Brian Riedl has been trying to get the United States government to avoid catastrophic levels of debt for more than two decades. On this week’s Overton Window podcast, I speak with Reidl about his work on budget issues as a senior fellow at the Manhattan Institute. He’s got a lot to say.
It starts with a standard. The federal government doesn’t need to pay down all its debts. It just needs to ensure that debts don’t grow faster the government’s ability to pay down debts. So Riedl looks at debt as a percentage of gross domestic product. A country’s economy produces things, and the value of that is measured as Gross Domestic Product. The measurement of debt as a percentage of GDP shows how much debt there is in comparison to how much value the country’s economy produces each year.
“In the early 2000s, the debt was about 35% of GDP,” Riedl says. “It’s gone from 35% of GDP to 100% of GDP, which is much larger than most other countries and quite expensive. Depending on the fate of interest rates, we could be heading to a debt going from anywhere to 20% to 350% of GDP over the next 30 years.”
Owing more than is produced in a year is not by itself a sign of catastrophe, but it is a sign of increased risk. It is also expensive for the American taxpayer. Interest payments alone could soon cost 10% of GDP.
“Before we get to that point, there’s the question of whether we can even borrow that much money,” Riedl says. “Right now, the entire public debt held by the public is $26 trillion to $27 trillion. We’re going to borrow $120 trillion to $150 trillion over the next 30 years.”
That is, when it comes time to borrow money by issuing federal bonds, there’s a chance that no one wants to lend money to the federal government. Foreign governments, the Federal Reserve and international institutional investors may not be willing to give the U.S. government the cash it needs to keep spending. And they may not want to lend even if the interest rates they charge taxpayers increase.
“What happens if they can’t lend us the money? Instead of making tough decisions to borrow less, Washington could run the printing press. Then you get really big inflation,” Riedl says.
“It’s one thing when you’re borrowing money for investments where you’ll make more money later,” Riedl says. “We’re borrowing money to give seniors more benefits than they’ve paid in Social Security and Medicare taxes. That’s not going to make the economy bigger. That’s not an investment. In fact, we’re going to be diverting money from the private economy that would go toward pro-growth investments.”
Social Security and Medicare constitute the bulk of future debts, not defense spending or relief for needy or other federal spending priorities. “Of the $119 trillion from 30-year deficits, $116 trillion of it is Social Security and Medicare shortfalls,” Riedl says.
It is within these programs that lawmakers need to make changes. And voters seem not to understand the scale of the problem.
“It’s just a myth that you’re getting back what you paid in Social Security and Medicare, that you pay these taxes and it’s saved into a fund for you and they give it back to you when you retire. Today’s taxes fund today’s retirees,” Riedl says.
“But there’s also a myth, again, that you don’t get back more than you paid in,” Riedl says. “In reality, Social Security recipients retiring today on average will get about 15% to 20% more than they paid into the system and Medicare recipients will get triple what they paid into the system.”
Lawmakers boosted program benefits in the past, ignored the influx of baby boomers, and simply acted as if there were no problems. They did this in part because voters themselves don’t want to hear that governments need to change the programs.
“The politics of this has been, to a certain degree, interest group politics,” Riedl says. “Seniors vote. Seniors vote in much higher proportions than younger individuals, so senior benefits have been sacrosanct.”
“Today’s seniors are the richest age group in America, and senior incomes have grown about five to ten times faster than the incomes of the taxpayers paying the benefits over the past couple decades,” Riedl says. “Some seniors struggle, but seniors as a whole are the richest people right now.”
So, we’re bankrupting the country to keep money flowing to the country’s wealthiest group of people. It’s not exactly free market or progressive. Instead, it’s interest group politics in which a politically active group keeps collective cash.
Riedl is disappointed with policymakers’ willingness to wave away the basic problems with entitlements.
“There is an obsession with finding the easy solution,” Riedl says. “That we’re just going to cut waste, tax the rich, cut foreign aid, get out of Ukraine, cut welfare, cut illegal immigration, raise immigration and this will fix Social Security and Medicare. There are no easy solutions. None of them add up. You could tax the rich at 100% and it wouldn’t come close to being enough. You could eliminate the defense budget, deport every immigrant, cut foreign aid to zero. None of it would be even close to getting entitlements out of debt.”
These false solutions have been tempting to elected officials because changing the formulas around Social Security is unpopular. “Lawmakers don’t care because voters don’t care,” Riedl says.
If the country is to avoid catastrophic debt, either people must want to change Social Security and Medicare formulas or financial markets must refuse to lend money to the U.S. government. Neither of these is easy, but Riedl is working hard to inform people about the issue. “After 22 years of working on this, I’m not optimistic that voters will be disciplined,” he says.
“What we can try to do is get the debt to stabilize at the current 100% of GDP. That allows you to run budget deficits of about 2.5% to 3% of GDP, which would today be about $750 billion. But you need Congress and the president to work together.”
What would that entail?
“I studied the 14 biggest deficit negotiations since 1983. Six succeeded and eight failed. There are three elements to success. There is a penalty if you fail — some sort of cliff you’re coming to where failure to make a deal causes something bad to happen. Number two: public support, or at least not public hostility. And the third element, which has ultimately become the most important, is a motivated Congress and White House who are interested in the issue and can sit down to negotiate in a healthy way. If you get two out of three, you will get a deal.”
“Commissions fail when they’re put in to throw a bone to some members. Then leadership says to forget it and ignore anything the commission comes up with,” Riedl says. “If you want a commission to work, you actually have to have both parties totally committed from the leadership on down. It always comes back to the commitment issue.”
Riedl thinks catastrophic debt levels are clearly within the Overton Window right now. That’s where we’re headed. He thinks that a balanced federal budget is not feasible, either. But debt can be stabilized at the same rate as the growth of the economy so that it doesn’t become catastrophic. And he’s working hard to convince people that’s a good idea.
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