Brian Riedl on the Federal Budget

Brian Riedl, Senior Fellow at the Manhattan Institute and former staff director of the Senate Finance Subcommittee on Fiscal Responsibility and Economic Growth, joins us this week to discuss the federal budget, tax reform, the national debt, and the future of U.S. economic policy.

Transcript

Juliette : 0:00

Hi, my name is Juliette Sellgren and this is my podcast The Great Antidote. This podcast is brought to you by the center for growth and opportunity at Utah state university. To learn more, visit www.thecgo.org. Hi, welcome back. I'm excited to have Brian Riedl on today. He is the guy that everyone I've talked to has mentioned. When I've asked for recommendations, and I've been looking to have a conversation about the budget. He's a senior fellow at the Manhattan Institute with a focus on budget taxes and the economy. He was the staff director of the Senate finance subcommittee on fiscal responsibility and economic growth. He knows a ton about the budget, about the economics of all of it, and is definitely the guy to talk to welcome, Brian, glad to be here. Thank you. So my first question, which I ask all my guests is what is the most important thing that people my age or in my generation should know that we don't

Brian Riedl: 1:23

Well that's, that's a very broad and challenging question. Um, uh, I'm, I'm, I'm 45, so I'm definitely in an older group now, but I feel like I was in my twenties yesterday. Time goes so fast. I guess if I were to stick it to, to my field of, of politics and policy, I would point out, and this comes from, you know, watching Twitter and watching the debates all day. Very smart people who have been studying public policy, their entire lives can come to completely opposite conclusions on the same issue. Uh, not because they're bad people, not because they're dumb, but because policy is enormously complicated, whether you're talking about healthcare taxes, climate, economic growth spending, antipoverty you name, you know, abortion, guns, you name it policies really complicated. And the more you learn, the more expertise you gain over 20, 30 years, the more you should see how both sides often make really good points. And the people I see in the debate who are totally sure of themselves who say, this is the right answer. This is the right policy. Anybody who disagrees with me is stupid or uncaring or an idiot. Those are the people who generally don't understand the issue. You know, there's a whole Dunning Kruger theory that says the people who are the most sure they are, right, are the people who know the least. And the more you learn, the more humble you should be. Relatedly. I recently wrote an article for city journal talking about how so much of what we think we know about politics and policy we take on faith. And what I mean by that is think of what you know about, you know, healthcare policy, tax, policy, minimum wage, you name it. Most people didn't actually go and study the data themselves. So what you know about policy is what someone else told you, a reporter, a columnist, a politician, a TV personality, a friend. How do you know what they told you was? Right? How do you know when you, when you're screaming at someone on social media, you don't know anything about healthcare policy, how do you know that you're right and they're wrong because somebody in your tribe gave you information that you are now repeating back at that person. You don't know if that information is right and you don't know if the person that person is paring back to you as information is right. And so this is just broadly a call for people to be more humble, verify what, you know, go look up, you know, the primary sources of the information, especially people in your tribe. Don't take. What other people tell you always as given research the best from both sides, verify info and be humble. I guess that's the main point I would make for the, I didn't understand as well when I was 20, you know, when, when I was 20, 25, I thought I knew everything. And now that I'm 45, I realized that I don't know anything. And you know, even things I thought I knew when I went and went to verify and it turned out that it wasn't true. And so I just, that would be my lesson for younger people, be humble, read both sides and verify information.

Juliette : 4:57

And I don't know, you make such a good point. I was just sitting here like kind of gasping at how that's exactly. I even on a small scale in the past, like year or two, I've kind of learned that. I mean, obviously I still have a lot to learn about it and I don't know the full scale of it, but I feel like the second point you made about not going to the primary source and knowing what, you know, based on faith feeds into your first point and the reason why people are so sure. And I don't know, the more, the older I get, even by like a day, I feel like I'm, I dunno. I feel like I understand how little I know even more and it's in a way it's scary, but also, I don't know. That's what makes policy so complicated at the same time, because there's just, I don't know. You can kind of see what other people are thinking, even if you don't necessarily agree. And that's why it's so hard to come to one conclusion. I dunno. It's like a whole, I, it's a good point. I'm going, I have been kind of trying to do that, but it's a good reminder listeners. You do that.

Brian Riedl: 6:14

I have been studying the federal budget for 30 years and I'm still finding myself on a regular basis, questioning my assumptions, rechecking the data, listening to other people who have totally opposite conclusions and going, wow, that's actually a really good point. Even after, even after 30 years of studying this issue at the highest levels of think tanks, presidential campaigns, the Senate, I still find, you know, learn new things from other people. And in terms of taking things on faith, I just see so much on social media where people tear each other apart for disagreeing with each other on, on a certain issue, you know, it's like, you know, take the minimum wage, people just screaming at each other. And there's so much misinformation out there because everyone's just parroting what Tucker Carlson told them that out, hold them. And it's like, you're both wrong. Like you're both just taking things on faith. And so I just think, you know, we all, there's so much misinformation out there. We all need to do better.

