America’s Economic Edge Requires Hard Choices on Deficits, Housing, and Allies

Roger Ferguson described the United States economy as “fundamentally in good shape,” but not in a way that settles the argument about how Americans are experiencing it. Growth is solid, surveys suggest many people feel reasonably comfortable, and the stock market is doing well. For households with meaningful financial assets, that matters. For others, the relevant fact is that the economy is still carrying the aftereffects of the inflation shock.

Ferguson, a former Federal Reserve vice chairman, put inflation first. It has been above the Fed’s 2% target for some time and, by some measures he cited, above 3%. That is down sharply from the post-COVID peak, but the decline in inflation rates has not reversed the level of prices. He stressed the distinction: inflation can come down while the price of groceries, dairy, and other daily items remains painfully high. People “down valley” and across the country, he said, are still having trouble making ends meet.

Nancy Lazar called this a bifurcated economy: many people are doing well, while many others are still struggling. She noted that the consumer price index peaked at 9% in 2022 and, in her framing, remained roughly double the inflation rate that prevailed for much of the previous two decades. Her question was not only economic but social: what kind of instability does that create?

Ferguson connected high price levels and stagnant real wages to the global rise of populism. For moderate-income households, he said, wages adjusted for inflation have been relatively flat for a long period. Add a rapid inflation shock, prices that do not fall back, and an affordability problem in housing and everyday goods, and the result is a broad sense that people cannot get ahead. Recent national and local elections in the United States, as well as politics in continental Europe, South America, and England, have been heavily driven by that perception, he said. The answers being offered increasingly sound populist from both the left and the right.

The labor market is another example of strength with qualifications. Ferguson cited unemployment at roughly 4.2%, a level that “sort of sounds like full employment.” But beneath that headline, he said, the economy is not creating as many jobs as it historically has. The labor force is relatively small because of policy and demographic forces, and long-term unemployment remains a problem for some workers.

The result is not an economy Ferguson characterized as weak. It is an economy whose headline performance can coexist with a serious affordability problem and a politically destabilizing sense of stagnation among households that do not experience asset gains as relief.

Ferguson treated Federal Reserve independence not as an institutional nicety but as a condition for economic credibility. Roger Ferguson offered three pieces of advice for Fed Chair Kevin Warsh: keep the inflation message clear, change the institution only judiciously, and demonstrate independence from the president who appointed him.

Warsh, Ferguson said, had used his first press conference to come out “guns blazing” on inflation, with a simple commitment to bring inflation back to 2%. Ferguson called that an important message. Having been close to Fed chairs since Paul Volcker, he emphasized that credibility is a core asset for the central bank.

He also noted that Warsh had announced task forces to rethink Fed communication, data, productivity, and inflation targeting. Ferguson did not object to review. He argued instead for listening carefully and moving slowly before making dramatic changes. The Fed, in his view, is not fundamentally broken. He described it as one of the most trusted government institutions in surveys, while allowing that any institution can improve.

The third point was the most politically charged. Warsh was appointed by a president Ferguson described as “historically anomalous” in his attacks on the Fed. Ferguson said Warsh should continue to show independence, because that independence creates credibility not only for the chair but for the American economy overall.

Nancy Lazar pointed to market signals that, in her reading, suggested confidence in Warsh: the dollar had rallied since his appointment and gold had fallen significantly. Ferguson unpacked the gold point for the audience. Gold is often perceived as an inflation hedge, though he added that it does not actually work very well that way. Still, if gold is falling, it suggests investors believe inflation will be brought under control. A rising dollar, in his reading, signals a broader global belief that the United States will remain a stable economy.

The Fed’s balance sheet produced one of the clearer disagreements between Ferguson and Lazar. Ferguson explained the premise before answering: the Fed, as the U.S. central bank, has a balance sheet that became large during the pandemic because it bought many government bonds. It has since allowed those bonds to run off only slowly. Critics worry that the balance sheet crowds out other capital in the Treasury market, supports government debt issuance, or drives inflation.

Ferguson said the Fed will need to reduce the balance sheet gradually over time, but he rejected the idea that it is currently the source of inflation, saying there is little evidence for that. He also argued that the balance sheet will not return to historically small levels, because the economy is larger and there is strong demand for U.S. currency both domestically and globally. If the economy grows faster, that demand may grow too.

