The next administration and Congress will face a large and growing federal debt. Although everyone recognizes the long-term imbalance between federal spending and revenues, there is ample debate about just how big a problem this is, and the extent to which it should be a priority for lawmakers.

Jason Furman—a Harvard Kennedy School professor and former chair of the Council of Economic Advisors—coauthored a 2019 Foreign Affairs essay that argued for accepting that the debt would grow as a share of the economy, prioritizing new investments, and maintaining full Social Security benefits over deficit reduction. For Furman, fiscal consolidations such as tax increases and spending savings should be limited to offsetting expensive new initiatives.

MI senior fellow Brian Riedl, by contrast, offered a more pessimistic view about the fiscal trajectory in a recent issue brief, arguing that lawmakers should prioritize stabilizing the national debt as a share of the economy over the long term. In Riedl’s view, continuously rising debt could bury Washington in interest costs, raise interest rates, and risk a future economic crisis.

 

Event Transcript

Allison Schrager:

Hello. I'm Allison Schrager, a senior fellow here at the Manhattan Institute. Welcome to our event cast, The Federal Debt Debate. We are delighted to have two esteemed economists who are intimately familiar with the contours of America's debate on debt and deficits and the political realities that drive it. This debate cannot be timelier. We have a new presidential administration coming in. And following large economic shocks, we usually have large expansions of the entitlement state and more spending. So today's event really can't be timelier. To achieve some clarity on this very divisive issue, it's my pleasure to introduce today's moderator, Kate Davidson, of The Wall Street Journal. Ms. Davidson covers the US economy and the Federal Reserve for the Journal's Washington bureau and is perfectly positioned to equip us with a guide to today's discussion. Kate Davidson, welcome.

Kate Davidson:

Thanks so much, Allison, and thanks everyone for joining us. I have the job of introducing our esteemed economists as Allison mentioned. Jason Furman is an economic policy professor at Harvard and a non-resident senior fellow at the Peterson Institute for International Economics. He spent eight years as a top economic advisor to President Barack Obama, including serving as the chairman of the Council of Economic Advisers from August 2013 to January 2017. Brian... Excuse me, Brian Riedl is a senior fellow at the Manhattan Institute focusing on budget, tax, and economic policy. Previously, he worked for six years as chief economist to Senator Rob Portman. He also served as a director of budget and spending policy for Marco Rubio's presidential campaign and was the lead architect of the tenure deficit reduction plan from Mitt Romney's presidential campaign. From 2001 to 2011, Brian served as the lead research fellow on federal budget and spending policy at the heritage foundation. Thank you both for joining us today.

Brian Riedl:

Thank you.

Kate Davidson:

I guess I want to kick it off with a very easy one. I'll throw you a softball and allow you both to lay out your views on the subject. We recently found out the CBO confirmed that debt, as a share of GDP, has reached 100%. It's about the size of the economy now. And the Congressional Budget Office also projects that over the next 30 years, the debt will rise to 195% of GDP. The question really is, should we be worried about this? Is this dangerous? Does it matter? How concerned should Americans be? Do you want to kick it off, Brian?

Brian Riedl:

Sure. I'll open up by making three quick points that are explaining it in a little more detail. My three main takeaways are, yes, we should wait until the recession is over then focus on the deficit. Number two, the current debt trajectory is still unsustainable over the long-term. And number three, it is dangerous to assume interest rates will never rise again. Let's dive in. Is it a recession and we should spend what is necessary to end the recession? Absolutely no argument there. But what happens when the recession ends? We must absolutely address the soaring structural debt. Over the next three decades, CBO projects total deficits of $104 trillion. And that's the rosy scenario that assumes no spending expansions, most of the 2017 tax cuts expire on schedule and interest rates remain below normal, 104 trillion. By 2050, interest will be 8% of GDP and consume 44% of all tax revenues as the biggest portion of the federal budget.

Brian Riedl:

The deficit alone will be 12 and a half percent of GDP and growing rapidly. Again, this is the rosy baseline scenario before we've added any new spending or extended any tax cuts. In 30 years, as Kate mentioned, the debt would be 195% of the economy. 10 years after that, 270% of the economy. 10 years after that, 374% of GDP. For those who say the current debt is too small at 100% of GDP, we don't have to do anything. It's already going to double or triple as a share of the economy, even with low interest rates and no legislation. But what if interest rates do rise? Rates may be low today, but government relies on short-term borrowing. So if rates rise in 10 or 15 years, it'll soon hit the entire national debt.

Brian Riedl:

So let's say interest rates exceed the CBO projection by just 1% point. That would add $30 trillion over 30 years in additional interest costs, about two and a half percent of GDP. That's one and a half times the cost of the entire Social Security shortfall. It puts the debt 30 years from now at 264% of GDP according to CBO. And that's just if interest rates rise 1% point above the CBO projection. If rates go 2% points above CBO, then just 30 years from now, we have a national debt of 333% of GDP. And that world interest is costing 17% of GDP per year and the budget deficit is 21% of GDP. So the question really is, are we feeling lucky? On the baselines, we gradually rise to 200% or 300% of GDP. If interest rates exceed, that baseline, it goes up even faster.

Brian Riedl:

Here's my point. Regardless of what one considers the right, that level, 100, 150, 200, most economists will tell you and agree, but a debt drastically rising to 200% or 300% of GDP is not sustainable, nor annual deficits of 12% to 20% of GDP. So my position is let's get out of the recession first, let's spend what it takes to fix the economy, and then let's implement some gradual reforms to at least level off the debt at some level and focus on that. Thank you.

