Veronique de Rugy joins this week’s episode to discuss the national debt, which totals over $26 trillion dollars. As Congress debates more COVID-19 funding packages, we consider the future of our country with an ever-increasing debt and what it will take for Washington to control spending and stick to a budget.
Veronique de Rugy is a Senior Research Fellow at the Mercatus Center at George Mason University and a nationally syndicated columnist. Her primary research interests include the US economy, the federal budget, homeland security, taxation, tax competition, and financial privacy. Her charts, articles, and commentary have been featured in a wide range of media outlets, including Bloomberg, the New York Times, the Wall Street Journal, CNN and Fox News. In 2015, she was named in Politico Magazine’s Guide to the Top 50 thinkers, doers and visionaries transforming American Politics.
Transcript
Beverly:
Welcome to She Thinks, a podcast where you’re allowed to think for yourself. I’m your host, Beverly Hallberg. And on today’s episode, we discuss the national debt which now totals over $26 trillion. As Congress debates more COVID-19 funding packages, we’ll consider the future of our country with an ever growing debt and what it will take for Washington to control the spending and actually put themselves on a budget.
But before we dive in, IWF does know that many Americans are facing unprecedented challenges due to COVID-19 and that it’s more important than ever to show what America is made of. IWF is highlighting American ideals of ingenuity, generosity and kindness. From everyday Americans donating blood, to companies providing free food and housing, it’s a beautiful reminder that we’re in this together. Visit iwf.org or check us out on Facebook and Twitter and follow our campaign using the hashtag inthistogether. That is #inthistogether.
And now to our guest today. Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University and she’s a nationally syndicated columnist. Her primary research interests include the US economy, the federal budget, homeland security, taxation, tax competition and financial privacy. Her charts, articles and commentary have been featured in a wide range of media outlets, including Bloomberg, the New York Times, the Wall Street Journal, CNN and Fox News. In 2015, she was named in Politico’s Magazine’s guide to the top 50 thinkers, doers and visionaries transforming American politics and it’s an honor to have her on today. Veronique, thank you so much for joining us on She Thinks.
Véronique:
Thank you for having me.
Beverly:
We are in the midst of a staggering debt. That number is now, as I mentioned up top, $26 trillion. This has increased dramatically in the past few months due to COVID-19 and spending, but I want to just start us off and have you give us a framework of how we got to such a large debt.
Véronique:
A lot of spending. That’s how we got to that much debt. I think a number that is quite telling, actually, I would say it’s a lot of spending and it’s particularly a lot of spending really quickly. I would say in the last 20 years. Our debt to GDP ratio in 2007 was 35% of our GDP, which seems already quite big. And now after the pandemic in 2020, it’s going to be a 101% and it was 79% before the crisis. It gives you a scale of how much money we’re spending and how we’re spending more money and we’re spending it faster and we’re spending it through borrowing. This is how you accumulate debt is you spend more money than you raise in taxes. It’s just as simple as that. You make big purchases, you don’t have the money, you put it on the country’s credit card and you don’t pay it back.
Beverly:
And this is something that I’ve wondered as we see the debt increase year after year after year, is I feel that the numbers or even the word trillion loses its meaning. When there hasn’t been any clear ramifications to this point, I think people easily push it aside. And so do you think part of this is we haven’t faced any repercussions for the number so far, so people just don’t think it’s that bad of a problem?
Véronique:
Yeah, I think you have a point. This week is the anniversary of Frederic Bastiat, the French economist, and one of the things that Bastiat is known for is for his essay, What is Seen and What is Unseen. And one of the points that Bastiat makes in this essay is that there are always two side to policies. There is the side that you see the seen, and then there’s all the other side that you do not, sides that you don’t see. And the good policy people, the good economists are those who actually see both. And unfortunately the way a lot of policymaking is happening in this country is that we actually only highlight one side without showing the other. And in this case, it’s actually really quite hard sometimes to see, because as you said, there hasn’t been a really visible connection between anything that has happened to us yet and the size of our debt.
However, there’s actually a ton of academic work that actually tells you that we shouldn’t, it’s not because you don’t actually see it with your eyes all the time that it’s not happening. And one of the biggest set, apart from the immorality of it all, that we are pushing all this debt onto our children and at some point high deficits are going to be met with demand for higher spending. And also that actually higher debt means lower growth.
