cc >> I'm Margaret Lewis,
executive director of the Wisconsin Academy of Sciences,
Arts, and Letters, and welcome this Wisconsin Academy Evening,
The Post 9/11 Economy: Getting Civilized About Deficit
Reduction, featuring Diane Lim Rogers.
She's the chief economist of the Concord Coalition in Washington,
DC, a nationwide nonprofit grassroots organization,
advocating generationally responsible fiscal policy.
Rogers also writes the blog, EconomistMom.com, which is noted
as one of the top economics blogs by the Wall Street
Journal. She writes, also, a tax notes
column, "Taxes for a Civilized Society."
And at the Concord Coalition, she writes policy briefs,
gives speeches and provides general expertise on the
economic effects of the federal budget and tax policy.
She's worked in Washington for the last two decades.
Prior to working at the Concord Coalition, she held many
prominent positions on the hill, including the chief economist
of the House Ways and Means Committee, Senior Economist with
President Clinton's Council on Economic Advisors, among others.
She received her BA in Economics from the University of Michigan,
her MA from Brown University, and her PhD from the University
of Virginia. Please help me welcome
Diane Lim Rogers. [applause]
Thank you. [applause continues]
Am I on? Yes.
Thank you so much, Margaret. And thank you to all of the
Wisconsin Academy for inviting me.
That is not my first slide, however.
Let's see. Here we go.
That's okay. So, thank you.
I'm from the Concord Coalition. If you've never heard of us,
we've been around since the early 1990s.
I'm very pleased to be here today.
This is actually my very first time in Madison.
It's hard to believe since, you know, I went to a Big Ten
school, that I never got over here for a football game.
I'm a Midwest girl, so I hope we can relate that way.
I was born in Chicago, maybe you can tell from the way
I'm speaking. I grew up in a Detroit suburb.
My sister has never left Michigan.
She's an engineer for Ford, so I have a fondness for the auto
industry, and a fondness for academia, because my dad was a
chemistry professor at Wayne State University in Detroit.
So I come from an academic background in an academic
household. The first part of my career,
after I received my PhD, was I was a professor at Penn State
University for five years. I still teach to this day part
time in DC, at George Washington University.
But I'm here to talk about the deficit today.
I want to point out that the reason I started the blog, which
I was able to start when I left Capitol Hill and was finally
allowed to speak my own mind about things, you know,
reporters were no longer told that no, you can't talk to
Diane. The problem with being an
economist working for a Democratic staff is you end up
being the most conservative person on the Democratic staff,
and you also end up saying politically incorrect things
like, you know, well if you don't like President Bush's
proposal for reforming Social Security, why don't we just come
up with a better one? That was my response.
And I didn't learn that the answer was no.
Just say no. Just say no.
So, as soon as I had reached a level of frustration that I
couldn't take anymore on Capitol Hill, especially once I was
working for the party in charge and I was still frustrated, and
I realized this was a problem, was I started talking with Bob
Bixby, who's the executive director of the Concord
Coalition. I had worked with the Concord
Coalition while I was at the Brookings Institute.
I had been part of the so-called fiscal wake-up tour, as the
Brookings representative. I enjoyed that opportunity so
much, and I enjoyed the Concord Coalition's mission and believe
in it so much that I was very excited when Bob Bixby told me I
could come work with Concord, like as a real staff person for
Concord. My blog, economistmom.com,
is a blog that's my perspective as an economist and as a mom.
I am a babyboomer. I'm a young babyboomer, but I'm
a babyboomer. I have four children.
My oldest two are in college now.
My baby is 13. So, right at the moment, for the
next few days, I have four teenage children, because my
oldest is turning 20 this weekend.
So, have sympathy for me and be nice to me, because you know
that I have a lot of stress in my life.
My perspective on the budget deficit has always been because
I'm both an economist and a mom. And you know, as an economist,
the budget deficit is something that we all worry about,
Liberal, Conservative, all economists worry about the
budget deficit, because there are reasons to worry about it
both from a long-term economic growth perspective and from a
shorter-term economic stability perspective, in terms of, you
know, when you're in a recessionary economy, you still
have to worry about the deficit, for different reasons.
As a mom, I'm concerned because I'm worried about my kids'
economic future. I don't want to just put off
solving our problems and paying our bills, because I know you
can't put it off forever. Chances are that my kids are
going to end up paying for a lot of the bills that we're not
willing to pay for now, in the form of, they're going to pay
for it either in the form of higher taxes or reduced
government services, because we won't be able to afford those
services anymore. Or, they'll just pay for it
indirectly in terms of an overall weaker economy.