Juliette : 7:20

Yeah. I, that, I think it's something it's a lifelong goal. I think. Um, so diving right in, um, I feel like I don't know that much about the budget and I feel like a lot of people don't know that much about the budget or the process of coming to have a budget. So my first question is what are the different parts of the budget and what are each of them for

Brian Riedl: 7:48

The different parts of the federal budget? Yeah. Um, are you talking about there's mandatory discretionary breakdowns and then there's the program by program breakdown. Is there an angle that you're kind of looking at more?

Juliette : 8:00

I would say, um, discretionary mandatory.

Brian Riedl: 8:04

Um, okay. That, that, that's, uh, that's a great question. Um, so two thirds of the budget is what's called mandatory programs. Mandatory programs are when Congress creates a program and instead of actually allocating money every year, it's just on autopilot. And it spends what it spends. An example of a mandatory program is social security. We don't decide every year, how much to spend on social security. We create a program, we create a payment formula, people sign up for it and it spends what it spends. The examples of mandatory spending are social security, Medicare, Medicaid, antipoverty programs, farm subsidies, unemployment, student loans. You just kind of create a structure and people sign up for it. And it costs what it costs. The other of the budget is discretionary spending. And these are the programs where on a yearly basis, Congress actually decides we're going to spend$700 billion next year on defense, we are going to spend 30 billion on foreign aid, 40 billion on health research. Um, and, and we're going to give States$50 billion in grants for K through 12 education that they control every year. Congress essentially writes a check to an agency and says, this is what you get. One of the concerns we've had over the long-term is 50 years, 60 years ago, mandatory spending was only a third of the budget. And now it's two thirds because when Congress creates a program and puts it on autopilot, it automatically grows bigger and bigger and bigger without anybody reviewing it. The only way to actually pair back a mandatory program is to actually have Congress vote, to reopen the program and change the formulas, which they usually don't want to do. So what happens is these mandatory programs, social security, Medicare, Medicaid just automatically grow seven, 8% a year on autopilot. And as a result, Congress ends up squeezing the discretionary programs. A lot of the domestic programs, the social programs, even defense more and more to make room for mandatory spending. So that that's something that we've been dealing with in policy for a while,

Juliette : 10:20

But it's still spending whether the government is spending it on autopilot or is choosing to do it, or is changing the proportions of which, um, of the money that's being spent and where it's being spent. It's still like a dollar is a dollar. So why does the distinction exist? And like when did it kind of come into play at first and do you find it useful when talking about the budget?

Brian Riedl: 10:52

The reason we have mandatory programs on autopilot is because the idea came around, especially with social security in the 1930s, which was really the first real entitlement that you should be able, anybody should be able to sign up for a certain program who's eligible. And in that, if that's the case, it should spend what it spends. Let's say, if we had said each year, we are going to spend$600 billion on social security and not a penny more. That would mean that if more people sign up for it, you either have to kick people off or you have to cut the benefits. And so what Congress kind of said was that that was, shouldn't be fair. You should have a predictable spending formula that anyone can sign up for. And that means you can't control what it costs. I understand the concept, you know, and that's why they did it because they wanted it to be predictable. And, uh, for each individual and open to everybody. The problem again is, as I mentioned earlier, is the costs grow uncontrollably. So what I, and many others have proposed, you can't necessarily every year say we're going to, we're going to change the social security formulas every year in order to meet some target. You know, if you can't say we're going to spend$800 billion on social security next year. And if a lot of people retire, that means we're going to cut benefit to stay under the cap. That's not feasible. But what you can do is you can create what we call like 30, 20, and 30 year targets and say, here is how social security needs to be constrained over the next 30 years to only grow at a certain rate. And so let's change the formulas so that we can be sure it will probably only grow at a certain rate. And then every five years we'll revisit the programs and the projections and we'll tweak the formulas every five years or so to try to keep it on that path. That's probably a more realistic way of, of controlling the costs and bring some accountability without at the same time, jerking the formulas up and down every year for people who are on social security in order to meet some target. I think, you know, every couple of years you make sure you're on the right path. This is something that's been proposed by conservative and liberal think tanks, but had really hasn't gotten anywhere in Congress because Congress doesn't want to touch these programs.

Juliette : 13:11

That sounds like such a good plan because it's a goal and it's forward-looking instead of being like, Oh, we have to completely cut spending right now, or we have to do this or that. It's very much little adjustments along the way. So it's not one big thing at one time, which I think would be much more digestible, but also it does kind of sadly make sense that Congress doesn't want to touch these programs because it hurts them and hurts their reelection. It hurts all these things. And of course it's work who wants work, um, but kind of figuring out how to change the budget and change the formulas. It kind of leads me to thinking about the process in which the budget is decided. Um, can you describe that process for us and kind of the steps and how it starts and how it ends?

