In this episode, show host Gene Tunny engages with Dr Dan Mitchell in a frank discussion about the US’s looming debt crisis. The conversation covers Dan’s new book, co-authored with Les Rubin, The Greatest Ponzi Scheme on Earth: How the US Can Avoid Economic Collapse. In the episode, Dan talks about the unsustainable trajectory of federal debt, the consequences of government overspending, and the tough choices needed to avert economic disaster. Hear how Dan reacts to the Modern Monetary Theory view that debt and deficits aren’t a problem.
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You can listen to the episode via the embedded player below or via podcasting apps including Google Podcasts, Apple Podcast and Spotify.
About this episode’s guest: Dr Dan Mitchell
Daniel J. Mitchell is a top expert on fiscal policy issues such as tax reform, the economic impact of government spending, and supply-side tax policy. Mitchell is a former senior fellow with The Cato Institute and The Heritage Foundation and served as an economist for Senator Bob Packwood and the Senate Finance Committee. His articles can be found in such publications as the Wall Street Journal, New York Times, Investor’s Business Daily, and Washington Times. He is a frequent guest on radio and television and a popular speaker on the lecture circuit. Mitchell holds bachelor’s and master’s degrees in economics from the University of Georgia and a Ph.D. in economics from George Mason University.
What’s covered in EP235
- Introduction. (0:00)
- US government debt and entitlement programs. (4:48)
- Government spending and its impact on the economy. (9:05)
- US government spending, Social Security, and fiscal policy. (14:06)
- US retirement systems and entitlement programs. (18:32)
- Medicare reform and the federal budget. (24:05)
- US budget deficits and entitlement programs. (27:59)
- Taxes, spending, and economic growth. (33:01)
- Kyle Kulinksi clip. (38:11)
- Dan responds to Monetary Monetary Theory (41:00).
- Entitlement programs and government spending. (44:40)
Takeaways
- The US federal debt is soaring, with projections showing a large increase in the debt-to-GDP ratio in the coming decades.
- Government spending, particularly on entitlement programs, is the primary driver of fiscal imbalance.
- Addressing the debt crisis requires significant policy changes, including reforming entitlement programs like Social Security and, to a lesser extent, Medicare and Medicaid.
- Reforming Social Security through personal retirement accounts could save trillions over the long run.
- Lessons from other countries show that fiscal discipline and restructuring can improve economic stability.
Links relevant to the conversation
- Dan’s bio: https://mises.org/profile/daniel-j-mitchell
- Dan’s International Liberty blog: https://danieljmitchell.wordpress.com/
- Dan’s post “OECD Economic Research Finds that Government Spending Harms Growth”: https://danieljmitchell.wordpress.com/2016/11/28/oecd-economic-research-finds-that-government-spending-harms-growth/
- Dan’s post “The IMF, The Laffer Curve, And Supply-Side Economics”: https://freedomandprosperity.org/2022/blog/the-imf-the-laffer-curve-and-supply-side-economics/
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Lumo Coffee Discount: Visit Lumo Coffee (lumocoffee.com) and use code EXPLORED20 for a 20% discount until April 30, 2024.
Transcript: Is Uncle Sam Running a Ponzi Scheme with the National Debt? w/ Dr Dan Mitchell – EP235
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Dan Mitchell 00:04
We had this wonderful opportunity back when we had a much stronger fiscal situation and we blew it. And it could very well be in 30 years. As you know, once we’ve hit that iceberg with our fiscal Titanic’s, you know, sort of the, on the tombstone of the American economy will be. It’s a shame that we had the Monica Lewinsky Bill Clinton scandal because it ruined our chance of saving the country.
Gene Tunny 00:37
Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. A lot of thanks for tuning into the show. In this episode, I’m delighted to speak once again with one of my favourite economics commentators Dr. Dan Mitchell, co founder and chairman of the Centre for freedom and prosperity. Dan was previously a senior fellow at the Cato Institute. And earlier in his career, he worked as an economist for a US senator and for the Senate Finance Committee. This episode I’m speaking with Dan about his new book, co authored with entrepreneurs Rubin titled The greatest Ponzi scheme on Earth, how the US can avoid economic collapse. It’s about a rapidly growing US federal debt. The US federal debt is over 120% of GDP currently, and according to the Congressional Budget Office, it will reach 181% of GDP in 2053. In this episode, Dan explains the difficult policy choices that will need to be made for the US to get its debt under control. This episode of economics explored is brought to you by Lumo coffee, which has three times the healthy antioxidants of regular coffee. It seriously healthy organic coffee Lumo offers a 20% discount for economics, explore listeners until the 30th of April 2024. Check out the show notes for details. As always, I’d be interested in what you think about what we discussed this episode. Are you concerned about the ever growing US federal debt? Also, please let me know any ideas you have for how I can improve the show. You can find my contact details in the show notes. Right? Oh, we’d better get into it. I hope you enjoy the episode. Dr. Dan Mitchell, welcome back on to the programme.