They won't be able to find jobs, or they won't have good paying
jobs. So, because I'm a mom, I've
really worried about this issue of fiscal responsibility for
many years. When I worked for the Clinton
administration, I was there for the very last year of the
Clinton administration. When you work for the CEA, the
Council of Economic Advisors, your primary responsibility,
your biggest assignment during the year that you work on the
council, is to produce the president's economic report, the
so-called Economic Report of the President.
While what the president himself writes is very short,
it's like the one big cover letter.
The whole thing is labeled the Economic Report of the
President, and it's signed by him, but we on the staff of the
Council of Economic Advisors write the whole rest of the
report beyond that first page letter.
I was tasked that year with writing about President
Clinton's legacy in terms of what were the economic effects
of turning our budget situation around, our federal budget
situation around from record deficits to surpluses by the end
of his administration. What did that have to do, if at
all, with the strength of the economy at the time.
I concluded, after doing a lot of research that year, that it
wasn't a coincidence that we had turned our budget deficit around
back to surpluses, that we had raised taxes, yes, in the early
1990s, despite the fact that President Clinton had campaigned
on middle class tax cuts, he ended up kind of reneging on
that campaign promise, because deficits were too large to do
that, to follow through on those tax cut promises.
It wasn't a coincidence that we had very strong economic growth.
It wasn't entirely due to fiscal policy.
And I have to admit now, because I can, that when I wrote the
first draft of that chapter, I explained that it was a
combination of good policy choices and good luck.
There was a little luck there. Well, when the White House
edited the chapter, the luck part got taken out.
It was all "good policy." But I can say with confidence
today, it really was a combination of both.
It wasn't just good luck. It wasn't just good policy.
We were fortunate that good policy and good luck,
good economic fortune happened at the same time.
In the late 1990s, we were getting repeated what we call
revenue surprises in DC. In other words, every time the
Congressional Budget Office was projecting what tax revenues we
would raise by the end of the year, it always turned out to be
a lowball estimate. We always ended up getting more
revenue than what we had expected.
So those were revenue surprises. We ended up with larger budget
surpluses, or smaller budget deficits, earlier on than we
were expecting. Why did that happen?
Well, we were gaining a lot, we were collecting a lot in capital
gains and dividends, tax revenue, because the stock
market was booming. There was what Alan Greenspan
referred to as the irrational exuberance of the marketplace.
It was associated with the high tech bubble, right, all the
computer technology, the Internet.
So, all of that created this wonderful, what I call the
virtuous circle in the economic report of the president, that we
had this wonderfully strong private sector economy, and we
were saving in the private sector at a decent rate.
But we were also saving in the public sector.
We were positively saving. The public sector's contribution
to national savings was actually positive at the end of the
Clinton administration. In other words, we weren't
running deficits anymore. We were running surpluses.
When you raise national saving, national saving is one of the
surest ways to ensure strong economic growth over time.
So, the Clinton administration years were a good experience.
I came out of that, I did stay for the first hundred days of
the Bush administration, and by the way, that is traditional.
When you go to the CEA as a staff member, it is a
non-partisan job. Most of the staff at the Council
of Economic Advisors are professors coming for academia
for a year leave. You come to the staff of the
CEA, and you work on real research in preparation for the
report that you're going to produce at the end of the year,
the economic report of the president.
So it is a non-partisan job. The idea is you're supposed to
be able to, without problem, stay for, even at the end of an
administration, it's a summer to summer appointment.
You stay through, even if it's the last year of an
administration, you stay at the end of the administration and
continue with the new administration until the
following summer. I was the senior economist,
however, for tax and budget policy.
If you might recall, that was a rather unusual election.
The Gore versus Bush election. And I didn't know who my boss
was going to be. Was it going to be President
Gore, or President Bush. There was a little bit of a
difference in terms of tax policy going forward.
[laughter] So it was a very, kind of, it
was a very stressful time in my career, in that I didn't know
what I was supposed to say from one day to the next.
You're supposed to stay non-partisan.
It's hard to stay non-partisan when you get sent abroad to
represent the new administration and speak about a tax policy
that you don't really believe in.
So, just as a warning, if there's anyone in the audience
that loves the Bush tax cuts, you're going to hate me after
tonight, okay? So, I don't make any qualms
about it. If you go to my blog, you'll
think this woman is obsessed with the Bush tax cuts.
