 Are we on? There we go. Welcome everyone. My name is Stephanie Leiser. I know many of you. I'm happy to welcome you to this policy talk called Fiscal Challenges Facing the Next Administration. Today, we are very happy to welcome Mark Goldwein, who's the Senior Vice President and Senior Policy Director for the Committee for a Responsible Federal Budget. He guides and conducts research on a wide array of topics related to fiscal policy in the federal budget. He's frequently quoted in a number of major media outlets and works regularly with members of Congress and their staff on budget-related issues. Previously, Mark served as the Associate Director of the National Commission on Fiscal Responsibility and Reform, otherwise known as the Fiscal Commission, and Senior Budget Analyst on the Joint Select Committee on Deposite Reduction, the super committee. I always love these government titles of policy-making bodies. He also conducted research for the government Accountability Office, GAO, the World Bank, the Historian's Office at the Social Security Administration, and the Institute of Governmental Studies at UC Berkeley. And as many of you might know, Mark is here on a very special day. The Biden administration has just released its latest fiscal year 2025 budget proposals. So we can talk a little bit about that, although we don't necessarily have a whole lot of detail as of right now. But as we know, a budget, especially an election year, is both a wish list and a political statement. So I look forward to our conversation about that. Mark will give us an opening presentation, and I think we're welcoming questions during this part of it. And then we'll talk about some of the issues in greater detail and have a question and answer section. We have a number of questions that people have submitted when they registered for this event, so we can do some of those. But we can also have a more free-flowing question and answer during the presentation as well. So Mark, the floor is yours. Thank you so much. Happy budget day, everyone. Happy budget day, everyone. I'm not gonna get any, like happy budget day back, okay. Well, thank you so much for having me here. As mentioned, we will do Q&A at the end, but if you have questions throughout, like I raise your hand, we won't have a mic come around so that people can hear you. They're tuned in online, but raise your hand. I'll probably call on you, unless it looks like your questions will be mean, then I'll ignore you. For starters, I wanna let you know a little bit about myself, about my organization. I've been doing this for a long time, doing budget policy. You heard all the committees that I worked on, so I really have very deep experience in failing to fix our underlying fiscal situation. I've worked on two nonpartisan commissions that tried to do just that. One succeeded in putting together a plan that actually got pretty broad support, but just didn't make it to the finish line. The other didn't make it far past the start line. But other than that, for the last 17 years, I've been at a group called the Committee for Responsible Federal Budget. We are a DC-based think tank. We are nonpartisan. Now, technically, everything tank in DC is nonpartisan, because it's the law. If you're not nonpartisan, you lose your tax status. But we're actually nonpartisan. Our board is some of the top budget experts and former budget practitioners in the country from left to right and center. One of our co-chairs is Leon Panetta. He was President Obama's Secretary of Defense. He was President Clinton's Chief of Staff. Another one is Mitch Daniels. He was President Bush's OMB director. He's a Republican governor. A third one is Tim Penny. He's an independent congressman from Minnesota. And then our board is just some of the top former members of Congress, heads of CBO and OMB and other three acronym organizations in Washington that really care about the budget. They disagree on a lot. They disagree on how big government should be. They disagree on what the tax code should look like. But they agree that we ought to have a sustainable budget, which they generally define by our debt can't grow forever faster than our economy is growing. In good times, we ought to be reducing deficits. Understandably, there are times that borrowing is really important, especially say during a pandemic or during a recession or during a war. But we generally advocate for lower borrowing. That's one part of what we do is advocacy. Most of what we do is education. Most of what we do is write papers and blogs and go around the country and have presentations and we have online interactive tools. And we write memos and we go on the hill and we talk to members of Congress and we work with their staff to develop legislation to understand the cost of legislation and we work with the media. Most of what we do is educational. We try to explain the budget in ways that people can understand. The president's budget came out today and I think the main document is 580 some pages or something like that. Later today, and I know you guys are already on our mailing list, but if not, you can go to CRFP.org. Later today, you'll get a paper that's more like seven pages that tries to explain the budget as thoroughly as possible and as few words as possible by using, by kind of focusing on the most important parts of it and explaining in a digestible way. So that's a lot of what we do. We advocate for responsible budgeting. We do analysis, we explain things and we serve as a watchdog role because believe it or not, sometimes members of Congress and the president like to cheat and say that they are being good in the budget when actually they're doing bad in the budget and we're there to kind of call the balls and strikes. We also have a special project that comes around once every four years. It's like the Summer Olympics called US Budget Watch. This year we call it US Budget Watch 2024. My guess is the next one will call US Budget Watch 2028. And this focuses on the presidential campaign. Most of what we do focuses on what's happening in Congress or what's happening with the White House but this focuses on what's gonna happen with the next president. And so we follow the campaign starting early in the primaries. We explain their policies as they come out. We try to put estimates to those policies because it's really easy to go on the campaign and say I think everybody should have free tuition at University of Michigan but then you need to figure out, okay, how much does it cost to give everybody free tuition at University of Michigan? So we go through their policies. We try to figure out their costs. We try to compare them with each other. We fact check them. We try to encourage them to avoid perpetuating budget myths. And again, we go around the country to try to talk about the many challenges and opportunities that they face. Sorry, excuse me, we're in high altitude here. So let me start by giving some basics in the federal budget. And again, if you have questions throughout this, feel free to raise your hand. The last full budget that we had, the last year that we've completed was fiscal year 2023. In fiscal year 2023, the federal government spent $6.5 trillion. Take a total spending, six and a half trillion. In that same year, they raised about four and a half trillion. Anyone here accounting or math, right? Like you might notice there's a gap here, right? We spent two trillion more than what we brought in in revenue. These are the unofficial numbers because of some quirky accounting stuff that you can ask me about if you care. Just trust me that they're the better numbers. So we spent about two trillion more than we raised. Where did that spending go? Well, all sorts of places. We spend on literally thousands of government programs. About a quarter of it is what we call discretionary. These are the programs that, for the most part, Congress appropriates every year. Every year, the Congress decides how much we're gonna spend on events. That's half of that quarter. Every year, they decide how much we're gonna give for K through 12 education. How much we're gonna fund the EPA, the Department of Energy, the State Department, the Department of Homeland Security, things like that. The federal workforce, almost all the federal workforce. These are under the discretionary budget and these are decided every year. But three quarters of the budget isn't decided every year. Three quarters of the budget is mostly on autopilot. Either it's on a multi-year basis or in most cases on a permanent basis. The largest category, the largest single government program is social security. Of that six and a half trillion, about 1.3 trillion with social security benefits. This mainly goes to the elderly, but it also goes to people with disabilities, workers with disabilities, and it also goes to survivors, children's survivors as well as adult survivors and elderly survivors. That's the largest government program. After that is Medicare, which actually goes to almost the same population for providing social security gives you a check. Medicare gives you healthcare benefits, basically public insurance. After that is everything else we spend on healthcare. That's your Medicaid, which is health insurance for low income. The Obamacare, ACA subsidies, which go a little bit higher at the EM ladder and the children's health insurance program. And then we've got everything else. We spent a lot of time talking about everything else. Your food stamps, your welfare programs, farm subsidies, military retirement. Pretty small share of the budget when you look at it. That's that dark blue next to the non-defense, about 1.1 trillion dollars. And then last year about 10% of the budget, about one of every $10 went not for some kind of new program, not for infrastructure, not for education, not for welfare, not for healthcare, but it went to just pay interest on our debt. It went to pay bondholders in order to not ditch our debt, which we sold to them because we needed a loan. I wanna focus in a little bit on this discretionary part because this is a big change for how things used to be. If you go back to 1970, and I apologize for looking backwards, but my eyes it turns out are not actually good to see numbers on that screen all the way back there. But if you go back to 1970, most of the budget, 60% was discretionary. That meant that most of the budget was decided