Understanding Debt, Deficits, and Fiscal Challenges

You probably already know that the national debt is bigger than our whole economy. But relax, because things can always get worse! And they will, regardless of whether Biden or Trump gets elected in the fall. Each has a proven track record of spending like a drunken sailor and most projections show that debt will grow to between 181 percent and 340 percent of GDP over the next few decades. Reason's Nick Gillespie discussed all of this and more with Brian Riedl, a budget expert at the Manhattan Institute. Riedl explains why massive and growing debt is really bad, why reducing it is really hard but really important, and why young people should be really pissed.

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Watch the full video here and find a condensed transcript below.

Gillespie: We know who the candidates are going to be. It's going to be Biden vs. Trump. They both have track records that you have been tracking as a policy analyst at the Manhattan Institute talking about debt and deficits. You, last fall, released a big book of charts and doom and deficits. The Congressional Budget Office [CBO] is projecting $119 trillion worth of deficits over the next 30 years. And that's optimistic. 

You note that we have gone from the national debt being $3 trillion in the year 2000 to $27 trillion in the past quarter century. According to the CBO calculations, depending on what happens, debt will be between 181 percent and 340 percent of gross domestic product [GDP] in another 30 years. So we got a lot of debt floating around here. Why are debt and deficits bad?

Riedl: Modest and sustainable deficits are not bad. It's like any sort of borrowing. It's OK to go into debt for your mortgage. It's OK to borrow for school. I am not a balanced budget absolutist. 

Every year's deficit adds up to the national debt. Modest borrowing is not bad. It doesn't raise interest rates very much. It doesn't cost taxpayers much. The problem is debt gets out of control when it grows faster than the economy forever. It's just like a family. If your debt is growing faster than your income forever, it's not sustainable. And for most of the period after World War II, the debt was about 40 percent of GDP, which most economists considered sustainable. It didn't raise interest rates very high, and the interest costs as a share of federal spending were manageable. 

The problem is now we've gone from 40 percent to 100 percent, and we're going much higher. If that happens, the dangers are, in a basic macroeconomic angle, higher interest rates. Because the more savings the government borrows, the less savings are available for everyone else to borrow. And that'll bid up interest rates and reduce investment. But what becomes even a bigger issue is how Washington's even going to be able to borrow that much money. Is there enough savings for Washington to even lend? And if they are able to borrow it, are the interest costs going to be so high that we could have a situation where 50 percent or 80 percent of your federal taxes are just paying interest on the debt rather than getting anything of value?

Gillespie: What about the idea that long, persistent, and growing national debt decreases long term economic growth?

Riedl: Absolutely. Again, modest debt doesn't make much of a difference. But, if you think of it, there is a certain pool of savings in America and in the global economy. That savings usually would be borrowed for home loans, car loans, business loans, investment to grow the economy. But the more the government borrows this money, the more they soak up the savings. And instead of spending on investment, they spend it on consumption. They're going to give it to seniors to consume. 

There's going to be fewer money for home loans, car loans, student loans, and business loans. Ultimately, because investment is the lifeblood that drives the economy, when you starve the economy of investment dollars, you're going to get less business investment. It's going to create fewer jobs. There's going to be lower wages and lower growth. And you could argue we've already seen this. Japan has a debt of 200 percent of GDP. Their economy has been a basket case for 30 years.

Gillespie: Both the federal government and the Federal Reserve System are ostensibly independent. They've just said, "OK, well, we're just going to keep printing money. We're going to create money out of thin air." Is that also unsustainable?

Riedl: Yes. In fact, of the growth in debt over the past decade or so, about $4 trillion to $5 trillion of it has essentially been funded by the printing press. The Federal Reserve's holding of Treasury bills, which they essentially buy with printed money, has gone up $4 trillion to $5 trillion. The Fed is actually looking to unload that $4 trillion to $5 trillion. But if they didn't, let's say they keep printing money, you're just going to get hyperinflation. 

The [Modern Monetary Theory] MMT crowd says you can always just print more money and the debt goes away. You can't expand the money supply by tens of trillions of dollars without creating significant inflation. My worry is long term. There's going to be a lot of pressure in Congress to go that direction. [It's] what's called fiscal dominance, when interest rates are set more to keep borrowing costs low than to stabilize the economy. That's my worry.

Gillespie: What is driving the debt? What is driving persistent deficits?

Riedl: The debt up until now has been driven by all sorts of factors. When you go from $3 trillion to $27 trillion, there's going to be a lot of blame to go around. We've had Social Security and Medicare costs rise. There have been wars, tax cuts, just yearly runaway spending. The pandemic cost about $5 trillion. But moving forward from where we are now, there's one answer: Social Security and Medicare. Over the next 30 years, the Social Security and Medicare systems will run a shortfall of a $116 trillion.

