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May 6, 2026

Cato Institute, 1000 Massachusetts Ave, NW, Washington, DC

Romina Boccia: Director of Budget and Entitlement Policy, Cato Institute

Jessica Riedl: Budget and Tax Fellow, Urban-Brookings Tax Policy Center, Brookings Institution

C. Eugene Steuerle: Institute Fellow and Richard B. Fisher Chair, Urban-Brookings Tax Policy Center, Urban Institute

Event Description

Social Security is widely portrayed as a self-financed program with a long-term trust fund solvency problem. But for more than a decade, the program has already been financed in part through federal borrowing. The trust fund is a political construct, not a true repository of savings or investments. Since 2010, the Treasury has borrowed more than $1.5 trillion to pay Social Security benefits, and borrowing is projected to rise sharply even before the trust fund is exhausted in 2032. Over the next 75 years, the program’s cash-flow shortfall will exceed $28 trillion in present-value terms.

This event will examine how trust fund accounting masks Social Security’s growing contribution to federal debt, why economic growth cannot solve the problem on its own, why lifting the payroll tax cap will not sustainably close the program’s funding gap, and how current benefit design fuels immediate deficits and long-term fiscal imbalance. Experts will discuss reform strategies that address the program’s structural flaws and prevent Social Security from worsening the debt crisis.

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The American Economy: How Unchecked Executive Power Affects the Market

Principles First Summit, February 21, 2026,

Featuring Will Rinehart, Senior Fellow at AEI;

Jessica Riedl of the Brookings Institute;

Francis Fukuyama of Stanford University; and

Justin Wolfers, Professor of Economics and Public Policy at the Gerald R. Ford School of Public Policy at the University of Michigan

CLICK HERE to watch on Reason website

Script:

Can taxing the rich fix the budget deficit? Whenever debates arise over how to fix the soaring federal debt, many on the political left—and even some on the populist right—invariably say “easy, just tax the rich.”

But is it really that easy?

Can those budget deficits of nearly $2 trillion headed toward $4 trillion annually within a decade can simply be closed by higher taxes on the wealthy and corporations?

The answer is an emphatic “no” -- and it’s not a question of ideology, it’s not about picking winners and losers.

It’s just math.

To be clear, we can tax the rich more. And in fact, taxing the rich can absolutely be part of a broader deficit “grand deal” where all taxes and spending are up for debate. But it could only ever be a modest part of a grand deal, because the potential revenue available from taxing the rich can close only a small portion of our nearly unfathomable deficits.

Let’s begin with an extreme example -- America has about 800 billionaires. Let’s imagine we seized every single dollar of their wealth -- every home, property, business, investment, car, and yacht … all, right down to their kids’ teddy bears -- and we sold it all for full market value.

That would raise enough revenue to finance the federal government for 9 months. Not 9 months out of every year -- 9 months one time. Then, with no billionaires left to pillage, It’s gone.

Oh, and so is your 401(k), because most of that wealth would’ve been liquidated out of the stock market.

Even taxing million-dollar earners at 100% marginal tax rates wouldn’t balance the long-term budget -- even if each of those taxpayers continued working optimally for zero net pay.

Chart - https://media4.manhattan-institute.org/wp-content/uploads/Budget-Chart-Book-2024.pdf#page=80

Only slightly more realistically, Imagine that President Bernie Sanders gets to implement his dream tax proposal. We’re talking his proposal of federal income tax rates as high as 52%, an uncapped 15.3% payroll tax on all wages, and capital gains tax rates of 62% -- plus the state tax rates on top of those. And we’d also hit corporations with a world-leading 35% corporate tax rate that includes all multi-national income, a wealth tax rate as high as 8%, an estate tax rate as high as 77%, new financial transaction taxes, and… that’s only the beginning of countless other surtaxes.

Basically, income, capital gains, business, wealth, and estate tax rates would all be set at the highest rate in the developed world. And the total new revenues would be… Approximately 1.5% of GDP.

That is a lot of money. But it’s not enough to close more than a fraction of a current-policy budget deficit heading toward 8% of GDP in the next decade.

And even those revenue figures implausibly assume that people and corporations would continue working, saving, and investing despite combined federal and state marginal tax rates on labor and investment that would approach 80% to 100%.

Actual tax revenues would likely increase by about 1.5% of GDP.

Two years ago I ran a model that set every upper-income and corporate tax policy at its revenue-maximizing level without regard to economic damage. It showed roughly 1.5% of GDP in new revenues and much slower economic growth. It’s a terrible tradeoff.

The mathematical reality is that there just aren’t enough millionaires, billionaires, and undertaxed corporations to close a 30-year budget deficit of between $115 trillion and $180 trillion, depending on the baseline we use.

It just isn’t possible to finance annual deficits heading to $4 trillion in a decade and 14% of GDP over the next 30 years on the backs of corporations and only 5% of American families.

There just are not enough super-rich people to pay for the other 300 million of us. And most of the available tax base resides in that large middle class.

The surprising secret no one seems to talk about is that the tax code is already extraordinarily progressive -- it’s the most progressive tax code in the OECD. And it’s grown radically more progressive over the past 40 years.

The top-earning 20% now pays 69% of all federal taxes, and the top 1% currently pay 25% of all federal taxes. By contrast, the bottom-earning 60% of Americans -- that’s 3 out of 5 taxpayers -- pay just 13% of total federal taxes, including a combined negative income tax.

Last year the federal government funded 263 days of spending by taxes instead of borrowing. Of that, the top-earning 20% funded the government for 201 days, or nearly 7 months. The next 20%? 41 days. And the bottom-earning 60% of Americans -- which means most of the US population including the median-earners -- funded the federal government for just 21 days of the year.

That level of tax progressivity might not be a bad thing. But most of the nation’s total income comes from families earning under $400,000. And their dramatically lower current tax rates mean that the large majority of the available remaining tax base resides within the tens of millions of these families.

No one likes the idea of raising middle class taxes, but there’s only so much revenue to raise from the wealthy.

Now, I know what many of you are thinking. How can this be true? What about those old 91% tax rates from the 1950s? What about Europe’s tax-the-rich social democracies? What about those millionaires and corporations that paid nothing last year? Ok, let’s take these one at a time.

Start with those old 91% income tax rates in the 1950s. Those income tax systems averaged only 7.2% of GDP in federal income tax revenues. As the top tax bracket fell to 70% in the 60’s and 70’s, income tax revenues actually rose to around 7.8% of GDP. And since all the dramatic reductions of the top income tax rates starting in 1981, federal income tax revenues have averaged 8.1% of GDP.

So, Washington collects more income tax revenues as a share of GDP today with a top tax bracket of 37% than it collected in the 1950s with a 91% tax bracket. In fact, since 1950, the correlation between the highest income tax bracket and revenues as a share of the economy is -0.25%, meaning that higher top tax rates are correlated with lower income tax revenues.

How can that be? Well, it turns out that the highest income tax brackets don’t tell us much about the total income tax revenues. What matters more are the income thresholds for every tax bracket, the amount of tax preferences and tax deductions, whether the tax system encourages tax avoidance and tax evasion, and—most important—broader economic growth rates. If you want more tax revenues, look there.

You see, almost no one actually paid those old 91% tax rates, which kicked in at today’s equivalent of a $4.1 million annual income. In 1961, that was just 446 families, and it raised just 0.1% of all income tax revenues. In fact, all of the tax brackets between 52% and 91% collectively produced just 1% more income tax revenue than if we had capped those tax brackets at 50%. Those tax brackets won’t even pay for 2 days a year of federal spending.

If you want 91% tax rates, go ahead -- but don’t point to 1950s America as proof that they work.

But surely Europe has it figured out! They know how to fund large welfare states on the backs of the rich!

Right? Wrong again. They do it by taxing the middle class.

Europe just isn’t the caricature Americans imagined decades ago. The average OECD nation does collect 7.5% of GDP more in tax revenues than the US across all levels of government. And virtually that entire gap is explained by every other OECD nation assessing a value-added tax -- essentially, a sales tax, as high as 27%. That typically raises 7.2% of GDP, so not counting the VAT, US and European tax revenues are nearly equal.

Even the social democratic Scandinavian countries that collect 14% of GDP more than the US do it almost entirely from their VAT and higher payroll taxes -- which come from everyone, not just the rich.

America’s top tax brackets for income, capital gains, corporate, and estate taxes are actually all slightly higher than the typical OECD nations when merging all levels of government. We’ve got the most progressive tax system in the OECD because we tax the rich at similar rates as those other countries, but we tax the middle and lower classes dramatically less than they do.

The American middle class deals with far lower payroll and income tax rates -- so if you want America to tax like Europe, then our middle class is going to get the nastiest surprise of its life.

That third common counter-argument is to blame budget deficits on that billionaire or corporation that reportedly paid no taxes last year.

Every year we get reports of a handful of corporations that paid little to no taxes last year, or those ‘Warren Buffet pays less tax than his secretary’ stories. The corporate examples are often the result of shifting income and taxes from one year to the next, which means any real analysis should examine a corporation’s taxes over a period of several years.

And the corporations paying low taxes over many years are typically either earning most of their income abroad and paying foreign taxes, or taking advantage of tax breaks for business investment and R&D that politicians create to encourage those activities.

Either way, eliminating those tax breaks and taxing these companies more could raise perhaps $100 billion a year. That’s real money -- but it’s not a game-changer in the context of those $4 trillion annual deficits we’re heading toward. And, of course, we’d lose the business investment and job creation that comes from those incentives.

With rich individuals, it’s absolutely true that much of their income is shifted into capital gains or borrowing against their wealth. The capital gains will eventually be taxed when it’s sold, unless they carry it through to death. Ensuring that capital gains would be taxed at death or that rich people can no longer easily borrow tax-free against their wealth are possible reforms -- but they wouldn’t raise revenue of any significance to our deficits.

None of this means we shouldn’t tax the rich more. Fixing a ruinous deficit requires putting everything on the table, including higher taxes on the rich.

Personally, I support closing the loophole that permanently exempts capital gains from taxation if they’re held until death. And I also support dramatically scaling back upper income and corporate tax loopholes, and fully funding IRS audits against high earning and corporate tax cheats.

But we’ve got to acknowledge the mathematical reality that our budget deficits have grown so massive that “tax the rich” policies can’t close more than a tiny fraction of them. And, also, that much of Europe long ago learned the hard way that going overboard on tax the rich policies can backfire on the economy. That’s why their “tax the rich” policies have moved so much closer to ours. A slow-growing economy can’t produce enough revenues to cut its deficit no matter how high its tax rates are. We need higher revenues in the least economically-damaging way possible.

And yes, if we want to stabilize the debt, that means middle class taxes will have to rise -- as well as putting all federal spending on the chopping block, especially including Social Security, Medicare, and defense.

The problem, of course, is that neither political party is suicidal enough to tell middle class voters that their taxes and benefits must also contribute heavily to reining in runaway deficits. So we comfort ourselves with the wishful thinking that millionaires and billionaires can take the entire burden off our hands. But, beyond the empty rhetoric, you will never see a specific, fully-scored proposal to eliminate most of the long-term deficit by taxing the rich, because mathematically, it’s just not possible.

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Full transcript:

Do Reagan Republicans still have a home in the Grand Old Party? This week on Firing Line.

Ronald Reagan once said, “I didn’t leave the Democratic Party, the Democratic Party left me.” Jessica Riedl, a senior fellow at the Manhattan Institute, says fiscal conservatives like her are feeling the same way about today’s Republican Party.

RIEDL: Today’s Republicans have seemingly given up on conservative economics. They’re adding five trillion dollars to the deficit with the tax cuts. And it’s not even smart tax reform, but it’s just tax giveaways to different constituencies.

JOHNSON: The yays are 218, the nays are 214. The motion is adopted [cheers]

Republicans voted overwhelmingly for Trump’s “big beautiful bill”…

REPUBLICANS CHANT: USA! USA!

But outside of Congress, not all Republicans support the party’s fiscal direction. What does economic policy expert Jessica Riedl say now?

‘Firing Line’ Margaret Hoover is made possible in part by: Robert Granieri, The Tepper Foundation, Vanessa and Henry Cornell, The Fairweather Foundation and by The Pritzker Military Foundation.

HOOVER: Jessica Riedl, welcome to Firing Line.

RIEDL: Glad to be here. Thank you, Margaret.

HOOVER: You have worked in Republican economic policy circles for more than 20 years. You’ve been a participant on two Republican presidential campaigns. You worked in a Republican Senate office that focused very heavily on the budget. You recently wrote, quote, “Washington Republicans have essentially given up on reining in a runaway debt. It is no longer clear what most congressional Republicans actually do besides serve as television cheering sections for President Trump and troll Democrats on X.” Where does this leave a traditional economic conservative like you in today’s Republican party?

RIEDL: I think traditional economic conservatives like me are pretty homeless. When I started working with Republicans 20, 25 years ago, there was a big focus: We’re going to cut spending, we are going to streamline taxes. I remember tax reform; ‘broaden the base, lower the rates,’ and we’re going to cut the budget deficit. But today’s Republicans have seemingly given up on conservative economics. They’re adding five trillion dollars to the deficit with the tax cuts. And it’s not even smart tax reform, but it’s just tax giveaways to different constituencies. Republicans have given up on spending. They’ve given up deficits. They’ve given up on Social Security and Medicare reform. They’ve given up on energetic solutions to healthcare, energy. They’ve-

HOOVER: You haven’t even mentioned tariffs.

RIEDL: They’ve deferred to the White House on tariffs and even on spending cuts with DOGE where the Republicans aren’t really doing anything.

HOOVER: So the Wall Street Journal reported this week that the U.S. economy is, quote, “regaining its swagger.” Consumer confidence supposedly is up. Fears of recession seem to be fading. When President Trump began to impose tariffs, many experts, you included, predicted disaster. And Vice President J.D. Vance recently posted on X, quote, “It’s almost like the economics profession doesn’t fully understand tariffs.” So were the experts like you wrong?

TARIFFS

RIEDL: No. Most of the tariffs were pulled back. When Trump announced his Liberation Day tariffs, the market dropped 20 points, 20 percentage points. Moreover, we saw that in the first quarter, the economy shrank.

HOOVER: Yep.

RIEDL: This caused the president to finally panic and create a pause on his tariffs. Markets responded to the pause. They became more optimistic. And this quarter is looking a little bit better. However, most economic forecasts assume that as the tariffs are gradually reimposed, as we’re seeing now, we’re going to see less growth the rest of the year. So I don’t think this has proven tariffs work. I think we’ve proven that stopping tariffs works.

HOOVER: While President Trump did delay most of the tariffs, as you point out, the effective tariff rate is still the highest in the United States now since 1910. Inflation did tick up slightly since June. Is this a sign of what could come if these tariffs remain in place and more tariffs are added?

RIEDL: If more tariffs are added, I expect economic stagnation. It’s not going to totally put the economy into a recession by itself, but we are going to grow more slowly. We are going to have higher prices. We are going to have higher interest rates. You know, last month inflation ticked up to its highest rate under President Trump. If you’re worried about inflation President Trump’s economic agenda should really concern you. The tariffs are inflationary. Immigration restrictions are inflationary. Tax cuts, spending hikes are inflationary. And through it all, the president is trying to get the Federal Reserve to artificially lower interest rates, which is also inflationary. After beating Joe Biden on inflation, he’s doubling down.

HOOVER: Administration officials are flaunting, essentially, that revenue from tariffs have already topped 100 billion dollars this year. And some say that it could be as high as 300 billion dollars by the end of 2025. Now, General Motors reports that it took a billion-dollar loss in profits in order to absorb the cost of the tariffs. But on the flip side, price increases to products like toys and appliances suggests that some companies are choosing to pass the costs of the tariffs on to consumers. So which is it? Who is actually paying for the tariffs?

RIEDL: The consumers are going to ultimately pay for the tariffs. Even if businesses try to absorb them in the short term, again, over time, businesses are going to have to replenish their reserves, replenish the imports, and raise prices. Look, tariffs raise prices because that’s the purpose of tariffs. The purpose of tariffs is to make imports so expensive that you purchase domestic alternatives instead. As for the revenue they’re raising, it’s about 20 billion dollars a month in tariff revenues, which is about 240 billion dollars annualized. However, as the economy slows down, you’re going to lose revenue broadly because there’s less economic activity to tax. Which is why I think, when all is said and done, the revenue impact of tariffs is going to be approximately zero.

HOOVER: President Trump has spoken at times that tariff revenue will fund other priorities. It will fund the deficits. It will fund the debt. It will fund social programs. You disagree.

RIEDL: No. tariffs cannot fund what President Trump is promising because, again, so far it’s been about 20 billion dollars a month, but ultimately, if you want more tax revenue, you need a growing economy, creating jobs, raising wages. First quarter, when most of the tariffs were imposed, economic growth was negative. You’re not going to grow revenues with economic growth. You may get tariff revenue, but you’re going to have companies with lower profits paying lower taxes, families who are poor paying less taxes, and overall you’re just not going to see a revenue bump. Additionally, the president has talked about bringing back domestic manufacturing. But if businesses are going to invest in long-term factories, they need predictability and consistency out of Washington. Not a president turning the tariff dials every five minutes. No company is going to invest based on that. So I don’t really know what we’re accomplishing.

HOOVER: So, I mean, that is one of the arguments, is that the uncertainty caused by Trump’s constant threats actually creates a backlash against the economy itself. How do you price in the uncertainty?

RIEDL: You price in the uncertainty of tariff policy by looking at the decline in business investment we’re seeing. We’ve already seen it since President Trump was inaugurated. Businesses are investing less, they’re expanding less, they’re not hiring more workers like they were at the same rate before. Businesses are paralyzed by uncertainty. And as that reduces investment, it’s going to eventually factor all the way through the economy into slower growth, fewer jobs and lower incomes.

BIG BEAUTIFUL BILL

HOOVER: The Congressional Budget Office released its final analysis of Trump’s One Big, Beautiful Bill act this week. Its estimate is that it increases deficits by 3.4 trillion over the next decade. Now, supporters of the bill argue that experts like you underestimated the benefits of Trump’s first tax cuts, the Tax Cuts and Jobs Act. And what they say is that the White House projections now are that stronger economic growth will be spurred by making the cuts permanent and ultimately will reduce deficits by more than 2 trillion dollars over the next decade. Now, you’re a projection that you have said is based on, quote, “fantasy land math.”

RIEDL: Well first off, the real cost is five trillion dollars over 10 years when you stop counting the fake expiration dates of some of the provisions in a few years that we know they’re not going to hold. Republicans have already been on the record saying we don’t respect expiration dates. We didn’t respect the expiration dates in the last bill. We’re not going to respect them in this bill.

HOOVER: I see.

RIEDL: If it does cost five trillion dollars, that will cost more than the 2017 tax cuts, 2020 CARES Act pandemic aid, and 2021 American Rescue Plan combined. Now, will it bring economic growth? Here’s why economic modelers on the left and right aren’t so sure. The majority of the costs of the bill are just extending the 2017 tax cuts. Those aren’t new policies that are going to increase growth over current rates because you’re just keeping current policies in place. The rest of the new policies are more special interest giveaways: No tax on tips, no tax on overtime, no tax on car loans, bailouts for farmers, bailouts for seniors, bailout for state and local tax deduction. Those do not encourage working, saving, investing in productivity. This is special interest clutter. So while you’re not getting a lot of pro-growth policies, you are getting five trillion dollars in more debt, which is going to raise interest rates, squeeze investments, and after a short-term economic bump we might see for a year or two, probably drag down long-term growth.

HOOVER: For people who’ve worked in this space for a long time, people like you have been talking about what pro-growth economic policy looks like.

RIEDL: Yes.

HOOVER: If you were to have been at the drafting table, can you just remind our viewers what a pro-growth economic tax bill would have looked like?

RIEDL: Well, first off, remember that economic growth is the sum of a bigger labor force, more workers, and higher productivity. If you want to grow the economy, you need more workers making more stuff. So if you want pro-growth policies, first off, you want to encourage people to work. Our immigration laws are really not doing that because we’re going to lose workers. But also, you want to encourage productivity: work, save, invest. Now, when you do policies like no tax on tips, no tax on overtime, higher state and local tax deductions, that doesn’t encourage people to work, save, invest, and be productive. What you want is lower marginal tax rates on work, lower marginal text rates on investment, on expanding your business. There is some of that in this bill, like small business expensing. But a lot of the giveaways don’t encourage working, saving, investing, and being productive, and therefore they won’t bring growth.

DEBT CRISIS

HOOVER: You’ve been warning about a debt crisis, you’ve been talking about deficits and the debt for years, even when the debt was much smaller. It was a frequent topic of debate on the original firing line with William F. Buckley Jr. Here is a clip from 1992, a discussion of deficits with James Davidson of the National Taxpayers Union. Take a look at this clip.

DAVIDSON: We tend to suppose that governments have a great deal more power than I believe they really do. If you look across time, every society which has gotten into trouble has tried as a first approximation to solve that problem by spending money it didn’t have. Now they either do that by financing it through inflation or by trying to run down their balance sheet if they have a balance sheet to run down. But at the end of the day they tend to avoid the solutions to the problems, which are quite real.

HOOVER: You’ve worked for several Republican politicians who have sincerely tried to tackle these issues. And yet, that was in 1992, and the debt now is 37 trillion dollars. What gives?

RIEDL: The reality is, everyone likes small deficits in theory, but very few people are willing to actually pay the price. If you ask people, will you cut your own spending or raise your own taxes to cut the deficit, most people say no. And politicians are going to do what people want them to do. And so ultimately, politicians talk a good game. They try to look like they’re cutting deficits. But the American people only seem to like deficit reduction if their political opponents are paying the price.

HOOVER: What does a debt crisis really look like?

RIEDL: From the end of World War Two to 2008 the debt was about 40% of the economy. It was manageable.

HOOVER: Yeah.

RIEDL: It has since grown to 100% of the economy and is set to go to 250% of the economy long-term, which is something we’ve really never seen. The economists at the University of Pennsylvania Wharton School tried to model out what the long-term economy would look like under these debt projections. Their economic models crashed. They couldn’t even project it out. The way this would play out is in the bond market.

HOOVER: Yeah.

RIEDL: You see, the federal government is going to need to borrow 200 trillion dollars over the next 30 years under current projections. That’s not an accident. 200 trillion dollars.

HOOVER: Okay.

RIEDL: The bond markets may not be able to supply that much lending at reasonable interest rates. If that is the case, they’re going to have to force up interest rates which then forces the government to borrow even more money to pay the higher interest costs. And that is where the debt spiral begins, when the bond market gets squeezed.

HOOVER: So, the time horizon by which we can structurally address some of these issues is really shrinking. Now, in 1992, there were people who were very concerned that we had an impending crisis. And I know you think that that in some ways was Chicken Little saying that the sky was falling. Have Republicans been hurt by their own alarmism about the debt over time?

RIEDL: I think Republicans overstated the short-term dangers of debt back in the 80s, 90s, and early 2000s. At that point, the debt was not out of control. The danger was always what happens when the baby boomers retire and drive up Social Security and Medicare. The retirement of 74 million baby boomers between 2008 and 2030 was always going to bring a debt crisis sometime after those retirements end. The reason we wanted to reform Social Security and Medicare in the 90s was so that we could phase in the reforms before the baby boomers retire. Unfortunately, we didn’t, and now we’re facing a short-term crunch, which is going to make any sort of reforms to Social Security and Medicare so much more painful and drastic.

HOOVER: This fiscal year interest on the debt accounts for more than defense spending, more than Medicare spending, more than any other category of spending except social security. You wrote in 2023 for the Manhattan Institute a report that estimated that the maximum sustainable revenue that could be collected from taxing the rich would be about 700 billion dollars a year. So if you can’t tax your way out of it, can’t spend your way of it, what are the practical reforms that we can implement now on each of these legacy programs that will allow us to have a sustainable social safety net and a growing economy?

RIEDL: Viewers aren’t going to like to hear this…

HOOVER: Well, if viewers aren’t going to like it, voters are going to hate it.

RIEDL: Social Security and Medicare are facing a 124 trillion dollar shortfall over the next 30 years.

HOOVER: Is it fixable? Is it sustainable?

RIEDL: We can save these programs, but not in their current forms. There are three levers to fix Social Security: Raise the eligibility age, start trimming back benefits, usually for upper income retirees, and bring more revenue into the system, such as charging more payroll taxes. Most Social Security reforms are some combination of those three options.

HOOVER: But hold on, we’ve known how to do this for a long time. These aren’t new ideas. I mean, you’ve been talking about these ideas for at least 15 years.

RIEDL: Yes. We’ve known how to fix Social Security, and to some degree, we have known a lot of good Medicare options for decades. And when I meet with Republicans and Democrats on the Hill, when I have been in the room where they have had their closed door off the record meetings, they agree on how to fix these programs.

HOOVER: Right.

RIEDL: But they also know that you can’t get away with it politically, which is why, unfortunately, I’m worried that by the time we finally fix Social Security and Medicare, it’ll be because we already are facing a debt crisis, the bond market has already started panicking, the debt and interest rates have already risen. I don’t think we have the discipline to fix Social Security and Medicare until the sky actually begins falling.

HOOVER: Well, to your point, Josh Hawley, the Senator from Missouri, who voted for the big, beautiful bill, actually has already introduced legislation to block Medicaid cuts that would take effect in the bill that he voted for.

RIEDL: Of course, the most controversial part of the tax cuts among Senate Republicans were the offsets. They wanted to make sure that the SALT deduction was bigger. They wanted to make sure the farm bailout…

HOOVER: State and local tax deduction.

RIEDL: The state and local tax deduction was even larger. They wanted to make sure farmers and seniors got even bigger bailouts, and now they want to reverse the Medicaid savings. It seems like there’s just really no restraint.

HOOVER: What are the most obvious structural reforms that could be made to Medicare and Medicaid?

RIEDL: Healthcare reform is a lot more complicated than social security.

HOOVER: Yeah.

RIEDL: But for Medicare, I like what’s called premium support. Where you bring in more private plans, more choice and competition to hold down costs. But Medicare and Medicaid are very difficult to fix.

DOGE

HOOVER: This month, Congress approved a request to rescind nine billion dollars of appropriated funds, which codifies cuts that were recommended by the Department of Government Efficiency. Of course, public television and public media were part of those cuts. Cuts to philanthropy overseas, and public health also were on the docket. You have said, and you said at the beginning, that you were, quote, cautiously hopeful about DOGE at first. And you wrote in May, quote, as an effort to meaningfully reduce federal spending, DOGE remains wholly unserious. Where did it go wrong?

RIEDL: DOGE is really just spending cut theater.

HOOVER: Spending cut theater.

RIEDL: Elon Musk originally promised to cut two trillion of the seven trillion dollar budget, then it was one trillion, then it was 150 billion. I recently estimated that they’re only cutting about three billion dollars a month. And in fact, DOGE may end up losing money when you take into account the fact that they are eviscerating IRS staff, which is going to increase the losses for tax evasion. Here’s where they went wrong. 75% of all federal spending goes to six items, social security, Medicare, defense, veterans, and interest. They didn’t go after that. They went after the culture war totems that excite conservatives: DEI contracts, Politico subscriptions, government employees, aid to Africa. These are symbolic cuts that budget analysts like me consider to be budget dust. If they’re not going to go after the real programs where the money is and they’re going to defund the IRS’s ability to collect taxes, they’re going to lose money, and they are doing this against the backdrop of a five trillion dollar tax cut. That’s not serious.

