Brian Riedl on the Current and Future Outlook for US Public Finance and Budget Reform

As the US continues to face higher interest rates, ballooning public debt, and runaway entitlement spending, budget reform must become a top policy priority.

Brian Riedl is a senior fellow at the Manhattan Institute where he focuses on budget, tax, and economic policy issues. Previously, he worked for six years as chief economist for Senator Rob Portman of Ohio and as staff director of the Senate Finance Subcommittee on Fiscal Responsibility and Economic Growth. He also served as director of budget and spending for Marco Rubio’s presidential campaign and was the lead architect of the 10-year deficit reduction plan for Mitt Romney’s presidential campaign. Brian joins Macro Musings to talk about the outlook of US public finance and the tough choices ahead. Specifically, David and Brian also discuss the surging US debt to GDP ratio, the shortfalls of Republican and Democratic plans for budget reform, Brian’s preferable policy path forward, and much more.

Read the full episode transcript:

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

David Beckworth: Brian, welcome to the show.

Brian Riedl: Thanks, David. I'm honored.

Beckworth: Well, it's great to have you on. I have followed you closely. You've been mixing it up lately, very timely part of the year for you. As we were talking before the show, there are ebbs and flows in what you do, but just looking at what's been going on, we have a really busy season that's really up your alley. We got the new CBO report that just came out. We'll talk about that later. President Biden's budget plans are coming out tomorrow, on Thursday. We're recording this on Wednesday. The GOP and the debt limit issue, they're pushing that, they have their vision of what should happen and we'll talk about that. Then you're mixing it up on Twitter with some of these Republicans and others, as well as the president. It's a great time to be discussing this issue and a great time to have you on the show. Thanks again for coming on the program.

Riedl: Yeah, thank you. I'm happy to dive in.

Beckworth: All right. Let's first talk about your career path, how you got into this. How does someone become a budget wonk?

Riedl: Well, it started in college when US News did a cover story in the mid-nineties that said, "So you say you can balance the budget, show us how." The US News and World Report had a big table of the whole federal budget. As a nerdy policy wonk, I basically considered it a fun game. I really got interested in budget policy, because it was kind of the nexus of everything you want government to do. It's where you debate the role of government. Do you want more welfare and liberal priorities? Do you want more defense? Do you want to cut taxes? It also kind of scratched my econ nerdy back and my number crunching skills. I started doing budget policy, actually, and I got a bachelor's in econ and poli-sci from Wisconsin and then I got a master's in public policy from Princeton. I just kind of took all domestic policy courses. There's not really a budget policy field in school. You just take all of the public policy courses.

Riedl: Then, my luck, the Heritage Foundation after I graduated had a job opening for a research fellow in federal budget policy and I applied and got it, spent a decade there. It's amazing. I have been doing budget policy in Washington since November of 2001, which makes me feel really old. I've been out here 21 and a half years working on the budget in various capacities. But, if you like debating the role of government and you like a little bit of math, it touches everything which I like. Every policy touches budget.

Beckworth: So you live, breathe, and dream the federal deficit, the debt, the public finance of the US, the budget. Very interesting life you lead there in Washington DC making the world a better place, pushing for important change. We'll get to that, some of the proposals you have moving forward. I thought we'd ask one other question related to your journey. How do you approach these issues? Do you have a framework in mind in terms of economics? How do you think about what's appropriate in terms of size of budget or deficits and how does it cause inflation or affect interest rates and all of those things?

Riedl: I'm not actually a balanced budget absolutist. I am not entirely, always, “the deficit is all that matters.” My concern is that right now the trends are just really bad. The thing that concerns me is that the debt, which was 40% of GDP when I arrived in Washington 20 years ago, is now about 98% of GDP and it's heading towards 200% of GDP under the rosy scenario in a couple of decades. My framework is that that's bad, is that if your goal is to have a federal budget that can afford the things that we prioritize, you can't have interest costs rising to half, two thirds or even 100% of all our taxes. You can't have the debt growing faster than the financial market's ability to pay for it to loan us the money at low interest rates. My framework is sustainability. If we even had a deficit of two to 3% of GDP per year, that would stabilize the debt at about its current level of about 95% of GDP. I would be okay with that, because at least then the interest costs are stable and the economic effects are stable. It's not that I'm a balanced budget absolutist or anything like that. It's more that when the ratio of the debt to GDP is going to be going from 40%, 20 years ago, up to two to 300% by mid-century, that's a problem screaming for a solution. That endangers everything else we want public policy and the economy to do. It's not that I'm a anti fire activist, as much as the house just happens to be burning down right now and someone's got to put it out.

Beckworth: You're doing your part. You mentioned the capacity of the economy to absorb all of this debt. If it continues to grow, interest payments grow, we're in a real bind. Economists often talk about this relationship, R versus G. The real financing cost, real interest cost versus the growth of the economy. In theory, you can imagine an economy growing, growing, growing and as long as it grows faster than the financing costs, we could roll things over and it'd be sustainable. Kind of your point, keeping that peg close to 95%. What do you think of those debates when you see them in academia? For example, Olivier Blanchard had a piece out recently [where] he argued [that] he thinks rates are going to come back down. Now, should rates come back down, it would make it a whole lot easier to maintain that 95% debt to GDP ratio. When you do your analysis, I mean, can you pencil in such rosy scenarios or do you try to be more realistic and say, "Look, we're at 5% now, we might as well put that into the numbers."