Jason Furman:

I want to thank the Manhattan Institute for organizing this discussion. I think we all come out smarter when we disagree about some things and maybe we agree on some things. I want to start with the most important agreement that I think Brian and I have that is pretty broadly agreed across the economics profession, which is that right now, one doesn't need to worry about the debt, in responding to what is roughly the third worst of the 12 post-war recessions that we've had. That's the view that Ken Rogoff and Carmen Reinhart have both taken. They're much more concerned about the debt than I am. They have a long history of concern. They have said spend whatever it takes.

Jason Furman:

I should say that's not a license to spend wastefully or unnecessarily. That doesn't mean you want to do $12 trillion fiscal stimulus. I don't think we need $12 trillion. I think that would be wasteful. It's just to say, "Figure out what the economy needs. Don't worry about the debt over the next year." I think where Brian and I differ is I continue to be worried about the overall shape of the macro economy after next year. I think the decline in interest rates has been profound and has shifted me on my thinking about the debt. I agree we can't count on it, but just like anything where there's a risk, how much do you want to pay an insurance, how big is the risk, what is the cost of dealing with it now versus later, all become very important questions.
 

Jason Furman:

Let's talk about that decline in interest rates. It's happened across all of the advanced countries in the world. It's happened over several decades. It started before the financial crisis. It was still apparent and interest rates were even lower at the end of 2019 when the economy was very close to full employment. And obviously, it's happened to an unusually large degree now with the real interest rate, the interest rate adjusted for inflation, being minus 0.8%. There are many debates about why this has happened, whether it's slowing productivity growth, demographic change, rise of China and the global economy, increased inequality. You can debate what the relative importance of those and other factors are. But what's important is to understand this has happened everywhere over a long period of time, isn't just a choice of one central bank and the like.

Jason Furman:

So what is this decline in interest rates telling us? It's telling us a few things. One is it's telling us that we have a hard time having enough demand in the economy. In order to get enough demand in the economy for the market to clear, we need a very low interest rate. In fact, often we need a nominal interest rate that's actually negative. It's also telling us that every time we hit a recession, we're going to have interest rates cut to zero and still not have done enough in monetary problem policy. There's a whole nother room having a conversation that's not worried about debt that's worried about financial bubbles, increased risk taking in financial markets. And what they view, I think, in an overstated way is the problems with quantitative easing and the like. But all of those problems and all of those instabilities that people worry about in financial markets that in another room they're talking about derive from these low interest rates and would be even worse if we managed to get our debt down.

Jason Furman:

If I could pick one metric to look at, it wouldn't be the one, Kate, that you began your question. Whether you began it with the very standard metric, many people begin with debt to GDP. I would look at interest payments as a share of GDP because that's effectively what your federal government is losing out and can't spend on something else for a given amount of revenue. This year, those are in nominal terms 0.5% of GDP. Back when we were worried about deficit reduction a lot in the late '80s, early '90s, it was 3% of GDP. Real interest payments, which is the more economically correct way to look at it, adjusting for inflation and the way we're inflating our debt, are actually negative as a share of the economy. So the US economy, in important ways, is in a better fiscal position today than it was in 20 years ago. The debt is higher, your interest is lower. Household analogies are very dangerous, but households should worry about what your mortgage payments are, not what their total mortgage is.

Jason Furman:

The last thing I want to address is there is a very real possibility that interest rates rise in the future. In fact, I think they'll certainly rise from their rock bottom rate right now. I think there's a certain amount of symmetric risk around that. They might be lower than we think, in which case maybe we don't have any fiscal problem at all. They might be higher than we think. If you look back at the fiscal productions for the 1990s for where we'd be right now, they thought we'd be at dead of 150%, 200% of GDP. I don't know how much I want to make policy over 20, 30 year period based on projections. I'd look at interest as a share of GDP now maybe over the next decade. I do agree, by the way, some tweaks are very likely going to be needed on taxes and spending. I just think of the 15 economic problems I worry about. I'm not sure that one is in the top 5 or even the top 10.

Kate Davidson:

Thanks so much to both of you. You, I think, covered every single question that I was going to ask you. So I'll have to dig a little deeper. I want to go back to a point that you were making, Brian, and ask both of you really. When is really the right time to start thinking about long-term deficit and debt reduction? Brian, you said after the recession, but I'm thinking back to the last recession and it was over. I know we didn't realize this in real time, but it ended in the middle of 2009, which in hindsight, clearly, the economy was still very weak then. How do you figure out the right time now in the current moment and same question for Jason too?

Brian Riedl:

Well, that's a good question. I don't think you start going into reforms just the day the recession ends because the end of the recession doesn't mean that the economy is back to its optimal performance. It just means that you've stopped digging and the hole is no longer getting bigger. I think it's safe to wait another year or two. When I wrote a report last year on a 30-year blueprint to fix the budget, it began implementing reforms very gradually in 2023. The hope is that while a V-shape recovery is not looking very likely, that the economy by 2023 or so should be available to at least begin phasing in reforms, nothing drastic.