every year. You elected your member of Congress, you elected the president, and every year they decided how to allocate the money. By 2000, that had fallen to a third. So by 2000, most of the budget, significantly most of the budget was mandatory, was not decided by the person you elected, it was probably decided by the person that your parents elected, maybe by the person your grandparents elected. Last year, as I mentioned, it was a quarter, and by 2050, 300 current course, it's gonna be a fifth. So separate from anything I'm about to tell you about deficits and debt and about all this extra borrowing, one thing that's happening with the budget is it's becoming less democratic, little de-democratic over time. Less and less of the budget is in the hands, or directly in the hands of the people that you're electing, and more and more of it is in the hands of people that may be long dead, right? It was decisions made in the past that were continuing. Now what about the revenue side? That was the spending side. We spent six and a half trillion last year. We raised four and a half trillion. The other two trillion we borrowed, right? And of that four and a half trillion, about half of it was from individual income taxes. I think this is the part of the tax code most people are familiar with. It's a progressive tax, so the richer you are, the more you pay. People that highest incomes pay 37% on their last dollar. A large share of people pay nothing or even get something back. The lowest rate is 10%. Goes up incrementally. There's all sorts of credits, credits for children, credit for earned income, credit for college tuition. There's all sorts of deductions, whether it's from mortgage interest or your retirement account contribution or your charitable giving. There's all sorts of things that aren't included in the tax code, whether it's your healthcare benefits or interest bonds or things like that. There's special rates for capital gains. It's a very complicated tax, but it's a tax that mostly is paid by higher earners. Really, most of this tax is paid by people in the top quarter of the income spectrum, the top fifth even. The second largest tax, and the one that's the largest tax for most people is the payroll tax. If you ever look at a paycheck and you see that FICA that the government's taking, that's your federal insurance contribution amount. That's your payroll tax. It's basically most of the cases flat tax on your wages that goes to pay for social security, Medicare, and in some cases unemployment. You pay some, your employer pays some. In most cases it's split evenly, although there's exceptions. And again, even though this isn't the most revenue, it's the most tax that most people pay because anybody that works pays the payroll tax. Doesn't matter if you worked one hour and you have $15 of income for the entire year, you're paying the payroll tax. Same as somebody that's making 150,000. I will say for social security, eventually your income gets high enough that you stop paying more in payroll tax. That's about 180,000 this year. After that we got the corporate tax, which is about 10% of all revenue. We spent a lot of time fighting about the corporate tax, but it's one of those things that's like, it's really important if you got rid of that, our deficit would be 400 billion bigger, but it's not that large a share of total revenue. And then everything else we talk about is just tiny. Cigarette taxes or gas taxes or the estate tax, which is the tax you pay a few, or basically our billionaire and you die tariffs. Like they get a lot of discussion, but they don't bring in a lot of money, at least not relative to the income payroll tax. So because of this large gap, we are borrowing about $2 trillion per year. Prior to the pandemic in 2019, we were borrowing $1 trillion a year. During the pandemic, we really ramped that up. We ramped that up mainly because we were providing support. We were, we sent people three rounds of checks. We dramatically spent unemployment benefits. We had that Paycheck Protection Program for small businesses. We had aid to states. We had all sorts of money we were putting into the economy. There's a question over here, if we get the mic and I'll get to it when I finish this, but we have all sorts of money we were putting into the economy, in part to support the economy, mainly to support people through the pandemic. And that boosted it up to $3 trillion a year. But now we're post pandemic, we're post all that relief. And you can see kind of going forward, we're at $1.5 trillion a year, headed to two, even $2.5 trillion a year. This is where we're borrowing annually, yeah. I've always been confused, especially like when we borrow from other countries on what the consequence is, because the standard of living, at least for me in my ignorant experience has been the same, like no matter how much we're borrowing, except for like a little bit of inflation. So what's the consequence of that? That is a great question, but I have like 15 slides probably just dedicated to that question. So I promise I am gonna get to it. The question was what are the consequences of borrowing? And there's many of them. The one thing I'll say is that, most of the consequences seem invisible because they're very diffuse and they're very incremental typically. And this is a consequence that people face in budgeting. It's a little bit like climate change in the sense that nobody feels the effect of, an additional ton of emissions, but like everybody feels the effect 20 years down the road of the accumulation of emissions. I'm not saying debt is the same level of threat as climate change, but it's a similar situation where the benefits of deficits are actually very targeted, because the benefit is, you got a paycheck protection program where you got a $1,200, $1,400 check, but the costs are very diffuse. It's that everybody's standard of living is a little bit worse than it would have been accumulating over time. But I'll spend about 15 slides on that out of my 412 total slides, just joking. And if I still don't answer your question after those, ask me the same question again or ask it in a different way. I got a question over here. We get them. The extent that social security deficit, if that's the right word, is included in this trillion. I've always been curious if we remove the cap on social security taxable income and taxed everyone to the full extent of their income, how would that impact the deficit and the borrowing? That's a great sort of two-part question, is technically social security is off-budget. And often when we talk about social security, we talk about it on its own basis, because social security's got its own dedicated tax that goes into a trust fund that pays for its own benefits. But whenever I show numbers like this, whenever anybody does, they're looking at the unified budget deficit. And so that means this is including social security's deficit and it was previously including social security surpluses when it ran them. If we were to raise the cap, eliminate it without the, a lot of people want to do a $400,000 donut hole because God forbid anyone making $398,000 pays a higher tax. But if we were just to eliminate it entirely without that donut hole, it would be about $200 billion a year. So instead of a, so you could basically take all these numbers and subtract $200 billion. Now that's a lot, over 10 years that's $2 trillion. But it's not like that, it's not like it brings us to balanced budget. Let me keep going. So deficits are what we add to the debt each year, pretty much. So there's the difference between how much we spend each year and how much we raise in revenue. And we add that to the debt. So it's kind of like this would be your monthly credit card bill is your deficit and then your credit card balance is your debt. And so we keep accumulating debt year after year after year because we're never paying it down. In fact, when the debt comes due, we pay it by issuing new debt. So we roll it over. We're never paying it down. The last time we paid down any debt other than on like a monthly basis was in 2001. We're rolling it over. And as a result, debt has gotten quite high. Now as an economist, a budget person, I prefer to look at debt not in dollar numbers. We hear a lot about like 36 trillion in debt or things like that, but as a share of GDP. Why? Because this is one way to tell us how much debt we have relative to what we can afford. It's the same again as, I think people can take the household metaphor too far, but there's some ways that it's extremely apt. If you're making $2 million a year and you have a $200,000 mortgage, you're in pretty good shape. But if you're making $20,000 a year and you have $200,000 mortgage, you may be struggling. Same thing for the federal government. The bigger our GDP, the more debt we can afford. And so one way we like to measure debt is as a share of GDP. Historically, debt's averaged about half the size of GDP. But it has gone up and down a lot. Historically, it used to go up during wars. We'd issue a bunch of debt during wars. And then we'd run balanced budgets and allow it to erode, even pay it back after the wars. In World War II, debt peaked at about 106% of GDP. That's the highest it's ever been. Then we ran balanced budgets and it came down. Then we had sort of the Reagan era, Cold War buildup and tax cuts that went up. And then it came back down. And then we had the Great Recession and it went up. And then it didn't come back down. Actually, after that ended, it kept going up. Then we had the COVID crisis and it went up again. And then it didn't come back down. The little coming back down you see is not actually debt coming down. It's actually that GDP recovered. Because this is relative to GDP. So like 2020 was a really bad year for GDP. But debt did not come back down at all. And in fact, it's continuing to rise. So we have debt today that is almost as large as the economy. That's approaching those record levels we set with World War II. Except for the difference being, it's not because of one time borrowing for a global war. It's because of ongoing borrowing. And we have no plan to pay it back down. And how did we get here? There's a lot of ways to look at how we got here. But remember I mentioned the last time that we ran a surplus was 2001. In 2001, we were running surpluses and we were projected to run surpluses as far