Marc Goldwein on the US Government Budget: Structure, Challenges, and Reform Strategies

In order to help secure the long-term health of the US economy, policymakers must begin to grapple with the harsh realities of entitlements reform.

Marc Goldwein is the Senior Vice President and Senior Policy Director for the Committee for a Responsible Federal Budget (CRFB), where he guides and conducts research on a wide array of topics related to fiscal policy and the federal budget. Marc joins Macro Musings to talk about the US government budget, its structure, its challenges, and its long-term trajectories. David and Marc also discuss the basics of government shutdowns and the budgetary process, how the most recent inflationary episode unfolded, how to fix the US budget over the long run, and a lot 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: Marc, welcome to the show.

Marc Goldwein: Thank you for having me.

Beckworth: It's great to have you on. I have gotten to know you on X, formerly known as Twitter. I still like to call it Twitter, so I'll just say Twitter going forward. We've had a lot of fun conversations, I've learned a lot from you. You're part of a bipartisan organization that's really fighting the good fight on the budget deficit, very sympathetic to what you guys are doing there. I'm excited to have you on, this is long overdue. This is a very important issue. We have some folks at Mercatus working on this as well, but I'm glad to get you on because this is your specialty, and we have some considerations to get into today. Before we get into all of that though, Marc, tell us about your journey into the federal budget policy space. That's a niche area. How does one get there?

Goldwein: Well, you know, I've been doing this, I think, for 16 or 17 years now. I started in an even more niche space, which I was only interested in, basically, Social Security solvency policy.

Beckworth: Wow.

Goldwein: That's what I wrote my thesis on, the politics of Social Security reform in school. I came to DC, worked at the Government Accountability Office, a little bit on their Social Security work. Then I went over to work for a very small organization called the Committee for a Responsible Federal Budget, which when I started, was essentially three people. I've continued to work on this, as I said, for the last 16-plus years. I took two leaves to work on the Simpson-Bowles Fiscal Commission in 2010, and they called it the Super Committee in 2011. I'm really experienced in failing to come to solutions to fix our fiscal situation, overall. Every time I leave, I keep coming back, because I just love the federal budget. You say it's niche, but it actually covers almost every other policy area. Some days and some years, I'm really focused on healthcare, sometimes it's tax policy, sometimes it's macroeconomic policy, sometimes weapons acquisitions. It really can be anything.

Beckworth: We'll come to this later, but you were a big part of the conversation in 2021 on whether ARP was too big and whether it would be inflationary. You got into the weeds of the inflation debate, and we'll come back to that in a bit, which was interesting and enlightening. So, you found your way into this space, maybe talk a bit more about the work that you do and your colleagues do at the Committee for a Responsible Federal Budget.

Goldwein: I mentioned we were a three-person organization when I started, but we're about 25 or 30 now. CRFB has been around since 1980. It represents a board of some of the top budget experts in the country, former directors of all of the three-letter agencies you can think of, former chairs of the Budget Committee, and members of Congress, and senators. It's truly bipartisan. Our co-chairs include Leon Panetta, who is the Democratic Secretary of Defense and Congressman, Mitch Daniels, Republican Governor and OMB director, Tim Penny, a political independent.

Goldwein: They disagree on a lot, but they agree fundamentally on the importance of what we call fiscal responsibility, which we define as, your debt can't grow too quickly relative to your economy. At CRFB, some of what we do is advocate for that fiscal responsibility. Some of what we do is serve as a watchdog because members of Congress and the president are always trying to pretend to be fiscally responsible using games and gimmicks when, actually, they aren't, but most of what we do is analysis. We really are out there to inform the public, the press, and Hill staff that don't have time to read 80-page papers every time they want to understand what's going on [with] a particular budget issue.

Beckworth: We'll provide a link to your website because you have a lot of interesting documents there, we'll be referencing some in a few minutes. You also have these widgets or these apps on your page. “You try to solve the budget challenge”, “you try to fix Social Security.” It's a lot of fun. It's great engagement and a great education as well. Thank you for the work you're doing there. Alright, so we want to talk about the structure of the federal budget. It's very important, and as you said, it covers many areas. Before we do that though, today is September 29th. We're recording this on Friday.

Beckworth: It seems likely that Congress probably won't have a continuing resolution passed by the deadline of midnight, September 30th, Saturday, tomorrow. A government shutdown seems likely. By the time this comes out, it may have come and gone because this will be about a week from the recording, so we may be in a place where the government is back and open. I want to read an excerpt just to kick it off, then we can talk about this for a bit. I'm going to read an excerpt from an article from Jeff Stein in the Washington Post. The title of this piece is, *Amid GOP Confusion, US Braces for 'First-Ever Shutdown About Nothing'.*

Beckworth: This is what he writes: “In 1995 and 1996, the federal government shut down as House Republicans and the Clinton administration clashed over spending cuts. In 2013, the government shut down because of a partisan disagreement over President Barack Obama's Affordable Care Act. In 2018, Democrats bucked President Donald Trump's demands to fund a US-Mexico border wall, leading to the longest shutdown in US history. And now, ‘We are truly heading for the first-ever shutdown about nothing,’ says Michael Strain, Director of the Economic Policy Studies at the American Enterprise Institute, a right-leaning think tank.”