She's got to let it go. You know, it's been over a
decade, just give it up. They're not going away.
But that has been my number one obsession.
It started from a position from where I had to write about
Clinton's tax policy. Clinton's tax policy was hugely
different from George W. Bush's tax policy.
I had to write why Clinton's tax policy was good for the
economy. So that's why the undoing
of Clinton's tax policy was a little difficult for me.
I only lasted the first hundred days of the Bush administration,
when I was supposed to stay until the summer.
To be honest, I ran over to Capitol Hill to go work for the
Democrats. Yet, as I started my talk,
I have always been the most conservative person on the
Democratic staff of a congressional committee, so
I didn't fit in very well there, either, is what I'm saying.
Concord Coalition has been my perfect home.
I'm finally kind of home with the Concord Coalition.
What I'm about to do is go through a quick little chart
talk. The Concord Coalition, we have
an organization of about a dozen of us staffers, although that
counts our accountant and our computer tech person.
So our policy staff is actually very small.
There's like six of us that go around the country
and do chart talks. But my colleague Sara Imhoff is
the Midwest field director. She's based in Iowa, and she
comes to Wisconsin all the time. So whatever you hear from me
tonight that you're dying to hear more of, Sara is close by,
and you should contact us and see if Sara can come
give a talk for your group, to your, you know, maybe smaller
more local group. I'm going to tell you a little
story about the deficit in just maybe a dozen charts tonight.
The current fiscal situation, this is a picture of our deficit
this fiscal year. Our deficit is $1.3 trillion.
That's a very high deficit, because it is something that is
approaching maybe 9% of our gross domestic product.
That's considered too high. Why do economists consider that
too high? Because you can think of the
deficit as the annual increase in the debt, which is the stock
of money we owe. And economists consider a debt
economically sustainable as long as it's not growing faster than
the economy. Right?
You can think about it as akin to what if a family's got debt,
consumer debt, would you worry if the household is running debt
or incurring a debt load? No, not necessarily, as long as
the debt wasn't growing faster than their means to pay it back,
right? So, why do we borrow as
families? Well, I borrow right now a lot
for college education, for example.
I view that as a worthwhile thing to borrow for, because I
believe that it increases the income potential of my children,
so I won't have to give them as much money in the future if I
borrow some money today. It's an investment that I
believe is going to pay off. Similarly, why would you borrow
to buy a house? Maybe because you believe that
the value of your house will rise, and your income will rise
too? That got some people in trouble
a few years ago. But you know, it's the reason
why we've always believed that you should be able to borrow to
buy a house, right? It's because homes appreciate in
value, hopefully, eventually, and your income grows.
You typically buy a house when you're young in your career,
right? So, borrowing to buy things that
will increase in value over time and will produce a source of
capital or income for you is okay.
It's borrowing to buy things that don't raise your income
potential in the future that's not okay.
That's how you get into this unsustainable problem.
Unfortunately, if we run deficits this large, the problem
is that we're not, if we kept running deficits this large, the
problem would be that we would not be growing our economy fast
enough to keep up with the rising debt.
This annual increase in the debt is faster than the annual growth
rate of the economy, which has averaged maybe 2%-3%, you know,
over the past few decades. So, economists consider this
too big a deficit. But it's not a bad thing,
because this is unusual. We have a very big deficit this
year, because we're still recovering from a very bad
recession. Any time we're in a recession,
where we're not operating at the full capacity of the economy,
government spending is going to go up, and government revenues
are going to fall. That's sort of a natural
business cycle effect on the deficit.
So, whenever you're in a recession, you should expect
that deficits get bigger. But you should also expect that
once you recover out of that recession, once you get back to
something closer to what economists think of as full
employment, a full-employment economy, then the deficit should
go back down to something that's lower than the rate of growth of
the economy, ideally. The problem is that this is
unusual, yes, but it's not expected to get much better
before it starts getting worse again.
So, I would not be worried-- I'm not terribly worried about
the $1.3 trillion deficit this year.
What I'm more worried about is the fact that even after
economists are projecting that our economy will be back to full
employment, that over the longer term, our deficits start to go
up again to levels that are again, greater than 3% of GDP,
which means greater than the growth rate of the economy.
This is a graph that shows our history since 1980, and a
projection going out to 2021. The projection shows two sets of
lines. I have a pointer here.
Shall I use this? So, two sets of lines.