Brian Riedl: 14:07

Well at the beginning of every year? Well, you're, here's the way it's supposed to work. Congress. Usually doesn't often make it work this way, but the way it's supposed to work is that every year you start out, well, the PR the president proposes a budget every year, which is the president's 5,000 page vision of here's, what should happen to every program and every tax over the next 10 years, usually, you know, and there's, you know, this should be increased. This program should be caught. This is how much should go to each discretionary program. This is how much each tech should, should rise and fall. The president proposes that. And then Congress pretty much throws it in the garbage because the president's budget has no actual legislative or legislative power. The president just pass it. You know, it's just a suggestion in States. It's different in States. They actually will introduce the president's budget as legislation and for state governments in Washington, the president produces a book, it gets a lot of attention and then it gets thrown in the garbage. So instead of what Congress will do is they'll pass a budget resolution. And what a budget resolution says is that we start out with, let's say the baseline for these entitlement programs around autopilot, they get a baseline that says here's how much these programs are probably going to grow over the next 10 years on autopilot. And Congress will decide, should we add to it or subtract from it? And they'll put that in the budget budget resolution and say, we should raise the baseline. We should add more benefits over this 10 year path, or we should try to subtract benefits over this ten-year path. Then they'll do the same thing on taxes. They'll get the ten-year path for tax revenues and decide, should we raise it or cut it after they pass the budget resolution, which is just non-binding, it doesn't go to the president that doesn't sign it. It's then time for Congress to actually go and do the bills, actually increasing taxes or cutting taxes and increasing mandatory or cutting mandatory. The budget resolution doesn't actually change the programs. It just is where they make the decision of their intention. I want to add 300 billion to Medicare over 10 years. I want to cut taxes by a trillion over 10 years. Um, but you actually then have to go pass the bills and what some of which has done in a process called reconciliation that we're hearing a lot about. Now on the discretionary spending side, there really is no baseline discretionary spending that final one-third of the budget. That's the part where they just say, we want to spend$1.1 trillion next year on discretionary spending. And they put it in the budget resolution. We're going to spend 1.1 trillion. And then after the budget resolution passes, they have to go actually pass 12 appropriations bills that allocate we're going to spend 600 billion on defense, 30 billion on health research, 50 billion on highways, um, you know,$20 billion on K through 12. So then they spend the rest of the year actually doing the bills. The discretionary spend the appropriations bills that fill in that 1 trillion for discretionary spending, and then any changes to tax are mandatory. They'll have to go do the bills to either raise it above or drop it below the baseline. The sad reality is in the last couple of years, Congress hasn't even bothered to pass a budget resolution. They just don't really make it. They just didn't make changes to taxes and they didn't make changes to mandatory spending. They just left everything on autopilot. And then, which means all they would really do is the discretionary side. They would just say, instead of doing a budget resolution, we're just going to spend$1 trillion on discretionary spending and we'll go do that, leave taxes and mandatory on autopilot. It's kind of a messy process.

Juliette : 17:57

Yeah, but it gets messier if you don't try to fix it. So with all that, leaving the spending on autopilot and the growth that kind of leads to that and the deficit and all of this super kind of, and it's not super, super complicated, but it's still complicated. It falls into this whole topic. Um, um, few weeks ago you published a chart book at E-21 and you showed that since the beginning of the 1990s, we've had deficits most years, except for three or four, maybe we also see that the deficits get bigger and bigger every year when it's adjusted for inflation. The deficit in 1990 was 395 billion. And in 2019 before the pandemic, the deficit was that almost a trillion dollars. So why is it, why has it grown that much has discretionary spending grown, or is it just the mandatory side of things

Brian Riedl: 19:02

Since the early 1990s discretionary spending has, has not grown much at all, as a matter of fact, um, you know, there there's two kinds of discretionary spending defense and non-defense spending, and they've both actually dropped as a percentage of the economy. Uh, since the 1990s, non-defense discretionary has gone from about 4% of GDP to 3% of GDP. Um, and the fence spending since around 1990 has gone from five and a half percent of the economy down to 3%. You know, it's funny because people are under this impression that defense spending is always growing. It's actually since 1990, it's fallen from five and a half percent of our GDP down to 3%. What's happened. The main reason we've had deficits over this period is because mandatory spending has, has skyrocketed. Um, it's grown, uh, uh, you know, probably I think, well, it's, uh, it's grown from about 7% of GDP to about 12% of GDP during that time. And it's on pace to grow to about 16 or 17% of GDP by 2050, that's what's driving. The spending increases that are driving the deficit tax revenues have been remarkably stable over that period. Tax revenues have averaged about 17% of GDP over the last 40 years. They spiked here and there when we had a balanced budget from 98 to 2001, um, revenue spiked up to about 20% of GDP right now, the right about 17% of GDP. And they're supposed to stay 17% of GDP for the next 30 years. The variable, the main variable is when you have, uh, you know, especially social security, Medicare and Medicaid that are going to be growing, and I've already started growing four, five, six, seven, 8% of GDP over a 40 50 year span. Ultimately even the slight reduction we've had in discretionary spending during that period, hasn't been enough to make room for the huge increases in mandatory spending that are going to continue now that we have 74 baby million baby boomers retiring. So it really, you know, the story, the story of the budget is a story of, of a very rapid increase in mandatory spending, particularly social security, Medicare and Medicaid.

Juliette : 21:27

I also see in your charts that the deficit in 2020 was 3.1 trillion. That's such a big number. That's kind of scary, um, which obviously has to do with all of the money that was spent during the pandemic, but also that this deficit will never get back down to its pre COVID level of 2019, at least in the next 10 years, which also has to do with the whole tax thing and how taxes are probably going to remain stable. Um, I assume that the extraordinary measures that are put into place during times of emergency, like the pandemic are supposed to be rolled back when the emergency is over. Well, that's what it should mean. I would think extraordinary measure is an extraordinary measure after all, but can you explain what is happening with all of this?