Gillespie: As we mentioned, we're looking over the next 30 years at $119 trillion in total deficits. It's all Social Security and Medicare.

Riedl: The long term budget is roughly balanced if you take out Social Security and Medicare deficits. We do not really have a budget problem. We have a Social Security and Medicare problem.

Gillespie: In your book you mention that there are specific episodes where things cost a lot of money. It's fascinating. After 9/11, there wasn't the type of spike there was after the 2008 financial crisis. There was a massive blowout of debt finance spending. And then there was, of course, COVID. Broadly speaking from 1960 to 2022, spending was 20.4 percent of GDP. 

So the government is spending 20.4 percent of the equivalent to the economy; revenue average over that same time was 17.4 percent. So that explains where we're at now. But you're saying going forward, it's going to get worse. And it's almost all because of old age entitlement.

Riedl: Right. You mentioned revenue has averaged 17.4 percent of the economy since 1960. It's projected to rise above that depending on whether or not we extend the 2017 tax cuts. Revenues are going to be 18 percent or 19 percent of the economy over the next 30 years. That's above average. 

The problem is spending is going to jump all the way to 30 percent of the economy under the rosiest scenarios that the CBO can come up with. So people can have their own value judgments, like, "Well, I think revenues are lower than they should be." But if you're just looking at the moving variable driving deficits, it is 100 percent above average spending. There is no below average revenues projected for the next 30 years. We're going to have the highest sustained revenues in American history under the baseline. But it can't keep up with spending jumping 10 percent of GDP.

Gillespie: One of the things that you talk about in your book of charts—you have a piece  recently at The Dispatch that talked about this—is that this is not a Republican or Democratic issue. It is both parties. How do Democrats tend to spend money? And then how do Republicans tend to spend money?

Riedl: Democrats like to do big bursts when they get a new presidency. For instance, Barack Obama came in, spent trillions of dollars on stimulus, then did Obamacare. The next year, you get this big burst of activity. And then it was similar with Joe Biden. Biden comes in, spends $4.8 trillion in new legislation in 20 months, which is remarkable.

Gillespie: And as remarkable as that is, he came in promising $11 trillion in new spending. So he got halfway there.

Riedl: He got halfway there in 20 months. And, who knows, had the Democrats had a good election year in Congress, they could have gone further. Democrats not only do these bursts, but Democrats also are the defenders of the status quo with entitlement costs. The quiet driver of deficits is Social Security and health care costs rising 6 percent or 7 percent a year. And Democrats are the adamant party that says we can never touch that. So even if they weren't passing their bills, that Social Security and Medicare 6 percent or 7 percent a year buries us.

Gillespie: So what about Republicans? How do they jack up spending?

Riedl: Republicans talk a good game. But if you take a look at 2017 and 2018, Republicans had the trifecta. They had the House, the Senate, and the presidency. They didn't reform entitlements at all. There was a little bit of push to repeal Obamacare that failed. There was no Social Security reform, no Medicare reform, no Medicaid reform. Instead, they came in, cut taxes, and busted the discretionary spending caps with a 13 percent hike in one year. 

When Republicans get the trifecta, when Republicans control the government, the first thing they want to do is reward their constituents. They're not thinking in terms of deficit reduction. They're thinking in terms of handing out benefits to constituents, whether it's big defense hikes, big discretionary hikes, or tax cuts. You don't get the fiscal spinach from Republicans when they control everything. They consider it time to party. Republicans need to be judged by their actions, not their rhetoric. You listen to Republicans give speeches, "We're going to balance the budget. We're going to reduce wasteful spending, and we're going to cut waste, fraud, and abuse." It's all empty rhetoric. If you look at Republicans, not only is their past record terrible, but their current proposals to reduce the deficit don't even reduce the deficit. Every Republican presidential candidate has an economic plan that increases deficits, every one of them.

The House Budget Committee released a budget blueprint that was entirely gimmicks. The Freedom Caucus, for all their talk, has released no actual blueprint to how to balance the budget. In fact, Republicans take 75 percent of spending off the table. They say, "We're not going to touch Social Security, Medicare, defense, veterans, and interest." They immediately take 75 percent off the table. So it's hard to trust a party that cuts taxes, increases spending, and then moving forward takes 75 percent of the spending off the table and won't tell us where they'd cut the other 25 percent. I think you need to judge them by their actions, not their empty balance the budget rhetoric.

Gillespie: Are there Democrats who are more serious about fiscal responsibility?

Riedl: There are some. What are the modern equivalent of blue dog democrats? The blue dogs were wiped out under Obama. There is a quiet group of Democrats, about two or three dozen of them in the House, that are trying to work with Republicans kind of under the table on budget process reform, Social Security and Medicare reform. They're very quiet about it. 