Beckworth: “Strain has started referring to the current GOP House-led impasse as the Seinfeld shutdown, a reference to the popular sitcom widely known as a show about nothing. The weirdest thing about it is that Republicans don't have any demands. What do they want? What is it they're trying to get out of the shutdown?” He goes on to quote some other Republicans, Newt Gingrich, Grover Norquist. They all say that it's just really hard to know what they want, so it makes it difficult to actually get anything accomplished. We don't need to get into politics of this, but suffice to say, it doesn't appear there's any traction to get a continuing resolution by this weekend. So Marc, let's begin our discussion of this with maybe a very basic definition. What is a continuing resolution? What role would it play in getting the budget processed?

The Basics of Government Shutdowns and the Budgetary Process

Goldwein: Let me back up a little bit more. About a quarter of the budget is appropriated every year. Meaning that if Congress doesn't pass legislation to fund the budget, it doesn't get funded. That includes our military and includes most of what the Department of Education does, Department of Interior, state, EPA, Homeland Security, federal employees, things like that. They're supposed to get all 12 appropriations bills done before October 1st to fund the government. That really never happens. Almost always, when it comes time to the first deadline, they do a kick the can move called a continuing resolution. The continuing resolution basically says, "We're going to take current funding levels or adjusted current funding levels and just extend them for a little while, while we keep debating."

Beckworth: Now, I know last year they passed an omnibus bill that had a lot of spending in it. Where did those bills fit in? What do they do?

Goldwein: So, an omnibus is what happens when instead of trying to pass each of those 12 appropriation bills individually, you package them together in a big bill. It's maybe not as clean as doing them individually, but that is a full funding package that makes decisions over how to allocate money. That's very different from a CR, where you're literally saying, "We're not going to make any decisions, we're just going to punt at last year's levels until we figure it out." A CR is very different from a shutdown. That's where you say, "Well, we can't figure this out at all, so we're just going to turn off the spigot and the funding is going to stop."

Beckworth: You have put out an article titled, *Government Shutdown Q&A: Everything You Should Know,* and in this article, you guys ask a number of questions and provide the answers. Let me start with one that I thought was very interesting. How many times has the government shutdown occurred? You note, "Since Congress introduced the modern budget process in 1976, there have been 20 funding gaps, including the 2018-2019 shutdown and the one in January 2018." That indicates it's not an uncommon event. Is this one any different do you think? Is it unique in any way?

Goldwein: I'll say a couple of things. One is, this is really in the weeds, but there's a little difference between a funding gap and a shutdown because the way it used to be, and even to present, if the fiscal year ends in the weekends and you have agreement to restart your spending on Monday, there's a funding gap, but there's no shutdown. A shutdown happens when, essentially, the agencies realize the money's not coming, and so they stop their activities. That's less frequent. The other thing I'll say is that this has been becoming less frequent over time. We really had no shutdowns in the first decade of the century, for example. Now, they're becoming more frequent again. We had shutdowns in 2013 and it's a short one, a funding gap in 2018, a very long one, over a month long, starting in 2018 into 2019. Now, it looks like, likely by the time you play this podcast, we'll be in another shutdown. What makes this one a bit weird is, often shutdowns happen when you don't have agreement on your spending level. But, we just had a major negotiation that resulted in the Fiscal Responsibility Act that was supposed to set our funding level. The fact that, despite that, we're still having a shutdown, probably is pretty unusual.

Beckworth: That goes back to Jeff Stein's article, all of this disagreement within the Republican Party. What about the shutdowns? Do they actually save money or do they end up costing more?

Goldwein: Shutdowns don't save money. They don't really cost much money, what they mostly do is waste money. They do technically cost a little bit because, for example, we're not collecting parks fees and we owe some extra money in interest and contract padding, but that's really negligible. The main thing shutdowns do is they waste money because we send a large number of federal employees home, but we still pay them. Instead of paying federal employees to process our taxes, and look through applications, and make sure that our water is safe and our Superfund sites are being cleaned up, we pay them to do nothing. That's incredibly wasteful.

Beckworth: In a sense, it's like a paid vacation for a number of federal employees. That's interesting. What services are affected in shutdowns?

Goldwein: Every agency has to decide which of their employees are, we call it essential. It's not really essential, but which of their employees are essential and will keep working, but with no pay until reopening, with delayed pay, and which are sent home? Everyone in the Department of Defense, pretty much, is continuing to work. Anything that's a national security issue is going to continue running. Anything that's not funded out of appropriations, Social Security benefits, Medicare benefits, things like that, they will keep running. The disruption will happen largely to things where there's applications that need to be processed, where there's administration that needs to happen. If you're trying to get a visa, if you are newly disabled and try to apply for benefits, you're in trouble. If you are trying to go to a Smithsonian museum or a park, those will be shut down, and you're in trouble. If you are flying, you'll probably be okay, but after several weeks of not receiving their paycheck, the TSA agents may not be super thrilled to show up to work, and they may call in sick more. That's what we saw last time. You may see that kind of thing just in a little bit of a slower pace. Most people, especially outside of Washington, DC, won't feel this on a daily basis. But, the longer it goes on, the more they will start to feel it, and the more likely they are to interact with government in a way that is subject to this shutdown.

Beckworth: Alright, let's move on to the structure of the budget deficit. So maybe walk us through that. What are the components, how big is it, and any other important details we should know?

