Manhattan Institute senior fellow Brian Riedl joins Brian Anderson to discuss the debt ceiling, the limits of prioritization, and the unsustainable long-term future of federal spending.

Audio Transcript

Brian Anderson: Welcome back to the 10 Blocks podcast. This is Brian Anderson, the editor of City Journal. Joining me on today's show is Brian Riedl. He's a senior fellow at the Manhattan Institute, where he works on fiscal and economic policy. He's been on the show before. Brian has previously worked as the chief economist to Senator Rob Portman, and as the staff director of the Senate Finance Subcommittee on Fiscal Responsibility and Economic Growth. Brian, thanks for joining us.

Brian Riedl: Glad to be here. Thank you.

Brian Anderson: Now, Congress, as people know who follow these things, is in the midst of a protracted showdown over the debt ceiling—something that's happened in the past. The federal government hit its borrowing cap recently, and the clock is now ticking until it's not going to be able to pay its bills. But at the moment, negotiations are at a standstill between Republicans, who see in the debt ceiling and opportunity to reduce federal spending, and the Democrats, who argue that Congress has a duty to raise the debt limit unconditionally in order to avoid default, which would be disastrous. So what, in your assessment, is the current state of play of these negotiations?

Brian Riedl: Well, right now, there isn't much negotiation going on. Republicans are trying to decide what they want, and that debate is happening internally. There are some Republicans who want to be really aggressive on the debt limit. They want to get Social Security and Medicare reforms, or discretionary spending cuts as high as even 15 and 20 percent. There are other Republicans who are a little more realistic, that you only control a slight majority of one half of Congress, and ultimately the debt limit is a hostage they can't shoot. We have to raise the debt limit. It would be too economically destructive not to.

That suggests Republicans really don't have that much ability to force through reforms, if everyone knows ultimately they can't shoot the hostage. And so those people are looking for more modest reforms and ways for everyone to save face and get what they want. Things like modest discretionary savings, very modest reductions in wasteful spending, ending Covid emergency spending, maybe some border funding, marginal advances that even Democrats may not have a problem giving away. But you still have the people who want much bigger reforms who ultimately hold the votes for the Republicans. Because they have such a small majority, they need to be pretty much unanimous if they're going to hold together on this.

Brian Anderson: Now, the Republicans have released a plan for something called prioritization. So as I understand it, this is a way basically to keep paying the bills even after the debt limit is reached. You've expressed skepticism that this plan can keep the lights on and avoid default. What's its principle weakness?

Brian Riedl: Yeah. The prioritization is something I worked on 10 years ago or 12 years ago, when we were having debt limit fights and I was chief economist for Senator Portman. As background, the idea is, well, if you hit the debt limit, you have to balance the budget immediately. Which means you have to eliminate 20 percent of spending that's currently financed by deficits, which means you can keep 80 percent of spending going. Prioritization says, if we hit the debt limit, let's make sure that within the 80 percent of bills that we can still pay, we include interest on the debt, Social Security, Medicare, veterans healthcare, and military pay. Make sure that that's the 80 percent that we still pay.

The problem with prioritization is it makes sense at first blush, but there's several problems with it. First, the treasury's computers can't even separate out bills like this. The Federal Reserve can probably separate out interest on the debt, but in terms of Social Security, Medicare, veterans, defense, the Treasury gets millions of invoices every week to pay, and they don't even have the ability technologically to separate out, here are the bills we're going to pay and here are the bills that aren't getting paid. Instead, they would just pay each bill every day in order sequentially, until they run out of tax dollars from that day. So if your Social Security check goes out in the morning, you'll get it. If your Social Security check goes out in the afternoon, you may not.

The other problems with prioritization beyond just not being technically feasible is you're still defaulting on 20 percent of the government. Including you're defaulting on all these businesses that do business with the federal government, sell goods and services to the federal government, and would basically be defrauded. They wouldn't even be able necessarily to make payroll or stay in business. You're also not going to fool the bond market. They're going to see prioritization as default.

And to put the political hat on, prioritization is really dumb politically. What the TV ads are going to say about anybody who voted for prioritization is that this congressman voted to pay Chinese bond holders before we pay food stamps, veterans pensions, or border security. I don't know why lawmakers would want to take ownership like that of which bills get paid and which ones don't, especially when you're going to be attacked for prioritizing Chinese bond holders first.

I'm hearing Republicans are likely to pass a prioritization bill out of the House later this spring. I'm trying to tell them that it's not going to work and it's going to be politically dumb.

Brian Anderson: Yeah, well, that's a pretty persuasive case you make. Last week you wrote a New York Times op-ed that sparked quite a conversation online and elsewhere. You argued there that President Biden made two promises in his State of the Union address that he can't possibly keep. One, to block any reductions in future Social Security or Medicare benefits, and two, not to raise taxes on anyone earning less than $400,000 a year. In your view, these guarantees are incompatible. Why is that?

Brian Riedl: Yeah. I mean, if you just take a look at the Congressional Budget Office projections, they project that Social Security and Medicare will run a shortfall of $116 trillion over the next 30 years. The current debt held by the public is $25 trillion. These two programs alone are going to be $116 trillion short, meaning their benefits are going to exceed how much money they're going to raise in payroll taxes and senior premiums, et cetera. So how are you going to close a $116 trillion shortfall? Well, President Biden also says we're not going to raise taxes on anyone but the top 2 percent. Well, you could tax the top 2 percent at 100 percent, it wouldn't come close to closing $116 trillion shortfall.

