The Bond Market Always Gets the Final Vote

Bill Clinton famously exploded during a 1993 economic meeting: “You mean to tell me that the success of the program and my re-election hinges on the Federal Reserve and a bunch of f***ing bond traders?”

More than three decades later, the bond traders are once again getting everyone’s attention.

Every president eventually discovers the same thing: Washington can tax, spend, borrow, regulate, impose tariffs, and even go to war. But the bond market gets a vote. And right now, that vote is becoming more expensive.

Across the world, borrowing costs are climbing. Governments are carrying enormous debts. Oil and inflation are creating new anxiety. Artificial intelligence is consuming staggering amounts of capital. And in Washington, Treasury Secretary Scott Bessent — himself a veteran trader — appears to be doing something even Clinton never contemplated: trying to out-trade the bond traders.

Our guest on this WhoWhatWhy podcast, economist Dean Baker, questions some of the conventional explanations for what’s happening — starting with the alarm surrounding America’s $40 trillion debt. “If we have a strong, growing economy,” Baker argues, “our debt’s not a problem.”

So what is driving long-term rates higher? How much do war, energy prices, tariffs, and the unpredictability of American policy matter? And what happens when Bessent wants long-term rates lower while Federal Reserve Chairman Kevin Warsh may decide short-term rates need to go higher?

Then there is AI. The enormous data-center buildout is creating an extraordinary appetite for capital — and potentially reshaping both financial markets and the larger economy. But what happens if that investment boom runs out of road?

Ultimately, the conversation reaches beyond bonds and deficits to a larger question: Has the era of cheap money ended — and if so, how many assumptions about government, markets, housing, and economic growth have to change with it?

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Full Text Transcript:

Jeff Schechtman: Welcome to the WhoWhatWhy podcast. I’m your host, Jeff Schechtman. Every era has its own way of discovering that the laws of economics have not actually been repealed. For a long time, money was extraordinarily cheap. Governments borrowed, companies borrowed, investors borrowed, and an entire generation came to think of low interest rates less as an economic condition than as part of the natural order of things.

But the bond market is, in some ways, monetized faith in tomorrow. You lend money today because you believe that years from now, the borrower will still be there, the currency will still mean something, and the promises being made will still be worth keeping. And lately, that faith has been getting more expensive — not in the form of a crash or a bank failure or some dramatic moment on a trading floor; something quieter is happening. Around the world, the people who lend money are simply demanding more to do it. And that matters because beneath almost every argument we have about the economy — housing, deficits, artificial intelligence, government spending, even war — is the same question: What does money cost?

Suddenly, that question has become political. Treasury Secretary Scott Bessent is trying to push long-term rates lower. The Federal Reserve may have to push short-term rates higher. Oil prices are feeding inflation. Governments everywhere are carrying enormous debt. AI companies are consuming staggering amounts of capital. And the bond market, which has no constituency, no campaign slogan, and very little interest in anyone’s political timetable, keeps rendering its verdict.

The temptation is to call this a debt crisis or an inflation story or another consequence of the war in the Middle East. But perhaps the more interesting possibility is that something larger is changing. Maybe the age of almost free money is simply over. And if it is, an awful lot of assumptions about what government can afford, what houses are worth, how companies grow, and even what kind of economy we are going to have may have to change with it.

We’re going to talk about this today with my guest, Dean Baker. Dean Baker is an economist and co-founder of the Center for Economic and Policy Research and someone who has spent much of his career not being afraid to question economic assumptions that Washington often tends to accept as settled fact. It is my pleasure to welcome Dean Baker back to the WhoWhatWhy podcast. Dean, thanks so much for joining us.

Dean Baker: Hey, Jeff, thanks a lot for having me on.

Jeff: Well, it is a delight to have you here. Thank you so much. I want to begin by explaining to our listeners, that may be confused by a lot of what they’re hearing and reading today, exactly what Treasury bonds are, what the bond market is all about.

Dean: Well, Treasury bonds are typically… We talk about these as longer-term bonds. So instead of short-term lending — 30 days, 90 days — usually of Treasury bonds, we’re thinking of 5-year, 7-year, 10-year, 30-year bonds. And these are — they’re debts that basically are bought and sold.

