Brian Riedl joins Allison Schrager to discuss the end of free-lunch economics, the hard choices facing fiscal and monetary policymakers, and the long-term demographic challenges facing developed-world economies.

Audio Transcript

Allison Schrager: So welcome to Risk Talking a podcast about economics. I'm your host, Allison Schrager, and this week I'm delighted to be joined by my colleague here at Manhattan Institute, Brian Riedl, who is also a senior fellow here. So welcome and thank you for joining us.

Brian Riedl: Glad to be here. Thank you.

Allison Schrager: So I feel like people like you and me, who for probably about 15 years have been screaming into the wind about deficits and how much risk we were running up by just assuming we could spend endlessly, interest rates would never go up, and there's really no constraint on our borrowing. Do you think we're at a moment where this is going to change?

Brian Riedl: Yeah. Reality is beginning to set in. I wrote an article for City Journal called “The Era of Free-Lunch Economics Is Over” that basically described how, starting with the big stimulus during the Great Recession, the $787 billion stimulus that was passed in 2009, it didn't bring the end of the world. And so we started to hear more and more, perhaps deficits don't matter, perhaps runaway spending doesn't matter. We didn't get hyperinflation, we didn't get soaring interest rates, the deficit didn't kill us. So for the next 12 years, all we heard was how deficits don't matter. And they just got bigger and bigger and bigger and the democratic proposals got bigger and bigger and bigger. But it was always an unsustainable idea. And now that we see inflation rising and interest rates rising as the deficit gets bigger and bigger, reality is setting in now, and this is going to shape our politics going forward, even if members of Congress and the president don't even realize it yet, this is going to shape the politics of spending and deficits for the next 20 years.

Allison Schrager: So you said that there was a huge amount of spending in the Great Recession. Somehow a narrative has emerged that we didn't spend enough and that the U.K. practiced this extreme austerity, and we weren’t austere, but we also didn't spend enough. Do you think that's wrong?

Brian Riedl: Yeah, the narrative is really hard to prove economically, that we didn't spend enough. First off, the amount of spending was larger than people realize. There was the original stimulus, which was again about $800 billion in 2009. But if you look at all the follow-up stimulus bills that passed, many of which in a bipartisan way, things like payroll-tax holidays, make-work pay, unemployment extensions. We actually did $2 trillion over a few-year period of stimulus, which was very large if you look at how the economy was recovering. And if the issue was just we didn't stimulate enough, you think you would've seen the economy respond somewhat, just not enough. If you take a look at how the GDP and unemployment rates responded, not only did we miss the stimulus goals and the stimulus targets that CBO and the Obama White House put out, the economy even missed the zero-stimulus scenarios that the White House and CBO pointed out. So we actually did worse with stimulus than they projected we would even do without stimulus.

So if the argument is just, well we could have done more, you would think that the stimulus we did would have done something, but we did $2 trillion of stimulus and the economic impact was zero, absolutely zero. So I think it's hard to argue that the next trillion dollars would've made all the difference, or the next two trillion, it's an unfalsifiable theory, but there's no underlying fundamentals in how the economy responded to the last stimulus that would back that up.

Allison Schrager: Why do you think that is? I do recall, back when they were cashing this stimulus that they were very frustrated wasn't big enough. People were saying things like, “Well, it doesn't even matter how we spend it, it will have a positive-multiplier effect.” People were calling and saying, “If you just dig a hole and pay someone to fill it again with dirt, it has some stimulative effect.” Do you think that fiscal spending just doesn't work? Do you think there was something structurally wrong with the economy? Because it seems like on one hand we got no benefit, but on the other hand, it doesn't feel like we paid a huge cost anyway because interest rates didn't go up, inflation didn't happen.

Brian Riedl: Sure. I think my general take on this, which I will admit is perhaps a little more controversial, is that Keynesian stimulus usually doesn't work very well because the multiplier is actually quite small. And that's because generally every time we spend money, we have to borrow the money first. So every dollar government injects into the economy must first be borrowed or taxed out of the economy. Now stimulus spending can work to the extent that the money you're borrowing out of the economy wasn't actually doing anything. If you're taking money that was just sitting unused in safes or bank accounts and you're spending it, you're applying it. But as long as you have a mostly functioning financial system, a lot of the money that you're taking out would have found a home somewhere in the financial system anyway, which means stimulus spending is really just moving purchasing power around more than it is creating new spending.

