In the course of 2020, the federal government made massive attempts to cope with the economic consequences of the pandemic. Republicans and Democrats agreed that in the face of the crisis, America had to put out the fire first and worry about all the water they would later use. But in 2021, people are starting to worry about these huge costs, especially on top of the existing federal debt. Republicans say it’s a looming problem, Democrats say it’s just an excuse to oppose progressive priorities. So who is right? Or maybe both have a point? Manhattan Institute Household Expert Brian Riedl explains in this edited transcript.
Listen to the full conversation here:
Matt Robison: What is the fault? The way people use debt and deficit interchangeably at times can be confusing.
Brian Riedl: The deficit is the amount of new money that Washington has to borrow each year because it does not collect enough taxes to pay the expenses. So if Washington levies $ 3 trillion in taxes and spends $ 4 trillion, we have a deficit of $ 1 trillion this year. Debt is the sum of all of our annual deficits. So let’s say the government has to borrow $ 1 trillion every year for ten years in a row. We have $ 10 trillion in debt at the end of the year.
Matt Robison: Where are we now
Brian Riedl: The debt is $ 22 trillion. We have a GDP of around 21 trillion. So debt is just over a hundred percent of GDP: a little larger than the size of our entire economy. To put that in historical context, the biggest debt surge we’ve ever had was during World War II. The debt rose from 30% of GDP to 106% of GDP in about four years. The situation will get much worse from here, but that’s where we are right now.
Matt Robison: Is it really a problem to have so much debt?
Brian Riedl: Yes and no. In the short term, it’s better than the alternatives. There are actually times when you might want to go into debt, and one of them is during a recession. They want to stimulate the economy through larger deficits. While this situation isn’t necessarily a good one, it is better than the alternative.
There are two major problems with debt. Number one is what is called crowd out. There is a limited amount of savings in business. These savings are loaned out to people to buy houses or cars, invest in businesses or college students. And those are the things that make the economy grow. But the more of these savings the government borrows, the less there is left for companies to invest and people to spend. These things are being suppressed.
The second problem that I’m more concerned about in the long run is the cost of interest. The federal government has to pay interest every year to the people who lend money. We are well on our way to borrowing so much money over the next 30 years that we will have to put a lot of money aside in the federal budget to pay the interest. And that means less money for other priorities.
Matt Robison: How bad does the future situation look?
Brian Riedl: As a country, we have no idea what will hit us. Even after we come out of the recession, the 30 year numbers are terrifying. According to the Congressional Budget Office, we will run into deficits of $ 104 trillion over the next 30 years under the rosiest possible scenario: After all tax cuts have expired, not a penny of new spending, no new wars, and low interest rates.
It’s driven almost entirely by Social Security and Medicare deficits. Social Security is facing a $ 31 trillion cash squeeze. Medicare faces a $ 71 trillion cash squeeze. And the rest of the budget is facing a $ 3 trillion cash squeeze. So ultimately, Social Security and Medicare are pretty much the place to look to get a handle on the problem. With 74 million retired baby boomers coupled with rising healthcare costs, this will be a major challenge.
The result is that interest rates will be 8% of GDP by 2050. In other words, half of all taxpayer money goes towards paying interest on the debt.
And that is the rosy scenario.
Matt Robison: What are we doing against it? What are your ideas for making our way down the mountain?
Brian Riedl: Once we get the economy back on its feet, we need to tackle those $ 104 trillion. Most of the solution has to come from social security and health care reforms: raise the eligibility age, cut back benefits at the top, and likely increase payroll taxes on the Medicare side.
You also need to increase the eligibility age. Move to more efficient models and cut some subsidies to wealthy individuals, but even that won’t solve the whole problem. There will likely have to be some tax hikes as well.
The key is to get started. I’d rather start soon and move on with reforms gradually rather than waiting for the last baby boomer to retire and then trying to put them down because that just won’t work.
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Matt Robison is a writer and political analyst focusing on demographics, psychology, politics, and economics trends that shape American politics. He served as the legislative director and chief of staff for three members of Congress on Capitol Hill for a decade, as well as serving as a senior advisor, campaign manager, or advisor on several New Hampshire congressional races. In 2012, he ran a comeback race, dubbed the election’s biggest surprise win by national political analysts. He then served as Policy Director in the New Hampshire State Senate and successfully helped coordinate legislative efforts to pass the Medicaid expansion. He has also done extensive private sector work on energy regulation policy. Matt holds a bachelor’s degree in economics from Swarthmore College and a master’s degree in public policy from Harvard Kennedy School of Government. He lives in Amherst, Massachusetts with his wife and three children.