So, most people… I shouldn’t say this; I was going to say your mortgage is sold — of course they are. But anyhow, just think of it like your mortgage, that you take out a 30-year mortgage on a house. That’s pretty standard. Obviously, you can get a shorter 15 or whatever. That’s the most common — 30-year mortgage. And 30-year bonds, the same sort of thing: it comes due at the end of 30 years. Different from a mortgage, you’re not paying it off month by month. You pay the full amount at the end of 30 years. So if you had a $400,000 mortgage, at the end of 30 years, you’d pay $400,000. But each month you’re paying — or quarterly, actually — each quarter you’re paying an interest rate, let’s say 4 percent, 5 percent. So you’re paying that amount each quarter.

And this is really central to the economy. The Treasury bond market sets interest rates for mortgages, for corporate bonds, for bonds for state and local governments. So when you hear that interest rates on 30-year or 10-year bonds have risen, that means interest rates throughout the economy are rising. And that’s going to slow growth.

Jeff: And explain how yields move opposite of prices with respect to bonds.

Dean: Yeah. So what I was saying a moment ago, that the interest is fixed. So let’s say you had a $10,000 bond that pays 4 percent interest. So it pays $400 a year in interest. That $400 doesn’t change. So the question is, how much are people willing to pay to get $400 a year in interest payments? And for the moment, we’ll make it a 30-year bond, pays off long time in the future. So you’re just concerned about the $400 a year in interest. And when interest rates go up, you’re willing to pay less for that. You could get a… If you can get short-term interest rates, you can get 6 percent or something; you’re willing to pay less for that $400. So the price of the bond will fall when interest rates rise, and vice versa. If interest rates fall, then the price of the bond goes up. And that’s a story: during the pandemic, when interest rates became very low, if you had held bonds before the pandemic, you did very, very well because the price of those bonds went up a lot. So bond prices go in opposite directions to interest rates. And if interest rates are rising, bond prices are falling, and vice versa.

Jeff: Talk a little bit how deficits impact the bond market.

Dean: Well, that’s actually not that clear. So, it’s sort of conventional wisdom that deficits make interest rates rise because we’re selling all these bonds — there’s more supply of bonds. That means interest rates will rise. I think, in some sense, there’s some truth to that, but I don’t know if there’s that much truth to that because currently we have very large deficits. It’s around $2 trillion annually, measured as a share of GDP, which is the appropriate metric, because $2 trillion — what does that mean? Well, it’s about 6 percent of GDP, give or take. So that’s very large by historic standards. But interest rates are not particularly high. They’re higher than what we were used to during the pandemic. They’re higher than what we saw in the Great Recession, when interest rates were very low. But if we go back to the ’90s, interest rates were actually higher in the late ’90s, when government was actually running a budget surplus. So, there’s not a close relationship.

So I’ll just say, other things equal, if we run a larger budget deficit, interest rates will be higher. But the other things are far, far more important than the budget deficit. So I think it’s a little bit sloppy, or maybe very sloppy, to say that a big budget deficit means high interest rates. Because, again, by historic standards, we do not have high interest rates, even though we definitely have a large budget deficit. I don’t think there’s any two ways about that.

Jeff: And talk about the things that are driving interest rates at this point: the price of oil, the Iran war, inflation, etc.

Dean: Yeah, that’s a real good question. There’s some clear things that are driving interest rates. Others are more ambiguous. So, the AI boom — that’s leading to massive borrowing to build data centers. Hundreds of billions, we might be over a trillion next year. So this is really large-scale borrowing to build data centers. That’s clearly a factor.

Inflation. We’ve seen the jump in inflation had been falling to 2 percent back in 2024; we’re now at around 3.5 percent. I don’t have a crystal ball, so I don’t know [if] it goes higher or lower from here, but the Iran war is clearly a big factor pushing it up. So we see oil prices, of course, risen — we’re up around 90, even 100 a barrel by the Brent measure, Brent crude. So oil prices have risen a lot. There’s other products — fertilizer products. Fertilizers have risen a lot because a lot of that’s produced in the Gulf states and not getting out. So that’s been a big factor. Trump’s tariffs have been a big factor raising inflation.

