 Aaron Ross Powell Today we're joined by our colleague Michael Tanner, a senior fellow at the Cato Institute and author of the new book Going for Broke, Deficit to Debt and the Entitlement Crisis. Grease is in the news right now because they're having their own sort of crisis and is that where we're ending up? I mean, your book is Things Look Pretty Bad and we're spending way more money than we have and it's going to be hard to reform it. Are we on the road to Greece? Michael Thurston Well I think you can overstate that premise because there are some significant differences between us and Greece. We're a much bigger economy which gives us more room for error. We owe most of our debt internally whereas Greece owed it to foreign creditors who could therefore have a lot more claim over them. Most importantly of all, we control our own currency whereas the Greeks are basically in hot to the European Central Bank. If nothing else, we can always devalue the currency and inflate our way out of debt which is something the Greeks don't have the ability to do. We're not as export basis and economy and so on. So there's differences. But if you look at the underlying problems, the thing that basically got Greece where it was, we do seem to be going down along the same trail. We of course have run up unsustainable amounts of debt and particularly debt for dealing with things like their pension and healthcare systems. We're very much in the same boat. We already owe 101% of GDP which means we owe more than the value of all the goods and services you produce in the country over the course of a year. It's sort of like as if your credit card bills were bigger than your entire salary pre-tax, you'd have a problem. They have a government that's growing, that's more intrusive and just kind of a heavier burden on their economy. We're nowhere near where Greece is but the CBO projects that we could well end up there by mid-century. And finally, they have a business climate that really is too regulatory, too stricter which is making it very difficult for economic growth in their country and we're seeing growth in regulations and taxation in this country that also puts a burden on business and slows economic growth. We're not getting anywhere near the post-war average growth that we used to see. Now, libertarians and conservatives have been writing about the debt for a very long time. The coming fiscal train wreck is almost boilerplate for libertarians and conservatives. I remember when Aaron and I were setting up the Kato Institute library. We had a special section of books we were setting aside that were saying the collapse of 1984, the collapse of 1987, the coming collapse of 1995. What's different? Is there anything different this time? Have you just been kicking some can down the road or is there something worse now than there was before the last 20 books that were written about this? Well, I think it's worse in the sense that our debt is bigger. I mean, I do think that there were people, and myself included, who sort of underestimated the resilience of the American economy and thought that we would hit the wall before we did. But I think it's still out there. In fact, they asked the head of the congressional budget office last about two weeks ago whether or not he thought there was a Greek-style crisis coming or when that would hit. And he basically said, we just don't know. It could hit. It could not. If it comes, we don't know when it is. There's some point that you simply can't sustain this amount of debt. The old saying that that which cannot go on forever eventually stops. Well, we just don't know when it's going to stop. Something I'm curious about with this debt, and you mentioned it in passing, and your answer to the last question, you said that unlike Greece, a lot of the debt that we have, we owe to ourselves. How does that work? How is that even really debt? Like is it different from, I could take money out of one of my pockets and put it in the other. Or borrow from your wife. If you borrow from your wife, are you just in debt? It's all from the same bank account, right? So to talk about it as debt, but we owe it to ourselves, something doesn't make sense there. Sure. Well, and that's always sort of in the Keynesian approach to this. In one sense, when I say we owe it to ourselves, I mean we don't owe it to external creditors. About 60% of our debt is held by Americans. If you have a 401K or a pension fund that buys government bonds, you owe part of the, own part of the American debt. If you have a savings bond, I mean that's, that's American debt. So, in that sense, it's different than the Greeks, where their debt is held by basically German banks, or the IMF and the European Central Bank. Now, with a larger question economically about whether we owe it to ourselves, there is a sense in which you can owe debt to yourselves, yourself, and sort of pay it back. And I'm trying to think, I'm thinking in terms of, for example, if you as a household were to go into debt so that you could go to college and therefore earn a higher salary in the future when that debt comes due and pay it back, you're actually better off running that debt. But most of what we spend money on in this country is not that type of investment. If the U.S. were to say, borrow money, or like states do, they would issue a bond and then they build the roads and bridges and that theoretically increases economic growth in their state and they can pay it back with that. If the U.S. ran debt for that purpose, you could have an argument about whether or not they achieved that goal, but it would be an understandable economic point. The problem is that only about 13% of all federal spending is considered investment spending. And that's even a broad definition of investment that includes human resource capital like education spending. Considered by who invest in spending by the CBO? Economists. But most economists. I mean, most of it, and I don't think there's much to speak about, most of it is transfer payments. It is simply taking money from one person and giving it to another and that does nothing to build economic growth for the future and make it easier to pay that money back. And in a sense, of course, we don't just owe it to ourselves. What we do is we owe it to future generations, which are not necessarily going to be the same people who are collecting the benefit of the consumers now. In your family, it's a little bit like if you ran up your credit card bills right now to go on a great vacation and you get to consume that vacation and have a great time. And then you just leave that credit card bill for when you die, so your kids will pay it off. So it's not really ourselves. That's not really ourselves. Well, the Greeks, I'm sure, are pretty – or maybe the younger Greeks are somewhat mad at the older generation of Greeks and the next generation might be angry, too. So they're all Greeks, but they're not the same people. You would think so, although in the recent vote to turn down the EU offer, actually younger Greeks were more likely to vote against the debt deal than the older Greeks. That's because they went in on the goodies everyone else had. Precisely. And