02:42
Glad to be with you, Jane.
Gene Tunny 02:44
Yes, it’s excellent. Dan, I’ve enjoyed reading your new book with your co author, Liz Rubin, the greatest Ponzi scheme on Earth,
02:55
how the US can avoid economic collapse. To start off with, could
Gene Tunny 03:02
you explain why do you compare the fiscal situation in the US to a Ponzi scheme, please? Well,
Dan Mitchell 03:09
a Ponzi scheme as your listeners and viewers may know or not know, is when you, in fact, get the sucker people into a game where they pay money. And they’re promised that they’ll get their money back because new people will always come into the game. So if you get the game early, you can wind up winning, but all Ponzi schemes ultimately fall apart. Because they’re your pyramid schemes where however you want to describe them, there just aren’t enough new suckers that join the game to keep it going. So the early people get out, and they make a profit. But the vast majority of people wind up losing their money. And when you look at the budgets, by the way, not just in the United States, but in many Western nations with demographics of ageing populations, and poorly designed entitlement programmes. When the US budget and the budget of a lot of other countries, we’re heading toward disaster because government is growing faster than the private sector. And when government grows faster than the private sector sooner or later, that’s going to lead to massive debt increases massive tax increases massive money printing to finance government spending is just a recipe in the long run for some sort of disaster, and then the United States. We’re like the Titanic sailing toward the iceberg. Except we can see the iceberg. We know what’s going to happen. We know it’s going to be bad news, but politicians, they don’t think past the next election cycle, or at least they don’t act like they do. And as a result, it gets worse every year because they keep adding more spending on top of all the spending already in the pipeline.
Gene Tunny 04:48
Yeah. Can we talk about that, please? Dan, is it true that the US it’s running it’s got a baked in budget deficit, hasn’t it? It’s got a structural budget deficit of several percentage points of GDP. And so that means your debt to GDP ratio is going up by several percentage points of GDP every year. And I’m not sure the exact figure, but are you at something like 100? And is it 130% of GDP or something of that order of magnitude at the moment in terms of debt to GDP, we
Dan Mitchell 05:18
have two measures. And this, this confuses a lot of people, we have gross debt as a share of GDP. And then we have public debt as a share of GDP. The public debt as a share of GDP, I think is the more relevant number, because that’s the calculation of how much money the government has borrowed from the private sector. The gross debt includes the money the government owes itself because we have with programmes like our social security system, which is our pension system in the US. When the government was collecting excess payroll tax revenues, the Social Security system would give those payroll tax revenues to the Treasury, the Treasury would issue government bonds, a special type of government bond and the Social Security system, but it was the government taking money out of one pocket and putting an IOU in the other pocket. It’s only a bookkeeping entry. So so a lot of people when they cite that higher number in the range of 130% of GDP, that’s the gross public debt, which is the real public debt, ie the debt held by the public, plus the the amount of money the government owes itself for these phoney trust funds.
Gene Tunny 06:29
Right, so So what is it roughly I mean, you have, I think, what’s good about your book as you you’re careful to you talk about the actual liabilities, there are some there are the ones that are owed to the bondholders. And then there are also these unfunded liabilities. So you talk about this broader range of liabilities as well, I like that, can you? Can you give us a picture of where the US is now and where it’s heading?
Dan Mitchell 06:55
Well, it’ll be a depressing story. As I already said, the most important thing to worry about is that government spending is growing faster than the private sector. And as long as those trend lines are upside down, where government is growing faster than private sector, that ultimately is a recipe, as I said, for massive tax increases, massive debt increases, and government printing money to finance its budget, Allah, Argentina, at least pre President Malay down there. Now, what accounts for our trouble? Why is government growing faster than their private sector? The main thing is the entitlements. And since we were just talking about public debt, government debt, let me try to explain three different calculations. That held by the public, as we already discussed, is the amount that governments borrowed from the private sector to gross public debt includes the money the government owes itself for the phoney trust funds and Social Security and things like that. But then the really scary number are the unfunded liabilities. And that’s just a measure of how much money the government has committed to pay for various entitlement programmes Social Security, Medicare, Medicaid, and since those programmes are the ones growing the fastest, and says the revenues, even though revenues are growing over time, you know, not only a nominal dollar, not only in inflation adjusted dollars, but even as a percentage GDP, the tax take in the United States is scheduled and projected to increase over the next several decades. The problem is government is projected to grow at a much, much faster rate. And these unfunded liabilities. And as you probably know, Jean, you know, a lot depends on what your projections are interest rates, discount rates, all these other things. But we’re talking potentially several 100 trillion dollars, depending again, what what assumptions you have in your model. And what it really boils down to is massive, long run fiscal imbalance in the United States, because government is simply growing much too fast and, and reuse my metaphor, we are heading for that iceberg. We’re in the Titanic. And it’s very frustrating that we have such short sighted politicians in both parties, by the way, where they just say, Oh, who cares? That’s, that’s a problem for someone in the future. Yeah.