Now, the reason why I’m saying it’s somewhat ambiguous is it’s fairly easy to pull out the inflation component of the interest rate because the government sells inflation index Treasury bonds. So if I want to, I could buy a 10-year Treasury bond that pays me a yield — whatever, 2 percent, 2.5 percent — plus whatever measured inflation there is. So you could look at the difference between the interest rate and the inflation index bonds — and the ones that aren’t indexed — to see how much inflation people are expecting. And the expected inflation hasn’t really gone up much in the last year, even as the interest rate on bonds has gone up about six- or seven-tenths of a percentage point. So that’s why I’m saying that, doesn’t seem that inflation has been a major factor pushing interest rates higher. It’s been more other factors, again, I think the data centers are clearly important. I suspect that Trump’s erratic behavior has been important. But it’s hard to pin down exactly what the factors are.

Just say a little bit more about Trump’s erratic behavior. The US, of course, had a reputation as having sterling gold credit, and we never default on our debt. And that helped kept interest rates low. I don’t know, everyone’s expecting us to default on our debt, but what I think is fair to say is Trump has been acting in ways that no prior president has, and any investor would reasonably be much more cautious about putting their money in US government bonds or, in fact, in the United States more generally, given Trump’s behavior. And it’s just something we’ve never seen in the US administration.

Jeff: Talking about investors and who holds these bonds: For a long time, it was conventional wisdom that a larger percentage of these bonds were held internationally, were held overseas. What we’ve seen today is hedge funds owning larger and larger amounts of these bonds.

Dean: Well, it’s always been the case. Most of it is held domestically: it’s somewhere around 60 percent — I don’t know the latest figures, but I’d be surprised if it’s very far off 60 percent. What has changed in, say, the last 10 or 15 years has been that instead of central banks — foreign central banks — being major holders, we’ve seen increasingly that private foreign investors — so that’d be private banks in Germany and Japan and China, Korea, whatever — and also private companies or individual, as you were saying, hedge funds. We have hedge funds here; they have hedge funds in England, in other countries. So you see private investors largely taking up the slack as central banks have chosen to hold fewer bonds. They still hold a lot of US government bonds, but before, the major foreign holders were foreign central banks, and now — again, I’ve not looked at the data lately, but my guess is they probably don’t account for more than 10 percent of US bond holdings.

Jeff: Explain what we read about earlier in the week and last week about the Treasury Department: Scott Bessent buying up bonds.

Dean: I wish I could because, in all seriousness, he seemed to indicate… And he was getting angry at people — well, I don’t think he’s being truthful — so he’s getting angry at people just trying to honestly convey what he’s doing. He seemed to be saying that he was going to look to buy up government bonds to bring down the interest rate.

Treasury has limited ability to do that. But there’s an old idea — dates back at least to the ’60s, for all I know, it goes back further. This idea of a twist: that you borrow short-term because the government’s a borrower. So it’s not like we have some massive stash of money that we could just go out and buy government bonds with. We’re a borrower. So we could borrow short-term, say 30 days, 60 days, 90 days, and use the money that we’ve borrowed to buy 10-year Treasury bonds or 30-year Treasury bonds, with the idea of bringing the interest rates of those bonds down.

It’s hard to see that having very much impact, and interest rates — I haven’t looked at where they are today, but they were actually higher this morning or yesterday than they were when Bessent said he was going to do that. Now, since then, he’s denied that that’s what he was trying to do. He said he was simply trying to maintain liquidity, meaning maintain a smooth-working market in the bond market. That seems a little far-fetched to me because I hadn’t heard of any liquidity problems.

Just to be clear to people, what that means is: Suppose I have $10 million in government bonds. That’s a lot for me, but it’s not a big deal in terms of the government bond market. So I’d like to think that, I want to sell it, I could just arrange with a broker. I have my $10 billion — $10 million in government bonds. I want to sell it. And, in principle, I should be able to do it fairly quickly. But if there were liquidity problem, my broker might call me back and go, “Oh, I can’t find anyone who wants to buy it.” That would be a very, very rare thing with the government bond market because it’s so huge. Certainly for $10 million. If I were Saudi Arabia, I wanted to send $10 billion, then maybe that would be a bit of an issue. But that would be the idea of a liquidity problem: that I have my $10 million in government bonds and I can’t sell them, in which case Bessent might have a case: “Oh, we want to maintain an orderly market,” blah, blah, blah. But I, again, am not attuned to everything going on in Treasury market hour to hour, but I had not heard of any issues of a serious liquidity problem, which makes his doing it for liquidity reasons kind of dubious.

