- 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, senior fellow at the Manhattan Institute, says fiscal conservatives like her are feeling the same way about today's Republican Party.

- Today's Republicans have seemingly given up on conservative economics.

They're adding $5 trillion to the deficit with the tax cuts, and it's not even smart tax reform, but it's just tax giveaways to different constituencies.

- The yays are 218.

The nays are 214.

The motion is adopted.

(congresspeople cheers) - [Margaret] Republicans voted overwhelmingly for Trump's Big Beautiful Bill.

- [Representatives] USA, USA.

- [Margaret] But outside of Congress, not all Republicans support the party's fiscal direction.

What does economic policy expert Jessica Riedl say now?

- [Announcer] "Firing Line" with 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.

- Jessica Riedl, welcome to "Firing Line."

- Glad to be here.

Thank you, Margaret.

- 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 reigning 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?

- 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 gonna cut spending.

We're gonna streamline taxes.

I remember tax reform, broaden the base, lower the rates, and we're gonna cut the budget deficit.

But today's Republicans have seemingly given up on conservative economics.

They're adding $5 trillion 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 on deficits.

They've given up on Social Security and Medicare reform.

They've given up on energetic solutions to healthcare, energy.

They've- - You haven't even mentioned tariffs.

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

- So "The Wall Street Journal" reported this week that the US 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 JD 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?

- 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.

- Yeah.

- 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 gonna 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.

- Well, 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?

- If more tariffs are added, I expect economic stagnation.

It's not gonna totally put the economy into a recession by itself, but we are going to grow more slowly.

We are gonna have higher prices.

We are gonna 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.

- 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 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 cost of the tariffs onto consumers.

So which is it?

Who is actually paying for the tariffs?

- 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 gonna have to replenish their reserves, replenish their 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 a month in tariff revenues, which is about $240 billion annualized.

However, as the economy slows down, you're gonna 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 gonna be approximately zero.

- 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?

- No, tariffs cannot fund what President Trump is promising because again, so far it's been about $20 billion 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 gonna grow revenues with economic growth.

You may get tariff revenue, but you're gonna have companies with lower profits, paying lower taxes, families who are poorer, paying less taxes, and overall you're just not gonna 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 gonna invest based on that.

So I don't really know what we're accomplishing.

- 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?

- 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 gonna eventually factor all the way through the economy into slower growth, fewer jobs and lower incomes.

- 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 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 over the next decade.

Now, a projection that you have said is based on quote, "fantasy land match."

- Well, first off, the real cost is $5 trillion 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 gonna 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 gonna respect them in this bill.

- I see.

- If it does cost $5 trillion, 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 gonna 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, bailouts 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 $5 trillion in more debt, which is gonna 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.

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

- Yes.

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

- Well, first off, remember that economic growth is the sum of a bigger labor force, more workers and higher productivity.

If you wanna grow the economy, you need more workers making more stuff.

So if you want pro-growth policies, first off, you wanna encourage people to work.

Our immigration laws are really not doing that because we're gonna lose workers.

But also you wanna encourage productivity.

Work, save, invest.

- [Margaret] Yes.

- Now, when you do policy 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 tax 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.

- 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 of James Davidson of the National Taxpayers Union.

Take a look at this clip.

- 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 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.

- 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.

What gives?

- 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 gonna 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.

- What does a debt crisis really look like?

- From the end of World War II to 2008, the debt was about 40% of the economy.

It was manageable.

- Yeah.

- 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.

- Yeah.

- You see, the federal government is gonna need to borrow $200 trillion over the next 30 years under current projections.

That's not an accident.

$200 trillion.

The bond markets may not be able to supply that much lending at reasonable interest rates.

If that is the case, they're gonna 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.

- 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?

- 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 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 gonna make any sort of reform to Social Security and Medicare so much more painful and drastic.

- 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 a year.

So if you can't tax your way out of it, can't spend your way out 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?

- Viewers aren't gonna like to hear this.

- Well, if viewers aren't gonna like it, voters are gonna hate it.

- Social Security and Medicare are facing $124 trillion shortfall over the next 30 years.

- Is it fixable?

Is it sustainable?

Or are these- - We can- - Are they compromised?

- 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.

- Yeah.

- Most Social Security reforms are some combination of those three options.

- But hold on.

We've known how to do this for a long time.

- Yes.

- These aren't new ideas.

I mean, you've been talking about these ideas for at least 15 years.

- Yes.

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

- Right.

- 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.

- 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.

- 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 bailouts- - State and local tax deduction.

Yeah.

- The state and local tax deduction was even larger.

They wanted to make sure farmers and seniors got even bigger bailouts and now they wanna reverse the Medicaid savings.

It seems like there's just really no restraint.

- I mean, what are the most obvious structural reforms that could be made to Medicare and Medicaid?

- Healthcare reform is a lot more complicated than Social Security.

- Yeah.

- But for Medicare, I like what's called premium support, where you bring in more private plans, more choice in competition to hold down costs, but Medicare and Medicaid are very difficult to fix.

- This month, Congress approved a request to rescind $9 billion of appropriated funds, which codifies cuts that were recommended by the Department of Government Efficiency.

Of course, public television, 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?

- DOGE is really just spending cut theater.

Elon's- - Spending cut theater.

- Elon Musk originally promised to cut 2 trillion of the $7 trillion budget.

Then it was 1 trillion.

Then it was 150 billion.

I recently estimated that they're only cutting about $3 billion a month, and in fact, DOGE may end up losing money when you take into account the fact that they're eviscerating IRS staff, which is gonna 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 gonna go after the real programs where the money is and they're gonna defund the IRS's ability to collect taxes, they're gonna lose money.

And they're doing this against the backdrop of a $5 trillion tax cut.

That's not serious.

- 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?

- It would be much worse.

Federal Reserve independence is based on its credibility from being insulated from political pressure.

- Why is the independence of the Fed important?

- 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.

- Why?

- And that's because the Federal Reserve credibility would be shattered.

Financial markets would believe that inflation is gonna be coming and they're gonna demand higher interest rates to compensate for the inflation.

So ultimately, you end up with higher interest rates.

I also wanna 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.

- You have written, quote, "Seeing the critics of 'Bidenflation' and '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's from Calvin and Hobbes where Calvin makes up the rules as he goes along.

- 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 wanna cross a White House that got elected on big government populism, so they're somewhat paralyzed.

- Yeah.

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

- I still do.

I still talk to Republicans.

I talk to Democrats, too.

- Where are these ideas?

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

- Republicans right now are kind of lying in wait, at least the ones that I talked 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 gonna 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.

- It doesn't change the fundamentals.

- Budget deficits are 1.8 trillion on course to double to 3.6 trillion over the next decade.

We are gonna start to see the economic impacts, and that's gonna force our hand.

- Is there anything that gives you hope?

- 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.

- Jessica Riedl, thank you for joining me on "Firing Line."

- Thank you so much, Margaret.

- [Announcer] "Firing Line" with 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.

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