisive, because Reagan was the first major figure on the right to break with traditional Republican balanced budget ideology. I’ve always thought supply-side economics was a brilliant idea if you wanted to be on the right because it released you from the constraints of fiscal propriety, which is never very politically popular. That transformed politics.
The next Democratic president after the Republican landslide of 1980—Reagan won in ’80, I think—was Bill Clinton. And Clinton, along with Bob Rubin and Larry Summers as his Treasury Secretaries, eliminated the deficit. That was seen as a great triumph, and the economy boomed for a whole set of reasons I won’t go into. Then George W. Bush came into power, slashed taxes like crazy, and fought a big war. So Democrats looked back and thought, what did we do that for?
Then came the huge financial crisis. Obama, again, was quite responsible. He really did a lot to cut the budget deficit. They didn’t do a huge fiscal boost—it was actually quite modest, much less than I and many others thought was necessary. Growth was weaker as a result, and partly because it was weaker than it needed to be, they lost in 2016. Trump came in, slashed taxes—as we’ve just discussed—and produced a huge deficit. Then the pandemic hit and produced another huge deficit. And finally, the Democrats said, well, that’s crazy. We’re not going to keep cutting spending while the Republicans slash taxes and run deficits. We’ll just do it too. Because being responsible didn’t win them elections—it just got them blamed for slow growth and left them with less room to spend when they were in office.
So I think you’re absolutely right: both sides have now decided there’s no point in running a balanced budget. The question, then, is: can they get away with it? The answer, I suspect, is simple—we can go into the details—but fundamentally, no. Gigantic fiscal deficits are not sustainable forever. But if you're the United States, in the current structure of the world economy, nobody has the faintest idea how long you can get away with it before there's a big problem. The trouble is, if you wait until it really is a big problem, it becomes almost unmanageable—a full-blown crisis. This is what the late Rudi Dornbusch, a great MIT economist, once said—this is a rough paraphrase: when things are unsustainable, they can go on for much longer than you think. But when they end, it happens much faster than you expect. The prudent thing is: don’t go anywhere near that. But from everything we’ve discussed, it seems absolutely clear that prudence is not represented in current politics. So I assume there will be a huge fiscal crisis. And I have absolutely no idea when.
Mounk: I mean, that seems right to me. It almost feels like the economy is a bit like that Wile E. Coyote cartoon. Once you've gone over the cliff, you're going to fall, but exactly when you look down and when the fall begins is hard to predict. And that creates suspense.
Wolf: I don't think they're there yet, but if things continue as they are, the United States is going to have more debt relative to GDP in four or five years than at any point in its history, including after World War II. And it will almost certainly keep going up. This has nothing to do with trade or the supposed wickedness of foreign countries in trade. Because the country is running a huge fiscal deficit, and household and corporate savings are very low, it’s dependent on foreign savings. That means foreigners have to keep buying U.S. debt—a lot of them Europeans, and also the Japanese. And at some point, people are going to say, this is just too risky. Nobody knows when—it could be tomorrow, though much more likely it’s further off.
But once you get to that level of debt—150%, 180% of GDP—and real interest rates rise to 4% or 5%, or even higher, then debt becomes fiscally unmanageable. You get massive inflation. The central bank gets overwhelmed. And here, a crucial factor that could accelerate the crisis is that I think Trump clearly intends to replace Jay Powell with an inflationist central banker. I’m going to assume he’ll tell them to cut rates, just as he’s trying to sell vast quantities of bonds. That could accelerate the crisis significantly, just as, in a very different way, Nixon’s pressure on Arthur Burns in the early 1970s contributed to the great inflation of that decade, along with a few other factors that destabilized the U.S. economy so much.