Beverly:
And so, I’ve wondered as people about doomsday scenarios and say, “Our debt can’t continue to grow. At a certain point of time there’s going to be a catastrophe.” What does that catastrophe look like? If our debt is too high to be sustainable, what are we expecting?
Véronique:
Unfortunately, I actually don’t think, debt crisis, the type that people talk the doomsday type scenario. They only happen in the country that are usually less stable with not as strong institutions that what we have. What we could be having, however, is a scenario where we’d go from financial crisis to financial crisis, but not this kind of just cliff where we fall and it just kind of, it’s this unprecedented. Each financial crisis could be bigger than the next, but it may not be this kind of what Greece faced a few years ago.
What is more likely unfortunately, and this is, you know the tale about the frog that you put in super hot water versus the frog that you put in slow water and just increase the temperature. That we’re more like that second frog. And what happens is, as the debt grows, we’re becoming more and more like Japan. And this is an example that I only want to keep, push so far, but what happens is it’s you end up with countries with high level of debt, not too high interest rates, because we are still a country that is still attractive relatively to other countries, but with really actually very low economic growth. And part of it is because government spending actually does shrink the size of the private sector. We have evidence of it academic studies, but also again, as I said, because the debt itself at some point weighs on our growth.
And I will just, I just my colleague at Mercatus, Jack Salmon and then I just actually published a study that actually shows that since the financial prices and since the studies by Carmen Reinhart and Rogoff, sorry, I forgot his first name. Back in 2010, that showed this connection between debt and lower growth. Which was controversial because they had some mistakes, actually has been about 25 to 30 studies. And all of those studies actually they’re finding with the exception of two, they find that same connection that Reinhart and Rogoff found. Higher debt in and of itself, this is the important point is the debt itself becomes actually a burden on our growth.
Beverly:
And you talked about the burden that we’re passing on to future generations. And I think one of the things I wanted to hear from you on is, so as we look at how much debt is on each individual or each household as the debt grows, what does this mean practically for families and for individuals? As they see the debt continue to grow, how should they put that in real terms for what that’s going to mean financially for them?
Véronique:
There are different effects. You move to a situation where, with higher debt what you end up on earning, usually it’s because you have high deficits. People may be somewhat immune to the debt rising with the exception of a few people who pay attention or care about it. But people actually tend to pay attention to kind of threshold, deficit threshold, reaching a trillion dollar. And by the way, we went from almost crossing the trillion dollar threshold for deficit in time of peace and growing and economic growth period to now we’re at $3.7 trillion of deficit at the end of 2020 because of this crisis. People are actually really sensitive to this. The thing is what follows is usually there are calls for lower spending, but there also actually calls for higher taxes.
And that is important because there will come a moment where the debt is so high that all these people who’ve been calling for years and decades for higher taxes and especially for new form of taxes in the form of a value added tax or a carbon tax or both actually, they will get their wish. You have high taxes plus you add new taxes that leads to lower economic growth. And that’s how many people feel it not because only because taxes are higher, but also because the impact of taxes on growth is really, you can feel it. And of course, the burden of that growth fall heavier on lower income people and also on young people who already, because of our mandatory programs, we have a system where basically there’s a massive transfer of wealth from those lower, relatively lower income and relatively young in our society, towards the relatively wealthy, relatively old member of society.
They’re the ones who are really going to see the burden of it. And again, unfortunately they may actually start react to higher taxes and be upset with it, but there’s all these unseen effects. And the unseen effects are actually going to be significant. The impact of low growth is actually no one can. You cannot overstate how important to people’s welfare fast economic growth is.
Beverly:
And so, this leads me to my question on COVID-19 and the decisions that both Republicans and Democrats made to help individuals who were unemployed, helping businesses who were forced to stop working. What has been your perspective on the stimulus funding to this point? Some like to talk about this as being bailouts, others are saying, it’s not a bailout because people were told they couldn’t open up. This is a once in a lifetime catastrophe and crisis. What has been your take on how government has responded to this pandemic?
Véronique:
Too fast, too big, not enough thought were put into it. There was definitely a need for doing something, but unfortunately, member of Congress were panicked. I understand we all were. And the problems, you would expect them to know a little bit more to actually basically act in a less panicky way than we do. But by the way, they were actual bailouts in the CARE Act, they were $50 billion of bailout, of direct bailout to the airline industry. There was $17 billion that looks, it’s not named as such, but it’s done in such a way that it’s a bailout for Boeing. They were actual bailout of corporation in there. The other problem is that basically Congress treated this as you mentioned, as a stimulus, but there was no way to stimulate the economy. In fact, a lot of what Congress was doing and governors around the countries is to actually make sure people weren’t producing, people weren’t consuming.