Breaking Down the Structure of the Current Budget Deficit

Goldwein: We are now spending, the federal government, about $6.5 trillion per year. As I mentioned before, a quarter of that is appropriated annually, roughly split between defense and all those non-defense functions. The remainder is mostly programs that are on autopilot, things like Social Security and Medicare that there's a benefit formula, then people get benefits based on that formula, food stamps, Medicaid, farm subsidies, various types of welfare benefits, refundable tax credits, et cetera. Then a small but growing share of the budget is interest we pay on the debt. Just like when you take out a mortgage or a loan, you have to pay interest, the federal government pays interest. That cost has been relatively low for the last two decades, but is rising extremely rapidly as we see interest rates are coming in hot and our debt is rising.

Beckworth: You mentioned the actual size is around $6.5 trillion right now?

Goldwein: That's right.

Beckworth: If we go back a few years, I was looking at some CBO numbers, we've been running deficits. In fact, we've been running deficits for decades, but they really got large in 2020, 2021. I'm just looking at the CBO here. What they have down is $3.1 trillion in 2020, $2.8 or so trillion in 2021. It's particularly striking if you look at it as a percentage of GDP, it really blew up. These deficits, CBO says it was almost 15% of GDP in 2020, 12.3% in 2021, and then 5.5% last year. It seems like we're on pace this year to push that number up from 5.5% maybe up to 7% or so. In fact, you had a piece out about this. We've had a $2 trillion deficit over the past year, you guys have noted.

Beckworth: So, it seems like we're on pace to continually increase the deficit at an even faster pace. What is happening? I guess, why are we running these deficits now that we're out of the pandemic? Let me add one other observation. If you go, say, to the FRED database, which we both love, and you plot the unemployment rate, and you plot the budget deficit as a percentage of GDP, they track each other really closely. You see big deficits when there's a recession, and it tends to close when there's not a recession. Recently, that relationship is broken down. We're getting these non-recession, peacetime deficits getting larger and larger. What's happening?

Goldwein: I'm going to use rounded nominal numbers, which is a little bit unfair, but I think it will help to illustrate the point. In the 2010s, early mid-2010s, a normal deficit was about 500 billion a year. By 2019, right before the pandemic, thanks to tax cuts and spending increases, et cetera, $1 trillion had become the normal. Last year, we were at that $1 trillion, and so it seems like we were back to that normal. That normal is way too high, but it's normal. It turns out that was an aberration. It turns out that last year, we were benefiting from a huge one-time surge in revenue. This year's effective deficit is likely to be $2 trillion, which is, as you alluded to, unprecedented outside of a war or recession. We've never had it.

Goldwein: Now, intermingling these structural deficits, we've had two instances that we've done big surges of borrowing. One was during the global financial crisis, thanks in part to the big unemployment, but also the bank rescue, and the stimulus, and the payroll tax holidays, and all of that. The other was during COVID, where we basically put an extra $2 trillion a year into the economy. That was troubling to me, particularly at the end, because I think it was very inflationary, but it was temporary. Now, what we're seeing is a structural deficit that is close to $2 trillion, and it's really being driven by the aging of our population, the rising cost of healthcare, growing interest costs, especially as rates rise, and the failure of tax revenue to keep up. Our revenue is as low as ever, despite the fact that we have all of these tremendous government costs. We're just not paying for them.

Beckworth: Going back to the CBO data that I pulled up, in 2022, the outlays were $6.3 trillion and revenue was $4.9 trillion, just to put the numbers in perspective. You just mentioned that a lot of this funding is going towards Social Security, Medicare. Maybe walk us through those components. What makes up the lion’s share? What are the most important? You mentioned interest on debt, but how big is Medicare and Social Security relative to the overall budget?

Goldwein: Social Security is the single largest federal government program. It costs us well over $1 trillion per year, and those costs are growing rapidly. They're growing rapidly mainly because we have more and more beneficiaries, but also because the benefits themselves essentially grow as income grows. The second largest program is very close to a tie between defense and Medicare. Both of those are spending in the $700, $800 billion range. They're not at a trillion yet, but they're certainly heading that direction. Now, both defense and Medicare are very costly, but only one of those is seeing rapid cost growth, and that's Medicare. Again, Medicare is healthcare for seniors, so as we get older, it has more and more beneficiaries. Then the underlying costs are growing, not just with wages like Social Security, but at a much faster pace because healthcare costs continue to go up. After that, every other program by itself is smaller. We have interest on the debt, which, back in 2020, was $300 billion. This year, I wouldn't be surprised if we finish at $650 billion, something in that range. It's growing rapidly. Interest on the debt this year will exceed everything the federal government spends on children. Add together the child tax credit, education, child nutrition, interest is more.

Beckworth: Wow.

Goldwein: If current rates continue, then within the next two years… so by 2025, interest will exceed the defense budget. It is by far the fastest growing part of the budget, driven both by these increases in rates, but also the fact that we have more and more debt we're paying interest on. Then below that, we have food stamps, Supplemental Security Income, farm subsidies, everything we're spending for K through 12 education. We have a lot of new investments we've made in infrastructure and tax credits that are actually refundable for energy, things like that. We could go down the list down to things that are $1 billion, but the big money is Social Security, Medicare, Medicaid, and defense. By the way, we don't count it in the budget, but we spend another $1.5 trillion dollars through the tax code in a variety of tax breaks. I think it's important to put those up against the Social Security and Medicare spending as well, because they're extremely expensive.

Beckworth: Well, Paul Krugman, our favorite commentator from the New York Times, he has this saying that the US federal government is effectively an insurance agency and a military. That's his two big expenditure categories. Is that a fair characterization?

