David Remnick: The Trump administration has just pulled off another sweeping change to the United States.

Donald Trump: In a few moments, we're going to make official the greatest victory yet when I sign the One Big Beautiful Bill.

David Remnick: The budget bill, beautiful or not, includes cuts to social services that would have been unthinkable in earlier Republican administrations. 10.5 million people will be kicked off of Medicaid and the Children's Health Insurance Program in the next decade. SNAP and other nutrition programs will be cut by $186 billion. Now, the foundational belief in conservative economics is that cuts to social services are necessary to shrink the expanding deficit. The so-called Big Beautiful Bill is hardly an austerity measure. It's a windfall for the wealthy. The Cato Institute estimates that it will add $6 trillion to the national debt. That's $6 trillion.

To get a sense of how this is supposed to work, I called up Janet Yellen. Few people understand the American economy better than Janet Yellen. She's served as Treasury Secretary, leader of the White House Council of Economic Advisers, and Chair of the Federal Reserve. Her term as the Fed chair overlapped with Donald Trump's first term in office. Curiously enough, they really didn't come into that much conflict, but Trump now wants even more control over economic policy, and he's hurling brickbats and insults at his own appointee for the Fed Chair, Jerome Powell. I spoke with Janet Yellen last week.

What are the implications for us in our daily lives? What are the possibilities that a federal deficit that's grown by that much, how will that affect things?

Janet Yellen: Interest payments on this debt are now the second-largest expenditure in our overall budget. Defense comes first, interest comes next. Now, Americans have told us their key concern is the cost of living. Part of that is high housing costs, and part of that in turn reflects mortgage rates that are much higher than they were for many years before the pandemic. What this is going to do is to raise interest rates even more. Housing will become less affordable, car loans, less affordable. This bill also contains changes that raise the burdens of anyone who has already taken on student debt. With higher interest rates, further education, college, professional school become less affordable.

It may also curtail investment spending, which has a negative impact on growth. Most analysts, when they look at the long-term impacts, this is something that will harm economic growth rather than stimulate it. There are huge, steep cuts to Medicaid, which provides health coverage for the poorest Americans.

David Remnick: What's the extent of the cuts in Medicaid? How will people feel the impact of this bill?

Janet Yellen: Well, it's estimated that 12 million people will lose Medicaid coverage.

David Remnick: Entirely?

Janet Yellen: Entirely. There are work requirements for Medicaid. One thing the bill does is it makes it very much more complicated and burdensome to show that you qualify for Medicaid. Think of people who have work that is not secure and have low incomes having to go through a paperwork burden of documenting every hour that they have worked to qualify during the previous year. People will just find it impossible to meet that type of burden and won't be able to claim benefits. When you listen to President Trump describe the bill, I've heard him say, "Oh, nobody is going to lose health insurance, only people who were fraudulently claiming it."

Well, many members of Congress, including many Republicans, are concerned that rural hospitals that depend on Medicaid patients and this funding, that the states are not going to be able to step in and provide the amount of money that they're losing from the federal government. Probably many rural hospitals will close. He can portray it as-- he just says the opposite of what is true.

David Remnick: Both parties, for as long as I've been around, have talked about cutting deficits. In reality, in reality, we keep increasing them. This is not unique to the Trump administration. Why is this different?

Janet Yellen: We, at this point, have a serious deficit problem.

David Remnick: We didn't two years ago?

Janet Yellen: We did 2 years ago, and it's getting worse for reasons we have known about for 30 years, that is that we have an aging population. The baby boomers are retiring. The three biggest programs that are so-called mandatory outside of discretionary spending, so Medicaid, Social Security, and Medicare, and the size of these programs will continue to escalate over time. That is a force that's making deficits worse.

David Remnick: There are economists out there who pooh-pooh the idea that deficits are so profoundly dangerous. They even argue that deficits don't matter all that much. What is their rationale, and why, in your view, are they wrong?

Janet Yellen: Well, I'm not a person who always thinks deficits are terrible. I think that there are times when deficits are desirable.

David Remnick: When are those?

Janet Yellen: I think it was totally appropriate that during World War II, the US debt rose to its highest level relative to GDP. The pandemic, we had huge spending, and this occurred even before Biden was elected to deal with the fallout. That's a good reason for deficits. Sometimes, the economy is just really weak and we need to create jobs by providing stimulus. We have a 4.1% unemployment rate. I would call that full employment. Inflation is low, growth has been solid, and yet our debt-to-GDP ratio is at 100%, which is the highest since World War II.