Lazar disagreed at the margin. She described herself as a monetarist and said she worries about the amount of money in the system, especially as inflation surprises keep appearing. She cited medical insurance companies announcing 15% to 20% increases in insurance rates for the following year. Ferguson responded with humor that economics is “a great science” because economists “aren’t real scientists” and have points of view. But the disagreement was substantive: he wanted to lower the temperature around the balance sheet; she saw it as a continuing inflation risk.

Ferguson separated the visible investment boom from the still-emerging labor and productivity effects of artificial intelligence. In macro data, he said, AI’s labor-market and productivity effects are still hard to see. In boardrooms, however, they are already concrete.

Roger Ferguson described his vantage point as close to the front row: he sits on the board of Alphabet, where he chairs the audit committee and sees capital expenditures, and on the board of Corning, which he called an important infrastructure provider to the AI world. He also cited other boards where management teams are already discussing how AI affects hiring, training, and staffing needs. Klarna, a Swedish company he described as “very AI forward,” had roughly 4,000 employees a few years ago and is now under 3,000, with AI use playing a role. Ferguson offered that as anecdotal evidence rather than a claim that the full labor-market effect is already visible in aggregate statistics.

Longer term, Ferguson expects AI to raise productivity: more output for every hour worked. He placed AI in the broad history of technological change, comparing it to mechanized agriculture. In the 1700s, he said, 85% or more of the population lived on farms; now the figure is roughly 2%. That transition produced massive changes in work and productivity. He expects AI to create new jobs that do not currently exist, while also displacing some existing ones.

His main concern was not the endpoint but the transition. Technological transitions are where economies and societies struggle, and this one could move very quickly. AI is ubiquitous, he said, available “in the palm of your hand” through a phone. Because adoption can happen rapidly and broadly, the social challenge may be larger than the economic one: how to manage a technology that creates some jobs while eliminating others before institutions, workers, and education systems know what advice to give.

He used career advice to show the uncertainty. Five years ago, the common answer was to go to college and learn to code. Now people ask whether coding will be necessary and whether it is better to become a plumber. Ferguson did not claim to know the right answer. He said he is optimistic long term, concerned about the transition short term, and hearing more anecdotes than seeing decisive macro data.

Nancy Lazar added a counterpoint: in her reading, some macro data show wages for software developers up 8% year over year, which she attributed to their logical way of thinking. She argued that it remains too early to dismiss coding and also emphasized the importance of liberal arts education.

Then Ferguson revised his own emphasis. The most visible macro effect of AI, he said, is not yet productivity or job displacement but investment. A surprisingly large share of recent growth has come from sectors associated with AI: business fixed investment, software, and related components. Ferguson said he had seen a statistic that 30% to 40% of growth over the last several quarters was associated with AI-driven sectors; Lazar sharpened the point to “at least 40.”

Ferguson called that “unimaginable” and said he did not think there had been another period in economic history when one sector or one component accounted for 40% of growth. Lazar suggested railroads might be the only comparison, though neither of them was alive for that investment boom. She also said capital spending by the “Mag 8” large tech companies was on track to increase more than 70% in one year.

The AI boom also shaped Ferguson’s view of whether current markets resemble the late-1990s technology bubble. He acknowledged one similarity: a tech-driven cycle led by a narrow sector. But he emphasized a major difference. The dot-com bubble included companies that, in his view, had no rational reason to exist at high valuations. His example was online dog-food sales: businesses premised on buying online what consumers could still buy in stores.

This time, he said, the firms driving the AI cycle have massive balance sheets, borrowing capacity, free cash flow, and established global organizations with large workforces. Lazar put it more bluntly: these businesses make a lot of money, while dot-com companies often did not. Ferguson therefore called the current moment a technology cycle, perhaps a “super cycle,” but not a bubble. He also argued that capital-intensive infrastructure such as data centers and telecommunications assets can support growth over time even if returns are not immediate.

Sustained 3% growth would help the United States manage its deficit problem, but Ferguson argued it would not be enough by itself. Nancy Lazar raised Treasury Secretary Bessent’s view that 3% growth could help chip away at the debt issue. Roger Ferguson gave the answer he said economists like to give: yes and no.

The “yes” was the math. If GDP growth reaches something like 3%, deficits can gradually decline relative to the economy. Lazar noted that current growth is around 2.5%, and that the United States grew around 4% in the 1990s, making 3% a hopeful but not impossible target.