they were afraid that they were going to get cut off before you got there, that the gravy train was going to stop. And then, of course, they've known they've been paying. Also, it's worth noting that the Greek so-called austerity had – didn't have a lot to do with cutting benefits. It had a lot to do with raising taxes, and it was going to be those young Greeks that had to pay that. So if these entitlements – these entitlements cost us money, which is what – how we run up the debt because we're spending it. But if a large portion of the entitlement spending is transfer payments, then we're taking the money out of the economy in a form of taxes or borrowing it from future Americans, but then we're turning right around and giving it back to Americans, right? We're giving Social Security is handing people checks and Medicare Medicaid is paying for their health bills. So how is this ending up spending the money as opposed to just cycling it around within the U.S. economy? Well, as much as anything, it is just cycling it around within the U.S. economy. The problem comes down in the future to the point where what you're spending in terms of benefits is less than the amount you're taking out of the economy in terms of taxes. We ran about a $65 billion or so shortfall in Social Security this year. And it's just never going to get any better. Every year after that, it's going to get larger and larger. Overall, we owe some $25 trillion in future benefits that the tax revenue is not expected to pay. So that's money you have to borrow in effect to keep paying those benefits. If it was just tax it and give it to someone else, you have a lot of efficiency loss. You could argue about deadweight losses and things like that, but essentially that would just be kind of moving it around the economy. Wouldn't do anything to gain growth. It's just redistribution, but it's not as bad as where we're going to go. Now, you mentioned the term a few minutes ago, hitting the wall. Like when we're going to hit the wall, when is the cloud? What does hitting the wall look like? Does it look like Greece, or who knows exactly? What will we know when we've hit the wall? Well, some degree, we don't know what it'll look like. And to some degree, it depends on whether we may start making changes now that are going to enable us to make a soft landing in the future, or whether we're going to just go up to the cliff and sort of fall off it. What it will mean is that we will either not be able to pay the benefits that are promised, and there'll be people who suddenly find out they're not going to get a check or their check will be 75% of what they thought it was going to be for Social Security, for example, and be in real trouble if that's what they were relying on in retirement. Or it'll be that we'll continue to pay those benefits because after all, seniors vote, and we won't pay for anything else. By mid-century, we'll be in a position in which essentially, Social Security, Medicare, Medicaid, and interest on the debt consume every penny in taxes. So there basically would be no money for anything else that the federal government does. It kind of always amazed me that folks on the left were such ardent defenders of these social insurance programs like Social Security and Medicare because they're ultimately squeezing out all the other things the left would like to do, education, childcare, social welfare spending on that. That's all going to go away. We're going to be a country that does nothing but mail checks to old people. But isn't that just because the wealthy and corporations aren't paying their fair share? I mean, we could cover all this if we just taxed people what would be reasonable. Unfortunately, there's just not enough rich people out there to pay for it or fortunately, depending on how you want to look at it. The reality is if you didn't just raise taxes a little bit on Warren Buffett and Bill Gates, if you actually went out and confiscated every penny that was owned by everybody who earned a million dollars or more last year. So just look all the millionaires and billionaires and took it all, which you could only do once as far as I know. You still wouldn't get enough to pay off the national debt, let alone enough to pay all the future unfunded liabilities of social security and Medicare. What you really would have to do is raise taxes enormously on the middle class in order to get there and frankly, middle class isn't going to do that. But doesn't that work? Isn't there some sustainability in Scandinavian welfare state? There's something out there. We can always sit here and sort of hyperbolically say that the welfare state is unsustainable, but it doesn't seem that way across the border. Are all these going to teeter on the edge and jump off a cliff, eventually? Well, all of them are either going to teeter on the edge or they're going to make reforms. And in fact, many of the Scandinavian countries have already made reforms. Now, you can sort of set aside Norway, which is sitting on a sea of oil and then sort of like the Saudi Arabia of Northern Europe and that sort of allows them to get away with a lot of things that they wouldn't otherwise be able to do. But Sweden, for example, has begun reforming its system. It has drastically reduced government as a percentage of its GDP. It has partially privatized its social security pension system. It has made a number of reforms designed to move people from welfare to work, for example. So they are beginning to make changes in their social welfare system to bring their country back into line. And they're still much bigger than us. They're still about 50% of GDP that their government spends, but they were close to 70% not so long ago. Before we turn to the specifics of social security, Medicare and Medicaid, are the problems that we're talking about just the nature of entitlement programs in and of themselves? I mean, is there, is it ultimately like there's just something wrong with having entitlement programs to begin with or is what's wrong that we just haven't done them the right way? Well, I think there's two big problems with them. One is sort of something you can't get away from and that's the demographics. The fact is that as a society, we're aging. We have more and more people who are in retirement collecting benefits for longer and longer periods of time. And we're also having fewer babies, which means there's going to be fewer people to support those retirees. And those are parts of long-term trends that really aren't gonna change. I mean, the healthcare, the fact that we have medical breakthroughs and stuff like that. It's always been said if the day we come up with a cure for cancer, everyone celebrates except the treasury secretary who kills himself. I mean, it's going to be a very tough situation if people start living another 10 years longer than they do now, how are we gonna pay them? So those, and on the other side of it, if you were babies, women are waiting, are going to workforce now, they're going to college, they're waiting a lot longer to have babies. The average age at which a woman has a baby, I think it's going up about three years in the last couple of decades. Those