I would actually argue, though, that Keynesian stimulus was more successful this time around during the pandemic because we actually did have more of a frozen banking period with the economy essentially shut down. So we actually were, to the extent that we were injecting new money into the economy, the Federal Reserve was much more active, the banking system was not clearing as well. But back then I think the multiplier was just smaller. And no, we haven’t paid a huge cost with inflation and interest rates yet. But that doesn't necessarily mean that it was all new dollars being spent in the economy either. A lot of it was really more redistribution

Allison Schrager: And that's why rates didn't go up, or we didn't have the inflation. People get focused on the fact that there was no cost to doing it. Well at least not immediate cost. But I think you're right. People missed there was no real benefit either.

Brian Riedl: Yeah, exactly. And on one level people say, well then what's the harm? The harm is you add $2 trillion to the debt. Interest rates may be low back then, so it doesn't really matter much, but because we borrow on short-term interest rates, not long-term, we don't lock in the long-term rates. What ends up happening is, if interest rates ever rise in the future, that $2 trillion is going to get a lot more expensive, because you're going to be rolling over that $2 trillion forever. And if interest rates hit 5 percent, for instance, someday you're going to be paying a $100 billion a year in interest forever just from that period of borrowing.

Allison Schrager: Wow. So why do we borrow short? It's like taking out adjustable rate mortgages when interest rates are 0 percent. What's the thinking?

Brian Riedl: This is something that's been driving me crazy. I spent pretty much 2018 to 2021 screaming from the mountain top, why aren't we locking in low interest rates? The 30-year bond was trading at 1.5 percent. Why in the world would you not lock in a 1.5 percent rate? I was screaming this. And a couple things happened. First off, I actually had debates with other economists who said they could go lower, we should wait for them to go even lower. And if we lock in 1.5 or 1.8, that's higher than we need to actually pay, which made my brain explode.

Allison Schrager: Wait, it couldn't have been financial economists. What kind of economists would say that?

Brian Riedl: People who used to work on the hill who have econ degrees, who now work in think tanks and do economic policy said rates are going to keep going lower and we'd be stupid to lock in 1.5 or 1.8. My head exploded. The other argument that we hear is that the financial markets don't want us to roll over into 20- or 30-year bonds. This is what the treasury said. The treasury a couple years ago said they put out feelers for doing more 30-year bonds and the response they got from the financial markets is that they would prefer shorter bonds.

And so what was planned to be a bigger 30-year bond sale ended up being a very small 30-year bond sale. My problem with what treasury said is, I don't really care what financial analysts told them. If the treasury is going to put out the 30-year bonds more and they're going to do short-term bonds less, financial markets will buy them because that's what's out there. If you look at who buys our debt, mutual funds, insurance funds, state and local governments, they need the safety and the flights of safety of American government debt. To a certain degree they're going to take what we give them. They're not just going to swear off government bonds because they don't like 30-year bonds.

Allison Schrager: Well, more than that, if you're a pension or an insurance company, you're probably short-duration. When the treasury put that out, I'm like, I don't think that's right. Just working in the pension space. How desperate people are for duration.

Brian Riedl: Exactly. There were a lot of these industries where they would want the long-term bonds. So when treasury came back and said, there's no interest in this, I was flabbergasted. I said, of course they'll buy it, because what else are they going to buy? And they should want the stable long-term bonds. And what's interesting is America's a little bit of an outlier here. The U.K., the average maturity of the U.S. debt is 62 months, much shorter. The U.K. has average maturity almost twice as long as the United States. Europe has been moving towards long-term bonds. It's not like this is some crazy idea that no one else is doing. We've shrunk the maturity over a while, while other countries have extended their maturity, and now we're going to pay the price for not locking in these low rates.

Allison Schrager: Yeah, I think the U.K. is in less bad shape than people think for that. And I think, just prove your point, they've issued a lot of long-term debt, and their yield curve in the U.K. was always concave in large part because there was such large demand for 30-year gilts.

Brian Riedl: Yeah, exactly. And even with longer maturities, they found the demand. And it's funny because the same people who would tell me that interest rates are never going to go up in the United States because we're the only game in town, we're the flight to safety, globally, everybody needs American debt, everybody wants to borrow it, were the same people who would sometimes tell me that if you extend the maturity, the whole world's going to dump U.S. bonds. I find it hard to square that.

Allison Schrager: I can't imagine who these people are. So what do you think changed this time? Did we just go too hard too fast?

Brian Riedl: In terms of raising interest rates?