Brian Riedl: 22:19

Sure. I mean, we we've had, we've had three and a half trillion dollars in legislation so far responding to the pandemic, which is really amazing. Uh, and, and, you know, Biden's proposing 1.9 trillion more that actually passes and we're at about$5.3 trillion in legislative response to the pandemic. By the time the pandemic is over one fifth of the entire national desk will have come from pandemic legislation. It's, it's really remarkable. The pandemic will cost even the will, will cost the budget, even when, when the recession ends for two reasons. Number one, some of the policies that are temporary are going to be made permanent. And this always happens in the recession. They do things like they expand the child credit, they expand the ITC. Uh, these are policies that are, we're always told are temporary. They're never meant temporary congresses, let them expire. Um, you know, for like for instance, the Biden's proposing$120 billion, uh, as for a one-year expansion of the child tax credit, forget the a hundred and billion, a hundred, 120 billion for one year, you know, darn well, that's going to be made permanent. In which case it will cost 1.2 trillion over the decade. The second reason you have larger costs long-term is because if you have an additional$5 trillion in debt, you have to pay interest on that$5 trillion. And even if let's say we're going to pay 3% on that 5 trillion, we've borrowed that's$150 billion a year in interest, we are going to have to pay on that$5 trillion in debt forever. You know, we're not, we're not going to pay back the debt. We're not going to balance the budget, run surpluses and pay it back. We're going to keep rolling it over. But the reality is if you borrow$5 trillion more, you got to pay interest on that forever. 150 billion. That being said, those costs are not the main driver of rising deficits. The main driver is social security and Medicare shortfalls. And just to go briefly into that, there is a perception out there that's not really true that social security and Medicare don't add to the deficit because the amount that comes in in payroll taxes and premiums that seniors pay for Medicare is, is what comes out. That's not true at all. Social security and Medicare payout, much more every year, the may pay in that's, what's driving the deficit. Um, in 2019, these programs rainy$430 billion shortfall. So we had to take$430 billion from general revenues and transfer it into social security and Medicare to make up the shortfall. Well, as more baby boomers, retire and healthcare costs rise, that's going to skyrocket by 2030. So we're going to have to be transferring 1.5 trillion per year into social security and Medicare. So again, you go from 430 billion a year to 1.5 trillion a year, transferred into social security and Medicare between 2019 and 2030. That's an extra$1.1 trillion. And if you want to know the main reason why the deficit is projected to rise by$1.1 trillion between 2019 and 2030, that's why an extra$1.1 trillion a year is going to have to be transferred into social security and Medicare because there's too many baby boomers and too high of healthcare costs to actually be paid for in the payroll taxes and premiums. That's, what's driving the deficit and over 30 years, let me scare you more for third. In the next 30 years, we are going to have to transfer$101 trillion into social security and Medicare just to make up their shortfalls 101 trillion. Over 30 years, the debt today is about 22 trillion. We're going to add$101 trillion in debt, just from social security and Medicare. Over the next 30 years,

Juliette : 26:26

I was going to say, I don't even want to know how bad it's going to get, but there it is. It's going to get very bad. Um, that's kind of a nightmare. So the debt, our debt is the accumulation of deficits, all of the borrowing, um, who are we borrowing from

Brian Riedl: 26:51

These days? Um, well, let me put it this way. Over the last 10 years, most of the borrowing was done. Actually let me back up further for a while. We were borrowing a lot of money from China in Japan. Uh, they were lending us a lot of the money. In fact, about 12 years ago, the debt was$10 trillion and China in Japan had lent us 2.2 trillion of that 10 trillion. The other 7.8 trillion came from domestic savers banks, mutual funds. You know, people who lend the government money, domestically, uh, individuals, anyone who buys a savings bond, anyone who buys treasuries, you know, by, by, by 2010, about 7.8 trillion had been lent domestically. And$2.2 trillion had come from China in Japan. Um, and a little bit more from some other countries as well, smaller amounts from other countries. Well, here we are$12 trillion in debt later, uh, from, from then we're up to$22 trillion in debt trying to in Japan, haven't increased their lending to us at all. They still own$2.2 trillion of our$22 trillion debt. Uh, so it's it. Over the last 12 years, it hasn't come at all from China and Japan, the entire$12 trillion increase has come domestically mutual funds, banks, savers, anyone who buys a Siemens bond what's been particularly concerning to me is that of the$3 trillion in borrowing that we did last year, 2 trillion of it came from the federal reserve. The federal reserve essentially ran the printing press last year to fund$2 trillion because it was too hard to borrow$3 trillion in one year out of domestic savers, especially when the economy is struggling. So the federal reserve basically monetized$2 trillion. Now the federal reserve cannot directly lend money to treasury. Instead, what happens is they kind of do it indirectly where the treasury, you know, regular people lend money to the treasury. And then the federal reserve also at the same time adds$2 trillion by doing bond sales. A and bond purchases will add$2 trillion on the side. Now that's just kind of a roundabout way of at the end of the day, there's$2 trillion in new cash out there, and only a net of$1 trillion has been lent to the government. So that's my concern right now is that foreigners aren't really lending much to us anymore. Uh, China and Japan have stopped, which puts all the pressure on domestic lenders to pay this huge debt. And if domestic aren't able to lend enough to Washington, which we saw during last year when we had to borrow 3 trillion, the next step is the federal reserve lending. The money, uh, are essentially running the printing press and that can create all sorts of long-term problems. It's not really sustainable.