things are not gonna turn around. So we're gonna be stuck with this demographic problem in the future. On the other side of it, the problem is that there's no real link between inputs and outputs on these entitlement programs. The contributions you make or the taxes you pay are not directly related to the amount of benefits that you get out of the program. And that means there's always an incentive to increase benefits, to push benefits up, and to minimize the amount of payment into the program. You want to keep the taxes low and the benefits high. So in many ways it kind of runs like a Ponzi scheme, if you will. And the people at the top are big winners and they demand more. And the people at the bottom have to pay. The difference, of course, is that Ponzi didn't have a gun. He couldn't force people to keep contributing and the government could kind of keep making young people pay more and more, at least for the time being. Well that sort of brings up the social security question because social security is often called a Ponzi scheme. And as you said, maybe it's one that works if it is a Ponzi scheme. Maybe it's one that works because he has a gun in the situation that we can just keep rolling it forward. We can always be in debt to future generations. I mean, some amount of debt is sustainable, I would imagine. And so the national government is a better prospect for debt and the US is a better prospect for debt than other countries. So we could have some debt and we could keep rolling it forward and they have the power of the gun. So what's the problem with social security? Yeah, I think Paul Samuels, as we recorded, was once saying that social security is the best Ponzi scheme ever invented because it works. And I mean, one of the things people have to realize, I think, with social security is that when they pay their social security taxes, none of that money is saved for their retirement. People always write to me, I get all these emails telling me that I paid into the social security system, I'm just getting my money back. Well, no you're not. When you pay in, that money immediately goes out to pay for people who are already retired. Just like in the pyramid scheme, when you pay, you give the money to the guy who's running the scheme, he uses it to pay for people who are vested above you or earlier than you. That's the same way social security works. And you then hope that when you retire, there'll be another generation that comes along behind you that will then pay into the system and support you. And that works really well when you only have the top tip of the pyramid. You have only a few people receiving benefits and you have a lot of people who are paying in and getting the benefits. But if you go back in 1950, you had that situation. You had 26 people, I believe, paying in for every person who was retired. That's a pretty good deal. Now, unfortunately, we're down to about three now and it's gonna continue down to slightly less than two in the future. And that's a big burden on those two people who have to pay all the taxes in order to support those benefits. I'm curious about the history of how social security came to be, particularly in light of, I mean, yes, these demographic trends that longevity and whatnot have accelerated, but were those trends visible at the time that people were proposing social security? Because it seems, once you recognize that, you recognize that people are getting older and that as we get wealthier, we have fewer kids. It seems obvious that this system, once put in place, could not be meaningfully sustainable. So was that a conversation at the time when social security was first proposed? Was it intended to last as long as it did? I think it was pretty much intended to be permanent. I mean, Roosevelt famously said that the reason they used the payroll tax and this idea of contributing to social security was so no one could ever touch it in the future. It's worth noting that social security was originally very small. The original tax was 1% on the employer, 1% on the employee, to a maximum of $60. So, I mean, even accounting for inflation, that was a very small tax and the benefits were fairly, fairly low. It was intended not to be as a substitute for retirement benefits to take care of you in retirement. It was supposed to be something that was sort of on top of your retirement to kind of make sure that people didn't fall into poverty. And it was done under sort of enormous, very difficult circumstances in the United States, very rare circumstances. We had just had the Great Depression. And if you look at it, there's a number of things that are happening at the time. Number one is the people couldn't rely on their savings as the banks were closed and their savings had been wiped out. And they couldn't rely on working because many of them were out of work. We had one third of unemployment at the time nor could they necessarily rely on their children to take care of them because their children were out of work before. So you had a real problem that was being taken place. And I think drove it. And of course, this was a go back all the way to its origin, Social Security was originally a Bismarck idea out of Prussia in the 1880s or so. I mean, it was done essentially as a trade off to Social Democrats to get their support for the war with France and so on. So, I don't think it was ever thought of to be the structure it is today. Well, you also write in the book, which I had never heard before, that it didn't originally apply to government workers or farm workers, I think, or non-people from non-profits, a very weird assortment of people that it didn't apply to. It was originally manufacturing workers, essentially. It was designed to be laborers in the factories. I mean, everyone else was assumed to be able to take care of themselves. I mean, farmers were thought of with their families and they could always grow crops and so on. So it really took a lot of them out. And then it also didn't include household help and things like that who were largely minorities and blacks and they were not considered part of the general population in the Roosevelt years and stuff. So they were excluded. So, yeah, I had a very narrow focus and it was greatly added. It also didn't include disability benefits or survivors of benefits originally and they've been added to the program since then. Is that sort of a predictable train of increasing the government program? Does this always happen? Because now we have SSRIs for the disability payments and SSDI and all these other sort of things. Is it just sort of do we always find that they keep getting bigger and bigger? Yeah, I mean, exactly. I mean, the natural extension of these programs is that they grow. I mean, there just seems to be something about government that, you know, if it's even a modest success, we figure it can do that much more. And if it's a failure, we figure we haven't spent enough money on it. So we try to spend more on that. I will mention just in terms of the programs that SSI, which a lot of people sort of conflate with Social Security, should we need to be careful of that one? It is a terrible program. It's perhaps one of the most