Gene Tunny 09:17
And you talk about this concept of a doom loop. Are we is the US in that doom loop already? Or is that something that could happen in the future? If you
Dan Mitchell 09:27
were to ask me to make a guess? I would be on the pessimistic side. I just don’t think that our current political class has enough responsibility. My former George Mason University professor, the Nobel Prize winner, James Buchanan, we came up with the whole public choice school of economics, analysing what are the incentives facing politicians and bureaucrats, things like that. He and other public choice scholars will sometimes talk about the unwritten constitution And for a long time in the United States, there was this sort of expectation, even among politicians, well, we can’t really mess things up too badly. We have to sort of keep government under control. We can’t let debt spiral out of control. We can have massive, massive money printing or excessive taxation. And so that sort of kept things within check. Unfortunately, I just don’t think those constraints exist anymore. In some cases, I think it’s just pure shallow politics. I don’t care about the future. I’m going to buy votes today, try to accumulate power, make my committee more important, whatever their the incentives are, the politicians have. And in some cases, I think you have genuinely deluded people, especially on the left, who think, Oh, well, bigger government is good for the economy. You know, maybe they’re Keynesians, maybe they’re hardcore socialists, but I’m sure some of them are, are sincere in their beliefs, however diluted they are. But I think the main problem is, is that the politicians simply are so short sighted. They care more about their political careers than they do about the best interests of the country. Yeah,
Gene Tunny 11:07
I think I think you’re right there. Unfortunately, it seems to me, my impression is, is that politicians were more, there was more of a bipartisan consensus. I mean, now you don’t have either party that seems to be concerned about it. But back in the 90s, it seemed to be that there was more of a concerted effort by Congress on both sides of the aisle to get things under control. And then that helped Bill Clinton run some budget surpluses in the 90s. So yeah, even Joe Biden’s as a senator was, was very much in involved in these efforts. Am I reading that correctly? Dan?
Dan Mitchell 11:44
I think you’re basically Correct. You had, especially once the Republicans took over Congress in 1994. You know what sometimes it was called the Gingrich revolution, after being in the minority in Congress for What deal 40 years, the Republicans took the house, they took the Senate, it was a massive landslide win. And to give Bill Clinton credit, he didn’t try to fight it, he gave that famous State of the Union address where he said the era of big government is over, there’s over. And it wasn’t just rhetoric, going for a four year period, following the Republican takeover of Congress, government grew by an average in nominal terms of only 2.9% a year. And that was when we went from these massive $200 billion plus deficits. Now, of course, that seems small when we’re talking about reading today. But back then everyone was worried that was some threshold and you’ve crossed over it, you were being very irresponsible. Well, those big deficits turned into budget surpluses within a very short period of time, why government road grew at an average of 2.9% a year. And nominal GDP, of course, was growing much faster than that. And since revenue tends to track nominal GDP, that meant revenue was growing faster. So we had a bigger and bigger private sector, and relatively speaking, a smaller and smaller burden of government spending. Now, we got the budget surplus, but you know, when I think mattered, even more government spending as a share of GDP declined, because as Milton Friedman informed us many decades ago, the burden of government is not how much in taxes, it’s how much it spends. Because whether you you finance that government spending with borrowing with printing money, or with taxing, you’re diverting resources from the productive sector of the economy, so a lot of people in the US are very fixated on reading deficits, and that, Oh, that’s terrible. Well, they are bad. But government spending is the real problem. That’s what we need to get under control. And if we get government under control, make sure that the private sector is growing faster than the government, you’re gonna get rid of reading, you’re maybe not in one year, maybe not two years. And given the magnitude of the problem we face today, it might even take five years or 10 years. But so long as government spending is constrained, you’re eventually going to solve your problems of reading. And but the key thing to understand is government spending is the underlying problem. Red ink is simply a symptom of the problem.
Gene Tunny 14:14
Yeah, one of the strong points you make in the book is that the US Treasury itself, it’s issued warnings about this, hasn’t it? That this current fiscal path is unsustainable. So is this Janet Yellen is treasury. Does that mean that Janet Yellen, the Treasury Secretary knows this problem? And presumably she’s, I mean, you hope she’s telling, you know, Biden, and you know, the people in the West Wing about this. So where does the what’s going wrong? Is it in Congress? Is it the fact that it’s all just politically too hard that you’ve got these entitlements baked into the system? Well, what’s going on? What’s going wrong?