R vs. G and the Issue of US Debt and Interest Rates

Riedl: I'll approach that in two parts. First off, I think the R versus G argument basically says as long as you've achieved primary balance, as long as the rest of the deficit isn't growing, as long as the GDP is higher than interest rates, you'll stabilize the debt. Mathematically, that's true, but it's kind of irrelevant right now, because we are running huge primary deficits. Because we're running primary deficits, that's going to add debt and interest costs. Even if interest rates are low, you still have the huge primary deficits which negate that idea. In terms of where we're going on debt and interest rates, I wrote a huge report that I think has aged well, in December of 2021. I wrote a 10,000 word report arguing that we shouldn't assume interest rates will stay low forever. I would go on Twitter and I debated Jason Furman on this, I debated Alan Cole, we had Zoom debates, we had events with Jason Furman, with Alan Cole and others. There was an argument being made at the time that interest rates were going to stay at one to 2% literally forever. I argued interest rates tend to fluctuate over time. I think I've been proven right since. My report in December of 2021 not only made the case for why interest rates might rise over the long term, but how much it will cost the budget. The numbers are really scary.

Riedl: The CBOs scenario that pushes us up to 200% of GDP in debt, assume that the government's interest rate never rises above 4.4% in the next 30 years. Well, right now, the 10-year bond is at four right now and the 10-year bond ends up being pretty close to where the government ends up on its interest rate. If interest rates go up, every point that they rise above that CBO projection would cost 30 trillion over 30 years in interest or add about 30 or 40% of GDP to the debt in 30 years. Instead of 200, you can go to 230, 270, 300 with each point that interest rates rise. That's dangerous. I mean, basically, we are gambling our fiscal future on the promise that interest rates never exceed about 3.5% ever again because if they do, the numbers go haywire. There's a lot of reasons interest rates can rise over the long term, that I'm happy to go into, but suffice it to say it is very dangerous to gamble our entire fiscal policy on the promise that rates stay low forever.

Beckworth: What has been the pushback you get when you put out these numbers and you say, "Hey, look, debt to GDP might get 200, 300% in a less rosy scenario when rates do go up higher." What is the pushback from the other side?

Riedl: The argument I was getting up until a year and a half ago was that interest rates will never rise. Honestly, that's what I was told. I was told that it was insane to argue that interest rates can rise, that we have reached a new normal where productivity is low, real growth rate is low, labor force growth is low and that this will create a stable equilibrium of interest rates of about one or 2% forever, which I think was a profoundly somewhat ahistorical point, to put it nicely. I think that there are factors that can raise interest rates and I also just think you can't predict the future that well. I can build any model on showing that sort of equilibrium, but the future has a way of not matching our projections. The other point that I often hear on long-term debt is either A, perhaps we can handle two to 300% of GDP because Japan has 200% in GDP and they're a basket case, but they haven't sunk.

Riedl: Then the third argument I hear, which I find to be the most frustrating argument that I hear is, “nah, something will bail us out. Something will happen. Don't worry about it, something good will happen. We'll raise tax rates on the rich a couple points, we'll cut foreign aid a couple points and everything will be fine,” which is just kind of what I call the hand wave. Something good will happen, it won't be a problem. If you take a look at the numbers, we're not projecting inflation rates in 30 years, we're fine. Inflation can be up or low. We're talking about demographics. The amount we have projected to spend on social security is already set in law. People get documents from SSA telling you how much you are going to get every year. These people walk among us and the spending levels have already been determined. So to just say, “well, you never know,” you can say that about GDP growth in 30 years, but the retirement of 74 million baby boomers is not a theoretical projection. They walk amongst us. I'll say, I haven't heard really great arguments against addressing these issues.

Beckworth: Brian, let me ask a morbid question, but related to what you've just said, has COVID affected any of this by taking out a lot of the elderly? How big of a dent or difference has COVID made?

Riedl: It's been pretty small. It is morbid, but relevant, when you're calculating these demographics. I haven't noticed much of an effect in terms of social security and Medicare projections from COVID. The main event of the past year or two has been that the inflation rate is going to make Social Security go insolvent even faster, because we're having to push up benefits 8% instead of two or 3% and the amount of revenue coming in to Social Security isn't growing as fast, because a lot of it is capped in terms of how much you can pay in taxes for Social Security. Overall, the effect of COVID and the subsequent inflation had actually been to possibly make Social Security go insolvent faster.

Beckworth: Yeah. That was my sense too, is that once you account for these other effects ... And I would add another one to that, and that is a lot of these elderly people who didn't die, they've left the labor force. That's less revenue coming into the government. So that’s another potential-

Riedl: Early retirements.

Beckworth: Let's look at the numbers of debt to GDP. You touched on them already, you mentioned the 95%. I want to just to look back over the past decade, before we start looking forward and look at where we've come from and then use that to motivate our discussion looking ahead. In terms of actual deficits, back in 2013, I'm going to pick that period, takes us a decade back. We’re running 680 billion. This year, or 2022, I should say, 1.3 trillion. We've come a long ways, but the past few years have been large in general. We're starting with the pandemic. So 2020, according to the CBO, the deficit was just over 3 trillion, 2021, 2.78 trillion, and then 1.3, almost 1.4 this past year. That's large in an absolute number, but to put it in context, as a percentage GDP, we got 14% in 2020, 11.4 and then still a little over five last year.