fraud-ridden programs in government and there's a lot of reasons to criticize it. It is run by the Social Security Administration but it is not part of the Social Security system. It's not funded through the Social Security tax. In fact, into the, I think around 1980, I could be wrong on that date, but it was funded actually at the state level. And then they said, well, but the federal government's so good at mailing out checks. The Social Security Administration knows how to print a check and mail it if nothing else. Why don't we put it in there? And so it's just sort of an illusion. Took it all, that's right. One of the weird things, I mean, Social Security's supposed to be insurance against poverty in old age. I mean, which it seems like a laudable thing. We don't want our old people dying on the street or not being able to afford heat or air conditioning. I mean, sure, this is good, but so one of the things that we talk about though, and we're talking about offering up reforms, is that Social Security goes to a lot of people who don't need it. That everybody gets Social Security. How do we get, I mean, how do we get there? It seems obvious that yes, if we have an insurance just like Medicaid, if you can't afford health insurance will help you out, but if you can, like Warren Buffett should not get Social Security. Yeah, so is that how substantial of a part of this death that we're in is the result of that? And how, why can't we fix that? That seems like an obvious fix. It's not a huge part in terms of dollars. I mean, there's just not enough Warren Buffett to bill gates out there collecting Social Security that's gonna make a big difference. You'd actually have to mean to test it at a very low level. Means testing is quite popular, interestingly. If you go to the public, they actually support means testing. As long as it's done at the dollar amount immediately bill of whatever their income is. Which actually says something about the theme. Yeah, exactly. I think don't touch my benefits, but if you want to take Warren Buffett's away, that's fine. And Warren Buffett says, you can take the guy above me, but there's no one there. There's no one there. Economists worry about it for a couple of reasons, the means testing. One is that you create a disincentive to save on your own. Why should I save on my own if it means they're gonna take away my Social Security? No, it's probably not gonna affect millionaires. They're gonna do what they want, people who are in that middle range deciding whether they're gonna put a little more money in their 401k or take that vacation this year. Well, if it's gonna make the difference whether I get Social Security or not, then the vacation looks that much better. The second is income doesn't always matter in retirement. It's assets and how much you've accumulated, things like that. So you'd actually have to have not an income test, but an asset test. And that becomes very hard to do. How do you value stock options? How, you know, a house? Is it, you know, is it the book value and what happens when they go down like we just had in the last recession and so on? So I think you've got to, it's something that's popular but much more difficult to put in practice. I've had some of my Democrat and other friends who support Social Security say that one reason they're against means testing, which does seem like Aaron said a very obvious thing to do, is because even cracking open Social Security and start asking the question about who deserves it and who doesn't deserve it at what level and will put questions on the table that they don't want to be on the table at all. Yeah, that's our position. The ARP has taken that position for a long time that they oppose any sort of means testing. There are arguments that it needs to be a universal program because that's what generates universal support. The phrase is poor programs for the poor are poor programs. That if this becomes a means tested program that we only see poor people taking advantage of, there'll be a move to disfund it, to unfund it because we don't like programs for the poor but this is universal, mom and dad get it so we all like it. Yeah, that seems like, again, part of the public choice analysis of the support of these programs and why they keep going forward. So I guess then on Social Security, we've partly answered this but how bad are things specifically for Social Security and then what are the possibilities for reform on that? Sure, we can generally estimate the shortfall in the future of Social Security and do it fairly accurately because it's really just math. We know how many people will be retired in a given year in the future within a certain range. We know what the law says their benefits should be. We also know roughly what we'll be taking in taxes in the future, assuming for economic growth scenarios and stuff and you can find the gap between them and right now that gap is $25 trillion give or take now that's for all the accounting nerds out there that's a discounted present value over the infinite horizon which essentially means that if we had $25 million or a trillion right now and we stuck it in the bank and it earned a 3% interest rate then it would pay for the benefits for Social Security forever. Interesting, so there's no like by 2050 that this is gonna be a $25 trillion gap. Oh sure, you can do the estimates in each year. The argument becomes well, dollar amounts don't matter as much in the future. You'd have to discount the worth of the dollars worth in the future because it's better to have a dollar today than it is tomorrow. That's why banks lynch your money and so on. But yeah, it's gonna be within about 10 years it's about $200 to $300 billion a day. It's about $65 billion right now. And it is the biggest part of the budget, correct? The Social Security is the single biggest part. Social Security is about 23% of federal spending, yeah. So even in Washington, $25 trillion is a fair amount of money. So how is this, is this fixable? I mean, is it realistically, can we do anything about that $25 trillion shortcoming or do we just have to run into it? Well, essentially, if you're spending more money than you're taking in, you only have a couple of options. You can take in more money or you can spend less. To take in more, you'd actually have to take in quite a bit. You'd have about a 50% increase in the payroll tax. It would have to go from it's 12.5% now and it would have to go to about 18%. Or the equivalent in other taxes, of course. And we should recognize that the payroll tax is the largest tax that most families pay. Far more families pay more in payroll taxes over the course of a year than in federal income tax. So for all the income tax debates we have here is the payroll tax is the big tax. A big increase on that is very regressive. It would fall heavily on middle class and more income people. Or else you'd have to find some other way to raise that kind of taxes and transfer the money over which doesn't seem very realistic. On the taking it outside or reducing the spending you'd have to cut Social Security in the future by about a quarter. And there's lots of ways you can do that. I think phasing people