Allison Schrager: Yeah. After everything in the U.K. it seems like, well gee, maybe developed markets don't have the same fiscal space. But the naysayers are saying, “Well, it's the U.K., it's like an emerging-market country,” or something. Do you think the U.S. is at a similar point? Do you think if they push the needle a bit, that interest rates will explode here too, or not explode, they're still historically low in the U.K. too.

Brian Riedl: I think the interesting thing about what happened in the last couple years is, the Federal Reserve did $5 trillion expansion of its balance sheet, which was enormous. And you also had huge fiscal stimulus when we were reopening the economy, and we did the combination of historic fiscal stimulus, historic monetary stimulus, and we did it at the moment that supply was constrained. We pushed demand through the roof at the moment that productivity was low, the economy was reopening. We had problems with the ports and supply chains. It was the worst possible time to try to goose demand when you have constrained supply. So it's no surprise that inflation soared. As for our interest-rate outlook, getting back to the whole argument of interest rates are always going to be low because everybody wants to buy American debt. I did a huge report in December 2021 last year anticipating the rise in interest rates and showing how much it'll cost. And one of the things I noticed was only 1 percent of American debt that has been sold since 2011 has been bought by China and Japan, just 1 percent.

Allison Schrager: Since 2011?

Brian Riedl: Since 2011, I think we've added $15 trillion in borrowing and China and Japan have bought 1 percent of it. Other international debt has not grown too much either, which means our debt is becoming more of an American market debt rather than global-market debt, at least the treasury debt. And even within the United States, the Federal Reserve bought $5 trillion, but they're looking to limit their balance sheet. So let's think about this. If China and Japan aren't buying our debt, and the smaller countries aren't buying that much, and the Federal Reserve doesn't want to buy any amount of our debt, who actually is the market for our debt?

At this point, it's more and more domestic financial systems or again, the mutual funds, the insurance companies, pension funds, domestic financial entities, state and local governments. That gets you into the question of, okay, if that's who's going to be buying our debt, how much can they absorb? We're on pace to borrow $114 trillion over the next 30 years. If the Fed ain't going to monetize it, and the international community isn't going to buy a lot of it, you really think the American financial industry can absorb that without raising interest rates? Yikes. I don't know.

Allison Schrager: Do you think that's backed the Fed into the corner, that they can't shrink their balance sheet?

Brian Riedl: Might over time. I think right now, they're going to shrink the balance sheet. But what happens when the deficits start rising to two to $3 trillion a year in the next 10 years? What happens in two decades when the baseline deficit is 10% of GDP, assuming peace and prosperity, when you're running four and $5 trillion deficits per year, the Fed is all a sudden going to find itself under a lot of pressure to help out with some of this, because lawmakers aren't going to want to raise taxes and cut spending that much. And the Fed, one of the Fed governors gave a speech about a year ago where he said, “We do not listen to political pressure” Hogwash. They have in the past, they've done it before, they'll do it again. And if not, Congress might actually go in legislatively and push them a little bit. It's hard to see those scenarios now, but wait until you have interest rates going through the roof and deficits of $3 to $4 to $5 trillion. At that point, politically, all bets are off.

Allison Schrager: Well, to some degree we can spend as much as we want. People do have a point. Even if people aren't buying as much U.S. debt, it is still seen as the least dirty shirt on the floor. Is there an alternative risk-free asset that’s as liquid?

Brian Riedl: I remember reading John Cochrane, a great economist, where he was talking about how we're getting to the point that money can move so quickly internationally that it might make it much less likely that King Dollar lasts much longer. That you can wake up in the morning and put your money in the German stock market for the day and then the next morning you can move it over to the UK and the next day you can move it somewhere else, that money may not be locked into dollars as much 10 to 20 years from now. But again, one of the themes of my report is that the economy's unpredictable and financial markets and interest rates are unpredictable. And I get nervous when I hear assumptions that, well, no one will ever dump the dollar, or China and Japan will come back and they'll buy more, maybe, but maybe not. And I get nervous when we say we're going to borrow all this money on the assumption that it'll just find a way to work out. Maybe it will, maybe it won't.

Allison Schrager: But the argument was that you can't really default if you borrow in your own currency, because you can always just print more money. For some reason some notable people are saying that this is a victory lap for MMT. How's that wrong?