Brian Riedl:

The danger is the longer you wait, the more drastic the reforms have to be. Because every year you wait, the debt gets bigger, which means the interest costs get bigger. You also have more baby boomers retiring every year, locking in Social Security benefits, locking in Medicare benefits that are really the main driver of long-term deficits. So if you don't want to do something drastic, I would rather start phasing in reforms maybe around 2023 if the economy has grown and it hasn't continued to worsen rather than 2028 or 30 and definitely not right now.

Jason Furman:

Yeah. Kate, just stepping back from this question and then getting to it, there's a general worry that some who are concerned about deficits and debt have, that the political system systematically only makes errors in one direction, a view that Congress is irresponsible, they're constantly spending like drunken sailors, they're constantly cutting taxes like lunatics, and it's constantly raising the debt. And that when you speak in public, it's important to lean against that. And they're always going to be crazy and irresponsible. In Congress, we need to be the voice of sanity and reason. My own experience over the last 12 years is the errors in Congress, the errors in among the public too, and public perception go in both directions. Definitely, you see the error of irresponsibility and wanting to spend too much and wanting to cut taxes too much, also see the error of access concern about the deficit and the debt.

Jason Furman:

We saw that in Europe in response to the financial crisis. We saw that in 2009 and 10 when there was a premature shift to austerity. It wasn't just Congress. They were reflecting views of the public. When a family hits tough times, they tighten their belt. That was a resonant line with the public. That is something a lot of the public agreed. So I am worried that whatever we do on the deficit, we'll pivot to it too soon. And we'll pivot to it too soon. Some might say because there's cynicism of one political party. That might be part of it. It might be partly based on a misguided belief and partly based on the politics both parties will face and the constraints they face. So I worry whatever we do on the deficit, it might be too soon.

Jason Furman:

In terms of when I think we need to deal with it, partly it's when interest rates start to rise. Partly, I think Social Security is not a bad forcing event. It's projected to exhaust its trust fund in the early 2030s. I think solving Social Security within the payroll tax benefit framework is the right way to do it. I would do it mostly on the tech side. In fact, I don't even mind benefits going up if you're willing to raise Social Security taxes to pay for them as Congressman Larson's plan, I think that does. I think that's a decent forcing event. And then the very last thing I'd say is acting early is more important if you want to change benefits than if you want to change taxes.

Jason Furman:

Brian and I, I think, have different views on the deficit and debt. I think we also have different views as to whether we would like the majority of the solution to Social Security beyond the tax side of the spending side. And if you act sooner, it enables you to ramp in slowly benefit cuts. If you wait more time, I think it's going to push more of the solution to the tax side. I don't mind that terribly. I suspect from where Brian's coming from, he does mind that quite a lot.

Brian Riedl:

Can I jump on the interest rate point? Because that's come up a lot is ultimately I agree with Jason that a lot of what we face in the future depends on interest rates. Here's my concern. First off, again, the baseline even shows interest on the debt hitting 8% of GDP in a couple of decades. You don't even have to assume interest rates go through the roof. That's the baseline, about 40% of all federal revenues is a rosy baseline. Jason is right. It could be lower. If it's higher, you're going to look at 12% to 17% of GDP. Now, could interest rates be higher? Well, Ernie Tedeschi is a former Obama administration economist. And he and others have confirmed that all else equal each 1% point of GDP rising government debt still raises interest rates by about 4% points.

Brian Riedl:

If that is the case, then 100% in GDP index should all else equal raise interest rates by 4%. Up until now, as Jason mentioned, these forces have been balanced out by recession, lower productivity, boomer saving more, the global preference for safe assets. But if you're going to have a factor that would, by itself, shoot interest rates up four more percentage points, are we going to assume that these factors are going to accelerate and fully offset those 4% points again? What if instead the economy strengthens? What if productivity rises? Boomers retiring are going to start drawing down their savings, which is going to have the opposite effect. Investment can shift towards emerging economies. You could have inflation. Any of these would at least prevent the full offset of that four percentage point effect.

Brian Riedl:

There is a danger here. Peter Orszag recently favorably reviewed a book that explained why rates may rise more than is commonly understood. And so it's interesting that CBO and a lot of economists over the last 30 years have overestimated interest rates. But I worry that now we're doing the opposite and underestimating them going forward because the reality is none of us know what interest rates are going to be in 10 years. None of us know what interest rates are going to be in 20 years. But we do know that the effect of this debt is going to put some upward pressure. And so for me, as Jason said, it's a question of risk.

Brian Riedl:

My concern is that we're going to better economic future on the idea that interest rates will never top 5% or 6% ever at any point in the future. That strikes me as a very dangerous assumption. We cannot predict that, especially, like I said, when there were forces that might push them up. And again, to reiterate, even if interest rates remain low, you still have 8% of GDP in 30 years. If they go a little higher, you're at 12 or 17. So I do think the interest rate point is really important. And it's a question of how low do we want to assume they're going to be and how much do we want a better economic future on that assumption?

Jason Furman:

Kate, should I [crosstalk 00:23:14].

Kate Davidson:

Do you want to respond to that, Jason?

Jason Furman:

You have all these great questions prepared. We keep talking here. Thinking about that insurance question, Brian, you want to ask yourself three questions. One is what is the bad outcome here? There's termites in the woodwork argument against deficits and debt that they drive up interest rates slowly over time, and that crowds out investment and that reduces economic growth. I think there's something to that. I think it's relatively small and doesn't really tell us a whole lot about how to prioritize deficit reduction versus the other goals we have and what the timing is. There's then this other argument that there's a fiscal crisis in our future. Many of the people who worry about deficits and debt warn about fiscal crisis.