I love technology, by the way. Concord Coalition Plausible
Baseline. I explain more about this in the
next slide, but these purplish lines are the Concord
Coalition's plausible baseline. Those are the lines that look
kind of bad, right, because the gap between spending and
revenues is our deficit. This is at the percent of GDP.
We're already translating it into a gap that you can compare
to the growth rate of the economy.
The green lines are what the official CBO, Congressional
Budget Office, baseline projections are.
Those are based on current law. Like, if literally followed
what's written in current law, then those are the deficits,
the spending levels and revenue levels that CBO projects we'll
achieve. This doesn't look so bed.
There's a deficit still, because spending is greater than
revenues, but you notice how that gap is really narrowing and
looks to be stabilizing here, at least for a while, at maybe, two
to three percent of GDP. Maybe two percent of GDP
actually. That is considered economically
sustainable. So why is there such a big
difference between current law, literally taken, and this
projection, that we call the Concord Coalition Plausible
Baseline? Well, hold that thought.
I forgot about a slide. This is how those numbers
translate into deficits. So this is the CBO baseline, the
top line. Deficits of 3.5 trillion dollars
over ten years. That's a ten year total.
That's not bad. You see that the deficit is
falling. That's why the line is going up,
because these are negative numbers here.
So this is the negative surplus, also known as the deficit.
Here is the deficit under current law.
Here is the deficit under what we call the Concord Coalition
Plausible Baseline. It is triple the size of the
current law projections. What is the difference?
Well, here's the bad news. You're going to think, well,
that's not current law. You know, current law has all
the tax cuts in place. Here's the funny thing about the
tax cuts. The Bush tax cuts, I told you I
was going to say I hated the Bush tax cuts.
The Bush tax cuts were very expensive when they were first
passed. They haven't gotten any cheaper.
They've actually gotten more expensive over time.
When they were passed, they were passed with an expiration date,
the end of 2010. Even though that wasn't the end
of the budget window when they were passed.
The end of the budget window when they were passed, the
budget window at the time was fiscal year 2002 to 2011.
At the time the CBO was saying we would run surpluses over that
ten year window of 5.6 trillion dollars.
Surpluses! Here's something very
interesting, if you go back and read that economic report that I
helped write, in it we mentioned that the debt would be
completely paid off by 2012. I don't mean reduced.
I mean gone. We were starting to worry
about what does that mean to pay off the debt completely.
If we don't have treasury bonds, what's going to be the safe
investment in the economy? So we had to start worrying
about that. We had to write a section called
"Life After Debt." [laughter]
That section never was published in the Economic Report to the
President, because politically, it was viewed as, why do we have
to bring up that there might be a down-side.
That we have to worry about running these big surpluses.
It turned out that was a good point.
[laughter] Here's what happened.
We passed the Bush tax cuts in 2001.
The weekend that President Bush signed the tax cuts into law was
Memorial Day weekend 2001. My golden retriever died in the
backyard that weekend. I kid you not.
It was the worst weekend of my life.
I mean, I kid you not. When they were passed, they were
passed with an expiration date at the end of 2010.
That was to artificially, but not a lot, hold down the cost of
the tax cuts. So that instead of close to two
trillion dollars over ten years, it was only going to be one and
a half trillion dollars in cost over ten years.
That, by the way, that was kind of a gimmicky cost because it
didn't include a ten year window.
It also doesn't include the cost of interest in servicing a
higher debt. They're deficit financed even if
we are running surpluses. Even if we are running surpluses
in total with the federal budget, and your funding
tax cuts without paying for them, without cutting other
spending or raising other taxes, is still deficit financing.
You're still reducing the surplus and there's an interest
cost associated with that. It didn't include the cost of
interest on the added debt. It also didn't include something
called Alternative Minimum Tax Relief.
The Alternative Minimum Tax is this weird, sort of, parallel
tax system that, if you are on the AMT you may realize you're
on the AMT but not really realize how it works.
Especially if you use Turbo Tax. It makes it sound like it's just
a little adjustment to your ordinary income tax.
If fact it's wiping out your entire ordinary income tax and
saying, scratch that. Start over with this calculation
that dis-allows many of the major deductions.
It's a much broader base tax system with a lower top marginal
rate, but it was designed to make sure that very rich people
wouldn't get away with so many special deductions and credits
and loopholes and shelters, that they would end up paying nothing
in taxes. So we designed this, kind of,
brut force tax system to layer on top of the income tax that
makes tax payers go through their ordinary income tax
calculation, calculate the taxes out, then go through this
broader based calculation, the Alternative Minimum Tax, and
then whichever is higher is the tax you pay.