Goldwein: Yes, if you count Social Security as insurance. It's an insurance company and a pension fund with the military. I think that's about right.

Beckworth: Good framing. Alright, let's talk about the budget deficits during the COVID years. I already mentioned they blew up, they got really large. You noted that you were concerned about them. I think, in 2020, when ARP came out, you thought it was too large. Walk us through that experience. What was going through your mind? What were you thinking about others who were less worried about inflation like myself? I have come clean on this show, my forecast for inflation was way off in 2021. You were one of the few people, as I recall, that was worried in early 2021.

Budget Deficits During the COVID Years

Goldwein: Let me start by saying in the spring of 2020, we all agreed that it was time to pull out all of the stops. The CARES Act was not perfect. Nobody thinks it was perfect, but this was a true national emergency. We were shutting down large parts of the economy. The actual unemployment rate was probably 25%. I know it never recorded that high, but that's probably, actually what it was at least for a few days. We didn't know what tomorrow was going to look like. The plan was to get as much money out as fast as possible to as many people as possible. At that point, it made sense to send checks, unemployment, PPP, aid to states, all of the stuff, even though we knew it was somewhat wasteful, because the priority one, two, and three had to be to stabilize the economy. That was no longer the situation by the spring of 2021 when we were debating more stimulus. I looked at the economy then and it did seem like there was still a gap to fill, but it was not particularly large. We had just passed $1 trillion of relief at the end of 2020 in the form of checks, extended unemployment, more COVID money, things like that. It was just starting to make its way through the economy.

Goldwein: We had just really launched this vaccine program, and the economy was on a clear path to too slow of a recovery. At the time, we looked at the situation. We said that the economy probably needs… our estimate was $300 billion more. I think it's reasonable to make the case, well, it's better to overshoot than undershoot. If you take my $300 billion and you say, "Okay, just to be safe, we should do $600 billion worth the policies or even, you could twist my arm to $1 trillion worth the policies." But that's not what happened. As I understand it, the White House came up with a plan for $1.3 trillion, took it to Chuck Schumer and Chuck Schumer said, "Let's turn that three to a nine," and they ended up with almost $2 trillion of stimulus. Most of the stimulus didn't make sense on its own merits. For example, state and local governments were clearly already flushed with cash. The only possible one that was in question at that point was Hawaii because of its tourism issues. Every other one was in fabulous shape. The idea that we were going to send them another half a trillion dollars made no sense. Households had very strong balance sheets. Bank accounts were strong. People didn't spend a lot during the COVID era. They had their own savings plus two rounds of government checks, plus everything else.

Goldwein: The idea that we were going to send them another $1,400 per person, $7,000 for a family of five, that made no sense. The origin story of that, frankly, is that the previous president had a temper tantrum after his bill, the bill that his secretary negotiated, didn't have exactly the parameters he wanted. Somehow that led the current president to support it. The elements didn't make a lot of sense, I could go on, but then the number was just far too large for the gap. We had a situation that the economy was still supply constrained. You can't create 10 million jobs overnight, so it's still labor supply constrained. It wasn't going to get there fast enough. It was still mobility supply constrained because of COVID.

Goldwein: The idea that you could just dump $2 trillion into an economy that was maybe $300 billion short and expect no consequences seemed unlikely to me. I wasn't predicting there would definitely be an inflation, I think this could have played out a lot of ways. One was that people would hoard the money and so it would be ineffective. That was probably the best case scenario, that it was just wasteful. But, it seems reasonably likely that if you gave people that much money to spend on top of the money that they already had in savings, at a time that the supply was still constrained relative to normal, that the response would be that businesses would have to raise prices. It really would be the only way.

Goldwein: I think you can draw a straight line, in some cases, from the checks people got, again, $7,000 for a family of five, to the used car dealership, where they literally, basically, took that check to go buy used cars all at once. It turned out it wasn't just the car market, we could use supply arguments for any one of these things in isolation. But, when you have a normally functioning economy, a boat stuck in a canal doesn't lead to a point increase in inflation. These kinds of supply disruptions are only problematic when the money has nowhere else to go. That was the situation when essentially every household in America was flushed with cash.

Beckworth: That's a great point, one that's not made often enough, and that is, you can't just look at supply disturbances, you've got to look at them in combination with demand pressures that are accompanying them. Your point, well taken, is that there were really strong spending surges occurring against these bottlenecks, which were bound to create the inflation. You mentioned that you guys estimated a $300 billion hole in the economy in early 2021. I think I went back and CBO said $400 billion, so pretty close. Then you're adding $1.9 trillion.

Beckworth: I know some folks like Larry Summers, Olivier Blanchard, maybe Jason Furman too, the way they looked at it was that, basically, you have got a bathtub, you have got to fill up a few inches of water, and you're going to keep that water running. It's going to overflow, it's going to overheat the economy, in the case of the analogy, you're going to flood the bathroom. What is your understanding of how this inflation process is created? I bring it up, because the story I just told is what I'd call more of a hydraulic Keynesian story. You just get too much money in the economy, given capacity constraints, and things happen. There's also this other thought, a fiscal theory of the price level perspective.

Beckworth: And they would argue that this fiscal policy was excessive, but they would argue that, in this case, CARES Act, ARP, it was well understood that this wouldn't be offset by taxes in the future. This was money sent to households, so households aren't thinking, "This is free money, there's no repercussions in the future in terms of tax policy. I can just go out and spend it." It was truly like helicopter drop of money given to households. And yet, households aren't thinking through the fiscal theory of the price level and future primary surpluses, but they do get this sense that this money literally is dropped to them, and if they don't spend it now, maybe inflation in the future will erode its value. Where would you come down on those two views of how this actually unfolded?