Jason Furman:

I've heard these my whole life. I haven't seen one. It doesn't mean there's not one tomorrow. But we can look at Japan, which is a smaller, weaker economy than the United States with much higher debt than the United States and still has interest rates of zero. There's a lot of issues with the Japanese economy, but most of them are the lack of demographic growth in Japan and their productivity growth is actually quite similar to ours. I don't think the United States should be like Italy. But Italy borrows in a foreign currency that it doesn't control the Euro and even borrow at cheap rates, even with debt well above the United States.

Jason Furman:

There are precious few examples in history of a major fiscal problem around a country that could borrow in its own currency, controlled its own monetary policy, especially one that has the exorbitant privilege of being the world's reserve currency. But [inaudible 00:25:18] licensed the UK in the 1970s, one could argue, I think, is the best counter argument. So how big is the risk? I think there's a small termites in the woodwork thing. I think that's real, that doesn't motivate me a whole lot. There's a financial crisis risk. I don't think it's zero, but it gets harder to worry about.

Jason Furman:

Second thing is what is the value of insurance against that risk? If we lowered our debt to GDP from 110% of GDP to 90% of GDP or even to 70% of GDP, that doesn't entirely eliminate the risk. In fact, emerging markets have debt crises at debt to GDP way below that level. The UK in the 1970s had one with debt below that level. And so some of the steps you'd take are quite costly. They may reduce your chance of a crisis from something very small to something even smaller. But how much do they reduce it? How much do you still have left after it, et cetera? I think some of this also depends on what's going on in other countries. If you want people to borrow from your country, you want to just be the least ugly horse in the glue factory. And if everyone else's debt is high too, they're not going to shun the United States. If only the United States is in this position and everyone else is in a radically different position, it'd be different.

Jason Furman:

The third thing is what happens when this comes? If it's the type of gradual increase in interest rates, real interest rates, that was mostly what we saw over the course of motivating the last election rounds in the late '80s, early '90s, that will give us some time to deal with it. And do I know that's true for sure? No. But we could get rid of financial crises by requiring banks to hold 100% in the form of reserves, not letting them have any leverage in the financial system. We get rid of crises, but we get rid of them at quite a big cost. I think there's some analogy to that in this space as well.

Kate Davidson:

I'd love to hear from both of you about what you think is the appropriate level of debt, either what should our goal be, or put another way, how much room do we have right now?

Jason Furman:

My own view-

Brian Riedl:

Oh, go ahead.

Jason Furman:

We all have a problem, which is none of us know how to think about the right level of debt. If it was 500% of GDP and rising rapidly, I wouldn't be very happy. I don't know where Brian's unhappiness starts. If I had to guess, looking at Japan, looking at Italy, looking at, by the way, the UK's history, they often had debt of 250%, 300% of GDP, but being mindful that there is a risk here, that there is a cost if interest rates go up, I'd be comfortable with debt to GDP ratio stabilizing around 150% of GDP.

Jason Furman:

To stabilize at around 150% of GDP will require some fiscal adjustment. Roughly speaking, let the tax cuts expire at the end of 2025, deal with Social Security and then pay for everything else that's not an emergency. If we did that, our real interest payments on the debt would stabilize within their historical range, and then we could reevaluate all of that as interest rates change. I think some adjustment at some point would be needed to keep yourself to 150% of GDP. I'd be comfortable if that's what we did and then would revise that view based on what happens in the future.

Brian Riedl:

I think Jason and I are finding a lot of common ground here. If we stabilized permanently at 150% of GDP, I would consider that a major success. As I said, the baseline for the next 30 years before we spend another dollar and even with the tax cuts expiring is 195% of GDP and rising drastically beyond that, the 300, 400, 500. So if we could stabilize it at 150%, I'm prepared to declare a victory and go home. I think it's not just a matter of there being a magic number, like 150 or 130 or 170, part of the issue is just that it's truly stabilized at that level, that it's not rising 50%, 70%, 100% every decade. That's one of the things that scares me about the baseline. It's not just that we're going to level off at 200 or 250, it's that it's going to be rising so fast.

Brian Riedl:

And you're just getting into unchartered territory. You're getting to the debt levels that countries have never seen before, and that's really dangerous, and that levels that you couldn't possibly finance through taxes or spending changes. I'll also make the point on the international comparisons. [inaudible 00:30:32] has an advantage being the world's reserve currency, although I don't know if that's a huge advantage in a world where you can move money around so fast and shift currency so fast. I'm not sure that's as big of an advantage. But one challenge we have that other countries do not have is because our economy is so much bigger, we can't rely on the rest of the world to bail us out. Greece can have 200% of GDP, that's $350 billion. The rest of the world could write a check.

Brian Riedl:

When the US debt hits 200% of GDP, there's no economy that could really help us out. It's too big. You can't really depend that much on international. I'll mention just over the last nine years, we've added $10 trillion in debt and China and Japan have financed only 1% of it. If we're going to hit 100 trillion dollars in borrowing over the next 10 years, China and Japan do not have the capacity much less the interest in making much of a dent. So while we do get some benefit from being the world's reserve currency, being the biggest economy with the biggest debt also means you can't really expect as much help internationally because your numbers are so big.

Kate Davidson:

[crosstalk 00:31:50]. Go ahead.

Jason Furman:

I feel bad.