In the Senate, you have [Sens.] Joe Manchin [(R–W.Va.)], Michael Bennet [(D–Colo.)], and Mark Warner [(D–Va.)]. There are some Democrats who at least talk a better game than even Republicans. But there hasn't been, of course, much action. The Democrats who are reasonable on this issue are unfortunately overshadowed by the loud progressives who cost their party any credibility when you have [Sen. Elizabeth] Warren [(D–Mass.)], [Sen. Bernie] Sanders [(I-Vt.)] and [Rep. Alexandria Ocasio-Cortez (D–N.Y.)] demanding $40 trillion in spending.

Gillespie: How important is the presidency when it comes to increases or decreases in spending? 

Riedl: The president cannot cut spending himself or herself. The president does not have the full power of the purse. And that's why I think sometimes presidents get too much blame when spending rises. When they tried to cut spending, Congress wouldn't cut it. That being said, you can't cut spending without the president being involved. The president has to sign the bills. And the president also has the bully pulpit to frame the issue. If presidents would actually invest political capital in spending cuts, they can create the framework in order to help us get there. They can't do it themselves. But again, the problem is we haven't really had a serious fiscal conservative president in memory. Not only are they not a help, they're usually a barrier to spending cuts.

Gillespie: The budgeting process that comes out of Congress was reformed in the mid-'70s or early '70s. People in Congress don't follow it. Is that part of the problem?

Riedl: The 1974 Budget Act has been neutered into oblivion. One way to think about how it works is every year Congress is supposed to pass a budget. They never do.

Gillespie: And they're supposed to pass a budget before that budget year starts.

Riedl: Right, they're supposed to pass the budget in March for the following October 1. 

Gillespie: How many times does that happen?

Riedl: Rarely. And then after that, you're supposed to pass 12 appropriations bills that actually fund the programs. The first problem is the appropriations bills only fund discretionary spending, which is 30 percent of the government. The budget process takes 70 percent of spending on autopilot out of the process. We're talking Social Security, Medicare, anti-poverty programs, Medicaid, farm subsidies. They're not even part of the budget process. They're just set aside on permanent autopilot. 

Congress spends all year tearing itself apart over the remaining 30 percent that's discretionary spending. And then you have situations like now where we're almost six months into the next fiscal year, and we still don't have discretionary appropriations for this year. We're still just running last year's numbers on autopilot. So the '74 Budget Act simply doesn't work anymore. If its goal is to help Congress set priorities, make tradeoffs, and shape a holistic view of the budget, it's nonfunctional.

Gillespie: What gave rise to the '74 Budget Act? And does that have any lessons for how we might reform things today?

Riedl: The '74 Budget Act resulted primarily from Nixon trying to impound money. There was a huge constitutional crisis under Nixon, where he was trying to impound money that had been already appropriated by Congress. Impoundment means the spending has already been signed into law and the president says, as chief executive, I'm not spending the money. 

Gillespie: What was he trying to not spend money on?

Riedl: That I do not know right now. But the Supreme Court essentially shot down impoundment and said, if the law says to spend it, the president doesn't have a choice. That's why the Budget Act was called the Budget and Impoundment Act. But also what was happening back then is the budget was expanding. We were just past the Great Society. You had huge new government programs and a totally unwieldy process. It was just kind of all funded on an ad hoc basis. So the combination of the Great Society and impoundment drove the '74 Budget Act.

 

Gillespie: Is there anything that might spark a reform of the budgeting process?

Riedl: The challenge right now is everybody in Congress knows the process is broken. The debt limit, the government shutdowns, that often motivates members to say that this is no way to run a country. We keep having debt limit crises. We keep having government shutdown crises. The problem with budget reform that we've run into is there have been a lot of commissions in Congress and a lot of working groups and a lot of special blue ribbon lawmaker commissions. Nearly every reform they come up with dies because somebody's ox gets gored. Some committee is going to lose power, whether it's that the Appropriations Committee is going to lose to the Budget Committee or that the Budget Committee is going to have to give power to Appropriations, or the Ways and Means [Committee] is going to lose some authority over some of their entitlement programs. 

Budget process starts out idealistic and good government, and it ends up devolving into a turf war between members over who can control what, and the whole system falls apart. One way of doing it, potentially, is enact reforms that don't go into effect for five, seven, eight years so that members who are voting on it don't have to worry that they won't be the committee chairman anymore.

Gillespie: What's the role then of public opinion? In your theory of social change, does it come from people protesting bad budget processing and things like that?

Riedl: You know, I have a sign up in my office. I believe it's a quote that says, "Do not think that public opinion doesn't matter in the long run. It's the only thing that does matter." And ultimately, I have worked 20 years trying to adjust public opinion because when I worked on the Hill, I worked for six years in the Senate as chief economist of Sen. Rob Portman [(R–Ohio]). And when you're working in Congress and you talk to lawmakers, they will tell you the same thing. We know all these problems. We know it's unsustainable. But if I try to do anything about it, the voters will kill me. 