Beckworth: That pushes our debt up, to help out the public at least, to 24 trillion, which gets us in that 90% ballpark. We've seen some huge spikes in the amount of national debt over the past three years. There's work done by Thomas Sargent and I think George Hall where they look at what we did over these past few years as a war of sorts. They look at World War I, World War II and view this, and you can loosely call it a public health war. In every war what they saw is that there's this huge run up in debt and then it's partly deflated away, maybe we raise some taxes, but a lot of it is simply inflated away. What is your thoughts? How are we going to handle this surge going forward? Are we just going to come to terms and accept that 95% to debt to GDP ratio?

Handling the Debt to GDP Ratio Moving Forward

Riedl: Yeah. The most famous example is World War II. The debt spiked to 106% of GDP during World War II, which is pretty close to where we're going right now. Then, from the end of World War II to 1974, a period of 38 years, the debt actually fell from 106% of GDP to 24% of GDP. How did we do it? We did it because nominal economic growth was about 5% per year. Again, we're talking nominal, not adjusted for inflation, because you had a lot of new enterers in the workforce, baby boomers. You also had us coming out of World War II as the economy buried in rubble. You had about 5% nominal GDP growth and you had deficits about just 1% of GDP for that period. It's not that we were running big surpluses to pay it down, It's that the economy's growing this fast, 5% per year, the debt was only growing 1% a year and that's how we cut it.

Riedl: I don't know if we can match that right now, because the economy is going to be growing closer nominally to about 3.5% over the next couple of decades, not just because productivity's a little bit lower, but because the workforce is growing more slowly. That's going to limit growth. On the spending and budget side, World War II ended and that saved us a lot of money. The problem right now is that the 74 million baby boomers are going to continue raising Social Security and Medicare costs. Instead of us nearly balancing the budget with a fast-growing economy, CBO projects that the baseline deficit goes to about six or 7% of GDP in a decade and about 11% of GDP in 30 years under exceedingly rosy scenarios. When I say rosy, I mean the tax cuts expire, no additional tax cuts, no additional spending expansions, interest rates stay low forever, no wars, no recessions.

Beckworth: Right. That's not going to happen.

Riedl: Yeah. So really, you could be looking at deficits heading to 15, 18% of GDP in the next 30 years unless we do something drastic. That's totally unsustainable. It's impossible to run an economy borrowing 15% of GDP per year. In terms of how do we get out of this, you have to make difficult decisions. You can't count on economic growth. You can't just count on, it'll be easy to balance the budget or cut the deficit because the spending will end. Basically, you have to put everything on the table, but ultimately the savings are going to have to come primarily from Social Security and Medicare, because they are driving virtually 100% of the deficits. You can't do enough reforms in the other programs to close that gap.

Beckworth: The three key variables, just to summarize, in thinking about this going forward, is how fast is the economy going to grow? The dollar size of the economy, view that as the income from which we can pay the debt or service the debt. So, that's not very hopeful, 3% versus say 5% after World War II. The other thing is how large will our primary deficits be? We're not very hopeful there either given expectations that you mentioned already, Social Security, Medicare. Finally, interest rates, and it's not clear that they'll come down. Now, I'm a little more hopeful than you. I know we have high rates now. I'm hopeful, maybe I'm naïve, that things will adjust, but even with that we still have the other two factors going against us, the growth of the economy and the prospects for the primary deficit.

Beckworth: Now, let me go back to that first one, the size of the economy, and that's where we look at debt to GDP ratio. I want to throw something by you, and this is something I put on Twitter. You probably saw it. It actually went a little bit viral, by my standards at least. I put the market value of the debt to GDP versus the par value. The par value is what we actually have to pay, the face value, and that’s come down a little bit too because nominal GDP growth has been so rapid because of the inflation. It's come down about eight or nine percentage points. If you look at market value, it's come down about 20 percentage points. It was that like 105, now it's down to 84. For two reasons, one, nominal GDP has grown rapidly, above trend since the middle of 2021, I believe. The other big thing, of course, is that market value of the treasuries have fallen dramatically as interest rates have shot up higher than expected. Inflation has gone up, rates have gone up, and therefore the market values come down. I know in the literature they often look at the market value as a percent of GDP as a measure of the true burden of debt. I want to run that by you and see if that makes any sense to you.

Beckworth: Here's the argument. The argument is this, why would you look at the market value as a percent of GDP versus the face value or par value to GDP? The argument is that the Treasury is now paying in terms of real resources ... The coupon payment, in real terms, it's actually less once you adjust for inflation. It's a fixed dollar number. You make this interest payment, but in real terms, it's less because inflation is higher than what was expected when the creditor took out the bond. The coupon payment, the principal payment, in real terms, is less going forward. The market value might be a better measure. What do you think of that?

Riedl: I mean, I think it's interesting. I hadn't thought of it that way. I don't see those that showing up in the budget tables though. In terms of the fact that the federal government is still going to be paying a rising percentage of its taxes collected in interest payments… I think it's interesting, but I don't see directly how that makes servicing the debt easier as a share of the tax revenues coming in. I guess, I'm a little fuzzy on that one. Maybe you can help me.

Beckworth: Well, no, I guess maybe it's more of a textbook exercise, but the idea is in terms of real resources, what is the real resource burden on the government and taxpayers in making these payments, in terms of real resources? What are we really collecting from taxpayers, adjusted for inflation, then giving to the bond holders? It's less, because inflation's gone up. The flip side of that, of course, though, is bond holders are taking the hit. They're paying for that. They've effectively paid for the lower market value to GDP ratio. Let's move on to that, because I have another data question for you. We have limited time here. Another question I've always wondered and something that I've taken some views on, but may not be right, and that is, what measure of total debt should we look at? The actual total 31 trillion or the 24, 25 trillion held by the private sector or the non-intergovernmental part of the economy?