talk about raising the retirement age or means testing to get really wonky. I'd favor something that's called changing the wage price indexing formula. But there's different ways you can get there and if you phase it in over time you can minimize the hit. But frankly young people have been lied to. And one of the first things we can do is face up the fact look them in the eye and say yeah we lied and you're not going to get all the benefits that are promised to you. And that's just a fact of life. Do you see this as being a thing that could happen? I mean I'm interested in the political realities of this because one really interesting thing about this narrative and I've always thought this about economists from our side so to speak is that it seems like math. It seems like it would be silly for anyone to deny the realities that you're talking about but we're still all denying it or a lot of people are. So we're all denying it. And it's not just that politicians are denying it or the AARP which has a constituency is denying it but Paul Krugman. I mean other qualified economists seem far less concerned than you are. Well yeah I think they think it's sort of the low hanging fruit. Certainly nowhere near as bad off as Medicare let's say which we're gonna talk about in the future. And they think you can get there by raising taxes on the wealthy or that we'll just deal with it in the future. The other answer of course is economic growth. They'll say well if we do all these things and it grows the economy. Hate using that phrase grows again. It's if the economy grows. If the government grows the economy. Karim Balm will beat me up for that. So if the economy grows that in that case there'll be more money available and that people in the future will have higher wages and therefore they can afford the higher taxes that'll be necessary to support it. I question whether or not you can get that economic growth when you have the type of debt overhang that we have that eventually that begins to slow economic growth for a lot of reasons. Businesses anticipate debt as future tax increases and therefore they slow their hiring and things of that nature. And politically the politics of this have really shifted to some degree. Used to be a very bipartisan issue that everybody recognized. I mean Bill Clinton at one point will support his social security form including personal accounts. You had a number of Democrats in the Senate like Bob Kerry of Nebraska, John Brole of Louisiana, Charlie St. Holman, Texas who supported social security reform very strongly. They're all gone. And now you essentially have Bernie Sanders and even Hillary Clinton talking about the need to increase social security benefits rather than to cut them back. Who are the constituencies behind this? You mentioned that young people are being lied to and are being told they're gonna get benefits. They aren't. The voting blocks that would stand in the way of politicians wanting to reform social security especially on the reducing benefits side. Are those older people who don't wanna see their benefits cut? Are they mostly younger people who are hoping to get their hands on high benefits later? I think it's in the United States is mostly older people. Generally seniors are, and it's interesting because most of the reform plans that are out there don't involve current seniors. They talk about people under the age of 50 for example, making changes. Yeah, that was why I was asking because it seems like you could fashion a plan that's like, look, all of you old people will be dead by the time this kicks in. Yeah, and we keep trying to say that to them but they're very easy to scare. If you're getting a social security check, it's very easy for them to scare you on this. And so there's a lot of kind of demagoguery that goes on around this. You see people being pushed over cliffs and their wheelchairs and all that sort of stuff every time an election comes. So that's always a big issue. And at the same time, young people just don't vote. And they certainly don't vote on the social security issue. There's so many things that are more important than from foreign policy to gay marriage and so on that really animates young people but it's just not an issue. Social security's not one of them. And the likelihood of your voting was sort of like the equivalent of your age, about 70% of 70-year-olds vote and about 30% of 30-year-olds vote. So it's kind of sort of a line in between. And so politicians are always happy to play the 70-year-olds and not to the 30-year-olds. One other interesting group which is why there's some problems on the Republican side with this that really are like social security is actually some folks on the Christian right. Gary Bauer, for example, in the Family Research Council was against privatizing social security because they thought it was too likely to encourage women to enter the labor force if they could have their own accounts rather than rely on their husbands. And... Wow, that's incredibly disturbing. They're not surprising. And also, though, if you look at the constituent, particularly in the Christian right, there's a lot of older women there. And for a lot of these older women, social security just found money. I mean, basically, they didn't work back in their generation. And now women are more likely to pay social security taxes today. But for a lot of women in their 70s and 80s, they didn't have to ever pay into the system. Their husband did. And now their husband's dead and this check comes every two weeks. And they just don't want anybody touching it. I can understand that. The other two that are the big part of this are Medicare and Medicaid, which come 30 years after social security more or less. And you're right to break this down that between these three programs, Medicare and Medicaid and social security, that's how much of the U.S. budget? About 48% of federal spending is just those three programs. If you throw in interest on the debt, you're over 50%. So clearly you've got to deal with those issues if you're going to fix the program. You know, I'm always amused by Republicans who want to sort of balance the budget on the backs of the usual suspects. Well, foreign aid, which the Republicans all hate, is 1% of federal spending. And they want to kill Big Bird or right now we're going to defund Planned Parenthood. Well, fine, Big Bird and Planned Parenthood combined are 110,000ths of a percent of federal spending. So you're certainly not going to balance the budget on the backs of Big Bird. Would the fourth be defense after those three? Well, yeah, in terms of size, defense and discretionary spending are about the same. They're both around 17%. And what does discretionary spending describe? That's everything. Everything else. Everything else, essentially. Yeah, the FDA, to the FBI, Department of Commerce, Department of Education, essentially all the things that I kind of wish would go away, that's everything else. But it's called... And frankly, they're not all going away. So that, there we go. If we just get rid of everything, libertarians don't think government should be doing besides entitlements. We've just balanced the budget and the