The “no” was distribution, taxation, and spending. Faster growth does not automatically become government revenue. Some of the benefits may appear in stock prices, which are not taxed until gains are realized. Some may flow to a relatively small number of high-income earners, and Ferguson said the marginal tax rate on very high incomes is relatively low. Translating GDP growth into federal revenue would require policy choices.

On spending, he identified three large constraints. First is interest on the debt, which can be reduced only by reducing the debt itself, a slow process. Second is defense spending. The “peace dividend” that once seemed possible has evaporated in the United States and globally. Third is demography: aging populations are putting pressure on Social Security, Medicare, and Medicaid.

That combination leads Ferguson to a politically difficult conclusion. It will be hard to cut expenditures enough, so the country will have to increase revenue. But voters are not eager to elect candidates who promise to raise taxes. He recalled a political line about one candidate warning that another would raise taxes, only for the candidate who admitted it to lose. The hard way to balance the budget, he said, is to raise taxes to some degree because spending reductions will be so difficult.

The 1990s, in Ferguson’s account, show the contrast. Growth was relatively rapid, inflation was slowing, and the United States briefly had budget surpluses under President Clinton. Ferguson said that when he was at the Fed, officials spent time asking what monetary policy would look like if there were no more government debt. Serious papers were written on monetary policy in a world of shrinking deficits and potentially declining debt. He acknowledged how arcane that sounds now, but it was a live issue at the time.

That era, he said, is known in economics as part of the Great Moderation: a period of strong markets, relatively low inflation, and better fiscal outcomes. The implication was not that the 1990s can simply be recreated. It was that today’s deficit problem is not an abstract accounting issue. Ferguson later named it as one of the things that keeps him up at night: a self-inflicted wound that weakens the United States internationally and harms future generations.

Roger Ferguson separated short-term business reaction to deregulation from long-term institutional design. CEOs are generally happy with deregulation, he said. But as a former regulator, he argued that a pendulum swinging back and forth is not a net positive. Businesses struggle to plan when regulatory burdens drop for four years and then rise again.

His preferred answer was a less politicized regulatory environment with a bipartisan view of how much regulation is appropriate. He did not describe himself as a regulatory hawk and did not argue that everything should be regulated. He did say that deregulation can have unintended consequences, including failures caused by inadequate oversight of products, services, or industries. He also noted that some deregulation involves tradeoffs that may be unpopular in Aspen, such as drilling on government land.

The same logic did not lead him to support heavy AI regulation. On AI, he argued that regulators are often the last to understand what is happening because industries move faster and have stronger incentives to engage in “creative destruction.” Regulators then catch up, understand the new practices, identify harms, and try to contain them.

Ferguson said over-regulating AI now would be “a massive mistake.” He acknowledged that some outcomes will be undesirable. But he did not think anyone today can know which harms are so severe that they should be made nearly illegal or unacceptable by regulatory standard. The industry, in his view, needs room to drive forward while regulators learn enough to respond intelligently.

Ferguson’s assessment of the Trump administration’s economic record had negatives and positives. The negatives were immigration policy and attacks on the Fed. He said immigration restrictions have damped labor-force growth and harmed the economy, while acknowledging the need to control borders. U.S. population and labor-force growth, he argued, are tied closely to immigration; with fewer immigrants and an aging population, the labor market becomes harder to read and more constrained.

His second negative was the aggressive pressure on the Federal Reserve. Even people who are not Fed “afficionados,” he said, should recognize the value of a solid, independent central bank.

On the positive side, Ferguson credited the administration for pushing NATO allies to take more responsibility for defense spending. The United States, he said, spends a great deal on defense and cannot always afford to carry the burden. European and Asian allies had lived under the U.S. umbrella while failing to meet obligations to spend 2% to 3% of GDP on defense. He said the president was right to identify that as a significant problem.

He also saw a case for moving the regulatory pendulum back if it had swung too far toward regulation. The question, again, was balance.

The housing diagnosis began with supply and demand. Roger Ferguson said the United States has underbuilt new homes by several million for a sustained period. The affordability crisis did not appear suddenly in the current or prior administration, although it worsened during COVID. With demand outstripping supply, prices rose.

The policies that could fix the problem, in his view, are mostly not federal. They are local: lot-size rules, multifamily restrictions, conversion rules, and other regulations that shape what can be built and where. That makes the problem difficult. It also makes it politically local, as Nancy Lazar joked when asking whether Ferguson could talk to regulators in Aspen.