How Did the Recent Inflationary Episode Unfold?

Goldwein: I actually think there's three different views of how this inflation took hold. The [first] one is, the water overflowing the bathtub, as you said. The second is the fiscal theory of the price level that were expectations of we're going to inflate it away. The third, which actually has been conventional wisdom in economics, has been through the labor markets, through the Phillips curve model. I am, and have been mainly, in the bathtub camp. I think fiscal theory of the price level, in my view, it's not a good way to describe why we have price levels, but it is a helpful way to describe how inflation expectations can change. I do think that inflation expectations plays a role, both in how much inflation you get and then how quickly it can come down. I think the fact that we were adding to the debt worsened us on the expectations front. I think the fact that the labor market was so hot, because businesses wanted to hire faster than people wanted to work or possibly could work, I think that mattered. Fundamentally, I think the key driver of the inflation here was, literally, there was too much money that people were excited to spend on too few goods and services.

Beckworth: Going back to the money that was given out during these programs, CARES Act, the ARP, you mentioned that the states got a lot of funding when they didn't need it. Are they still sitting on those funds? Because I've heard stories, like, if they were to spend it all, it could stoke some more inflation.

Goldwein: We sent state and local governments about $1 trillion of aid over the course of COVID. Part of the reason, I think, we sent them so much is because we felt in the Great Recession, we'd sent them too little, and they actually exacerbated the recession by laying off workers. It turned out that they laid off workers even with all of this money. State and local governments have been the slowest… had the slowest job recovery of any industry, despite effectively having the most money of any industry, and it's an ongoing threat. States now have very robust rainy day funds, which is good news, but in other ways, it's a potential concern for inflation.

Goldwein: Also, almost every state has cut taxes, and some have cut taxes a lot. That, maybe, has already contributed to inflation, but my real worry there isn't the inflationary impact, it's that states are going to take this temporary surge in revenue to make permanent policy, which they have, and the next time when they're in trouble, they're not going to be able to pull that back. They're either going to have to come to the federal government for help or otherwise hurt the economy. My number one fear of the aid to states isn't that it'll be inflationary further, although that's a factor, it's that we've created this type of dangerous dependency where the federal government wasted $1 trillion and trickled it… not all of the trillion, but the federal government wasted a decent share, and it's trickling down to the states where they are wasting it and won't be able to pull back when the time is necessary.

Beckworth: That could create challenges for the US federal government in the future if they come to the federal government asking for more assistance. Let's quickly turn to the Federal Reserve during this time. My view is that the Fed kept rates too low for too long. They should have tightened sooner or they should have cut back on their QE program sooner. Do you think that also contributed to the inflation?

Goldwein: Absolutely. I will say, in hindsight, I agree that the Fed really should have raised rates earlier, but they were in a very tough situation, in part because they were at what's called the zero lower bound at the time of the COVID crisis. One of the tools that they had at their disposal when they can't cut interest rates anymore is to promise they'll keep interest rates lower for longer to try to spur investment. They were doing everything they could to support the economy. Chairman Powell… maybe they shouldn't give such strong forward guidance, but he made his forward guidance very clear that they are going to keep the rates low until, essentially, the employment situation returned to 2019 levels.

Goldwein: Despite knowing that guidance, Congress moved forward with a $2 trillion stimulus bill. I still put the onus on Congress here and the president because the Fed acted first and they made their decision, and then Congress acted in an irresponsible way. That put the Fed in an impossible situation where they had to do one of two things, break their forward guidance or break their bigger mandate for price stability. They, unfortunately, I think, chose to break their bigger role for price stability first because they essentially kept their forward guidance. They really didn't start raising rates until we were basically where they said they were. That may have been the wrong choice. It probably was the wrong choice in hindsight, but it was an almost impossible choice to put on their lap.

Beckworth: Stepping back from this period, we have both fiscal policy being excessive, as well as monetary policy being too loose for too long. We both agree, also, that in 2020, it was important to have that strong support from the government because the government forcibly shut down the economy. It's only fair and reasonable that they would do something even if it was far from perfect. Do you think that the federal response, the Fed's response, was pivotal in getting us back to trend growth, back to full employment while conceding that yes, we overdid it, we overheated, we overshot, but compared to, say, 2008, it never returned like that trend, real GDP path. There's always this weakness. Do you think the really strong response played a role in the quickness and to the level that it got?

Assessing the Policy Response to the COVID Crisis

Goldwein: I think a few things. I think that the response in 2020, not just here but around the world, prevented what could have been a global depression, and that was really important. I think the response at the end of 2020, and even in 2021, even the part that I thought was excessive, I think it got us a quicker labor market recovery than we would have had otherwise. Now, the last dollar, the last $500 billion, maybe even the last trillion, I'm not sure how much that sped it up. I think there was definitely diminishing returns, but I do think that it got us there a little quicker, of course, at the consequence, in part, of higher inflation and higher interest rates.

Goldwein: That said, I do think this argument is very overstated by a lot of folks. I think that we underestimated the resilience of the US and global economy, our ability to adapt to really big changes. Some of this technology like the Zoom that we're on right now and Uber Eats came just in time. I think we underestimated our resilience, and I think that our ability to bounce back was just stronger than we thought. This was not like the global financial crisis, which was fundamentally a hole in the financial system. This was a hole in the public health apparatus. I expect even with a lot less stimulus, while we wouldn't be in as good of shape, we wouldn't have had a repeat of the global financial crisis.