Again, I can’t comment on what his real motives were, but, again, he originally talked about it like he was going to try and bring down interest rates. Clearly, that didn’t work. Now he’s saying it was all about liquidity. I don’t know there was any liquidity problem that he had to address.

Jeff: Also, it was a relatively small amount. I mean, he’s talking in billions, and yet it’s a market — trillions of dollars. It really amounts to a pretty small amount that he was even talking about buying back.

Dean: Yeah. It’s very hard to see how he thought you could have had a major influence on the market for more than a very short period of time. I mean, you come in there with a billion, $2 billion, $3 billion — immediately, at least, you have this buy order, and there’s no offsetting sell order. But over even just a day, as we saw, you’re going to see other money come in and offset whatever you’re trying to do. So it really seemed a wrong-headed strategy.

Again, I have no idea what his actual intentions were, but the idea that, with the amount of money he was talking about, he could have a major impact on long-term interest rates seems pretty far-fetched.

Jeff: And to what extent is this counter to what we hear the Fed thinking about doing? And Kevin Warsh indicated in a speech last week that interest rates, as far as the Fed is concerned, are probably on the uptick.

Dean: Yeah. You have this bizarre story. I mean, Warsh… Trump was saying he wants low interest rates, and he was berating Powell, the outgoing Fed chair — he’s still on the Fed, but he’s no longer chair, Jerome Powell — calling “Too late”. He even was talking about indicting him. Just crazy, crazy, crazy stuff. Again, the Fed is supposed to be independent. You could argue whether that’s a good thing or bad thing, but the Fed is supposed to be independent of the president, and Powell was doing — I totally think — what he believed to be the best policy. Again, you could argue with him, but he was pursuing what he believed. And, for the record, there was no one who thought there should be lower rates. Its interest rates are determined by a 12-person committee, so the Fed chair is just one person. Now, his vote carries a lot of weight, but there was only… I should correct that. Trump had one appointee who had voted to lower rates, but that was it, and he had other appointees on the board, and they voted either to keep rates steady or raise them.

Anyhow, Warsh comes in in that context, that Trump’s saying, “Low rates, low rate.” He’s still saying low rates. And Warsh had traditionally been an inflation hawk. He was on the Fed back in… I forget the exact term, 2008 to 2010, roughly; again, those aren’t the exact years. But there he was, yelling about hyperinflation. This was when we were in the Great Recession. Inflation was very low. It seemed pretty far-fetched, but he was very… He said he was concerned that the Fed’s policies — at that time, we had zero interest rates — going to lead to hyperinflation. So he had that reputation coming from that period. And he’s written other things since that he’s very concerned about inflation. So now he comes into a situation where inflation is well above the Fed’s target. Ostensibly, the Fed has a 2 percent inflation target; that’s at least what they’ve committed themselves to. We’ve been above that for over five years, and there’s no evidence it’s going lower. Again, I don’t have a crystal ball, neither does he, but there’s no story we could tell where it’s quickly going to go back to 2 percent. Anything in the world could happen, but it’s not clear how that would happen.

So if you’re committed to a 2 percent inflation target, you have this tradition as being an inflation hawk, that’s your reputation. What does the Fed do? The implication would be, well, you got to raise rates because that’s the only tool they have. So he’s been… He hinted at his Jackson Hole speech that he is going to be looking to raise rates. If he’s trying to raise rates and Bessent’s trying to lower them, in that battle, Bessent’s got a — I don’t know — small knife or something, and Warsh has a huge bazooka. So if the Fed wants to raise rates, Bessent is not going to be able to counter it.

Jeff: There was also a point when Bessent attacked Janet Yellen several years ago for getting too involved in debt management.

Dean: Yeah, well, he was a critic of Yellen. He was a hedge fund guy at that point; he was very critical of Janet Yellen, who, as best I could tell, was simply trying to do the… Janet Yellen, just to remind people, she was Treasury secretary under President Biden. She was doing liquidity management, so maintaining liquid markets. And there actually were some problems of liquidity at that point. I mean, those were documented, not speculated. There were some problems — not disastrous, but, again, it was less liquid than might have been desired. So that was what she said she was doing, what it looks like she was doing. And that’s what Bessent criticized her for.