Kate Davidson:

Please.

Jason Furman:

Brian, you said you'd go home. It looks like you are home. [crosstalk 00:32:03] let me into my office. So it's a little bit further for me to get home. I think in some ways this is good news. If we coalesce around, we're comfortable as I'm toting to 150% of GDP for the debt. That if you think the difference between growth and interest rates is around 1.5, I'm not saying you thought that, that means you can have a primary deficit, a deficit not counting interest of about 2.25% of GDP. We're a bit above that now and we need to make some tweaks to get there. If I had talked to you circa three years ago, I think you would have thought the notion of 150% of debt to GDP was just loony insane the whole world would come to an end. I'm not trying to characterize you. In fact, I might've thought that if you found me four years ago, it would have been one year ahead of you.

Jason Furman:

What it seems sort of loony insane, how could you possibly think that could happen in the United States? Moreover, when talking about the scale of the problem, the difference between our current primary deficit path in 2.25% of GDP is sort of, I don't know, 2% of GDP adjustment that's needed. That's a lot smaller than the way people who try to make people very nervous about deficits and debts talk. And so the question I'd have for you, Brian, is if I'm right that a couple of years ago you would've thought 150 was loony, was that because you would have been secretly okay with it, but if you let people know that, they wouldn't just end up at one 150, they'd start there and go higher and higher, it's reasonable, or is it because actually the world has changed your thinking about deficits and debt has changed and it turns out maybe higher actually is okay, just not too much higher?

Brian Riedl:

That's a great question. I would say I was targeting 100% of GDP three years ago. In fact, I wrote a report a couple of years ago that said stabilize at 95. I'm okay on 150 because there has been some lower pressure on interest rates that I'm at least a little bit confident that interest rates won't be as bad as I thought a few years ago, that I think we could handle 150. I don't think we could go really beyond that. I do think that there is even a little bit of a risk there, but I'm not as concerned about a cataclysmic interest. I'm not as concerned about interest rates ever going back to 7%, 8%, 9% as I would have been a couple years ago.

Brian Riedl:

Now, the concern is 5% or 6%. So that adjusts me to about 150. If somebody could convince me that interest rates would never hit 4% ever again in American history, I might bump up to 170 or 180. I don't know if we can make that promise, especially given the fact that that again should have some all else equal effect on rates. I'm just scared that we're going to end up at these big numbers. And so 150, I'll grab onto that.

Jason Furman:

Right. Well, I think that's an important point, which is we both agree that interest rates are lower. We both agree you have to reevaluate your thinking. We're focusing on the United States, but in Europe, they reached the Maastricht Treaty in 1992. I think real interest rates were about 7% then. They set a debt to GDP target of 60%. Maastricht today, she could have a number higher than 60% given how much interest have fallen. Same for us. And now, we're arguing about how much we change our thinking based on that, how quickly we need to adjust. And some of those differences might be economic, some of them might be political about how you adjust. But Kate, get us onto something.

Kate Davidson:

Okay, no, this is great. This is very easy for me. I don't mind. Well, so I have a question. Obviously, we know the president elect, Biden, has pretty ambitious big plans for spending and investments, infrastructure, and green jobs and healthcare. You both said you don't think that we need to worry about deficits in the short-term. Maybe if there's a fiscal package next year, early in the year, we can assume that that's deficit finance. But going forward, what do you think if there is not a, what we call a PAYGO rule, if we're not going to offset every dollar, what should the rule be? What do you think is the constraint? How should they think about what needs to be paid for and what doesn't?

Brian Riedl:

I'll jump in on that. I'm nervous about some of president Biden's spending proposals. My estimate is that it came to about $11 trillion over 10 years if you include three trillion in stimulus. Some other organizations have estimated a little lower. I think you get about $6 trillion in debt above the baseline, which is 16 trillion between 2020 and 2030. So instead of 16, you're at 22 trillion. Again, do what it takes to get out of the recession. And then my preference is, again, if we're going to bend the curve a little bit from the 195 and higher over 30 years, then you actually have to go below the baseline a little bit. And so I think not only do you need to pay for what you do, whether it's healthcare, loan forgiveness, climate infrastructure, but I think you also have to actually start figuring out how you're going to reduce the deficit below the baseline through gradually phasing in Social Security and healthcare reforms.

Brian Riedl:

Now, I'm going to put some words in Jason's mouth that he can then tell me I'm totally wrong on and say that there might be an argument that infrastructure is less of a concern to pay for because it can create economic growth. I would agree if we can actually make the reforms to the bigger programs that are driving the deficit. Infrastructure is not driving the deficit, it's not driving the debt. If we could make room in the other programs, there is certainly room for infrastructure. My concern with exempting infrastructure is that if the Democrats say, "Infrastructure doesn't have to be paid for because it creates growth," then Republicans are going to say, "Well, then the tax cuts they create growth, or at least business expensing creates growth and defense R&D creates growth." And once you start taking things off the table, you know how politics works, they all fall apart.

Brian Riedl:

My take is keep it simple after the stimulus. If it's worth doing, it's worth paying for, even the stuff we really like. And then let's start looking at the reforms we can to pull us down off the trajectory we're on. Start gradually putting in some Social Security and healthcare reforms. I would love to recap discretionary spending, including defense, everything on the table. And I would be willing as part of this deal, of course, to put taxes on the table as well.