Dan Mitchell 14:52
I don’t know what Janet Yellen, the Treasury Secretary tells Joe Biden or for that matter, the Director of the Office of Management Budget, theoretically in charge of the spending side of budget, but whatever they’re telling him, Joe Biden’s budgets are terrible. He does have massive tax increases. And some people say, Oh, look, he’s serious about the deficit. He wants to raise taxes. But he’s always proposing massive spending increases. And of course, what do we know about tax increases, they never generate as much revenue as the politicians think because people change their behaviour. But also, whenever there’s an expectation of higher revenue in Washington, politicians can’t resist increasing spending. So Biden’s budgets were ever enacted. I would bet dollars to donuts that we would have more brand A we would have higher deficits, for those two reasons. So I don’t think you and again, is it Biden’s fault? Is it is it his appointees fault? Who knows who cares? The the key thing to understand is, he has terrible fiscal policy. He seems to be captured by sort of the Bernie Sanders Elizabeth Warren wing of the Democratic Party. And frankly, there really isn’t a bill clinton wing of the Democratic Party anymore. That’s that’s the problem. So, you know, Joe Biden, when he was a senator went along with Bill Clinton’s more free market economic agenda in the 1990s. But now, Joe Biden is doing the Elizabeth Warren Bernie Sanders agenda. And unfortunately, you know, Republicans have sort of lost that that old Tea Party zeal for fiscal responsibility and spending restraint. And that makes it very depressing for people like me, who work on fiscal policy in Washington.
Gene Tunny 16:35
Yes, yes. In terms of what can be done about it. So I had a guest on a couple of weeks ago, Michael Johnston is a in the in the finance industry. And he’s and he’s had a look at it. And you know, he’s we talked about the retirement age, we talked about the contributions, changes to the payroll tax contributions. We talked about, you know, different options for reforming Social Security. And you cover those in your book, many, I think, similar ones, but you’ve got a transition plan, which I think is really interesting, because there’s this recognition that the trust fund is exhausted to the or what happens is that when they run out of those IOUs, that the Treasury put in there, I mean, the cash went a long time ago. But when you get to a certain point, and then they have to cut benefits, don’t they? There’s a there’s a point in 2033, or whatever it is, but you’ve got a plan for improving that or getting out of that situation fixing up social security over I think it’s a 20 year period. Can you explain that plan, please, Dan,
Dan Mitchell 17:46
the problem we have with Social Security is that the spending and the programme is growing much faster than the revenues going into the programme. And as a result, this mythical trust fund is being depleted, the IOUs are being cashed in, which simply means the Treasury’s borrowing more money. But the trust fund, you know, as funny as it is, it’s still an important bookkeeping entry. And that’s going to run out in the early half of the first half of next decade. And then, technically, under the law, there’ll be an automatic cut and benefits for senior citizens of more than 20%. Now, will politicians allow that to happen? Probably not, you know, they could pass a lot tomorrow and add five zeros to every IOU in the trust fund. And on paper, that would solve the problem. But of course, it would only solved the problems by having Uncle Sam just issue hundreds and hundreds and hundreds of billions of dollars, and eventually trillions and trillions of dollars of new debt. So given the ageing of our population, and given the fact that Social Security is so poorly designed, in the book, less Reuben and I proposed to, in effect, do something similar to what you guys have in Australia, have a system of personal retirement accounts based on real savings. Now, you guys sort of just adopted it out of nothing. We have this giant unfunded liability and poorly designed Social Security system. And so our challenge is going to be entirely different. Because if we allow younger workers to start, in effect, shifting their payroll taxes into personal retirement accounts, how are we going to pay the benefits to current retirees, or to workers who are too old to benefit from a new system? And that’s what’s called the transition cost. And the transition costs, frankly, will be enormous. You’re talking 10s of trillions of dollars over the next 20 years. And some people say, Oh, my God, we can’t do that. 10s of trillions of dollars when we already have this giant amount of government debt. Well, here’s the here’s the most important thing to understand the unfunded liability. The cash flow deficit of The Social Security system over the next 75 years, and inflation adjusted dollars is more than $60 trillion. So here’s the choice, we have in the US two choices, to keep the current system going with a giant $60 trillion plus cash flow deficit, or transition to a system of personal retirement accounts, which $20 trillion or more of transition costs. Now, I don’t like having to make that choice. But if I’m going to have to make a choice, I’d rather have a $20 trillion problem to deal with than a $60 trillion problem to deal with. And then at the end of the day, wouldn’t it be great to have a retirement system based on private savings, rather than a government retirement system that’s untrustworthy, that’s based on taxes and debt. So I think Australia, not just Australia, Switzerland, Netherlands, Sweden, Chile, you know, there are several dozen countries around the world that now have much stronger and retirement systems that are better for national economies, but retirement systems that also are better for individual workers. So that’s a giant challenge for the United States. We almost did it, by the way, during the Clinton years. And that’s what’s so tragic. rebill Clinton was on board, he understood the issue, Republicans and Congress understood the issue. But then we got that whole impeachment thing, and Bill Clinton had to move to the left to shore up the Democratic base. And as a result, we had this wonderful opportunity back when we had a much stronger fiscal situation, and we blew it. And it could very well be in 30 years. As you know, once we’ve hit that iceberg with our fiscal Titanic’s sort of the, the tombstone of the American economy will be it’s a shame that we had the Monica Lewinsky Bill Clinton scandal because it ruined our chance of saving the country. Right? Yeah, yeah. Yeah, that’s