Brian Riedl: Yes, yes. We can print money. It would just create financial chaos. Again, the baseline deficit is $114 trillion over the next 30 years. And by the way, when I say baseline, I mean the tax cuts expire. There is no more spending expansions. There's no more tax cuts, there's no more wars, there's no more recessions and interest rates stay low. It's a $114 trillion. Every point that interest rates rise adds $30 trillion. So the amount that we're looking to borrow, $114 trillion is the best case scenario. It could easily get into the $140, $150 trillions. Yes, we don't have to default on that. We can run the printing press. If we even tried to print half of that amount, it would be financial chaos. You would have inflation go through the roof, you would have interest rates heading in chaos. You can do it. I'm not sure that you want to, and I'm not sure it solves the problem. If the problem you're trying to avoid from default is economic chaos, it's just a different kind of economic chaos.

Allison Schrager: So, if you are looking through, with midterms in mind, the policy plans for both the Right and the Left, it doesn't seem like fiscal austerity is in anyone's plans. Say for a few Republicans who've said that they want to index Social Security to life expectancy, and even their own party doesn't seem to be fully supporting it, and the Democrats have called this “gutting” Social Security. Do you think the policy mindset is capable of changing?

Brian Riedl: Not right now. Both parties are totally in denial of the new fiscal and financial reality we're in. You hear nods to deficits occasionally as a political football to hit the other party. But I came of age in politics in the ‘80s and ‘90s when the deficit was a huge thing. Ross Perot, Gramm Rudman, there were not major fiscal expansions. Everything had to be paid for. They still did expansions, but that was the culture back then, that you had to be responsible and pay for things. And ever since about 2000, when we balanced the budget, lawmakers don't even think that way anymore. Lawmakers have spent 20 years seeing their job as handing out new tax cuts or spending goodies and buying election that way. That's how they see their job. That's what they've been doing for 20 years, and it’s felt cost-free to them.

And I don't even know if these lawmakers even have the muscle memory to think this way anymore. I don't think they're even ready to approach their job if it's something other than handing out tax cuts or handing out new spending benefits without it being paid for. The only role they know is Santa Claus. And the public has soured on some of this stuff. The 2017 tax cuts weren't that popular. The democratic spending hikes that we've seen over the past two years, $4.8 trillion, aren't winning them any elections coming up. But the lawmakers still are in that mindset and they just haven't transitioned out of it. Ultimately, though, I think they're going to have a hard time passing these policies because the public is actually becoming more nervous about this stuff than the politicians.

What makes me nervous is that if politicians no longer see their job as buying votes with deficit spending or deficit finance tax cuts, what are they going to shift to, to win reelection? Culture war? Other issues? Where do politics go if that's not what you're hanging your hat on to appeal to voters? It actually makes me nervous that you could actually go in some odd directions.

Allison Schrager: Well, voters might not respond well to tax cuts or the child tax credit, but they might respond in a negative way to an actual tax increase.

Brian Riedl: Exactly. And that leads to a little bit of paralysis, and frankly that's why the extension of the Trump tax cuts will probably sail through for at least the bottom 95 percent because that's more a baseline issue. People may not want new tax cuts, but they sure as hell don't want their taxes raised. And this is why lawmakers aren't even close to actually raising taxes or cutting spending. And in fact, even the mere hint of it that we're seeing on Social Security and Medicare leads to World War III. So there's a far cry from, they don't want new fiscal expansions as badly to they actually want new taxes or spending cuts. We're not close to that point yet.

Allison Schrager: Yeah, it seems like Democrats are in an awkward position for the Trump tax cuts, because they kept saying that they were only for the wealthy, but if they let them expire, I think people are going to discover, no, they were more broad-based than people realized.

Brian Riedl: Yeah. The Democrats are bluffing on this because, of the $1.5 trillion net cost of the Trump tax cuts, 30% of it is the child credit expansion that they're bragging about and trying to expand. So for all their talk about letting the whole thing expire for the rich, you guys have spent the last two years highlighting the successes of the child credit and trying to expand it. Now you want it to expire? They can't square that. Ultimately, we saw this happen with the Bush tax cuts. They continued them for the bottom 98 percent and let him expire for the top 2 percent. I would expect something like that to sail through again.

Allison Schrager: How much room is there to tax the wealthy? Because if you listen to the Democrats, they don't want any sort of cut to entitlements. But they are open to say, lifting the cap on Social Security taxes, which is, I think a rather large tax increase. It seems like taxing the rich, high earners or the wealthy, is their answer to paying for all this. How much more room do they have? Is there a limit on which you can tax people?