But I think… I mean, it’s an unfortunate thing. I mean, this administration is staffed by people who just say whatever’s convenient at the time, regardless of whether there’s any basis in reality.

Jeff: Come back to the issue of the debt, because we keep reading a lot about that, hearing a lot about this $40 trillion debt and the degree to which it is sustainable, and even beyond that, the path that we seem to be on.

Dean: Yeah. Well, I think there’s way, way too much concern about the sustainability of the debt, the problem of the debt. Again, I’d be happier if we weren’t. We’re currently spending a bit over a trillion a year, a bit more than 3 percent GDP, on interest. I’d be happier if we weren’t, but I don’t see that as the big problem. If we have a strong, growing economy, our debt’s not a problem. Our problem comes up if we don’t have a strong, growing economy, in which case everything about the United States gets called into question.

So it’s not particularly the debt. It’s simply, if you have a president doing erratic things like putting on tariffs, starting wars that make no obvious sense, picking fights with our closest ally, Canada — just, as best anyone could tell, crazy. I mean, what has Canada done? It really is close to nuts. That undermines confidence in, again, not just government debt, but the US as a place to invest. That’s what I worry about. The debt… again, it would be nicer if we had a smaller debt. But what would that mean? How do you reduce the debt? I mean, we could reduce its importance relative to the economy by growing more rapidly. We had a debt of comparable size — again, I won’t go into measurement issues — but we had a debt of comparable size after World War II. It’s no problem at all. We had great growth — in the ’40s, the ’50s, the ’60s — and the ratio of the debt to GDP fell precipitously.

So if we have a strong, healthy economy, the debt’s not going to be a problem. If we don’t have a strong, healthy economy, the debt’s going to be a problem, but everything’s going to be a problem. So I think the concern is really misplaced.

Jeff: I guess it was Powell that said that he was also less worried about the debt at this point, but that he was concerned about the trajectory that we were on.

Dean: Well, we are running very large budget deficits. I said a moment ago that we were talking about budget deficits around $2 trillion, around 6 percent of GDP — those are historically large. And, of course, they’ll get much larger if we go into a recession. I mean, you could think of lots of bad scenarios. Trump wants to raise the military budget by half a trillion; he wants to have a $1.5 trillion military budget. We’re at $860 billion just a couple years ago under Biden. So, massive increases in spending.

So that is some cause for concern. And, again, it’s not a this-year-or-next-year problem. The question is, does that undermine confidence in the US economy? And I think that is cause for concern.

I’ll raise another point that I don’t think gets anywhere near enough attention. We have what’s referred to as a tax gap of around 600 billion. So the idea of a tax gap is: We should be collecting revenue based on the law. So this isn’t so-and-so’s some company’s found a very creative way to avoid paying their taxes. Tax avoidance means you’re real clever. You got clever accounting. You reduced your tax bill. But that’s legal. The tax gap refers to tax evasion: money that’s owed. It’s not that you’re being tricky here. You owe money, and you’re not paying it. And that’s estimated, as I said, around 600 billion. That’s estimates from the Congressional Budget Office that’s probably two or three years old, maybe longer. I’m sure it’s higher today.

And what’s happened is rich people and large corporations have gotten to the point they don’t feel like they have to pay their taxes. Biden did try to crack down on this. He substantially expanded the resources at the IRS specifically so that they could investigate the taxes of corporations and high-income individuals. And, again, that is where the issue is. I know the Republicans like to yell that — tell people that you have a plumber, that maybe they did something off the books and they’re going to get some jackbooted IRS agent. That’s crazy, that’s just totally crazy. That’s not what they’re doing. They’re looking at Wall Street guys and lawyers and people with partnerships of different types — they’re raking in millions, tens of millions, hundreds of millions, and they’re not paying their taxes. And so Biden was trying to crack down on that. Those people all got fired by Trump and Musk, DOGE. They had massive layoffs in the IRS, and, even worse, they’ve made a conscious policy of not going after the high-income people. And in the few cases where they do, Justice Department drops the case, or they make a campaign contribution and Trump pardons them.

So if you have high-income people that don’t think they have to pay taxes, we really do have a very big problem because, at the end of the day, we do have to collect some taxes. We have a deficit, could argue how serious that is, but if you cannot collect taxes, you have a government that cannot collect taxes, you have a really big problem.