This is exactly the opposite. Unfortunately we did a lot of things that we’ve called stimulus in a world where actually there was nothing to stimulate because the whole point of the lockdown was to actually kill economic growth. It really, if you look at this plainly as a bill that was supposed to alleviate pain, the problem that I have with it, and again, I supported obviously doing something, but what I have problems with is that there were a lot of programs, they were really big. They were either you go the unemployment route or you go the individual checks route or you go the paid leave route but unfortunately they went every route, all of them at the same time. They also designed an unemployment benefit expansion that is so generous that in the end 66%, roughly two third, basically of the beneficiaries right now make more unemployed than they were making while they were employed.
That’s a real big problem. It’s a big problem for the recovery. It’s a big problem in my opinion, for the message that it sends to Americans. But it’s also a big problem for another program that they put in place, the payroll protection program. That program, which is loan to small businesses. And I’ll pass my complaints about implementation and all of that stuff. That program, in order for you to get your loan forgiven, you have to keep a big, big chunk of your employees. Unfortunately, that when it interacts with the unemployment benefit, makes it very hard for businesses to actually keep their employees and to bring them back when the economy reopens. It was just all over the place. It was all over the place.
Beverly:
Yeah. And like you said, it led to some bad incentives. I think how much people were paid not to work as being a clear cut example of that. And when you’re talking about such major decisions, there are these unintended consequences and with unintended consequences and this being new, this pandemic and something we’ve not seen in our lifetimes, and as governors are trying to figure out the phases of openings and closing things back up, I know as a business owner, myself not having certainty is a really tough thing. There’s of course, understanding that we’re in uncertain times, but what does it mean from an economic standpoint to not just shut down the economy, but to have starting up again and then maybe some of that is tailored back, this back and forth that we may see throughout 2020, and maybe even 2021. What does that mean economically for the country?
Véronique:
Well, you know better than I who’ve only worked as an employee of nonprofits really and just uncertainty in the business world means paralysis. When you are uncertain about the future, you are not going to be investing in your business. You’re not going to be hiring new people. You’re not going to be expanding your business. You’re going to be taking risks. And unfortunately, the level of uncertainty, the level of conflict and the messages that are given to people, the change in direction all the time is a big problem. And I think that this is going to be the biggest impediment to the recovery.
Beverly:
And let’s talk about solutions. We’ve talked about all the problems. We still need to see what the outcome will be of COVID-19 and how long that’s going to be impacting the economy. But when we look at it as a whole, the debt that we have, it seems that both parties struggle to keep themselves to a budget. They ask us to personally, but they struggle as the legislative branch of government to do so. What are some steps that you think we can take and need to be taken in order to try to get our debt under control?
Véronique:
Well, so one of the things that seem particularly important to me is going to do be to make sure that the unemployment benefit expansion is not renewed, at least not in the current state. That means basically it’d be the $600 bonus that everyone gets should be removed. You can do a minor expansion of the benefits on top of state benefits, but it needs to be minor. That’s really one thing because unemployment benefits, even when they’re not incredibly generous, they create disincentive to work. That’s the first thing. And this is like that, the way this was designed, and it’s not by the way, just the $600, but it’s also it extended eligibility to a lot of people for basically any reason they want it, they could just drop out of the labor force, stop their job, whether they were working full time or part time and get that $600. It was just like, we created so many disincentive to work. You need to put that under control.
And I think that the problem here is the big problem that we have in getting our debt under control. Talking about the debt is effectively talking about what we call mandatory spending. Mandatory spending is what other called entitlement spending. And they’re not entitlement spending because even for social security, the Supreme Court has ruled that actually you’re are not entitled to that spending. It’s Congress changes the law. It doesn’t matter how long you’ve contributed with your taxes, your benefits could be cut. But this is really the problem, entitlement spanning, so that’s social security, Medicare, Medicaid, that these are and they consume the bigger chunk of our budget. And they are the drivers of our future debt. If you want to control the debt, if you want to control deficit going forward, you need to reform those programs.