At this point, in knowing that they're going to rise more in the future, if both parties have said they want to protect Social Security and Medicare, if you do that and you're not willing to cut those programs, then you have to find some other way of containing the deficits, at least somewhat. If we get ourselves in a situation where we need to reduce deficits to get our debt under control, we do the tough stuff. It's not pleasant. The United States--

David Remnick: What would be the tough stuff?

Janet Yellen: The tough stuff is we have to raise taxes. That's what's wrong with what's happening now. Let me be clear about this. If you don't touch Social Security and Medicare, and Congress just cut Medicaid and food stamps significantly, what else is there? Now people carry on about, "Oh, we have out-of-control discretionary spending."

David Remnick: Discretionary funding is not that profound in the big picture, is it?

Janet Yellen: It is very small and it has been declining as a share of GDP, and there is just not enough waste, fraud, abuse, or anything like it to be able to find significant further cuts outside of defense.

David Remnick: Despite the spectacle of DOGE, for example?

Janet Yellen: Yes. DOGE came, and you know what DOGE did, is they found minor savings by choking off foreign aid to the rest of the world and the like. Then what they did was slash the Internal Revenue Service staff. We have estimated uncollected taxes. This is called the tax gap. What it is, is the amount of taxes we owe ought to be collecting versus what we actually are collecting. Under existing law, that gap is estimated at something like $700 billion a year.

David Remnick: Because people are able to cheat more efficiently.

Janet Yellen: Cheat. Who cheats? It's not working-class people who are Trump voters who get W-2s in the mail. It's high-income and net worth individuals. It is complex business partnerships and corporations. Congress cut the funding of the Internal Revenue Service to such a low level that the audit rate went close to zero on these entities. We were in the process of rebuilding the Internal Revenue Service. Every dollar we spent on that we estimated over years would yield $10 of additional revenue. It's not costly, it's net saver. Musk came in, and he's cut IRS staffing by a third, and he fired all of the tax accountants, and lawyers, and IT professionals.

When we see what the cost of that is going to be to revenue collections, I would absolutely think that those losses will overwhelm any savings that he got from the slash and burn he did elsewhere.

David Remnick: Do you suspect that was Elon Musk's idea all along?

Janet Yellen: It would not surprise me. I don't know. Because I think anyone who knew anything about the federal budget would have seen that discretionary government spending outside of defense had been declining and declining, and is way below the level it's averaged for the last 30 years.

David Remnick: When you look at Donald Trump insulting his own pick for Fed chair, Jerome Powell, what do you think? He's called him a fool, a numbskull, a stupid person. This is a guy that he put in place. Why is he so abusive toward Jerome Powell? Why is he so desperate to lower interest rates, which is what he's constantly on Powell to do?

Janet Yellen: One of his most recent comments about Powell, he said, "Look, interest on the federal debt, it is huge." As I mentioned, it's the second-largest spending item after defense. We're spending about a trillion dollars a year on interest on the federal debt. Well, look, if interest rates were lower, the cost of financing the federal debt would be lower. Doesn't that sound like it's a great way to lower budget deficits and help us solve our underlying problem?

That's exactly what Trump said he wants Powell to do. He can't understand why he's such a numbskull that he won't do that. Well, if I'm allowed to give the answer as to why Powell's not allowed to do it, the words that Trump uttered are the words one expects from the head of a banana republic that is about to start printing money to fund fiscal deficits when a country-- I can give you lots of examples. Argentina is a classic case. Think of all the countries that have suffered from bouts of high inflation in Latin America, and Zimbabwe, and other places.

Governments get in a position where their expenses can't be financed by tax revenue, and they find it politically difficult to either cut spending or to raise taxes. Then the market becomes less and less comfortable with absorbing the debt they have to issue to cover this shortfall.

David Remnick: The ramifications and the outcome of that is what?

Janet Yellen: The outcome of that is that they go to their central bank and say, "We're selling the debt to you," and you should pay for it by printing money. Then you get very high inflation or hyperinflation. Powell absolutely won't do this and won't accept this type of reasoning, because this is the road to allowing inflation to get out of control. The Fed made an explicit agreement back in 1950 with the US Treasury because during World War II, the Fed had tried to keep interest rates low to help finance the war, and it allowed inflation to pick up.

There was an agreement that essentially created Fed independence. It was later enshrined by laws that, no, the Fed's job is to keep inflation low and stable, or price stability, and to try to create a strong job market, maximum employment. That's what the Fed does.