Juliette : 29:57

It sounds kind of like the government is eating itself to survive, but like growing at the same, I don't even know how to explain it. This is what I was thinking about. Um, so something that is well directly related that I'm, I've always been a little confused about and I kind of have a better handle on it now, but even my friends, when I talked to them about this sort of stuff, they seem pretty confused is so it's good when other countries have our debt or is it bad? What does that mean? Really?

Brian Riedl: 30:30

Um, w the, the positive side of other countries lending to us is that it doesn't raise interest rates as much. Um, cause he, he, the, the way to think about interest rates is if you believe that there's a certain pool of savings in America, uh, and these savings that get put in the banks and, and everywhere else are available for people to lend to people, to, to borrow for home loans and business loans and car loans and student loans. Well, if the government is instead borrowing all that money, there's less money left over, uh, to go to home loans for a business to borrow, to invest for students. There's just less money to invest in things that make the economy grow. And the result of that too, is interest rates go up because as the demand for money rises, the price of money rises. So the interest rate rises and you have less money, um, uh, for Americans to invest. The good thing about foreign borrowing is if you're borrowing the money from China, then you're leaving a lot of the domestic savings to finance, to keep interest rates low and to finance those business loans that are so important and those home loans. So in that way, you know, you, you kind of want foreigners to kind of help you out a little bit so that you, you have enough domestic savings left, you know, but that there are dangers in that what that means is as national income rises, the more of our, of our, of our assets are owned by foreign countries. The more of the profits they're going to get moving forward. You know, you have to pay them all back. They end up getting a higher proportion of our, of our national income every year because you're having to pay them back. Additionally, you're kind of at the whim of other countries now, uh, you know, if, if you're that dependent on, on, on say China, China now has a lot of power over your economy, they can decide to borrow a lot more. They can decide to dump your debt. They could do it for economic reasons. They can do it to mess with your economy. They can do it cause they're mad at you. And so you, you kind of become a little bit dependent, more dependent on foreign countries than you're necessarily, uh, comfortable with, you know, with China. There's a lot of, you know, there always been a lot of talk that we need to get tough on China. We need to get tough on China. Well, if you get to the point where China is, once again, owning 20 or 30% of our debts, you kind of gotta be a little careful or they might dump all of your debts or do something like that all at the same time and mess with your economy. So there is a sovereignty issue that kind of balances out the economic positive of not having to not having the government soak up all your domestic savings and leaving nothing left for anyone else to invest with.

Juliette : 33:13

That makes sense. So how much interest are we paying now and what share of our budget does that interest represent

Brian Riedl: 33:22

Interest rates are low right now. Um, we're spending about 250 or$300 billion a year on interest that is about 8% of the budget. Um, we have been very lucky in that the average interest rate, the government pays has fallen to 2%. The average interest rate on our entire, our entire data is about 2%. So it's about 300,$350 billion, which makes it about 8% of the budget. And that's not fatal yet. It's still too much in that that's still 200 or$300 billion. I shouldn't say that you're having to tax people and spend where you're getting nothing in return. Here's the danger though, as the debt gets bigger and bigger and bigger, even if interest rates remain low, they're going to become a bigger part of the budget. You know, according to the congressional budget office in the next 30 years, even if interest rates remain below historical averages, 30 years from now, interest is going to be 8% of the economy which comes to about, I believe 44% of all your tax dollars will go to paying interest on the debt. And the next 30 years, 44% of your tax dollars will go to interest. It will become the biggest part of the budget. And it's not because interest rates are rising it's because when the debt goes up to 120,$130 trillion, even low interest rates are going to strangle you and anyone with a student loan can tell ya, you know, if you owe$200,000, even low interest rates, aren't going to save you too much. Or if you buy a house or you can buy a$3 million house, even if you get a good interest rate, it's still a pretty big mortgage. So in 30 years, it's going to be 44% of our taxes. The scary thing is I just said, that's the rosy scenario in which interest rates remain low. The reality is any time someone talks about, well, we can borrow more because interest rates are low. How do you know they're going to stay low? The federal government relies on short-term borrowing. The average debt that we hold is about 60 months in maturity, which means if interest rates rise, the whole debt rolls over into the higher interest rates. So if interest rates start returning back up to normal levels, the whole debt is going to get more expensive. And I ran some numbers on this using some congressional budget office data. And what I determined was that for every point interest rates rise above the baseline estimate. It will cost$30 trillion in additional interest. Over 30 years. That's a one percentage point of interest rates exceed the baseline. By one percentage point, you have to add$30 trillion in interest over 30 years. What that means is that by 2050 interest, isn't 40, or it isn't that 44% of your taxes are paying interest on the debt. At that point, 67% of your taxes are paying interest on the debt. And if interest rates rise two points at that point about 90% of your taxes are going to interest on the debt. So it doesn't even take much even the small interest rate increases with a debt that big mean that essentially all your taxes are just going to be paying interest in 30 years. And anything else government is going to want to pay for. It's all going to have to be funded by borrowing because all, all your tax dollars went to interest. And of course, borrowing more just makes the problem even worse. So that's, that's why when people say today, well, interest rates are low. Who cares unless you can promise me that they're going to stay at one or 2% forever. We're in deep trouble.