Jeff: Talk a little bit about the corporate spending. We’re seeing huge amounts of money of CapEx with all these AI companies, which you alluded to earlier. What impact is that having on the bond markets, on the larger economy?

Dean: Well, this is clearly a big source of demand for funds. We’re seeing massive borrowing by what are referred to as the hyperscalers. These are the big tech companies: Google — or Alphabet now — Meta, Microsoft, Amazon. They’re spending the… I don’t know if we’re over a trillion for 2026, but we’re for sure over a trillion dollars in 2027. That’s annual. So that’s not a cumulative number. So it’s a massive amount, even for our economy. That’s a lot of money. And that’s leading to very large demands for borrowing.

And, again, I should mention that these companies are now borrowing. They have enormous cash flows. So I don’t follow any of their balance sheets closely, but all these companies had enormous cash flow — Microsoft and Google — but now they’re actually spending more than they’re taking in. So they have to borrow. So that definitely is a factor pushing up rates. How big a factor I think it’s difficult to assess, but I’d be surprised if we’re not talking about at least half a percentage point.

And the big concern I and others have is that, at the end of the day, this is likely to go bust because that market — the end market — the market for AI does not seem to be that big. The two big AI companies, of course, OpenAI and Anthropic, are losing money hand over fist. So it’s hard to see how that story changes. If your end buyer is losing money, it’s hard to see how you end up doing okay with these massive investments.

Jeff: And to the extent that that blows up at some point or it becomes a cash crisis, what do you see as the larger ripple effect from that?

Dean: Well, there are two big parts of that. One is simply that the capital expenditures go through the floor. So if you go back to the housing bubble in 2007, 2008, 2009, it was collapsing. We had massive construction of housing. We were spending about 6.5 percent of GDP on construction. That fell back to 2 percent of GDP. So that’s a fall of 4.5 percentage points of GDP. In today’s economy, that would be about 1.5 trillion a year in demand lost.

Now, spending on AI isn’t quite that large, but you could see a huge falloff. I was just saying a moment ago, a trillion a year in spending — that’s going to go to zero. I mean, the demand is just going to go through the floor if we see a crash there.

The other part of the story is the consumption part. We know people have been spending based on their stock gains. Wages have been growing very slowly — in fact, they aren’t even keeping pace with inflation anymore. The labor market’s barely growing; we’re creating very few jobs. And what that means is, insofar as we’ve seen consumption growth, it’s all based on stock gains.

And if that goes in reverse, if we see the market fall 20 or 30 percent, which is certainly a plausible story — I mean, go back to the tech bubble in the ’90s: S&P fell 50 percent; the Nasdaq fell 80 percent. We could very well see a big hit to the stock market; you’ll see consumption fall off. We’re, in that case, talking about a recession, and likely a pretty bad one. So the consequences of the AI bubble bursting are not pretty.

Jeff: Also, we’re talking about, the Fed’s talking about raising interest rates — which potentially runs counter to the Fed’s other mandate, which is full employment.

Dean: Yeah. So we have a weakening labor market; I don’t mean to say it’s a horrible labor market, I mean, 4.1 percent unemployment historically is pretty low. But it doesn’t look like a real good one by a lot of measures. So one of the things that I and others look at is the extent to which people feel comfortable quitting their jobs. And the quit rate is actually very low. So ordinarily, with a 4.1 percent unemployment rate, you’d think people would be pretty confident that they can get a new job somewhere if they don’t like their boss, they don’t think they’re getting paid enough, they don’t like their workplace — whatever it is — they would be quitting their jobs in fairly high numbers. But in fact, the quit rate’s very, very low.

The other part of that story is that wage growth is very low. Again, in a tight labor market, you’d think you’d be seeing good wage growth, that’s not the case. Wage growth has been slowing sharply. By a measure I like to use — looking three months compared to the prior three months — it had been over 4 percent back in 2024. Now it’s down to about 2.5 percent. So that’s a sharp slowing in wage growth in a relatively short period of time. That’s not a story that’s consistent with a strong labor market.

So, in my view, there’s a good case for lowering rates. But, again, I recognize the problem with inflation, so I understand why they may not want to go there. But there’s definitely a conflict, where — to the Fed’s mandate, full employment. What does that mean? Well, should mean low unemployment and also a strong labor market. Pretty hard to say it’s a strong labor market right now.