The Most Important Measure of Government Debt

Riedl: Yeah. Most economists look at the debt held by the public because… I think the more relevant amounts are the amount that has actually been borrowed from the economy, from the private sector… even, some of it too is, I guess, the Federal Reserve, but mostly you want to look at the amount that's been borrowed from the economy that we have to pay back to bond holders. That's the amount that's diverting from investment, diverting from other uses. Trust fund debt, which is what gets you from 25 to 31, like the Social Security Trust Fund, I don't see that that is real debt that's been borrowed out of the economy, as much as that's just a government promise to pay a certain level of benefits by however they can find the resources later.

Riedl: I think that there's two important concepts. There's how much have we actually borrowed from the public? Then there's how much do we owe in the future for Social Security and Medicare? In which case, I would actually go beyond the $6 trillion intergovernmental debt and look at total promises. I think those two are important, but they're separate. How much have we borrowed? How much are we on the hook for in the future? The $31 trillion figure is kind of neither. It's a poor measure of both. I would say that the way I look at it is, we've borrowed $25 trillion from bond holders, from people who've lent the government money, but the Social Security and Medicare systems face a funding shortfall of $116 trillion over the next 30 years.

Beckworth: Wow.

Riedl: That is the amount of benefits and resulting interest costs above what they will collect in payroll taxes and Medicare premiums and related revenues. They have a shortfall of $116 trillion over the next 30 years. That is more relevant than just even the $6 trillion that's specifically tied to trust funds, it's the whole liability. So those are the numbers I look at.

Beckworth: Very sobering numbers. Hundred trillion plus that we have promised and at some point we will have to find a way to cover that, either through defaulting, I mean in higher inflation or explicitly changing what we give them, or higher taxes. I mean, there's some painful process ahead. There's no way to escape the commitment that large.

Riedl: Yeah. I mean the numbers are impossible. I had an op-ed recently in the New York Times where I tried to walk through the fact that these programs themselves will be running a budget deficit of about 12% of GDP in 30 years. Two programs. They'll be running a budget deficit, a shortfall, of about 12% of GDP. You can't run an economy with a hole that big. Again, that gets back to the thing when people say, "Well, just raise other taxes or cut defense or anything else," you can't have the rest of the budget run a 12% of GDP surplus in order to finance a 12% of GDP shortfall in these two programs. The numbers just don't work. But the 116 trillion is a terrifying number when you look at it-

Beckworth: Oh, definitely.

Riedl: If you want to adjust it by inflation, you reduce it by about one third. Again, a 12% at GDP shortfall 30 years from now for two programs.

Beckworth: Okay. One last question about the data, then we'll move on to the forward-looking part of this conversation. That is, who is responsible for it? You've written about this, President Biden has claimed recently that he's a deficit hawk and you responded to that. Can we blame with any one party or is it kind of a bipartisan effort to get the debt up as high as it is?

Riedl: There's a lot of blame to go around. I'm going to actually move back a little bit and say I think the primary culprit for long-term debt is LBJ and Richard Nixon. Chuck Blahous at Mercatus has written reports on this, that, ultimately, Social Security, Medicare, and Medicaid have been the biggest long-term drivers of deficits and debt. It was the creation and rapid expansion between about ‘65 and ‘72 of Social Security, Medicare, and Medicaid that put us on a path to total unsustainability. I think Johnson and Nixon get the most blame. If you want to look at what's happened since 2000, we had a temporary budget surplus from ‘98 to 2001, which if you look back on it, was pretty fluky in terms of what was driving it. Since then, we've had a very expensive war in Iraq. We have had a pandemic that cost three or $4 trillion. There has been some Republican tax cuts in 2001 and then again in 2017 that were also extended. There have been spending increases that have passed. Republicans keep cutting taxes. Democrats keep cutting spending. Nobody's doing anything about the entitlements that Nixon and Johnson put into motion in the sixties and seventies that are ultimately going to overwhelm everything else.

Beckworth: So it's the mandatory spending that's really driving everything. We're tinkering on the margins when we talk about a tax dollar here, spending dollar there. Alright, well, let me move on then to the current discussion and looking ahead. I'm going to read an article that came out today. We are recording this Wednesday, March 8th. Tomorrow, March 9th, Thursday, as we mentioned earlier, President Biden is going to detail his big budget. Jim Tankersley had an article out today in The New York Times. I'm going to read a few paragraphs from it. The article is titled, *Biden Is Set To Detail At Least 2 Trillion In Measures To Reduce Deficits.* Here's what it says.

Beckworth: “President Biden, on Thursday, will propose policies aimed at trimming federal budget deficits by at least 2 trillion over the next 10 years as his administration embraces the politics of debt reduction amid a fight with Republicans over raising the nation's borrowing limit. Mr. Biden's plans, which will be detailed as part of his budget blueprint, are expected to rely heavily on a familiar batch of tax increases on corporations and high earners, along with savings from spending reductions, including efforts to save money on federal healthcare programs by expending legislation he signed last year that allows Medicare to negotiate the price of certain prescription drugs. The president is also expected to continue proposing some tax increases to offset the cost of portions of his agenda that have not yet passed Congress.” I'll stop right there. What are your thoughts on this? I should say, you actually have a nice op-ed that… it came out before this, but it kind of anticipated this. You have an op-ed in The New York Times titled, *Biden's Promises on Social Security and Medicare Have No Basis In Reality.* Walk us through that.