as the eye can see. In fact, we were on course to pay off our debt. And people were panicked. What are we going to do if we pay off our debt and there's no bonds in the global financial system? Those people maybe never talked to a member of Congress or they wouldn't have been so worried. That was never really a serious risk that Congress would let money burn that hole in their pocket. But debt in 2001 was at about a third of the size of the economy, like 32% of GDP. Had we enacted no major legislative changes since then? Or any legislative changes we had paid for? Meaning you could do a tax cut, but you got to do a tax increase elsewhere. Or you got to do a spending cut elsewhere. Had we done that, debt would have been paid off several years ago. This doesn't look at every piece of legislation, but this looks at all major legislation that's happened since 2001. And basically what we find, looking at this major legislation, debt would have been paid off 2022. Instead, it's almost 100% of GDP. And both parties shared the blame. About 77% of GDP of the debt was legislation that passed on a bipartisan basis. Some of it had a lot more support from one party or another, but this is legislation that had at least significant support from both parties. And the remaining 20% partisan basis, but pretty evenly between the parties. And it's come not just from tax cuts, not from spending increases, but from both. Again, we looked at the math and we basically said, we basically found without major tax cuts passed since 2001, debt would be 37% of GDP lower. Without major spending increases, it would be 33% of GDP lower. And without responses to last two recessions, it would be 28% of GDP lower, which basically means that those three categories of legislation explain the entirety of our debt. Without any of them, we would have no debt at all, right? So spending increases are the problem, tax cuts are the problem, Republicans are the problem, Democrats are the problem. The few independents that have been in Congress are part of the problem too, because they've also voted for most of this stuff. It's very easy to mudsling and blame, but I would just recommend slinging your mud everywhere because there's plenty of it to go around. And it's not just the things we did since 2001. It's also the things we allowed to happen, right? So a lot of the budget is on autopilot. And so part of the issue with 2001, it wasn't just that we cut taxes and that we increased spending in some areas. It's that we didn't do anything to avoid automatic spending increases in other areas. So this is a different way to look at it. We looked at, in 2001, there was a surplus of about 1.2% of GDP. In 2023, there was a deficit of 6.3. So that's a 7.5% of GDP difference. Two-thirds of that is because spending is higher. One-third is because tax revenue is lower. Of that higher spending, it's mostly social security and health care. And that's not because there's been a ton of policies to expand social security and health care. There have been a few, but not much. It's because the baby boomers are entering retirement. Health care costs are rising. The cost of retirement is rising. And so those programs have become more expensive over time. And we've allowed them to continue to grow on autopilot. So all this is just context for what the next president or the next administration is going to face. We think we know the candidates. There's technically four major candidates running for office. And I heard no labels is going to have another candidate. But probably either Joe Biden or Donald Trump are going to be the next president barring some significant turn of events. And whichever it is, whomever it is, in their next term is going to face debt that's either at or extremely close to record levels. They're going to face interest costs that are growing rapidly. They're going to face, at the end of 2025, major policy aspirations that they have to deal with. And they're going to face looming trust fund insolvency. So let me go through each of these in a little more detail. Let's start with the debt. Remember I said debt right now is almost as large as the economy. It's projected to keep rising. It's projected within 10 years to reach 116 percent of GDP, which would be, that's under current law, which would be a new record, never before reached in this country. And over the long run, excuse me, and that assumes that they allow current law to stick, which means it assumes that there's a bunch of tax cuts that expire at the end of next year, including middle class tax cuts, as well as tax cuts for the wealthy. It assumes they don't extend any of them. It assumes that they let discretionary appropriations shrink to a level that they agreed to in a budget deal that they all sort of winked and said, we're not actually going to follow this budget deal. It assumes that the expansion of Obamacare that we put in effect a couple of years ago goes away. And so if we relax those assumptions, instead of saying current law, we say, what if they just keep doing what they're doing? They keep doing what they're doing. Debt is headed to 131 percent of GDP. That's not that much higher than 116, but if you look at the trajectory, you can see it's meaningfully different. Instead of debt rising kind of slowly but surely, you can see by the end here it's starting to rise really rapidly. That especially becomes true over the long run. So the congressional budget office tries to project out 30 years. In 30 years, they estimate under current law, reaching 174 percent of GDP. That would put us at Japan levels. Japan's really the only country that has been able to sustain debt at levels like that. And they also haven't had any economic growth in 25 years, so I'm not sure we should look to them as an example. But at least like there is an example of a country that has debt and isn't in total crisis. But if we take the keep doing what you're doing approach and we start to kind of refer to the mean, then debt really starts to explode. It would exceed, I'm not sure why this graph cuts off in 230, but you have to trust me to exceed 250 percent of GDP shortly after 2050. And the congressional budget office stops estimating after that because they basically think you're in a debt spiral at that point. And they don't know how to deal with it with their model. So we would have debt realistically out of control. But if I could pretend it was still in control, it would be well above 300 percent of GDP. There's no historical experience. There's no international experience of anybody with debt at something approaching these levels. Now what's driving this relative today is the aging of the population and rising healthcare costs growth. If we didn't have those two things, Social Security and Medicare wouldn't grow as a share of the economy. Revenue would grow because taxes grow over time as we get richer. Discretion or spending would fall relative to the economy because when your economy doubles, you don't need twice as big a military, for example. So if we could freeze everybody demographically, so nobody was aging, and we could stop healthcare costs from growing fast in the economy, our debt would be under control. Those are the key drivers of what is bringing our debt out of control. You can kind of see that here. This is kind of the 30-year forward picture of you can see kind of Social Security is growing some from 5 percent to 6 percent. It used to be 4 percent. Interest is growing a lot because we keep borrowing more than we're paying more interest on it, and everything else is kind of shrinking. Everything else just isn't that big a deal relative to... That doesn't mean that there's not tons of money we can save in the defense budget, or tons of money we can save from food stamps or name your program. It doesn't mean that there's not efficiencies to be had, but they're not growing rapidly. They're not really growing at all relative to the economy. The growth is coming from our health programs, our retirement programs, and interest on the debt. Just to give you another sense, here's what revenue looks like. We think revenue is going to kind of stabilize off, but this assumes, again, that these tax cuts expire, which my guess is they will not. President Biden and his budget today said he wants to extend all of them for everybody making below $400,000 a year. That happens to be 95 percent of the population. That's cheaper than extending it for 100 percent of the population, but still quite expensive. If you look at that as kind of our... He says he wants to pay for it, but in a budget where literally the job is to put pay-fors out, he didn't include pay-fors, so that's not an encouraging sign either. Bottom line is probably our revenue estimates are too optimistic, at least relative to where they're headed. Now consequences, that's what we're asking about. Why should we care about the fact that the next president is facing higher debt? One reason, as you mentioned, is his inflation. When you see a big change, this isn't really debt so much, debt came out of it, this is really deficits. When deficits have a big change year over year, it can lead to inflation. It can lead to a situation where you basically have too much money chasing too few goods. This is not all of... This is a key part of what likely happened after the COVID crisis. We all kind of were locked in our homes for a year. Meanwhile, the federal government wasn't just keeping households whole, but was actually... Personal income went up 10% in 2020. You wouldn't picture that normally. You would think this is the worst recession in our lifetimes, and income went up 10%, when typically it goes up 4% in normal year. It went up another 10% in 2021. People have tons of cash. They also had additional savings because they weren't going to restaurants, they weren't going on vacations, they weren't having their work commute, so they had even more cash. If you owned a home, if you owned a stock portfolio, if you owned anything that was an asset, if you owned Bitcoin or whatever, anything, its value went up. So you felt there's extra wealth, and then all of a sudden things reopened, and so people went out to spend that money. They went out to spend it fast, and we didn't have the productive capacity to meet it. In part, we didn't have the productive capacity to meet 10 million jobs. We're still down 10 million jobs when kind of the reopening