JEROME POWELL

HOOVER: You mentioned monetary policy earlier. President Trump continues to publicly toy with the idea of firing the Federal Reserve Chair Jerome Powell. There are some prominent economists who believe that it’s time for Powell to step down. Would Powell resigning under pressure from the president be better or worse for the integrity of the Fed?

RIEDL: It would be much worse. Federal Reserve independence is based on its credibility from being insulated from political pressure.

HOOVER: Why is the independence of the Fed important?

RIEDL: The independence of the Federal Reserve is important because it gives it the credibility to maintain price stability. The Federal Reserve makes the tough decisions so that politicians don’t have to. And that in the long term gives us lower inflation, low interest rates, and faster economic growth. Moreover, ironically, as much as the president wants to fire Jerome Powell to lower interest rates, replacing him would actually increase interest rates.

HOOVER: Why?

RIEDL: And that’s because the Federal Reserve credibility would be shattered. Financial markets would believe that inflation is going to be coming and they’re going to demand higher interest rates to compensate for the inflation. So ultimately, you end up with higher interest rates. I also want to add that this really does tie into the budget deficit because one of the reasons President Trump tweeted out this week that he wants low interest rates is to make it less expensive to finance our growing debt. But of course, doing so paralyzes the Federal Reserve, prevents it from stabilizing the economy and promotes inflation. Let’s actually cut the deficit, not paralyze the Fed.

REPUBLICAN PARTY

HOOVER: You have written, quote, “Seeing the critics of Bidenflation and the end-the-Fed inflation hawks now chastising the Fed for caring too much about inflation is more proof that today’s politics are Calvinball.” Of course, Calvinball is from Calvin and Hobbes where Calvin makes up the rules as he goes along.

RIEDL: Yeah, I think we’ve seen in the last decade that the Republican Party really doesn’t know what it stands for on a policy basis. It used to stand for free trade, free markets, deficit reduction, social security, and Medicare reform. And then in 2016, Trump came along and threw most of those economic policies over the edge. And he won. And lo and behold, it seemed like Republican voters are really more motivated by culture war, by anti-immigrant fervor, by populism than by free market economics. And I think a lot of Republican lawmakers don’t know what to do with that. A lot of them were raised with free market principles. But they don’t want to cross a White House that got elected on big government populism. So they’re somewhat paralyzed.

HOOVER: Are you still briefing Republican members of the Senate and the House?

RIEDL: I still do. I still talk to Republicans. I talk to Democrats too.

HOOVER: Where are these ideas— If the Republican Party has been so fundamentally transformed, as you have observed, where do these ideas go for purchase?

RIEDL: Republicans right now are kind of lying in wait, at least the ones that I talk to, waiting for the fever to pass where they can start to look at more common sense ways to reduce deficits. At this point, economic policy is completely run out of the Trump White House. And very few Republican lawmakers are going to cross the Trump White House. But they’re hoping that when the country moves on from President Trump, that perhaps the Republican Party can bring back some of its traditional economic views. So a lot of these lawmakers right now are collecting ideas, trying to come up with ways that, maybe starting in 2028, they can actually gain currency. But even if the political system doesn’t make it possible right now, we are facing a potential debt crisis moving forward.

HOOVER: It doesn’t change the fundamentals.

RIEDL: Budget deficits are 1.8 trillion, on course to double to 3.6 trillion dollars over the next decade. We are going to start to see the economic impacts, and that’s going to force our hand.

HOOVER: Is there anything that gives you hope?

RIEDL: The country has faced challenges before. We have won the Cold War. We have won World Wars. Our economy has been the envy of the world for a century. I believe we can overcome this challenge. The problem, of course, is that sometimes we’re a little slow grasping these challenges, but when we do motivate ourselves, eventually the United States has managed to overcome all challenges up until now, and I think we can beat this one.

HOOVER: Jessica Riedl, thank you for joining me on Firing Line.

RIEDL: Thank you so much, Margaret.

CLICK HERE for the transcript on the New York Times website)

As a fiscal conservative, the columnist David French held some hope for Elon Musk’s Department of Government Efficiency before President Trump took office. Those hopes were quickly dashed. In this conversation with the Manhattan Institute’s Jessica Riedl, French reckons with what Musk and his department have wrought on the government and argues that DOGE will do little to ameliorate the proposed tax cuts in the budget resolution recently passed by the House.

This conversation was recorded on Friday, Feb. 28.

Elon Musk and the Useless Spending-Cut Theater of DOGE

The columnist David French speaks with a fellow fiscal conservative about what the Department of Government Efficiency should actually be doing.

Below is a transcript of an episode of “The Opinions.” We recommend listening to it in its original form for the full effect. You can do so using the player above or on the NYT Audio app, Apple, Spotify, Amazon Music, YouTube, iHeartRadio or wherever you get your podcasts.

David French: I’m David French, an Opinion columnist at The New York Times and a fiscal conservative.

At first glance, you might think I would be excited for an initiative like Elon Musk’s DOGE, but I’m not. Even though I believe the federal bureaucracy could use some efficiency, I’m actually pretty appalled at what I’m seeing out of Elon Musk and the Trump administration. So is my friend Jessica Riedl. Jessica is a fellow at the Manhattan Institute and, like me, is a fiscal conservative.

Jessica might be one of the nation’s foremost experts about the federal budget and about America’s fiscal realities, and she has taught me an enormous amount about those issues. So I am delighted that Jessica is joining us for this conversation.

Jessica Riedl: Thank you for having me.

French: You worked on Republican presidential campaigns in 2012 and 2016. You’re at a conservative think tank now. You would think that if there was a Department of Government Efficiency announced to get the budget and the growth of spending under control, you and I would both be really excited.

When you heard that Elon Musk was going to be forming and running DOGE, what was your first reaction? What were you hoping it would be? What were you fearing it would be?

Riedl: I was hoping that this would be the biggest war on government waste in decades. There’s no shortage of spending to go after. We have a $1.8 trillion deficit, and spending is growing. And I knew going in that DOGE was not going to be able to negotiate the grand deal on Social Security and Medicare and taxes — that’s going to be a bipartisan effort in Congress — but there is a lot of waste. There’s $191 billion a year lost to payment errors.

The hope was that Elon Musk would use his technical expertise to open up the hood, dive into waste and overpayments, and finally focus us there. That was the hope.

French: Few big-ticket initiatives have been more opaque than DOGE. There is a lot of energy, there is a lot of activity, a lot is happening. But we’ve even had judges even ask government lawyers, who runs DOGE? Who is the administrator? How is this set up? And they don’t have the answers. So what is DOGE actually doing?

Riedl: You’re right, it’s a challenge. For all the talk about transparency, they’ve taken offline parts of the federal budget, and a lot of what they’re doing we’re learning by tweet rather than true government reports and tracking.

There is a website that supposedly shows $55 billion in cuts so far. However, anyone who has looked into the wall of receipts has realized that most of what is claimed to be spending cuts are just accounting errors. The real cuts are smaller.

So we’re trying to piece together what they’re doing and we’re all kind of guessing. But it’s the most real for the people in Africa who aren’t getting U.S.A.I.D. aid and for the federal employees being laid off. It’s very real for them. For the rest of us, it’s piecing together information from different sources.

French: Let’s take a minute and back up, because I had said at the beginning, I identify with the term “fiscal conservative.” That is not a term that is widely used much these days. So when I say fiscal conservatism, how do you define that?

Riedl: I have long defined fiscal conservatism as wanting a smaller government that spends less money, focuses on the primary objective of government, tries to keep taxes down, but high enough to fund the government and not push up deficits. So, small limited government, less spending and no large budget deficits.

French: That’s exactly how I see it myself. But I’ve never known someone to convincingly describe Donald Trump as a fiscal conservative. He’s purely a populist. He’s going to do the things he believes will be popular.

How would you describe the fiscal approach of the Trump administration? What is their overall fiscal philosophy?

Riedl: I agree with you. The word I use is “populism.” I think Donald Trump is a big government populist who reflects where the Republican Party is today. Today’s Republican Party is older, lower income, more dependent on not just Social Security and Medicare, but programs like Medicaid and SNAP. It also includes a lot of veterans who want veteran spending and a lot of people concerned about defense.

So, overall, you have a big government populist party. But what’s interesting in this populism is, while they’re definitely more comfortable with government spending than past Republicans, they’re also accelerating the tax cut rhetoric. And as an economist, I look at that and say something’s got to give.

If you’re going to make the Republican Party a populist, big-spending party, you can’t also be the party of bold tax cuts or you get what happened in Trump’s first term, which is $8 trillion in new borrowing just from the legislation he signed in four years. Something’s got to give.

French: Why do these deficits matter? Why do they matter to an average everyday American?

Riedl: In the short term, soaring borrowing will push up inflation and interest rates. In 2021 we all saw how the American Rescue Plan that Joe Biden enacted pushed up inflation that was already on track to be a little high coming out of the pandemic. That plan added about three more points to the overall inflation number. That also pushes up interest rates.

In the long term, it’s even worse. With our debt reaching levels higher than we’ve ever seen in the developed world, you will eventually get to the point where Washington can’t even borrow enough money to pay for its spending. That will then force the government to go to the printing press, and then you have all sorts of problems. We want to stop the train before we get to that point.

French: So, what is your best estimate about the DOGE savings right now?

Riedl: Perhaps $2 billion, which they claim is $55 billion. Even that $2 billion may not ultimately happen because technically speaking, DOGE cannot impound and unilaterally reduce federal spending. Any spending cuts legally have to be reprogrammed elsewhere unless Congress goes in and reduces the spending levels. So right now I would say DOGE has saved $2 billion, which, to put it in context, is one-thirty-fifth of 1 percent of the federal budget, otherwise known as budget dust.

French: Wow. The House very narrowly passed a version of a budget resolution last week. How much will that increase the deficit? And what is in it?

Riedl: The budget resolution mostly consists of $4.5 trillion in tax cuts over 10 years.

They’re also indicating they’ll offset this with cuts to Medicaid, SNAP and other nutrition spending, and likely student loans. I’m skeptical that Congress can actually pass this. If they don’t, it will be a $4.5 trillion cost over 10 years.

The budget also promises discretionary savings far into the future, but there’s nothing enforcing that and there’s no reason to take it seriously. The budget also assumes a huge growth in tax revenues from economic growth. That is more of a gimmick. It’s not going to happen.

French: It’s been a while since I’ve had a math class, but it sounds like what you’re saying is they’re cutting $2 billion for savings but they’re adding $4,500 billion in deficit. It’s $2 billion versus $4,500 billion. Those are very, very different numbers.

Trump and DOGE have been focused on reducing the number of federal employees. What would the impact be on the federal deficit of, say, cutting 300,000 or 400,000 federal employees?

Riedl: Here’s one way to look at it: There are 2.3 million civilian employees. If we eliminated one quarter of them — which would be remarkable, that would be laying off nearly 600,000 workers and not replacing them — you would save 1 percent of federal spending.

The savings aren’t large. You’re not going to fix the deficit, even if you eliminate a quarter of federal employees. And I want to be careful because yes, we should reduce federal employment if we have extraneous employees or if they’re not doing a good job or if the agency should be shut down. Even one dollar in waste and unnecessary spending is too much.

But if the goal is to reduce spending, you’re not going to get there by firing federal employees. Most government spending goes to benefits to us, not to administrative costs.

French: The implication of what you’re saying is that DOGE is causing an awful lot of disruption to federal operations without doing anything material to address the long-term fiscal challenge America is facing.

Riedl: I would call what DOGE is doing “government spending-cut theater.” The targets they’re going after are not where the money is. D.E.I. contracts, Politico Pro subscriptions, federal employees, foreign aid. Some of it is essentially a rounding error, but they are targets that hit a lot of cultural touchstones for a lot of conservatives. DOGE is really a distraction from the spending increases and tax cuts Congress is really doing right now.

French: Suppose you wanted to be serious about cutting the deficit. Where does federal money go? And as a corollary to that, what has to be cut or what kind of revenue has to be raised to meet these obligations?

Riedl: When I explain where the money goes, it’ll be clear why we’re not cutting it.

Seventy-five percent of all federal spending goes to six items: Social Security, Medicare, Medicaid, defense, veterans and interest. That is 75 cents of every dollar. Everything the government does besides that — education, health research, housing, justice, homeland security — that’s all the other 25 percent. But Social Security, Medicare and Medicaid are the big drivers. That’s really the ballgame.

French: Is there anything you like about Trump’s policies so far? Is there anything that you’re pleased by?

Riedl: Some of the talk Trump offers on reducing red tape is welcome. In the first Trump administration, there was a rule that for every regulation we add, we’re going to repeal two regulations. I think that was a good guideline.

French: Is there anybody in the political world right now, Republican or Democrat, that you look to and say, this is a serious person talking about these issues? They get what’s happening.

Riedl: Not many come to mind, to be honest. I work with a lot of lawmakers. It’s funny because there are certain members that I work with on these issues, but I’m actually not supposed to mention them because they’re working quietly on them behind the scenes, and they don’t want me outing them as actually trying to solve problems.

I have been invited to bipartisan Social Security working group dinners, where you have Republican lawmakers and Democratic lawmakers getting together in the back room of a restaurant, inviting some experts and talking about bipartisan ways to address Social Security.

And one of the rules of attending this is that this dinner never happened. None of us were here. Everything is off the record. Do not tell anyone that these meetings took place. And on the one hand, you’re heartened that these conversations are happening behind the scenes in a bipartisan fashion. But what does it say for the state of our democracy that they don’t want anyone to know they’re trying to solve a really important challenge in a bipartisan way? It’s backward.

French: Let me wind down the conversation by asking you maybe the hardest question: I’m going to ask you to put on your prophecy hat. Where do you think the American economy is headed over the short to medium term and how much do you think Trump’s current policies are going to impact it positively or negatively?

Riedl: It’s early, and economic predictions have a history of making fools of people.

French: I won’t hold you to it. This is informed speculation.

Riedl: There are headwinds right now. Consumer confidence is falling, consumer spending is falling in preparation, and in some instances reaction to the tariffs. Interest rates have been inching up, housing starts are starting to slow down. I would think that right now it’s more likely we see the economy declining over the course of the year than growing. I hope I’m wrong.

As critical as I am of Trump’s policies, I’m never going to stop rooting for the economy or rooting for America. I hope I’m wrong, but it really looks like investment spending is getting spooked. Consumers are getting spooked. And this is pretty scary because Republicans keep budgeting on the hope that economic growth is going to skyrocket immediately. And I think we might be heading a little further downward instead.

French: Jessica, thank you so much for joining me.

Riedl: Thank you. It’s been a pleasure.

(CLICK HERE for the transcript on the New York Times website)

Congress Must Address Washington’s Unsustainable Debt Path

Jessica Riedl

Senior Fellow in Budget, Tax, & Economic Policy

The Manhattan Institute for Policy Research

Testimony before the Committee on the Budget

United States Senate

May 4, 2023

Good morning, Chairman Whitehouse, Ranking Member Grassley, and Members of the Committee. Thank you for inviting me to participate in today’s hearing in a committee where I have many fond memories of staffing so many hearings back when I was the chief economist to Senator Rob Portman.

Today, I will make three main points.

First, that the current debt path is unsustainable and requires immediate attention.

Second, that there is a long, bipartisan history of attaching deficit reforms to debt limit bills.

Third, that ultimately the debt limit must be raised on time, no matter what.

On the first point, the federal debt is totally unsustainable. The deficit will likely settle in around $1.5 trillion this year and approach $3 trillion within a decade even assuming peace, prosperity, and low interest rates. That comes to $20 trillion in new borrowing over the decade, even if the 2017 tax cuts expire.

The long-term projections are worse. CBO forecasts a staggering $114 trillion in baseline deficits over the next 30 years – pushing the debt to nearly 200 percent of GDP. Virtually the entire projected shortfall is from Social Security and Medicare systems that CBO forecasts will run $116 trillion in shortfalls. These two programs – by themselves – will run a 13 percent of GDP deficit by 2052.[i]

Even under those baseline assumptions of low interest rates, interest costs will set a record share of GDP within a decade, and consume half of all tax revenues in 30 years. If interest rates rise – as we are seeing – each percentage point will cost $3 trillion over the decade and $30 trillion in added interest costs over 30 years. By that point, interest costs could easily consume 70 or even 100 percent of tax revenues.[ii] With respect to interest rates and soaring debt, we are sitting on a ticking time bomb.

Congress should be working diligently to avert an otherwise-inevitable debt crisis. And raising the debt limit has historically been one opportunity to address the underlying debt problem.

For decades, the debt limit served as a legitimate tool for both Republicans and Democrats to address budget deficits. Debt-limit “showdowns” were relatively rare because both sides recognized the need to include fiscal reforms. Indeed, of the eight largest deficit-reduction laws since 1985, all eight were attached to debt-limit bills.

This includes both Gramm-Rudman laws in the 1980s, the 1990 Bush tax hikes, the 1993 Clinton tax hikes, the 1997 Balanced Budget Act, the 1996 Line-item-veto law, the 2010 PAYGO law, and the 2011 Budget Control Act. Every one of these deficit reforms was married to a debt limit hike.[iii]

Most of these laws occurred in the 1980s and 1990s – when a 6 percent of GDP deficit was eliminated and turned into a budget surplus. Clearly, both parties have gotten away from using the debt limit to address red ink – just as both parties bear responsibility for the past decade’s deficits. But the unsustainable debt means that all legislative avenues should again be open.

This is perhaps why a new survey shows that 74 percent of voters – including 58 percent of Democrats – agree with the statement that “President Biden should agree to negotiations and try to find common ground around the debt ceiling, including some reductions in government spending.” Just 26 percent believe the president should resist negotiating and demand a clean debt ceiling hike.[iv]

All that said, I agree that the debt limit must be raised on time, no matter what. Hitting the debt limit would force an immediate 20 percent cut in federal spending, and possibly default on the national debt. The effect on families, businesses, financial markets, and the broader economy would be devastating. That is not a solution to soaring debt. The debt limit must be raised.

In fact, replacing the debt limit should be an option, but only if Congress can come up with an alternative process that would allow members to vote on the entire budget with the true ability to trade-off between competing tax-and-spending priorities. Right now, the debt limit – as flawed as it is – is the only lawmaker vote available that truly covers the whole federal budget. If we don’t want lawmakers to use a risky process to address soaring deficits, then we need to find a better tool to have these debates and votes.

Thank you.

CLICK HERE for the hearing video

How Federal Policies are Accelerating Inflation

Jessica Riedl

Senior Fellow in Budget, Tax, & Economic Policy

The Manhattan Institute for Policy Research

Testimony before the Committee on Banking, Housing, and Urban Affairs

Subcommittee on Economic Policy

United States Senate

April 26, 2022

Good afternoon, Chairwoman Warren, Ranking Member Kennedy, and Members of the Subcommittee. Thank you for inviting me to participate in today’s hearing.

Inflation is currently creating significant economic pain for American families and businesses. With the inflation rate soaring to 8.5 percent – the highest rate in 41 years – real wages have fallen 2.7 percent. Moody’s Analytics and Penn-Wharton estimate that inflation is costing the average household $300 per month. A Harris poll reveals that 84 percent of Americans are cutting back on key purchases. And the problem is deepening every month.

Inflation has been driven by numerous factors, but fiscal and monetary policy are the lead causes. Since the beginning of the pandemic, the Federal Reserve has pumped $4.8 trillion into the economy, more than doubling its balance sheet. Some of this was necessary to keep the economy afloat, but it was excessive, as the Fed was still buying mortgage-backed securities as recently as last month.

The Fed’s actions have worked in tandem with overly aggressive fiscal policy providing more than $2 trillion in new benefits – an average of $16,000 per household. Again, a healthy portion of this spending was justified by the pandemic and the economy. But policies such as $11,400 in relief checks for a typical family of four, a child credit expansion as high as $1,600 per child, a $600 per week enhancement of unemployment benefits, and a continued student loan payment pause were often excessive and poorly targeted.

The Federal Reserve notes that consumer spending (annualized) has leaped by $2 trillion since the pandemic began and $1 trillion since last summer. No wonder supply chains are overwhelmed. Families also have $2.7 trillion in savings exceeding what would have been expected without the pandemic, yet the economy has not produced trillions more in goods and services for them to purchase. And as families spend those savings, consumer spending will surge even higher – and drive even more inflation.

A major culprit is last year’s $1.9 trillion American Rescue Plan. At the time, the Congressional Budget Office estimated that the baseline economy would operate $420 billion below capacity in 2021, and then gradually close that output gap by 2025. While some stimulus was justified, lawmakers shot a $1.9 trillion bazooka at a $420 billion output gap. And this was just weeks after the December 2020 stimulus law poured in $900 billion. Economists on the left and right, such as Lawrence Summers, warned this excessive stimulus would bring inflation. They were right.

Yet other actions have also worsened inflation. The Biden Administration has hiked tariffs on Canadian lumber, and added tariffs on other building materials. It renewed President Trump’s tariffs on solar panels, extended the tariffs on Chinese imports, and imposed tariff quotas on steel. It imposed Buy America provisions raising the cost of infrastructure, and is working to expand Davis-Bacon policies that raise the cost of government contracts. The White House is defending the Jones Act that raises shipping costs, and allowing a higher ethanol blend in gasoline that will raise food prices. It has also deferred student loan payments well past the point justified by the unemployment rate.

Many of these policies can be defended as achieving other important policy goals. But cumulatively, they significantly worsen an inflation problem that is already sinking under the weight of fiscal policy, monetary policy, supply chain disruptions, and the war in Ukraine. The Peterson Institute for International Economics calculates that even a 2-percentage point reduction in tariffs could lower inflation 1.3 percent and save $800 per household.

Current economic factors show that inflation will not likely recede by itself and may even accelerate in the near-term. There is no easy path to bringing down inflation, but the first rule should be to do no harm. That means resisting calls for more aggressive federal spending as well as ensuring that businesses can operate efficiently without expensive tariffs and over-regulation. Because if inflation persists and real wages continue to fall, it will soon cost jobs and create economic chaos that endanger all the good things you want government to do.

Thank you.

CLICK HERE for testimony on Senate website

Four Principles for Responsible Infrastructure Investments

Jessica Riedl

Senior Fellow in Budget, Tax, & Economic Policy

The Manhattan Institute for Policy Research

Testimony before the Committee on Banking, Housing, and Urban Affairs

United States Senate

June 15, 2021

CLICK HERE for hearing page and video

Good morning Chairman Brown, Ranking Member Toomey, and Members of the Committee. Thank you for inviting me to participate in today’s hearing.

My name is Jessica Riedl. I am a Senior Fellow in Budget, Tax, & Economic Policy at the Manhattan Institute for Policy Research. The views I express in this testimony are my own, and should not be construed as representing any official position of the Manhattan Institute.

My testimony today will offer four principles for responsible infrastructure investments:

· First, Congress should avoid piling on new taxes or debt. The federal budget is already facing $100 trillion in baseline deficits over 30 years, and any taxes should address that first.

· Second, state and local governments should use for infrastructure the $530 billion in additional federal windfalls they have recently received. In fact, infrastructure is a perfect use of one-time federal funding.

· Third, any additional federal investments should be funded within the current $61 trillion spending baseline over the decade. The offsets are there if infrastructure is truly a Congressional priority.

· Finally, America’s main infrastructure policy challenge is not funding, but rather the slow, bureaucratic, high-cost implementation of the policies. Spending another $1 trillion without making these programs more effective is a poor use of taxpayer dollars.

As an addendum, I will show that there is a broad economic consensus that infrastructure policies do not provide short-term stimulus, and most new construction jobs are redistributed from other jobs.

Principle #1: No New Taxes or Deficits

Washington has proven to be increasingly unable to pay for its current spending commitments. It is on pace to borrow nearly $7 trillion across 2020 and 2021, and faces $100 trillion in baseline budget deficits over the next 30 years. Adding trillions more in spending will further raise the spending baseline to levels that no plausible tax system can finance. Even if this new infrastructure spending is financed with trillions in new taxes, that would still use up a large portion of the taxes that will instead be needed to address the $100 trillion in baseline deficits. Thus, lawmakers should commit to not worsen the unsustainable budget outlook by adding more debt, or diverting its limited tax options into financing new spending programs.

Let’s dive deeper into the numbers. The cost of the American Jobs Plan[1] – $2.6 trillion over 8 years, an average of 1.25 percent of GDP – would represent the most expensive non-emergency spending bill in at least 50 years.[2] And it follows Washington enacting $5.4 trillion in (mostly-necessary) pandemic spending over the past 12 months – a total that comprises one-fifth of the entire national debt. The American Families Plan would add $1.8 trillion more in spending.

The underlying fiscal outlook is unsustainable. The national debt held by the public is already projected to double from $17 trillion to $35 trillion between the end of 2019 and 2030.[3] If President Biden’s entire campaign agenda is enacted, and expiring provisions are extended, it would mean the national debt rising from $17 trillion to $44 trillion over that period.[4] This would leave the national debt at 130 percent of GDP, or one-quarter higher than at the end of World War II.

And it only gets worse thereafter. The Congressional Budget Office projects that – due overwhelmingly to escalating Social Security and Medicare shortfalls – Washington will run $100 trillion in baseline budget deficits over the next 30 years. This would leave the national debt at nearly 200 percent of GDP. At the end of that period, government interest payments will consume half of all tax revenues.[5]

That is the rosy scenario that assumes no new legislation is enacted, the 2017 tax cuts expire, no new recessions, and low interest rates. If interest rates exceed the CBO baseline assumption by even one percentage point, it would add $30 trillion in interest costs over three decades. Deficits would reach 18 percent of GDP, the debt would hit 264 percent of GDP, and two-thirds of all tax revenues would merely pay the interest on the debt.[6]

That is simply the CBO baseline, with interest rates rising by an additional percentage point.

And that is why it is shortsighted to assert that low interest rates make this the right time to borrow. Washington is behaving like a subprime homeowner and making long-term debt commitments based on short-term interest rates. The average maturity of the U.S. debt is five years and declining, which means most of the national debt would quickly roll over into any future interest rate increase.

In short, the federal government is essentially gambling our fiscal future on the hope that interest rates never again exceed four percent. Because if they do, simple math shows that combining rising interest rates with a debt approaching 200 or 300 percent of GDP risks a catastrophic debt crisis.

In that context, Washington should focus on paying for our current escalating commitments before undertaking the most expensive non-emergency spending bill in half a century.

Some suggest that fully financing this infrastructure bill with new taxes would make it fiscally responsible. That is not the case. If a family facing a $100,000 credit card debt suddenly finds a $20,000 windfall, spending it all on expensive new furniture would not be a responsible use of that money simply because it is “fully paid for” by the windfall. Similarly, there is a limited universe of plausible tax increases on families and businesses.[7]

Enacting all of these taxes would not even close the current 10-year projected budget deficit of $14.3 trillion, much less finance the President’s new spending proposals.[8] And even if they did, the escalating spending levels projected by CBO would re-open large budget deficits in the 2030s and 2040s.

In short, it will take aggressive tax increases – or drastic and painful spending cuts – just to finance Washington’s current commitments. Applying the easiest $3 trillion in taxes to a historic spending expansion simply leaves fewer options to close the remaining deficits. The only people left to pay the remaining taxes will be the middle class.