Gene Tunny 22:02
a that’s a good political observation there. Dan. I think that a lot of the maybe a lot of the craziness does date from from that episode. That was an extraordinary of a so now, what about Medicare? I mean, one of the other issues is Medicare and Medicaid, do you have recommendations for those programmes to
Dan Mitchell 22:25
the good news about Medicare and Medicaid is that those problems are much easier to deal with and Social Security. With Medicaid. That’s the easiest one of all because, and that, by the way, for your your listeners and viewers outside of the United States, Medicaid is the federal government’s programme, to provide health care to poor people. And what we should do to that programme is what we did under Bill Clinton with welfare reform in the 1990s. Simply take the programme, block, grant it and turn it over to the states. And then the states would then have full flexibility to innovate and experiment, figure out the best way and most cost efficient way of providing health care to low income people, and that work fantastically with welfare reform. We reduce poverty, we reduce child poverty, we increase labour force participation among low income people. So let’s learn from that success and fix the Medicaid programme. Wonderful, simple choice. We actually almost did it during the Trump years. I mean, Trump was very irresponsible in many areas on government spending. But Congress came within one vote in the Senate from making that reform is another one of these tragic things of history, that, that we didn’t take that opportunity. But maybe it can happen in the next four years, because that’s an issue where we’re, I think Trump is open to doing the right thing. Now let’s shift to Medicare. Now, Joe Biden has said no changes to Medicare, that’s irresponsible. Donald Trump has said no changes to Medicare, that’s fiscally irresponsible. So it’s very hard for me to be optimistic about anything happening on this programme in the next few years. But let’s explain what should be done. And again, for your overseas listeners and viewers. Medicare is the federal government’s programme to provide health care for old people, Medicaid, health care for poor people, Medicare, health care for old people. I’m on Medicare, because I’m 65. So you have to sign up. So I know I’m part of the problem now. But the simple way to solve that, and by the way, Republicans back during the Tea Party era, in the early part of last decade, they had budgets, the Paul Ryan budgets that fix both Medicare and Medicaid and what they did with Medicare at the end of that they looked at the Health Care programme for federal government workers for the Federal Employees Health Benefits programme. And in effect, what it does is it tells federal bureaucrats, here are your choices and health plans. You pick the one that that best serves you the federal gov reds can provide a certain amount of support to premium support. So we subsidise the plans, but you pick the plan that you want. Well, let’s do the same thing with senior citizens. Give everyone this sort of voucher if you want to call it that, and then let them pick from from a range of approved plans. And then of course, if you limit how fast the premium support grows, you could wind up saving trillions and trillions of dollars over time. Just like with the Medicaid block grant, you can save trillions and trillions of dollars over time, so long as you keep the growth of either the block grant or the premium support from growing slower than the private sector. So fixing Medicare and Medicaid shouldn’t be that difficult, not nearly as big of a fiscal challenge as fixing Social Security. But of course, it will be a political challenge, because we saw back when Paul Ryan was trying to fix these programmes. last decade, you had you had folks on the left running campaign commercials of a Paul Ryan look like pushing a grandmother off a cliff. It gives you an idea of the kind of silly demagoguery we get in US elections. But the good news is Republicans several years in a row during the Tea Party era, they were passing budgets that presumed Medicaid and Medicare reform. Now, Bill Clinton was in the White House, obviously, these programmes died in Congress because they couldn’t get any farther than that. But if Republicans can sort of rediscovered that Ronald Reagan, Tea Party type spirit of fiscal responsibility, I think there is a chance maybe not with Trump in the White House. But at some point, you know, I think there’ll be a Reagan type conservative in the White House. And those programmes can and should and must be fixed. We discuss that in the book we explain, you know, we don’t go into great details, we don’t want to bore just the average reader. The whole purpose of the book is to explain and common sense language with lots of facts, but not bearing people with jargon and stuff like that. Here is our problem. Here’s the direction we’re going that direction is going to be a disaster. But if we make these reforms, we can we can make America much more prosperous.
Gene Tunny 27:19
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Gene Tunny 27:53
Now back to the show. Okay, and what about defence, Stan? So there’s a you know, reasonably widespread view that I mean, the Pentagon waste money? I mean, I think that’s undeniable. It’s failed six or seven audits. There are concerns about unnecessary, costly military adventures abroad. 7 trillion or whatever. There’s all of these astronomical estimates for what the, you know, Iraq, Afghanistan, Syria has cost the US and will continue to cost in the future. Is there anything that should be done about defence in your view?