Beckworth: Marc, I'm someone who is a champion of “make-up policy.” Make-up policy is if you're in a recession, you return as quickly as possible to that pre-trend path of the economy and vice versa. If you're above that trend, you need to tighten policy and come back down. I'm glad that we actually saw it happen in real time. I do worry, though, because we overdid it so much. I agree with you, those last dollars, they definitely went mostly into prices, not into real activity. I think that's the key point there. My concern is, though, that we will take this lesson and say, "Oh, we shouldn't try to aggressively respond to recessions in the future, see what happened when we had high inflation." I'm afraid we'll throw the baby out with the bathwater, so to speak. Do you see that as happening? Do you see the big lessons being learned by policymakers [that] we have to be much more conservative in the future when there's a downturn, or will they be able to tease out the difference?

Goldwein: I think a lot of people think that Congress and policymakers never learn, but I don't think that's right. They learn, but they don't always learn the right lessons. I think, often, we're fighting the last crisis. I think a major part of the COVID response mistake was that we were treating it like the global financial crisis. Part of that mistake was we may have misdiagnosed some of the issues with the global financial crisis. We really thought the problem with state and local government employment was that they didn't have enough money. I very much question that now because we gave them more money than they possibly know what to do with, and they still are at job loss. But, in general, I think we were fighting the wrong crisis, and there's a very good chance that next time, we'll learn the wrong lessons again, and we may indeed do too little. I, on net, think it's healthy that we learned that money is not infinite, we learned that some discipline is necessary. I think there was a feeling… you and I both supported the 2020 money, but I supported it while arguing that this is not free. This is a choice we make, and there will be a cost associated with it, and that cost is worth it. But, I don't think a lot of policymakers were thinking that way, and now they are, and that's a good thing, to get them to wrestle with trade-offs. That's a good thing. But, yes, they do worry we'll overlearn the lesson, and we may indeed do too little next time.

Beckworth: I think that's a great point. I think many observers didn't think it would cost anything in 2020 because we had that previous decade of low rates, low inflation. In fact, if you look at Google Trends and plug in MMT, it peaks during this period. I think some books and some people had some stuff out that was getting a lot of attention, but MMT really shined in 2020. “See, we can do it all,” and so I agree with your point, and I hope you're right that policymakers have learned that there are trade-offs. There are costs to choices, even choices that you have to make in times of crisis.

Beckworth: Let me circle back to the question of a government shutdown coming up. I bring this up because some of the conversations surrounding it, as well as the previous debt ceiling talks, were proposals to get the long-run trajectory of federal spending such that debt will be on a sustainable path. And what we see then and what I see now is that Republicans don't want to touch Social Security or Medicare. They only want to touch these categories… and in fact, they won't touch defense either. They want to touch the small category that's discretionary, and yet we know that's not going to be the fix. Maybe walk us through that as a segue into what are truly legitimate fixes over the long run.

Fixing the US Budget Over the Long Run

Goldwein: Look, total appropriations are a quarter of the budget, non-defense appropriations are half of that, so that's not to say you can't save real money from changes to an eighth of the budget, but you're not going to solve a $2 trillion structural deficit. We've done some math. If you want to balance the budget in 10 years, which is the stated goal of at least one party, and do it on the spending side only without touching Social Security, Medicare, or defense, or veterans, you'd have to cut everything else by 85%. That's Medicaid, food stamps, everything government does, 85%. It is literally impossible.

Goldwein: Just to be bipartisan here, if you were to trade it all on the tax side and exclude the 98% of Americans that make below $400,000 a year as the other party wants to do, you'd have to raise taxes by about 85%, which is literally impossible because they've put tax rates above what I think is the revenue-maximizing level, so you can't do this. When we have a debt outlook that's on such an unsustainable path, you can't do this looking at just a small share of taxpayers or a small share of the budget. You need to look at everything, but including the big programs, that's Social Security, Medicare, Medicaid, and the tax code. You really need to look at the revenue side as well.

Beckworth: I had Brian Riedl on the show before, and he made the case, you have to touch Social Security, Medicare, you have to touch those things, and/or you have to touch taxes. If you don't touch those things, he foresees a future where the middle class will have a much bigger tax burden if we don't touch those things. Is that a fair assessment?

Goldwein: Yes, or we have an implicit tax burden through much higher inflation, much higher interest rates, and much slower economic growth. In fact, the CBO did some analysis recently that, basically, if we continue on our current debt path, it will slow income growth by about 1/3, relative to where it's going. That's an implicit tax on everybody. No one pays more payroll tax, your income growth is just 1/3 slower over 30 years.

Beckworth: Along these lines, your institution had an article titled, *Retirees Face a $17,400 Cut if Social Security Isn't Saved.* Let's talk about that and talk about Social Security in general, what needs to be done to it?

Solving the Social Security and Medicare Puzzles

Goldwein: There are a few government programs that are self-financed, they're run in trust funds. The largest one is Social Security. The idea is that people should contribute in through the payroll tax, and then receive benefits that are at least loosely based on those contributions. That worked great through… essentially, through the present, but the problem is that since 2010, that those benefits have exceeded the tax mainly because of aging of the population. In 10 years, we're going to exhaust all of the reserves that we've built up during the surplus times. What that means is that in 2033, we will only be able to pay, essentially, three quarters of benefits.