Jason Furman:

My four things that I would do are the following. Number one, don't pay for anything that's related to the emergency. Number two, pay for everything that's permanent to the extent that it adds to the deficit and debt after accounting for its economic impact. Number three, let the tax cuts expire at the end of 2025, or be fiscally neutral relative to that baseline. And number four, eventually solve Social Security, with my strong preference being doing that as much as possible with revenue. There's some blurriness in that, what counts as an emergency, what doesn't? [crosstalk 00:40:04] two years is that emergency, if it's not, I'd take quite a broad approach towards that, what pays for itself or partly offsets it's cost over time.

Jason Furman:

I think actually the strongest academic evidence for that is investments in children, especially preschool and other investments as well. An article published in the Quarterly Journal of Economics, co-authored by some of my colleagues here at Harvard, including Nathan Hendren, Ben Sprung-Keyser went through a lot of different studies and basically synthesized the evidence and found this. It's a little tricky because the fiscal benefits happen outside the budget window, not inside. And it's not something we have a long history of doing. I might be inclined to just say, "Let's give a pass to investments in children and not subject to that PAYGO rule because we think they're ultimately going to regroup."

Jason Furman:

Infrastructure, actually, contrary to the words that were put in my mouth, I'd be comfortable with not paying for that on the either emergency grounds or it generates economic activity. Infrastructure is a case where the pay for is as good for the economy as the infrastructure itself. If you pay for it with a gas tax, which is what we did historically in a world of electric vehicles, you need to update that and make it around miles traveled. Same thing with climate change. There, the carbon tax, is a more important part of the solution to climate than any spending you could do. I think spending is important and there's some spending things we should do.

Jason Furman:

So it's a set of places where partly if it's worth it, you should be willing to pay for it, but also where the tax itself is an important part of the solution. And getting rid of PAYGO, I think gets rid of all of those types of policies and the pressure for them. Yeah, a lax interpretation of paying for things with a backstop around the expiration of tax cuts in 2025 and a revenue-oriented Social Security plan would be my recommended approach.

Kate Davidson:

Okay. I'm going to make sure that I leave some time for questions from the audience. I'll start introducing a few. Here's one, one thing that has not been discussed, how we are using the additional federal debt. Can you both agree that deficits during good economies that are not used for investment are damaging to future generations?

Brian Riedl:

This is a great question, and I completely agree that what matters as much as debt is what we're going into debt for. We went into huge debt from World War II, 108% of GDP, and no one will tell you it wasn't worth it. We also actually reduced that over the next 60 years primarily through really impressive economic growth from the baby boomers entering the workforce. We won't be that lucky again probably with economic growth. There are really good things to go into debt for. I agree with Jason that there early childhood investments are cheap. They are not a deficit driver, they are easily affordable and they're worth doing. My main concern is what we are going into debt for in the future, these 30 year numbers, is almost primarily Social Security and Medicare.

Brian Riedl:

Those do not create economic growth. They have a lot of value. They have a lot of benefits. We want to take care of seniors, absolutely. But in terms of do they create growth to offset themselves, to make it worth borrowing for, not so much. I think Social Security and Medicare are important programs and they're worth paying for. And the concern I have on Social Security and Medicare is these programs collect 6% of GDP in premiums and payroll taxes, and their costs are going to rise to 12 and a half percent of GDP just based on mostly demographics and some rising healthcare costs. You can't have these two programs running six to six and a half percent of GDP shortfall without problems. And so I think these are the things that are worth paying for, especially in good times. They're important programs, pay for them. I think early childhood investments are easily affordable. World War II was worth it. It all depends on what you go into that for.

Jason Furman:

Yeah. First of all, this one thing for the questioner, I think there is certainly agreement between Brian and me, and I don't think there's any serious analyst, economist, et cetera, who thinks the right goal is a balanced budget, having your revenue equal your spending. Everyone agrees that it is okay to have a deficit. And the reason is that your economy is always growing. And so you're growing out of some of your debt. If you want to stabilize your debt at 100% of GDP, you need a lower deficit. If you want to stabilize it at 200% of GDP, you can have a higher deficit. So I think the argument is over not can you have a deficit, it's how big a deficit can you have, and it depends on what your goals are.

Jason Furman:

So the balanced budget obsession that people had a couple of decades ago, I think that's pretty uniformly gone. The IMF, for example, generally tells countries have a deficit of 3% of GDP or less, for example, they don't tell them to balance their budgets. It's not gone in places like Germany, by the way. The black zero, it continues to transfix policymakers there, but I think it's gone from serious economics. And then definitely the deficit matters for what it is. I didn't like the tax cuts in 2017 because I thought that was unnecessary and poorly designed way to add $1.5 trillion to the deficit. I disagree, by the way, with Brian. I think a lot of what the run-up and the deficit is more because of a series of tax cuts over time, where Republicans cut taxes for everyone, Democrats partially repeal the tax cuts at the top, retain the tax cuts and expand them for the bottom 99% and you get a ratchet.

Jason Furman:

You can't look at revenues and shared GDP to assess this question because people are richer today. So the question is somebody who made $1 million a decade ago, or $50,000 a decade ago, or 20 years ago, how are they taxed and then compared to now? Most income groups are taxed a decent amount lower now than they were in the past. And so I think the continual dynamic around democratic and Republican tax cuts has played a very big role.