Dan Mitchell 28:34
I’m sure there must be hundreds of billions of dollars of waste, and the Pentagon, but we focused in the book, what are the long term drivers of our fiscal problems, and it’s, it’s not the defence budget, the defence budget has, has keeps coming down as a percentage of the budget over time. Or if you measure the defence budget as a share of GDP, it’s come down. Obviously, we don’t want to waste money anywhere, even if it’s not the driving force and driving problem in the budget. But defence is not the issue. Now. That doesn’t mean we should do costly nation building exercises in the Middle East. But on the other hand, I’m not enough defence foreign policy expert. But given what Russia is doing, and given China’s sabre rattling in the South China Sea and stuff like that, I’m not sure I would want to radically slashed the defence budget, I would probably want to reorganise it. So we’re more focused on being able to protect America’s national interest. But but that’s separate from I guess, a fiscal debate. Again, fiscal fiscally speaking, the defence budget is is just a tiny fraction of our problem. And that’s even part of the problem at all.
Gene Tunny 29:47
Right? Because it’s these, these entitlement programmes where you’ve got that fundamental problem of the spending ghetto, getting away from any revenue that’s coming into town, you know, to fund them. So yeah. And take that point. Right, and why isn’t higher? I mean, I think you make a good a good case for why this is a spending problem. It’s not a just a low tax problem. Can you explain why you wouldn’t want? The government has to address this fiscal gap through higher taxes? Please, Dan?
Dan Mitchell 30:22
Well, I guess there are two things that are important to understand. The Congressional Budget Office every year publishes a long run forecast. And by long run, they’re looking out 30 years, they published his long run forecast of the US economy. And in that document, the most recent one came out just last month, I think it was maybe two months ago. But it showed that revenues are above their long run average. Spending is also above the long run average. And if you look at the forecast, 30 years out, the revenue burden is going to climb to record levels, because mostly because of real bracket creep. In other words, as you know, even in a sluggish growth economy, you know, people are going to sort of their incomes are going to increase, they’re gonna go into higher tax brackets. So the government winds up getting bonus tax payments, with even modest levels of economic growth. So the tax burden is heading to be at an all time high. But because government spending is projected to grow much faster than the private sector, it means that, that we’re falling farther and farther behind. So just as a matter of pure math, our problem is more than 100%. on the spending side of the budget. Again, revenue is climbing as a share of GDP. But because spending is climbing much, much faster. Why on earth would we want to increase taxes on the American people for a problem that is more than 100%? on the spending side of the budget. But that’s just the math argument. Now, let’s look at what I call the public choice slash economic issue, which is that if you put taxes on the table, what are politicians going to do, they’re going to increase spending. And not only that, if they get the taxes throw, the economy’s gonna suffer. Now, I’m never one to say, Oh, you raised this tax or that tax, there’s going to be a recession, I worry more about if you raise this texture, that tax, the long run growth rate will decline. And even if it only declines a small amount, maybe two tenths of 1%, a year that has massive long run implications because of the wedge effect over time. And then, and I think that even left wing economists, the honest ones are going to admit that higher marginal tax rates on work saving and investing are not good for growth. So as GDP gets smaller and smaller over time, at least in terms of compared to some baseline projection, that means foregone tax revenue, because there’s less national income to tax. So what’s the bottom line, politicians will spend more money because of the higher taxes and the higher taxes won’t generate as much revenue? And you don’t want to know what the most powerful evidence for this is? I think I get the data for the, for the 15 countries of the old European Union, in other words, the core Western European countries that would be most analogous to the United States or, for that matter, Australia, relatively rich by world standards, Western oriented nations. And what did I show in the European Union, you go back and I did a five year average. So nobody could accuse me of cherry picking just one year that was favourable to my analysis. I did a five year average for the last half of the 1960s. And I looked at government spending as a share of GDP, taxes of the share of GDP, and government debt as a share of GDP, and taxes between the end of the 1960s. And the most recent five years, the tax burden in Western Europe increased by 10 percentage points of GDP. Now, politicians in Western Europe and these various countries Germany, France, Belgium, Netherlands, etc, etc. They said, Well, we have to raise taxes, because we have red ink, we have deficits and debt. So I said, Okay, taxes went up by an enormous amount as a share of GDP between the late 60s and today. What happened to government debt, they use this massive increase in the tax burden to lower government debt, no government debt during that period, doubled as a share of GDP. In other words, politicians spend every single penny of that new revenue plus some. So when I debate some of my left wing friends, I tell them, show me an example. Anywhere in the world, where we’re giving politicians more money to spend has resulted in better long run fiscal performance. It just doesn’t happen. By contrast, I’ve gone through the IMS World Economic Outlook Database, and I found not a lot unfortunately, but I found many examples of countries that for multi year periods had government spending growing at 2%? a year or less? And what do you find, in those cases when they’re spending restraint. And we talked about this, by the way, we have an entire chapter in the book, where I cite some of these good examples. When you have spending restraint. Deficits go down the burden of government spending, as a share of GDP goes down, you have success. Yeah, I couldn’t, we could add some blank pages in the book, and lift and title that chapter success stories of higher taxes, because there wouldn’t be anything to write.