Evaluating President Biden’s Budget Blueprint

Riedl: Yeah. I mean the op-ed that I wrote that was in The New York Times argued that the president has said he will not touch Social Security and Medicare benefits. He's also said we can't raise taxes on anyone earning under $400,000 a year, which is 98% of taxpayers. The argument I made in my op-ed was that those two promises together are virtually economically impossible. If you're not going to do anything about the $116 trillion Medicare and Social Security shortfall and you can't raise taxes on 98% of taxpayers, you could tax the other 2% at 100% tax rates and it's not going to come close. The math just doesn't work.

Riedl: Ultimately, the only two choices we have as a country are to address Social Security and Medicare or nearly double middle class taxes. Everything else doesn't come close to closing the gap. Ultimately, this is what Europe does. Europe finances its large government spending with payroll taxes and value added taxes. You can't do it all from taxing the rich. In fact, what I calculated was, just to stabilize the debt, not balance the budget, but stabilize the debt at about 95 or 97% of GDP, if you don't do anything on the spending side, you would have to both raise the payroll tax from 15% to 24%, that's the combined payroll tax, employer and employee, and do a 20% value added tax.

Riedl: Both. Just to pay for the spending that's been promised in the baseline. And without even balancing the budget just to stabilize the debt, you need a 24% payroll tax and a 20% VAT. You can't get there from just taxing the rich. In terms of the president's proposal, I'm going to have to see when it comes out. Last year, the president promised deficit reduction by simply leaving out the cost of his expansions. He had a $2 trillion Built Back Better proposal that he just didn't include in the totals, and that's how we cut the deficit. We'll see.

Riedl: My concern is, if all it is is big tax hikes on the rich ... There is room to raise taxes on the rich, I think you can get a little bit, but if that's all you're doing, you're not going to come anywhere close to closing the gap. You're going to have some negative economic consequences as well. Keep in mind the president's bragging that he might be able to cut the deficit $2 trillion. He's already added $6 trillion to the 10-year deficit in just two years. Even 2 trillion, if he can pull it off, is pretty weak. It's only a third of what he's done. That's assuming that it's legitimate, not gimmicks, and not just we're going to max out on taxing the rich while still leaving enormous gaps because that's not going to come close to the rest of the budget. Maybe this is the first step to actually sitting down with Republicans and negotiating a more balanced deal. We'll have to see.

Beckworth: Brian, let me speak to something you just mentioned and that is, the middle class ultimately is the tax base that pays most of the bills. Is that right?

Riedl: Yes.

Beckworth: Any meaningful change in revenue has to come from them?

Riedl: I've run the numbers. I put this on Twitter, this menu of tax hikes, put how much you can raise from each popular tax hike. The first thing that sticks out is that the ones that raise all the money are the middle class. Income tax, payroll tax, and value added tax are the only ones that raise any real significant revenue relative to the gap we face. When you do the tax the rich stuff, the amounts are really small as a share of GDP. Just to give an example or a couple examples, the fiscal gap grows to 6% of GDP over the next 30 years. That's how much you would have to save, outside of interest savings, just from programmatic savings to stabilize the debt, about 6% of GDP. Doubling the top two tax brackets to 70 and 74% gets you one quarter of the way there. The 8% wealth tax gets you 10% of the way there. That's like the Bernie Sanders wealth tax that blows away anything Europe has done. Getting rid of the cap for Social Security payroll taxes so that you pay payroll taxes all the way up gets you about 10% of the way there. You could do all the tax the rich stuff, you don't come close. You've got to go to the middle class.

Beckworth: That's assuming it works. It assumes Laffer curves don't kick in and all those things.

Riedl: There's no economic losses. You're assuming everybody keeps working, everybody keeps paying taxes, no one does anything to avoid.

Beckworth: That's interesting. So even in the best case scenario where the richer paying a lot more, it's just a drop in the bucket.

Riedl: Ultimately, If you push tax rates on the rich to 100% and the biggest wealth taxes possible, you could get maybe 4% of GDP and that's with like 100% tax rates, which is still short of the six you need… Realistically, I think if you did the most soaking the rich, that is even in the realm of slightly plausible, you're looking at about 1.5 to 2% of GDP that you can get from taxing the rich. Beyond that, you start to actually lose revenue, because the rates go so high, people stop working, they avoid it. Again, when the gap is 6% of GDP, you're going to have to get most of it from the middle class taxes or from the spending side.

Beckworth: What was the pushback you got on your New York Times op-ed? Because I know Dean Baker for one responded to you, but was there a recognition that, hey, you're right, these numbers don't add up or was there, no, no, no, you're wrong?

Riedl: Dean wrote a headline that said, "The New York Times publishes an op-ed that's lying." Then I actually read the body of it and he said, "Well, technically all of Brian's numbers are right, but I would've framed it differently. Oh, by the way, we can just tax the rich." The body of the article didn't really match the headline. Paul Krugman, my former professor who's been trolling me for 20 years, also wrote a response that said, "Well, the future's unpredictable. Maybe the problem will go away by itself, and if not, something will come up and we'll fix it. We'll raise taxes. We'll cut spending, something will fix it." Again, first off, Social Security projections are not just guesses, they're scheduled payments in law. For his point that, well, we'll just raise taxes or cut spending, that's the point that I was making in the article is that President Biden's contention that we don't have to raise taxes on the 98% or trim benefits is wrong. You have to do something. Ultimately, the critics eventually got around to conceding my point, which is you have to do something. They can argue maybe that it won't be as painful…

Riedl: By the way, I just want to say, one thing about the people who have responded to my op-ed and my writings on this over the years. The people who come back and have said, "This is easy to fix, just tax the rich or do this or fix healthcare," they never actually put out a proposal. They just kind of hand wave it and say, "Oh, if you just do this, it'll go away." Where's the proposal? That's the thing that frustrates me the most in this debate is, okay, show me the numbers. Model it for me. Show me, if it's so easy, what taxes are you proposing and what spending changes are you proposing and how much will they save? What frustrates me is the people who say this isn't a big deal or this is easy to solve, never actually put their money where their mouth is and lay out a specific program, policy, or framework. They just say in general,  “Something will fix it." Ultimately, I think it's lazy and kind of cop out to be blunt, to argue that without actually backing it up.