started, and you can't create 10 million jobs in a month. So part of it was just a timing thing. But part of it was this huge amount of money that we deficit-financed that people went out and spent, and that disconnect between supply and demand caused a surge in inflation, or was a factor in the surge in inflation, along with continued supply constraints. There's other theories of why debt may further cause inflation and expectations and the price value of money. I can talk about that more, but the bottom line is excessive borrowing, especially when it's rapid, can cause high inflation. That raises the cost of living for everything. So I took a few sort of items that not at random, but I selected a few things. Used car prices today are 45% higher than they were prior to the pandemic. Average rent is 22% higher. Gasoline, 37% higher. Milk, 38% higher. Now all these are official data. This last one is original research. That's the Zingerman's Rubin. So which I had today, and it was delicious, but it cost 2099, which compared to 2019, is a 24% increase. So inflation can hit you where it hurts. Not just things nobody cares about, because I use cars, but like the Zingerman sandwich also affected by inflation. It's really broad across the board. It's part of the economy experienced this inflation, and that means, particularly if you're on a fixed income, there's a lot of pain. If you're on a salary, you may be lucky enough that your wages on a lag caught up to that inflation. But nonetheless, you still have that inflation. That's one reason you should worry. Another reason you should worry is interest rates. So luckily, inflation is coming down. We had two years that was about 6% or 7%. Last year was 3%. So we're still elevated, but it's coming down. But it's being replaced with high interest rates. Government treasuries are paying, I don't know what it is today. This graph's a couple weeks old and they changed rapidly. But they're paying between 4% and 5.5%, whereas if you kind of look back to the last 15 years, the three month has been at zero for most of it, and the 10 years has been at 3%, 2%. So rates of government bonds are high, but that translates into mortgage rates. Mortgage rates are 7% now compared to people were locking them in at 3%, not too long ago. Car loans are expensive. It's harder to buy a washer-dryer on installment plans, and often you've got to pay an interest rate on that, credit card interest. So this interest cost hit everybody. And there's a really good amount of academic literature that kind of backs up the theory. The theory is this idea called crowd-out. The easiest way that I explain it is when the government sells bonds, somebody's buying that bond instead of investing in the private sector. And that means there's less investment in the private sector. But the mechanism through which that usually happens is higher interest rates. They have to offer higher interest rates in order to attract people away from those private sector investments. And there's pretty good literature that like for every 10% of GDP increase in debt, interest rates go up a quarter point. That's not exactly true. There are a bunch of different studies over different periods of time, but the link is pretty well established. And so more debt means higher interest rates are paying on everything. It also means lower economic growth. And this is one of those things again, it's the frog in the boiling water. If you throw a frog in the boiling water, they'll jump out. But if you start to boil it, they won't notice. We're not going to notice these things except we're looking backwards. But what the theory tells us is that the more debt, the less that kind of growth we have over time. Because of that same crowd out reason. People are putting more money to government bonds, they're investing less into the private sector, which means they're buying less stocks and so there will be less issuance. Or they're putting less money in the bank, which it can then loan out for mortgages or for small businesses or other things like that. And over time, that's its way into income growth. These are estimates from the Congressional Budget Office 30 years out, right? So that's our current trend. If debt basically stopped growing, average income per person would be about $125,000 in today's dollars. That's average, it's not median. But trust me, they don't run the median, but trust me that the differential would be similar. They think that if we continue on our current law path, it'll be $116,000. And if we continue on that hockey stick path I showed you before for debt, it'll be $110,000. And so that basically means in the last rapidly growing debt scenario, income will grow a third slower. It only grows two-thirds as fast, right? $30,000 instead of $45,000 as with no more debt as a share of the economy. Stable debt. That's really meaningful. It's not meaningful that you feel from year to year, right? So I was going to have a 2% wage increase and instead I have a 1.6% wage increase. 0.4%, that's not a big deal. But if every year you were going to get a 2% increase and instead you have a 1.6% increase, that starts to matter. It starts to matter a lot. Is the variation across these scenarios coming from some sort of exogenous fluctuation in the debt or is it that there's actual cuts that households experience as losses of benefits? Like I might be willing to forego my higher income if I knew I had Social Security and Medicare, for example. So how does that fit in here? Great question. Let me tell you the technical answer than the philosophical answer. The technical answer is the difference between the first two scenarios is essentially completely exogenous because the difference is CBO ran it once by saying what if we assumed debt had no crowd-out effect and then they ran it a second way and said, okay, now what do we see in our model? Between the second one and the third one is actually specific because our significantly lower how they incorporate them are significantly lower tax rates on capital and labor which is sort of reflective of it's complicated how they do it but it's basically reflective of extending the trump tax cuts and then don't let real bracket creep happen after that. And its increases in discretionary spending of which they assume a certain amount is investments. And so that's the technical answer to your question is that essentially between the first and the second it's sort of very dust between the second and the third is actual policies. I think the philosophical point you're making is that we need to compare the economic cost of debt to the economic benefit of what we're buying with that debt and not just the GDP benefit but the benefit that may appear in transfer payments for example or in lower taxes or in having more security because we know that the Department of Defense is more likely to protect us and that is the trade-off. That's always the trade-off between borrowing and not borrowing. Oh wait I think we need a microphone. Sorry. Tax rates, I mean you talked several of your slide presentations about it. Is the tax rate on individual and corporate income realistic? I mean I used to live in Massachusetts and the state last year enacted a millionaires tax at minimum tax on incomes over, I don't recall now exactly what it was because their analysis showed that people paying income tax in Massachusetts due to all the deductions and so forth that the welfare people could take whatever the stated rate was, the actual rate they were paying was substantially lower and contributing to the state's deficit. Is that with that whole truth for the federal government as well and how would that impact your analysis? Nobody's paying 37% of their income in taxes is the answer in income taxes, right? That's the top rate. Nobody's paying 37% of their income in income taxes because 37 is your top rate but you're paying so many of the lower rates you're deducting, if you're wealthy enough to be in the 37% rate, you're deducting $10,000 in local taxes, you're deducting a mortgage interest, you're deducting your charitable giving you probably have tax-free bonds, you have a bunch of money in capital loans that's paying a lower rate that can be 23.8 you maybe are a pass-through business owner of some kind and so you're getting a 20% deduction and you're taking losses most of which are actual losses but some of which maybe you're fudging a little bit because your company car you're also using for individual purposes your health care isn't subject to tax. The bottom line is nobody's paying the top rate. We have a I wouldn't say a narrow base but we've kind of a Swiss cheese right where there are a lot of ways to reduce your rate relative to the taxable rate. That's all included in this analysis and the other piece of it is a lot of people aren't paying all the taxes that they owe. In fact I'll get to that in a few charts but what that suggests is there's actually a lot more room to raise revenue without having to kind of first of all without raising taxes just by collecting taxes that are owed but secondly without having to raise rates or without having to even explicitly cut tax breaks that are intended under the law because they're because you can start by kind of going after the compliance and the work around the loopholes and then you go to the tax breaks then you look at the rates. It's one way to think about it but we have a very broad base that leaves a lot of opportunity to avoid taxation some of it by intent some of it sort of just has just happened over time. So many other consequences of debt kind of slower economic growth there's you mentioned kind of foreign owners of debt there that's declined over time actually but there's there's still risks associated there's risks and benefits associated with foreigners owning our debt. The benefit is we don't get as much of the crowd out we so basically get the economic growth because we're not taking it out of domestic investors. The downside is we don't get the returns to that growth returns to that growth actually go abroad the other downside is when there's major geopolitical tensions we become a tool you know to be used for for better or for worse we've rising interest payments which I'll get into a little bit in a minute less fiscal space there's a lot of research on this basically countries that enter recessions with very high levels of debt don't respond to them as