Gene Tunny 35:32
Very good. And you saw it studies by OECD and IMF, I think that do establish that empirical link between taxes and growth and negative link. If you have a higher tax to GDP, you have a lower economic growth rate. If I’m if I remember correctly, you cite some of those studies. So I can put links in there.
Dan Mitchell 35:53
It is remarkable that the OECD and then the IMF, by and large are sort of, I don’t know whether you’d call them left leaning bureaucracies, but drug pushers controlled by government bureaucrats who respond to their political paymasters in Washington and Berlin and Brussels and Paris. And so you get a lot of bad advice from the IMF and the OECD. But both of those international bureaucracies have economics departments that do working papers and studies. And even though these studies don’t get a lot of attention, I look at them. And it’s remarkable how often those studies point to the fact that spending restraint, and low tax rates are good for growth, while at the same time to political appointees at the IMF and the OECD. They go around the world saying government should raise taxes and increase spending. So I’m not a fan of international bureaucracies. He has the leadership of the International bureaucracies. They respond to pressure from national capitals around the world. And unfortunately, when you have Joe Biden, and the US and your Sunak, in the United Kingdom, might as well be a Labour Party, Prime Minister, and then of course, he macarons No, good. Schultz. I mean, we just have so many bad left wing governments and the major countries of the world that you wind up with the OECD and the IMF responding to their pressure to give bad advice, even though many of the economists that work at those bureaucracies, publish papers that have findings that that good economists would agree with.
Gene Tunny 37:22
Yeah, yeah. Yeah, they’re not motivated by the politics. They just want to do the the analysis, crunch the numbers and come up with credible findings. So absolutely. Dan, before we wrap up, I’d like to play you a clip, which I think is it’s representative of all the the opposite view to yours. And, and in a way, it’s almost like when I listened to it yesterday, I thought is this Kyle Kolinsky actually talking about Dan, but I think he’s just thinking generally about other, you know, economists and what economists are not and what I think mainstream economists think about the dead. I don’t think this is necessarily a libertarian economist view. So I want to play this and then get your reactions to it because it’s, it’s quite a quite a fascinating clip.
Kyle Kulinski 38:11
Your line of attack against both Trump and Biden is the debt. That’s the first thing you list the existential issue of the debt. Okay, let’s be clear, guys, that is simply a right wing argument. That’s like the libertarian economics types, the Austrian economics types. The idea that, you know, the nation’s debt is you should conceptualise it the same as household debt. Like if you have household debt, you only have a choice, you kind of have to pay it off. Like you have to. It appears like RFK has no idea how the national debt functions, especially when you have a sovereign currency. He should read up not only on Keynesianism, but on modern monetary theory, because all this debt and deficit fear mongering, I just need to understand this. It’s the dumbest shit of all time. It’s just the dumbest shit of all time. Just just to give one example, Japan has had a lot of debt for a long time. And even their debt to GDP ratio was kind of out of whack. And a lot of like, right wing wall street types have been predicting forever, a debt crisis that’s going to hit Japan. And it never comes. They’ve been saying it since like the 1990s. That that’s gonna happen. It never comes. Why? Because they fundamentally misunderstand what the national debt is, what it means to run a deficit, how that impacts the economy. Here’s a fact that a lot of people don’t know. Did you know that public debts lead to private growth? Right. So from that perspective, you might even say in many instances, public debt is a good it’s just a good thing. Not it’s a bad thing. We got to fear it. You know, this is bad and wrong, and we need to reverse it and we need to Make sure we cut it. No. In some instances, it’s a good thing. Like there are very positive outcomes that come from public debt. And again, I don’t, I don’t think he understands it, that public debt means private surpluses. That is like, that’s the lifeblood, certainly of a capitalist economic system.
Gene Tunny 40:21
Right. So that was Carl Kolinsky, who’s a very prominent progressive commentator in the, the US and he was responding to something RFK Jr. said, he told Erin Burnett on CNN, regarding how he sees the dead as an accident, an existential threat to the US. And he’s worried that neither Biden nor Trump are actually that concerned about it, or will will do anything about it. So Dan, do you have any thoughts on I mean, that particular viewpoint, I’d be interested in your reactions to that because it is it does seem to be a common view among, among many people out there.