Brian Riedl: Yeah, I've run the math on this. I have it coming out with my budget chart book in a week or two. Yeah, there's going to be all sorts of charts on tax. I have tables of how much you can raise by taxing the rich. And the reality is that you could seize every dollar of billionaire wealth, just completely seize it, and it would finance the government for nine months. You could impose 100 percent tax rates over $500,000, assume everybody keeps working, you wouldn't even balance the budget today, much less balance the long-term budget, much less pay for anything on the progressive wish list. The numbers just aren't even close. You could double the 35 and 37 percent tax brackets to 70 and 74 percent. It would close about one-fifth of the long-term gap. Same thing, raising the Social Security payroll cap would close a little less than half of the Social Security gap, but it would use up all your upper income tax hikes. Essentially, you wouldn't have anything left from Medicare or anything else.

So I'm not saying you can't tax the rich at all, I'm not saying you can't do some, but the idea that if oh, just tax the rich and you can pay for all of this, it is mathematically impossible. And it's also politically silly because Democrats just had the trifecta for two years, and all they could do was about $300 billion in upper-income tax hikes, that in turn was all just repurposed into energy tax cuts. So even a democratic government can't raise upper-income taxes by more than $30 billion a year, and yet they're going to raise upper-income taxes by trillions?

Allison Schrager: Especially, they keep revising who counts as upper-income. It used to be $250,000; now it's $400,000.

Brian Riedl: Now it's $400,000, it's going to be heading to $500,000. I hear a little bit more $500,000. Yeah, because their base is the professional class. You see this with the SALT deduction, where the upper-income professional class making $200,000 a year, that's now their voter base. That's not the rich, that's their voters. So they keep raising the threshold. But again, you could do a 100 percent taxes on these people. It ain't going to come close to raising the revenue you need.

Allison Schrager: So I'm curious, could this come-to-Jesus moment possibly happen? When you look at what's going on in the U.K., it's a mystery to me. Liz Truss said she was going to focus on growth, great. She wanted to cut taxes a little. And the narrative is that markets just freaked out and now the prime minister is like, we're abandoning this whole supply-side growth agenda. Do you think markets just found fiscal religion in the U.K., or do you think there's something else going on?

Brian Riedl: I'm confused, to be honest, because these governments have gone on such an enormous spending spree over the last couple of years, and markets shrugged all the spending sprees. And then they do one modest tax-cut proposal, and the market completely panics about the deficit. I'm a little confused why that suddenly triggered it, and the spending didn't. And so I'll be interested to see what happens in the United States with the bond market.

Allison Schrager: Well even what's most perplexing to me about it is, the E.U. is doing a ginormous Green New Deal, and they're spending trillions, and a lot of it is deficit-financed, and individual countries are in much worse fiscal shape than the U.K. is, yet markets don't seem to care at all.

Brian Riedl: Yeah, I don't get it, because you wouldn't think markets would be responding ideologically. Entire markets wouldn’t respond purely that way. And so I don't really understand, unless they have some view that the spending is temporary, but the tax cuts would be permanent or something. I can't square why now, why these tax cuts? We'll see. And again, we're going to have a little test case in the United States when the Trump tax cuts come up for renewal in a year or two, if the American bond market suddenly freaks out for that while shrugging at a lot of Biden's spending, again, I won't have an explanation for it.

Allison Schrager: I never would have thought that the market would see government spending as a prudent investment in the future, but tax cuts as reckless and irresponsible.

Brian Riedl: And I would expect investment markets to look at, to prioritize anything that aides productivity, capital formation, supply-side, I would think would actually get a stronger and more positive response from markets than pure demand-driven policies. I would figure markets want capital investment and growth. And in that way you would think they might have a little more of a bias in favor of tax cuts. And so yeah, I was hoping you would tell me that the difference is markets.

Allison Schrager: Well, some of it was brought on by the pension funds, but the pension funds were triggered by a 100 basis-point increase in interest rates, which if you look through the history of bonds, happens, but no one was ready for it.

Brian Riedl: And it might just be a matter of the timing, where now that interest rates are rising, perhaps it is just a timing factor. If the U.K. had done the same size spending increase, maybe it would've had the same response, and it's just a matter of the interest-rate timing. But as you mentioned, in other countries, you're seeing the timing right now, the bond markets in some countries are shrugging right now to certain spending hikes. And so I'm confused.