So one of the reasons I left the Senate was I'm like, "OK, if everything comes down to public opinion because lawmakers are just weather vanes, we have to fix public opinion." The challenge addressing public opinion on deficits is nobody believes it and nobody feels it. And they've been hearing concerns of deficits for a long time. But they don't feel it as much. I mean, there's been a little bit with interest rates. My fear is that we're not going to get real budget reform until the pain starts to hit us hard enough that people feel it.

Gillespie: And that will be inflation. 

Riedl: Inflation, rising interest rates, the bond market cutting us off, stock markets falling, and the danger, of course, is by the time you've gotten to that point, it's too late to fix it in any way that's not totally brutal. But I have spent 25 years trying to motivate people, even looking for a Ross Perot type or something to motivate people. 

One of the reasons it's harder to get people motivated on the deficit now than, say, in the 1990s is in the 1990s, the deficit was smaller, and you could fix it by reforming programs that didn't matter as much. Today, the deficit is $2 trillion and driven almost entirely by Social Security and Medicare. It's really hard to motivate people to address the deficit when they realize that's the ox that's going to be gored. It's going to be Social Security, Medicare, and middle-class taxes. You're not going to be able to tweak your way to this like you did in the 1990s.

Gillespie: Before we go into what is to be done—and I want to talk about some of the proposals that you've articulated over the years—let's talk a little bit about Trump and Biden. 

By the time George W. Bush left office, he ended up adding $10.3 trillion in deficits, beyond what was expected. Obama added $4.6 trillion in a 10-year budget window. Trump in four years had $3.9 trillion extra budget deficits that he added to the baseline. Biden, I guess, in his first 20 months, because it's still going on, added $5 trillion. So does that tell us anything essential about these people or the parties they represent?

Riedl: You don't just want to look at what the deficit was when they arrived and when they left because you might inherit a budget where everything is on autopilot getting better or everything's on autopilot getting worse. But you can further divide up these changes between legislation vs. the economy. And if you do that, Trump comes out a lot worse. Trump actually added $7.8 trillion in deficits, but he was able to save $3.9 trillion through faster economic growth, which cut the impact in half.

Gillespie: Obama came in with a terrible economy, and I think we would both agree that the actions that came after him slowed down the recovery. But by the time Trump came into office, things were picking up.

Riedl: Sure, exactly. Especially in those first three years, the economy overperformed. 

Gillespie: And Biden also inherited a bad economy.

Riedl: So if you go by just legislation and you further take out the economy, Bush's legislation added $7 trillion in borrowing, Obama $5 trillion in borrowing, and Trump nearly $8 trillion in just four years. So what you see is that Bush and Trump added more than Obama, and much of Obama's debt was actually extending the Bush tax cuts. But Biden really came in all guns blazing. Like I said, he added $4.8 trillion in 20 months. He added as much debt in 20 months legislatively as Obama did in eight years. And so I think things are getting worse. That's why I'm concerned about a Trump-Biden rematch, because you have two presidents with two of the worst fiscal records of the past 100 years.

Gillespie: What is the option beyond despair when we look at the 2024 election? 

Riedl: I think one hope you can have on spending in deficits is gridlock. I think if you get a full Republican government or a full Democratic government, you're going to see massive deficits. If you get gridlock, you might have some hope that even if neither side cares about the deficit, they don't want to increase the deficit the other way. Republicans don't want spending hikes. Democrats don't want tax cuts. 

But other than that, the real danger coming up after this election is we have an epic fiscal cliff coming next year. Next year, the tax cuts expire and are up for renewal. That's about $4 trillion over 10 years. The recent Obamacare expansion that Biden signed expires. The discretionary spending caps expire. The infrastructure bill expires, and we hit the debt limit. So it's going to be interesting to see whether we have a unified or divided government in a situation where we have $6 trillion or $7 trillion in renewals coming, and whether or not they're going to try to constrain or blow this out of the water.

Gillespie: Talk a bit about how gridlock has operated in the 21st century. Because Bush came in and ultimately, by 2004, he had a united government. But in 2006, he lost control of the House and the spending slowed down toward the end of his term. Obama, as we discussed, basically elected a Republican Congress. There was a massive increase and then a kind of flatlining. It didn't quite work that way with Trump, although he also managed to fracture control of Congress. But is gridlock viable and is it good? 