Dan Mitchell 41:00
But I never thought I would agree with RFK, Jr. on something, but he is right about Trump and Biden. They don’t care about that. But I would change the focus. My concern with Trump and Biden is that they don’t care about the growth of government. And as we’ve already talked about, Jean, that growth of government is the problem. The growth of debt is a symptom of the problem. Now, there’s no question that, that a lot of people who do fixate on the debt, have pointed to Japan and said, Oh, this, this is not going to end well. And, and I think those people are right, but it’s always a danger to imply that crisis will happen overnight. Now, having said that, let’s Ruben and I, at the start of our book, we give a little story. We say imagine that you’re Greek, and that you’re living in Greece in the mid 2000s. And everything seems great. You’re now part of the euro, your interest rates have come down, your economy is growing 4% a year. And sure there are some people complaining, well, wait, our demographics aren’t friendly, and our government debt is too high and government’s growing too fast. But you don’t care as a great citizen, because the government’s giving you lots of benefits. And it seems like the economy is just fine. And you think, oh, this person is just, you know, crying wolf. Well, guess what, within five years, your economies and one of the most massive, severe economic downturns that we’ve seen in the modern history of the Western world, and then, you know, their living standards dropped by 25%. In Greece, it was a horrible wrenching experience, because they got to the point where what happened were investors didn’t trust the Greek government. Now, we’re used to that with third world countries or developing countries, I guess we don’t use third world anymore. Why? Why has Argentina defaulted so many times because at least before President Malay, they’ve had all these Coronas governments that would spend money, borrow money, print, print money to finance their budgets. And then they got to a point where international investors said, I’m not gonna buy any bonds from that, from that government. That’s when you have a fiscal crisis, when investors no longer trust your government to pay back the bonds when they borrow money. Now, is Japan going to hit that? That that that crisis point? I think at some point, they probably will, because their demographics are really challenging. They have the entitlement problems, and government debt is more than 20% of GDP. And now, yes, they got the Japanese government has certain regulations, that sort of forces, a lot of private savings into buying government bonds. But at some point, you have to wonder they’re gonna run out of time. And I think the same thing will happen to the United States if we don’t get control of government spending. So I disagree with the gentleman whose clip that you played. I think that government debt is a troubling symptom of a bigger problem of government growing too fast. And I think Greece isn’t is a real world. Not that far ago, example of how that won’t end well. And yes, the US is the world’s reserve currency. We can print a bunch of money. But the mere fact that that guy was citing modern, modern monetary theory, the biggest crank theory that you could possibly imagine that you can sum up print your way to prosperity if that was true. Why isn’t Venezuela the most prosperous country on the planet? So I don’t know what that guy was smoking but that must be really fun.
Gene Tunny 44:40
Yeah, but look, it is. It is actually a an increasingly common view among particularly younger younger people. So I think it’s it’s interesting, he’s very influential on in those progressive circles in the state so that I get your reaction from that. Okay to that Okay, Dan, this has been terrific go. Yeah, I really enjoyed your book, I’m really gonna recommend it. I’ll put a link in the show notes. I learned a lot I learned about, you know, exactly what’s happening with Social Security in this days for the trust fund. That’s fascinating how it’s full of IOUs, how there’s going to be this, this critical point in in 2032, or 33. And I chatted about that with Michael Johnston as well, that will, hopefully for some type of action is not just some sort of, you know, putting in a couple of zeros, as you suggest that they could do, they could just say, Oh, look, all is good. We’ll just give you some, you know, pretend you’ve got more money in that trust fund. Let’s say they actually do something about that. And also liked you cite Switzerland as an exemplar of a of a, of a country that appears to be doing things really well. And in federal, the federalism there, the Federation could help because there’s the cantons compete with each other. They don’t want to have high taxes, they want to attract people. So I think that’s a good example. So yeah, definitely learned a lot from the book. Is there anything you’d like to say before we wrap this up, please, Dan?
Dan Mitchell 46:09
Well, of course, I recommend that people buy the book. I suspect, given that it’s a wonky topic, we’ll never sell enough that we get any royalties to speak of. So I want people to buy the book, not to not to put money in my pockets. But to understand what our problem is. Government is growing too fast. We have so many real world examples of countries that have done good things and bad things in the book. We have very accessible, easy to understand explanations of what’s wrong with our entitlement programmes, to solutions to fix those problems. And all I know is that I don’t want to be that Greek citizen in 2005, who 10 years later, was suffering through a deep, deep economic downturn because my politicians never got spending under control.
Gene Tunny 46:58
Yeah, yeah. Very good point. Okay, Dan Mitchell. This has been great. Thanks so much for appearing on the show. I’ve really enjoyed it.
Dan Mitchell 47:05
Well, thanks, Lucky. Thanks for having me on.
Gene Tunny 47:09
rato, thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics explore.com, or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.
47:56
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Credits
Thanks to Obsidian Productions for mixing the episode and to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts, Google Podcast, and other podcasting platforms.