Well, here's the problem with the Bush tax cuts.
We passed the Bush tax cuts without making any change to the
Alternative Minimum Tax. What happens when you lower
taxes under the ordinary income tax and you don't change the
Alternative Minimum Tax? Suddenly a lot more households
are going to have higher liability under the alternative
tax then under the ordinary tax. So a lot more households were
suddenly going to be put on to the Alternative Minimum Tax,
even though these were not really rich households.
Who are these households? These are households that would
otherwise benefit the most from the Bush tax cuts.
So families with lots of children in high tax states
where, because the state and local tax deduction is
dis-allowed under the Alternative Minimum Tax.
The households that would have been shifted onto the
Alternative Minimum Tax tended to be not the very richest
households, but more middle to upper class households.
I am an AMT household, with my four kids.
It's really easy to-- you know, all of the sudden the Bush tax
cuts were passed, I was put on the AMT and my kids aren't worth
a dime in terms of the tax system.
You know? Here I am borrowing right now to
pay for their college educations.
The Alternative Minimum Tax would have swallowed a lot more
households and it would have seemed kind of unfair because
they weren't really rich households.
What did we do? Every year we passed alternative
minimum tax relief. We kind of did a brut force
correction on this brut force tax and we just raised the
exemption level every year. And how did we pay for it?
We didn't pay for it. We deficit financed it, just
like the Bush tax cuts. So what happened?
We only temporarily fixed the AMT year after year.
We always had this expiring set of Bush tax cuts.
Now we have, in current law, those projections by the CBO
assume AMT relief is gone after the one or two year extension
that has always passed. Assume the Bush tax cuts go
away. Everyone know what happened to
the Bush tax cuts at the end of 2010.
They were extended. For how long?
This is a really savvy crowd. [laughter]
How did we pay for them? We didn't.
I feel like I should sing the Mickey Mouse song now.
[laughter] Here's a little shocker.
Here's the CBO baseline, deficits over ten years.
This is a ten year total. 3 and a half trillion dollars.
Not bad. If we adjust for the Concord
Coalition Plausible Baseline. Plausible means possible.
I don't like to think that plausible means most likely, but
a lot of people in D.C. think that's what it means.
They think, in fact, it's a done deal.
A lot of policy makers believe that if you are talking about
changing policy, you are talking about changing policy from this
Plausible Baseline. They haven't yet realized that
their legislators and their job is to change things relative to
current law. They bake all this stuff that
I'm about to show you into their projections of what is the
baseline they should be working from.
The cost of permanently extending the tax cuts over the
next ten years, so beyond their current expiration of 2012,
would be almost three trillion dollars.
Right there you've almost doubled the deficit.
But if you add the cost of permanently fixing the AMT over
that same period of time that adds another 1.7 trillion
dollars. I noticed this chart, this
should say Bush/Obama tax cuts. Insert Bush/Obama.
They are now President Obama's tax cuts too.
You can see I'm a little bitter about that.
[laughter] The effect of permanently fixing
the AMT is another 1.7 trillion. The effect of extending all
other expiring tax cuts adds almost another trillion.
This seem just like a pittance, but this is the payroll tax cut
that has been proposed as ongoing stimulus efforts.
Small! Small potato's, right?
Relative to these other changes. That's 5.7 trillion dollars
more in deficits. If you add some adjustments to
spending, like, assuming discretionary spending grows at
the rate of the economy,is what this means.
Keeps pace with the nominal GDP. That's another 2.1 trillion.
Why do we have to adjust it this way?
Well, because CBO assumes the discretionary spending grows
only with the rate of inflation, not with the full growth rate of
the economy. This is an adjustment for the
difference. But CBO also has to project that
war cost continue at their recent pace.
Instead of acknowledging that, perhaps war cost will slow
gradually over time. That admittedly might be an
optimistic view. It's only fair to adjust the war
costs downward, because that's another difference between
what's in current law, extended verses what might be more
plausible. This is a little thing that we
call the Doc Fix in D.C. They're Medicare cuts that are
in current law scheduled to happen that we have repeatedly
postponed. How did we pay for those?
We didn't. You're catching on.
The total outlay changes are 1.2 trillion dollars.
Notice how small of a difference, most of it is
revenues, between the Plausible Baseline and the CBO baseline?
It's mostly revenues. That's because we're talking the
next ten years. Tax policy is really a huge
factor in the next ten years. If you go out over the longer
term the spending on Social Security and Medicare gets to be
a much larger factor, but over the next ten years tax policy is
really the huge factor. It's the difference between
running what is economically sustainable deficits, and what
is clearly an unsustainable budget deficit.