Jeff: And not factored into this yet, really, is the impact that AI potentially is going to have in the job market.

Dean: Well, I just wrote a piece on this. The amount of confusion here is incredible. So we have a lot of people running around saying, “Oh yeah, AI is going to get rid of all the jobs.” Well, we’re not seeing that. I don’t mean to be an AI total skeptic — I think we are going to see benefits from it — but the idea it’s going to lead to mass unemployment to my view is close to crazy. But let’s, for a moment, say that it does. Part of what these people are saying: That will mean more unemployment. That’s productivity growth, and if we have productivity growth, we know how to deal with that. We actually had very rapid productivity growth from the end of World War II to the early ’70s, and that didn’t have mass unemployment. We had very low unemployment; we had rapidly rising real wages; we had shorter workweeks. We know how to deal with that. This is not something out from outer space.

The way you deal with that is you make sure workers get their cuts. More unionization would be a really big part of that story because that was certainly true if we go back to the ’40s, ’50s, ’60s, with unionization rates over 30 percent. So that would be a really big part of the story. Things like shortening the workweek. We shortened it to 40 hours in law back in 1937. Well, it’s 90 years later, maybe we should shorten it to 36 or 32. So, shorter workweeks, more vacations. In Europe, five to six weeks a year vacation is pretty much standard. Incredibly, I just saw Donald Trump is saying we have too much vacation.

The last point I’ll make on that: We were talking before about the deficit and debt. These are 180-degree opposite concerns. If we’re seeing huge gains in productivity because of AI, we have abundance. We don’t have to worry about debt and deficits. So you’re welcome to worry about one or the other, but you’re very confused if you’re worried about both.

Jeff: And another point of this, which we haven’t touched on, is really the global nature of this, that some of the issues that we’re seeing with the bond market here, we’re seeing throughout the Western world at this point.

Dean: Yeah, we’ve seen a rise in interest rates, and it’s quite striking. It’s in Japan, it’s in Europe, pretty much everywhere. And, again, some of that is going to be tied to the US, and I think the fact that the US dollar, US Treasury market isn’t as safe as it used to be probably affects everyone, so that you’re seeing US bonds pay higher interest rates, so that probably puts upward pressure on yields elsewhere.

But I think also the AI boom — that’s an international phenomena. Some people, some good economists, have made some mistakes on this, they say, “Oh, it accounts for two-thirds of GDP growth,” or whatever — I mean, that’s not an exact number. But people have been coming up with things that really exaggerate the amount of GDP growth that are directly due to AI spending. And the reason why they make that mistake is they ignore the fact that a lot of what we’re putting into these data centers, those are chips that were made in Taiwan, made in Korea, made in other places — a lot of what we’re spending on the data centers is actually produced in other countries. This is a worldwide phenomenon, so it’s not just the US; it’s big enough that it’s pulling in the whole world. And that makes it a much bigger deal.

Jeff: And finally, what do you think it would take to calm the markets right now, in the short run?

Dean: I can give you a cryptic answer and say a new president. Certainly, if you had a resolution of the war in Iran, that would be a really big thing, and presumably energy prices would come down. I think that would be the biggest thing. And also ending the trade wars. People have made the point: We — meaning we, the economy, businesses — could live with 15 percent tariffs. That might be stupid, but if we said, “Okay, 15 percent tariffs. 15 percent tariffs today, 15 percent tariffs tomorrow, 15 percent tariffs next year,” they could adjust to that. The big problem with Trump’s trade war is it’s “Whatever I feel like. I’m pissed at the president of India or prime minister of India, so 50 percent tariff.” And he didn’t like what Lula did, so, again, 50. That’s what is really erratic.

So if we saw a return to something resembling normal trade policy, again, coupled with an end to the war and the idea that we’re not about to start another one, that would go far toward soothing the markets.

Jeff: Dean Baker, I thank you so much for spending time with us.

Dean: Thanks a lot for having me on.

Jeff: Thank you. And thank you for listening and joining us here on the WhoWhatWhy podcast. I hope you join us next week for another WhoWhatWhy podcast. I’m Jeff Schechtman. If you like this podcast, please feel free to share and help others find it by rating and reviewing it on iTunes. You can also support this podcast and all the work we do by going to WhoWhatWhy.org/donate.