David Remnick: You spent two years as Fed chair under Barack Obama, and then two years under Donald Trump. Tell me a little bit about how those experiences differed.

Janet Yellen: Well, I met infrequently with both, but in Obama's case, he expressed interest in understanding the economy and the economic outlook, and I met with other members of his administration. There's a long tradition in which the Fed chair and Treasury Secretary meet on a very regular basis. I will say, during that time, never did anybody attempt to lobby me about monetary policy. Not a soul ever uttered to me, "We think you should do X."

David Remnick: And under Trump?

Janet Yellen: I had the same set of contacts. I met a couple of times with Trump.

David Remnick: What was that like?

Janet Yellen: Well, first let me say, interest rates were extremely low during this time. He once said to me, "You're like me. You're a low-interest rate person. I like that." I probably should have added, "I'm a low-interest rate person for now," because inflation is too low and unemployment is too high, and we're doing everything possible we can to try to improve that picture and it calls for low rates. In another time and under different circumstances, I wouldn't be a low-interest rate person.

David Remnick: One of the names being floated is Powell's replacement as Fed chair is the current Treasury Secretary, Scott Bessent. Now, Bessent said he would "Do what the president wants." What happens if the Federal Reserve is completely beholden to the president? How does that change the dynamic and the ethics of government?

Janet Yellen: Well, in my experience, we really haven't seen that in decades. There are stories about Arthur Burns having been strong-armed by Richard Nixon, and some earlier stories. It would have various implications. I have to say, Trump has said he absolutely intends to appoint a replacement for Powell who will lower interest rates. I want to be careful here because right now the economy is doing well, but there are reasons to think the labor market may get weaker and that inflation may subside, and it could be appropriate to lower interest rates at some time in the future.

David Remnick: Sure.

Janet Yellen: There are good reasons to lower interest rates and bad. If a replacement lowers them for reasons considered to be inappropriate, given an independent institution, you will see a pronounced market response. Markets let the Fed and the president know what they're thinking about his proposals and actions. In addition, the Fed structure is set up so that the chairman of the Fed, he's not an independent decision-maker over interest rates. All of the governors-- there are seven governors and then five presidents of reserve banks. There are people who vote on interest rates. It's not so easy to strong-arm themselves or necessarily other members of the board of governors.

David Remnick: I know you're pressed for time, but I'd be remiss to not ask you about the president's tariff policy, which you at one point said was the worst self-inflicted wound that you could imagine. You said that the average household would see $1,000 reduction in income at a minimum.

Janet Yellen: At least.

David Remnick: At least. Now, so far, after a lot of chaos in the markets, there's been a kind of evening out, a little bit more stability, certainly in the stock market and other indicators. Is there no chance that Donald Trump has proven himself, at least to some degree, as a deal maker, as he has with NATO, for example? He really pushed the NATO countries hard, and that turned out to be, just arguably, a good thing.

Janet Yellen: I agree with that.

David Remnick: Is it not possible that on tariffs he set out to freak out, to use a technical economic term, some competitive countries, knowing that he would dial things back as the bargaining process went along?

Janet Yellen: He signed a very minor deal with the United Kingdom. He claims that there's a deal with Vietnam, but he's going to impose 20% tariffs. He doesn't like the fact that South Korea and Japan, two of our biggest trading partners after Canada, Mexico, and China, aren't offering enough concessions. He said they're both going to face 25% tariffs. Now, when you say success, I guess the question is, what do you mean by success? First of all, he just thinks that the United States is being treated really unfairly and always has by every other country in the world. I don't know what factual basis there is to think that.

Now, China, I have a lot of problems with. I don't want to put China in the bucket of all is well.

David Remnick: You agree that we get a bad deal with China?

Janet Yellen: In many ways, but I still think we benefit from trade and investment with China, so I would not want to see that collapse. What about Canada and Mexico? We have deeply integrated economies. He signed a trade deal with them during his first term. Billions and billions of dollars of investment in all of our countries, including the United States, have been made on the basis that we are a tariff-free area. No one said that these countries have not played by the rules. They have, and we've benefited from this. I'm coming in and ripping this up.

[music]

David Remnick: Janet Yellen, thanks so much. I appreciate it.

Janet Yellen: My pleasure, David. Thanks for the invitation.

David Remnick: Janet Yellen is a professor of economics at the University of California, Berkeley. She's a former chair of the Federal Reserve and served as Treasury Secretary under President Biden.

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