Here's a picture of mean by unsustainable.
For some reason all the numbers fell off the chart.
This is percent of GDP debt held by the public.
This is that stock. It's the cumulative total of
deficit. This is supposed to be 50%, 100%
150%, right? That little hint is World War
II. And I have a nice hint up here.
This graph is not entirely devoid of meaning.
1940-2040, so here's 1940 and here's 2040.
Here we are today. There are at least some clues to
what this graph means. You can see that we were are
higher levels of debt. Today we're at 70%, almost 70%
of GDP debt. That's pretty high.
It's not the highest we've been. We've been over 100% at the end
of World War II. The big difference between the
end of World War II and now is at the end of World War II all
of our debt was financed by Americans.
Okay? If you looked at foreign
holdings, I think they existed, but it's so small you
can't see it in the data. Okay?
We issued war bonds. When we borrowed for the cost of
the war we borrowed from American investors.
The difference today is that over half of treasuries are
currently held by foreign investors.
At the beginning of the Bush administration about 30% of
treasury bonds were held by foreign investors.
How is it that you can go from 30% held by foreign investors to
50% in such a short span of time?
Well, it means that almost all additions to debt were financed
almost entirely by foreign investors.
Why? Because Americans were not
saving. Americans didn't have the
savings to invest in treasury bonds.
Foreign investors had a savings glut.
So globally there was actually a savings glut.
A lot of economists say we are lucky that we had so much
foreign investment pouring into treasuries.
Why does that make us lucky? It keeps the rates down.
Wow, you don't need me here. [laughter]
You guys are great. Yes, it kept rates down.
That's good, right? It reduces the cost of
borrowing. It's good unless we get a little
too excited about it. Right?
Cheap money. It got us into trouble with the
government finances. It makes it seem like deficit
financing is almost like free money to the government,
certainly to policy makers that have very short time horizons
and don't have to worry about paying back the debt later.
Right? Because they'll be long gone out
of office. The same thing happened to the
private sector. Cheap mortgage rates made it
seem like it was almost free to get a huge house.
You don't really think about the longer term consequences if
interest rates go up or if your income doesn't raise.
The exact same problem that faced American families, faced
the federal government. Unfortunately, at the very same
time. So we were all borrowing like
crazy over the past decade. This is our projection.
This is what we get. A lot of Liberals hate this
chart. This is Chicken Little.
"The sky is falling! The sky is falling."
I'm here to tell you, don't believe this chart.
This cannot happen. If I had this scale up here this
would be 100% of GDP, 200% of GDP, 300% debt GDP by 2040.
That is no economically possible.
We will not get there. This is just a graph that shows,
what if you just take the accounting projections and just
keep going. Keep counting the projected
spending and the projected revenues and just keep
calculating the deficits and the debt.
You go out in the projections of current policy extended.
If we extend all the Bush tax cuts, the deficit financing, the
growing discretionary spending at the rate of growth of the
economy. This is the debt to GDP ratio
you would get, but we would not get there.
I'm here to tell you, yes, don't believe this chart.
It wouldn't happen. Somewhere on the way from here
to here the economy is going to give us the signal that things
are going to be too painful to let this trend continue.
What is the natural market break on deficits running up
like this? What is the break?
What would cause is to not get there?
[inaudible] What was that?
The lenders give up. And what happens to interest
rates when the lenders loose faith?
They go skyrocketing. That is the beauty of the
invisible hand, as Adam Smith tells us, that we won't get
there because prices will naturally signal that this is
not sustainable. The price of borrowing will get
too high and we'll stop borrowing so much.
The scary part is that, even though this won't come true, we
don't know where along this path it will suddenly not come true.
We don't know how dramatic a correction it's going to be,
that forces us to stop borrowing so much.
In other words, when do we reach that tipping point at which
suddenly our foreign investors loose all faith in our
ability to honor our debts and interest rates start to
skyrocket. How fast will they rise and how
sudden and dramatic will be the pull out of our investors, we
don't know. That's the scary part.
Here's a picture of-- How am I doing on time,
everyone? I've got to wrap it up.
Sara's telling me, I've got to wrap it up.
Here's the unsustainable picture.
This is not a lie though. This is projected Medicare and
Medicaid spending. This is over the longer term,
going out past 2050. The reason why Medicare spending
is raising so rapidly is because we have a program the benefits
primarily retirement-aged population.