I think that the way to do it is to move to a needs based system as opposed to an age based system like we have with Medicare and social security. And that is because while in the past lower income seniors were overrepresented once they stopped working in the lower income bracket and now they’re overrepresented in the top income quintile. And so a lot of seniors and it makes sense, thanks to markets and accumulation of capital and all this. And then seniors, a majority of seniors actually do really well. But so if you have a system that is needs based, as opposed to age based, then you actually restore some sanity where we don’t have this system that is designed to send a ton of money to people who actually have the most. That’s the issue.
The other issue is going to be to actually roll back in a significant fashion, all of the program that have been put during this crisis, that have been allowed and implemented on a temporary basis and to not make them permanent. That means federal paid leave program. That should absolutely be a goner because that too has really a lot of unseen effects. And there’s so many others that I could name, but that is going to be the battle in the short term. And then there’s the long term and longterm is all mandatory spending.
Beverly:
And it seems that the entitlement spending, which has been talked about for years seems to be a hard thing for politicians to be able to move forward on. They’re always afraid of losing votes in their districts if they do so, but like you’re saying something that has to be done.
Véronique:
Seniors vote. And there is actually really strong support among the population, but this is why we actually need to change the debate. There was a really good poll a few years ago done by, I guess it was reason at the time. It was Emily Ekins. She’s at Cato now. And actually looked at young people’s support for reform of entitlements. They support in time and spending but what they actually really supported is a safety net. And there is this misconception again, that’s program like social security, Medicare, they actually support lower income people. And it’s actually not the case in most cases. Yes, they are seniors. Absolutely there are seniors who are low income, but if you actually redesign the system to make it based on needs, those seniors will be covered. And then there actually all these programs, they actually create big disincentive to save. And so it’s just kind of, we must reform them and there’s a lot of support for all of these programs.
My colleagues actually asked Mercatus, Matt Mitchell, Adam Thierer and Patrick McLaughlin have just put out a paper about how we should create a bright light commission to address healthcare spending. And so basically it would be a commission, an independent commission that actually looks at, if you remember, the black is base realignment act committee or something like this. And basically what they did at the time that was in the nineties, they needed to close a bunch of bases, but they have the same problem where Congress people didn’t want to actually support closing the base in their district. They had this commission that actually presented a package for an up or down vote. And that’s the way they closed a lot of bases. Well we should do that for healthcare. And they just put out a paper about this. And I think we can do this for a lot of the spending that we have. And I think these are a good idea.
Beverly:
And that leads me to my final question. I’m glad you brought up healthcare. We heard a lot during the Democratic primary debate about Medicare for all and how much that would cost should that be implemented. And the refrain that we heard from Bernie Sanders over and over again, was that it would actually save money. When you hear Bernie Sanders talking about his plan, which is trillions of dollars, tens of trillions of dollars, saying it will save money. What is the economist in you think when you hear that?
Véronique:
Well, when you put in place a system that pays a lot of things for a lot of people, you know that it actually is not saving money. Especially, it’s not saving a lot of money, but you also know that there’s a lot of rationing that comes with that system, by the way. Now there’s a lot of rationing that goes on in a system of private insurance. But the question is who would you prefer does the rationing? The thing that’s interesting by the way about the debate over Medicare for all and the Bernie plan in particular saving money, as my colleagues at Chuck Blahous actually wrote a really, really fair paper about the Bernie plans, where he actually took very, very seriously, every single one of his assumptions and did not push against them, including the most outrageous.
And he found that still under this scenario, sure there’d be a significant decrease in administrative cost, but in some parts, but overall it was a huge amount of money. Bernie Sanders was like Steve in the Mercatus Center says, but they’re saying that Chuck was pointing out is that this is you only get these type of cost reduction in some areas if you actually take seriously implement and actually assume that doctors are okay for getting a 25% cut to their fee, to their reimbursements fees. Which of course we know, if you’re going to be cutting doctors’ reimbursement fees by 25%, what’s going to happen is you’re going to have a reduction of the supply of healthcare. And so you’re going to get, you may get lower cost in some ways, but you’re going to get very little healthcare, much significantly less healthcare. It was kind of an interesting. People have to be careful when they listen to what Bernie Sanders is saying about his own plan.
Beverly:
Well, often politicians like to skew their numbers in their favor. We’re not surprised by that. And I think it comes back to what we do know is foundational, which is free, is never free. Costs do have to be paid for somehow. And we so appreciate you coming on to talk about the budget and not just where we are, but where we need to go and how do we correct it. Veronique, I so appreciate you joining us today.
Véronique:
Well, thank you for having me.
Beverly:
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