AI Won't Save the U.S. Fiscal Picture: Longer Lives, Bigger Deficits
The optimism around AI needs to be halved — longer lives, higher rates, low capital taxes, and an arms race are four mechanisms all pushing the fiscal position toward worse.
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Four shocks did not break the U.S. economy
Four things happened at once in 2025: the trade-weighted average tariff jumped from 2.5% to around 28% and then fell back to roughly 12%; net immigration dropped from about 1 million a year to near zero or even negative; the "One Big Beautiful Bill" added roughly $5 trillion in debt; and there were unprecedented attacks on Fed independence, such as the Justice Department investigating Lisa Cook and the president's attacks on Jay Powell. By any normal reckoning, those four together should have been enough to trigger a recession, but they didn't. Ben's framing: if you locked 100 economists in a cave and let them out in early 2026 to describe these shocks, every one of their GDP forecasts would carry a negative sign.
— Ben HarrisThe pain from tariffs was overstated
The swings in the average tariff rate look scary, but the money actually collected looks completely different: tariff revenue in 2025 was about $250 billion, roughly $200 billion more than a normal year, of which about $170 billion is expected to be refunded — because many companies anticipated the Supreme Court would rule this way and had been waiting for that money to come back. Netting it out, the hit to GDP is only a few tenths of a percentage point. Another underappreciated variable is how trading partners responded: most countries chose to "give the president something that looks like a deal" to placate him, and the deals themselves are not detailed and have little enforcement teeth. Add in evasion like Chinese goods transshipping through Vietnam, and the effective tariff burden is far below the nominal rate.
— Ben HarrisThe oil problem isn't crude, it's refining
About 15 million barrels a day of crude moves out through the Strait of Hormuz, of which 6 to 6.5 million barrels can bypass via pipelines through Saudi Arabia and the UAE, and with some ships still transiting, the shortfall is only about 6 million barrels a day. By traditional elasticity estimates, the worst case is Brent at $125, and $150 in an extreme scenario, which by itself does not constitute a global recession. The real bottleneck is refined products: roughly 10% of global refining capacity has been destroyed over the past six months, a large part of it from Ukrainian drone strikes on Russian refineries, with losses in the Gulf as well. Refineries take a long time to rebuild, so the crack spread is now extremely high. Russia has already banned diesel exports, after previously cutting diesel exports by about 75%, and diesel is the transmission chain for trucking, food and retail — that is the problem that persists for quarters or even years.
— Ben HarrisTrump shelved the price cap design for sanctions
At Treasury, Ben helped design the price cap mechanism on Russian oil: rather than limiting quantity (unlike Iran, where exports were pushed to zero), it limited the price Russia could get per barrel, using control over tankers, insurance, financing and flags — the services essential to trade — at a time when the West controlled about 90% of the services in Russian oil trade. The mechanism worked for a while, costing Russia tens of billions of dollars and avoiding the $285 oil price and accompanying recession that major banks had forecast. But Russia then bought hundreds of tankers and shifted to China, India and other non-coalition countries, circumventing the cap. By the time the Biden administration left office it had sanctioned 216 tankers; the Trump administration has sanctioned zero, other G7 countries lowered the price cap, the U.S. stayed at $60, and broad exemptions were issued for importing Russian oil.
— Ben HarrisThe hard fiscal constraint is that the primary deficit must go to zero
The key metric is not the total deficit but the primary deficit, after subtracting interest. The U.S. runs a deficit of about 6% of GDP, of which about 4 percentage points is interest, leaving a primary deficit of about 2 percentage points. For the economy to have a chance of growing its way out, the primary deficit needs to be zero, or even a surplus of about 1% of GDP. The "One Big Beautiful Bill" worsened this by about 1 percentage point — it was a 5% deficit with a 1% primary deficit, now it's 6% and 2%, effectively doubling the medium-term problem. Rising interest costs have two sources: the debt stock keeps growing, and the risk premium investors demand on Treasuries is rising. When Ben met investors in Europe, they were rushing to pull money out of the U.S. after the president threatened to invade Greenland.
— Ben HarrisThe AI fiscal dividend should be halved
The paper's conclusion is a rule of thumb: whatever you think AI can do to the deficit, cut it in half first. If the baseline case resembles the late-1990s internet shock, with faster growth and higher productivity, the deficit could fall from 6% to 2% and the primary deficit could go to zero — in which case Elon Musk's "grow our way out of it" would be right. But the paper gives five reasons this shock differs from past ones: longer lifespans actually increase Social Security and Medicare spending; AI investment pushes up the equilibrium interest rate, shifting the entire yield curve up by 35% in the most extreme case; displaced workers mean more people relying on income support like SNAP and Medicaid; capital is taxed at a lower rate than labor, so a rising capital share means less federal revenue; and the AI arms race brings purely wasteful spending.
