Can America afford $30 trillion in debt—or is the real question whether it wants to?

In the final episode of Season 2, Alex and Tyler take on the growing mountain of federal debt—now equal to 100% of GDP, with interest payments alone rivaling national defense spending. Alex lays out the case for concern: rising obligations, off-balance-sheet liabilities for Social Security and Medicare, and a political system with no appetite for hard choices. Tyler pushes back, arguing that markets remain calm, real borrowing costs are near zero, and America's wealth-to-debt ratio tells a far less alarming story. From the relevance of the R versus G framework to the lessons of Japan's sovereign wealth strategy, they debate whether the real risk is insolvency or illiquidity, and whether solutions will come through growth, inflation, financial repression, or some mix of all three. Along the way, they explore how AI could reshape the fiscal picture—raising welfare more than wealth, extending lifespans while straining budgets, and changing what kinds of income governments can actually tax.

Transcript: https://www.mercatus.org/marginal-revolution-podcast/americas-debt-crisis-or-calm

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Timestamps

• 00:00:00 - Should We Be Worried About the US Debt?
• 00:08:19 - R vs. G? It's the Political Economy, Stupid
• 00:16:52 - The Five Ways Out
• 00:22:21 - AI's Fiscal Paradox
• 00:30:44 - The Hidden Sovereign Wealth Fund
• 00:34:56 - The Bottom Line

In this episode, Alex and Tyler tackle the resurgence of tariffs in American policy, a development neither saw coming after decades of trade liberalization. They unpack the economics of who really pays when tariffs jump from 2.4% to 18% in a matter of weeks, exploring everything from tax incidence and exchange rate adjustments to the question of why we treat tariffs so differently from currency depreciation. Along the way, they debate Tyler's new "soft" arguments against tariffs (including contagion effects and rising correlations), examine whether Lerner symmetry still holds in a world of T-bills and exorbitant privilege, and consider the Trumpian case for investment over trade. From soybeans and pharmaceuticals to AI data centers in outer space, they trace how tariff policy affects everything from American landowners to Canadian defense spending.

Tyler arrives ready to confuse and Alex ready to clarify, but by the end they agree on one thing: we've muddled ourselves into something quite bad.

Link to transcript: https://www.mercatus.org/marginal-revolution-podcast/return-tariffs

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https://www.mercatus.org/

Timestamps

00:00:00 - The return of tariffs
00:02:44 - The threat of contagion
00:04:14 - Who really pays for tariffs
00:16:39 - Exchange rates muddle the picture
00:20:40 - Are tariffs making bad things more correlated?
00:22:53 - Does Lerner Symmetry hold?
00:29:56 - Differences between dollar depreciation and tariffs
00:33:13 - Retaliation
00:34:28 - Tariffs as a Georgist tax on land rents
00:38:10 - How the US economy will adjust
00:49:42 - The bottom line

Why do butchers earn more than bakers even though they're typically less educated? What does Uber driver data reveal about wage gaps? In part three of their series on favorite models, Tyler and Alex explore compensating differentials, Adam Smith's insight that wages adjust for a job's pleasantness, safety, and flexibility. But Tyler pushes back: in a world of increasing returns and clustering talent, are we moving toward winner-take-all dynamics where all good things come together instead of trading off?

Then they turn to Mancur Olson's theory of selective incentives. How do small groups organize to lobby for benefits while big groups struggle? And as markets become more competitive and surveillance more pervasive, are the village chieftains who once solved collective action problems disappearing from economic life, or reemerging in a different form?

Transcript: https://www.mercatus.org/marginal-revolution-podcast/compensating-differentials-and-selective-incentives

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Timestamps

00:00:35 - Compensating differentials overview
00:04:48 - Segmentation vs. Differentials
00:13:02 - Amenities and the gender pay gap
00:22:07 - Two Competing Theories
00:24:26 - How fixed costs complicate the picture
00:29:02 - There are many margins of adjustment!
00:31:39 - Mancur Olson and selective incentives
00:38:02 - Special interests or bad voters?
00:41:50 - The Waxing and waning of selective incentives
00:48:22 - Alternatives to Selective Incentives

Why are college tuition, healthcare, and car repairs eating up bigger shares of our budgets? Alex says it's all about the Baumol effect, a deep economic insight about relative prices that explains why labor-intensive services inevitably become more expensive over time. Tyler isn't buying it. He thinks the Baumol effect is often invoked as an ex-post explanation but can't make predictions. Further, there's not enough Kelvin Lancaster in Baumol, Tyler argues—not enough attention to bundle of characteristics that define what a good really is.

In this episode, Alex and Tyler debate whether the Baumol effect is profound or overstated. They wrestle with examples ranging from haircuts in India to doggy daycare in Northern Virginia to Soviet-era ballet prices, touching on what poor countries can teach us about service costs and whether we're headed toward a future of AI tutors and robot mechanics. They also explore Staffan Linder's theory of the "harried leisure class"—the idea that as we get richer, we try to squeeze more utility into less time, making even our leisure more goods-intensive and rushed.

Link to transcript: https://www.mercatus.org/marginal-revolution-podcast/baumol-effect

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Timestamps
00:00 Introduction
00:34 Baumol effect overview
03:28 Critique of Baumol and whether it applies to higher education
09:06 Product quality, Lancastrian bundles, and replacement as repair
15:45 Music industry productivity growth
18:52 Rising healthcare costs: Baumol or improved quality?
22:39 Why haircuts are cheap in India
30:44 The difficulty in predicting productivity gains
34:47 Childcare as a clear example of the Baumol effect
37:26 Are repairs getting cheaper or more expensive?
47:18 The Staffan Linder effect

Alex and Tyler put three classic models through their paces. Alex starts with Spence on how a monopolist chooses quality and applies it to how the New York Times' paywall flipped its audience incentives. Tyler pushes back, arguing that network effects and loyalists matter more than marginal customers. They move to Harberger on tax incidence and the hidden winners and losers of corporate taxes, minimum wages, and congestion pricing. Finally, Solow's growth model frames a conversation on why some countries catch up and others stall, including what it gets right about China, and what it misses. Together, their debate shows why the best models keep earning their place—not because they're perfect, but because they still shape how we think even when they're wrong.