So what I argued in the New York Times is, something's got to give. We can't borrow $116 trillion over 30 years. The bond market is not going to lend the federal government that much money at a reasonable interest rate; that would stretch the bond market way too thin. And they may not even want to lend the government that much money if our finances are not under control. So either you're going to have to reform Social Security and Medicare, or you're going to have to nearly double middle class taxes. There is no other option.

Waste, fraud, and abuse, defense, tax the rich, Ukraine: you can do everything on those policies for savings, you're not going to come close to closing the gap. So I think President Biden is taking the easy, cynical approach of, I'm going to promise everybody all these benefits without paying the taxes and let my successors worry about how to pay for it.

Brian Anderson: Well, relatedly, the Democratic Party is increasingly becoming what Fred Siegel would call a top-bottom coalition. It relies on voters in the very top quintile of the income distribution, and those at the bottom. But this certainly makes funding things like social services and entitlements a difficult political bargain. So what becomes of our fiscal politics going forward if Democrats continue to live in this kind of political universe?

Brian Riedl: It's interesting because President Biden said, we're not going to tax the middle class, and he set the threshold at $400,000. Now, you and I are old enough to remember when Bill Clinton set the threshold at $125,000. And then President Obama raised it to $250,000. And now Biden, $400,000. The threshold of middle class keeps rising and rising and rising. Who knows, by the next presidency, they may be saying no taxes on anyone earning under $600,000.

This is because the Democrats’ coalition is increasingly upwardly mobile professionals, particularly on the coasts. So upwardly mobile professionals are trying to be protected from the taxes, and it's really only the rich of which the threshold keeps going up to pay all the taxes. But again, the numbers don't work. The more you limit the population that can pay these taxes, they don't have enough income over that threshold to pay a shortfall of $116 trillion. So again, something has to give. Are Democrats going to go along with reducing social services? Probably not.

Eventually, I think they're going to have to give something on entitlement spending. Unless their goal is to just wait it out until the baby boomers have already retired and then concede that, okay, we are going to have to tax like Europeans. We are going to have to significantly raise middle class taxes. Maybe that's what they're trying to do. That's ultimately the result of their delay tactics right now, is it just makes middle class taxes much more likely to be the result. Because again, once you wait 10 or 15 years beyond now, the baby boomers are going to be in their eighties, and there's not much you can do for benefits at that point.

Brian Anderson: Yeah. Now, not so long ago, really, just two or three years ago, something called Modern Monetary Theory was all the rage. It was being reported on in the New Yorker and bandied about in the popular press anyway, as a new and important school of economic theory. Now, this school of thought rested on a mixture of claims and accounting identities to claim that basically federal government spending was not meaningfully constrained by running deficits.

Meanwhile, even many sober economic commentators who didn't buy into modern monetary theory were persuaded at that time that inflation was something we weren't going to see again. That it was a part of our economic past and that interest rates were going to remain low for the future, that could be foreseen, anyway.

Now, we don't hear much of that, suddenly. Would you say that the economics commentariat at least has a restored sense of reality, or are these arguments just waiting for a shift again in our economic condition before they make their roaring return?

Brian Riedl: Yeah. I think if you work in economic policy long enough, you see that no bad idea is ever dead forever. And so MMT had its peak boom lit a couple of years ago. Reality has since crushed it, but I'm sure MMT advocates are lying in wait. The thing that MMT people point out that's accurate is, the government does not need the default on its debt as long as we can run the printing press. Yes, that is technically true. We can always print more money to pay off the debt. The flip side of that though is that's really bad too. MMT advocates suggest that if we just, say, close the $116 trillion Social Security and Medicare shortfall by just printing $116 trillion and paying that, that would be essentially a free lunch. That it wouldn't be inflationary.

I think 98 percent of economists who have studied macroeconomics and economic history consider such a viewpoint to be complete nonsense, to be honest. Of course, if you print that much money, no, you won't default. You'll just kill yourself with inflation. MMT would come back and say, inflation is debt. There is no inflation. Interest rates are going to stay low forever. You can keep printing money. Don't worry about it. The last couple of years have not been convenient for MMT. We saw during the pandemic a couple trillion dollars in expansions in the Fed's balance sheet, as well as a couple trillion dollars of stimulus. And now we have inflation going up to 9 percent at its peak, which doesn't bode well for the MMT argument that we could have had the government spend and print $116 trillion without inflation.

I think it's hard for MMT to defend their record with where we're at right now. I also think MMT is never going to die, because MMT's usefulness is not necessarily that it's a really smart economic theory. Its usefulness is that it gives politicians an excuse to spend and borrow money, and that's really what the appeal of MMT is. It's people who want the government to spend and borrow more money grasping for any economic theory they can find to justify it, rather than letting the economic theory itself drive where they're at.

Brian Anderson: Yeah, I guess it would be appealing to both Democrats and Republicans if they could just spend money freely without worrying about it. Very politically useful. But as you say, with inflation spiking and interest rates rising, it seems to me you have a very strong real-world proof of the flaws in Modern Monetary Theory.

Brian, thank you very much for those very lucid answers. As always, succinct and clear. And thanks very much for coming on the show today.

Brian Riedl: Thank you, Brian. This was fun.

Brian Anderson: Don't forget to check out Brian Riedl's work. It's on the City Journal website. We'll link to his author page in the description. You can also find City Journal on Twitter, @CityJournal, and on Instagram, @cityjournal_mi. And as usual, if you like what you've heard on today's podcast, please give us a five-star rating on iTunes. Brian Riedl, thanks again.

Brian Riedl: Thanks, Brian.

Photo: shmoil/iStock

More from 10 Blocks