well. It's partially a political constraint partially a market constraint but there's at least the perception among policymakers that debt is too high already so we can't borrow more even if we need to borrow and so that you know we saw on the Great Recession low debt countries did a lot better coming out of it than high debt countries there's the budget becomes more stagnated and stuck and there's less room to make changes and then the one that is unlikely but it's kind of the crisis scenario is that debt gets so high we create a financial crisis. The scenario here look we're never going to default on our debt we print in our own currency so we don't have to default on our debt. The only way we can default on our debt is if congress does something stupid like not raise the debt limit. We are also the strongest economy in the history of the known universe and so for those reasons we don't face solvency crisis but we could face a situation where our debt is rising at such a rapid clip that the markets start to panic that we're not going to ever be able to bring it back down and that our only two choices will be that there's some percent chance that our only two choices will be to default on the debt intentionally or to inflate our way out of it and then they may demand higher interest rates and that may cause the 14 trillion of bonds around the world that are currently back in the global financial system the ones that aren't held by the Fed or elsewhere to lose substantial value and that'll cause a banking crisis right so think of the silicon valley banking crisis as kind of a little microcosm of that they were putting a lot of their assets in bonds and the value went down because the interest rate went up and they went in solvent if interest rates went up a lot not just a you know not just a point they went up rapidly that could happen broadly we could have a financial crisis I put this as a low risk scenario but it's a scenario that that low risk increases as your debt does and then I mentioned before but I want to kind of pull this separately because it's a separate challenge at least in the paper how we wrote the paper the next president is going to face growing interest costs and we're actually already seeing this interest on the debt this year will be the second largest government program it was a fourth two years ago it is this year going to exceed the defense budget this year is going to exceed the Medicare budget so we're going to spend more on interest than we spend on defending our country last year we spent more on interest than we spent total on children at the federal level add together all federal spending on children K through 12 education, child tax credit children's nutrition children's health care, children's share of social security for those dependent benefits we counted everything, even programs that aren't for kids we were spending more on interest than those, we were spending more servicing the past than investing in the future and on our current trajectory interest will become the largest government program within a quarter century it is crowded everything else is exceeding everything else it is approaching a new record as a share of the economy when this happened in the 90's it was a major impetus for deficit reduction because there really was a panic that like why is our biggest line item we're paying interest on the debt our biggest line item should be we're protecting the country, we're investing in the future we're providing health care, pick your thing that you care about it shouldn't be we're paying for tax cuts that happened 30 years ago or 20 years ago as I mentioned before interest is now past children and there's no looking back we are really past the point of return unless we have a huge increase in investment in children combined with significant reduction in debt or interest rates really collapse but if interest rates collapse there may be something else very bad happening in the economy so I'm not sure we should wish for wish for that one we now spend more service in the past than investing in the future and where this really gets to be potentially troubling is if it leads debt sustainability out of control for the last 15 years we've benefited from the fact that the economy grew faster than the interest rate and this is kind of like in finance literature this is really important because when you're looking at your past debt there's sort of two things that are happening to it over time one is it keeps growing with interest but the other is it keeps eroding relative to your economy because remember what I said is debt to GDP matters and as long as that erosion is happening faster than that growth all you got to worry about is your new debt now that new debt is still problematic but like at least you can say at some point we could Congress maybe will stop but at some point Congress can stop and what is the worry of the past debt but and in fact mathematically if Congress keeps borrowing at the same level for kind of new deficits and your growth rate is above your interest rates it would stabilize at some level so for example sorry this is just the last 15 years so for example if your Congress was borrowing 3% of GDP a year for non-interest just they were spending 3% more of GDP on fun stuff than we're raising in taxes and your interest rate was 1% below your growth rate your debt would stabilize at 3 over 1 which is 300% of GDP you know like that would put us at historically uncharted territory so I'm not saying we should go there but like you at least would know that eventually mathematically it should stabilize this is sort of a similar situation with 2% of primary deficit it would be 200% of GDP but the risk is when your interest rate is above the growth rate which is now on new debts new interest rates are 4 to 5.5% our growth rate is about 4% then your debt can grow forever with no end in sight and what I can get especially scary is when you think about the dynamics effects because remember more debt pushes up interest rates and it pushes down the growth rate and so this kind of assumes the growth rate and the interest rate are fixed but we know that more debt means higher interest and lower growth and so that can lead to this sorry my clicker's backwards that can lead to this sustainability scenario so when your interest rates are high the risk on the horizon that you go from debt that seems like it's rising rapidly to debt that's rising uncontrollably this is not a projection of where we'll be this is sort of an illustration to show what can happen if your debt spins out of control so the next president's going to face those interest costs, they're going to face that debt they also have a bunch of like legislative deadlines that they have to face that are really important in January the debt limit comes back we have to raise the debt limit on a re-default there's all sorts of tricks we can play to extend the deadline but probably sometime in the summer maybe in the fall we'll have to raise it last time we raised it with a budget deal we agreed to a budget deal that would set discretionary levels for this year and next that budget deal expires so we either have to renew it or come up with something new by October then the big one is at the end of the year we passed a ton of tax cuts in 2017 corporate individual most of the corporate ones were permanent not all of them but most of them are permanent most of the individual ones were set to expire in 2025 there's a couple reasons for that but one was that I think they thought the political pressure to extend the individual ones would be a lot stronger than the political pressure to extend the corporate ones so if we do nothing tax rates go up for everyone every tax rate goes up the top-tie rate, the bottom rate, the middle rates the child tax credit goes from 2,000 per child to 1,000 per child and it drops in half the alternative tax comes back which was a very confusing tax we mostly got rid of the salt cap disappears that's something some people might like and some corporate provisions change as well and on top of that we expanded Obamacare recently those expansions go away so there's a lot that's going to happen at the end of December and there's big fiscal implications so depending on what we do with these caps spending could be significantly lower specifically higher if we were to extend basically everything that expires as is from the tax cuts in the health care bills we'd have 4 trillion dollars to that 4 trillion dollars on top of what we're already scheduled to borrow the president said he only wants to extend below 400,000 that could still easily be 3 trillion if he does it the way you know I want him to do it, it would be 2 trillion that Chuck Schumer wants to do it it may actually be 4.5 trillion because he may not want to extend the 2017 tax bill had tax increases and tax cuts the tax cuts were just bigger he may want to not extend any of the tax increase part of it, any of the pay-fors so this is a very expensive decision point and there's going to be a lot of disagreement among the members and somebody's got to solve it we got a model where you can kind of choose every option in two weeks we're going to release a more online version of it but you can kind of play around with the parameters and you can see you can do this in a way that doesn't cost money but it's not easy you got to make some tough choices you got to have some of those rates be higher make some of the tax breaks stricter things like that, things that politicians don't like to do things that tax economists love to do but politicians don't like to do and then on top of that there's looming and solvency of these major trust fund major trust fund programs remember we're getting older the number of 65 year olds is growing but the number of 85 year olds is also growing this means fewer people paying into these programs or actually the same number of people paying into these programs no growth in people paying into them but a lot more people collecting benefits from social security and Medicare there are 10,000 Americans born every day and I want to guess how many Americans are turning 65 every day also 10,000 so essentially the only growth that we have in our population right now is immigration and for people living longer otherwise there's no growth in the population the population is basically frozen but for those two factors people