There are more of us babyboomers who are going to be
retiring relative to the numbers of the children that we had.
The working age population shrinks relative to
retirement-age population. Medicare grows faster the Social
Security because it's not just demographics, it's per capita
health costs that are rising. We're trying to figure that out
right now. How to keep per capita health
spending down. Here's interest.
That's the huge problem in debt.
Interest compounds when you're a debtor.
It's the curse of compound interest when you're a debtor.
It's unsustainable because our revenue can't keep up with
entitlements and interest. Here's what the problem is.
We all know that healthcare spending is the biggest factor
in terms of the long-term pressures on the budget.
It's not tax policy. We could probably reform our tax
system to keep up a little bit better, and health costs are
still going to rise over time. Due to demographic factors and
the fact that each person is getting more and more costly to
care for. We're projected to see
continued dramatic increases in federal healthcare spending,
and that's even with healthcare reform.
Let see, this was 2009 projection.
Here's 2010 projection. The dotted line is 2010
projections without healthcare reform.
You see it's very small. We've just gotten started
figuring that out. We have a lot more work to do,
and the question is, is our society going to be willing to
make even harder choices in terms of healthcare reform to
keep costs down. We have to keep pulling the
other policy levers. Just because healthcare costs
are the biggest factor for the long-term, doesn't mean we can
let all the other levers alone. This graph shows debt held by
the public as a percent of GDP. Under the status quo, where
discretionary spending grows with the growth rate of the
economy. And all expiring tax cuts are
extended in deficit finance verse the CBO baseline which
assumes that spending only increases with inflation.
And tax cuts expire under current law.
I should point out that tax cuts don't have to literally expire.
They could be extended, but just paid for.
So anytime you see a projection that's based on the tax cuts
expiring, you don't have to think it's just a projection
based on literally letting all the tax cuts expire.
It could be letting them be extended in more fiscally
responsible manner and paying for them for a change.
Paying for what we want to keep. Here's what can be done to
change course. I'm just going to go through
this list really quickly. The President's Fiscal
Commission had two goals, sustainable deficits by 2015
which means something at 3% of GDP or, I would say more like 2%
of GDP now. Because our latest projections
of economic growth do not look really rosy in terms of
expecting us to get back to an average 3% per year growth.
Longer-term sustainability means we have to meaningfully improve
the long-term fiscal outlook. That means we have to pursue
reforms of the spending programs, Social Security,
Medicare, Medicaid. Not just tax reform.
But for the first goal, within the next few years, there aren't
many options outside of tax policy.
I strongly believe that the first thing we have to figure
out is, what are tax cuts we really think are worth keeping,
and how are we going to pay for them.
Are we willing to pay for them? If not, they are not really
worth keeping. The cost is too great relative
to the benefits. There were common elements of
the bipartisan commission's recommendations, both on tax
reform and on Social Security and Medicare reform.
What they had in common, in terms of tax reform is that they
all recommended that we reduce tax expenditures in our federal
tax code. That's the special deductions,
exceptions, credits, preferential tax rates.
If you think about our income tax system, it's like a piece of
Swiss cheese. It's like saying, we would do
better to raise more revenue by filling in the holes in that
Swiss cheese tax system. That way we could raise revenue
without having to raise tax rates.
If we just raise tax rates, the problem with that is that just
increases the distortionary effect of the tax system on
economic decisions. It increases the difference
between being a taxable activity, verses being one of
those holes in the tax system. There are reasons Conservatives
and Liberals should like this. That's why the bipartisan
commissions all recommended this strategy.
It's very easy to reduce tax expenditures in a way that, not
just preserves the progressivity of the income tax system, but
actually increases it. Also, for Conservatives, if you
are able to broaden the base, you actually increase the
economic efficiency of the tax system.
You might even be able to pay for some marginal tax rate
reduction, which Conservatives love.
It's, kind of, standard supply-side tax policy.
But broadening the tax base is as hard as cutting direct
spending entitlement. This is a list of the biggest
tax expenditures under the individual income tax;
The exclusion of employer provided health care, the
mortgage interest deduction, the preferential tax rate on
capital gains, the exclusion of retirement contributions,
state and local income tax deductions, tax preferences
towards savings, defined contributions plans, exclusion
of capital gains of death, charitable contributions
deductions. Are these things that we're
going to be willing to eliminate?
Probably not. What I would encourage you to
think about though, is we don't have to outright eliminate them.
We could decide to pare them down in a progressive manner.