Goldwein: The law says that you need to cut your benefits at that point to equal taxes, which we estimate means that for new retirees, for a newly retired couple, that would be a $17,400 cut. I've been working on Social Security since I was in college. We used to say, "You’ve got to figure this out for your grandkids or your kids." Actually, you have got to do it for your grandparents, because somebody that is a new retiree today will only be 72 years old when the trust fund runs out of money. We cannot, under current law, promise to even pay current benefits for current beneficiaries.

Beckworth: Let me ask a morbid question related to this. Did COVID change, at all, the calculus for baby boomers as it relates to Social Security? That was the group that was really hit hard, they died. Now, maybe you can argue they also left the labor force en masse too, so they're not generating as much revenue. Did COVID have any bearing on the longer-term projections?

Goldwein: Not meaningfully. We saw a bit of cost reduction in Social Security and in Medicare too, but not significant, and basically offset by the earlier retirements that we saw.

Beckworth: What needs to be done with Social Security, long-term?

Goldwein: We have a great tool called, where we've had high school classes use this, we've had members of Congress use this to write their bills because Social Security is that easy that even a member of Congress can figure it out.

Beckworth: Awesome.

Goldwein: There's a few major levers. You’ve got your retirement age, you've got your benefit formula, you've got your cost-of-living adjustment, you got your payroll tax rate, and you have your tax base. That's most of it. There's other things that you can do that change various rules, but that's most of it. I think we need a combination approach. I think that one could reasonably say, "I want to solve this entirely with revenue," but it's a lot of tax increases, and you've got to do the middle class. One could reasonably say that you have got to solve this entirely with benefits, but we're 10 years out, so you'd have to make pretty steep benefit cuts pretty quick to get there in time. I think that the right approach is going to be some combination. I think we ought to do it in a way that strengthens retirement security, especially for lower-income seniors, and that promotes economic growth, because Social Security sends people such strong signals about when to retire, when to work, how much to save. Just by tinkering with those signals to let people do what's already best for them, we can get some extra economic growth and offset, I think, some of the negative economic effects of our aging population.

Beckworth: Let's segue into Medicare. What's happening there? What needs to be done?

Goldwein: The good news with Medicare is the bad news, which is that we waste an incredible amount of money on healthcare. The United States spends twice as much on healthcare as a typical rich country. We spend an average amount for government, despite the fact that we only cover the poor and seniors. That means that there's significant room for efficiencies that won't meaningfully reduce benefits or access, and in some cases, actually make seniors and other beneficiaries way better off. I'll point to three areas really quickly, and then maybe we can do a whole another podcast where I do 20 or 30 areas.

Beckworth: Sure.

Goldwein: One is something called site-neutral payments. This has broad bipartisan support. Medicare essentially pays more for the exact same procedure if it's in the hospital versus a doctor's clinic. That makes no sense, at least to hospital consolidation and expenses and costs. The second is the Medicare Advantage program. This is a private alternative to Medicare that is in many ways more efficient, and yet, for some weird cheating reasons, it costs the government more money. If we just paid these plans actually what they were worth, we could save hundreds of billions of dollars. The third is Medigap plans, which are these wrap-around plans that seniors buy from the AARP and insurance companies that turn out to be very expensive to them in terms of premiums and mask them from any cost sharing, so they're not involved in the copay process in any meaningful way. Restricting these plans would not only lower costs for seniors, but it would also reduce a lot of excess treatments that take place in the current program.

Beckworth: So Marc, it sounds like there's a lot of administrative waste happening with Medicare. I'm just wondering, is it any different than the private sector? I bring this up because some people would say, "Oh, we could save so much in administrative costs if we had a single payer." I don't want to get into the whole single payer thing, but what you just described to me leaves me a little leery. We can't get these basic things figured out. Is Medicare any different than, say, the private health care administrative costs?

Goldwein: Private costs on that are actually higher, both higher in terms of payment rates, and higher in terms of how much is spent on administrative costs, profits, other things like that. On the other hand, private plans are better at, rationing is the wrong word, but they are better at managing care than the public plans are, and they are better at going after waste, fraud, and abuse. I think what you want to do is take the best parts of the private sector and the best parts of what the public sector does, and either have them learn from each other or have them compete with each other.

Beckworth: Okay. Now, recently, the Biden administration pushed forward a plan for Medicare to negotiate prices. What is that all about, and will it make a meaningful difference?

Goldwein: Right now, Medicare Part D, which is the drug benefit, everyone is in their own, essentially, government funded but privately run plan, and these insurance plans negotiate with the drug companies. What the Inflation Reduction Act did is it said that for a small subset of drugs, ones that are really expensive, and that face no meaningful competition, and that have been on the market for a long time, the government is going to step in and negotiate on behalf of these insurance companies with a backstop that if the… It's a forced negotiation because if the drug companies don't agree, they're out of all the Medicare plans, they pay a very high fee.

Goldwein: I think this can help to reduce costs, both for beneficiaries and for the Medicare program. There's a risk that if you take this negotiation too far, it can stifle some innovation. I actually think they designed it in a pretty careful way that focuses on those drugs that have already been on the market for a long time and don't face competition. It's not going to be perfect, there's going to be fits and starts, but, look, we're spending an incredible amount of money on Medicare, and at this point, no ideas are bad ideas. If we have ways to meaningfully reduce costs that we think isn't going to much hurt value or quality, we should be talking about it.