Large spending increases create the difficult financing choice between using up our limited plausible tax increases, and going deeper into debt. The American Jobs Plan includes approximately $1.8 trillion in new corporate taxes that dwarf the $300 billion in net corporate tax cuts (over ten years) enacted in the 2017 Tax Cuts and Jobs Act. That law reduced the corporate tax rate from 35 percent to 21 percent, but offset most of those savings by curtailing key business tax preferences. The president would raise the corporate rate back to 28 percent (33 percent including state taxes) – restoring America to the highest rate in the OECD – while also raising international taxes and retaining the lost 2017 tax deductions. Moreover, the president would severely weaken the 2017 tax reforms that finally gave U.S. multinational corporations a more level playing field when competing internationally. Now, once again, American companies abroad may face higher tax rates than our global competitors.

No, infrastructure won’t pay for itself through economic growth. Some advocates suggest that infrastructure spending is not a major budgetary drag because it will provide enough growth and prosperity to pay for itself, or at least become more affordable down the road. This spending version of the free-lunch Laffer Curve collapses under basic scrutiny. Infrastructure spending is not like borrowing $100,000 for a college degree that brings $1 million in higher future income. A government program requires a 500 percent return on investment to pay for itself in future tax revenues. (Imagine a $100 expenditure creating $500 in new GDP that is then taxed at the long-term average federal rate of 20 percent to bring in $100 in tax revenues.)

Do government investments typically produce a 500 percent return? Try 5 percent. A 2016 CBO report concluded that federal investments typically return only 5 percent[9] — compared with 10 percent for private-sector investments — because federal investments are costly, bureaucratic, unresponsive to market forces, and are often offset by state and local governments cutting back their own investments. Under this rate of return — and adjusted into net present values — it would take 100 years for tax revenues to recoup even 20 percent of the cost.

Moreover, this 5 percent figure refers to traditionally-defined government investments, rather than new broader definitions that include roughly $2 trillion in combined proposals for long-term care for seniors, corporate welfare, public housing, government-building renovation, child credits, and Affordable Care Act subsidies. By contrast, just $500 billion of the American Jobs Plan and American Families Plan would go toward roads, bridges, highways, airports, water transportation, and even electrical infrastructure. Some of those other policies may have merit, but they are not going to bring a historic burst of new productivity and economic growth that recoups any significant share of the initiative’s $4 trillion overall cost.

In fact, economists at the University of Pennsylvania found that the spending provisions in the American Jobs Plan would actually reduce economic growth and wages over the long-term. Any modest productivity benefits from these new public investments would be more than offset by the productivity losses caused by the necessary government borrowing crowding out more-productive private-sector investment. In other words, stronger economic growth means encouraging private-sector investment, not transferring those resources to the government. Specifically, the Penn-Wharton Budget Model projected that the infrastructure spending in the American Jobs Plan will – over the long run:

• · Create no net jobs;

• · Reduce wages by 0.3 percent (0.8 percent when including the proposed taxes);

• · Reduce the capital stock by 1.5 percent (3.0 percent when including the proposed taxes);

• · Reduce the GDP by 0.3 percent (0.8 percent when including the proposed taxes).[10]

• So not only would the president’s infrastructure proposal fail to produce the 500 percent return needed to pay for itself, it would likely produce a negative overall return.

Additionally, on the tax side of the proposal, the Tax Foundation estimates that:
“An increase in the federal corporate tax rate to 28 percent would raise the U.S. federal-state combined tax rate to 32.34 percent, highest in the OECD and among Group of Seven (G7) countries, harming U.S. economic competitiveness and increasing the cost of investment in America. We estimate that this would reduce long-run economic output by 0.8 percent, eliminate 159,000 jobs, and reduce wages by 0.7 percent. Workers across the income scale would bear much of the tax increase. For example, the bottom 20 percent of earners would on average see a 1.45 percent drop in after-tax income in the long run.”[11]

Principle #2: States Should Use Their Federal Windfalls

State and local governments have received more than $850 billion from the federal government’s pandemic emergency bills.[12] A portion of this spending was for necessary costs related to public health. On the flip side, state and local governments recently received $350 billion to close budget deficits that – for the most part – no longer exist. California’s state government received $26 billion (and their local governments received an extra $16 billion)[13] despite facing a $75 billion surplus for the upcoming fiscal year.[14] My home state of Wisconsin has reported an “unprecedented” revenue surge and projects a $5.8 billion surplus over the next two years – enough to rebate 30 percent of all state income taxes.[15] And yet the state will receive an additional $2.5 billion bailout from Washington D.C. to address a budget shortfall that does not exist. These stories are being repeated across America: State and local governments with large one-time cash windfalls that they do not know how to spend, as well as frustration of strings attached on federal funds they are receiving.

States are also holding approximately $180 billion in unspent K-12 education grants from earlier relief bills.[16] This money is purportedly to cover pandemic-related renovations and costs, but CBO estimates that most will not be spent until between 2023 and 2028, likely well after COVID has passed.[17]

All in all, state and local governments are sitting on more than $500 billion in federal funds, the vast majority of which lacks any clear direct purpose. It would be irresponsible for states to create new permanent spending programs that outlast this temporary cash windfall, and Washington has tried (perhaps unconstitutionally) to forbid these states from cutting taxes. Thus, applying most of that $500 billion towards a one-time infrastructure boost makes the most sense.

This amount is well sufficient for most states. Government at all levels spends approximately $235 billion annually on highways, roads, and bridges,[18] split equally between capital improvements and maintenance.[19] Even applying half of the states’ $500 billion towards highways, roads, and bridges would more than double the $115 billion in the President’s plan, and amount to a doubling of their total budget – surely enough to meaningfully address any backlog (without Washington micromanagement of the projects).

And it would cost taxpayers nothing above what Congress has already distributed.

Additional state spending can go towards other infrastructure needs such as modernizing the electrical grid, purifying the water supply, improving broadband access, or renovating schools. Even putting $100 billion into these priorities would represent “moonshot” reforms over current spending levels.

The key question is how to encourage state and local governments to apply these funds towards infrastructure. Congress could offer perhaps $150 billion in infrastructure matching funds (this is still much cheaper than Washington spending $2 trillion) and also pass legislation freeing up the education funds for broader infrastructure uses. At the same time, if governors truly resist investing their large windfalls in infrastructure, that may be a sign to Washington that it is less of a national priority after all.

Principle #3: Washington Can Add Spending Within the Current Budget

It is not unreasonable for Washington to contribute somewhat more to infrastructure, whether through matching funds for states, or truly national projects like interstate waterways or rail. But Washington is already projected to spend more than $60 trillion over the next decade. If it cannot apply $500 billion of that amount towards infrastructure priorities – less than one percent of the budget – then it is fair to question how serious Congress and the President are about infrastructure. Congress already spends $306 billion annually on non-defense investment (including $112 billion for physical infrastructure), and should be able to repurpose some of this spending.[20]

The most straightforward carve-out would bring back caps in discretionary spending. Rather than drastically increase this spending by 8.4 percent as President Biden has proposed, Washington could save $500 billion over the decade by cutting that budget by 1.5 percent in 2021, and then capping its annual growth at the inflation rate over the decade. Alternatively, Congress could inflation-adjust federal spending using the more accurate chained CPI, sell hundreds of billions worth of excess federal assets and land, or even begin broader entitlement reforms.[21] Some modest rescissions of leftover pandemic spending may be available as well. The money is there if Congress wants to pay for infrastructure.

As an alternative to taxing the rich, I have recently released a report proposing upwards of $1 trillion in potential savings over the decade from reducing spending benefits for these same upper-income families.[22] This includes slightly trimming Social Security benefits and raising Medicare premiums for retirees with millions in financial assets, and reducing farm subsidies for families earning more than $300,000 annually. Spending savings are never easy or popular, but living within our means and building a sustainable federal budget means that new priorities should be offset with lower-priority savings.

Principle #4: Reform Infrastructure Waste and Delays – Do Not Throw Money at an Unreformed, Broken System

The easiest answer to most political problems is simply to throw more money at them. Yet America’s infrastructure is not held back by low spending levels, but rather by its status among the world’s most expensive, bureaucratic, and slowly built. It has become cliché to contrast the 410 days needed to build the Empire State Building in 1930-31 with the more recent 25-year process of building Boston’s “Big Dig.” Yet the persistence of delays, cost-overruns, and death-by-NIMBYism can be seen today in California’s high-speed rail project that is now expected to take nearly 40 years from planning to completion (which itself is increasingly unlikely) and cost $70 billion more than originally-estimated.

Our infrastructure can certainly use some upgrades, particularly its roads and electrical grid. That said, the crumbling state of American infrastructure has been overstated. A 2019 report of the World Economic Forum ranked the United States’ infrastructure first among the 10 geographically largest countries (i.e., the countries that likely have the most extensive infrastructure needs).[23]

Similarly, last year a Congressional Research Service report titled “The Condition of Highway Bridges Continues to Improve” noted that “the number and share of bridges in poor condition have dropped significantly over the past 20 years. Furthermore, repairing every deficient bridge in just a few years is unrealistic, and not every bridge repair is likely to be justified when considering both the economic benefits and costs. FHWA’s own analysis of bridge data suggests a relatively modest increase in spending could substantially reduce or eliminate the backlog of economically justifiable investments if sustained over a 20-year period.”[24]

Spending levels remain healthy. Transportation infrastructure spending (adjusted for inflation) rose from $332 to $371 billion between 2008 and 2018.[25] Government spending on transportation and water infrastructure at all levels is 2.3 percent of the GDP ($440 billion), just slightly below the 30-year average of 2.5 percent.[26] That said, there has been a modest shift from capital spending to operations and maintenance. Spending on energy and the electrical grid continues to rise, although challenges remain.[27]

America’s main infrastructure challenge is not spending levels, but rather its general ineffectiveness per dollar spent. In 2016, CBO released a report entitled “The Macroeconomic and Budgetary Effects of Federal Investment.” Economist Scott Hodge succinctly summarizes the reports three leading conclusions:[28]

1. “Federal investments deliver only half the economic returns as private sector investments, 5 percent versus 10 percent.

2. A dollar of federal spending results in only $0.67 worth of actual investment because state, local, and private sector entities reduce their spending in response to the federal dollars.

3. Federal investment financed by debt or taxes could do more economic harm than good because federal borrowing and taxes crowd out private investment. To avoid harming the economy, federal investments should be financed by cuts in other discretionary programs.”

Diving deeper, America’s transportation infrastructure is among the most expensive, bureaucratic, and slowly built in the world.[29] Consider that:

• · The cost of interstate construction spending per mile quadrupled from 1960 through 1990, and has continued to grow since then (adjusted for inflation).[30]

• · Labor costs are higher in part because the Davis-Bacon Act, which mandates that those awarded government contracts pay a “prevailing wage,” raises wage costs by as much as 22 percent.[31]

• · Government-mandated project labor agreements (PLAs) have been shown to significantly raise labor costs as well.[32]

• · America requires many more workers to do the same construction work as Europe.[33]

• · Most U.S. construction projects are performed only during the workday, while much of Europe has round-the-clock shifts.[34]

• · U.S. subway systems are by far the most expensive to build in the world, and in New York City cost quadruple the world average to build. The difference is high labor costs, poor contractor work, poor oversight, and defensive designs meant to avoid a cascade of stakeholder lawsuits related to environmental and historical artifact protection.[35]

• · Coordination between various local governments and stakeholders – while often necessary – brings endless delays and veto points, particularly for transportation projects.

• · Nearly a century ago, the Empire State Building was built in 410 days. More recently, Boston’s Big Dig took 25 years from planning to completion. Today, California’s high-speed rail is expected to take nearly 40 years from planning to completion. Some delays are helpful – we want to ensure safety and environmental protection – but the U.S. has become a global outlier.

A major cause of delays are the necessary-but-slow Environmental Impact Statements and Historical Artifact Reviews. Consider that:

• · Environmental reviews commonly exceed 1,000 pages and require on average seven years to complete (compared to no more than one to two years in Canada and 3.5 years in the European Union).[36]

• · Several environmental impact statements now take more than 17 years to complete – and no ground can be broken until the project has survived the legal process, including appeals by any litigant.[37]

• · In America – unlike many other countries – environmental and historical reviews can be challenged in court by a wide range of stakeholders, and these challenges can take years or even decades to be decided. Other countries use faster, non-judicial options to enforce these regulations, rather than expensive and time-consuming lawsuits that essentially become a project veto.[38]

• · Megan McArdle cites an egregious example: “The Southeastern High Speed Rail Corridor was proposed in 1992. You will be thrilled to learn that in September 2017, the Department of Transportation announced the completion of the project’s Tier II Draft Environmental Impact Statement.”[39]

President Biden’s physical infrastructure component throws $1 trillion at this broken system. In fact, it would raise costs further by tightening higher-wage requirements and imposing stricter “Buy America” requirements that limit trade and lower-cost options. And it allocates more funding to transit and high-speed rail ($165 billion) than highways, roads, and bridges ($115 billion) despite the surging costs[40] and declining public interest[41] in the former.

There is certainly a case for increasing infrastructure investment. But any new funding should be accompanied by reforms to spend that money more effectively.

The $213 billion proposal to build, rehabilitate, and retrofit millions of homes is expensive and vaguely defined. While public housing should obviously not be left in disrepair, lawmakers should focus more on housing vouchers that provide low-income families with more options to escape public housing if they so choose. Thus, building more private housing and addressing zoning restrictions would be more helpful. That said, local communities must play a lead role. Additionally, the proposal to “build, preserve, and retrofit homes” is vaguely defined, and it is unclear if tax credits will be sufficient to bring such expensive projects – especially given the push for more expensive unionized workers in an industry that is only 13 percent unionized.[42]

Additionally, the proposed $100 billion for K-12 school construction and renovation ($50 billion in direct grants plus $50 billion through bonds) is unnecessary. School construction has long been a responsibility of state and local governments, and federalizing this role engages in mission creep while diminishing the role of the governors, mayors, and school boards closer to these schools. Furthermore, states are flush with $180 billion in K-12 grants from earlier pandemic bills that well exceed their COVID-related expenses (which is why CBO assumes most will not be spent until between 2023 and 2028).[43] Congress should clarify that these $180 billion in recent grant funds may be used for broader education expenses.

Addendum: Economists Agree that Infrastructure is not “Stimulus” or Job Creation

Finally, let’s address the “jobs” portion of the American Jobs Plan. The Biden Administration and other advocates assert that massive infrastructure spending will stimulate short-term economic growth and create jobs.

Economists across the political spectrum have debunked this myth for the obvious reason that infrastructure projects require several years of planning and regulatory reviews before they begin – at which point the economy has already recovered. In fact, as stated above, environmental impact statements typically take seven years to complete. After allocating $94 billion for mostly “shovel-ready” stimulus projects in 2009, President Obama later joked that “Shovel-ready was not as … shovel-ready as we expected.”

Former Obama White House chief economist Jason Furman and former Congressional Budget Office director Doug Elmendorf added that “In the past, infrastructure projects that were initiated as the economy started to weaken did not involve substantial amounts of spending until after the economy had recovered.”[44]

Delays are not the only stimulus barrier. Stanford economists John Cogan and John Taylor observed that state and local governments receiving 2009 federal stimulus infrastructure grants simply cut back on their own spending and borrowing almost dollar-for-dollar, completely negating the impact of the federal spending.[45]

The stimulus case is also undermined by Washington distributing spending largely based on politics rather than local economic needs. Harvard economist Edward Glaeser revealed that 2009 stimulus dollars were disproportionately distributed to regions with lower unemployment rates that did not need stimulus. On one level, this makes sense -- many high unemployment regions are rural or losing population, and are thus not the best candidates for widening local highways or adding high-speed rail. However, this approach exposes the disconnect between the goals of infrastructure and job creation. Glaeser also writes that, unlike the past infrastructure projects that relied more on manual labor, today’s “big infrastructure requires fancy equipment and skilled engineers, who aren’t likely to be unemployed.”[46]

Because of these factors, a review of 2009 stimulus highway projects shows no sustained effect on county-level employment.[47] Another study found that half of all new employees hired at firms that received stimulus dollars had peen poached from other firms (rather than coming from the ranks of the unemployed), and many of these companies were forced to turn down other construction projects to accommodate the new “stimulus” projects.[48]

Overall, CRS examined highway spending and concluded that “to the extent that financing new highways [comes from] reducing expenditures on other programs or by deficit finance . . . the net impact on the economy of highway construction in terms of both output and employment could be nullified or even negative.”[49]

Adherents to the infrastructure stimulus argument should consider the case of Japan, which responded to a sustained economic downturn with $6.3 trillion in infrastructure investment between 1991 and 2008.[50] One of the largest investments in airports, trains, highways, and tunnels in world history helped push Japan’s national debt from 38 percent to 140 percent of GDP, yet its per-capita GDP was roughly the same in 2008 as in 1994.

Third, political considerations can limit the stimulative effect of infrastructure. The geographic distribution of infrastructure spending has historically been driven by the political leverage of lawmakers, as well as political considerations within federal agencies. It is naïve to expect politics remove to be removed from the allocations.

Consequently, Washington has historically over-invested in large vanity projects that provide ribbon-cutting ceremonies. such as high-speed rail, the expansion of interstate highways, and the famous (and eventually cancelled) $223 million “Bridge to Nowhere.” However, economist Aaron Renn has shown that “America’s infrastructure crisis is local,” and repairing local streets, bridges, and potholes is a much higher and more affordable priority. These locally managed projects are often ineligible for federal funding.[51]

State governments face their own mis-aligned incentives with federal dollars. A state funding a $100 million project with its own transportation revenues must convince its taxpayers that the project will provide $100 million in value. By contrast, if the state is required to put up just $20 million of its own funds -- and can use a federal infrastructure grant for the remaining $80 million -- it need only convince its citizens that the project is worth $20 million. In other words, the ability to offload the costs on the federal government makes states more cavalier with how the funds are spent.

Consequently, past infrastructure stimulus bills and reauthorizations have not sufficiently relieved traffic congestion, repaired bridges and roads, or improved waterways. Instead, they brought unfinished high-speed rail projects, cost overruns, a $3.4 million “eco-passage”[52] to help turtles cross a highway in Tallahassee, Fla., and a $54 million “Napa Valley Wine Train.”[53] Better to eliminate the federal middleman and empower state and local governments to more easily raise the funds to finance local projects based on local priorities.

Conclusion: Fix the System First, and Be Fiscally Responsible

The laws of economics have not been repealed. Budget constraints still exist. Doubling or tripling the national debt is extraordinarily reckless. There is no guarantee that interest rates will never rise again – indeed such a result is overwhelmingly likely. There are no plausible taxes that can finance the projected spending levels, and counting on the Federal Reserve to monetize much of this debt is a recipe for economic chaos.

Spending $1 trillion on infrastructure without fixing the underlying waste, inefficiencies, and delays in our system represents an extraordinary missed opportunity, and confuses spending levels with outcomes. Lawmakers should first reform the infrastructure costs and delays, and encourage states to use their $530 billion in federal aid to address local infrastructure priorities.

[1] White House, “Fact Sheet: The American Jobs Plan,” March 31, 2021, at https://www.whitehouse.gov/briefing-room/statements-releases/2021/03/31/fact-sheet-the-american-jobs-plan/.

[2] Preliminary cost estimate from “What’s in President Biden’s American Jobs Plan?” Committee for a Responsible Federal Budget, April 2, 2021 at https://www.crfb.org/blogs/whats-president-bidens-american-jobs-plan.

[3] Congressional Budget Office, The Budget and Economic Outlook: 2021 to 2031,” February 11, 2021, at https://www.cbo.gov/publication/56970. CBO projected a debt held by the public of $33.3 trillion at the end of FY 2030, before the latest stimulus bill added $2 trillion.

[4] Cost estimates of Biden campaign proposals are at Jessica Riedl, “Joe Biden Has an $11 Trillion Spending Plan. Can He Enact It?” The Dispatch, September 3, 2020, at

https://thedispatch.com/p/joe-biden-has-an-11-trillion-spending

. Most of the $11 trillion spending breakdown comes from the Biden campaign itself, and the $3.5 trillion in taxes comes from the Brookings/Urban Tax Policy Center.

[5] Calculated using Congressional Budget Office, “The 2020 Long-Term Budget Outlook,” at September 21, 2020, at https://www.cbo.gov/publication/56516 and the “Long-Term Budget Projections” tab.

For more analysis of these long-term deficits, see Jessica Riedl, “Spending, Taxes, & Deficits: A Book of Charts,” Manhattan Institute, October 26, 2020.

[6] Calculated using Congressional Budget Office, “The 2020 Long-Term Budget Outlook,” at September 21, 2020, at https://www.cbo.gov/publication/56516 and the “Long-Term Budget Projections” tab.

[7] For a sample proposal to stabilize the long-term debt, see Jessica Riedl, “A Comprehensive Federal Budget Plan to Avert a Debt Crisis,” Manhattan Institute, October 10, 2018, at https://www.manhattan-institute.org/html/report-comprehensive-federal-budget-plan-avert-debt-crisis-11497.html.

[8] Congressional Budget Office, The Budget and Economic Outlook: 2021 to 2031,” February 11, 2021, at https://www.cbo.gov/publication/56970. CBO projected a $12.3 trillion deficit from FY 2022-2031, before the latest $2 trillion stimulus bill.

[9] Congressional Budget Office, The Macroeconomic and Budgetary Effects of Federal Investment,” June 2016 at https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/51628-Federal_Investment.pdf.

[10] “President Biden’s $2.7 Trillion American Jobs Plan: Budgetary and Macroeconomic Effects,” Penn-Wharton Budget Model, April 7, 2021, at https://budgetmodel.wharton.upenn.edu/issues/2021/4/7/president-biden-american-jobs-plan-effects.

[11] Garrett Watson and William McBride, “Evaluating Proposals to Increase the Corporate Tax Rate and Levy a Minimum Tax on Corporate Book Income,” Tax Foundation, February 24, 2021, at https://taxfoundation.org/biden-corporate-income-tax-rate/.

[12] Committee for a Responsible Federal Budget, “COVID Money Tracker,” at

https://www.covidmoneytracker.org/

.

[13] Committee for a Responsible Federal Budget, “State and Local Governments Do Not Need Half a Trillion in COVID Relief,” February 17, 2021 at https://www.crfb.org/blogs/state-and-local-governments-do-not-need-half-trillion-covid-relief.

[14] Kevin Yamamura, “California has a staggering $75.7B budget surplus,” Politico, May 10, 2021, at https://www.politico.com/states/california/story/2021/05/10/california-has-a-staggering-757b-budget-surplus-1381195.

[15] Mitchell Schmidt, “Wisconsin projects $4.4B more in tax revenue by mid-2023 following ‘unprecedented’ tax collections,” Wisconsin State Journal, June 9, 2021, at

https://madison.com/wsj/news/local/govt-and-politics/wisconsin-projects-4-4b-more-in-tax-revenue-by-mid-2023-following-unprecedented-tax-collections/article_0934dccb-5f76-5d1f-b7e7-1c073e2ff6c9.html.

[16] The most recent stimulus law contained $129 billion that is purportedly for school mitigation measures to accommodate social distancing and pandemic risks. However, the CDC has estimated that school mitigation strategies should cost no more than $23 billion. Moreover, education policy expert Dan Lips notes that state and local governments are still sitting on more than $50 billion in unused K-12 school relief funds from earlier emergency bills.

[17] Congressional Budget Office, “Cost Estimate: Reconciliation Recommendations of the House Committee on Education and Labor,” February 17, 2021, https://www.cbo.gov/system/files/2021-02/hEdandLaborreconciliationestimate.pdf.

[18] Bureau of Transportation Statistics, “Transportation Expenditures by Mode and Level of Government From Own Funds, Fiscal Year,” Department of Transportation, at https://www.bts.gov/content/transportation-expenditures-mode-and-level-government-own-funds-fiscal-year-current-millions.

[19] Congressional Budget Office, “Reauthorizing Federal Highway Programs: Issues and Options, May 2020 at https://www.cbo.gov/publication/56373.

[20] Congressional Budget Office, “Budgeting for Federal Investment,” April 15, 2021, at https://www.cbo.gov/publication/56900.

[21] For a detailed, gimmick-free, fully-scored blueprint to stabilize the long-term debt, see Jessica Riedl, “A Comprehensive Federal Budget Plan to Avert a Debt Crisis,” Manhattan Institute Report, October 10, 2018 at https://www.manhattan-institute.org/html/report-comprehensive-federal-budget-plan-avert-debt-crisis-11497.html

[22] For details, see Jessica Riedl, “Cut Spending For The Rich Before Raising Their Taxes,” Manhattan Institute Report, May 20, 2021 at https://www.manhattan-institute.org/cut-spending-rich-raising-their-taxes.

[23] Klaus Schwab (editor), The Global Competitiveness Report: 2019, World Economic Forum, at http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf. For a discussion, see also Charles Lane, “No, America’s infrastructure is not ‘crumbling’,” Washington Post, April 6, 2021 at https://www.washingtonpost.com/opinions/no-americas-infrastructure-is-not-crumbling/2021/04/06/ab97cc50-9554-11eb-a6d0-13d207aadb78_story.html.

[24] William J. Mallett, “Condition of Highway Bridges Continues to Improve,” Congressional Research Service Insight #IN11395, May 19, 2020, at https://crsreports.congress.gov/product/pdf/IN/IN11395.

[25] Bureau of Transportation Statistics, “Transportation Expenditures by Mode and Level of Government From Own Funds, Fiscal Year,” Department of Transportation, at https://www.bts.gov/content/transportation-expenditures-mode-and-level-government-own-funds-fiscal-year-current-millions. Figures then adjusted for inflation.

[26] Congressional Budget Office, “Public Spending on Transportation and Water Infrastructure, 1956 to 2017,” October 2018 at https://www.cbo.gov/system/files/2018-10/54539-Infrastructure.pdf.

[27] American Society of Civil Engineers, “2021 Report for America’s Infrastructure,” Energy chapter, at https://infrastructurereportcard.org/cat-item/energy/.

[28] Summary appears at Scott A. Hodge, “CBO Study: Benefits of Biden’s $2 Trillion Infrastructure Plan Won’t Outweigh $2 Trillion Tax Hike,” Tax Foundation, March 31, 2021, at https://taxfoundation.org/biden-infrastructure-spending-tax-hike/. For full report, see Congressional Budget Office, The Macroeconomic and Budgetary Effects of Federal Investment,” June 2016 at https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/51628-Federal_Investment.pdf.

[29] For an overview, see Josh Barro, “Why New York Can’t Have Nice Things. It costs three times more to build a subway station here than in London or Paris. What if we could change that?” New York Magazine, May 30, 2019, at https://nymag.com/intelligencer/2019/05/new-york-infrastructure-costs.html. Josh Barro, “Here’s Why We’ve Failed to Figure Out Why Infrastructure Costs So Much,” New York Magazine, July 24, 2019, at https://nymag.com/intelligencer/2019/07/why-we-cant-figure-out-why-infrastructure-is-so-expensive.html. Alex Marshall, “Why Can’t We Build Infrastructure Cheaply, Quickly and Well?” Governing, April 16, 2020, at https://www.governing.com/community/Why-Cant-We-Build-Infrastructure-Cheaply-Quickly-and-Well.html.

[30] Alon Levy, “So You Want to Do an Infrastructure Project,” Niskanen Center, March 16, 2021, at https://www.niskanencenter.org/wp-content/uploads/2021/03/levy-infastructure.pdf.