Juliette : 37:25

Yeah. And I feel like it's pretty rational to think, or to assume, I guess that they are going to rise because, you know, that's just what happens. Like I would, that's so scary. And I mean, looking at some of your charts, there's one that shows that in 2050, our debt, as a share of GDP will be 195%. That's, that's crazy. That's almost twice the size of our entire economy. And today it's almost a hundred percent it's 98%, which is, Oh, I don't even know so big. And then in 2007 it was only 35%. And so the debt is exploding and it's happening faster and faster, which then you're thinking about how that, okay, well, you're going to be spending a lot on interest on the debt, but then you're also have to take into consideration the fact that the debt is going to keep growing, because we're going to keep spending more and more, especially if these programs are on autopilot. So I don't know. What does that mean for the ordinary person?

Brian Riedl: 38:36

Well, first let me say that 195% of GDP in 30 years, that's the rosy scenario. That's the scenario bef uh, before most of the Corona virus before most of the pandemic that's scenario assumes that Congress never creates another additional spending program, never expands and entitled, never cuts taxes. Again, in fact, it assumes the current tax cuts are from 2017 expire and it also assumes no war. It assumes that interest rates stay low forever. So 109 95% of GDP is the rosiest scenario possible. It's probably going to be significantly high. How this will affect us is, well, first off the congressional budget office says that the, the, the slower economic growth resulting from this debt and the slower economic growth resulting from having to pay the government back money that would otherwise have gone to investment to make our economy grow. So it means there'll be less investment, less productivity, and a smaller economy that will, um, reduce, uh, that will lost$6,300 in income per person, compared to what otherwise would be in 2050. So just however you think incomes are going to grow between now and 2050 adjusted for inflation, it'll be$6,300 per person, less just from the, the slower economic growth from this debt. But there's more to it than that. There's the fact that all your taxes are going to interest, which means this assumes that there's going to be a lot less money for tax cuts. There's going to be less money for social security and Medicare. There's going to be less money for social spending that people want. There's, you know, if we go to war, there's going to be less money for defense. So you're going to also have a government. That's just doing fewer things that people want or cutting your taxes less than you want. Next they're simply the process, um, that this is unsustainable and it could cause an economic crash. You know, the problem is when the debt gets bigger and bigger and bigger at a certain point, the bond market and the people who are lending money to Washington are going to say, wait a minute, this that's out of control. I don't really trust that Washington's going to have the money to pay for all of this. And then they really hesitating to lend money to Washington. In response, Washington has to raise the interest rate. They have to offer a higher interest in order to compensate investors for their fears. And, uh, that Washington is good for it. What that means is you get into a vicious cycle where con we have to raise interest rates in order to persuade people to lend money, but that just makes the debt bigger, which makes people even more nervous, which means you have to raise interest rates even more to induce them, which makes the debt bigger. Again, that creates a debt spiral. There's a lot of concern among economists that at a certain point. And we don't know what if it's at 130% of GDP, 150 200, 250% of GDP. We don't know what that point is because a lot of it is really just market psychology, but at a certain point, investors are going to panic and then you're going to get a debt spiral. And that's when things get ugly, because once you are in a debt spiral, it is virtually impossible to get out of it. Because again, the higher, the more you have to borrow to get out of the debt spiral for the higher interest rates, you just make the debt even bigger, which forces you to raise interest rates even higher. At that point, you can try to run yourself out of the economy with the printing press, but that just causes inflation, which also raises interest rates even higher. Um, at that point, what you're left with is either raising taxes through the roof or cutting, spending to the bone in order to make all these debt payments, uh, in a sustainable way. And so the best way to get out of a debt crisis is not to enter one. And that's my concern right now is, is there's a lot of people who say, well, let's just keep borrowing. And if a debt crisis happens, we'll deal with it. Then, you know, let's keep borrowing until we find out that we've borrowed too much. Well, by the time you've borrowed too much, you're already in a debt spiral. You can't really extricate yourself out of it very easily. So my, my preference is not to risk a debt spiral to begin with.

Juliette : 43:06

Yeah, that sounds very much preferable. You're kind of sending me into a little panic thinking about all of this. I would not want to be an investor. That's so scary. Um, so what do you say to people who, who, so some people tell me this and I'm wondering what you would say. So they say that we could pay down a lot of our debt and kind of close the deficit and all of that. If the government plays higher taxes on the rich. So where do you say