Allison Schrager: Yeah, well you could also argue it was the energy subsidies, but Europe is doing similar energy subsidies. And if you look at their debt-to-GDP ratio, the U.K. is in much better shape than say France, which is doing energy subsidies and embarking, as I said, on an enormous Green New Deal.

Brian Riedl: Yeah, it's hard to explain.

Allison Schrager: Maybe everyone thinks Germany's written a put option on their debt. That's the only thing I can think of.

Brian Riedl: I guess, we'll see how they respond long-term. It could just be a blip. I was having a discussion yesterday about how the U.S. bond was downgraded during the debt-ceiling crisis in 2011, 2012, 2013, but the demand for bonds didn't stop, and interest rates kept falling, and then a couple years later the bond rating actually quietly inched back up. So some of this stuff might just be temporary irrational blips from the bond market. Some of it might be a turning point. I guess we'll know more of that in a couple years.

Allison Schrager: So, I remember when I went to grad school, in the very early aughts, there was actually concern that because we were running surpluses that there wouldn't be a financial market anymore for bonds.

Brian Riedl: There was a hearing on that. Yeah, there was a Congressional hearing on that.

Allison Schrager: Yeah, we abandoned that research agenda pretty fast. But do you recall in the ‘90s, Robert Rubin had this theory that if you run a fiscally responsible government, that helps growth. Do you think that's true? Do you think that was also proven wrong?

Brian Riedl: That fiscal responsibility is good for growth? Absolutely. I think in 1999 there was a Congressional hearing with Alan Greenspan, and the concern was that if we pay off the national debt too fast, the Federal Reserve won't be able to do open-market operations. Boy was that a different era to even be thinking about that? No, I'm not a balanced-budget fascist. I don't think you shouldn't run deficits at all. But I do think that if the debt-to-GDP ratio is rising, that does raise interest rates, and that does crowd out private investment while also raising costs to taxpayers.

The interest-rate effect is about, usually every time the debt-to-GDP ratio rises one percentage point, interest rates rise by three basis points. So, if the debt-to-GDP rises 100 percent over the next 30 years as projected, that should raise interest rates by about three points. That's a lot, and that'll just make the debt bigger and the interest costs bigger. I think that's a concern. I think CBO has modeled growth effects that say, if the debt hits a 185 percent of GDP in 30 years as projected, it'll shave the GNP by $6,000 per capita adjusted for inflation, because a lot of the money will be going out of the country. You're also going to have some less capital formation. And so I don't think we have to balance the budget, but I think we don't want to raise interest rates, we don't want to lower GDP or GNP, and we also don't want to have taxpayers simply paying half of their federal taxes just to interest on the debt, which is where we're headed in 30 years. That's just a waste of taxes.

So we don't need to balance the budget, but if we can stabilize the debt at 100 percent of GDP where it is now long-term, we can avoid a lot of problems.

Allison Schrager: Do you think we should keep the debt ceiling?

Brian Riedl: I don't like the debt ceiling because it's a hostage you can't shoot, you absolutely cannot allow default. And so it is a hostage you're not allowed to shoot. But I have liked in the past using the debt ceiling as an opportunity to reassess spending. Yes, you raise the debt ceiling, but you should also attach reforms in order to fix the budget. And in fact, the eight biggest deficit-reduction laws since 1985 were all attached to debt-ceiling bills, all eight of them.

So I'm fine getting rid of the debt ceiling because it's a hostage you can't shoot, and it's a hostage you don't want to shoot, but you have to replace it with something. And right now we have a budget process that's totally biased toward bigger spending, bigger deficits on autopilot. If we can replace the debt ceiling with something that doesn't risk default, great. I get nervous about giving up the one tool we have in order to reign in deficits with nothing in return. So I say yes, get rid of it if you can find some other budget rule to force us to confront all of what's happening on autopilot. What do you think about debt ceiling?

Allison Schrager: I feel the same way. I like that at least every couple years we have this panicked conversation about debt, because I feel like if we just got rid of it, there would just be no end to our spending. But again, I don't like this, “are we going to default on our debt?” conversation that seems to happen, but never actually happens.

Brian Riedl: And it can't happen. And frankly that's why the debt ceiling hasn't been effective anymore for the last 10 years, because everybody knows we're not going to default. So again, you can't take a hostage that everyone knows you're not going to shoot, and everybody knows that neither party at the end of the day is going to allow a default. And so that means you can't really use it to extract any concessions. You have to more just use it to appeal to people's good financial instincts to just try to use it as a teaching moment and learning moment and motivating moment to attach good bills, and they're just not doing that anymore.