[31] Sarah Glassman, Michael Head, David G. Tuerck, and Paul Bachman, “The Federal Davis-Bacon Act: The Prevailing Mismeasure of Wages,” The Beacon Hill Institute at Suffolk University, February 2008, http://www.beaconhill.org/bhistudies/prevwage08/davisbaconprevwage080207final.pdf.

[32] For a background discussion of PLAs, see William F. Burke, BSBA, David G. Tuerck, Ph.D, “The Effects of Project Labor Agreements on Public School Construction in Connecticut,” The Beacon Hill Institute, January 2020, at https://beaconhill.org/wp-content/uploads/2020/02/CT-PLA-FinalRev-2020-0211.pdf.

[33] Alex Marshall, “Why Can’t We Build Infrastructure Cheaply, Quickly and Well?” Governing, April 16, 2020, at https://www.governing.com/community/Why-Cant-We-Build-Infrastructure-Cheaply-Quickly-and-Well.html.

[34] Alon Levy, “So You Want to Do an Infrastructure Project,” Niskanen Center, March 16, 2021, at https://www.niskanencenter.org/wp-content/uploads/2021/03/levy-infastructure.pdf.

[35] Alon Levy, “So You Want to Do an Infrastructure Project,” Niskanen Center, March 16, 2021, at https://www.niskanencenter.org/wp-content/uploads/2021/03/levy-infastructure.pdf.

[36] Mitch Daniels, Testimony before Senate Finance Committee, June 25, 2015, at https://www.purdue.edu/president/speeches/2015/150625-infrastructure-testimony.pdf.

[37] Alon Levy, “So You Want to Do an Infrastructure Project,” Niskanen Center, March 16, 2021, at https://www.niskanencenter.org/wp-content/uploads/2021/03/levy-infastructure.pdf.

[38] Alon Levy, “So You Want to Do an Infrastructure Project,” Niskanen Center, March 16, 2021, at https://www.niskanencenter.org/wp-content/uploads/2021/03/levy-infastructure.pdf.

[39] Megan McArdle, Twitter, February 13, 2019, at

.

[40] Kerry Jackson, “The Low Spark of High-Speed Rail: California’s bullet-train project is still under construction as delays and costs pile up,” at February 25, 2021, at https://www.city-journal.org/high-costs-construction-delays-plague-ca-high-speed-rail.

[41] Randal O’Toole, “Transit: The Urban Parasite. The costs of supporting the nation’s urban transit industry are rising, yet ridership is declining.” Cato Institute, Policy Analysis No. 889, April 20, 2020, at https://www.cato.org/policy-analysis/transit-urban-parasite.

[42] Bureau of Labor Statistics, “Union Members – 2020: Table 3. Union affiliation of employed wage and salary workers by occupation and industry” January 22, 2021, at https://www.bls.gov/news.release/union2.t03.htm.

[43] The most recent stimulus law contained $129 billion that is purportedly for school mitigation measures to accommodate social distancing and pandemic risks. However, the CDC has estimated that school mitigation strategies should cost no more than $23 billion. Moreover, education policy expert Dan Lips notes that state and local governments are still sitting on more than $50 billion in unused K-12 school relief funds from earlier emergency bills. Then what is the purpose of this additional $129 billion? Certainly not to address the pandemic; the CBO calculates that more than two-thirds of this spending would occur between 2023 and 2028.

[44] Lori Montgomery, “Critics Say Roads Projects Won’t Jump-Start Economy,” Washington Post, October 30, 2008 at https://www.washingtonpost.com/wp-dyn/content/article/2008/10/29/AR2008102904125.html.

[45] John Cogan and John Taylor, “The Obama Stimulus Impact? Zero,” Wall Street Journal, December 9, 2010, at https://www.wsj.com/articles/SB10001424052748704679204575646603792267296.

[46] Edward L. Glaeser, “If You Build It . . .Myths and realities about America’s infrastructure spending,” City Journal Summer 2016, at https://www.city-journal.org/html/if-you-build-it-14606.html.

[47] Edward L. Glaeser, “If You Build It . . .Myths and realities about America’s infrastructure spending,” City Journal Summer 2016, at https://www.city-journal.org/html/if-you-build-it-14606.html.

[48] Garett Jones and Daniel M. Rothschild, “The Limits of Infrastructure Stimulus,” Mercatus Center, Policy Brief, March 25, 2020 at https://www.mercatus.org/system/files/rothschild_and_jones_-_policy_brief_-_covid_series_-_lessons_learned_from_arra_for_infrastructure_stimulus_-_v1.pdf.

[49] David J. Cantor, “Highway Construction: Its Impact on the Economy,” Congressional Research Service Report for Congress No. 93-21E, January 6, 1993.

[50] Edward L. Glaeser, “If You Build It . . .Myths and realities about America’s infrastructure spending,” City Journal Summer 2016, at https://www.city-journal.org/html/if-you-build-it-14606.html.

[51] Aaron M. Renn, “Beyond Repair: America’s Infrastructure Crisis Is Local,” Manhattan Institute Issue Brief, October 22, 2015, at https://www.manhattan-institute.org/html/beyond-repair-america%E2%80%99s-infrastructure-crisis-local-7943.html.

[52] Scott Mayerowitz and Nathalie Tadena, “Stimulus Waste? The $3.4 Million Turtle Crossing,” ABC News, July 9, 2009, at https://abcnews.go.com/Business/Economy/story?id=8045022&page=1.

[53] Jonathan Karl, Michael Callahan, and Kristina Wong, “Public Stimulus Funds Spent on Private Wine Train,” ABC News, February 1, 2010, https://abcnews.go.com/GMA/public-stimulus-funds-spent-private-wine-train/story?id=9721488.

Reform Infrastructure Policy First, and Limit Corporate Welfare

Jessica Riedl

Senior Fellow in Budget, Tax, & Economic Policy

The Manhattan Institute for Policy Research

Testimony before the Committee on Education and Labor

United States House of Representatives

April 28, 2021

CLICK HERE for the hearing video

Good morning Chairman Scott, Ranking Member Foxx, and Members of the Committee. Thank you for inviting me to participate in today’s hearing.

My name is Jessica Riedl. I am a Senior Fellow in Budget, Tax, & Economic Policy at the Manhattan Institute for Policy Research. The views I express in this testimony are my own, and should not be construed as representing any official position of The Manhattan Institute.

My testimony today will critique President Biden’s American Jobs Plan proposal with four main points:[1]

1) The $2.6 trillion cost – what would be the most expensive non-emergency law in half of a century – is fiscally irresponsible given America’s daunting federal budget outlook.

2) America’s main infrastructure policy challenge is not funding, but rather the slow, bureaucratic, high-cost implementation of the policies. Spending another $1 trillion without making these programs more effective is a poor use of taxpayer dollars.

3) Despite the title of “American Jobs Plan,” there is a broad economic consensus that infrastructure policies do not provide short-term stimulus, and most new construction jobs are redistributed from other jobs.

4) The American Jobs Plan includes a historic expansion of corporate grants, loans, and contracts with little-to-no Congressional oversight. Federal micromanagement of innovation and research is the wrong approach.

The Daunting Federal Budget Outlook

First, we must address the sheer enormity of the President’s proposal in the context of Washington’s deteriorating fiscal outlook. The cost of the American Jobs Plan – $2.6 trillion over 8 years, an average of 1.25 percent of GDP – would represent the most expensive non-emergency spending bill in at least 50 years.[2] And it follows Washington enacting $5.4 trillion in (mostly-necessary) pandemic spending over the past 12 months – a total that comprises one-fifth of the entire national debt.

The underlying fiscal outlook is unsustainable. The national debt held by the public is already projected to double from $17 trillion to $35 trillion between the end of 2019 and 2030.[3] If President Biden’s entire campaign agenda is enacted, it would mean the national debt rising from $17 trillion to $42 trillion over that period.[4] This would leave the national debt at 130 percent of GDP, or one-quarter higher than at the end of World War II.

And it only gets worse thereafter. The Congressional Budget Office projects that – due overwhelmingly to escalating Social Security and Medicare shortfalls – Washington will run $100 trillion in baseline budget deficits over the next 30 years. This would leave the national debt at nearly 200 percent of GDP. At the end of that period, government interest payments will consume half of all tax revenues.[5]

That is the rosy scenario that assumes no new legislation is enacted, the 2017 tax cuts expire, no new recessions, and low interest rates. If interest rates exceed the CBO baseline assumption by even one percentage point, it would add $30 trillion in interest costs over three decades. Deficits would reach 18 percent of GDP, the debt would hit 264 percent of GDP, and two-thirds of all tax revenues would merely pay the interest on the debt.[6]

That is simply the CBO baseline, with interest rates rising by an additional percentage point.

And that is why it is shortsighted to assert that low interest rates make this the right time to borrow. Washington is behaving like a subprime homeowner and making long-term debt commitments based on short-term interest rates. The average maturity of the U.S. debt is five years and declining, which means most of the national debt would quickly roll over into any future interest rate increase.

In short, the federal government is essentially gambling our fiscal future on the hope that interest rates never again exceed four percent. Because if they do, simple math shows that combining rising interest rates with a debt approaching 200 or 300 percent of GDP risks a catastrophic debt crisis.

In that context, Washington should focus on paying for our current escalating commitments before undertaking the most expensive non-emergency spending bill in half a century.

Some suggest that fully financing this infrastructure bill with new taxes would make it fiscally responsible. That is not the case. If a family facing a $100,000 credit card debt suddenly finds a $20,000 windfall, spending it all on expensive new furniture would not be a responsible use of that money simply because it is “fully paid for” by the windfall. Similarly, there is a limited universe of plausible tax increases on families and businesses.[7]

Enacting all of these taxes would not even close the current 10-year projected budget deficit of $14.3 trillion, much less finance the President’s new spending proposals.[8] And even if they did, the escalating spending levels projected by CBO would re-open large budget deficits in the 2030s and 2040s.

In short, it will take aggressive tax increases – or drastic and painful spending cuts – just to finance Washington’s current commitments. Applying the easiest $2 trillion in taxes to a historic spending expansion simply leaves fewer options to close the remaining deficits. The only people left to pay the remaining taxes will be the middle class.

And we still have not even got to the forthcoming release of the “human infrastructure” portion of the that is expected to push the total price tag as high as $4 trillion.[9]

Large spending increases create the difficult financing choice between using up our limited plausible tax increases, and going deeper into debt. The American Jobs Plan includes approximately $1.8 trillion in new corporate taxes that dwarf the $300 billion in net corporate tax cuts (over ten years) enacted in the 2017 Tax Cuts and Jobs Act. That law reduced the corporate tax rate from 35 percent to 21 percent, but offset most of those savings by curtailing key business tax preferences. The president would raise the corporate rate back to 28 percent (33 percent including state taxes) – restoring America to the highest rate in the OECD – while also raising international taxes and retaining the lost 2017 tax deductions. Moreover, the president would severely weaken the 2017 tax reforms that finally gave U.S. multinational corporations a more level playing field when competing internationally. Now, once again, American companies abroad may face higher tax rates than our global competitors.

Additionally, the Tax Foundation estimates that:
“An increase in the federal corporate tax rate to 28 percent would raise the U.S. federal-state combined tax rate to 32.34 percent, highest in the OECD and among Group of Seven (G7) countries, harming U.S. economic competitiveness and increasing the cost of investment in America. We estimate that this would reduce long-run economic output by 0.8 percent, eliminate 159,000 jobs, and reduce wages by 0.7 percent. Workers across the income scale would bear much of the tax increase. For example, the bottom 20 percent of earners would on average see a 1.45 percent drop in after-tax income in the long run.”[10]

More broadly, the American Jobs Plan is so poorly-designed that it will harm the long-term economy. When combining the painful taxes and ineffective spending, the non-partisan economists at the Penn-Wharton Budget Model have projected that the American Jobs Plan will – over the long run:

· Create no net jobs,

· Reduce wages 0.8 percent,

· Reduce the capital stock 3 percent, and

· Reduce the GDP by 0.8% percent.[11]

Infrastructure: Throwing $1 Trillion at an Unreformed, Broken System

Our infrastructure can certainly use some upgrades, particularly its roads and electrical grid. That said, the crumbling state of American infrastructure has been overstated. A 2019 report of the World Economic Forum ranked the United States’ infrastructure first among the 10 geographically largest countries (i.e., the countries that likely have the most extensive infrastructure needs).[12]

Similarly, last year a Congressional Research Service report titled “The Condition of Highway Bridges Continues to Improve” noted that “the number and share of bridges in poor condition have dropped significantly over the past 20 years. Furthermore, repairing every deficient bridge in just a few years is unrealistic, and not every bridge repair is likely to be justified when considering both the economic benefits and costs. FHWA’s own analysis of bridge data suggests a relatively modest increase in spending could substantially reduce or eliminate the backlog of economically justifiable investments if sustained over a 20-year period.”[13]

Spending levels remain healthy. Transportation infrastructure spending (adjusted for inflation) rose from $332 to $371 billion between 2008 and 2018.[14] Government spending on transportation and water infrastructure at all levels is 2.3 percent of the GDP ($440 billion), just slightly below the 30-year average of 2.5 percent.[15] That said, there has been a modest shift from capital spending to operations and maintenance. Spending on energy and the electrical grid continues to rise, although challenges remain.[16]

America’s main infrastructure challenge is not spending levels, but rather its general ineffectiveness per dollar spent. In 2016, CBO released a report entitled “The Macroeconomic and Budgetary Effects of Federal Investment.” Economist Scott Hodge succinctly summarizes the reports three leading conclusions:[17]

1. “Federal investments deliver only half the economic returns as private sector investments, 5 percent versus 10 percent.

2. A dollar of federal spending results in only $0.67 worth of actual investment because state, local, and private sector entities reduce their spending in response to the federal dollars.

3. Federal investment financed by debt or taxes could do more economic harm than good because federal borrowing and taxes crowd out private investment. To avoid harming the economy, federal investments should be financed by cuts in other discretionary programs.”

Diving deeper, America’s transportation infrastructure is among the most expensive, bureaucratic, and slowly built in the world.[18] Consider that:

• · The cost of interstate construction spending per mile quadrupled from 1960 through 1990, and has continued to grow since then (adjusted for inflation).[19]

• · Labor costs are higher in part because the Davis-Bacon Act, which mandates that those awarded government contracts pay a “prevailing wage,” raises wage costs by as much as 22 percent.[20]

• · Government-mandated project labor agreements (PLAs) have been shown to significantly raise labor costs as well.[21]

• · America requires many more workers to do the same construction work as Europe.[22]

• · Most U.S. construction projects are performed only during the workday, while much of Europe has round-the-clock shifts.[23]

• · U.S. subway systems are by far the most expensive to build in the world, and in New York City cost quadruple the world average to build. The difference is high labor costs, poor contractor work, poor oversight, and defensive designs meant to avoid a cascade of stakeholder lawsuits related to environmental and historical artifact protection.[24]

• · Coordination between various local governments and stakeholders – while often necessary – brings endless delays and veto points, particularly for transportation projects.

• · Nearly a century ago, the Empire State Building was built in 410 days. More recently, Boston’s Big Dig took 25 years from planning to completion. Today, California’s high-speed rail is expected to take nearly 40 years from planning to completion. Some delays are helpful – we want to ensure safety and environmental protection – but the U.S. has become a global outlier.

A major cause of delays are the necessary-but-slow Environmental Impact Statements and Historical Artifact Reviews. Consider that:

• · Environmental reviews commonly exceed 1,000 pages and require on average seven years to complete (compared to no more than one to two years in Canada and 3.5 years in the European Union).[25]

• · Several environmental impact statements now take more than 17 years to complete – and no ground can be broken until the project has survived the legal process, including appeals by any litigant.[26]

• · In America – unlike many other countries – environmental and historical reviews can be challenged in court by a wide range of stakeholders, and these challenges can take years or even decades to be decided. Other countries use faster, non-judicial options to enforce these regulations, rather than expensive and time-consuming lawsuits that essentially become a project veto.[27]

• · Megan McArdle cites an egregious example: “The Southeastern High Speed Rail Corridor was proposed in 1992. You will be thrilled to learn that in September 2017, the Department of Transportation announced the completion of the project’s Tier II Draft Environmental Impact Statement.”[28]

President Biden’s physical infrastructure component throws $1 trillion at this broken system. In fact, it would raise costs further by tightening higher-wage requirements and imposing stricter “Buy America” requirements that limit trade and lower-cost options. And it allocates more funding to transit and high-speed rail ($165 billion) than highways, roads, and bridges ($115 billion) despite the surging costs[29] and declining public interest[30] in the former.

There is certainly a case for increasing infrastructure investment. But any new funding should be accompanied by reforms to spend that money more effectively.

The $213 billion proposal to build, rehabilitate, and retrofit millions of homes is expensive and vaguely defined. While public housing should obviously not be left in disrepair, lawmakers should focus more on housing vouchers that provide low-income families with more options to escape public housing if they so choose. Thus, building more private housing and addressing zoning restrictions would be more helpful. That said, local communities must play a lead role. Additionally, the proposal to “build, preserve, and retrofit homes” is vaguely defined, and it is unclear if tax credits will be sufficient to bring such expensive projects – especially given the push for more expensive unionized workers in an industry that is only 13 percent unionized.[31]

Additionally, the proposed $100 billion for K-12 school construction and renovation ($50 billion in direct grants plus $50 billion through bonds) is unnecessary. School construction has long been a responsibility of state and local governments, and federalizing this role engages in mission creep while diminishing the role of the governors, mayors, and school boards closer to these schools. Furthermore, states are flush with $180 billion in K-12 grants from earlier pandemic bills that well exceed their COVID-related expenses (which is why CBO assumes most will not be spent until between 2023 and 2028).[32] If Congress is adamant about disregarding federalism and funding school construction, it could instead clarify that these $180 billion in recent grant funds may be used for broader education expenses. State and local governments may also consider using the $350 billion in recent stimulus grants to close budget deficits that in many states no longer exist.[33]

Historic Expansion of Corporate Welfare – With Seemingly No Congressional Oversight

Yet only half of this proposal is truly about infrastructure. The largest single proposal is $400 billion for long-term care for the elderly and disabled. The rest of the American Jobs Plan largely consists of one of the largest corporate welfare proposals in history.

Specifically, the Biden administration is trying to position itself as the center of scientific innovation. Instead of merely encouraging research, development, and commercialization by providing tax incentives for investment and R&D, and tightening intellectual property and patent laws, Washington would micromanage the innovation process by steeply raising corporate tax rates, and then returning hundreds of billions of dollars in federal grants to companies that undertake government-approved projects. Advocates point to past federal loans to Tesla that were fully repaid by the flourishing company. However, today’s promising companies have no problem securing loans and equity from a financial system awash in capital and low interest rates.

The administration’s almost limitless discretion in dispensing hundreds of billions of dollars risks becoming a budget-busting slush fund for favored industries, businesses, and allies. The electric vehicle industry would receive $174 billion. Broadband subsidies would total $100 billion, even as the broadband industry already invests more than $50 billion annually in infrastructure.[34] There is a $25 billion “ambitious projects” fund in transportation, $52 billion domestic manufacturing fund, $31 billion venture capital fund, $27 billion “Clean Energy and Sustainability Accelerator,” $14 billion commerce competitiveness fund, $35 billion climate innovation fund, and $30 billion “innovation and job creation” fund.

Central planning is labor intensive, and distributing all these grants would require a staggering number of new federal offices, boards, and agencies. The Department of Commerce would create a $50 billion office “dedicated to monitoring domestic industrial capacity and funding investments to support production of critical goods.” The proposal would also spend “$20 billion in regional innovation hubs and a Community Revitalization Fund.” A “technology directorate” would coordinate countless new initiatives lavishing money on the computing, communications, energy, and biotech sectors. Another program would “bring together industry, academia, and government to advance technologies and capabilities critical to future competitiveness.”

But when Washington chooses the wrong winners and losers, the taxpayers pay. The last similar corporate welfare push was in the 2009 stimulus. Back then, a Washington Post investigation revealed that President Obama’s energy grant programs were so “infused with politics at every level” that the White House reportedly ignored red flags and expedited approval of a questionable $535 million loan guarantee to the well-connected clean energy company Solyndra.[35] It was later revealed that the company brazenly misled the administration on its application, and its subsequent bankruptcy left taxpayers holding the bag for the loan.[36]

More examples abound. The Advanced Technology Program (ATP) was a longstanding Department of Commerce program intended to provide last-resort corporate financing to bring their newest technologies to the market.[37] Several scathing GAO investigations revealed that ATP eventually became a slush fund for Fortune 500 companies, in which federal grant reviewers lacked expertise in the fields they reviewed, and were easily (and purposely) misled by grant applicants seeking easy federal cash with few strings attached.[38]

Consequently, just one-third of ATP grants successfully brought a product to market despite the technologies supposedly being ready to commercialize.[39] Both parties terminated the ATP in 2005 as well as its flawed successor program in 2011. The American Jobs Plan would resuscitate and expand the same failed approach, and give agencies even more money to hand out.

The idea that Washington can successfully pick innovation winners and losers competently and with no political interference reflects the triumph of hope over experience. Yet central planning is popular with those who aspire to do the planning, and with the well-connected industries hoping to cash in on the government spending gold rush.

Economists Agree: Infrastructure is not “Stimulus” or Job Creation

Finally, let’s address the “jobs” portion of the American Jobs Plan. The Biden Administration and other advocates assert that massive infrastructure spending will stimulate short-term economic growth and create jobs.

Economists across the political spectrum have debunked this myth for the obvious reason that infrastructure projects require several years of planning and regulatory reviews before they begin – at which point the economy has already recovered. In fact, as stated above, environmental impact statements typically take seven years to complete. After allocating $94 billion for mostly “shovel-ready” stimulus projects in 2009, President Obama later joked that “Shovel-ready was not as … shovel-ready as we expected.”

Former Obama White House chief economist Jason Furman and former Congressional Budget Office director Doug Elmendorf added that “In the past, infrastructure projects that were initiated as the economy started to weaken did not involve substantial amounts of spending until after the economy had recovered.”[40]

Delays are not the only stimulus barrier. Stanford economists John Cogan and John Taylor observed that state and local governments receiving 2009 federal stimulus infrastructure grants simply cut back on their own spending and borrowing almost dollar-for-dollar, completely negating the impact of the federal spending.[41]

The stimulus case is also undermined by Washington distributing spending largely based on politics rather than local economic needs. Harvard economist Edward Glaeser revealed that 2009 stimulus dollars were disproportionately distributed to regions with lower unemployment rates that did not need stimulus. On one level, this makes sense -- many high unemployment regions are rural or losing population, and are thus not the best candidates for widening local highways or adding high-speed rail. However, this approach exposes the disconnect between the goals of infrastructure and job creation. Glaeser also writes that, unlike the past infrastructure projects that relied more on manual labor, today’s “big infrastructure requires fancy equipment and skilled engineers, who aren’t likely to be unemployed.”[42]

Because of these factors, a review of 2009 stimulus highway projects shows no sustained effect on county-level employment.[43] Another study found that half of all new employees hired at firms that received stimulus dollars had peen poached from other firms (rather than coming from the ranks of the unemployed), and many of these companies were forced to turn down other construction projects to accommodate the new “stimulus” projects.[44]

Overall, CRS examined highway spending and concluded that “to the extent that financing new highways [comes from] reducing expenditures on other programs or by deficit finance . . . the net impact on the economy of highway construction in terms of both output and employment could be nullified or even negative.”[45]

Adherents to the infrastructure stimulus argument should consider the case of Japan, which responded to a sustained economic downturn with $6.3 trillion in infrastructure investment between 1991 and 2008.[46] One of the largest investments in airports, trains, highways, and tunnels in world history helped push Japan’s national debt from 38 percent to 140 percent of GDP, yet its per-capita GDP was roughly the same in 2008 as in 1994.

Third, political considerations can limit the stimulative effect of infrastructure. The geographic distribution of infrastructure spending has historically been driven by the political leverage of lawmakers, as well as political considerations within federal agencies. It is naïve to expect politics remove to be removed from the allocations.

Consequently, Washington has historically over-invested in large vanity projects that provide ribbon-cutting ceremonies. such as high-speed rail, the expansion of interstate highways, and the famous (and eventually cancelled) $223 million “Bridge to Nowhere.” However, economist Aaron Renn has shown that “America’s infrastructure crisis is local,” and repairing local streets, bridges, and potholes is a much higher and more affordable priority. These locally managed projects are often ineligible for federal funding.[47]

State governments face their own mis-aligned incentives with federal dollars. A state funding a $100 million project with its own transportation revenues must convince its taxpayers that the project will provide $100 million in value. By contrast, if the state is required to put up just $20 million of its own funds -- and can use a federal infrastructure grant for the remaining $80 million -- it need only convince its citizens that the project is worth $20 million. In other words, the ability to offload the costs on the federal government makes states more cavalier with how the funds are spent.

Consequently, past infrastructure stimulus bills and reauthorizations have not sufficiently relieved traffic congestion, repaired bridges and roads, or improved waterways. Instead, they brought unfinished high-speed rail projects, cost overruns, a $3.4 million “eco-passage”[48] to help turtles cross a highway in Tallahassee, Fla., and a $54 million “Napa Valley Wine Train.”[49] Better to eliminate the federal middleman and empower state and local governments to more easily raise the funds to finance local projects based on local priorities.

Conclusion: Fix the System First, and Be Fiscally Responsible

The laws of economics have not been repealed. Budget constraints still exist. Doubling or tripling the national debt is extraordinarily reckless. There is no guarantee that interest rates will never rise again – indeed such a result is overwhelmingly likely. There are no plausible taxes that can finance the projected spending levels, and counting on the Federal Reserve to monetize much of this debt is a recipe for economic chaos.

More specifically, a $400 billion long-term care expansion – whatever its merits – has no place in an infrastructure bill. Spending $1 trillion on infrastructure without fixing the underlying waste, inefficiencies, and delays in our system represents an extraordinary missed opportunity, and confuses spending levels with outcomes. Giving the administration carte blanche to hand out hundreds of billions of dollars in corporate welfare simply doubles down on past policy mistakes. Lawmakers should first reform the infrastructure costs and delays, and encourage states to use their $530 billion in federal aid to address local infrastructure priorities.

[1] White House, “Fact Sheet: The American Jobs Plan,” March 31, 2021, at https://www.whitehouse.gov/briefing-room/statements-releases/2021/03/31/fact-sheet-the-american-jobs-plan/.

[2] Preliminary cost estimate from “What’s in President Biden’s American Jobs Plan?” Committee for a Responsible Federal Budget, April 2, 2021 at https://www.crfb.org/blogs/whats-president-bidens-american-jobs-plan.

[3] Congressional Budget Office, The Budget and Economic Outlook: 2021 to 2031,” February 11, 2021, at https://www.cbo.gov/publication/56970. CBO projected a debt held by the public of $33.3 trillion at the end of FY 2030, before the latest stimulus bill added $2 trillion.

[4] Cost estimates of Biden campaign proposals are at Jessica Riedl, “Joe Biden Has an $11 Trillion Spending Plan. Can He Enact It?” The Dispatch, September 3, 2020, at

https://thedispatch.com/p/joe-biden-has-an-11-trillion-spending

. Most of the $11 trillion spending breakdown comes from the Biden campaign itself, and the $3.5 trillion in taxes comes from the Brookings/Urban Tax Policy Center.