living longer is wonderful but not helpful for the budget and immigrants can be very helpful for the budget and the economy but the problem with them is they also get old like the rest of us so that buys us time but it doesn't change the underlying structures we have a problem that we're getting much older as a society and yet we have major programs that are kind of built to be self-contained where we pay in based on wages and then we get out the benefits social security being the biggest one recently is 2009 workers were actually paying more into social security than we were paying out in benefits since we were running surpluses and we put those surpluses in a trust fund but since 2010 we've been pulling out of that trust fund pulling out of the interest of the trust fund the gap between spending and revenues getting larger and larger and projected by 2033 that trust fund will run out social security will run out of reserves maybe it'll be 2032, maybe it'll be 2034 I'm not, I don't have a crystal ball but we have a pretty good idea of how old the population is going to be in nine years because you know you can't birth a 10 year old or 12 year old and so even if birth rates go up a lot tomorrow they're not going to be contributing anything in taxes, nine year olds barely pay any taxes unfortunately so this is kind of pre-baked in nine years social security runs out, we've got countdown clocks to make it extra scary for these programs because it's not just social security it's also Medicare hospital insurance it's also the highway trust fund highway trust fund is running out of four years Medicare, seven years social security in nine years and change when it runs out that does not mean social security ends for a lot of reasons one being congress wouldn't let it end but the other being that's not what the law says but what the law says is it can't pay more than it's bringing in a revenue and effectively that would mean a 23% by our current estimates across the board 23% doesn't matter if you're 62 years old or 102 years old doesn't matter if you're rich, poor everybody gets this cut for a typical couple that retires in nine years and when you think about nine years away it means that if they were talking about the normal age that means they're 58 now 58 year olds so it's not like I used to give these talks and we used to say we got to save this for our kids we got to save it for our grandkids but it's actually your grandparents we got to save it for 58 year old is going to turn 67 in 2033 at that point if they're an average earning couple their benefits under the law would be cut $17,400 for a dual learning typical couple $17,400 that's the cost of doing nothing now we're not going to do nothing but it matters the something we do something we do can be to say we're going to abandon Social Security as we know it is a self-finance program and we're just going to borrow the money that's one option there's something could be we're going to have abrupt tax increases or abrupt benefit cuts or some combination there's something could be we're going to keep fighting and we're going to accidentally go off the cliff and it's probably not going to happen but it could happen from incompetence it could happen from physical dysfunction even if it doesn't happen the alternative would be similarly disruptive I heard that not to label generations but generation X was population was smaller than the population coming up so how does that affect the solvency so basically here's what's happened these are huge generation they're larger than the generation before because they're kind of compressed because everyone came home from war and so we talk about this as the big thing that's happening is the baby boomers are retiring but really the baby boomers retiring is the beginning of a total change in the birth rate every generation subsequent to the baby boomers had about two kids per couple give or take they've not all been exactly the same size now but some of it may be people having kids later but give or take we used to have three to four kids per couple now we have two and so the baby boomers are sort of just the beginning of a permanent change in demographics where we were permanently older as a society and as a result we will permanently have basically about half as many seniors as we do everybody else which means that sort of as we do workers so it means that basically as we do working age adults and so basically every two adults needs to take care of one seniors whereas right now it's close to three and it used to be five I want to say there's like a lot of ways to fix this right so you know saving social security could mean raising a bunch of taxes currently people only pay payroll taxes in the first hundred and seventy some thousand dollars of income we could eliminate that cap or eliminate it with a donut hole or that wouldn't fix the problem but that would give us a lot of the way there we could supplement that by say raising the payroll tax rate that's what basically what this top plan did Social Security 2100 it got rid of that cap and then it gradually raised the tax rate by like two and a half points and the combination of those things saved it we could fix this all on the benefit side you know cut benefits or slow their growth you can do it mainly for higher earners right now the richer you are you can get in Social Security benefits so you can cut benefits for higher earners and they'll still be doing better than low earners because it's sort of based on your wages you can gradually raise the retirement age people are living longer it turns out there's actually a lot of benefits to working longer I mean the literature isn't definitive but I think it's pretty clear that on average when people work a little bit longer not when they work like ten years longer but when they delay their retirement by a year or two what we see is they tend to live longer as a result they're basically healthier, mentally healthier stronger social networks lower divorce rates because they're not at home annoying their spouse all day like all sorts of benefits to working longer so like you could raise the retirement age you could change the inflation formula there's lots of things you can do you do it all on that side and solve it that way I think given how close we are to the deadline we're probably going to do some kind of combination approach which is kind of reflected in that middle plan but that's you know there's lots of options the issue is the closer you get to the deadline the fewer options you have so what do we need from the next president? the next president's going to face debt approaching or at record levels interest cost surging all these major explorations and these trust funds that are approaching insolvency if all they want to do is hold the debt to 100% of GDP which basically means stabilize it at where to probably be when they take office they need $6 trillion in debt debt reduction President Biden released his budget and they need $3 trillion so he'd be halfway there but it needs $6 trillion if you want to do something like balance the budget not in the first year but after 10 years you need $16 trillion that's a lot that's not going to happen $6 trillion is hard enough $16 trillion is not going to happen it's basically would be like cutting all spending by a quarter and they've been saying okay this is my next slide so that's perfect part of achieving part of achieving this $6 trillion I think involves leaving as much optionality as possible so that's been concerning me a lot is the candidate will say yeah I want to fix the debt I want to cut spending but we can't touch social security we can't touch Medicare we can't touch veterans and we can't touch defense those are like three of the four biggest government programs sorry four of the five biggest government programs if you want to balance the budget by all spending you already have to cut it by a ridiculous 25% but if you exempt defense, veterans, Medicare and social security you have to cut it by 76% essentially you got to eliminate the rest of government that's not happening similarly we hear we need more revenue the problem is taxes are too low but we can't raise taxes by a dime on anybody making less than $400,000 even if it's cutting a tax break that we agree is egregious like has anyone heard of the carried interest tax break people like to talk about this all the time it's like a hedge fund tax break not to pick on President Biden by the way that last one was Trump that says don't touch social security Medicare, veterans and defense that's Trump but President Biden has said we're going to close this terrible carried interest loophole which is a huge loophole that lets hedge fund people basically cheat on their taxes but if that hedge fund person only makes $399,000 a year they get to keep that loophole what kind of sense does that make that's ridiculous if it's such an egregious loophole I think somebody in the 97% of the income spectrum can afford to not have it anymore but those kind of pledges make solving this really hard if you were to try to balance the budget again that's not where we're going but just want to give you a sense of magnitude by raising taxes you have to raise all taxes by 30% but if you want to do it just on people making over $400,000 in corporations you have to raise it by 74% but probably not actually even possible because if you start to raise taxes that high you get more tax avoidance you get people working less investing less some people like to say cutting taxes pays for themselves that's ridiculous but there is a point that that's true at some point if you cut the tax rate from 100% to 99% it would pay for itself because who wants to work and get no money but if you get some money it might work so at raising all taxes you're probably on the wrong side of that situation or you're at least close enough to it probably literally impossible probably about as impossible as cutting spending by 75% it's just not going to happen we don't know what the candidates are going to propose yet because their campaign websites are disappointingly naked but we know what they've done when President Trump was in office last time he added $8 trillion to the debt half of this was COVID but half of it was before COVID it was tax cuts it was spending increases it wasn't Trump by himself it was Trump mostly with Congressional Democrats and