Brian Riedl:

If I can push back a little bit on the final point, between 2020-50, Social Security and healthcare spending are going to go from 7% of GDP to 15 and a half percent of GDP. That's an eight and a half percent of GDP increase for Social Security and healthcare. Tax cuts have cost a few percent of GDP of what we would have been, but I think it's really hard for tax policy to overcome going from 7 to 15 and a half.

Kate Davidson:

There've been several questions about debt management. How viable is using long-term bonds to hedge against high rates? This is something that treasury secretary Mnuchin has talked about recently. The treasury has been trying to shift financing to longer maturities. I guess how much of a factor would this be or should this be in stabilizing debt?

Jason Furman:

Yeah, no, Brian said, "If you could guarantee me interest rates are never going to rise above blank, I would be in favor of blank." We can't guarantee that forever, probably you could. The UK used to borrow in perpetuity, but we can lock that in for a much longer period of time. So I think if you're worried about interest rate risk, I would shift to longer maturity debt before I would shift to painful and unnecessary steps around debt reduction.

Brian Riedl:

Absolutely. We should be locking in 30-year bonds that would raise costs in the short-term because short-term interest rates are very low. It would raise cost in the short term, but you would save so much interest rate risk. Now, the treasury looked at doing a little more of this earlier in the year and what they found was that there wasn't much interest in the bond market for 30-year treasuries. But I think this can be pushed harder. I know the UK has pushed up their maturities over the last few years. I think we need to make a much bigger push while we're always careful on household analogies. You don't buy a $10 million house with an adjustable interest rate just because rates are low today. You want that 30 year fixed.

Kate Davidson:

Brian, are you also referring to the 50 and 100 year bond that the treasury was looking at? That's what they determined there wasn't really much interest right now.

Brian Riedl:

Yeah, they found no interest for 50 or 100 year. 30 year, they started doing smaller auctions on 30-year bonds. But the treasury secretary, I believe, was asked at one point why aren't you doing more 30-year bonds that the market said they don't want it, they don't want the market flooded with 30-year bonds, so there's not going to be the demand for it. And so they're keeping it pretty modest.

Jason Furman:

You don't need to issue in 50 and 100 year bonds to lengthen the maturity of the US debt. The maturity structure of the US debt is already tilted towards the short end. There's issues around macro economic managements in the current moment. So when you'd want to lengthen that maturity, it depends a little bit on how it interacts with monetary policy and where we want to go in the economy. But you can do a lot, even more 10-year bonds and fewer 3-month bonds to lengthen the maturity. And yeah, so I wasn't arguing there's an appetite for 50 or 100 years. If there isn't, we shouldn't do that at tremendous cost. We could certainly do a lot more 10 year and some more 30 year.

Kate Davidson:

Well, I think we were all waiting for a good MMT question because that's the topic that hasn't come up yet, modern monetary theory. Do either of the two of you, I know the answer to this, advocate or defend modern monetary theory as a way to discharge federal debt? And without adopting that approach, you've talked about this a little bit, but how would the huge, outstanding federal debt ever be tackled, reduced, or eventually repaid? Again, I know you've mentioned some strategies, but put it in an MMT context for us.

Jason Furman:

I think MMT is a little bit like supply side economics. It came from outside the economics profession. It had a patina of a set of equations and whatever else, and supply side economics was embraced by a broad spectrum of Republican political officials. MMT actually so far actually has relatively little support among Democratic political officials, but we'll see in the future. To say that it comes from outside of academia doesn't mean that it's automatically wrong, but it does mean, I think, we should have a high degree of skepticism if it hasn't been vetted and tested in the way that things that appear in journals and textbooks are.

Jason Furman:

The biggest problem with MMT is in the letter T. It purports to be a theory, grounded in a set of timeless truths that are rooted in identities. I don't think there is any theory or timeless truths here. I think the parameters, like especially interest rates that we've been talking about matter a lot. So why does an MMT work for Argentina, the same identities hold in Argentina as hold in the United States but doesn't work there? Why did the UK run into trouble in the 1970s? It can't tell you when it works and when it doesn't work because it's not based on empirics, it's based on a theory and a set of identities.

Jason Furman:

And so, in particular, I think it's like a stopped clock, and twice a day it's right, and the rest of the time it's not. I think right now it's a perfectly useful guide for policy in a recession, but we didn't need it. We already knew that from Keynesian economics. I teach the introductory economics class at Harvard. The students can take the material I teach, which is straight out of any textbook and have applied that to argue for deficit spending. They didn't need MMT for that. But it is coincidentally.

Jason Furman:

MMT also has some other propositions. Some are very, very strange. Like you should use tax policy to control inflation and the idea that Congress is going to raise taxes when inflation goes above target and cut taxes when inflation goes below target. Now, I still would leave the Fed as my primary line of defense for fluctuations and for price stability. It's just at times when you overrun that line of defense, which increasingly happens as it has now that you want a fiscal policy.

Brian Riedl:

I couldn't have said it any better. Jason covered it well.

Kate Davidson:

Okay. I have a question that's, I guess, more of a political question. You guys are economists, but I'd love to hear what you think are going to be the political challenges next year. This is a perfectly nice reasonable chat that we're having, but this debate is very charged as we know from Twitter and other places. And voters, I think, or just households tend to take this view that you've been talking about, Jason, thinking about government debt like household debt. They just feel very strongly, I think some of them, at least, based on the emails I get from readers that we should pay for things. We should pay for the programs that we're enacting. How much of a political challenge is this going to be for the incoming administration? And also, I guess maybe I'd ask Jason that question and then ask Brian. For Republicans who were tolerant of higher deficits during the Trump years and their party leader has presided over a huge increases in deficits before the current crisis, how did they start arguing that we shouldn't keep deficit spending to deal with the current crisis?