entitlements get paid for. Pretty much. Pretty much. It's sort of a libertarian dream but unfortunately I don't think people are going to go along with eliminating all those things, which is back in mind. Well, it would turn the government into like an old folks home. Yeah, a government will, and to say we're going to be in a position within a half century or less, that we will have enough tax money to do exactly that. That those four, essentially those three programs, plus interest and debt will consume everything that the federal government does. We may be able to have a little tiny army. But that's about it. So Medicare and Medicaid, for those who don't know, Medicare is for the elderly and Medicaid is for the poor and they're both part of the same act, correct? They were both passed in 1965, although I think that's a common sort of misunderstanding. Medicare is clearly for the elderly, although there's a few special things that are for kidney patients, for example, and things like that, regardless of age. Medicaid is interesting because people largely think of it as the program for the poor. And that's why it gets a lot more criticism than people than Medicare, because of course they think it's people taking advantage of it. But the reality is even though most of the people on Medicaid are poor, most of the money spent on Medicaid is actually for the elderly people in nursing homes. So this is another program that sends, basically checks to older people. Why is that? Is that, I mean, I'm just saying, that seems... They're hugely expensive, the nursing home care. If you're gonna be in a nursing home for three, four years and Medicaid is gonna pay for it. Why is Medicaid covering nursing homes and not Medicare? No good reason that I could think of whatsoever, essentially. I mean, essentially you have to shelter your income and you have to pretend to be poor. So you're a senior citizen before you go in a nursing home. What you do is you transfer all your assets, you let your kids buy your house for a dollar and you give a bunch of gifts to relatives and stuff like that. And so you then have no assets to speak of and then you get Medicaid to pay for it. And there's a whole industry that grows up around this. Right now there's been a series of radio ads when I come in in the morning on the radio. There's a woman who has a law firm that specializes in doing this and all these ads. You might think you have to give up your house in order to go into a nursing home and Medicaid. You don't. I will tell you how to shelter your income and stuff. So there's a whole industries out there do it devoted to that. So what is the fiscal situation for Medicare right now? Well, Medicare is much worse off than Social Security. Everybody agrees on that. It's a little bit harder to estimate because in addition to just the demographics, you also have to figure what will happen to the cost of healthcare in the future and nobody has a good estimate of that. We've actually been fortunate that for about the last decade the rise in healthcare costs has moderated somewhat but no one knows whether that's gonna continue or not. And you go to three different government agencies, you get three different guesses as to what's gonna happen in the future on that. But even if you use the best case scenario then the unfunded liabilities in Medicare are about to $50 trillion or so. So about twice as bad as Social Security. And if you use more pessimistic numbers it could be upwards from $80 to $90 trillion. Now a lot of these accounting things which I noticed in your book which is something I think worth talking about in the abstract for how government does accounting when they make these projections based off of things that will happen or growth rates or laws that will be passed or elimination of three of my favorite words, waste, fraud and abuse. And they just put that into the budget and they say, well we are definitely gonna eliminate $500 million of waste, fraud and abuse. So we'll just take that off. Can you explain a little bit more about how they do this budgeting and then secondly, can you explain about how they get away with this stuff? Well essentially, I mean a CBO lecture I think is a very good organization and actually does a very good job. But they're very constrained by law that they have to do exactly what Congress tells them. And if Congress tells them, perform your estimates assuming 2% growth then that's what they have to do. So you often get these weird kind of garbage and garbage out numbers from them. If you're looking at the budget what's interesting to do with the CBO is they always produce two budgets. They produce the budget they're sort of required to produce. And then they produce something called the alternative fiscal scenario in which they predict what they actually think will happen. And that always shows a much bigger deficit and much more problems down in the future because Congress will say, assume we don't extend any of the tax extenders this year in the budget. Like we haven't done for the past 10 years. We always do. And so then they'll produce a budget that shows, oh the deficit went down and then they'll produce the alternative fiscal scenario system. But if you didn't, if you did extend those tax extenders then it will go up. And so you have to look at both numbers I think to really get it. And the media, of course, doesn't dive into that kind of depth. They just look at the top line number and say, oh well, productive budget deficit's going to be lower next year. What's the genesis of that? I'm sorry Aaron. What is the genesis of the alternative budget? Do they just do this on their own or there's a statutory mandate that they do that? I actually don't know. Sort of gather on it. The kinds of people who work at the CBO think that sort of thing is fine. That's probably what it is. But the CBO is kind of interesting because at least according to your book, they seem to agree with you in many, many ways about the unsustainability, broadly speaking, of what we currently are in. Oh sure. And it's been bipartisan. The new director that the Republicans put in, of course, as I said, just said a couple weeks ago that he thinks that we are potentially down the road in line for a Greek style crisis. But Doug Elmendorf, the previous director of CBO, thought that. And Douglas Holtz-Eakin, who gave me a very nice blurb for my book, that he agrees with what I said. So this is something that CBO directors have recognized for a long time. It's not just Michael Tanner's wild dreams, apparently. I know that reforming Medicare would be rather difficult, often for the same reasons as our security, the constituencies and whatnot. But how necessary is Medicare to begin with? I mean, most of us, all of us who aren't on Medicare, get health insurance, or those of us who do have health insurance, get it. We buy it ourselves. We get it through our employer. We could get it other ways. So how many of the senior citizens who are currently getting Medicare through all these transfer payments could afford their health insurance on their own? Well, it's very hard to say. People would have to save for it, which they don't do now. And health