Ferguson added a productivity point. Housing is one of the few sectors where productivity has not improved much in a long time. Construction remains highly manual. The tools have improved from manual hammers to power-driven hammers, but the process still resembles earlier eras. He also noted that the United States has not embraced prefabricated housing the way some other countries have. Consumers and regulators have fixed ideas about what a house should look like and how it should be built.

He cited a conversation with someone renovating a house in the Aspen area for six years. The person was not surprised; he had expected a serious renovation to take that long. Ferguson’s broader point was that the housing system is slow, expensive, and structurally resistant to productivity gains.

The tempting monetary-policy shortcut, in Ferguson’s view, is a mistake. Lower mortgage rates can help affordability at the margin, but the underlying price of the home matters more. He called the idea that housing affordability can be solved by sharply lower interest rates a “canard.” Lower rates also risk increasing inflation, which would push up wages, lumber, and other housing inputs. More broadly, he warned against the assumption that lower rates are always better. Lower rates can worsen inflation, and inflation makes almost everyone worse off.

On the COVID period, Ferguson was more nuanced. In hindsight, it is easy to question whether the Fed kept rates too low. He said the Fed’s initial aggressive response was understandable given enormous uncertainty and helped make the recession relatively short and shallow. The better question, he said, is whether rates stayed low too long, and he acknowledged a real sense that they did.

But he resisted making interest-rate policy the whole inflation story. After COVID, the world had shut down and then reopened the global economy quickly. Consumers shifted away from services during lockdowns, supply chains faced bottlenecks, and demand returned into constrained supply. Inflation, in his telling, was driven by the combination of monetary conditions and a rapid closing and reopening of the global economy.

Ferguson treated China as both a source of enormous consumer benefit and a strategic challenge that the United States helped create. Policymakers in the late 1980s and early 1990s, he said, believed bringing China into the global trading system would be good for everyone. In many ways, it was. China became the manufacturing center of the world, and consumers benefited from higher quality and lower prices.

His example was the large flat-screen television at Costco: a 72-inch screen today costs roughly what a much smaller screen cost when many in the audience were growing up. That, he said, is the influence of China.

The downside was the destruction of manufacturing in much of the United States and other countries. Nancy Lazar, who said she is from Flint, Michigan, described the process as “gouging out” the middle of the country. She framed the next stage as “globalization 2.0”: not the end of globalization, but a rebalancing of manufacturing around the world. Roger Ferguson agreed: it is a different kind of globalization.

The challenge is not only that China became a manufacturing giant, but that the Chinese government has subsidized new industries, including electric vehicles, in ways that suppress the development of those industries elsewhere. The West has “woken up” to the challenge, Ferguson said, but has not yet found the answer.

Europe, by contrast, has inflicted part of its problem on itself. Ferguson said it has tried to hold onto older industries while discouraging new ones. Lazar named overregulation; Ferguson agreed, especially in sectors where Europe once had advantages. He mentioned mobile phones and Ericsson as an example of early strength that was overtaken.

He also argued that Europe’s tight social safety net, while beneficial in some ways, makes it hard both to create jobs and to destroy them. In his formulation, creating jobs requires the ability to destroy jobs as well. He criticized early retirement expectations, saying some European systems allow retirement in the “50-something” range with full benefits. He also pointed to underinvestment in infrastructure and an aging physical environment, using his experience teaching at Cambridge, where people note that some doors are older than the United States. If the doors are from the 1400s, he joked, the infrastructure is “pretty doggone old.”

The North American picture, by contrast, was framed as an opportunity being put at risk. Ferguson warned that creating economic tension with Canada and Mexico is dangerous because North America is already a deeply integrated economic zone. Companies manufacture components in the United States, Mexico, and Canada, assemble elsewhere, and bring goods back across borders. The system has been optimized around that integration.

Unlike China, he said, Mexico and Canada cannot fairly be accused of abusing the system. The United States has a free trade agreement with them, negotiated with whatever mix of labor protections and other rules policymakers chose. It has made all three countries wealthier than they otherwise would be. Picking fights with peaceful, integrated neighbors struck him as unwise.