Congressional Republicans adding $8 trillion to the debt President Biden I guess he wins by setting the bar very low he only added $4 trillion to the debt and again about half of it was COVID although I think that it was COVID at a time that a lot of people were telling him we didn't need that much COVID relief and again a lot of it was bipartisan basically all the non-COVID stuff most of it was bipartisan that's even with deficit reduction President Biden has signed a couple large deficit reduction bills even with those deficit reduction bills we're still at 4 trillion added to the debt so I'm going to just lastly kind of list to you what we've kind of called for in the campaign and then I want to turn to questions which is we just put out these principles and they're a little bit cheesy but we think campaigns are a little bit cheesy when they're at their best but we think they ought to be honest about the fiscal situation make deficit reduction a top priority put forward proposals to pay for new initiatives and pay off the debt not take things off the table deal with the trust funds do with new aspirations and use honest numbers like we understand that they don't have budgeting offices I mean President Biden does but we understand that it's hard to have great estimates for stuff but use the best estimates you can don't take advantage of the fact that you don't have a scorekeeper to make stuff up which happens a lot in these campaigns and a major part of what we're trying to do in this budget watch is to push back on that and bring real estimates to their policies so at this point I'd love to take excuse me I'm losing my voice I'd love to take any questions thank you so it seems like many of the things that would write the fiscal shift are unlikely enough to happen that you don't have to address this question but my question would hypothetically be clearly the level of the deficit and debt are too high but the right number is not zero right so how do you decide if you were in this scenario where like all these things happen what would it make you be like okay wait that's an off actually yeah it's a great question so I kind of look and it's so hypothetical because here's the truth that I hope doesn't get Wide Street webcast too far I would like the debt to stop growing but because the United States has such a strong economy if we can just get it to grow more slowly we probably are going to be okay that doesn't mean we're going to be great we're probably going to be okay well I kind of look at this as I'm not going to give you a number because there's no magic number but I kind of look at two different goals with different kinds of trade-offs involved the first goal is to achieve debt sustainability and what I mean by that is basically I want the debt that is declining not rising as a share of GDP and that I have reason I have reasonable cause to believe that it's not going to start rising again and it could be barely declining but like I want to know that like we're in the right direction and so we're not at risk of some kind of despair with a hockey stick and for that I think we're going to make some sacrifices of policies that we really don't like because even though the risk of a fiscal crisis is low the cost of it is incredibly high so we're going to avoid it and then I look at a second of like sort of debt optimization and so once we have a sustainable debt then I think every policy you look at more in more traditional trade-offs because we know that lower debt helps lower interest rates help grow the economy so once we're at sustainable then I think you really do take it one off and you say okay we could raise this particular tax and that would be good for the debt and good for the economy but it would be bad for the people paying the taxes and bad because it causes this distortion or we could cut this particular spending program so I'd like to get back to the world of traditional trade-offs which I think is hard to do when you have an unsustainable debt so my first step is sustainability and then after that it's got to be policy by policy because some policies have really high returns and some don't and then at some point sorry it would get so low that there would actually be a danger of having sort of the benefits of lowering the debt more would be negative I just I so wish that we could have that conversation and I could be up here telling you that our debt is too low but I don't think that now we're not just like at the moon now we're at like Alpha Centauri or something Hi my name is Shane Baum I'm a reporter with the Michigan Daily why is it important to stay informed about candidates policies regarding fiscal challenges in programs like Social Security Medicare and then why would you why would some people ignore these problems well Medicare insolvency is six years away Social Security insolvency is nine years away that means that we're going to deal with it within the next two presidential administrations or so and if we're smart we will deal with it in the next presidential administration I think you should care what your candidate thinks they're going to do to solve this or to ignore it and what's disappointed me so far is the degree to which candidates want to stick their heads in the sand and ignore it My name is Ben Farber I'm also with the Michigan Daily So my question is like how literate are the average voters currently about the fiscal challenges facing the federal budget and do you think that the level of literacy from voters affects what each candidate decides to do I'm more worried about the level of literacy of the candidates than of the voters I think voters understand generally the situation I don't think they understand the specifics I think Americans get a lot of things wrong they think foreign aid is way bigger than it is they don't understand the details of how the Social Security trust interacts with the general fund but like I don't think the voters need to understand at that level I think the voters understand there's a problem they understand there's a relationship between borrowing and inflation and interest rates and economic risk and I think they want candidates that are going to fix it but political candidates like to make promises they can't keep and I think that's the much bigger problem this is like on topic but off topic I've heard a lot about the US dollars apparently not backed by any commodity how does that impact like our economics if our dollars not backed by gold or I'm not really aware of any currencies that are still commodity backed by the full faith and credit of the US government and it works because we all believe it works and I guess that all could come crashing down but so far it's been a far superior economic system to one that's backed by commodity because it allows us flexibility with the money supply and that means that when there's recessions or when there's inflation problems we have solutions whereas when you're stuck being backed by gold there's a lot of money that's going to go down the drain and I'm not going to say that that's the same kind of way out I don't hear I mean I hear you but I don't hear you through the mic I don't think okay it is says it's on yeah there we go this is kind of a follow up to the other question you talked about just a minute ago is you know we wish our candidates had more literacy or we're more willing to work on sort of structural procedural recommendations and I was wondering if you could talk a little bit about that about kind of what does the budget process look like right now what sort of things are fundamentally broken and how could we put those structures in place to give people the incentives to do the right things that's a good question to me the budget process is broken because the norms surrounding it are broken the way it's supposed to work in the way it used to work is congress comes together and they write a budget and that budget was their actual plan for what they wanted to do over the congress and after it was passed they tried to do that plan they didn't always succeed in doing it they often changed the plan but they always tried to do that plan and that was really important that was in some years they got pretty damn close to almost exactly that plan in other years they got nothing done but like that was the north star since I don't know the exact year that 1998 or 2005 or 2010 it's not exactly clear because it happened so gradually but at some point the budget instead became one of two things a political document with make-believe numbers to just say we're balancing the budget or whatever or a way to shortchange the process because the budget has special rules that allow you to implement some policies faster and basically avoid the filibuster and so sometimes they pass budgets that don't actually have any budget in it they just have the fast track rules that's not sustainable to me because you start you can't budget without a budget I don't know how to say it other than that you can't budget without a budget and effectively that's what we've been trying to do and so we're going from leadership deal to leadership deal and crisis to crisis and we're trying to solve everything you know by threatening the full faith of credit in the US dollar on the debt limit which we shouldn't do but also there seems like there's no alternative to talk about the debt besides the debt limit so we're in a bad place now now I know you wanted me to tell you like how we can get out of this bad place and I wish I had great ideas we have a lot of ideas but the ideas are things like changing the way we report the budget and changing some of the rules around how easy or hard it is to add to the deficit they don't replace the need to like actually abide by the rules and I don't know how to force politicians to abide by the rules other than to reinforce those norms and I'm a little stuck in how we reinforce norms that are so far gone sorry that was really depressing someone asked me a happy question thinking back to the one slide you showed if the if the Social Security and Medicare trust funds being exhausted as the primary driver why isn't removing the cap on taxes to support those funds the solution I think it is part of the solution are you saying like I think it's the solution or why doesn't congress do it no I'm just saying on that one graph you put that showed up what would happen if which graph are we talking