Jason Furman:

When I talk to Democrats in Congress, Kate, I find more of them are, from my perspective, overly concerned about the debt. There's probably some MMT-ers who are less concerned than they should be, but I find more of them have the household analogy, the above 100% of GDP. I write in the opinion pages at the same newspaper, you write much more regularly professionally for, and I always get lots of email on... But your thing would raise the dead. I never get email. You should raise the dead even more. I think there's a disconnect between a conversation on Twitter where I got some criticism for dignifying the Manhattan Institute and Brian with great conversation we've been having, even Democrats in Congress, who I think are still overly concerned certainly for the next year, maybe even over a medium horizon in a way that would constrain what's doable.

Brian Riedl:

Republicans absolutely have a credibility problem on deficits. People who say they're hypocrites, they only care about deficits when Democrats are president are essentially correct. I liked a lot of the 2017 tax cuts on policy, especially the corporate side, but I think they should have been paid for. And by not paying the 2017 tax cuts, Republicans lost so much deficit credibility. And that's one of the reasons they don't talk about deficits anymore because every time a Republican says, "We need to do something about long-term deficits," the response is, "Okay, start by repealing your tax cuts." So Republicans just stopped talking about it. I will say there's an underground concern in the Republican Congress about deficits that has been there for the last four years. They were afraid to talk about it because President Trump that he'll veto any Social Security or Medicare changes. And if there's one thing Republican senators fear, it's a nasty tweet from President Trump, not exactly a profile in courage.

Brian Riedl:

I think publicans were in a tough position because the concern never really went away, but they were very cowardly about it the last four years. They voted for big discretionary spending increases, they voted for the tax cuts. But what's interesting is for those who say, "But Republicans are just trying to sabotage the economy when Biden is coming in," it is interesting that Republicans turned on deficit spending that summer after the CARES Act. And so what's interesting is even this fall when President Trump wanted one and a half, $2 trillion, and supposedly this would help Republicans and rev up the economy and get reelected, they actually started early, even when it would have under that theory hurt themselves.

Brian Riedl:

So I am seeing the start of the backlash among conservatives. I do think they have a definite credibility problem. Let's be honest, nothing is going to happen on the deficit if it's not bipartisan. There's too much heat. Democrats cannot raise taxes through the roof by themselves. Republicans cannot touch Social Security or Medicare or other programs by themselves. It's too politically risky. I'm hoping that once we're through the recession and we're focused on these scary long-term numbers that we can get a little bipartisan talk about how to turn the train around.

Kate Davidson:

Okay. I think we might have time for just one more quick one. Jason, one thing that you have, I think, supported an idea is this, it's a little bit arcane, it's the triggers for automatic stabilizer. In other words, that we would tie support for the economy to economic conditions so that when the economy sours, some of this would kick in automatically, we wouldn't have to worry about these political debates. And Brian interestingly has said, "That's a good idea." But on the other side, let's tie it to deficit reduction. I'm just curious what you think about that idea, Jason.

Jason Furman:

If we could have for a given level of, say, the Medicaid match rate, it'd be higher in bad times and lower in good times. That would be better than the match rate being what it is. I'm more worried about where we are in recessions than where we are in booms. I'm less worried about the path of the deficit. And so I'd rather make that trigger asymmetric and have a higher match rate in bad times, keep the match rate the same in booms, and you could apply the same analogy to everything else. I think with some things like unemployment insurance, I don't think there's an economy that would get so good that I think you should give people less than a 50% replacement rate or fewer than 26 weeks.

Jason Furman:

So I think some things do have an asymmetry built into them. Whereas if the economies are really horrible, I think you can go higher than that. Yeah, I think if I could have a choice between Brian's or the equivalent that wasn't that, I'd probably go with Brian's and I appreciate his having written and I tweeted a few positive things about it at the time. But I'd rather do it my way, [inaudible 00:59:55] or the highway.

Brian Riedl:

This is the kind of bipartisan deal that makes so much sense it'll never happen. During recessions, yeah, you automatically get the automatic stabilizer in there, higher unemployment, higher Medicaid match rates, higher SNAP benefits. And then during a boom, if state revenues are soaring, you reduce grants to states, you put tighter caps on discretionary spending in defense spending. You could even do it on the tax side. You reduce the Social Security COLA for rich seniors, or you raise the Social Security tax threshold a little higher during a boom. This seems to make sense. And let me tell you, I think conservatives will be a lot more comfortable increasing benefits during recessions if they understand that during the good times we find the parts of the economy where we can afford to pair back a little bit. Like I said, I think it's a really good idea, which is why it's [inaudible 01:00:48].

Kate Davidson:

All right. Thank you both so much. I think that's all we have time for. I think Allison is going to step back in and wrap this up.

Allison Schrager:

Thank you, Kate. I hope everyone enjoyed that as much as I did. But before we close, I invite you to browse the Manhattan Institute's research and subscribe to our newsletters. And if you are able, please also consider supporting the Institute at the link you see below. MI is a nonprofit organization and our work depends on support from people like you. Thank you and have a good afternoon.
 

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