Beckworth: This was your third group you mentioned earlier, they just hand wave the problem away. Your point that you've been making throughout this show is if you actually do the math, the rich can't cover it all. It has to come from the middle class or there has to be meaningful cuts in some of these mandatory spending plans. Now, let me play devil's advocate here, Brian. I'm very sympathetic to your view, but let me play devil's advocate and pretend I'm Paul Krugman. I'd say, "Well, Brian. Okay. Yeah. The math adds up on your side, but the bond market is on my side. Yeah, rates are up at 4% for the 10-year Treasury yield, but that’s pretty good. If we're going to hit 200%, 300% debt to GDP, why isn't the bond market freaking out even more? They have skin in the game. They're trading government securities, they could lose a lot. In fact, if you look at bond market inflation expectations, they're up a little bit, but they're not crazy, running 4, 5, 6%." How would you respond to that pushback?

Riedl: A couple ways. I'd say, first off, the paper that I wrote on interest rates in December of 2021 argued that you don't need high interest rates to have a debt crisis. Even if interest rates top out at three or three and a half percent, you still have the debt eventually getting to 250, 300% of GDP. It just happens maybe six years later, but you still ... What I did in my report was I actually mapped out the long-term debt projections under every interest rate from 1% to 8%. Even if the interest rates are one or 2%-

Beckworth: It's still a problem.

Riedl: It's so big, you still get to 200 and 300% of GDP, you just get there a few years later. Really, interest rates only determine the speed, not the destination. The other point is, well, why isn't the bond market freaking out on this stuff? I don't have a great answer other than the bond market has been wrong a lot. The bond market does not historically predict financial crises very well. They do not predict debt crises very well. They just kind of sneak up on economies and then they hit quickly. If you just kind of look at the history of financial crises around the globe, interest rates have never predicted them. I've talked to bond traders about this and I've asked them specifically, "Well, why aren't you predicting this?" The answer that I usually get is, “we're assuming Congress is going to fix it. We've actually priced in that at some point Congress and the president will come together and fix it and the bad things won't happen.” If that's the case, it would be circular to argue that Congress just shouldn't fix it, because the bond market already assumes a fix in their bond prices. I don't try to explain the regular fluctuations of the bond market. I think it's as much psychology, it's not always rational. My understanding is there's a certain assumption that Congress will fix it at some point, but if they don't, I mean, debt crises and financial crises are usually not predicted by bond markets.

Beckworth: Fair enough. Okay. Let's go from the left then to the right in this current debate. You have mixed it up on Twitter with Congressman Chip Roy, which was fun to watch. He went after you because you criticized Trump's OMB director, Russ Vought, who had some proposals. I think this debate, this exchange between you and Chip Roy kind of captures some of the tensions that we see in most of the Republican proposals for budget reform. Speak to that and what is the problem that Republicans aren't really addressing or meaningfully proposing solutions to?

Republican Shortfalls in the Budget Reform Debate

Riedl: Republicans continue to disappoint me. Honestly, I've known Russ for 20 years. We go back to when I worked at Heritage and he worked on the Hill. He's a smart guy. Ever since he started working at the Trump White House, he's kind of gone in a different direction. The framework that Russ and others are in is, first off, that we need to balance the budget in 10 years, which is a great talking point. I hear it on the Hill all the time. I'm trying to explain to people on the Hill, we can't balance the budget in 10 years. To balance the budget in 10 years, you would have to eliminate a third of the federal government in 10 years to do it without raising taxes. If you want to do it while extending the Trump tax cuts, you have to eliminate about 40% of the government 10 years from now. That's not going to happen. Let's say you want to extend the tax cuts and also not touch Social Security, Medicare, defense, and veterans, you have to eliminate 93% of everything else in 10 years.

Beckworth: Wow.

Riedl: What Russ said was, "Hold my beer." Russ put out a budget that said, “we're going to balance the budget in 10 years, but we're not going to cut Social Security and Medicare and we're not going to cut defense, because those are popular and Republicans are going to get beat up if they try to cut Social Security and Medicare.” Instead, what he does is he just essentially eviscerates all anti-poverty and social spending, cuts it by as much as two-thirds. We're talking Medicaid, food stamps, disability, student loan. He just says, "We're just going to call it all woke and wipe it out." Then he says, we're just going to assume that the economy grows twice as fast as the baseline projections, creates an extra $17 trillion in GDP and close a third of the gap off of those tax revenues.

Riedl: I pointed out that this was nonsense. I think, yes, Social Security and Medicare are hard to cut and they're hard to reform, but so is wiping out the entire welfare system and wiping out all social spending. The argument that they're essentially making is that the American people would rather eliminate the entire welfare state for all intents and purposes before they would accept even $1 in Social Security and Medicare changes. I don't agree with that. I think Social Security and Medicare are popular, but so is disability benefits, so are student loans, so is food stamps. When I pointed this out, Chip Roy came at me on Twitter and said my attitude is the reason Republicans lose presidential elections since 2000, because I'm trying to put everything on the table. Instead, we should just be protecting Social Security and Medicare and wiping out everything else. Give me a break.