[5] Calculated using Congressional Budget Office, “The 2020 Long-Term Budget Outlook,” at September 21, 2020, at https://www.cbo.gov/publication/56516 and the “Long-Term Budget Projections” tab.

For more analysis of these long-term deficits, see Jessica Riedl, “Spending, Taxes, & Deficits: A Book of Charts,” Manhattan Institute, October 26, 2020, at https://economics21.org/Jessica-riedl-on-taxes-spending-deficit.

[6] Calculated using Congressional Budget Office, “The 2020 Long-Term Budget Outlook,” at September 21, 2020, at https://www.cbo.gov/publication/56516 and the “Long-Term Budget Projections” tab.

[7] For a sample proposal to stabilize the long-term debt, see Jessica Riedl, “A Comprehensive Federal Budget Plan to Avert a Debt Crisis,” Manhattan Institute, October 10, 2018, at https://www.manhattan-institute.org/html/report-comprehensive-federal-budget-plan-avert-debt-crisis-11497.html.

[8] Congressional Budget Office, The Budget and Economic Outlook: 2021 to 2031,” February 11, 2021, at https://www.cbo.gov/publication/56970. CBO projected a $12.3 trillion deficit from FY 2022-2031, before the latest $2 trillion stimulus bill.

[9] Jeff Stein, “White House dramatically increased tax proposal as it sought to address tensions over next big spending plan,” Washington Post, March 29, 2021, at https://www.washingtonpost.com/us-policy/2021/03/29/biden-infrastructure-taxes-spending-plan/.

[10] Garrett Watson and William McBride, “Evaluating Proposals to Increase the Corporate Tax Rate and Levy a Minimum Tax on Corporate Book Income,” Tax Foundation, February 24, 2021, at https://taxfoundation.org/biden-corporate-income-tax-rate/.

[11] “President Biden’s $2.7 Trillion American Jobs Plan: Budgetary and Macroeconomic Effects,” Penn-Wharton Budget Model, April 7, 2021, at https://budgetmodel.wharton.upenn.edu/issues/2021/4/7/president-biden-american-jobs-plan-effects.

[12] Klaus Schwab (editor), The Global Competitiveness Report: 2019, World Economic Forum, at http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf. For a discussion, see also Charles Lane, “No, America’s infrastructure is not ‘crumbling’,” Washington Post, April 6, 2021 at https://www.washingtonpost.com/opinions/no-americas-infrastructure-is-not-crumbling/2021/04/06/ab97cc50-9554-11eb-a6d0-13d207aadb78_story.html.

[13] William J. Mallett, “Condition of Highway Bridges Continues to Improve,” Congressional Research Service Insight #IN11395, May 19, 2020, at https://crsreports.congress.gov/product/pdf/IN/IN11395.

[14] Bureau of Transportation Statistics, “Transportation Expenditures by Mode and Level of Government From Own Funds, Fiscal Year,” Department of Transportation, at https://www.bts.gov/content/transportation-expenditures-mode-and-level-government-own-funds-fiscal-year-current-millions. Figures then adjusted for inflation.

[15] Congressional Budget Office, “Public Spending on Transportation and Water Infrastructure, 1956 to 2017,” October 2018 at https://www.cbo.gov/system/files/2018-10/54539-Infrastructure.pdf.

[16] American Society of Civil Engineers, “2021 Report for America’s Infrastructure,” Energy chapter, at https://infrastructurereportcard.org/cat-item/energy/.

[17] Summary appears at Scott A. Hodge, “CBO Study: Benefits of Biden’s $2 Trillion Infrastructure Plan Won’t Outweigh $2 Trillion Tax Hike,” Tax Foundation, March 31, 2021, at https://taxfoundation.org/biden-infrastructure-spending-tax-hike/. For full report, see Congressional Budget Office, The Macroeconomic and Budgetary Effects of Federal Investment,” June 2016 at https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/51628-Federal_Investment.pdf.

[18] For an overview, see Josh Barro, “Why New York Can’t Have Nice Things. It costs three times more to build a subway station here than in London or Paris. What if we could change that?” New York Magazine, May 30, 2019, at https://nymag.com/intelligencer/2019/05/new-york-infrastructure-costs.html. Josh Barro, “Here’s Why We’ve Failed to Figure Out Why Infrastructure Costs So Much,” New York Magazine, July 24, 2019, at https://nymag.com/intelligencer/2019/07/why-we-cant-figure-out-why-infrastructure-is-so-expensive.html. Alex Marshall, “Why Can’t We Build Infrastructure Cheaply, Quickly and Well?” Governing, April 16, 2020, at https://www.governing.com/community/Why-Cant-We-Build-Infrastructure-Cheaply-Quickly-and-Well.html.

[19] Alon Levy, “So You Want to Do an Infrastructure Project,” Niskanen Center, March 16, 2021, at https://www.niskanencenter.org/wp-content/uploads/2021/03/levy-infastructure.pdf.

[20] Sarah Glassman, Michael Head, David G. Tuerck, and Paul Bachman, “The Federal Davis-Bacon Act: The Prevailing Mismeasure of Wages,” The Beacon Hill Institute at Suffolk University, February 2008, http://www.beaconhill.org/bhistudies/prevwage08/davisbaconprevwage080207final.pdf.

[21] For a background discussion of PLAs, see William F. Burke, BSBA, David G. Tuerck, Ph.D, “The Effects of Project Labor Agreements on Public School Construction in Connecticut,” The Beacon Hill Institute, January 2020, at https://beaconhill.org/wp-content/uploads/2020/02/CT-PLA-FinalRev-2020-0211.pdf.

[22] Alex Marshall, “Why Can’t We Build Infrastructure Cheaply, Quickly and Well?” Governing, April 16, 2020, at https://www.governing.com/community/Why-Cant-We-Build-Infrastructure-Cheaply-Quickly-and-Well.html.

[23] Alon Levy, “So You Want to Do an Infrastructure Project,” Niskanen Center, March 16, 2021, at https://www.niskanencenter.org/wp-content/uploads/2021/03/levy-infastructure.pdf.

[24] Alon Levy, “So You Want to Do an Infrastructure Project,” Niskanen Center, March 16, 2021, at https://www.niskanencenter.org/wp-content/uploads/2021/03/levy-infastructure.pdf.

[25] Mitch Daniels, Testimony before Senate Finance Committee, June 25, 2015, at https://www.purdue.edu/president/speeches/2015/150625-infrastructure-testimony.pdf.

[26] Alon Levy, “So You Want to Do an Infrastructure Project,” Niskanen Center, March 16, 2021, at https://www.niskanencenter.org/wp-content/uploads/2021/03/levy-infastructure.pdf.

[27] Alon Levy, “So You Want to Do an Infrastructure Project,” Niskanen Center, March 16, 2021, at https://www.niskanencenter.org/wp-content/uploads/2021/03/levy-infastructure.pdf.

[28] Megan McArdle, Twitter, February 13, 2019, at

.

[29] Kerry Jackson, “The Low Spark of High-Speed Rail: California’s bullet-train project is still under construction as delays and costs pile up,” at February 25, 2021, at https://www.city-journal.org/high-costs-construction-delays-plague-ca-high-speed-rail.

[30] Randal O’Toole, “Transit: The Urban Parasite. The costs of supporting the nation’s urban transit industry are rising, yet ridership is declining.” Cato Institute, Policy Analysis No. 889, April 20, 2020, at https://www.cato.org/policy-analysis/transit-urban-parasite.

[31] Bureau of Labor Statistics, “Union Members – 2020: Table 3. Union affiliation of employed wage and salary workers by occupation and industry” January 22, 2021, at https://www.bls.gov/news.release/union2.t03.htm.

[32] The most recent stimulus law contained $129 billion that is purportedly for school mitigation measures to accommodate social distancing and pandemic risks. However, the CDC has estimated that school mitigation strategies should cost no more than $23 billion. Moreover, education policy expert Dan Lips notes that state and local governments are still sitting on more than $50 billion in unused K-12 school relief funds from earlier emergency bills. Then what is the purpose of this additional $129 billion? Certainly not to address the pandemic; the CBO calculates that more than two-thirds of this spending would occur between 2023 and 2028.

[33] Committee for a Responsible Federal Budget, “State and Local Governments Do Not Need Half a Trillion in COVID Relief,” February 2017, 2021 at https://www.crfb.org/blogs/state-and-local-governments-do-not-need-half-trillion-covid-relief. For one example, the report states that “Though its revenue was flat in 2020, California is now facing a $25 billion surplus (originally $15 billion, with $10 billion more) thanks in part to a windfall from capital gains tax collections.”

[34] Michael Mandel and Elliott Long, “Investment Heroes 2020,” Progressive Policy Institute, July 24, 2020, at https://progressivepolicy.org/blogs/investment-heroes-2020/.

[35] Joe Stephens and Carol D. Leonnig, “Solyndra: Politics infused Obama energy programs,” Washington Post, December 25, 2011, at https://www.washingtonpost.com/solyndra-politics-infused-obama-energy-programs/2011/12/14/gIQA4HllHP_story.html.

[36] Katie Fehrenbacher, “Why the Solyndra mistake is still important to remember,” Fortune, August 27, 2015, at https://fortune.com/2015/08/27/remember-solyndra-mistake/.

[37] For an overview of this boondoggle of a program, see Jessica Riedl, “The Advanced Technology Program: Time to End this Corporate Welfare Handout,” Heritage Foundation Backgrounder July 15, 2003 at

https://www.heritage.org/budget-and-spending/report/the-advanced-technology-program-time-end-corporate-welfare-handout.

[38] See General Accounting Office, “Federal Research: Challenges to Implementing the Advanced Technology Program,” Report B-278569, March 2, 1998, at https://www.gao.gov/assets/rced/oce-98-83r.pdf. General Accounting Office, Advanced Technology Program: Inherent Factors in Selection Process Could Limit Identification of Similar Research, “GAO/RCED-00-114, April 2000, at https://www.gao.gov/assets/rced-00-114.pdf. General Accounting Office, “Measuring Performance: The Advanced Technology Program and Private-Sector Funding,” Report RCED-96-47, January 11, 1996, at https://www.gao.gov/products/rced-96-47.

[39] See Jessica Riedl, “The Advanced Technology Program: Time to End this Corporate Welfare Handout,” Heritage Foundation Backgrounder July 15, 2003 at

https://www.heritage.org/budget-and-spending/report/the-advanced-technology-program-time-end-corporate-welfare-handout.

[40] Lori Montgomery, “Critics Say Roads Projects Won’t Jump-Start Economy,” Washington Post, October 30, 2008 at https://www.washingtonpost.com/wp-dyn/content/article/2008/10/29/AR2008102904125.html.

[41] John Cogan and John Taylor, “The Obama Stimulus Impact? Zero,” Wall Street Journal, December 9, 2010, at https://www.wsj.com/articles/SB10001424052748704679204575646603792267296.

[42] Edward L. Glaeser, “If You Build It . . .Myths and realities about America’s infrastructure spending,” City Journal Summer 2016, at https://www.city-journal.org/html/if-you-build-it-14606.html.

[43] Edward L. Glaeser, “If You Build It . . .Myths and realities about America’s infrastructure spending,” City Journal Summer 2016, at https://www.city-journal.org/html/if-you-build-it-14606.html.

[44] Garett Jones and Daniel M. Rothschild, “The Limits of Infrastructure Stimulus,” Mercatus Center, Policy Brief, March 25, 2020 at https://www.mercatus.org/system/files/rothschild_and_jones_-_policy_brief_-_covid_series_-_lessons_learned_from_arra_for_infrastructure_stimulus_-_v1.pdf.

[45] David J. Cantor, “Highway Construction: Its Impact on the Economy,” Congressional Research Service Report for Congress No. 93-21E, January 6, 1993.

[46] Edward L. Glaeser, “If You Build It . . .Myths and realities about America’s infrastructure spending,” City Journal Summer 2016, at https://www.city-journal.org/html/if-you-build-it-14606.html.

[47] Aaron M. Renn, “Beyond Repair: America’s Infrastructure Crisis Is Local,” Manhattan Institute Issue Brief, October 22, 2015, at https://www.manhattan-institute.org/html/beyond-repair-america%E2%80%99s-infrastructure-crisis-local-7943.html.

[48] Scott Mayerowitz and Nathalie Tadena, “Stimulus Waste? The $3.4 Million Turtle Crossing,” ABC News, July 9, 2009, at https://abcnews.go.com/Business/Economy/story?id=8045022&page=1.

[49] Jonathan Karl, Michael Callahan, and Kristina Wong, “Public Stimulus Funds Spent on Private Wine Train,” ABC News, February 1, 2010, https://abcnews.go.com/GMA/public-stimulus-funds-spent-private-wine-train/story?id=9721488.

Reform Infrastructure Policy First, and Limit Corporate Welfare

Testimony before the

Committee on Financial Services

United States House of Representatives

April 14, 2021

Jessica Riedl

Senior Fellow in Budget, Tax, & Economic Policy

The Manhattan Institute for Policy Research

CLICK HERE for the hearing video

Good morning Chairwoman Waters, Ranking Member McHenry, and Members of the Committee. Thank you for inviting me to participate in today’s hearing.

My name is Jessica Riedl. I am a Senior Fellow in Budget, Tax, & Economic Policy at the Manhattan Institute for Policy Research. The views I express in this testimony are my own, and should not be construed as representing any official position of The Manhattan Institute.

My testimony today will critique President Biden’s American Jobs Plan proposal with four main points:[1]

1) The $2.6 trillion cost – what would be the most expensive non-emergency law in half of a century – is fiscally irresponsible given America’s daunting federal budget outlook.

2) America’s main infrastructure policy challenge is not funding, but rather the slow, bureaucratic, high-cost implementation of the policies. Spending another $1 trillion without making these programs more effective is a poor use of taxpayer dollars.

3) Despite the title of “American Jobs Plan,” there is a broad economic consensus that infrastructure policies do not provide short-term stimulus, and most new construction jobs are redistributed from other jobs.

4) The American Jobs Plan includes a historic expansion of corporate grants, loans, and contracts with little-to-no Congressional oversight. Federal micromanagement of innovation and research is the wrong approach.

The Daunting Federal Budget Outlook

First, we must address the sheer enormity of the President’s proposal in the context of Washington’s deteriorating fiscal outlook. The cost of the American Jobs Plan – $2.6 trillion over 8 years, an average of 1.25 percent of GDP – would represent the most expensive non-emergency spending bill in at least 50 years.[2] And it follows Washington enacting $5.4 trillion in (mostly-necessary) pandemic spending over the past 12 months – a total that comprises one-fifth of the entire national debt.

The underlying fiscal outlook is unsustainable. The national debt held by the public is already projected to double from $17 trillion to $35 trillion between the end of 2019 and 2030.[3] If President Biden’s entire campaign agenda is enacted, it would mean the national debt rising from $17 trillion to $42 trillion over that period.[4] This would leave the national debt at 130 percent of GDP, or one-quarter higher than at the end of World War II.

And it only gets worse thereafter. The Congressional Budget Office projects that – due overwhelmingly to escalating Social Security and Medicare shortfalls – Washington will run $100 trillion in baseline budget deficits over the next 30 years. This would leave the national debt at nearly 200 percent of GDP. At the end of that period, government interest payments will consume half of all tax revenues.[5]

That is the rosy scenario that assumes no new legislation is enacted, the 2017 tax cuts expire, no new recessions, and low interest rates. If interest rates exceed the CBO baseline assumption by even one percentage point, it would add $30 trillion in interest costs over three decades. Deficits would reach 18 percent of GDP, the debt would hit 264 percent of GDP, and two-thirds of all tax revenues would merely pay the interest on the debt.[6]

That is simply the CBO baseline, with interest rates rising by an additional percentage point.

And that is why it is shortsighted to assert that low interest rates make this the right time to borrow. Washington is behaving like a subprime homeowner and making long-term debt commitments based on short-term interest rates. The average maturity of the U.S. debt is five years and declining, which means most of the national debt would quickly roll over into any future interest rate increase.

In short, the federal government is essentially gambling our fiscal future on the hope that interest rates never again exceed four percent. Because if they do, simple math shows that combining rising interest rates with a debt approaching 200 or 300 percent of GDP risks a catastrophic debt crisis.

In that context, Washington should focus on paying for our current escalating commitments before undertaking the most expensive non-emergency spending bill in half a century.

Some suggest that fully financing this infrastructure bill with new taxes would make it fiscally responsible. That is not the case. If a family facing a $100,000 credit card debt suddenly finds a $20,000 windfall, spending it all on expensive new furniture would not be a responsible use of that money simply because it is “fully paid for” by the windfall. Similarly, there is a limited universe of plausible tax increases on families and businesses.[7]

Enacting all of these taxes would not even close the current 10-year projected budget deficit of $14.3 trillion, much less finance the President’s new spending proposals.[8] And even if they did, the escalating spending levels projected by CBO would re-open large budget deficits in the 2030s and 2040s.

In short, it will take aggressive tax increases – or drastic and painful spending cuts – just to finance Washington’s current commitments. Applying the easiest $2 trillion in taxes to a historic spending expansion simply leaves fewer options to close the remaining deficits. The only people left to pay the remaining taxes will be the middle class.

And we still have not even got to the forthcoming release of the “human infrastructure” portion of the that is expected to push the total price tag as high as $4 trillion.[9]

Large spending increases create the difficult financing choice between using up our limited plausible tax increases, and going deeper into debt. The American Jobs Plan includes approximately $1.8 trillion in new corporate taxes that dwarf the $300 billion in net corporate tax cuts (over ten years) enacted in the 2017 Tax Cuts and Jobs Act. That law reduced the corporate tax rate from 35 percent to 21 percent, but offset most of those savings by curtailing key business tax preferences. The president would raise the corporate rate back to 28 percent (33 percent including state taxes) – restoring America to the highest rate in the OECD – while also raising international taxes and retaining the lost 2017 tax deductions. Moreover, the president would severely weaken the 2017 tax reforms that finally gave U.S. multinational corporations a more level playing field when competing internationally. Now, once again, American companies abroad may face higher tax rates than our global competitors.

Additionally, the Tax Foundation estimates that:
“An increase in the federal corporate tax rate to 28 percent would raise the U.S. federal-state combined tax rate to 32.34 percent, highest in the OECD and among Group of Seven (G7) countries, harming U.S. economic competitiveness and increasing the cost of investment in America. We estimate that this would reduce long-run economic output by 0.8 percent, eliminate 159,000 jobs, and reduce wages by 0.7 percent. Workers across the income scale would bear much of the tax increase. For example, the bottom 20 percent of earners would on average see a 1.45 percent drop in after-tax income in the long run.”[10]

Infrastructure: Throwing $1 Trillion at an Unreformed, Broken System

Our infrastructure can certainly use some upgrades, particularly its roads and electrical grid. That said, the crumbling state of American infrastructure has been overstated. A 2019 report of the World Economic Forum ranked the United States’ infrastructure first among the 10 geographically largest countries (i.e., the countries that likely have the most extensive infrastructure needs).[11]

Similarly, last year a Congressional Research Service report titled “The Condition of Highway Bridges Continues to Improve” noted that “the number and share of bridges in poor condition have dropped significantly over the past 20 years. Furthermore, repairing every deficient bridge in just a few years is unrealistic, and not every bridge repair is likely to be justified when considering both the economic benefits and costs. FHWA’s own analysis of bridge data suggests a relatively modest increase in spending could substantially reduce or eliminate the backlog of economically justifiable investments if sustained over a 20-year period.”[12]

Spending levels remain healthy. Transportation infrastructure spending (adjusted for inflation) rose from $332 to $371 billion between 2008 and 2018.[13] Government spending on transportation and water infrastructure at all levels is 2.3 percent of the GDP ($440 billion), just slightly below the 30-year average of 2.5 percent.[14] That said, there has been a modest shift from capital spending to operations and maintenance. Spending on energy and the electrical grid continues to rise, although challenges remain.[15]

America’s main infrastructure challenge is not spending levels, but rather its general ineffectiveness per dollar spent. In 2016, CBO released a report entitled “The Macroeconomic and Budgetary Effects of Federal Investment.” Economist Scott Hodge succinctly summarizes the reports three leading conclusions:[16]

1. “Federal investments deliver only half the economic returns as private sector investments, 5 percent versus 10 percent.

2. A dollar of federal spending results in only $0.67 worth of actual investment because state, local, and private sector entities reduce their spending in response to the federal dollars.

3. Federal investment financed by debt or taxes could do more economic harm than good because federal borrowing and taxes crowd out private investment. To avoid harming the economy, federal investments should be financed by cuts in other discretionary programs.”

Diving deeper, America’s transportation infrastructure is among the most expensive, bureaucratic, and slowly built in the world.[17] Consider that:

• · The cost of interstate construction spending per mile quadrupled from 1960 through 1990, and has continued to grow since then (adjusted for inflation).[18]

• · Labor costs are higher in part because the Davis-Bacon Act, which mandates that those awarded government contracts pay a “prevailing wage,” raises wage costs by as much as 22 percent.[19]

• · America requires many more workers to do the same construction work as Europe.[20]

• · Most U.S. construction projects are performed only during the workday, while much of Europe has round-the-clock shifts.[21]

• · U.S. subway systems are by far the most expensive to build in the world, and in New York City cost quadruple the world average to build. The difference is high labor costs, poor contractor work, poor oversight, and defensive designs meant to avoid a cascade of stakeholder lawsuits related to environmental and historical artifact protection.[22]

• · Coordination between various local governments and stakeholders – while often necessary – brings endless delays and veto points, particularly for transportation projects.

• · Nearly a century ago, the Empire State Building was built in 410 days. More recently, Boston’s Big Dig took 25 years from planning to completion. Today, California’s high-speed rail is expected to take nearly 40 years from planning to completion. Some delays are helpful – we want to ensure safety and environmental protection – but the U.S. has become a global outlier.

A major cause of delays are the necessary-but-slow Environmental Impact Statements and Historical Artifact Reviews. Consider that:

• · Environmental reviews commonly exceed 1,000 pages and require on average seven years to complete (compared to no more than one to two years in Canada and 3.5 years in the European Union).[23]

• · Several environmental impact statements now take more than 17 years to complete – and no ground can be broken until the project has survived the legal process, including appeals by any litigant.[24]

• · In America – unlike many other countries – environmental and historical reviews can be challenged in court by a wide range of stakeholders, and these challenges can take years or even decades to be decided. Other countries use faster, non-judicial options to enforce these regulations, rather than expensive and time-consuming lawsuits that essentially become a project veto.[25]

• · Citing one particularly egregious example, columnist Megan McArdle notes that “The Southeastern High Speed Rail Corridor was proposed in 1992. You will be thrilled to learn that in September 2017, the Department of Transportation announced the completion of the project’s Tier II Draft Environmental Impact Statement.”[26]

President Biden’s physical infrastructure component throws $1 trillion at this broken system. In fact, it would raise costs further by tightening higher-wage requirements and imposing stricter “Buy America” requirements that limit trade and lower-cost options. And it allocates more funding to transit and high-speed rail ($165 billion) than highways, roads, and bridges ($115 billion) despite the surging costs[27] and declining public interest[28] in the former.

There is certainly a case for increasing infrastructure investment. But any new funding should be accompanied by reforms to spend that money more effectively.

The $213 billion proposal to build, rehabilitate, and retrofit millions of homes is expensive and vaguely defined. While public housing should obviously not be left in disrepair, lawmakers should focus more on housing vouchers that provide low-income families with more options to escape public housing if they so choose. Thus, building more private housing and addressing zoning restrictions would be more helpful. That said, local communities must play a lead role. Additionally, the proposal to “build, preserve, and retrofit homes” is vaguely defined, and it is unclear if tax credits will be sufficient to bring such expensive projects – especially given the push for more expensive unionized workers in an industry that is only 13 percent unionized.[29]

A more effective infrastructure initiative would not require such extreme federal micromanagement – or as much new funding. State and local governments are sitting on $350 billion in recent stimulus grants to close budget deficits that in many states no longer exist.[30] Infrastructure investment would be a perfect use of this one-time cash infusion. Additionally, The President’s call for $50 billion in direct funding for public school building upgrades and construction is not necessary when states are flush with $180 billion in K-12 capital grants from earlier stimulus bills.[31]

Historic Expansion of Corporate Welfare – With Seemingly No Congressional Oversight

Yet only half of this proposal is truly about infrastructure. The largest single proposal is $400 billion for long-term care for the elderly and disabled. The rest of the American Jobs Plan largely consists of one of the largest corporate welfare proposals in history.

Specifically, the Biden administration is trying to position itself as the center of scientific innovation. Instead of merely encouraging research, development, and commercialization by providing tax incentives for investment and R&D, and tightening intellectual property and patent laws, Washington would micromanage the innovation process by steeply raising corporate tax rates, and then returning hundreds of billions of dollars in federal grants to companies that undertake government-approved projects. Advocates point to past federal loans to Tesla that were fully repaid by the flourishing company. However, today’s promising companies have no problem securing loans and equity from a financial system awash in capital and low interest rates.

The administration’s almost limitless discretion in dispensing hundreds of billions of dollars risks becoming a budget-busting slush fund for favored industries, businesses, and allies. The electric vehicle industry would receive $174 billion. Broadband subsidies would total $100 billion, even as the broadband industry already invests more than $50 billion annually in infrastructure.[32] There is a $25 billion “ambitious projects” fund in transportation, $52 billion domestic manufacturing fund, $31 billion venture capital fund, $27 billion “Clean Energy and Sustainability Accelerator,” $14 billion commerce competitiveness fund, $35 billion climate innovation fund, and $30 billion “innovation and job creation” fund.

Central planning is labor intensive, and distributing all these grants would require a staggering number of new federal offices, boards, and agencies. The Department of Commerce would create a $50 billion office “dedicated to monitoring domestic industrial capacity and funding investments to support production of critical goods.” The proposal would also spend “$20 billion in regional innovation hubs and a Community Revitalization Fund.” A “technology directorate” would coordinate countless new initiatives lavishing money on the computing, communications, energy, and biotech sectors. Another program would “bring together industry, academia, and government to advance technologies and capabilities critical to future competitiveness.”

But when Washington chooses the wrong winners and losers, the taxpayers pay. The last similar corporate welfare push was in the 2009 stimulus. Back then, a Washington Post investigation revealed that President Obama’s energy grant programs were so “infused with politics at every level” that the White House reportedly ignored red flags and expedited approval of a questionable $535 million loan guarantee to the well-connected clean energy company Solyndra.[33] It was later revealed that the company brazenly misled the administration on its application, and its subsequent bankruptcy left taxpayers holding the bag for the loan.[34]

More examples abound. The Advanced Technology Program (ATP) was a longstanding Department of Commerce program intended to provide last-resort corporate financing to bring their newest technologies to the market.[35] Several scathing GAO investigations revealed that ATP eventually became a slush fund for Fortune 500 companies, in which federal grant reviewers lacked expertise in the fields they reviewed, and were easily (and purposely) misled by grant applicants seeking easy federal cash with few strings attached.[36]

Consequently, just one-third of ATP grants successfully brought a product to market despite the technologies supposedly being ready to commercialize.[37] Both parties terminated the ATP in 2005 as well as its flawed successor program in 2011. The American Jobs Plan would resuscitate and expand the same failed approach, and give agencies even more money to hand out.

The idea that Washington can successfully pick innovation winners and losers competently and with no political interference reflects the triumph of hope over experience. Yet central planning is popular with those who aspire to do the planning, and with the well-connected industries hoping to cash in on the government spending gold rush.