Mounk: There's another striking thing about the U.S. economy that I’ve been wondering about, and I’d love your help in thinking through it. The United States has about 5% of the world’s population. It has, I believe, about 50% of the world’s stock market capitalization. When you look at U.S. companies, they make up about half of the global stock market. This is partially because America has actually been astonishingly successful in maintaining its share of global GDP, even as Europe’s share has declined very significantly over the last 30 years. America’s share has slightly declined, but not by much despite the astonishing rise of China and other countries around the world. Is this sustainable? Is it really imaginable that 25 or 50 years from now, half of the valuable companies in the world or half of the value produced by companies in the world will still come from the United States? What is it that has allowed the American economy to be so phenomenally productive? And don’t we have to assume that some amount of reversion to the mean is going to happen at some point? What would be the political consequences of that?
Wolf: Well, my assumption is that almost none of this is sustainable, and you have to separate out the different elements. First of all, the United States has about a quarter of world GDP in market prices. That’s been roughly stable for the last 30 years. That’s an achievement, but a lot of it has to do with the strength of the dollar. And the strength of the dollar is closely related to the strength of the U.S. stock market. A lot of what’s driving up the dollar is capital inflows. There’s a very strong global appetite for owning U.S. assets more broadly, and that demand is driven by how impressive U.S. firms and markets look. The question is whether that’s real, or more precisely, whether it’s sustainable.
Let me cast some doubt on the situation in which people are pouring money into the United States—even more than is needed to fund the net deficit. That capital inflow drives up the value of the dollar, which in turn inflates the relative size of U.S. GDP. If we measure GDP the way many economists prefer—in purchasing power parity (PPP) terms, which reflects comparable real income—the U.S. share of global GDP doesn’t look nearly as large. It’s much smaller than China’s, for instance. But why might this not be sustainable? I’ll give you two reasons.
First, this is not the first time a country has had a stock market value wildly out of line with its share of global GDP. The last major case was Japan in the 1980s. There was a period—I’m quite sure of this, though I can’t recall the exact years—when the Japanese stock market was more valuable than the American stock market. I remember noting that at the time. There was a lot of discussion about how this couldn’t possibly be sustainable. That was also the period of the famous claim that the land under the Imperial Palace in Tokyo was worth more than all of California. And if you calculated it based on land prices in central Tokyo, that was true. It was the most famous bubble statistic in my lifetime. As economists, we said, this is nuts. This is the biggest bubble in human history—something has to give. And we know what gave: the stock market collapsed, land prices collapsed, and Japan entered essentially a 20-year deflation. I’m not saying that will happen here, but it’s a reminder that the relative value of stock markets can become completely unmoored during huge bull markets.
Now, obviously, American corporations are genuinely strong in certain sectors. I’m not saying this is identical to Japan in the 1980s. But if you look at standard measures of value relative to underlying earnings, the American stock market today is as highly valued as at any point since the 1880s—as high as in 1929, as high as in 1999. Despite all the problems we’ve discussed, nothing seems to affect these valuations. The implicit assumption is that the American corporate sector—and above all the tech sector, which plays such a dominant role—will go on extracting ever-greater monopoly profits indefinitely, and that those profits will sustain these market valuations. All I can say is: given the politics in America, the global political response to America, and the attacks on the rule of law, on research, and so forth, I find that story very difficult to believe. It seems to be a story people are clinging to because it has played out well in recent decades.
But I would be very surprised if, 20 or 30 years from now, we still saw this phenomenon. Maybe that’s partly because the idea that AI will generate limitless profit booms for the tech sector will turn out to be just as exaggerated as the internet bubble in the late 1990s. There may be perfectly good reasons why the profits from AI will accrue largely to users, and those users will be everywhere, not just in the United States. Meanwhile, the companies investing zillions in building these extremely expensive AI models may not see much of a return. That’s completely consistent, by the way, with what has happened in every major technological revolution in the past, from railways onward.
In the rest of this conversation, Yascha and Martin discuss whether the Chinese economy has a bright future ahead, and why we should be pessimistic about the future of Europe. This part of the conversation is reserved for paying subscribers…
