Last updated on March 26th, 2021 at 05:19 pm
Over the course of 2020, the federal government spent a massive amount trying to deal with the economic fallout of the pandemic. Republicans and Democrats agreed that in the face of crisis, America needed to put the fire out first, worry about all the water they were using later. But in 2021, people are beginning to worry about these giant costs, especially coming on top of the existing federal debt. Republicans say it’s a looming problem, Democrats say that’s just an excuse to oppose progressive priorities. So who’s right? Or do they maybe both have a point? Manhattan Institute budget expert Brian Riedl explains in this edited transcript.
Listen to the full conversation here:
Matt Robison: What is the debt? The way people sometimes use debt and deficit interchangeably can be confusing.
Brian Riedl: The deficit is the amount of new money that Washington has to borrow each year because they don’t collect enough in taxes to pay for spending. So if Washington collects $3 trillion in taxes and spends $4 trillion, we run a $1 trillion deficit that year. The debt is the total of all our yearly deficits. So let’s say the government has to borrow a trillion dollars each year for 10 years in a row. At the end of the year, we have a $10 trillion debt.
Matt Robison: Where are we right now?
Brian Riedl: The debt is about $22 trillion. We have a GDP of about 21 trillion. So the debt is about a little over a hundred percent of GDP: a little bigger than the size of our entire economy. To put that in historical context, the biggest debt spike we ever had was during World War II. The debt went from 30% of GDP to 106% of GDP in about four years. The situation is actually going to get a lot worse from here, but that’s where we’re at right now.
Matt Robison: Is it really a problem to have this much debt?
Brian Riedl: Yes and no. In the short term, it’s better than the alternatives. There are actually times where you want to go into debt, and one of them is during a recession. You want to stimulate the economy by running bigger deficits. So while that situation that isn’t necessarily good it’s better than the alternative.
There are two big problems with debt. Number one is what’s called crowd out. There’s a limited amount of savings in the economy. That savings is what gets lent to people to buy houses or cars, or for businesses to invest, or students to go to college. And those are the things that grow the economy. But the more of those savings that the government is borrowing, the less there is leftover for businesses to invest and for people to spend. Those things get crowded out.
The second problem, and the one I’m actually more concerned about over the long term, is the interest cost. The federal government has to pay interest every year to the people who lend money. We’re on course to borrow so much over the next 30 years that we’re going to have to set aside a lot of money in the federal budget just to pay the interest. And that’s going to mean less money for other priorities.
Matt Robison: How bad is the future situation looking?
Brian Riedl: As a country, we have no idea what’s about to hit us. Even after we get out of the recession, the 30 year numbers are terrifying. According to the Congressional Budget Office over the next 30 years, under the rosiest scenario possible, we are going to run $104 trillion in deficits: that’s after assuming all tax cuts expire, not a penny of new spending, no new wars, and low interest rates.
It’s almost entirely driven by Social Security and Medicare shortfalls. Social Security faces a $31 trillion cash shortfall. Medicare faces a $71 trillion cash shortfall. And the rest of the budget faces a $3 trillion cash shortfall. So ultimately Social Security and Medicare are pretty much where you’re going to have to look if you want to get a handle on the problem. But with 74 million retiring baby boomers combined with rising healthcare costs, that’s going to be a big challenge.
The upshot is that by 2050, interest will be 8% of GDP. In other words, half of all your tax dollars will go to paying interest on the debt.
And that’s the rosy scenario.
Matt Robison: What do we do about it? What are your ideas for starting to scale our way down that mountain?
Brian Riedl: Once we get the economy back on its feet, we have to address that $104 trillion. Most of the solution has to come from Social Security and Medicare reform: start raising the eligibility age, trimming benefits at the top, and probably raising payroll taxes on the Medicare side.
You’re going to have to also raise the eligibility age. Shift to more efficient models and start reducing some subsidies for wealthy individuals, but even that’s not going to solve the whole problem. There’s going to have to be probably some tax increases in there as well.
The key is to get going . I would rather start soon and go gradually with reforms rather than wait until the last baby boomer has retired and then start trying to chop it down on them because that’s just not going to work.
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