Riedl: Historically, gridlock is the only thing that has reduced spending and deficits. I can go a little earlier to the 1990s when President [Bill] Clinton came in and spent his first two years trying to nationalize health care. It was a disaster. Newt Gingrich comes in 1994, and all of the sudden, the entire debate is over how to balance the budget. And four years later, the budget was balanced. Clinton was dragged kicking and screaming by Republicans into this. Similarly, as you mentioned, Obama in the first two years did about $1.5 trillion in stimulus bills plus Obamacare. And it was after Republicans took the House in 2011, the next six years were six of the best years we've had. There was very little expensive legislation passing. It was Boehner and Obama at each other's throats on spending, and you had legitimate deficit reduction. 

It kind of fell apart under Trump after Trump lost in 2020 because you had the pandemic. And also, the Trump Republican Party had changed so much that they were happy to team up with Nancy Pelosi to increase spending, even outside the pandemic. Like I said, even when Republicans had unified government, that version of the Republican Party was happy to make deals with Democrats that said, if you give us a 10 percent hike in defense, we'll give you a 10 percent hike in domestic discretionary spending. So, we went off the rails there. But historically, the GOP has worked really hard to constrain Democratic presidents. That's probably been the top formula for spending restraint: a Republican Congress constraining a Democratic president.

Gillespie: Let's talk about the '90s, because we managed to have balanced budgets for three years in a row? 

Riedl: '98 through '01.

Gillespie: So, what happened there and how did that come about?

Riedl: There's a lot of mythology about the 1990s balanced budgets. There is a certain view that it was a massive amount of fiscal consolidation. The fiscal consolidation was actually pretty minor.

Gillespie: What do you mean by fiscal consolidation?

Riedl: Policies to reduce the deficit. You had President Clinton raise taxes in 1993, but it was only about half a percent of GDP out of a deficit that was about 5 percent of GDP. You had some modest spending restraint. But the real reason the budget got balanced and balanced faster than anybody predicted was, a) the end of the Cold War created a defense dividend. Defense spending absolutely plummeted from about 5 percent or 6 percent of GDP down to 3 percent of GDP. 

At the same time, you had a big revenue bubble in the late '90s when the stock market was on fire. The defense savings and that temporary revenue bubble provided about 90 percent of the deficit reduction in the late '90s. If you want to give Clinton and Gingrich credit, it was basically staying out of the way. They didn't pass big, expensive bills. They didn't do big tax cuts. They didn't do big spending hikes. They stayed out of the way and let the defense savings happen and the revenue bubble happen.

Gillespie: And Gingrich never talked about that partly because he didn't want to be seen as 

cutting defense spending.

Riedl: Right. He didn't mention that. But, you wonder then, why did the budget become unbalanced in 2001? Well, all the savings were due to a revenue bubble and defense cuts, and then you have the revenue bubble burst and then you have 9/11. The revenue bump went away at the same time the defense savings went away. You were suddenly right back to where you were 10 years earlier.

Gillespie: And then you have the added kind of secret future costs by expanding Medicare.

Riedl: And then the Bush spending spree. I think one thing that gets lost on a lot of individuals is when Bush ran on compassionate conservatism in 2000, that theme was a repudiation of Newt Gingrich. Because there was a concern that Republicans were being too aggressive cutting spending, even though they really didn't successfully cut that much.

Gillespie: Yeah, but they cut defense spending.

Riedl: Right, they didn't cut social programs at all. But there were government shutdowns. So Bush was trying to repudiate that. Bush was announcing in 2000, unlike meanspirited Newt Gingrich, I'm compassionate and I'm going to increase spending. And he did. We had no Child Left Behind, farm subsidies, a huge highway bill. Domestic discretionary spending was rising about 8 percent or 9 percent per year in addition to the defense programs. So Bush made it clear at the outset in 2000 that he was going to be a big spender. 

And then 9/11 just kind of put it on the acceleration. Even if there were some fiscal conservatives in the Bush White House, the prioritization of 9/11 defense funding meant that they didn't really didn't have much leeway to play hardball with Democratic spenders. In fact, when you talk to people from the Bush White House, they will tell you, we didn't want to increase discretionary spending as much as we did. But we needed our Homeland Security and defense funding from Democrats, and we had to give them what they wanted.

Budgeting is about tradeoffs. It kind of always reminds me of [the saying], "If we can afford to go to the moon, we can afford to do something else." No, because if you do A, you cannot afford to do B.

Gillespie: In 2021, we were spending $59,188 per household. Currently it's at about $48,000. So it's come down from the peak, but not that far.

Riedl: [It's] still much higher than before the pandemic.

Gillespie: Yeah. And then it's projected in another 10 years or so to be up to $55,000. That kind of figure, does that crystallize for people that government spending is out of control?