Beckworth: That view, though, is widely held among Republicans, right? It's not just a minority.

Riedl: Yes.

Beckworth: Okay. Okay.

Riedl: Republicans want to have their cake and eat it too. They want to balance the budget in 10 years, which again is more ambitious than I think we need to go and also not touch anything popular; Social Security, Medicare, veterans, defense. They want to balance the budget while cutting taxes and only cutting waste, fraud, and abuse. It's, frankly, cowardly. We're not going to get there with gimmicks. Democrats get there trying to say, we're just going to tax the rich. Republicans think we can get there just by cutting waste, welfare and foreign aid. It's all equally unserious.

Beckworth: Yeah. It's kind of disheartening. Both sides are not putting forth serious proposals. As you mentioned, the left doesn't have the math to add up to it, because they only want to hit the rich. They don't recognize that the middle class would have to pay. Then the Republicans are ignoring the biggest part of this, and that's the mandated spending on Social Security and Medicare, so unrealistic on both sides. So this makes me think, Brian, that maybe it's going to take a crisis for us to actually come together. I mean, you look at other countries, what compelled them to actually act? It's when things got so bad they had a debt crisis. I hope we don't get to that point. I look to Canada. I know Canada in the early 1990s actually was ... They got ahead of the game. They consolidated their finances and they brought things under control, if I remember correctly. But, that's Canada. They tend to be a little more thoughtful and forward looking in some of these issues than we do here in the US. In your view then, I mean looking forward, not doing numbers now, but just politically looking forward, is it going to take a crisis?

The Crisis Scenario and Brian’s Preferable Path Forward

Riedl: Probably. We've been trying for 20 years to motivate people on this. Nobody cares. I mean, nobody cares. Even at the height of the Tea Party movement, it was really just about bailout stimulus and Obamacare. Even the Tea Party didn't want to deal with the actual deficit drivers like Social Security and Medicare. Ultimately, it's going to take a crisis to get people's attention, because we just can't get, ultimately, voters to prioritize or take this stuff seriously. If we don't take it seriously, eventually it's going to be the bond market that says, we can't keep funding this level of debts at low interest rates that you guys need. We're going to start to demand higher interest rates or pull back a little bit. Ultimately, I think that's probably what happens. The danger is, the longer you wait, the more painful and drastic the reforms have to be.

Riedl: The whole reason we talked about fixing Social Security and Medicare in 2000 was not because we were going to have a debt crisis in 2000, but because we wanted to protect people over the age of 50. That was the reason to do it then. If you did it in 2000, you could protect people over the age of 50. Now all of the baby boomers have retired. When Social Security and Medicare reform comes now, we're not protecting the people over the age of 50. We're going to be hitting current retirees, because we blew the window, to mix metaphors. Ultimately, I think we probably have a series of little crises that bring gradual reforms until ultimately we end up with a tax code that looks more like Europe with high VATs and payroll taxes. I think that's ultimately where this ends with a 20% VAT and a 25% or a 24% payroll tax.

Beckworth: That's after the crisis?

Riedl: Yeah.

Beckworth: Okay. So let's do another path forward. That's the crisis path. Crisis and then the plans that you just mentioned. What would be your ideal path forward? You've written about this, you had an article in The Dispatch. Walk us through a better scenario.

Riedl: The better scenario is that lawmakers actually come together to put everything on the table and reform these programs. I've written 30 year fully scored blueprints on how to stabilize the debt at 95% of GDP. My plan, it's mostly Social Security and Medicaid reforms, but there are tax hikes too because you frankly can't close the whole gap out of Social Security and Medicare reforms. I think the first thing you need is… it would be great if in the short term Congress could do the basics, like put in some discretionary spending caps even though discretionary spending is not the main driver, end the COVID emergency spending, pass the Trust Act, which would create a lawmaker commission to take a look at Social Security and Medicare insolvency. Do some of the low-hanging fruit across the rest of the budget. Then come back in a year or two or whenever and actually put everything on the table. If you do it now, you can actually exempt the bottom 50% of seniors from reforms and you can phase in some of the reforms a little bit earlier, rather than having to wait 10 years and then just start punching current retirees in the face, ultimately, which I don't think is going to be feasible, which is why then, instead, you're just going to have to do the huge middle class tax route.

Beckworth: Flesh that out for me. What would be some of the specific adjustments that would be made to Social Security? It would grow at a slower rate, you would increase the age, what would you do?

Riedl: Well, I think [there is] ideal and the realistic. I think the realistic on Social Security is, raise the eligibility age, which is currently going to 67, up closer to 69 gradually over the next couple of decades. Start trimming benefits at the top, not necessarily cutting people off, but trimming the growth of benefits. You can do this [through] different mechanisms, but ultimately you're trimming the growth of benefits. You may have to raise the cap on Social Security contributions, which, currently, about 83% of all wages right now are subject to Social Security taxes. You want to go back up to 90%, which is where it was originally supposed to be set and where it was set back in the ‘83 reforms, maybe modestly lift the cap. Those can close a Social Security gap. Although, if it were really up to me, I would replace the whole benefit structure with a flat benefits of about 130% of the poverty line and make it true insurance against poverty by saying every retiree who pays into the system gets a flat rate to keep you out of poverty. 130%, period. That can actually solve much of the funding gap. That's probably too ambitious for Congress, though.