Allison Schrager: Yeah, I'm pessimistic. I was just trying to read up on what the Republican economic plans are.

Brian Riedl: Let me know when you find it.

Allison Schrager: I couldn't find much, but I did find one plan from what, according to several media sources I read, was referred to as a hard-right cadre of Republicans who want to “gut” Social Security. So I looked at their plan, and it was pretty much cutting benefits on rich retirees and indexing the normal retirement age to life expectancy. And I was just disheartened by this because I'm like, if that's gutting Social Security, what's your plan?

Brian Riedl: Oh, let me tell you. This is near and dear to my heart because I've worked the offices that are designing Social Security reforms in the House and Senate. I'm working with them, I'm helping them, I'm advising them. So I know very well what's being talked about on Social Security and what's not. I'm helping design the plans. And what they're talking about is so gradual, little small things like the retirement age is set to go to 67 by 2030, have it go to 68 by 2040. Little things like, if you're earning over $200,000 a year after retirement, maybe cap your annual inflation, or COLA, for your Social Security benefit. For the richest 2 percent. They are the most minor tweaks you can imagine. And instead the Democrats right now, Joe Biden's Twitter feed, is Republicans are going to eliminate and repeal the Social Security program. And it's just absurd gaslighting, especially when the status quo is the biggest danger to Social Security. Twelve years the trust fund hit zero and benefits get cut 25 percent. How is that responsible?

Allison Schrager: Yeah, I don't know if you read my last Bloomberg column where I quoted you, but I got a lot of feedback from people saying you're lying, you're making this up. Social Security is in fine shape.

Brian Riedl: Yeah, the misinformation that's out there on Social Security and Medicare is insane. People still believe that when I say I pay my Social Security tax and it's saved in a special account, and I get it back when I retire, and I get back exactly what I paid in, that's not remotely true.

Allison Schrager: But there's a strange cognitive dissonance.

Brian Riedl: People get back much more than they pay in, and the program has been in deficit since 2009.

Allison Schrager: But people also say all the time the program's going away. They're like, it's a myth we have to do anything about it. Yet at the same time, 47 percent of people, even older people expect their benefits just disappear one day entirely.

Brian Riedl: Yeah, totally cognitive dissonance. I remember in the ‘90s when I was first learning about these issues, there was a well-sited poll that said more people expect to see a UFO than a Social Security check. But at the same time, it's so hard because cynical politicians are still playing the greatest hits from the ‘80s, which is if Republicans win the next election, they're going to repeal the Social Security program. And I can't believe people still believe this. In fact, I've actually, I had a little frustration on Twitter the other day where I said the prediction markets that do election markets where you can bet on candidates, I would love for them to do a market on will the Republican Congress bring a bill to the floor to terminate Social Security and Medicare, because none of these people actually who say this, believe it. And if they did, I would love to bet the other side.

It's all just trying to prey on low-information voters. No expert who studies politics could possibly believe that any of our major parties is planning to terminate Social Security and Medicare. There has never been any move to do anything like that. It's just politics.

Allison Schrager: They won't even let private pensions fail.

Brian Riedl: Exactly. We just had an $80 billion bailout to the Teamsters private pension, and you think we're going to let Social Security fail? But it's so cynical. I worked in the Senate for six years, and I would talk to Democratic offices, and they know all of this stuff. They know the Social Security numbers, they know the Medicare numbers, they know this stuff has to be fixed. They know it's going bankrupt. But they say, I'm sorry, the politics are too good. We're going to demagogue it because it wins us elections. We know something has to be done. But the politics are too tempting.

Allison Schrager: Yeah, you can blame politicians, but everyone is choosing to believe to adopt this cognitive dissonance on this. Everyone knows our population's getting older, and the numbers don't add up. I think on a guttural level everyone understands that. People also know that a lot of people are very dependent on those benefits, yet the same time people are just very resistant to any sort of reform. I don't understand how all these things can exist no matter what they're being told by their politicians.

Brian Riedl: Yeah. Well, when I get in these conversations with people, which is all too often, it all comes back to we can fix Social Security by taxing the rich. If we just tax the rich, everybody can have all of their Social Security and Medicare benefits. It is the myth that won't go away. Bernie Sanders says this. And it's because they want to believe it. And I post these little charts on Twitter where I show, here's the size of the Social Security and Medicare gap, and here is how much money every Progressive tax hike individually would raise. And I say, you could do every one of these, every single tax Bernie Sanders talks about, and here's how much it adds up to, and it doesn't pay for it. And they just say I’m lying.