Riedl: It does. When I talk to audiences, they can't believe the numbers. I say the government is spending at the peak of the pandemic $59,000 per household and right now about nearly $50,000 per household. And I frame it to audiences [like this]: Imagine what you could do if you were able to keep even a fraction of that money for yourself in the first place without sending it to Washington. And that crystallizes it for people just how big it's gotten. I remember when George H.W. Bush was president, we were spending $27,000 per household. That seemed high. And that's all adjusted for inflation. 

But I think that should crystallize it for people. And it reminds me of a report and Wall Street Journal op-ed by my colleague at the Manhattan Institute, Judge Glock, who showed how much of people's taxes come back to the same household in benefits. I think he was estimating around 20 percent directly come back to the same household and much of the rest of it indirectly comes back to the same household. And it's really kind of dumb to send this money to Washington, have them cut an administrative haircut, and then send it right back to you.

Gillespie: This is current spending, the way the federal budget is split up: 34 percent currently goes to Social Security or Medicare, 19 percent goes to anti-poverty programs, 13 percent to defense, 10 percent to interest, and then there's 23 percent in another category. What are some of those?

Riedl: The other category? Basically education, infrastructure, border security, health research, housing. All that kind of stuff.

Gillespie: This is only going to get bigger, but a third of federal spending is Social Security and Medicare.

Riedl: And that's going to go way up. 

Gillespie: And interest will likely go up if interest rates continue to climb and things like that. In the early '60s, defense spending was close to half of federal spending. And it's not so much anymore because we spend less proportionately on defense, but it's also because we spend so much on everything else.

Riedl: We've gone from one-half to one-eighth of the budget on defense. 

Gillespie: What do we do in order to pay for this type of spending? Can we tax our way out of it?

Riedl: It is mathematically impossible to tax our way out of this. In order to stabilize that long term, you need non-interest savings that gradually rise to about 6 percent of GDP outside of interest. I did a report last year on taxing the rich that showed that, realistically, you can only get about 1 percent of GDP and higher revenues. If you set all upper income taxes at the highest possible rate at the revenue maximizing level, and you adjusted for the economic damage that would create, you get 1 percent to 2 percent of GDP. 

Just to put a finer point on this, if you seized every dollar of every billionaire's wealth in America, their home, their car, their stocks, their vacation houses, their yachts, their businesses, you could fund the government one time for nine months. That's it. If you assessed 100 percent tax rates over $500,000 a year, you still wouldn't balance the budget. So taxing the rich should be on the table because everything needs to be on the table, but when I hear lawmakers say all we have to do is tax the rich and it'll pay for everything, that is spectacularly, mathematically false.

Gillespie: In your book you show actually that according to data from the Organisation for Economic Cooperation and Development (OECD)—and the OECD are advanced economies. The United States actually has the most progressive tax code. We are taxing the rich. The rich pay a higher percentage of government revenue in the U.S. than in any other country. 

Riedl: Substantially more. And it's because we tax the rich at a similar level as other countries. In fact, our highest rates are actually higher for other countries. But we tax the nonwealthy so much less than other countries that it makes us more progressive.

Gillespie: The upper 10 percent of income earners in the U.S. pay about 90 percent of the taxes.

Riedl: The highest 20 percent of earners pay 90 percent of all income taxes. The bottom half collectively pays zero.

Gillespie: So does that mean in order to balance the budget, we have to tax the middle class or we have to tax a wider range of income earners?

Riedl: Here's the part that makes me really unpopular with all our audiences. If you try to build a stable budget for the next 30 years—and I don't mean stable, I don't mean balance the budget, I mean just one small enough deficit that the debt share of GDP stays at about 100 percent—you can't really get there on spending cuts alone. You have to cut that 5.5 percent of GDP. You can't really find 5.5 percent of GDP in reasonable cuts. You're going to have to have some revenue. And if taxing the rich is limited, there's going to be higher middle-class taxes. This is just a mathematical reality. 

As I explained in my Dispatch article, you can't stabilize the debt with revenues at 17 percent of GDP. Spending is going to 30 [percent]. You're not going to get spending all the way down that low. And you can't get there from taxing the rich. So, middle-class taxes are going to rise.

Gillespie: Yeah, so what's the median household income now? $76,000? Something like that? What will they be paying in taxes 10 years down the road vs. now?

Riedl: It remains to be seen. I can't give a number. I think people are surprised to hear, though, that the median earning family in America today pays an effective income tax rate of 2 percent. And people say I pay more than that. 

If you actually adjust for what they actually pay with the child credit, and sometimes the [Earned Income Tax Credit], the middle earning family pays an effective income tax rate of 2 percent. And then they pay an effective payroll tax of about 10 percent when you count the employer portion. So they do pay payroll, but it's going to go up from that. And the question eventually is, are we going to do most of this through payroll taxes and a value added tax, which is like a national sales tax, or through income taxes?

Gillespie: And in Europe, that is everything, right?

Riedl: We are the only country in the OECD that does not have a value added tax. I would like to keep it that way.