insurance has become very different than what it was in 1965, when it essentially was major medical. And that's one of the problems with Medicare, is Medicare is almost backwards as insurance would go. The deductibles in Medicare are much lower than they are in traditional insurance. Essentially, you go to doctors almost for free, essentially to get your checkup and all those routine things, which people use a lot, which is why Medicare is very expensive. But if you're actually sick in Medicare, it actually doesn't cover very much. The longer you're in the hospital, for example, the less Medicare pays. And after 90 days, I believe it is, they stop paying. So that's why you have to then go into Medicaid for the long-term care to go into the nursing home, because Medicare essentially cuts out. So it's actually kind of reverse from what real insurance would be. And a lot of it is based in 1965, dealing with what corporate hospital insurance looked like back then when they put it together, and it just hasn't changed a great deal. Well, that seems to sort of highlight Aaron's question, and your answer seems to highlight what might be the core of this debate, which is not just whether or not it's unsustainable, which is important, but whether or not the spending is doing anything worthwhile. If you think that it's doing worthwhile things, then you want to figure out a way to keep it going, budget debt or not, deficit or not. And if you think that it's not doing very worthwhile things, then you want to figure out a way to end it. And really, it's just a debate about the role of government at the end of the day. Well, what's interesting is the constituencies aside. The constituencies all believe it's doing wonderful things for them because they're all getting the goodies from it. But you actually look at the sort of Democrat and Republican approaches to this. They're pretty much an agreement that a lot of the spending is not doing anything. There's some very good academic studies, what's called the Dartmouth Atlas study, which looked at how much is spent in various counties around the United States and found there's no difference in health outcomes even when you don't know how much Medicare pours in in terms of spending, it comes out the same. There's a lot of studies that suggest that Medicare just subsidizes a lot of waste. So what you actually have is an agreement. If you actually looked at the budget proposals by President Obama and Paul Ryan, for example, their goal in terms of future Medicare spending is the same. They have the same projected future grace, which is about 1% above GDP. My opinion is still too high, but interesting that they're the same. The difference is in how they get there. President Obama essentially wants a top-down approach where he basically wants the government to set prices for doctors. And then he hopes that they set the prices low and up, the doctors will then be the intermediaries and will stop doing stuff. And that sort of rationing will occur and that will reduce costs. It sort of takes the blame and shifts it to the doctors, which is why doctors hate it. Paul Ryan essentially wants to limit the amount of money that individuals get. Say you can spend that on whatever you want. If you want all the benefits you're getting today, though, you're gonna have to spend more money, which means that some seniors are gonna have to pay a lot more out of pocket than they pay today and essentially do it from the bottom up, if you will, with it. And that's kind of the argument, who's going to make those decisions, whether it's gonna be the consumer or some expert at the top, and who's qualified to make those decisions better. And that's an interesting debate. It doesn't come across that way in the media. That's what they're actually debating. Well, interesting, the debate seems to be, at least from the Democrat side, which I'm somewhat biased, I guess, and to some extent, but any cut in the current amount of spending or the rate of spending that is proposed is synonymous with anarchy. It often seems to be what the debate is, and this is what we're like. The current level of spending is necessary at any given point in time. It's the way Republicans treat military spending. It's the way they treat entitlements spending. How can we get anywhere if that's the world way we're talking about this? No, that is a problem. It's more of a congressional problem. I say I will get President Obama credit for actually having tried to limit the growth in Medicare spending. I don't necessarily agree with him on the way he's going about it. Congress sort of tried to do this as part of the Comfortable Care Act. They created something called the Independent Payment Advisory Board, which essentially takes the responsibility, sort of like the Base Clothing Commission. You liken it to military spending. It's the same sort of thing where they created this independent commission that would come up with recommendations for how to save money, and then Congress could veto it, but they couldn't amend it. So essentially, both houses of Congress would have to vote no, and then they would get rid of it. That begins in 2018. I've always compared those to Congress trying to perform an intervention on it itself. Exactly. If you're an alcoholic, you give the bottle to another committee and say, don't even give me any unless I ask. They know that they won't cut, basically. That's right. And the problem's gonna be, we'll see what happens when the rubber hits the road in 2018 when the commission's actually supposed to go into effect. And it's something that's disliked on a bipartisan basis. And you see both Democrats and Republicans wanting to repeal this. And of course, it has a number of problems. I mean, it is kind of a blunt instrument to kind of try and have a group of experts decide what everyone's healthcare should be and impose it on one side if it's all across the board, which isn't a good approach, but it would reduce Medicare spending if it's imposed. We'll have to see. I also feel like we should pop in and mention, I mean, there's a moral issue at play here too in that setting aside Medicaid, Medicare and Social Security are going to older people and by and large, older people are wealthier than younger people. And so we have a system where, I mean, you talked about in the, what, in the 1950s, there were 26 working people, I think you said. Something like that, yeah. And then now it's down to three. 