Economists Agree: Infrastructure is not “Stimulus” or Job Creation

Finally, let’s address the “jobs” portion of the American Jobs Plan. The Biden Administration and other advocates assert that massive infrastructure spending will stimulate short-term economic growth and create jobs.

Economists across the political spectrum have debunked this myth for the obvious reason that infrastructure projects require several years of planning and regulatory reviews before they begin – at which point the economy has already recovered. In fact, as stated above, environmental impact statements typically take seven years to complete. After allocating $94 billion for mostly “shovel-ready” stimulus projects in 2009, President Obama later joked that “Shovel-ready was not as … shovel-ready as we expected.”

Former Obama White House chief economist Jason Furman and former Congressional Budget Office director Doug Elmendorf added that “In the past, infrastructure projects that were initiated as the economy started to weaken did not involve substantial amounts of spending until after the economy had recovered.”[38]

Delays are not the only stimulus barrier. Stanford economists John Cogan and John Taylor observed that state and local governments receiving 2009 federal stimulus infrastructure grants simply cut back on their own spending and borrowing almost dollar-for-dollar, completely negating the impact of the federal spending.[39]

The stimulus case is also undermined by Washington distributing spending largely based on politics rather than local economic needs. Harvard economist Edward Glaeser revealed that 2009 stimulus dollars were disproportionately distributed to regions with lower unemployment rates that did not need stimulus. On one level, this makes sense -- many high unemployment regions are rural or losing population, and are thus not the best candidates for widening local highways or adding high-speed rail. However, this approach exposes the disconnect between the goals of infrastructure and job creation. Glaeser also writes that, unlike the past infrastructure projects that relied more on manual labor, today’s “big infrastructure requires fancy equipment and skilled engineers, who aren’t likely to be unemployed.”[40]

Because of these factors, a review of 2009 stimulus highway projects shows no sustained effect on county-level employment.[41] Another study found that half of all new employees hired at firms that received stimulus dollars had peen poached from other firms (rather than coming from the ranks of the unemployed), and many of these companies were forced to turn down other construction projects to accommodate the new “stimulus” projects.[42]

Overall, CRS examined highway spending and concluded that “to the extent that financing new highways [comes from] reducing expenditures on other programs or by deficit finance . . . the net impact on the economy of highway construction in terms of both output and employment could be nullified or even negative.”[43]

Adherents to the infrastructure stimulus argument should consider the case of Japan, which responded to a sustained economic downturn with $6.3 trillion in infrastructure investment between 1991 and 2008.[44] One of the largest investments in airports, trains, highways, and tunnels in world history helped push Japan’s national debt from 38 percent to 140 percent of GDP, yet its per-capita GDP was roughly the same in 2008 as in 1994.

Third, political considerations can limit the stimulative effect of infrastructure. The geographic distribution of infrastructure spending has historically been driven by the political leverage of lawmakers, as well as political considerations within federal agencies. It is naïve to expect politics remove to be removed from the allocations.

Consequently, Washington has historically over-invested in large vanity projects that provide ribbon-cutting ceremonies. such as high-speed rail, the expansion of interstate highways, and the famous (and eventually cancelled) $223 million “Bridge to Nowhere.” However, economist Aaron Renn has shown that “America’s infrastructure crisis is local,” and repairing local streets, bridges, and potholes is a much higher and more affordable priority. These locally managed projects are often ineligible for federal funding.[45]

State governments face their own mis-aligned incentives with federal dollars. A state funding a $100 million project with its own transportation revenues must convince its taxpayers that the project will provide $100 million in value. By contrast, if the state is required to put up just $20 million of its own funds -- and can use a federal infrastructure grant for the remaining $80 million -- it need only convince its citizens that the project is worth $20 million. In other words, the ability to offload the costs on the federal government makes states more cavalier with how the funds are spent.

Consequently, past infrastructure stimulus bills and reauthorizations have not sufficiently relieved traffic congestion, repaired bridges and roads, or improved waterways. Instead, they brought unfinished high-speed rail projects, cost overruns, a $3.4 million “eco-passage”[46] to help turtles cross a highway in Tallahassee, Fla., and a $54 million “Napa Valley Wine Train.”[47] Better to eliminate the federal middleman and empower state and local governments to more easily raise the funds to finance local projects based on local priorities.

Conclusion: Fix the System First, and Be Fiscally Responsible

The laws of economics have not been repealed. Budget constraints still exist. Doubling or tripling the national debt is extraordinarily reckless. There is no guarantee that interest rates will never rise again – indeed such a result is overwhelmingly likely. There are no plausible taxes that can finance the projected spending levels, and counting on the Federal Reserve to monetize much of this debt is a recipe for economic chaos.

More specifically, a $400 billion long-term care expansion – whatever its merits – has no place in an infrastructure bill. Spending $1 trillion on infrastructure without fixing the underlying waste, inefficiencies, and delays in our system represents an extraordinary missed opportunity, and confuses spending levels with outcomes. Giving the administration carte blanche to hand out hundreds of billions of dollars in corporate welfare simply doubles down on past policy mistakes. Lawmakers should first reform the infrastructure costs and delays, and encourage states to use their $530 billion in federal aid to address local infrastructure priorities.

[1] White House, “Fact Sheet: The American Jobs Plan,” March 31, 2021, at https://www.whitehouse.gov/briefing-room/statements-releases/2021/03/31/fact-sheet-the-american-jobs-plan/.

[2] Preliminary cost estimate from “What’s in President Biden’s American Jobs Plan?” Committee for a Responsible Federal Budget, April 2, 2021 at https://www.crfb.org/blogs/whats-president-bidens-american-jobs-plan.

[3] Congressional Budget Office, The Budget and Economic Outlook: 2021 to 2031,” February 11, 2021, at https://www.cbo.gov/publication/56970. CBO projected a debt held by the public of $33.3 trillion at the end of FY 2030, before the latest stimulus bill added $2 trillion.

[4] Cost estimates of Biden campaign proposals are at Jessica Riedl, “Joe Biden Has an $11 Trillion Spending Plan. Can He Enact It?” The Dispatch, September 3, 2020, at

https://thedispatch.com/p/joe-biden-has-an-11-trillion-spending

. Most of the $11 trillion spending breakdown comes from the Biden campaign itself, and the $3.5 trillion in taxes comes from the Brookings/Urban Tax Policy Center.

[5] Calculated using Congressional Budget Office, “The 2020 Long-Term Budget Outlook,” at September 21, 2020, at https://www.cbo.gov/publication/56516 and the “Long-Term Budget Projections” tab.

For more analysis of these long-term deficits, see Jessica Riedl, “Spending, Taxes, & Deficits: A Book of Charts,” Manhattan Institute, October 26, 2020, at https://economics21.org/Jessica-riedl-on-taxes-spending-deficit.

[6] Calculated using Congressional Budget Office, “The 2020 Long-Term Budget Outlook,” at September 21, 2020, at https://www.cbo.gov/publication/56516 and the “Long-Term Budget Projections” tab.

[7] For a sample proposal to stabilize the long-term debt, see Jessica Riedl, “A Comprehensive Federal Budget Plan to Avert a Debt Crisis,” Manhattan Institute, October 10, 2018, at https://www.manhattan-institute.org/html/report-comprehensive-federal-budget-plan-avert-debt-crisis-11497.html.

[8] Congressional Budget Office, The Budget and Economic Outlook: 2021 to 2031,” February 11, 2021, at https://www.cbo.gov/publication/56970. CBO projected a $12.3 trillion deficit from FY 2022-2031, before the latest $2 trillion stimulus bill.

[9] Jeff Stein, “White House dramatically increased tax proposal as it sought to address tensions over next big spending plan,” Washington Post, March 29, 2021, at https://www.washingtonpost.com/us-policy/2021/03/29/biden-infrastructure-taxes-spending-plan/.

[10] Garrett Watson and William McBride, “Evaluating Proposals to Increase the Corporate Tax Rate and Levy a Minimum Tax on Corporate Book Income,” Tax Foundation, February 24, 2021, at https://taxfoundation.org/biden-corporate-income-tax-rate/.

[11] Klaus Schwab (editor), The Global Competitiveness Report: 2019, World Economic Forum, at http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf. For a discussion, see also Charles Lane, “No, America’s infrastructure is not ‘crumbling’,” Washington Post, April 6, 2021 at https://www.washingtonpost.com/opinions/no-americas-infrastructure-is-not-crumbling/2021/04/06/ab97cc50-9554-11eb-a6d0-13d207aadb78_story.html.

[12] William J. Mallett, “Condition of Highway Bridges Continues to Improve,” Congressional Research Service Insight #IN11395, May 19, 2020, at https://crsreports.congress.gov/product/pdf/IN/IN11395.

[13] Bureau of Transportation Statistics, “Transportation Expenditures by Mode and Level of Government From Own Funds, Fiscal Year,” Department of Transportation, at https://www.bts.gov/content/transportation-expenditures-mode-and-level-government-own-funds-fiscal-year-current-millions. Figures then adjusted for inflation.

[14] Congressional Budget Office, “Public Spending on Transportation and Water Infrastructure, 1956 to 2017,” October 2018 at https://www.cbo.gov/system/files/2018-10/54539-Infrastructure.pdf.

[15] American Society of Civil Engineers, “2021 Report for America’s Infrastructure,” Energy chapter, at https://infrastructurereportcard.org/cat-item/energy/.

[16] Summary appears at Scott A. Hodge, “CBO Study: Benefits of Biden’s $2 Trillion Infrastructure Plan Won’t Outweigh $2 Trillion Tax Hike,” Tax Foundation, March 31, 2021, at https://taxfoundation.org/biden-infrastructure-spending-tax-hike/. For full report, see Congressional Budget Office, The Macroeconomic and Budgetary Effects of Federal Investment,” June 2016 at https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/51628-Federal_Investment.pdf.

[17] For an overview, see Josh Barro, “Why New York Can’t Have Nice Things. It costs three times more to build a subway station here than in London or Paris. What if we could change that?” New York Magazine, May 30, 2019, at https://nymag.com/intelligencer/2019/05/new-york-infrastructure-costs.html. Josh Barro, “Here’s Why We’ve Failed to Figure Out Why Infrastructure Costs So Much,” New York Magazine, July 24, 2019, at https://nymag.com/intelligencer/2019/07/why-we-cant-figure-out-why-infrastructure-is-so-expensive.html. Alex Marshall, “Why Can’t We Build Infrastructure Cheaply, Quickly and Well?” Governing, April 16, 2020, at https://www.governing.com/community/Why-Cant-We-Build-Infrastructure-Cheaply-Quickly-and-Well.html.

[18] Alon Levy, “So You Want to Do an Infrastructure Project,” Niskanen Center, March 16, 2021, at https://www.niskanencenter.org/wp-content/uploads/2021/03/levy-infastructure.pdf.

[19] Sarah Glassman, Michael Head, David G. Tuerck, and Paul Bachman, “The Federal Davis-Bacon Act: The Prevailing Mismeasure of Wages,” The Beacon Hill Institute at Suffolk University, February 2008, http://www.beaconhill.org/bhistudies/prevwage08/davisbaconprevwage080207final.pdf.

[20] Alex Marshall, “Why Can’t We Build Infrastructure Cheaply, Quickly and Well?” Governing, April 16, 2020, at https://www.governing.com/community/Why-Cant-We-Build-Infrastructure-Cheaply-Quickly-and-Well.html.

[21] Alon Levy, “So You Want to Do an Infrastructure Project,” Niskanen Center, March 16, 2021, at https://www.niskanencenter.org/wp-content/uploads/2021/03/levy-infastructure.pdf.

[22] Alon Levy, “So You Want to Do an Infrastructure Project,” Niskanen Center, March 16, 2021, at https://www.niskanencenter.org/wp-content/uploads/2021/03/levy-infastructure.pdf.

[23] Mitch Daniels, Testimony before Senate Finance Committee, June 25, 2015, at https://www.purdue.edu/president/speeches/2015/150625-infrastructure-testimony.pdf.

[24] Alon Levy, “So You Want to Do an Infrastructure Project,” Niskanen Center, March 16, 2021, at https://www.niskanencenter.org/wp-content/uploads/2021/03/levy-infastructure.pdf.

[25] Alon Levy, “So You Want to Do an Infrastructure Project,” Niskanen Center, March 16, 2021, at https://www.niskanencenter.org/wp-content/uploads/2021/03/levy-infastructure.pdf.

[26] Megan McArdle, Twitter, February 13, 2019, at

.

[27] Kerry Jackson, “The Low Spark of High-Speed Rail: California’s bullet-train project is still under construction as delays and costs pile up,” at February 25, 2021, at https://www.city-journal.org/high-costs-construction-delays-plague-ca-high-speed-rail.

[28] Randal O’Toole, “Transit: The Urban Parasite. The costs of supporting the nation’s urban transit industry are rising, yet ridership is declining.” Cato Institute, Policy Analysis No. 889, April 20, 2020, at https://www.cato.org/policy-analysis/transit-urban-parasite.

[29] Bureau of Labor Statistics, “Union Members – 2020: Table 3. Union affiliation of employed wage and salary workers by occupation and industry” January 22, 2021, at https://www.bls.gov/news.release/union2.t03.htm.

[30] Committee for a Responsible Federal Budget, “State and Local Governments Do Not Need Half a Trillion in COVID Relief,” February 2017, 2021 at https://www.crfb.org/blogs/state-and-local-governments-do-not-need-half-trillion-covid-relief. For one example, the report states that “Though its revenue was flat in 2020, California is now facing a $25 billion surplus (originally $15 billion, with $10 billion more) thanks in part to a windfall from capital gains tax collections.”

[31] The most recent stimulus law contained $129 billion that is purportedly for school mitigation measures to accommodate social distancing and pandemic risks. However, the CDC has estimated that school mitigation strategies should cost no more than $23 billion. Moreover, education policy expert Dan Lips notes that state and local governments are still sitting on more than $50 billion in unused K-12 school relief funds from earlier emergency bills. Then what is the purpose of this additional $129 billion? Certainly not to address the pandemic; the CBO calculates that more than two-thirds of this spending would occur between 2023 and 2028.

[32] Michael Mandel and Elliott Long, “Investment Heroes 2020,” Progressive Policy Institute, July 24, 2020, at https://progressivepolicy.org/blogs/investment-heroes-2020/.

[33] Joe Stephens and Carol D. Leonnig, “Solyndra: Politics infused Obama energy programs,” Washington Post, December 25, 2011, at https://www.washingtonpost.com/solyndra-politics-infused-obama-energy-programs/2011/12/14/gIQA4HllHP_story.html.

[34] Katie Fehrenbacher, “Why the Solyndra mistake is still important to remember,” Fortune, August 27, 2015, at https://fortune.com/2015/08/27/remember-solyndra-mistake/.

[35] For an overview of this boondoggle of a program, see Jessica Riedl, “The Advanced Technology Program: Time to End this Corporate Welfare Handout,” Heritage Foundation Backgrounder July 15, 2003 at

https://www.heritage.org/budget-and-spending/report/the-advanced-technology-program-time-end-corporate-welfare-handout.

[36] See General Accounting Office, “Federal Research: Challenges to Implementing the Advanced Technology Program,” Report B-278569, March 2, 1998, at https://www.gao.gov/assets/rced/oce-98-83r.pdf. General Accounting Office, Advanced Technology Program: Inherent Factors in Selection Process Could Limit Identification of Similar Research, “GAO/RCED-00-114, April 2000, at https://www.gao.gov/assets/rced-00-114.pdf. General Accounting Office, “Measuring Performance: The Advanced Technology Program and Private-Sector Funding,” Report RCED-96-47, January 11, 1996, at https://www.gao.gov/products/rced-96-47.

[37] See Jessica Riedl, “The Advanced Technology Program: Time to End this Corporate Welfare Handout,” Heritage Foundation Backgrounder July 15, 2003 at

https://www.heritage.org/budget-and-spending/report/the-advanced-technology-program-time-end-corporate-welfare-handout.

[38] Lori Montgomery, “Critics Say Roads Projects Won’t Jump-Start Economy,” Washington Post, October 30, 2008 at https://www.washingtonpost.com/wp-dyn/content/article/2008/10/29/AR2008102904125.html.

[39] John Cogan and John Taylor, “The Obama Stimulus Impact? Zero,” Wall Street Journal, December 9, 2010, at https://www.wsj.com/articles/SB10001424052748704679204575646603792267296.

[40] Edward L. Glaeser, “If You Build It . . .Myths and realities about America’s infrastructure spending,” City Journal Summer 2016, at https://www.city-journal.org/html/if-you-build-it-14606.html.

[41] Edward L. Glaeser, “If You Build It . . .Myths and realities about America’s infrastructure spending,” City Journal Summer 2016, at https://www.city-journal.org/html/if-you-build-it-14606.html.

[42] Garett Jones and Daniel M. Rothschild, “The Limits of Infrastructure Stimulus,” Mercatus Center, Policy Brief, March 25, 2020 at https://www.mercatus.org/system/files/rothschild_and_jones_-_policy_brief_-_covid_series_-_lessons_learned_from_arra_for_infrastructure_stimulus_-_v1.pdf.

[43] David J. Cantor, “Highway Construction: Its Impact on the Economy,” Congressional Research Service Report for Congress No. 93-21E, January 6, 1993.

[44] Edward L. Glaeser, “If You Build It . . .Myths and realities about America’s infrastructure spending,” City Journal Summer 2016, at https://www.city-journal.org/html/if-you-build-it-14606.html.

[45] Aaron M. Renn, “Beyond Repair: America’s Infrastructure Crisis Is Local,” Manhattan Institute Issue Brief, October 22, 2015, at https://www.manhattan-institute.org/html/beyond-repair-america%E2%80%99s-infrastructure-crisis-local-7943.html.

[46] Scott Mayerowitz and Nathalie Tadena, “Stimulus Waste? The $3.4 Million Turtle Crossing,” ABC News, July 9, 2009, at https://abcnews.go.com/Business/Economy/story?id=8045022&page=1.

[47] Jonathan Karl, Michael Callahan, and Kristina Wong, “Public Stimulus Funds Spent on Private Wine Train,” ABC News, February 1, 2010, https://abcnews.go.com/GMA/public-stimulus-funds-spent-private-wine-train/story?id=9721488.

Watch video of the hearing on the Committee website

Social Security & Medicare Shortfalls Exceed $100 Trillion Over 30 Years

Testimony before the

Committee on Homeland Security and Governmental Affairs

United States Senate

January 28, 2020

Jessica Riedl

Senior Fellow in Budget, Tax, & Economic Policy

The Manhattan Institute for Policy Research

Main Takeaways from Jessica Riedl’s Testimony

• · The budget deficit is on pace to surpass $1 trillion this year – on its way to $2 trillion within a decade if current policies continue. And a return to even 1990s interest rates would push the projected annual budget deficit to $3 trillion in ten years.

• · The long-term picture is even worse. The CBO projects a staggering $80 trillion budget deficit over the next 30 years, even assuming all recent tax cuts expire. That would leave the national debt at nearly 150% of GDP.

Why the Annual Budget Deficit Will Rise an Additional $1.3 Trillion Over the Next Decade

• · The annual cost of recent tax cuts ($250 billion), and higher discretionary spending caps ($170 billion) helped push the annual deficit up to $900 billion. Yet the deficit is set to rise by an additional $1.3 trillion (reaching $2.2 trillion) over the next decade, under CBO’s current-policy baseline.

• · The additional $1.3 trillion growth in the deficit is driven by general revenue transfers into the Social Security and Medicare systems – which will rise from $440 billion to $1,656 billion between 2019 and 2029 (including resulting interest costs).

• Social Security and Medicare are not fully self-financed through premiums, payroll taxes, and other dedicated taxes. They require an annual general revenue transfer to pay all promised benefits (some of these transfers are credited as interest payments to trust funds). And these transfers – as well as the interest costs of the Treasury borrowing to cover these transfers – are soaring.

• In total, over the next decade, Social Security will require a general revenue transfer of $2.5 trillion, and Medicare will require $5.9 trillion. When including the $1.8 trillion in resulting interest costs from the portion of that spending that must be borrowed, the Social Security and Medicare systems will drain $10.2 trillion from general revenues over the next decade.

Why the 30-Year Deficit is Projected at $80 Trillion

• Over the next 30 years, CBO projects that the Social Security and Medicare systems will run a $103 trillion cash shortfall. The rest of the budget is projected to run a $23 trillion surplus.

The projected $103 trillion Social Security and Medicare cash shortfall breaks down as follows:

• Social Security will run a $19 trillion cash deficit (collecting $56 trillion, spending $75 trillion).

• Medicare will run a $44 trillion cash deficit (collecting $17 trillion, spending $61 trillion).

• These shortfalls are directly responsible for $40 trillion of the coming interest costs on the debt.

• CBO projects that the annual Social Security and Medicare shortfalls (and their interest costs) will leap from 2.0% to 12.1% of GDP, over the next 30 years. The rest of the budget in 2049 is projected to enjoy a 3.4% of GDP surplus – a result of both rising revenues and falling spending elsewhere.

Conclusion

• The long-term debt problem is overwhelmingly a Social Security and Medicare issue. The rest of the budget will run a growing surplus, but cannot balance out a $103 trillion projected shortfall within Social Security and Medicare.

• The TRUST Act would provide a path for lawmakers to begin addressing these shortfalls.

  ---

Good morning Chairman Johnson, Ranking Member Peters, and Members of the Committee. Thank you for inviting me to participate in today’s hearing.

My name is Jessica Riedl. I am a Senior Fellow in Budget, Tax, & Economic Policy at the Manhattan Institute for Policy Research. The views I express in this testimony are my own, and should not be construed as representing any official position of The Manhattan Institute.

Few Americans fully comprehend the fiscal avalanche that has begun. The budget deficit should surpass $1 trillion as soon as next year – on its way to $2 trillion within a decade if current policies continue. And if interest rates merely rise back to 1990s levels, that would push the projected annual budget deficit to $3 trillion in ten years. This is according to data from the Congressional Budget Office.

Over the next 30 years, Social Security and Medicare face a combined $103 trillion cash deficit, which will push the national debt to nearly 150% of GDP. At that point, interest on that debt would consume 40% of all tax revenues (or more if interest rates rise). Unless reforms are enacted, global markets will, at some point, stop lending to the U.S. at plausible interest rates. When that event occurs, or even approaches, interest rates will soar, and the federal government will not be able to pay its bills, with dire consequences for the U.S. economy.

I. Drivers of the Rising Ten-Year Budget Deficit

CBO’s current-policy baseline – which adjusts for the costs of extending the 2017 tax cuts, delayed ACA health taxes, annual tax extenders, and the recent increase in the discretionary spending caps – assumes that the budget deficit will leap $898 billion to $2,188 billion over the next decade (see chart 1), with a total ten-year deficit of $15.5 trillion.¹

A portion of the underlying deficit is driven by the $250 billion annual cost of the recent tax cuts, and the $150 billion annual cost of the higher discretionary spending caps. However, that combined $400 billion to $500 billion cost will remain relatively steady if extended. It does not explain the $1.3 trillion rise in projected red ink over the next decade (chart 2).

Instead, nearly the entire surge in red ink will come from adding 74 million baby boomers to the Social Security and Medicare systems. This is both a result of demographics, and rising health costs.

Social Security and Medicare are not fully self-financed through premiums, payroll taxes, and related dedicated taxes. Each system requires an annual general revenue transfer to pay all promised benefits (some of these transfers are credited as interest payments to trust funds). And these transfers – as well as the interest costs of the Treasury borrowing to cover these transfers – are about to soar.

The cost of filling Social Security and Medicare’s annual shortfalls (and the resulting interest costs) will jump from $440 billion to $1,656 billion between 2019 and 2029. These $1.2 trillion in additional general revenue transfers (and interest) will account for 90% of the $1.3 trillion projected rise in the annual deficit over the next decade.

In total, over the next ten years, Social Security will receive a general revenue transfer of $2.5 trillion, and Medicare will receive a general revenue transfer of $5.9 trillion. Given the percentage of federal spending that must be deficit-financed, these general revenue costs will add $1.8 trillion in net interest costs. Thus, the Social Security and Medicare systems will drain the general revenues by $10.2 trillion over the next decade. The rest of the budget deficit will total $1.8 trillion (1% of GDP) under a current-law baseline, or $5.3 trillion (2% of GDP) if current policies are extended.

Social Security has “earned” these deficits through all the prior surpluses that it had returned to the Treasury before 2009. And the Medicare system’s deficits are by program design. Nevertheless, these rapidly rising deficits are the main moving variable driving future deficits upward. The rest of federal spending (excluding interest) is projected to steadily decline indefinitely as a share of the economy. Revenues are projected by CBO to dip as share of the GDP, but then gradually rise past the 17.4% of GDP average that prevailed before the tax cuts (even if the tax cuts are extended).

II. Why the Long-Term Debt Is Soaring

From the mid-1950s through 2008, the national debt held by the public averaged 35% of GDP.² This level of borrowing could easily be absorbed by the increasingly global financial markets, and it resulted in interest costs averaging 2% of GDP (roughly 10% of a typical federal budget). Since 2008, the great recession and the beginning of the baby-boomer retirements have more than doubled the debt, to 78% of GDP. If current policies continue, the debt is projected to reach an unprecedented 194% of GDP within 30 years.³ And if this debt brings higher interest rates (as consensus economic theory suggests),⁴ the debt could surpass 250% of GDP (chart 3) and servicing the debt could cost 7.6% of GDP—the equivalent of $1.7 trillion in today’s economy. Americans of all incomes would face unprecedented tax increases; higher interest rates for home mortgages and car, student, and business loans; and a significant economic slowdown. Unlike Greece’s, the U.S. debt would be too large to be easily absorbed by the global economy.

What is causing the debt rise? Not inadequate tax revenues—which, since the early 1950s, have usually remained between 16.5% and 18.5% of GDP, regardless of tax policies, and which are projected to rise above historical norms, to 18.1%–19.5% of GDP, depending on the fate of various expiring tax cuts and delayed tax increases.⁵ Nor is it driven, on the spending side, by aggregate expenditures for discretionary and smaller entitlements, which are projected to continue falling as a share of the economy.

Chart 4 shows that the entire increase in long-term debt will come from surging Social Security, Medicare, and other government health-care spending. According to the Congressional Budget Office (CBO), these costs have risen from 7% to 10% of GDP since 2000 and are projected to reach 15.5% of GDP by 2049—or 21.2% of GDP when the interest cost of Social Security and Medicare’s annual deficits are included.

Why Social Security and Medicare Are Driving Budget Deficits

Between 2008 and 2030, 74 million Americans born between 1946 and 1964—on average, 10,000 per day—will retire and receive Social Security and Medicare benefits. Of this group, those retiring at age 66 and living to age 90 will spend one-third of their adult life receiving federal retirement benefits. The combination of more retiring baby boomers and longer life spans will expand Social Security and Medicare caseloads far beyond what current taxpayers can afford under current benefit formulas. In 1960, five workers paid the taxes to support each retiree (and, of course, Medicare did not exist). The ratio of workers to retirees has now fallen below 3–1, on its way to 2–1 by the 2030s. At that point, each married couple will basically be responsible for the Social Security and health care of their very own retiree.