Gillespie: Why? What's bad about a value added tax?

Riedl: Value added taxes are actually more efficient than income taxes, if you're starting a government from scratch, because you're taxing consumption. The danger, though, is value added taxes are a cash cow. Once you start with a 1 percent rate, it's so easy to raise it to higher rates and collect a huge amount of revenue. And my concern is, I wouldn't mind replacing the income tax with a value added tax, but I don't want to get to the point where families are paying large income taxes and large value added taxes because then you're burying families. A lot of conservatives have said if we're going to switch to a consumption tax, the income tax needs to be destroyed, burned, and salted the Earth first.

Gillespie: The income tax is not that old, right? In a way, we could conceivably do that.

Riedl: It's 100 years old, the income tax. But yeah, if you're starting a government from scratch, your bets are better. 

Gillespie: Can we grow our way out of this?

Riedl: No. And this might be news to Vivek Ramaswamy, who said that he was going to balance the budget by growing the economy 6 percent per year, which was absolutely absurd. 

The first challenge is, we can't get that much additional economic growth, because when you look at the economic growth rates of the '50s, '60s, and '70s, most of that was rising population. The population is set to pretty much level off for the next 30 years. We're going to have almost zero growth of the work force population, which means all the growth is going to have to come from productivity. You're not going to get 4 percent, 5 percent, or 6 percent growth entirely from productivity. Mathematically, that doesn't work. You would need to do it like we did in the past with people. But the other side is, while economic growth does reduce the deficit, it also increases Social Security, Medicare and Interest costs. 

Your Social Security payment is tied to your lifetime wages. The faster the economy grows, the more your wages grow, the bigger benefits you get. On Medicare, higher income is associated with higher health care consumption. Also, faster economic growth typically brings higher interest rates. And when you're in debt that much, every point interest rates rise has an enormous effect on deficits. So don't get me wrong, faster economic growth is very good and it can modestly reduce the deficit. But as long as entitlement spending and interest costs rise alongside, you're not going to get a huge deficit reduction.

Gillespie: So why don't we just cut Social Security and Medicare? Social Security was a New Deal program. It was a Depression-era program. Medicare was called the last act of the New Deal by President Lyndon Johnson. Those are programs that were designed for an economy in which you were more likely to be poor if you were an old person, if you were past retirement age. You also didn't live as long. Wouldn't it make sense to say, OK, what needs to be on the table, first and foremost, is this massive growing blob of space?

Riedl: Mathematically, it's going to have to come from Social Security and Medicare. Thirty years from now, Social Security and Medicare are going to be running a deficit of 12 percent of GDP. Just these two programs are going to be running a deficit of 12 percent of GDP if you count the interest costs that they create in the budget. 

You can't raise other taxes and cut other spending enough to close 12 percent of GDP gap. The challenge, of course, is even if everything is on the table, most savings are going to have to go with the actual policy driving it. The problem is the politics. You have Republicans even tripping over themselves to say they won't touch Social Security and Medicare because the voters will kill them, because there is this perception that you're just getting back what you paid into the system, which is absurdly, patently false.

Gillespie: How is that false? Are you getting more back?

Riedl: Social Security benefits are designed to become substantially more generous each generation, even adjusted for inflation. On Medicare, it's even a bigger gap. The typical retiring couple today gets back triple what they paid into Medicare. And that's after you've adjusted in the net present value. So you can't say, "Oh, [it's because of] inflation and interest." No, even adjusted for all that, you get triple. But there is this perception that there's a savings account for me in Washington that is just going to send me back by money. 

The reality is seniors get back more than they paid in. The programs are becoming more generous every generation. And baby boomers today are the richest generation, the richest age group, in the richest country in the world in the richest time in history. As a matter of fact, retiree income over the last couple decades has grown four times faster than the income of workers paying the benefits. So, Social Security and Medicare right now largely redistribute money up the income ladder, not down. Yes, some seniors struggle and you can design reforms. And I've designed reforms that protect struggling seniors. But it's really absurd that seniors making $1 million a year after retirement are still getting generous benefits.

Gillespie: This was also an issue with COVID relief. You had families making up to $400,000 cashing checks from various benefits for COVID. We've completely lost the distinction between even just median income families, much less struggling families, and people who can afford it. 

Riedl: Right. And keep in mind, when we're talking about senior income, seniors making half a million a year or $400,000 a year after they retired, this isn't even wage income. This is interest and Social Security income. These are net worths far into the millions.

Gillespie: But, the youngest boomers are 59, I guess, right? So, they're moving into retirement and they will die. And I think about that on an almost daily basis as a boomer myself. But they're going to give a lot of that money back to people, right? They have so much, they're going to leave it to their kids. Does that affect these calculations?