Beckworth: What bout Medicare? What are specific steps with Medicare?

Riedl: Medicare is much more complicated, because nobody has a full solution to solve the Medicare gap, but two places I would start are first raising Medicare B and D premiums for wealthier individuals. Again, B and D are not pre-funded by payroll taxes. You just retire and you pay 25% of your physician and drug costs, and taxpayers pay 75%. The only people who pay more than 25% are the richest 6% of seniors. Even then, for most of them, it only goes up to about 35 or 50%. I think if you're retired and you're earning hundreds of thousands of dollars a year, even after retirement, and you have millions of dollars in liquid assets, you can pay much more of your Medicare costs. You don't need a taxpayer subsidy. Again, this is not the part of Medicare prefunded with payroll taxes, either. This is closer to welfare.

Riedl: I think if you means test the B and D premiums, it'll be affordable. Also, I would like to move Medicare more towards the premium support model, kind of similar to where Medicare Advantage is, where more seniors can shop around for private plans. The Congressional Budget Office says that, if you just allowed seniors to shop around for private plans, you could provide a system that's just as generous at 7% of a cheaper cost for the government and 7% of a cheaper cost for seniors, without costing anything in benefits, just from efficiencies. Those two reforms would close about half of the Medicare gap. I think you probably may have to raise the payroll tax a little bit. You have to do more on the Medicare side. That's why I said it's not a comprehensive plan, but I think that can get you about half or a little more a way there if you include the payroll tax hike too.

Beckworth: There are so many issues with healthcare in America. Medicare is just one piece of the puzzle. I've had people on here talking about, for example, the shortage of doctors. We've artificially reduced the supply, which raises their incomes and the cost. There's many, many issues. We could go there-

Riedl: You could spend 10 episodes with just fixing the healthcare system.

Beckworth: Right. Let me go to one other area and that's President Biden's use of negotiating price, since Medicare is this big player in the healthcare market. It sounds like he's going to do it again. Is that something you think makes sense or do we need to be worried about it?

Riedl: Well, the odd thing is, the way Medicare Part D works originally, based on the 2003 law, is really without price controls. It was through competition. Again, like a premium support model where people just ... You get a subsidy from Medicare and you shop around for private plans. It came in dramatically under cost, under projection.

Beckworth: Really? Wow.

Riedl: It actually worked really well. Medicare D has cost less than projected. I think it's interesting that that's the part where they're going back to government controls, that's actually the part that came in under cost with choice and competition. I have nothing against trying to reduce costs further for Medicare for seniors. There's a danger, though, that what price controls do is they kill innovation. The Congressional Budget Office has said that because of negotiating these prices, there will be fewer drugs coming to the market. Whether or not that's a price we're willing to pay, that's a political choice people have to make. I think that people think of it as a free lunch. “The government's going to negotiate and we're going to get cheaper drugs.” You're going to get less innovation too. You're going to have fewer options on the market. You're going to have fewer drugs available.

Beckworth: Okay. Well, in the time we have left, let's move away from the big budget picture to another area that's related to the budget, but more germane to something happening right now and that's the Russia-Ukraine war. You have spoken out to some of the Republicans who are against it because of the cost. I really appreciated your comments you had on Twitter about that, because I'm very sympathetic to what you said. Share with us, how should we think about this properly in terms of the true cost and benefits?

The Cost and Benefits of the Russia-Ukraine War

Riedl: Yeah. We are projected to spend $9 trillion on defense over the next 10 years. It's actually reducing it as a share of the budget compared to what it used to be, but it's still a hefty sum of money, $9 trillion over the next decade, about three and a half percent of GDP. The point I made on Twitter is that the $115 billion we've given Ukraine to fight this war is probably the best 115 billion we could have spent out of the $9 trillion, because had Russia been able to overtake Ukraine quickly, or at least relatively quickly, there's a very good chance Russia would've moved on to reconstituting more of the former Soviet Empire; Latvia, Lithuania, Estonia, Moldova, and even old Warsaw Pact countries like Poland and Romania could ultimately had been threatened. That would've cost us a hell of a lot more than $115 billion out of 9 trillion in defense spending.

Riedl: I think the fact that we're only spending about 1% of our 10-year defense budget right now to decimate the Russian army and prevent them from trying to reconstitute more of the Soviet Empire is actually, I think, probably the best $100 billion we will have spent out of that 9 trillion. World War II analogies may be strained, but imagine if you could have slowed down Hitler by giving money to Poland in 1939… you're not spending any American troops and it's a hell of a lot cheaper than what ultimately resulted. To me it's a no brainer.

Beckworth: It made a lot of sense to me when I saw it, so I wanted to make sure you shared it with our listeners.

Riedl: I got my butt kicked on Twitter for this. If you really want to learn all the new swear words, say anything nice about Ukraine on Twitter.

Beckworth: Well, you have my support and I imagine many of our listeners as well. I think it makes a lot of sense. It's a good investment, bottom line. You've laid it out very nicely, the numbers. Well, with that, our time is up. Our guest, today's been Brian Riedl. Brian, thank you so much for coming on the show.

Riedl: Oh, this has been a lot of fun, David.

Photo by Stefani Reynolds via Getty Images

About Macro Musings

Hosted by Senior Research Fellow David Beckworth, the Macro Musings podcast pulls back the curtain on the important macroeconomic issues of the past, present, and future.