2.8, I think. But those are younger people who are working. And the payroll tax is a regressive tax. It hits lower income people more than higher income people. So what we've got is relatively wealthier people with more assets living off the backs of poorer people that this could have been fixed. They could have saved. They could pay for their own thing. And this just seems fundamentally wrong, regardless of the voting blocks, regardless of what the law says, like there is something wrong about wealthy people living off the backs of the poor. And that's precisely what the left is always accusing, say, capitalism of being. Yeah, I think that that's true. And it's true in a couple of ways in its immorality. I mean, particularly, I think it's sitious form of taxation without representation. You get to vote yourself benefits paid for by people who aren't even born yet. I mean, that's a pretty good deal for you, but it doesn't seem to be something that's morally justifiable under any stretch. And second, in terms of redistribution, is redistribution, because as you mentioned exactly the wrong way, we use a regressive tax and benefit formula that benefits high income people, essentially. Combine that with the fact that what you get and say social security benefits, or even Medicare to some extent, depends on how long you live. If you live to be 100, you're gonna get a lot of checks. And if you die at 66, you're not gonna do so well. In fact, you die at 64, you don't get anything if you haven't taken your early retirement. And so what you want, and longevity is linked to income and race in the United States, essentially, and sex, gender. Essentially, rich white women live a long time. Poor black men die early. So what you have is a system in which actually one out of every three African-American men pays social security taxes and then dies before they collect benefits. You would think that liberals would be up in arms about something that worked that way. Yeah, well, I'm sure that the injustice is that they're dying early, which is a very disconcerting fact that they would like. Sure, we all like to change that. Yes, everyone to get many checks versus. I guess, I don't know what the right answer to that question is. Now, the last little thing we've added on to this, this trio is Obamacare, the Affordable Care Act. Has that adjusted the prognostications about the budget in any way? Well, it's gonna add significantly to the debt over the long term. The costs are generally underestimated and you see some of the numbers that coming out of CBO and the cost has actually been declining according to CBO and that's true for a couple of reasons. One is that not as many people signed up for Obamacare as they thought. So there's fewer subsidies that are out there. If they're ever successful in getting all the people signed up, which is the purpose of the law in the first place, then the costs will go up but right now they're down. The number of states did not expand Medicaid under the program, so they didn't have to spend the money on that. That did bring down the cost from earlier projections. So we should keep that in mind. That said, there's a lot of costs that are off the books on Obamacare and the Affordable Care Act. For example, implementation costs are considered part of the regular budget. They're not a part of the ACA appropriations. They're considered authorized but not appropriated funds in Washington speak, which means we're not counting them. There's a lot of double keeping in the bookkeeping entries where they essentially funnel money through the Medicare trust fund, for example, and extend the life of the trust fund but then spend the money. In Washington, it's the only place you can spend the same dollar in two different places and count it both times. So you have a lot of those sort of bookkeeping games on there. We estimate that in 10, over 10 years or so, the ACA will cost a little over $2.2 trillion or so. About a trillion of that is paid for through new taxes but at least about a trillion two that's gonna add to the deficit over the next 10 years or so. So the situation is not terribly rosy. We've asked, we've already asked this a couple of times but you're probably not optimistic, I would imagine. But what can we actually do? Or what do you think we should do? And then secondly, what do you actually think will happen? Well, I think we have to face up to the fact that we are making promises we can't keep and that they're gonna have to be changes and I'm hoping they start the changes sooner rather than later. We actually have a bit of a window. If you look at just the budget deficit, it has come down and I think there's a lot of argument over who gets the credit for another there but it wasn't so long ago, about five years ago we had a $1.4 trillion deficit. Now we're gonna be about 450 billion. I mean, good is relative. A trillion less is a lot. But that's a lot of success and a lot of that has to do with the sequester that we put in place there has to do with the fact that tarps run out and the stimulus bills been done and things like that. So some of the spending went away and bipartisan basis we sort of held that down kicking and screaming all the way but that's only gonna last for a couple of years. According to CBO, the budget deficit starts to rise again in about two years and within 10 years it's back to a trillion dollars again. So if we can do something in the next, let's say four to five years before that deficit really starts to shoot up again, then I think we can ensure a soft landing. If we wait and we have trillion dollar deficits again and the debt's got up to 26, 28 trillion dollars on the books, plus we still have these huge unfunded liabilities, then I think anything we do is going to be very painful. And then we begin to look more like Greece in terms of the, not economy crashing but in terms of the pain that's gonna have to be inflicted. So given that this podcast is about libertarianism and we're, I mean, obviously we're stuck in this non-libertarian world and so most of these reforms that would be proposed are second best at best solutions but the first best solution would it be to get rid of these entitlement programs entirely? I mean, if we could wave a magic wand and just end them and if we could, how would we address the concerns that these programs exist to address themselves? Like, I mean, how would we in the absence of social security deal with old people who might not be able to support themselves in retirement or deal with poor people who might not be able to afford healthcare? Yeah, I think that these programs were put in place based on the idea that people were myopic, that people would not save and take care of themselves and I'm not sure that the studies bear that out. I'm not sure that there are the evidences there that people wouldn't save if they were given the opportunities. In many ways, social security squeezes out savings for those people who need it most. If you're a minimum wage worker, you have to pay 12.5% of your income to social security between you and your employer, the combined, that's not leaving you a whole lot of money to save on your own. Maybe you wouldn't save 12.5%, but maybe you might save 5% or 6% if you were left on your own devices and then we can deal with that. Now, you do have a sort of moral hazard issue. You have to deal with the fact that with the welfare state we have, if you chose not to save for yourself, you can fall back on taxpayers to support you, things like that. So it's not as easy as just saying, get rid of it, but I do think that in an ideal world, people and their families would be responsible for taking care of themselves. Thank you for listening. If you have any questions, you can find us on Twitter at freethoughtspod, that's freethoughts-p-o-d. Freethoughts is produced by Evan Banks and Mark McDaniel. To learn more, find us on the web at www.libertarianism.org.