People are so dedicated to the idea that they're getting screwed not by Social Security’s finances, but by the rich being undertaxed. And it's because people are looking for a free lunch. People want an easy way out, and taxing somebody else is the easiest way to get out of the hard choices we have to make. And as much as you try to show them the numbers, they tell you, you're part of the conspiracy.

Allison Schrager: So we're running out of time. So I do want to ask you before we sign off, if you were king, what would your budget be? Would you raise taxes, would you cut spending? I guess we know how you'd fix Social Security because I've read the plans, but just roughly, what would your strategy be?

Brian Riedl: I actually wrote in 2018, a fully scored 30-year budget plan to stabilize the debt. No gimmicks, trying to be plausible. And what I determined is that you have to save 6 percent of GDP from spending in taxes by the 2040s off the baseline. If you do that, you'll save 4 percent of GDP in interest and you'll stabilize the debt. The way I did the 6 percent of GDP was, I got 4.5 percent of GDP in spending savings, and I raised taxes by 1.5 percent of GDP. On the spending side, raise the Social Security age to 69, trim benefits for upper-income individuals. On the Medicare side, move to a premium support system where people buy healthcare in an exchange like the ACA, and get it reimbursed; restrict B and D subsidies for wealthier seniors, so that seniors making $300,000 a year aren't getting huge subsidies.

You do some basic Medicaid reforms. You protect the bottom 40 percent of seniors. No changes to the bottom 40 percent. And from there you just allow the rest of government spending to grow at a steady rate of about 3 percent per year. That's it. You stabilize the debt on the spending side. On the tax side, raising 1.5 percent of GDP isn't that hard. I cut the healthcare tax exclusion in half, so you'll pay taxes on half of your healthcare benefits. And I raised the Social Security and Medicare payroll tax one percentage point each because I wanted to do taxes in a broad-based way to minimize the economic damage. You do all that, you solve the problem.

Allison Schrager: So we wouldn't even have to really cut spending in a big way as long as we address entitlements.

Brian Riedl: Exactly. Exactly. And the reason I concentrated most of the reforms within Social Security and Medicare is, you can't cut the fence and raise taxes on the rich enough. And I wasn't going to do the conservative fantasy where, oh, just zero out welfare spending. No, there was no cuts to the safety net, no cuts to the bottom 40 percent of seniors. And I even maintained parity between defense and non-defense discretionary spending to be fair to Democrats who worry about non-defense being gutted. If you do that, you can fix it, but you have to move quickly because every year we wait, the cost gets higher.

Allison Schrager: I fear that we'll actually need to have a 400 basis-point rate increase for people to find religion or be open to such solutions.

Brian Riedl: This has been my fear for 20 years. How do we motivate reform without having to wait for a crisis that makes it worse? I still don't have the answer.

Allison Schrager: Here we are. I was feeling somewhat optimistic until I heard that plans to gut Social Security consisted of indexing the retirement age to life expectancy, which the U.K. has done. That's in completely reckless country.

Brian Riedl: Yeah, these are basic reformers, and you bring up an interesting point that some of the entitlement reforms that are seen as so crazy in America, we're 20 and 30 years behind Europe. Scandinavia, socialist Scandinavia, has been doing a lot of this stuff for 20, 30 years. Germany, the U.K., a lot of Europe has already been doing these reforms, and they’ve lived to tell about it. And so America's actually becoming the outlier on this stuff.

Allison Schrager: Yeah, well hopefully, as I said, it won't take a debt crisis to be more open to these things. Anyway, thank you so much for joining me. That's all with Brian. You can find his writing on the City Journal website at, and we'll link to his author page in the description. And we'll be sure to link to some of the reports he mentioned today—I highly recommend them. And keep your eye out for his enormous book of deficit pictures. It's terrifying but also enlightening and it will arm you to be in any discussion about fiscal policy. You will be so much smarter than everyone else. I highly, highly recommend it. I look forward to it each year. So you can also find City Journal on Twitter @CityJournal or on Instagram @CityJournal_MI. And as always, if you like what you heard on this podcast, please give us a five-star rating in iTunes. Brian, thank you again so much for joining. I've really enjoyed this.

Brian Riedl: Thanks again, Allison. It's been fun.

Photo: malerapaso/iStock

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