These demographic challenges are worsened by rising health-care costs and repeated benefit expansions enacted by lawmakers. Today’s typical retiring couple has paid $161,000 into Medicare and will receive $498,000 in benefits (in net present value), in part because Medicare’s physician and drug benefits are not pre-funded with payroll taxes, and only partially funded by retiree premiums. Most Social Security recipients also come out ahead.⁶ Thus, most seniors’ benefits greatly exceed their lifetime contributions to the Social Security and Medicare systems. By 2030, the 74 million baby boomers will have joined a retirement benefit system that runs a substantial per-person deficit.

Chart 5 shows that, according to CBO data, between 2019 and 2049:

• Social Security will run a $19 trillion cash deficit (collecting $56 trillion, spending $75 trillion).

• Medicare will run a $44 trillion cash deficit (collecting $17 trillion, spending $61 trillion).

• These shortfalls are directly responsible for $40 trillion of the coming interest costs on the debt.⁷

(To adjust these 30-year totals for inflation, trim by one-third.)

Rather than self-finance through payroll taxes and premiums, these two programs are set to add $103 trillion to the debt. The rest of the federal budget is projected to run a surplus over the next 30 years.

Between 2019 and 2049, the annual Social Security and Medicare deficits are projected to rise from 2.0% to 12.1% of GDP. This projected 2049 shortfall will consist of Medicare (4.6% of GDP), Social Security (1.8%), and the interest costs directly attributed to these program shortfalls (5.7%). The rest of the budget will run a 3.4% of GDP surplus, according to CBO data (see chart 6).⁸

The Fiscal Avalanche Has Already Begun

Since 2008—when the first baby boomers qualified for early retirement—Social Security and Medicare have accounted for 60% of all inflation-adjusted federal spending growth (with Medicaid and the Affordable Care Act responsible for an additional 31%). The majority of budgetary savings achieved by discretionary spending caps, defense cuts, and rising tax revenues have simply financed growing Social Security and Medicare costs, which will grow by another $130 billion annually over the next decade.⁹ That is the equivalent of creating another Defense Department every five years. This will happen automatically, without any congressional votes and therefore likely with scant media coverage.

And as federal resources further shift to the elderly, Washington is beginning to run out of offsetting spending cuts. This has contributed to the deficit expanding from $438 billion to $666 billion through 2017, even before the recent tax cuts. CBO’s current-policy baseline shows deficits rising to $2 trillion within a decade—or $3 trillion, if interest rates return to historical norms. Unlike the temporary, recession-driven budget deficits a decade ago, these Social Security– and Medicare-based deficits will expand permanently. Over the next 30 years, CBO projects that the national debt will grow from $22 trillion to $103 trillion ($56 trillion after inflation)—or much higher, if interest rates rise from the projected 3%–4% range to the historically typical 5%–6%.

Predictably, most of the popular blame for the rising deficits is currently pinned on the 2017 Tax Cuts and Jobs Act (TCJA). TCJA will likely decrease revenues by roughly 1% of GDP indefinitely if extended past 2025, when parts of the law are currently scheduled to expire.¹⁰ (This does not include additional tax revenues that will arise from economic growth that lower tax rates will induce. The congressional Joint Committee on Taxation estimates that these additional tax revenues would offset the additional interest costs of the tax law, though not the primary deficit-increasing impact of the tax cuts themselves.) While the government revenues forgone by TCJA will surely worsen deficits, they are a much smaller contributor than Social Security, Medicare, and Medicaid, spending on which will together rise by 2.6% of GDP over the decade and 5.7% over 30 years.¹¹ Even without the 2017 tax cuts, the annual deficit would still exceed $1.9 trillion within a decade. In short, TCJA did not create the federal government’s large deficits, and even repealing them would not absolve lawmakers of the need to address rising entitlement spending.

III. The Mirage of “Easy” Solutions

Real deficit reduction will involve a real burden. Yet standing in the reform is series of false claims that the problem is easily solved.

Economic Panaceas

Steep economic growth. A strong economy is necessary but far from sufficient for major deficit reduction. Growth rates will already be limited by the labor-force slowdown caused by baby-boomer retirements and declining birthrates. That leaves productivity to drive growth.

So, no problem? Let’s start by disregarding CBO’s 2019 projection that total U.S. factor productivity will continue growing at the 1.1% average rate of the past 30 years and instead assume the white-hot 1.8% rate that prevailed from 1992 through 2005.¹² Most economists¹³ would consider this rate far too optimistic.¹⁴ Nevertheless, the resulting higher incomes and tax revenues from this productivity jet stream would seem to close at least 40% of the cumulative deficits through 2049—until one accounts for the fact that higher incomes automatically result in higher Social Security benefits when the workers who earned them retire.

Much can be done to increase real economic growth rates above CBO’s long-term 1.9% annual projections. In particular, lawmakers should aim to grow the labor-force participation rate; continue to refine the tax code to encourage work, savings, and investment; and improve policies in the areas of trade, energy, job training, education, and health care. However, a refusal to address surging spending and deficits would still undermine economic growth by raising interest rates, decreasing business investment, and ultimately forcing up taxes. Lawmakers should aspire to faster growth but not simply assume it—especially if entitlement costs keep growing.

Inflate the debt away. In the short term, higher inflation can dilute some of today’s $22 trillion national debt. However, Social Security and Medicare benefits and payments are also tied to inflation, so future liabilities would expand. Additionally, Washington would have to pay much higher interest rates when borrowing to finance those benefits.

Low interest rates. CBO’s 2019 Long-Term Budget Outlook assumes that the national debt can rise from 35% to 144% of GDP between 2007 and 2049, with its average interest rate peaking at just 4.2%—which is below even the levels of the 1990s (6.9%) and 2000s (4.8%). By contrast, the economic-policy community consensus is that such a large increase in federal debt would raise interest rates.¹⁵ For each percentage point that interest rates rise, Washington must pay approximately $11 trillion more in interest costs over 30 years.¹⁶ That means an even higher national debt.

Immigration. Smart immigration policy may, on net, marginally improve the federal budget picture (and the economy). It is not a cure-all. High-skill immigrants send higher tax revenues during their working careers, but their eventual retirement into Social Security and Medicare would add new liabilities to the system. Low-skill immigrants generally increase costs to the federal government (and especially to state and local governments)—at least, in the first or second generation, because the resulting education, infrastructure, and social spending exceed the added tax revenues.¹⁷

Conservative Fantasies

Pro-growth tax policy. Economic growth is obviously important to deficit reduction—and tax legislation that depresses savings and investment must be avoided. Nevertheless, the historical record clearly shows that the vast majority of tax cuts do not increase tax revenues—especially by enough to keep pace with federal programs growing 6%–7% annually.¹⁸

Eliminating welfare and lower-priority spending. Over the past 15 years, congressional GOP blueprints have typically imposed nearly all the first decade’s cuts on antipoverty programs (Medicaid, ACA subsidies, SNAP [aka food stamps], and others) as well as nondefense discretionary spending, such as education, veterans’ health, homeland security, medical research, and infrastructure. This pot of spending—7% of GDP and declining—would have to be mostly eliminated to balance the budget a decade from now.¹⁹ These cuts will never be passed by any Congress, as their advocates on Capitol Hill and in top think tanks surely know. While there are any number of failed and unnecessary programs in need of major reform, proposals to eviscerate these entire categories of spending while letting Social Security and Medicare off the hook are a politically delusional distraction.

Impossibly tight spending caps. Spending caps are a vital tool to enforce realistic spending targets. But absent any achievable underlying programmatic reforms to meet those targets, they are an empty gimmick. Nevertheless, many conservative budget blueprints simply divide the federal budget into five to eight spending categories and then assume unprecedented cuts in targeted categories, with no underlying policy proposals to achieve those targets. For instance, President Trump’s budgets have assumed a 60% reduction in total nondefense discretionary spending as a percentage of GDP over the decade without specifying which specific programs would be slashed, and how they would operate once all cuts are enacted.²⁰ The 2011 Budget Control Act has shown that overly tight caps will be canceled rather than force politically suicidal cuts.

Devolution to state governments. There is a strong policy case for allowing states to have more control over poverty relief, education, infrastructure, economic development, and law-enforcement spending. However, counting the federal savings from devolution as the centerpiece of a deficit-reduction strategy is disingenuous because it simply shifts the deficits and taxes to the state level (minus modest efficiency gains that might come from better state fiscal management). The purpose of deficit reduction is to limit government borrowing and tax increases (and to limit economic damage), not merely to change the address where the taxes are sent.

Liberal Fantasies

“Just tax the rich.” Liberal advocates often vastly overstate the degree to which upper-income tax increases can finance the ever-expanding government. In the first place, the U.S. already has the most progressive tax code in the OECD—even adjusting for differences in income inequality.²¹ And setting aside the moral questions that would be raised by the government seizing the vast majority of any family’s income, basic math shows that large tax increases on high-income Americans cannot close most of the long-term budget deficit.

How much revenue is needed? Forget balancing the budget, simply stabilizing the debt at 95% of GDP (with annual deficits of 3% of GDO) would require a combination of tax increases and spending cuts that eventually adds up to 6% of GDP. Chart 7 shows the difficulty of building a tax increase of this size. Even a 100% tax rate on all income over $500,000 would raise just 4.7% of GDP (until those affected stop working and investing).²² Alternatively, doubling the top 35% and 37% tax brackets, to 70% and 74% would raise only approximately 1.7% of GDP—and even that figure ignores all revenues lost to the economic effects of 85% marginal tax rates (when including state and payroll taxes) on work or investment, as well as tax avoidance and evasion. A 6% wealth tax – far exceeding the mostly-abandoned rates of Europe – would raise less than 1% of GD).

If America wants to spend like Europe, it must also tax like Europe. This means, in addition to federal and state income taxes, a European value-added tax (VAT)—essentially a national sales tax—that affects all families. The most realistic way to raise 6% of GDP in revenues is by either:

• Imposing a VAT that rises to 36%; or

• Raising the payroll tax from 15.3% to 32.0%.²³

Deep defense cuts. Since the 1980s, the Pentagon budget has fallen from 6% to 3% of GDP—not far above Europe’s target of 2%. Cutting U.S. defense spending to the levels pledged by European members of NATO would save 1% of GDP, or roughly one-seventh of the Social Security and Medicare long-term shortfall. And Europe’s target level is possible only because its leaders can count on protection from a larger superpower—a luxury that the U.S. would not enjoy. A healthy portion of America’s higher defense budget comes from spending $100,000 per troop in compensation (salary, pension, housing, health care, and other benefits), which lawmakers are not eager to cut.²⁴ Some long-term budget savings are possible, though it should be noted that President Obama did not propose reducing the Pentagon budget to anywhere near the levels of France or the U.K.

Single-payer health care. When confronted with rising Medicare and Medicaid costs driving federal deficits, a popular response on the left is to propose single-payer health care. The theory here is that a fully socialized health plan would drastically slash costs to families and the federal budget.

The budgetary impact of single-payer health care has been widely debated over the past two years. However, it is important to emphasize that the estimated $30 trillion to $40 trillion federal cost of single-payer refers only to the federal cost of bringing those under 65 into the Medicare program (and expanding benefits for the elderly). It does not include the cost of closing the existing $44 trillion shortfall for those age 65 and older. In other words, even a “fully-funded” single-payer program would finance only the federal expansion, not the Medicare system’s baseline shortfall of $44 trillion. Perhaps lawmakers should figure out how to pay for the current Medicare system before pledging $30 trillion to expand it.

Chart 7

Tax Increases Cannot Easily Close the Social Security and Medicare Shortfalls
(Which by 2049, will total 6.4% of GDP – or 12.1% including resulting interest costs)

*Tax increase significantly includes low-income families

Notes:

• A) Estimates do not account for: 1) revenues lost to negative economic effect of policies, and 2) interactions between policies.

• B) The highest-income taxpayers currently pay a combined marginal tax rate (income, payroll, and state) of approximately 50%. Substantially higher tax rates would likely give back some of the new revenues due to reduced economic growth as well as tax avoidance.

• C) Sources: CBO, JCT, Social Security Office of the Actuary, Tax Foundation

Cross-Partisan Fantasies

Social Security trust fund to the rescue. Some suggest that redeeming the $3 trillion in assets held by the Social Security trust fund will shield taxpayers from the cost of Social Security’s deficits. In the first place, this $3 trillion accounts for a small fraction of the system’s $19 trillion cash deficit over 30 years. More important, the trust fund contains no economic resources with which to pay benefits—it consists of a pile of IOUs in a filing cabinet in Parkersburg, West Virginia. This $3 trillion in Social Security assets reflects a $3 trillion liability for the taxpayers, who must repay the bonds with interest over the next 16 years. All future Social Security benefits will be financed by future taxes and borrowing.

Long-term budget projections are just theory. Americans otherwise inclined to be skeptical of 30-year projections should nevertheless take these seriously. Future inflation rates are indeed anyone’s guess, but the 74 million baby boomers retiring into Social Security and Medicare are an actuarial and demographic reality. These present and future retirees exist, and the payment formulas have already been set. Furthermore, any future uncertainties are an argument for caution and prudence.

There is no hurry. Some assert that lawmakers can wait 10 or 15 years to address this challenge.²⁵ Unfortunately, every year of delay raises the eventual cost of a budget fix because: 1) on average, 4 million more baby boomers retire into Social Security and Medicare, and lawmakers have generally avoided reducing benefits for those already receiving them; 2) benefit levels rise further above an affordable level; and 3) the larger national debt locks in permanently higher interest costs. The longer the reforms are delayed, the larger and more painful they must ultimately be.

Let the kids deal with the problem. The final argument against reform asserts that Social Security and Medicare benefits represent an unbreakable, unamendable promise to the elderly, consequences be damned. In reality, retirement benefits have been repeatedly expanded far beyond what current retirees were promised while they were working. For example, President George W. Bush and Congress decided in 2003 that current taxpayers would pay 75% of the prescription-drug costs of the current typical senior. This benefit was never “earned” through payroll taxes. And today’s teenagers never signed up for this budget-busting deal.

Conclusion

For decades, economists and policy experts warned that a budgetary and economic tsunami would come when the 74 million baby boomers retire into Social Security and Medicare. Nevertheless, nothing significant has been done to avert the crisis. To the contrary, both parties added a new Medicare drug entitlement in 2003, after which the Affordable Care Act further expanded federal health obligations for Medicaid and new subsidized health-insurance exchanges.

Today, one-third of the baby boomers have already retired, and another one-third will retire over the next six years. Annual budget deficits will soon pass $1 trillion on the way to $2 trillion and possibly $3 trillion in 10–15 years. Overall, the Social Security and Medicare systems face an unfathomable $103 trillion cash deficit over 30 years.

Without reform, runaway deficits will all but guarantee a debt crisis that will profoundly damage the country’s economic and social order. There is still time to avoid that crisis, but it will require the nation’s political leaders to leave their respective comfort zones and compromise.

Appendix

Endnotes

[1] All figures in this section were calculated by the author using the CBO’s 10-year baseline, “The Budget and Economic Outlook: 2019 to 2029,” Jan. 28, 2019, and the 30-year baseline at “The 2019 Long-Term Budget Outlook,” June 25, 2019 with the supplemental tables at https://www.cbo.gov/publication/51119. Calculations available upon request.

[2] The debt held by the public generally refers to debt funded by borrowing from the public. It does not include intragovernmental debt, such as the Social Security trust fund.

[3] See note 1.

[4] See Ernie Tedeschi, “Deficits are Raising Interest Rates. But Other Factors are Lowering Them,” February 19, 2019; Eric M. Engen, R. Glenn Hubbard, “Federal Government Debt and Interest Rates,” April 2005, NBER; Thomas Laubach, “New Evidence on the Interest Rate Effects of Budget Deficits and Debt,” Journal of the European Economic Association Vol. 7, No. 4 (Jun., 2009), pp. 858-885; and Edward Gamber and John Seliski, “The Effect of Government Debt on Interest Rates,” Congressional Budget Office, Working Paper, March 14, 2019.

[5] See note 1.

[6] C. Eugene Steuerle and Caleb Quakenbush, “Social Security and Medicare Lifetime Benefits and Taxes: 2017 Update,” Urban Institute, June 5, 2018, at. Figures in the text reflect Steuerle and Quakenbush’s table 15 for a married couple with two average earners ($102,600 in 2017 dollars).

[7] See note 1.

[8] See note 1.

[9] See note 1.

[10] See note 1.

[11] See note 1.

[12] See note 1.

[13] For an overview of the research on realistic productivity rates, see Committee for a Responsible Federal Budget, “How Fast Can America Grow?” May 18, 2017.

[14] Adding 0.6% to the annual economic growth rate would produce an additional $135 trillion in cumulative GDP for 2020–49, which translates to roughly $27 trillion in tax revenues and $9 trillion in interest savings on the national debt.

[15] See note 4.

[16] See note 1. Figures adjusted into a current-policy baseline.

[17] A much-hyped CBO report (“S. 744 Border Security, Economic Opportunity, and Immigration Modernization Act,” June 18, 2013) showed overwhelmingly positive budgetary effects of immigration legislation that would both increase immigration levels and provide legal status to a large number of unauthorized immigrants. The score limited most of its analysis of federal taxes and spending over 20 years. It ignored significant state and local government costs as well as longer-term Social Security and Medicare costs.

[18] See note 1.

[19] In 2019, antipoverty spending equals 3.9% of GDP, while nondefense discretionary spending is 3.2%.

[20] The spending function tables accompanying Trump’s FY 2020 budget proposal employ what is essentially an enormous “cuts to be determined” line item to meet its proposed discretionary spending caps. See Office of Management and Budget (OMB), “Budget of the United States Government, Fiscal Year 2020,” “Table 29-1. Budget Authority and Outlays by Function, Category, and Program,” row 1153, February 2019.

[21] See Scott Hodge, “News to Obama: The OECD Says the United States Has the Most Progressive Tax System,” Tax Foundation, Oct. 29, 2008. Even those figures underestimate this country’s current tax progressivity advantage because they do not include the 2013 upper-income tax increases and, more important, do not include the large value-added taxes that make European tax systems even less progressive.

[22] Calculated using IRS, “SOI Tax Stats—Individual Statistical Tables by Size of Adjusted Gross Income,” table 1.4. In 2017, the amount of income earned over the $500,000 threshold approximated 7.0% of GDP. An estimated 2.3% of GDP was paid in federal and state taxes on this income, leaving 4.7% of GDP in available take-home pay.

[23] Calculated using tax estimates in chart 7.

[24] CBO, “Costs of Military Pay and Benefits in the Defense Budget,” November 2012, p. 2.

[25] This argument is most commonly associated with the talking point that Social Security is “fully funded” through 2034. Yet it is fully funded only because taxpayers will be repaying trillions to the Social Security trust fund over that period. These general revenue transfers will burden taxpayers and force up budget deficits each year.

What is Really Driving the

Unsustainable National Debt

Testimony before the

Committee on Financial Services

United States House of Representatives

December 20, 2018

Jessica Riedl

Senior Fellow in Budget, Tax, & Economic Policy

The Manhattan Institute for Policy Research

Main Takeaways from Jessica Riedl’s Testimony

• I will describe the policies that are driving a historic long-term surge in budget deficits.

• The budget deficit is on pace to surpass $1 trillion as soon as next year – on its way to $2 trillion within a decade if current policies continue.

• If interest rates merely rise back to 1990s levels, that would push the projected annual budget deficit to $3 trillion in ten years.

• The long-term picture is even worse. The CBO projects a staggering $84 trillion budget deficit over the next 30 years, even assuming all recent tax cuts expire. That would leave the national debt at 150% of GDP.

Drivers of the Rising Ten-Year Deficit

• The $250 billion annual cost of recent tax cuts, and $150 billion annual cost of the higher discretionary spending caps are certainly contributors to the deficit. But their cost will remain steady over the decade, and thus do not explain why the budget deficit (under current policies) would rise from $779 billion to $2,106 billion over the next decade.

• Those future increases in red ink will come from adding 74 million baby boomers to the Social Security and Medicare systems. This is both a result of demographics, and rising health costs.

• Social Security and Medicare are not fully self-financed through premiums, payroll taxes, and other dedicated taxes. Each system requires an annual general revenue transfer to pay all promised benefits (some of these transfers are credited as interest payments to trust funds). And these transfers – as well as the interest costs of the Treasury borrowing to cover these transfers – are about to soar.

• Annual Social Security and Medicare shortfalls (and their interest costs) will jump from $450 billion this year, to $1.6 trillion a decade from now. These $1.15 trillion in additional Social Security and Medicare deficits will account for nearly 90% of the $1.3 trillion projected rise in the deficit over the next decade, according to the CBO current-policy budget baseline.

• In total, over the next decade, Social Security will require a general revenue transfer of $2.2 trillion, and Medicare will require $5.6 trillion. When including the $2.0 trillion in resulting interest costs from the portion of that spending that must be borrowed, the Social Security and Medicare systems will drain $9.8 trillion from general revenues over the next decade.

Drivers of the Surging 30-Year Deficit

• Over the next 30 years, the Social Security and Medicare systems are projected by CBO to run a $100 trillion cash shortfall. The rest of the budget is projected to run a $16 trillion surplus.

• Specifically, Social Security will run a $18 trillion deficit, Medicare will run a $41 trillion deficit, and the interest costs of financing these shortfalls will add $41 trillion more.

• CBO projects that, between 2018 and 2048, the annual Social Security and Medicare shortfalls (and their interest costs) will leap from 2.0% of GDP to 12.6% of GDP. The rest of the budget in 2048 is projected to enjoy a 3.1% of GDP surplus – as a result of both rising revenues and falling spending across the rest of the budget.

Conclusion

• The long-term debt problem is overwhelmingly a Social Security and Medicare issue. The rest of the budget is projected by CBO to produce growing surpluses over the long-term – but cannot balance out a $100 trillion projected shortfall within Social Security and Medicare.

• Good morning Chairman Hensarling, Ranking Member Waters, and Members of the Committee. Thank you for inviting me to participate in today’s hearing.

My name is Jessica Riedl. I am a Senior Fellow in Budget, Tax, & Economic Policy at the Manhattan Institute for Policy Research. The views I express in this testimony are my own, and should not be construed as representing any official position of The Manhattan Institute.

Few Americans fully comprehend the fiscal avalanche that has begun. The budget deficit is on pace to surpass $1 trillion as soon as next year – on its way to $2 trillion within a decade if current policies continue. And if interest rates merely rise back to 1990s levels, that would push the projected annual budget deficit to $3 trillion in ten years. This is according to data from the Congressional Budget Office.

Over the next 30 years, Social Security and Medicare face a combined $100 trillion cash deficit, which will push the national debt to 150% of GDP. At that point, interest on that debt would consume 40% of all tax revenues or more, if interest rates rise. Unless reforms are enacted, global markets will, at some point, stop lending to the U.S. at plausible interest rates. When that event occurs, or even approaches, interest rates will soar, and the federal government will not be able to pay its bills, with dire consequences for the U.S. economy.

I. Drivers of the Rising Ten-Year Budget Deficit

The Congressional Budget Office (CBO) has projected a $12.4 trillion budget deficit between 2019 and 2028. However, if one adjusts for the “current-policy” costs of extending the 2017 tax cuts, delayed ACA health taxes, annual tax extenders, and the 2018 increase in the discretionary spending caps, the projected ten-year deficit rises to $15 trillion.[1]

Specifically, from 2018 through 2028, the current-policy budget deficit is projected to rise from $779 billion to $2,106 billion (see chart 1).

A portion of the underlying deficit is driven by the $250 billion annual cost of the recent tax cuts, and the $150 billion annual cost of the higher discretionary spending caps. They are certainly contributors to current and future deficits. However, that combined $400 billion cost will remain relatively steady if extended. It does not explain the $1.3 trillion rise in projected red ink between 2018 and 2028 (chart 2).

Instead, nearly the entire surge in red ink will come from adding 74 million baby boomers to the Social Security and Medicare systems. This is both a result of demographics, and rising health costs.

Social Security and Medicare are not fully self-financed through premiums, payroll taxes, and related dedicated taxes. Each system requires an annual general revenue transfer to pay all promised benefits (some of these transfers are credited as interest payments to trust funds). And these transfers – as well as the interest costs of the Treasury borrowing to cover these transfers – are about to soar.

The annual Social Security and Medicare shortfalls (and their interest costs) will jump from $450 billion this year, to $1.6 trillion a decade from now. These $1.15 trillion in additional Social Security and Medicare deficits will account for nearly 90% of the $1.3 trillion projected rise in the annual deficit over the next decade, according to the CBO current-policy budget baseline.

In total, over the next ten years, Social Security will receive a general revenue transfer of $2.2 trillion, and Medicare will receive a general revenue transfer of $5.6 trillion. Given the percentage of federal spending that must be deficit-financed, these general revenue costs will add $2.0 trillion in net interest costs. Thus, the Social Security and Medicare systems will drain the general revenues by $9.8 trillion over the next decade. The rest of the budget deficit will total $2.6 trillion (1% of GDP) under a current-law baseline, or $5.2 trillion (2% of GDP) if current policies are extended.

Social Security has “earned” these deficits through all the prior surpluses that it had returned to the Treasury before 2009. And the Medicare system’s deficits are by program design. Nevertheless, these rapidly rising deficits are the main moving variable driving future deficits upward. The rest of the federal budget is projected to hold steady at 13% of GDP through the next decade. Revenues are projected to dip as share of the GDP, but by 2028 return to the 17.4% of GDP that prevailed before the tax cuts.

II. Why the Long-Term Debt Is Soaring

From the mid-1950s through 2008, the national debt held by the public averaged 35% of GDP.[2] This level of borrowing could easily be absorbed by the increasingly global financial markets, and it resulted in interest costs averaging 2% of GDP (roughly 10% of a typical federal budget). Since 2008, the great recession and the beginning of the baby-boomer retirements have more than doubled the debt, to 78% of GDP. If current policies continue, the debt is projected to reach an unprecedented 194% of GDP within 30 years.[3] And if this debt brings higher interest rates (as consensus economic theory suggests),[4] the debt could surpass 250% of GDP (chart 3) and servicing the debt could cost 7.5% of GDP—the equivalent of $1.5 trillion in today’s economy. Americans of all incomes would face unprecedented tax increases; higher interest rates for home mortgages and car, student, and business loans; and a significant economic slowdown. Unlike Greece’s, the U.S. debt would be too large to be easily absorbed by the global economy.

What is causing the debt rise? Not inadequate tax revenues—which, since the early 1950s, have usually remained between 16.5% and 18.5% of GDP, regardless of tax policies, and which are projected to rise above historical norms, to 18.6%–19.8% of GDP, depending on the fate of various expiring tax cuts and delayed tax increases.[5] Nor is it driven, on the spending side, by aggregate expenditures for discretionary and smaller entitlements, which are projected to continue falling as a share of the economy.

Chart 4 shows that the entire increase in long-term debt will come from surging Social Security, Medicare, and other government health-care spending. According to the Congressional Budget Office (CBO), these costs have risen from 7% to 10% of GDP since 2000 and are projected to reach 15.5% of GDP by 2048—or 21.8% of GDP when the interest cost of Social Security and Medicare’s annual deficits are included.