Brian Riedl: 43:36

That's, that's very common, uh, of an argument. That's Bernie, Bernie Sanders ran, ran a campaign proposing that the reality of it, I'm not gonna S I'm not gonna sit here and say that no taxes can be raised on the rich, you know, that, that the top tech marginal income tax rate of 37% cannot go up by a penny or that the capital gains tax rate can't go up at all. The reality though, is you could never close the gap with taxes on the rich it's, it's the amount of revenue that they would raise. It's almost mathematically impossible for it. Let me, let me give an example, the deficit over the next 10 years, let's just say, even after the pandemic, we're going to have deficits of about 6% of GDP. If you took every penny from millionaires in America, you would add 4% of GDP. You could literally take every penny, they earn an income. You wouldn't even balance the budget. You could let's start at the threshold at five, at 500,000. If the government seized every remaining dollar of income from every American earning over$500,000 a year, it would raise five and a half percent of GDP. In other words, you wouldn't even balance the budget. If you took a hundred percent of the income over over$500,000 a year, it is, it is impossible. You know, just to throw out some additional numbers. Um, let's say, you know, again, we're looking at a debt of about six or 7% of GDP. If you wanted to balance the budget of six or 7% of GDP, one option would be, we're actually able to let me back up and say it, let's say you doubled the top two tax rates, 35 and 37% up to 70 to 74. The percent you would pay would balance one fifth of the budget. Oh, wow. Let's say you lifted the, the payroll cap for social security and said, you're going to pay social security tax is not just up to 144,000, but all the way up that would close one 10th of the deficits and only one third of the social security. Um, let's say you raised the corporate tax rate by 20 points. Again, one 10th of the deficits that would close. Keep in mind, I'm putting these in terms of how much of the deficit you'd close. I'm not even talking about paying for what the Democrats are proposing, which is, you know, Biden wants an additional 11 trillion over the decade. Elizabeth Warren wanted 40 trillion over the decade. Bernie Sanders wanted$97 trillion over the decade. What I am trying to say is you couldn't even balance the budget on a hundred percent tax rates on the rich, much less pay for the tens of trillions of dollars. There there are proposing. If you actually want to legitimately raise enough revenue, you are going to have to do what Europe does. Europe doesn't do it by taxing the rich. They do it by taxing the middle-class Europe has payroll taxes of 30, 40%. They have value added taxes, which are national sales taxes of up to 27% on the middle class, mathematically speaking. That's what you need. Um, you need to raise the payroll tax 10, 20, 30%. You're going to need about a 30% national sales tax. That's the only way to pay for some of the stuff that, that that's out there. And like I said, this is just a, it's the budget before you even talked about the new spending. So I'm not going to say you can't tax the rich. I'm not going to say that you can't raise the top rate from 37% to 42% or whatever. What I am saying, however, is the amount of money you're going to raise is a rounding error compared to what you need longterm.

Juliette : 47:48

That, again, sounds like another nightmare, 20% plus what? So in France, if you get, if you look at a receipt, they hide, they're not allowed to show the amount that is tax in the price. And so when you get your receipt, it shows it as a total, but you don't see how much is sales tax. But if you do the math based on the price you see in the store, you can figure out that it's like 22%, at least last time I was there, which is absolutely insane. The fact that they have to go so far as to hide it, because that's how ugly of the reality that it is. But also I was looking at some work by, uh, Thomas, so a little while ago, and I don't even remember exactly what it was, but he was talking about how, um, how, when you raise taxes on the rich, you actually make less in revenue because they find ways to evade and kind of put it in stocks or something like that instead of income. So I don't know, just having that in mind kind of makes this whole thing seem highly improbable of even the fact that we need close to like a hundred percent, more than a hundred percent taxes of like income and stuff to even close that gap or get close to it. That is wild and not going to happen so that I don't even know. But, um, no, no, no, you go,

Brian Riedl: 49:23

Well, I'm just going to say mean that all these numbers, I was throwing out the assumed you could actually raise the revenue. Like when I talk about a hundred percent taxes, my numbers assume people keep working and paying the taxes at a hundred percent rate. The reality is, of course, if you set a tax rate at 90 or a hundred percent, you're going to raise zero. You know, and even in the past, a lot of taxes on the rich have raised a lot less money than people guessed. They would because money is mobile money, money. You know, there's an old statement that, uh, income goes where it's loved. It, doesn't go where it's going to be punished. And it is pretty easy, especially for rich people to avoid taxes. Um, there is always a place you can move the money to, and it kind of becomes a, an attempt to chase it. And at the end of the day, too, you start to have incentives. If you're going to have, if you're going to raise taxes to 70, 80%, people are just going to stop working at a certain point. You know, Ronald Reagan used to tell a story that when he was an actor in Hollywood, in the 1940s, most Hollywood actors only did two movies a year. Almost none of them did three movies a year. And the reason was given the amount that they made per movie. The third movie you do would push you into the 91% marginal tax bracket, and no one wanted to pay 91%. And so as a result, they just stopped doing. They just, they would stop at two movies. And the interesting thing about those back those days back in the 1950s and the 1950s, the top tax rate was 91%. And we actually raised less revenue as a percentage of GDP then than we do today with the top rate at 37%, we, we raise more on at 37% today than we did with 91% back then as a percentage of the economy, because they would just stop working as a matter of fact, in 1960, when we had the 91% tax rate, only eight taxpayers in America reported income and the 91% tax bracket, just eight taxpayers in America. So the 91% tax rate literally raised nearly zero revenue. So that's, you know, not only, not only is it mathematically impossible, but you start to look at the economics and incentives and realize you're not going to make that much money. Once you raise taxes beyond a certain level,

Juliette : 51:47

And kind of going back to the Biden spending plan, what is the most striking thing about the plan and how, how do you expect that to kind of change the charts and the future of the United States?