Beckworth: Let's go to the political economy of reforming Medicare and Social Security. In particular, the voting power of baby boomers, older generations, they tend to vote more than, say, younger, middle-aged working people or families. One of the outcomes we talked about is, we could simply take care of this by increasing taxes on the middle class, so, increasing the tax burden, and you can foresee a world where that happens, it closes the holes, but, most of the benefits continue to flow to seniors. Do you see some kind of generational conflict, or some change in the political economy such that the burden will be evenly shared, or are we in a future where seniors will continue to hold the power?

The Political Economy of Medicare and Social Security Reform

Goldwein: One thing I will say is that there are more Americans that believe they are middle-class than Americans that believe they are old. That's some good news. But, we've done a tremendous generational disservice with the promises that we've already made through our Social Security, Medicare program, by voting ourselves, the boomers and younger generations, a series tax cuts after tax cuts, and new spending programs. There's already going to be a substantial burden placed on future and younger generations, whether that takes the form of higher taxes or slower income growth and increased risk of financial crisis, and things like that.

Goldwein: It’s not clear yet, but we've already created a tremendous imbalance. I don't think we're ever going to return to balance, but if we could just reduce that imbalance, I think that would be an important step in the right direction. My two political economy arguments would be, one, at this point, we have got to go save Social Security and Medicare, actually, for those very seniors. Medicare is only seven years from insolvency, Social Security is only 10 years from insolvency. Most people in those programs will still be alive and probably don't want to see their benefits cut in seven to 10 years. The second is, I think we have got to go appeal to our [inaudible] because nobody wants their kids to be worse off than they are. That's the thing I was always told is, "The one thing that we always want for you is for you to be better off than we are." I think if people understand, in stark real terms, that that's the trade-off, you're reducing what you're passing on to your posterity. I think, I hope, on my most optimistic days, that we can make a difference.

Beckworth: Do you think the aging of the planet, the slowing down of birth rates, population growth, is that an omen? Is that something we should be worried about for the sustainability of these plans?

Goldwein: I'm very worried about aging here and around the world. The costs manifest themselves, maybe most visibly, in our fiscal situation, but they really affect the entire economy. We used to grow 3 to 3.5% per year. I think we'll be extremely lucky if we grow 2% a year going forward. That's mainly because of the aging of the population, and so I am worried, and I think that we're not going to reverse it. Even if we all go home and have kids tomorrow, it's 18 years before they're any good to the economy, and that's not going to happen.

Goldwein: There are important things we can do on meaningful margins related to immigration, but also related to finding those in the margins of the workforce and giving them the right support, incentives, and signals to work. That especially means older workers, it also means workers with disabilities, formerly incarcerated, working parents. We need to make it easier for all of them to work because we have an incredible amount of literature, especially for seniors, that people that work more, not only do they contribute to GDP, and that's great, it also provides an individual benefit to them in the form of stronger finances, in the form of better physical and mental health, they live longer. In the case of seniors, they have stronger social networks, they drink less, they watch less TV, they have lower divorce rates because they're not home all day annoying their spouse. In a lot of metrics, it's actually better for people, not to work until they're 80 or 85, but to stay in the labor force a bit longer and to have more flexible arrangements that allow them to stay in the labor force while still enjoying some measure of retirement. I think that's where a lot of our focus ought to be.

Beckworth: I think we all know older people in our lives who once they lost their purpose for living, they quickly fell apart. What you’re suggesting here is that work does provide structure, meaning, value, among many dimensions that would help that. I would just add one other point to what you're saying about population. The reason I'm concerned about it is, how do we get innovation? How do we get ideas? It's in people's brains. The more people we have, the greater distribution of IQs, the greater opportunity there is to find solutions for things like climate change. I'm of the camp that says, "We need more people to solve our problems, not fewer."

Beckworth: Okay, last item here, and this is going to switch gears a bit in the few minutes we have left. I'm going to take advantage of the fact that I have a budget expert with me right now. One of the things that the US government does well is keep many of its liabilities off the budget. I'm thinking of agency securities, like Fannie and Freddie, those are things that are implicit liabilities. They became an explicit one in 2008, but we seem to be good at that. We have all of these off-balance sheet entities we create, you think of federal home loan banks, there's just a number of them that are quasi-private, but if push comes to shove, we're going to go bail them out. How do you think about those institutions as a budget expert?

Goldwein: I think about them as an unrecorded risk. People do try to estimate, what are all of the future potential liabilities of the government? Those come in two categories. The one is, who are all of the people that they promised they'd bail out? Now, by the way, COVID tells us maybe that's every small business with less than 500 workers in America and every household. That's a lot of contingent liabilities, if so. Then the second is, what are the future promises we've made in programs like Social Security and Medicare? I think this exercise can be useful, but it gives you numbers that are in the hundreds of trillions, and I don't think they’re very meaningful. I do prefer to look at just, what's the trajectory of where we're going? Tell me two standard deviations in either direction. How much better could it get? How much worse could it get? Then, what do we have to do to ensure that we can be relatively confident? We have a high level of confidence that we're not going to have a crisis, and at least a medium level of confidence that we're going to have ongoing prosperity, and let's shoot for that.

Beckworth: With that, our time is up. Our guest today has been Marc Goldwein. Marc, thank you so much for coming on the show.

Goldwein: Oh, thanks for having me. This was great, David.

Photo by Saul Loeb 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.