Riedl: It can, over time. I mean, if you assume a certain degree of inheritance, especially simply housing values. Boomers have so much home equity, and frankly, they're hanging on to the home equity a little too much to make the housing market difficult for their kids. But eventually, when they go, those are going to be inherited by their kids. And those huge 401(k)s are going to be inherited by their kids. That should make it a little easier. I'm Gen X. That should make it easier for Gen X and millennials to get by with less. And I've been telling people for years, if you're a Gen X or a millennial and you're assuming that Social Security is going to be there forever in its current form with no savings, you're just not paying attention. You should save as if Social Security and Medicare are a bonus because the programs will exist, don't get me wrong, but I wouldn't take the little mailing you get from Social Security with your future benefits too literally.

Gillespie: How do we activate Gen X, but especially millennials and Gen Z, to get motivated about this? How do we reach them to start creating that movement for social change on this policy?

Riedl: That is the million dollar question. It's kind of remarkable that we are facing the largest intergenerational transfer of wealth in world history. And while young people are often voting on the trendy issues of the day or not voting at all, seniors are going to the polls in record numbers and robbing them blind. And young people are completely oblivious to the fact that seniors are robbing you blind while you're voting on side issues. You have to get their attention. And one thing that I try to point out to younger progressives, and I haven't had a lot of luck, is whatever priorities you have in the future—not having your taxes go up, family leave, child care, health care, climate safety net—you're going to get squeezed. 

There is no way we can pay for any of the priorities you have. If we're giving $116 trillion in extra benefits to senior citizens, the math doesn't work. One thing that a lot of conservatives think about with motivating young people is climate change. Young people are so focused on climate change, even though it's something that's 30 to 40 years off—you don't feel it now, and some years it gets a little better and some years it gets worse—but young people are totally attuned to these long term climate projections and their effect. 

And conservatives are often asking, well, how do we get them to focus on long-term debt projections, which is a danger to them—I don't want to say just as much as climate. I don't want to get into that debate, but it's real. And the costs that are in the system are not theoretical projections. The seniors walk among us and they have the letters saying how much they get. If there's a way we could motivate them the same way they're motivated on climate, that would be a success. But we haven't had much luck.

Gillespie: What about younger conservatives? And to be honest, I don't care about progressives or conservatives. I care more about libertarians, and they seem to be somewhat in sync with these ideas. If you're right of center, and you're not as suspicious of capitalism, or you're not as motivated by climate change, what works to grab people?

Riedl: If I knew, I would have grabbed them by now. I think there is a certain perception, at least among right-of-center young people, that Social Security and Medicare are unsustainable. I don't think you have to really convince them of that. I think you have to get them to care about it though. And when I talk to young people on the right, to be honest, they're a little too focused on Twitter, the culture war, and Trump owning the libs that you can't really get much policy focus. They get it, but they're just not motivated on it yet. And again, if I knew a way to reach them better, I'd love to do it.

Gillespie: How do you reach your own generation of Gen X? It was very popular in the '90s, as I recall, that members of Gen X were more likely to believe in UFOs than that they were going to get collective security or Medicare. Are they still keeping the faith or are they lost in the hurly burly of everyday life?

Riedl: I think Gen X now has it in their DNA to be skeptical that Social Security and Medicare are going to be there for them. When I talk to people in my generation, they're not necessarily motivated to do anything about it, because I think when you talk to Gen Xers, there's bigger things going on in the world that are getting their attention politically. There is Trump, Biden, all the culture war stuff. That's what they're voting on. But they're aware that we're facing problems.

Gillespie: The leading edge of Gen X is really going to be in the pinch point when all of this blows up. 

Riedl: We're going to be the ones hit with the drastic changes when you have to do it. But you mentioned the '90s with Social Security. That was the time to fix it. You know, the reason to fix Social Security in the '90s was not because the program was going to go bankrupt in the '90s. It was always going to go bankrupt around 2030. 

But that was the time to phase in the reforms while people were young. And we missed the window in the '90s and early 2000s to gradually phase in reforms for boomers. And because we didn't, now we're going to have to do the more drastic reforms. And as you mentioned, when there's a ratchet of benefits, we're going to be the ones being ratcheted because we didn't do the reform 20, 30 years ago when we were warned to do it.

Gillespie: Do you think we'll be in a better place fiscally, or in terms of budget, a year from now, five years from now, 10 years from now?

Riedl: We're going to be in a worse place just because I think deficits are looking to get much bigger—$2 to $3 trillion deficits. I don't see Congress going in the other direction. Things are going to get worse until either voters wake up or the financial markets cut us off. I'm really hoping it's the first option, that voters wake up, but I'm just not seeing it.

This interview has been condensed and edited for style and clarity.

• Video Editor: Adam Czarnecki
• Audio Production: Ian Keyser

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