Lazar noted that Mexico is benefiting from AI-related capital spending and that the United States now imports more from Mexico than from China. Ferguson agreed, with qualifications: some of that reflects Chinese manufacturing moving to Mexico, and some also involves Taiwan. Still, he said the AI boom is benefiting jobs just across the border. Although AI seems purely high-tech, much of what must be done to make it work is small, manual, and lower-tech, and some of that work takes place in Mexico.

The United States should not presume it will remain the preeminent global economic power forever. Roger Ferguson pointed to earlier powers — Denmark, France, the Netherlands, and others — that had periods of dominance and then lost them. The United States rose in part because world wars destroyed infrastructure and lives elsewhere while the country built a massive industrial base.

The risk now is that China is the first power in a long time to come near the United States in economic measurement. Depending on the measure, Ferguson said, China may already be ahead in some ways. It has made large investments, and the competition for global economic preeminence is real.

His prescription was domestic: invest in education, improve infrastructure, get the fiscal house in order, tax more, and spend less where possible. He also described the China-U.S. trade relationship as an exchange in which Americans received concrete goods and China received dollar bills. That seemed like a good deal for U.S. consumers, but the dollar bills were not worthless pieces of paper. They were valuable reserve assets that China could use to build its economy.

Rebalancing, in his view, requires the United States to save more and consume less, and China to consume more and save less. Neither adjustment is easy. The current position developed over 70 to 80 years and will take time to change. But Ferguson said he would not give up on the United States because the system has a tendency to right itself after periods of disorder.

Nancy Lazar shared his optimism but made a different comparison. She said China’s economy is deteriorating significantly and that its growth is driven by exports while domestic demand is weak. She argued that China overregulates its economy and compared it to Japan in the 1980s: a boom followed by stagnation. In her view, the United States has some of the best businesses in the world and a business cycle marked by large swings in economic activity.

A competing global system is already emerging in Ferguson’s account. China is trying to develop a contrary system, both visible and less visible. The visible part includes the Belt and Road Initiative, which he described as lending money to countries and gaining access to raw materials. The less visible part includes an effort to build a parallel global payments system.

For the first time since the world wars, he said, there is a competing system. The U.S. response should be to keep friends close, manage the democratic side of the system, and remind countries of China’s weaknesses. He warned that China is doing well in soft power by convincing some countries that America is not a safe ally. The United States has to make its system appealing again.

No country wants to be a vassal to a larger country, Ferguson said. But the United States has to make its friendship look like something countries genuinely want.

When someone observed that the United States does not seem as interested in allies as it once was, Ferguson replied that he remains confident the American people and the American system will figure it out because so much is at stake. Lazar added that the United States had been carrying too much of the world’s burden and could not afford to continue doing so. In her reading, Europe and Japan stepping up on defense could strengthen alliances rather than weaken them.

The United States has benefited greatly from the dollar’s role as the world reserve currency, Ferguson said. The simplest benefit is that a dollar is accepted almost anywhere in the world. People trust it. There is nothing else like it.

Roger Ferguson acknowledged concern and mentioned books by distinguished economists, including Ken Rogoff, about why the United States might lose the privilege of reserve-currency status. Ferguson’s answer returned to domestic management. If the United States manages its system well, it will maintain the reserve currency. If it does not, it has no right to that status.

But he also argued that a reserve currency cannot be beaten “with nothing.” Every prior reserve-currency transition involved a rising economic power whose currency people wanted to hold. China, he said, is not running its currency in a way that would make it a reserve currency. For the foreseeable future, he does not see an alternative that people want to hold the way they want to hold dollars.

That does not make the issue irrelevant. It makes it another expression of the same vulnerabilities Ferguson identified throughout: fiscal imbalance, institutional credibility, central bank independence, alliance management, immigration policy, housing supply, and trust in capitalism.

His deepest worry, beyond the budget deficit and Fed independence, was the declining trust in capitalism itself. He said polling in advanced countries shows roughly 55% of people saying capitalism is not the best way to organize society. He called that startling. For Ferguson, the most serious risks are not individual market stories such as private credit, where he sees pockets of concern but not a central threat. They are the structural issues that determine whether the system retains legitimacy at home and authority abroad.

Nancy Lazar agreed on the budget deficit and added that high price levels help create political extremism. Ferguson agreed that price levels are a short-term problem to worry about, but he emphasized that monetary policy cannot return prices to where they were five years ago without serious damage to the economy. The Fed can control inflation — the rate of increase — but it cannot painlessly reverse the level of prices.