Why Social Security and Medicare Are Going Bankrupt

Between 2008 and 2030, 74 million Americans born between 1946 and 1964—on average, 10,000 per day—will retire and receive Social Security and Medicare benefits. Of this group, those retiring at age 66 and living to age 90 will spend one-third of their adult life receiving federal retirement benefits. The combination of more retiring baby boomers and longer life spans will expand Social Security and Medicare caseloads far beyond what current taxpayers can afford under current benefit formulas. In 1960, five workers paid the taxes to support each retiree (and, of course, Medicare did not exist). The ratio of workers to retirees has now fallen below 3–1, on its way to 2–1 by the 2030s. When today’s kindergartners are adults, each married couple will basically be responsible for the Social Security and health care of their very own retiree.

These demographic challenges are worsened by rising health-care costs and repeated benefit expansions enacted by lawmakers. Today’s typical retiring couple has paid $140,000 into Medicare and will receive $420,000 in benefits (in net present value), in part because Medicare’s physician and drug benefits are not pre-funded with payroll taxes, and only partially funded by retiree premiums. Most Social Security recipients also come out ahead.[6] Thus, most seniors’ benefits greatly exceed their lifetime contributions to the Social Security and Medicare systems. By 2030, the 74 million baby boomers will have joined a retirement benefit system that runs a substantial per-person deficit.

According to CBO, between 2018 and 2048, Medicare is projected to run a $41 trillion cash deficit, Social Security will run an $18 trillion cash deficit, and the interest on the resulting program debt will be $41 trillion (chart 5).[7] (To adjust these 30-year totals for inflation, trim by one-third.) Rather than self-finance through payroll taxes and premiums, these two programs are set to add $100 trillion to the national debt. The rest of the federal budget is projected to run a surplus over the next 30 years.

Between 2018 and 2048, the annual Social Security and Medicare deficits are projected to rise from 2.0% to 12.6% of GDP. This projected 2048 shortfall will consist of Medicare (4.5% of GDP), Social Security (1.8%), and the interest costs directly attributed to these program shortfalls (6.3%). The rest of the budget will run a 3.1% of GDP surplus, according to CBO data (see chart 6).[8]

The Fiscal Avalanche Has Already Begun

Since 2008—when the first baby boomers qualified for early retirement—Social Security and Medicare have accounted for 60% of all inflation-adjusted federal spending growth (with Medicaid and the Affordable Care Act responsible for an additional 31%). The majority of budgetary savings achieved by discretionary spending caps, defense cuts, and rising tax revenues have simply financed growing Social Security and Medicare costs, which will grow by another $130 billion annually over the next decade.[9] That is the equivalent of creating another Defense Department every five years. This will happen automatically, without any congressional votes and therefore likely with scant media coverage.

And as federal resources further shift to the elderly, Washington is beginning to run out of offsetting spending cuts. This has contributed to the deficit expanding from $438 billion to $666 billion through 2017, even before the recent tax cuts. CBO’s current-policy baseline shows deficits rising to $2 trillion within a decade—or $3 trillion, if interest rates return to historical norms. Unlike the temporary, recession-driven budget deficits a decade ago, these Social Security– and Medicare-based deficits will expand permanently. Over the next 30 years, CBO projects that the national debt will grow from $20 trillion to $99 trillion ($54 trillion after inflation)—or much higher, if interest rates rise from the projected 3%–4% range to the historically typical 5%–6%.

President Trump’s latest budget proposal shows the impossibility of reining in deficits without Social Security and Medicare reform. By allowing these programs to nearly double over the decade, from $1.6 trillion to $3.0 trillion, the White House is forced to propose slashing other entitlement spending by 20% over the decade and cutting both defense and domestic discretionary spending to levels—as a percentage of GDP—unseen since the 1930s. Yet even if these implausible cuts were enacted, CBO still estimates a budget deficit topping $1 trillion by 2028.[10] This deficit would continue escalating thereafter because Social Security and Medicare costs would continue growing even after Washington would have run out of other spending to cut.

Predictably, most of the popular blame for the rising deficits is currently pinned on the 2017 Tax Cuts and Jobs Act (TCJA). TCJA will likely decrease revenues by roughly 1% of GDP indefinitely if extended past 2025, when parts of the law are currently scheduled to expire.[11] (This does not include additional tax revenues that will arise from economic growth that lower tax rates will induce. The congressional Joint Committee on Taxation estimates that these additional tax revenues would offset the additional interest costs of the tax law, though not the primary deficit-increasing impact of the tax cuts themselves.) While the government revenues forgone by TCJA will surely worsen deficits, they are a much smaller contributor than Social Security, Medicare, and Medicaid, spending on which will together rise by 2.6% of GDP over the decade and 5.4% over 30 years.[12] Even without the 2017 tax cuts, the annual deficit would still exceed $1.7 trillion within a decade. In short, TCJA did not create the federal government’s large deficits, and even repealing them would not absolve lawmakers of the need to address rising entitlement spending.

How a Crisis May Play Out

The national debt’s share of the economy cannot rise forever. At a certain point, even large global savings markets will be stretched, and investor confidence in America’s ability to finance its debt will evaporate. The timing of a country’s debt crisis depends as much on market psychology as on economic fundamentals. But eventually, as the debt steeply escalates, investors will move from unease to panic and demand higher interest rates to finance the federal government. These higher rates will make it extremely difficult for businesses to borrow and invest, and will make auto loans, student loans, and home mortgages less affordable, while also forcing unprecedented tax increases and/or spending cuts to pay for Washington’s higher interest costs. Such an outcome is highly likely if annual deficits continue growing past 10% of GDP and the debt continues to approach 200% of GDP, as projected in the current-policy baseline. On the one hand, America will have some leeway due to its reputation as a safe harbor for investment and status as the world’s reserve currency. On the other hand, absorbing a debt of nearly 200% of America’s economy would be much more expensive for the global markets than absorbing, say, 200% of a smaller GDP, like that of Greece.

In the absence of fundamental reform, the more likely scenario is a series of minor investor panics (forcing up interest rates), followed by upper-income tax increases and lower-priority spending reductions that are insufficient to finance the rising entitlement and interest costs. Eventually, Washington will run out of such offsets to reduce deficits, leaving only the choice between historically large middle-class tax increases and a drastic reduction in Social Security and Medicare benefits for current retirees.

III. The Mirage of “Easy” Solutions

Real deficit reduction will involve a real burden. Yet standing in the reform is series of false claims that the problem is easily solved.

Economic Panaceas

Steep economic growth. A strong economy is necessary but far from sufficient for major deficit reduction. Growth rates will already be limited by the labor-force slowdown caused by baby-boomer retirements and declining birthrates. That leaves productivity to drive growth.

So, no problem? Let’s start by disregarding CBO’s 2018 projection that total U.S. factor productivity will continue growing at the 1.2% average rate of the past 30 years and instead assume the white-hot 1.8% rate that prevailed from 1992 through 2005.[13] Most economists[14] would consider this rate far too optimistic.[15] Nevertheless, the resulting higher incomes and tax revenues from this productivity jet stream would seem to close at least 40% of the cumulative deficits through 2048—until one accounts for the fact that higher incomes automatically result in higher Social Security benefits when the workers who earned them retire.

Much can be done to increase real economic growth rates above CBO’s long-term 1.9% annual projections. In particular, lawmakers should aim to grow the labor-force participation rate; continue to refine the tax code to encourage work, savings, and investment; and improve policies in the areas of trade, energy, job training, education, and health care. However, a refusal to address surging spending and deficits would still undermine economic growth by raising interest rates, decreasing business investment, and ultimately forcing up taxes. Lawmakers should aspire to faster growth but not simply assume it—especially if entitlement costs keep growing.

Inflate the debt away. In the short term, higher inflation can dilute some of today’s $20 trillion national debt. However, Social Security and Medicare benefits and payments are also tied to inflation, so future liabilities would expand. Additionally, Washington would have to pay much higher interest rates when borrowing to finance those benefits.

Low interest rates. CBO’s 2018 Long-Term Budget Outlook assumes that the national debt can rise from 35% to 150% of GDP between 2007 and 2048, with its average interest rate peaking at just 4.4%—which is below even the levels of the 1990s (6.9%) and 2000s (4.8%). By contrast, the economic-policy community consensus is that such a large increase in federal debt would raise interest rates.[16] For each percentage point that interest rates rise, Washington must pay approximately $13 trillion more in interest costs over 30 years.[17] That means an even higher national debt.

Immigration. Smart immigration policy may, on net, marginally improve the federal budget picture (and the economy). It is not a cure-all. High-skill immigrants send higher tax revenues during their working careers, but their eventual retirement into Social Security and Medicare would add new liabilities to the system. Low-skill immigrants generally increase costs to the federal government (and especially to state and local governments)—at least, in the first or second generation, because the resulting education, infrastructure, and social spending exceed the added tax revenues.[18]

Conservative Fantasies

Pro-growth tax policy. Economic growth is obviously important to deficit reduction—and tax legislation that depresses savings and investment must be avoided. Nevertheless, the historical record clearly shows that the vast majority of tax cuts do not increase tax revenues—especially by enough to keep pace with federal programs growing 6%–7% annually.[19]

Eliminating welfare and lower-priority spending. Over the past 15 years, congressional GOP blueprints have typically imposed nearly all the first decade’s cuts on antipoverty programs (Medicaid, ACA subsidies, SNAP [aka food stamps], and others) as well as nondefense discretionary spending, such as education, veterans’ health, homeland security, medical research, and infrastructure. This pot of spending—7% of GDP and declining—would have to be mostly eliminated to balance the budget a decade from now.[20] These cuts will never be passed by any Congress, as their advocates on Capitol Hill and in top think tanks surely know. While there are any number of failed and unnecessary programs in need of major reform, proposals to eviscerate these entire categories of spending while letting Social Security and Medicare off the hook are a politically delusional distraction.

Impossibly tight spending caps. Spending caps are a vital tool to enforce realistic spending targets. But absent any achievable underlying programmatic reforms to meet those targets, they are an empty gimmick. Nevertheless, many conservative budget blueprints simply divide the federal budget into five to eight spending categories and then assume unprecedented cuts in targeted categories, with no underlying policy proposals to achieve those targets. For instance, President Trump’s latest budget proposal assumes a 60% reduction by 2028 in total nondefense discretionary spending as a percentage of GDP. The budget proposal provides no breakdown of which specific programs would be slashed, and how they would operate once all cuts are enacted.[21] The 2011 Budget Control Act has shown that overly tight caps will be canceled rather than force politically suicidal cuts.

Devolution to state governments. There is a strong policy case for allowing states to have more control over poverty relief, education, infrastructure, economic development, and law-enforcement spending. However, counting the federal savings from devolution as the centerpiece of a deficit-reduction strategy is disingenuous because it simply shifts the deficits and taxes to the state level (minus modest efficiency gains that might come from better state fiscal management). The purpose of deficit reduction is to limit government borrowing and tax increases (and to limit economic damage), not merely to change the address where the taxes are sent.

Liberal Fantasies

“Just tax the rich.” Liberal advocates often vastly overstate the degree to which upper-income tax increases can finance the ever-expanding government. In the first place, the U.S. already has the most progressive tax code in the OECD—even adjusting for differences in income inequality.[22] And setting aside the moral questions that would be raised by the government seizing the vast majority of any family’s income, basic math shows that large tax increases on high-income Americans cannot close most of the long-term budget deficit.

Start with an extreme proposition: a 100% tax rate on all income over $500,000. Result: this would raise barely more than 5% of GDP—at least for year one.[23] After that, one needs a heroic, if not absurd, projection that this tax would have no effect on working or investment. Next, try a slightly more realistic doubling of the top 35% and 37% tax brackets, to 70% and 74%. Result: this would raise only approximately 1.6% of GDP—and even that figure ignores all revenues lost to the economic effects of 85% marginal tax rates (when including state and payroll taxes) on work or investment, as well as tax avoidance and evasion.

Popular proposals to impose a 30% minimum tax on “millionaires” and to more aggressively tax banks, hedge-fund managers, and oil and gas companies would raise a combined 0.1% of GDP—or lose revenue if they trim the economic growth rate by even 1/20 of 1% (0.0005).[24] The 0.4% of GDP raised by a $25 per metric ton carbon tax would be passed on to households through higher energy bills.

The top-earning 5% of families and pass-through businesses currently account for 30% of all income.[25] That means that 70% of this tax base comes from those outside the top 5%. Furthermore, that top 5% already pays 42% of all federal taxes, including 61% of all federal income taxes, which leaves less room for additional taxes.[26] So while some upper-income tax increases are possible, the idea that America can close an $18 trillion Social Security shortfall and $41 trillion Medicare shortfall—and even pay for additional spending proposals on the liberal agenda—solely by sticking it to the rich is a fantasy that finds no support in budget math.

Nor can corporate tax hikes close much of the gap. America’s total corporate tax revenues are generally in line with other developed nations. Although modest reforms may be on the table, major changes, such as a 10-point rate increase, would raise less than 0.5% of GDP while giving more companies an incentive to relocate abroad. Repealing the 2017 TCJA would not significantly raise corporate tax revenues, either, as that portion of the law was almost entirely “paid for” through a combination of tax offsets and additional revenues from projected economic growth.[27]

An inescapable reality gets lost in this country’s intractable budget debates: If America wants to spend like Europe, it must also tax like Europe. This means, in addition to federal and state income taxes, a value-added tax (VAT)—essentially a national sales tax—that affects all families. Forget balancing the budget, merely stabilizing the debt at 95% of GDP (with annual deficits of 3% of GDP) without touching government spending would require either:

· Imposing a VAT that rises to 34% by 2048, or

· Raising the payroll tax from 15.3% to 33.5%.[28]

By 2048, the Social Security and Medicare shortfalls are projected by CBO to reach 6.3% of GDP – or 12.6% of GDP including resulting interest costs. Chart 7’s menu of possible tax increases shows the extraordinary difficulty of building a 6.3% (or 12.6%) of GDP tax increase.

Deep defense cuts. Since the 1980s, the Pentagon budget has fallen from 6% to 3% of GDP—not far above Europe’s target of 2%. Cutting U.S. defense spending to the levels pledged by European members of NATO would save 1% of GDP, or roughly one-seventh of the Social Security and Medicare long-term shortfall. And Europe’s target level is possible only because its leaders can count on protection from a larger superpower—a luxury that the U.S. would not enjoy. A healthy portion of America’s higher defense budget comes from spending $100,000 per troop in compensation (salary, pension, housing, health care, and other benefits), which lawmakers are not eager to cut.[29] Some long-term budget savings are possible, though it should be noted that President Obama did not propose reducing the Pentagon budget to anywhere near the levels of France or the U.K.

Single-payer health care. When confronted with rising Medicare and Medicaid costs driving federal deficits, a popular response on the left is to propose single-payer health care. The theory here is that a fully socialized health plan would drastically slash costs to families and the federal budget.

There is some debate over whether single-payer would slightly increase or decrease total national health expenditures. The most generous analysis of Senator Bernie Sanders’s “Medicare-for-All Act,” performed by the Mercatus Center, shows a 3% reduction in projected national health expenditures.[30] Although those savings charitably rely on the bill’s assumption that private health insurance can be nationalized with reimbursement rates for its health providers cut by approximately 40%—a massive reduction that even the Mercatus Center report concedes is wildly implausible. Analyses that assume more realistic payment rates, such as those performed by the politically liberal Urban Institute, show a notable increase in national health spending under single-payer health care.[31]

Regardless of whether total nationwide health spending would slightly rise or fall, it is obvious that transferring the entire health-care system to the federal government would substantially increase federal spending. Thus, virtually all analyses of single-payer health care—from the politically liberal Urban Institute to the conservative Mercatus Center—have estimated a first-decade cost of $24 trillion–$29 trillion to the federal government.[32] That is on top of current federal health spending that is already growing at unsustainable rates. And if the large provider payment rate reductions prove to be unrealistic, the cost will rise by trillions of dollars.

Some suggest that these new federal costs would be fully “paid for” by the health savings to families, businesses, and state governments.[33] This response leaves unanswered the rather large question of how to convert every dollar of current private-sector and state-government health spending into a nearly $30 trillion “single-payer tax.” Single-payer advocates have still not provided a tax proposal that covers more than half of the exorbitant federal cost. The most likely option, a payroll tax, would need to be set at 30%, on top of the current 15.3% rate.[34] There is no indication that Americans would accept tax increases this large, even if no longer paying premiums for health insurance.

Furthermore, these new taxes would finance only the added federal costs of the new single-payer system—not the underlying cost of current federal health spending. In other words, “Medicare for All” would not address Medicare’s projected $41 trillion cash shortfall over the next three decades. It would simply make Medicare more generous, and then expand it to everyone under age 65. Perhaps lawmakers should figure out how to pay for the current Medicare system before pledging nearly $30 trillion per decade to expand it.[35]

Cross-Partisan Fantasies

Social Security trust fund to the rescue. Some suggest that redeeming the $3 trillion in assets held by the Social Security trust fund will shield taxpayers from the cost of Social Security’s deficits. In the first place, this $3 trillion accounts for a small fraction of the system’s $18 trillion cash deficit over 30 years. More important, the trust fund contains no economic resources with which to pay benefits—it consists of a pile of IOUs in a filing cabinet in Parkersburg, West Virginia. This $3 trillion in Social Security assets reflects a $3 trillion liability for the taxpayers, who must repay the bonds with interest over the next 16 years. All future Social Security benefits will be financed by future taxes and borrowing.

Long-term budget projections are just theory. Americans otherwise inclined to be skeptical of 30-year projections should nevertheless take these seriously. Future inflation rates are indeed anyone’s guess, but the 74 million baby boomers retiring into Social Security and Medicare are an actuarial and demographic reality. These present and future retirees exist, and the payment formulas have already been set. Furthermore, any future uncertainties are an argument for caution and prudence.

There is no hurry. Some assert that lawmakers can wait 10 or 15 years to address this challenge.[36] Unfortunately, every year of delay raises the eventual cost of a budget fix because: 1) on average, 4 million more baby boomers retire into Social Security and Medicare, and lawmakers have generally avoided reducing benefits for those already receiving them; 2) benefit levels rise further above an affordable level; and 3) the larger national debt locks in permanently higher interest costs. The longer the reforms are delayed, the larger and more painful they must ultimately be.

Let the kids deal with the problem. The final argument against reform asserts that Social Security and Medicare benefits represent an unbreakable, unamendable promise to the elderly, consequences be damned. In reality, retirement benefits have been repeatedly expanded far beyond what current retirees were promised while they were working. For example, President George W. Bush and Congress decided in 2003 that current taxpayers would pay 75% of the prescription-drug costs of the current typical senior. This benefit was never “earned” through payroll taxes. And today’s teenagers never signed up for this budget-busting deal.

Conclusion

For decades, economists and policy experts warned that a budgetary and economic tsunami would come when the 74 million baby boomers retire into Social Security and Medicare. Nevertheless, nothing significant has been done to avert the crisis. To the contrary, both parties added a new Medicare drug entitlement in 2003, after which the Affordable Care Act further expanded federal health obligations for Medicaid and new subsidized health-insurance exchanges.

Today, one-third of the baby boomers have already retired, and another one-third will retire over the next six years. Annual budget deficits will soon pass $1 trillion on the way to $2 trillion and possibly $3 trillion in 10–15 years. Overall, the Social Security and Medicare systems face an unfathomable $100 trillion cash deficit over 30 years.

Without reform, runaway deficits will all but guarantee a debt crisis that will profoundly damage the country’s economic and social order. There is still time to avoid that crisis, but it will require the nation’s political leaders to leave their respective comfort zones and compromise.

Appendix

[1] All figures in this section were calculated by the author using the CBO’s 10-year baseline, “The Budget and Economic Outlook: 2018 to 2028,” Apr. 9, 2018, and the 30-year baseline, “The 2018 Long-Term Budget Outlook,” June 26, 2018, with supplemental tables at https://www.cbo.gov/sites/default/files/recurringdata/51119-2018-06-ltbo.xlsx.

[2] The debt held by the public generally refers to debt funded by borrowing from the public. It does not include intragovernmental debt, such as the Social Security trust fund.

[3] Baseline estimates come from CBO’s 10-year baseline, “The Budget and Economic Outlook: 2018 to 2028,” Apr. 9, 2018, and the 30-year baseline, “The 2018 Long-Term Budget Outlook,” June 26, 2018, with supplemental tables at https://www.cbo.gov/sites/default/files/recurringdata/51119-2018-06-ltbo.xlsx.

[4] One of the more influential studies is Thomas Laubach, “New Evidence on the Interest Rate Effects of Budget Deficits and Debt,” Board of Governors of the Federal Reserve System, May 2003.

[5] CBO, “The 2018 Long-Term Budget Outlook,” June 26, 2018, with supplemental tables at https://www.cbo.gov/sites/default/files/recurringdata/51119-2018-06-ltbo.xlsx.

[6] C. Eugene Steuerle and Caleb Quakenbush, “Social Security and Medicare Lifetime Benefits and Taxes,” Urban Institute, Sept. 16, 2015. Figures in the text reflect Steuerle and Quakenbush’s table 15 for a married couple with two average earners ($95,600 in 2015 dollars).

[7] See note 2.

[8] CBO, “The 2018 Long-Term Budget Outlook,” June 26, 2018, with supplemental tables at https://www.cbo.gov/sites/default/files/recurringdata/51119-2018-06-ltbo.xlsx.

[9] CBO, “The Budget and Economic Outlook: 2018 to 2028.”

[10] CBO, “An Analysis of the President’s 2019 Budget,” May 24, 2018.

[11] Calculated from CBO, “The Budget and Economic Outlook: 2018 to 2028.”

[12] CBO, “The Budget and Economic Outlook: 2018 to 2028”; idem, “The 2018 Long-Term Budget Outlook.”

[13] CBO, “The Budget and Economic Outlook: 2018 to 2028.”

[14] For an overview of the research on realistic productivity rates, see Committee for a Responsible Federal Budget, “How Fast Can America Grow?” May 18, 2017.

[15] Adding 0.6% to the annual economic growth rate would produce an additional $132 trillion in cumulative GDP for 2018–48, which translates to roughly $26 trillion in tax revenues and $9 trillion in interest savings on the national debt.

[16] One of the more influential studies is Laubach, “New Evidence on the Interest Rate Effects of Budget Deficits and Debt.”

[17] Calculated using CBO, “The 2018 Long-Term Budget Outlook,” June 26, 2018, and supplemental tables at https://www.cbo.gov/sites/default/files/recurringdata/51119-2018-06-ltbo.xlsx, and adjusting into a current-policy baseline.

[18] A much-hyped CBO report (“S. 744 Border Security, Economic Opportunity, and Immigration Modernization Act,” June 18, 2013) showed overwhelmingly positive budgetary effects of immigration legislation that would both increase immigration levels and provide legal status to a large number of unauthorized immigrants. The score limited most of its analysis of federal taxes and spending over 20 years. It ignored significant state and local government costs as well as longer-term Social Security and Medicare costs.

[19] CBO, “The Budget and Economic Outlook: 2018 to 2028.”

[20] In 2018, antipoverty spending equals 4.0% of GDP, while nondefense discretionary spending is 3.3%.

[21] The spending function tables accompanying Trump’s FY 2019 budget proposal employ what is essentially an enormous “cuts to be determined” line item to meet its proposed discretionary spending caps. See Office of Management and Budget (OMB), “Budget of the United States Government, Fiscal Year 2019,” table 26-1: Net Budget Authority by Function, Category, and Program,” row 1163, February 2018.

[22] See Scott Hodge, “News to Obama: The OECD Says the United States Has the Most Progressive Tax System,” Tax Foundation, Oct. 29, 2008. Even those figures underestimate this country’s current tax progressivity advantage because they do not include the 2013 upper-income tax increases and, more important, do not include the large value-added taxes that make European tax systems even less progressive.

[23] Calculated using IRS, “SOI Tax Stats—Individual Statistical Tables by Size of Adjusted Gross Income,” table 1.4. In 2015, the amount of income earned over the $500,000 threshold approximated 7.8% of GDP. An estimated 2.7% of GDP was paid in federal and state taxes on this income, leaving 5.1% of GDP in available take-home pay.

[24] See Chart 7 for the revenue estimates of several popular tax proposals. CBO estimates that these proposals would raise $23.3 billion annually by 2026, on a static basis. However, budget sensitivity tables estimate that a sustained 1-percentage-point decline in real economic growth would cost the federal budget $472 billion annually by 2026. Thus, if these new taxes reduce economic growth by even 1/20 of 1%, revenues would fall by $23.6 billion—enough to negate the tax-increase revenues. See OMB, An American Budget: Analytical Perspectives, “Economic Assumptions and Interactions with the Budget,” table 2-4: Sensitivity of the Budget to Economic Assumptions, February 2018.

[25] CBO, “The Distribution of Household Income, 2014,” Mar. 19, 2018. Supplemental data are at https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/53597-supplementaldata.xlsx.

[26] CBO, “The Distribution of Household Income and Federal Taxes, 2013,” June 8, 2016. Supplemental data are at https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/51361-supplementaldata-2.xlsx.

[27] The Joint Committee on Taxation (JCT) scored Title II (business tax reform) and Title III (international tax reform) of TCJA as costing $329 billion over the decade. However, JCT separately shows that the tax bill would provide $385 billion in total growth revenues. The economic consensus assumes that most of this growth comes from the bill’s corporate reforms, rather than the individual reforms. Thus, the corporate tax cuts in TCJA are almost entirely “paid for” with offsets such as reduced deductions (such as those for interest paid) and growth revenues. See JCT, “Estimated Budget Effects of the Conference Agreement for H.R. 1, the Tax Cuts and Jobs Act, Fiscal Years 2018–27,” Publication JCX-67-17, Dec. 18, 2017; JCT, “Macroeconomic Analysis of the Conference Agreement for H.R. 1, The ‘Tax Cuts and Jobs Act,’ ” Publication JCX-69-17, Dec. 22, 2017.

[28] Calculated using tax estimates in chart 7.

[29] CBO, “Costs of Military Pay and Benefits in the Defense Budget,” November 2012, p. 2.

[30] Charles Blahous, “The Costs of a National Single-Payer Healthcare System,” Mercatus Working Paper, Mercatus Center at George Mason University, July 2018.

[31] John Holahan et al., “The Sanders Single-Payer Health Care Plan: The Effect on National Health Expenditures and Federal and Private Spending,” Urban Institute, May 9, 2016.

[32] Charles Blahous, “Questions and Answers About Medicare for All’s Costs,” Economics21, Aug. 21, 2018.

[33] For an example of this argument, see Dylan Scott, “Bernie Sanders’s $32 trillion Medicare-for-All Plan Is Actually Kind of a Bargain,” Vox.com, July 30, 2018.

[34] Jessica Riedl, “No, ‘Medicare for All’ Is Still Not Plausible,” Economics21, Aug. 10, 2018.

[35] For more on the unworkability of a single-payer system in the U.S., see Sally Pipes, The False Promise of Single-Payer Health Care (New York: Encounter, 2018); Richard A. Epstein, “Why a Single Payer Health Care System Is a Really Bad Idea,” Newsweek, July 18, 2017; Jessica Riedl, “America Needs Health-Care Reform, and Single-Payer Will Be No Part of It,” National Review Online, Aug. 15, 2017; Riedl, “No, ‘Medicare for All’ Is Still Not Plausible”; Chris Pope, “Bernie’s Bad Medicine,” National Review Online, Oct. 16, 2017.

[36] This argument is most commonly associated with the talking point that Social Security is “fully funded” through 2034. Yet it is fully funded only because taxpayers will be repaying trillions to the Social Security trust fund over that period. These general revenue transfers will burden taxpayers and force up budget deficits each year.