Transcript: https://www.mercatus.org/marginal-revolution-podcast/favorite-models-spence-monopolies-harberger-incidence-solow-growth

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Timestamps:

• 00:00 Intro
• 00:19 Spence's monopoly model
• 07:08 How Spence applies to NYT and HBO
• 16:13 Alex and Tyler's approach to writing a textbook
• 20:43 Harberger's model of who pays tax
• 24:44 Harberger's model as applied to congestion and minimum wages
• 33:54 Solow's growth model
• 42:22 What Solow's model misses

Tyler and Alex revisit Tyler's 1998 book and trace how commerce disciplines and amplifies creativity. Great artists bargained hard because money buys orchestras and time. "Inspired consumption" means high-quality audiences shape better art. Dynamic, Hayekian competition discovers new genres, while pulp cross-subsidizes the sublime. They disentangle when government support works, why TV improved with entry and subscriptions, how "payola" rhymes with supermarket slotting fees and with Spotify's algorithmic era, and why some modern art maligned as minimal is, in fact, marvelous. Along the way they touch on reading's spiky renaissance, textiles as the smartest undervalued collectible, the real story on brutalism (is the DC Metro overrated?), and a sober take on cultural pessimism's recurring illusions—plus what all this implies for AI-era culture.

Transcript and links: https://www.mercatus.org/marginal-revolution-podcast/praise-commercial-culture

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• Follow Alex on X: https://x.com/ATabarrok
• Follow Tyler on X: https://x.com/tylercowen

See Alex and Tyler's recent posts on Marginal Revolution: https://marginalrevolution.com/

Chapters

• 0:00:00 Why Alex loves the book
• 00:02:05 The challenge of getting it published
• 00:04:10 Mozart was motivated by money
• 00:06:40 Great audiences create great art
• 00:08:25 Economics of the avant-garde
• 00:13:39 Good and bad government art funding
• 00:17:22 Golden era TV
• 00:20:20 Book publishing and reading
• 00:26:43 Competition as a dynamic discovery process
• 00:32:14 The value of modern art and architecture
• 00:38:53 Payola got a bad rap
• 00:42:10 Spotify streaming economics
• 00:46:41 Why cultural pessimism pervades

Recorded 1/13/2025

In the final episode of Season 1, Alex and Tyler explore one of the most consequential quests in the history of economics and finance: the decades-long search for a formula to price options. From Louis Bachelier's groundbreaking work in 1900 to the eventual triumph of Black, Scholes, and Merton in the 1970s, they trace how brilliant minds across mathematics, physics, and economics gradually unlocked the how to properly price financial instruments like calls and puts. Along the way, they examine how this theoretical breakthrough revolutionized modern markets, sparked the creation of the Chicago Board Options Exchange, and transformed our understanding of uncertainty and risk management. The conversation ranges from the hidden histories of early options traders to how options theory now shapes everything from portfolio insurance to oil well investments to mega-sized chip plants. They close by reflecting on how options theory has become fundamental to modern decision-making far beyond trading floors, revolutionizing how we think about and manage uncertainty across the entire economy.

Transcript and links: https://www.mercatus.org/marginal-revolution-podcast/quest-price-options

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• Follow Alex on X: https://x.com/ATabarrok
• Follow Tyler on X: https://x.com/tylercowen

See Alex and Tyler's recent posts on Marginal Revolution: https://marginalrevolution.com/

Chapters

• 00:00 - The puzzle of pricing options
• 03:46 - Louis Bachelier's contribution
• 09:52 - Enter Paul Samuelson
• 15:05 - Black, Scholes, and Merton
• 27:05 - Kassouf, Thorp, and cashing in on options theory
• 32:28 - Other applications of options pricing theory

Recorded 4/12/2024

In this exploration of the "new monetary economics," Alex and Tyler revisit the ideas of thinkers like Fischer Black, Eugene Fama, and Robert Hall, whose bold views about the Fed and the money supply once seemed detached from reality but now increasingly describe the financial world we inhabit. They explore why traditional measures like the money supply are becoming obsolete, how crypto and stablecoins are reshaping monetary systems, and why AI might emerge as a major consumer—and creator—of cryptocurrencies. They also discuss the paradox of pegged currencies, the lessons of algorithmic stablecoin failures like Terra, and the surprising connections between fiscal and monetary policy in a world of increasingly liquid assets. Finally, they reflect on how the unconventional ideas of new monetary economics, once dismissed as fringe, are now critical for understanding our modern financial landscape.

Recorded March 14, 2024

Transcript, video, and links: https://www.mercatus.org/marginal-revolution-podcast/new-monetary-economics

Chapters

• 00:00 - Outlining the ideas of new monetary economics
• 09:03 - The difficulty of defining the money supply
• 17:36 - What determines the inflation rate?
• 22:32 - Crypto's role in validating new monetary economics
• 26:02 - The role of the Fed in a Modigliani-Miller world
• 32:09 - Stablecoins and the paradox of pegs
• 46:11 - The bottom line

Stay connected:

• Follow Alex on X: https://x.com/ATabarrok
• Follow Tyler on X: https://x.com/tylercowen
• See Alex and Tyler's recent posts on Marginal Revolution: https://marginalrevolution.com/