Robert Kaplan, Goldman Sachs Vice Chair and former Dallas Fed head, says the economy is strong in AI and defense but sluggish in housing, autos and low-to-moderate income spending.
Kaplan says government is historically highly leveraged, a strain already showing up in the Treasury curve, and he calls rising reluctance to hold Treasuries a red warning light.
Kaplan says about $250bn of the 2026 budget deficit miss came from entitlement spending, so entitlement reform has to be on the table.
Goldman's Robert Kaplan Warns Government Debt Outweighs Fed Worries
Robert Kaplan argues the US economy is split, with AI and defense spending running hot while housing, autos and lower-income consumers lag. Much inflation may be structural, so the Fed should work out the supply and demand mix and move deliberately. The larger danger is government leverage, since falling appetite for Treasuries signals trouble that entitlement reform, immigration and productivity would need to address.
Takeaways
The economy is split between AI-driven strength and weakness. Kaplan sees very strong activity tied to AI and defense spending, while housing, autos and businesses serving low- and moderate-income consumers are sluggish. He does not think the economy is overheating, and says much of the inflation may be structural.
The Fed should debate supply versus demand inflation. Kaplan says the Fed should spend most of its time on how much inflation is supply and how much is demand. A San Francisco Fed paper cited by Torsten Slock says some of each, and some ambiguous. He would lean on talking to companies over data.
Diesel prices could force a deliberate rate rise. Elevated diesel feeds into many other items, so broadening inflation is no surprise. Kaplan says the Fed could raise rates if diesel does not fall, but moving too far too fast could hurt already sluggish parts of the economy.
Government debt is the biggest tail risk. Kaplan points to governments worldwide, including France and the US. The long end of the Treasury curve keeps rising and investors are more reluctant to hold Treasuries, which he calls a red warning light.
The AI boom is narrow and still early. Spending centers on data centers, power and chips, and demand for capital to fund it is historic. Adoption is early. Kaplan is optimistic about many use cases and expects the jobs mix to shift toward fewer programmers and more client-facing roles.
Remote work eroded training and core skills. Kaplan says coaching requires observation, which is hard remotely, and younger bankers need it most. Reading, writing, communicating and debating atrophied. Goldman Sachs and most businesses are asking staff back to rebuild training and mentoring.
Leaders must ask questions and admit not knowing. Kaplan, who has written on leadership, says the most important thing for a CEO now is to ask questions and be willing to say I don't know, given the uncertainty AI creates over three, five and ten years.
Kaplan's fiscal prescriptions
Governments need a fiscal approach that shows how deficits will bend as a share of GDP.
The US needs one to two million immigrants a year to fill open jobs.
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On this episode 3
Show 1
Embedded cost management in government, using AI, should be applied.
About 250bn dollars of the 2026 deficit miss came from entitlement surprises and about 100bn from interest expense, so entitlement reform has to be on the menu.
Balanced regulation can lift productivity growth, which matters because labour force growth is weak.