— Ben HarrisThe longer you live, the worse the fiscal picture
Ben is very optimistic about AI improving health care itself: personalized medicine, faster drug approvals, better diagnostics — for example, about a decade ago research showed AI could help diagnose diabetic retinopathy, and a shift to personalized medicine could cut emergency room visits by about 3 percentage points. But "human lifespan is the most precious commodity; it's good news for humanity and bad news for the federal budget." The paper uses the Social Security Trustees' assumption as a baseline — mortality rates falling 0.7% a year at each age — and in the most optimistic scenario triples that pace to about 3% a year, roughly half the rate at which Japanese mortality fell after World War II. The result is that Americans over 65 rise from about 74 million to about 76 million, with 2 million more people collecting Social Security and on Medicare, compounding over time.
— Ben HarrisLet households hold equity, not the government
Faced with the distributional problem of labor being displaced while capital gains, Ben is explicitly against the government taking stakes in tech companies: that would set off a contest over who gets favors by giving the government more shares, and it would feel like China rather than capitalism. He argues instead for letting American households hold more equity themselves. The concrete lever is Secure 2.0's overhaul of the Savers Credit: for low-income and some middle-income workers, the government directly matches 50 cents for every $1 put into a 401k. Today roughly $250 billion in tax preferences for workers flows almost entirely to the top 30% of earners, while raising the match rate from 50% to 100% takes one line of legislation, and Secure 2.0 was itself a bipartisan bill. He also recommends narrowing the gap between labor and capital tax rates, and rebuilding the unemployment insurance system in advance — during COVID, because the system was so badly designed, it had to be designed on the fly, and trillions of dollars went out the door.
— Ben HarrisIn their own words · checked verbatim
if you locked a 100 economists in in a room or a cave and let them out at the beginning of 2026 and described all these shocks and said would you project for GDP growth I think everyone would have a negative in front of it.
Ben Harris3:04
the problem isn't really crude. The problem is refined product.
Ben Harris15:14
put Putin doesn't control the wind and the sun.
Ben Harris19:15
I think however much you think that AI will drive down deficits, just cut that in half because of all these idiosyncratic reasons with with respect to AI.
Ben Harris33:25
human lifespan is our most precious commodity. And what is great news for humanity is terrible news for the federal budget.
Ben Harris35:27
Rather than the government owning stakes and companies, American households should own more stakes and companies themselves.
Ben Harris50:43
I just want to turn down the temperature a little bit, okay? Because I can tell you that looking backwards, this has not been the shakeup that it seems like. I mean, you really have to squint to see where there have been job losses.
Ben Harris56:44
Figures
| Trade-weighted average tariff rate (when Trump took office) | about 2.5% | 1:03 |
| Trade-weighted average tariff rate (Liberation Day peak) | about 28% | 1:03 |
| 2025 tariff revenue | about $250 billion, of which about $170 billion is expected to be refunded | 4:05 |
| New debt from the "One Big Beautiful Bill" | about $5 trillion | 3:04 |
| Daily crude exports through the Strait of Hormuz | about 15 million barrels | 13:12 |
| Global refining capacity destroyed | about 10% | 15:14 |
| Cut in Russian diesel exports | about 75% | 16:14 |
| Tankers sanctioned by the Biden administration at departure | 216; zero under the Trump administration | 24:19 |
| U.S. annual deficit and primary deficit | deficit about 6% of GDP, primary deficit about 2% | 26:20 |
| Americans over 65 (most optimistic lifespan scenario) | from about 74 million to about 76 million | 35:27 |
Glossary
- primary deficit
- The portion of the total deficit after subtracting interest payments, measuring the structural fiscal gap.
- crack spread
- The difference between crude oil prices and refined product prices, the core metric of refinery profitability.
- price cap
- A sanctions mechanism that does not limit export quantity but limits the price Russia gets per barrel of oil.
- Secure 2.0
- A bipartisan U.S. retirement savings law that overhauled the Savers Credit match.
- Savers Credit
- A tax match subsidy for low- and middle-income people who put money into retirement accounts.
How to listen
Investors and policy researchers watching U.S. fiscal sustainability, tariff and sanctions policy, and the macro and distributional effects of AI.
If oil prices and refining capacity details don't interest you, 13:00-19:00 can be skipped.