Brian Riedl: 52:04

The thing that surprises me about the Biden plans that size, um, when, when, when Obama was right, when, when Kerry ran for president in 2004, he proposed$1 trillion over 10 years in new spending, um, or sorry, he proposed 2 trillion. Uh, and then in 2008, Obama proposed 1 trillion over the decade in 2016, Hillary Clinton proposed 2 trillion over the decade by just proposed 11 trillion. And people say, well, he's the moderate because Elizabeth Warren was proposing 40 trillion and Bernie Sanders was proposing 97 trillion you're right. Compared to that, it's a moderate, but it's$11 trillion compared to one or two that tells you that the democratic party has moved so far to the left. That 11 trillion is moderate, even compared to the one or$2 trillion of previous candidates. And additionally, it's even more shocking that he's proposing$11 trillion because that's on top of a$13 trillion baseline deficit over the next 10 years. I mean, he is inheriting just an autopilot,$13 trillion in projected borrowing over the next decade. We've never borrowed$13 trillion in a decade before. And on top of that, you know, most candidates would be running on deficit reduction plan. He wants to add 11 trillion to the 13 trillion. So if Biden got his way, we would be running$24 trillion in deficits over the next 10 years. It's completely fantasy land. Like, I mean, it's so divorced from reality. It's so irresponsible even compared to the democratic plans, uh, over the past 20 years, when you know, they were pretty much, you know, they at least gave lip service to the idea of paying for your new proposals. Now it's just, you know, forget 13 trillion in borrowing, let's borrow 24 trillion.

Juliette : 54:01

How do you think this will go over in Congress?

Brian Riedl: 54:06

Uh, well, Democrats seem to love it. Uh, Democrats have decided deficits don't matter and we are gonna, and, and nothing has to be paid for, and we can spend anything we want. Republicans are, of course, now that there's a democratic president. Now Republicans have rediscovered deficits. So Republicans, to the extent they have the power are going to try to block a lot of this. Um, and, and we're seeing that right now with the latest bite and stimulus. I realistically, I think Biden might be able to get some stimulus through, but a lot of his other ideas, like a$2 trillion green new deal and infrastructure plan,$2 trillion for healthcare trillion dollars to expand social security, one and a half trillion dollars for K-12 and college education. I don't think those have a chance. Um, I just think Democrats, we will, you need unanimous support to pass those. And I just think the Joe mansions of the world are not going to be on board for those, the stimulus may get through because it's a recession, the rest of it. I just don't think Congress is there at this point.

Juliette : 55:13

That makes sense. Okay. Final question. Before I let you go, what is one thing you believed at one time in your life that you later changed your position on and why?

Brian Riedl: 55:24

So I'm going to kind of cheat by going back similar to my first answer earlier, say overall, I I'm just generally less ideological than I used to be. I have my policy opinions, but the more expertise I gather, the more I see that both sides make points. And the more I default to going where the data and the information goes, you know, ideology is, can be very clean and convenient and it's a very useful guide, but it's often insufficient, I think, to persuade people. Um, one example of an issue that I really did change my mind on, I think is, is guns. Uh, when I was younger, when I was in my twenties, you know, I was a second amendment absolutist, even though I personally don't like guns, I've never shot a gun in my life. But as a libertarian, I was a second amendment Buddhist and said, guns are a human, right. There are a property rights. I don't care if you want to tank government does not have the right to disarm its people. Um, and then in 2012 you had the Sandy hook shooting where somebody, uh, a mentally disturbed 20 year old kid walked into an elementary school, walked into a classroom and shot 27 year olds, 27 year old children. And from that point on, I said the hell with your gun rights. I don't, I don't care about your individual right? At this point, I, it is ridiculous that we can live in a country where a 20 year old kid can buy a gun, walk into a school and just wipe out a class, a first graders. So now my take on guns is I'm still skeptical of most gun control policies, because I think they don't work. And there have been studies that have shown that most gun control policies would not have actually prevented most mass shootings, but I no longer have an ideological attachment to the second amendment. I no longer say I don't care if the policy works or not. You have an inalienable, right. And I don't care how many people die. Now, my take is if somebody could actually show me a gun control policy that worked, I would be totally open to it. I would have no ideological complaint with it. I would say if it works, it works. But again, more broadly speaking, I'm, I'm less ideological and more willing to just follow the data, even if it sometimes conflicts with, with some of my initial biases.

Juliette : 57:54

That makes sense. I, if there was one that worked, I could, I could see that. That's very interesting. Thank you so much.

Brian Riedl: 58:02

And I still don't see many that work though. I still, whenever I studied gun control, I feel out of the plan, the policies out there, and I say, well, that'll never work. Criminals can get around that easily. And your justice arming the law abiding people, you know, but, but hypothetically, you know, if it works, if it works, sign me up.

Juliette : 58:21

Yeah. That's that, that's a good take on it. I like that. Well, so that's all the time we have today. I'd like to thank Brian once again for his time and insight, I would also like to thank everybody who listened, subscribes and shares the great antidote podcast. If you'd like to be on the podcast or have a guest in mind, please feel free to reach out to me@thegreatantidoteatthecgo.org. Thank you for listening. And thank you, Brian so much for sharing. It's been so insightful and I've learned so much.

Brian Riedl: 58:52

Thank you so much, Juliet. I appreciate it.