about? no further back I guess there was one where you showed the top line on the assumption that the taxes on the tax limit on earnings that was taxed to support Medicare and Social Security if it was removed and it basically as I remember the slide it looked like it erased the problem oh I see hold on I know what you're talking about so let me see if I can find so first of all there is no limit on Medicare in fact not only have we gotten rid of the limit in 1993 we also now have an extra 0.9% surtax so Medicare is actually the opposite situation it's not only that there's no cap you actually pay more at the top so it's only Social Security where this is an issue hold on I think I know which slide you're talking about we just got to get there this one so this this blue line this blue dotted line at the top assumes two things happen on revenue the one is they eliminate the cap the payroll tax rate very gradually by 2.4 percentage points which is if you think about that at 12.4 that's like a 20% increase in the tax rate so the combination of those two things eliminating the cap and raising the rate you know by a quarter can fix Social Security I think we should put both of those to be part of the solution personally why would I not prefer that plan to say another plan is because basically if you raise the top rate in that case basically by 15% you're pretty tapped out the ordinary top rate is 37% with Medicare it's basically 40% that would put you at 55% with this payroll tax add in state and local taxes in some cases you're at 60 or 65% you're pretty tapped out on what you can raise from the rich at that point and with finite dollars from the rich I'd rather put more of it into other kinds of deficit reduction into investments into children rather than to Social Security which is both a lifeline for many seniors but also a huge windfall for a lot of people that are in the wealthiest generation and cohort in the known universe to repeat a phrase and so I would absolutely I absolutely think that we should look at lifting the cap and we should consider raising the tax rate it would not be my preference to solve it entirely there because I'd rather I'd rather raise that revenue elsewhere for other purposes and I think in Social Security there are things we can do in the benefit formula that don't hurt people that rely on the program and in fact can encourage more economic growth because they encourage more savings and encourage more work from many seniors that not only contribute to the economy but would benefit in other kinds of ways as well Hi, my name is Kathleen I'm curious how your team engages with MMT based arguments about the national debt I don't think there's any member of Congress that sort of like full heartedly embraced it but yeah curious how often that comes up and what your sort of like go to responses tend to be This is a great question so the idea of MMT I'm not sure even the MMT knows exactly the idea it's called modern monetary theory and I think my most charitable way to describe it is it starts with something it starts with two premises that are pretty much true the one is that the US can't really default on its debt because we can print in our own currency and the other is that one can manage borrowing by changing the money supply those two things are true or can manage deficits and then it sort of takes a whole shift it sort of turns out how we look in the world and MMT says actually all government spending is creating money and all taxes are destroying money which I think is not true other than like in some kind of like metaphor way but they believe it it's literally it's kind of I don't want to get into like Catholicism and like whether it's the literal or whatever but like I think they think it's literally true just not metaphorically true and because that's true we really shouldn't try to change the money supply with monetary policy the Federal Reserve really shouldn't do anything and what we should do is manage the economy entirely through fiscal policy and and I'm sorry there's a lot of ands because the MMT's kind of increasingly layered that usually means running very high deficits because debt doesn't matter because there is no debt because you're basically printing money and you've never really had deficits to guarantee full employment but deficits can be too high and you will see that through inflation and that used to be where it ended but then there was an additional but ended after we borrowed 2 trillion extra a year and had major inflation which was the extra but was but inflation may be caused by something else and you don't want to raise taxes to fight inflation because I don't know why we never said that and it becomes very bizarre that the pandemic and COVID really ended this idea of MMT because we sort of had a mini experiment we like I think it's wrong theoretically and I think it's wrong in practice and it's wrong theoretically because I don't think it's true that spending money is the same as creating money and taxing money is the same as destroying money and that we can manage the macro economy through fiscal policy and I think it's wrong in practice because I don't think Congress is literally a macro economy through fiscal policy that would require when we had a big bout of inflation them saying okay we're going to significantly reduce the deficit we're going to have big tax rate increases which all the MMTers disavowed as soon as there was the opportunity to do that as soon as we had a big bout of inflation and so like it's not going to work in practice it doesn't work in theory it's very frustrating but where I bring comfort is that like Stephanie Kelton who is like the godmother of MMT she was literally Bernie Sanders who was his chief economist when he was head of the Budget Committee and Bernie Sanders as the person he would think would be pretty predisposed to believe in it because he's left-wing as a Democratic Socialist and Bernie Sanders didn't buy it at all he really like you look at his plan for president 2016 and like it was pretty radical but guess what he tried to pay for it so like he had Medicare for all but he also had huge tax increases to try to pay for it because he didn't believe that you could borrow sustainably it was gaining a lot of traction prior to 2019 and I think now that we've had two years of very high inflation following two years of big deficits and the MMT years responded in the way they did I think it's really undermined their case like sorry I'm going to go on this for one more second but I could have if I was advising the MMT years I would say look you could actually say this proves that we are right it's just that Congress went too far and they said this proves the only consequence of borrowing is high inflation and look there was borrowers high inflation so now they need to have tax increases the fact that they wouldn't say that I think shows that it's really less of an economic philosophy more of a political philosophy more questions about I'm just curious what your ideal solution is with respect to tax expenditures if you have the reins what we do so about tax expenditure is like sort of it's a tax break it's called tax expenditure because a lot of them look a lot like spending so for example the difference between Pell grants and the American Opportunity of Tax Credit is that the Department of Education administers the Pell grants right otherwise and you actually need the FAFSA form so the difference is there's some accountability but otherwise it's kind of the same so like there's at minimum a gray line between what's a spending program what's a tax break generous few about what's what's a diversion from the tax code and under that few we lose one and a half to two trillion dollars a year from these tax breaks some of them are really valuable they help keep people out of poverty and support work and help move us towards a lower emissions energy production so some of them are really valuable a lot of them probably most of them are really poorly targeted for their role their goal they go really disproportionately to the rich other than the credits in part because the higher your rate the more benefit you get like if I deduct a dollar my rate is 10% I only get 10 cents back but if my rate is 37% I get 37 cents back so like they're regressive they mostly go to the rich but they also distort behavior like bigger homes and borrow more for them that doesn't make sense the health care exclusion drives up health care prices which are already 50% higher than the next highest country all sorts of business tax breaks cause businesses to incorporate in certain kinds of ways or make certain kinds of investments that aren't good for their profit they're good for their after tax profit that doesn't make any sense so we need to compare as a tax reform we tried that in 2017 like the original vision they worked off of in 2017 was a plan called the better way and it got rid of a lot of tax expenditures it's just as they got through the sausage making process it turned out it was really politically hard one of the best things that came out of 2017 is it barely touched the mortgage deduction but because it raised the standard deduction so much and it reduced the state and local deduction so much it actually sort of secretly got rid of the mortgage deduction for most people that was a huge benefit that people don't even realize so you asked me my ideal I'm now political strategizing which is the opposite like is there secret ways we can get rid of tax expenditures but my non-secret way would be we ought to have a lot less of them I mean we ought to try to tax income equally across types of income you know the tax code should have limited places where it's trying to incentivize behavior and when it is we need to look at it the same way we look at a spending program we should have a broad base and low rates and I'm willing to I'm different from some tax economists I'm willing to have a tax code that sort of on paper looks like it's actually more distorting to the economy because say rates on returns to investments are higher if in exchange it's less distorting across decisions because I think that our macroeconomic models aren't good at picking up the cost of getting people to make bad decisions which is a lot of what our tax code does anything else? wonderful let's thank Mark again for coming to see us and sharing your expertise thank you