One of President Obama's own tax proposals that he has presented
in every single one of his budgets thus far is to limit the
value of itemized deductions to 28%.
That's an example of reducing itemized deductions for only
those households that are above the 28% bracket.
Is that a coincidence that he picked 28%?
Well, if you know anything about the structure of the tax system,
the people who are above the 28% bracket tend to be those
households that have around $250,000 worth of income.
or higher. [laughter]
So, you know, it's not a middle class tax increase if you limit
the itemize tax deductions to 28%.
It's also still preserving the bulk of the benefit.
Not just for the bulk of households, but also a large
part of the benefit for higher income households.
You're just limiting it. You're no eliminating it.
Let me stop there. Sorry I blabbed on so long, but
I'm happy to take questions for--
30 minutes. >> 30 minutes?
That's a long time. [laughter]
That's fun. Okay.
So ask me more questions about the Bush tax cuts.
[laughter] >> Sorry, this is about
Medicare. >> Okay.
In May Dr. Rita Redberg, a San Francisco physician, had
printed an Op.Ed. piece in the New York Times
called "Squandering Medicare's Money," in which she innumerated
numerous procedures and devices that Medicare pays for, for
which there is absolutely no evidence of effectiveness.
I deliberately emphasized that. What do you think are the
chances of Medicare not paying for procedures that are
worthless? >> Well, it's tough because,
what you've identified as what sounds like waste, fraud and
abuse in the Medicare system, but what I've learned in the
federal government is that there is no such thing as wasteful to
absolutely everyone in charge of making the decisions.
That's the problem. What seems like waste to one
person, there might be someone somewhere who actually gets
those services. That even if they are proven, or
close to proven, to be medically ineffective, if you're someone
who's loved one is suffering from some ailment and you're
doctor says, here's a test that we can do, or a procedure.
Even if you don't know if it will do any good, if there is
some small probability that it might help, and not hurt, you
still want that. You still want that test of
procedure. I think the healthcare area is
unlike most other areas of the economy in that it's very hard
to be a rational consumer and comparison shop.
I've written about this on my blog before, I think that people
shop for medical care a lot like I spend my money on my kids.
I don't do this marginal benefit verses marginal cost thing.
The calculus I do in my head is, is there any chance of a
positive marginal benefit from this thing my kid wants me to
buy for them. My second question is, can I
afford it? Do I have the money to buy it
today? I'm very irrational that way.
When it comes to my kids I spend way too much money on things
that I'm sure are not cost effective, even in terms of
their own utility. How much utility it's bringing
them. But I have this tendency of not
weighing cost against benefits. I think, with healthcare,
because most consumers don't understand, and maybe none of us
fully understand, the benefit of certain health services.
It's very hard to say that a medical procedure has no
benefit to anyone. >> But should Medicare pay for
it? That's the question.
That's a good question. Right.
I agree with that. That is a distinction
that's important. It's not like we're going to
prevent people from paying for those services themselves.
That's a very good point. I think that the distinction has
to be emphasized in healthcare reform discussions going
forward. There's a difference
between allowing any private citizen to spend the money.
There will always be really rich people who will throw money and
any medical procedure if there's any small probability
of it doing any good. They should be allowed to do
that, certainly. So that is a very important
distinction. Do I think Medicare should
subsidize those procedures that are clearly not cost effective?
No, but I think that's a challenge for our policy makers.
That's a really good distinction.
Thank you for clarifying that. >> I'm reading a book called
Aftershock. It's written by two economists
who got their economics Ph.D from the Madison campus here.
Anyway, their saying that there's going to be a bubble
bursting in our national debt. Their saying that's going to
trigger a mega-depression worldwide.
Do you believe in the same prediction?
I believe it could happen, yes.
The problem is-- I think it's my boss, Bob Bixby,
that tells this story, that it sort of like the coyote chasing
the roadrunner over the cliff. The coyote is running with his
legs like this and he doesn't realize that he's off the cliff
until it's too late. Right?
He keeps running and he's over the cliff and all of the sudden
drops. A lot of economists believe that
that's the problem with our debt situation.
We're not going to know we have run off the cliff until we're in
a free fall, basically. You know, you will hear a lot of
economists talk about, when we're asked the question, what
is a sustainable level of debt? What's a good goal to try to
stabilize the debt to GDP ratio at?
A lot of economists say 60%. I'm here to tell you, that is
just a made up number. To be honest.
It's a number that's close to where we are now, right?
We're almost at 70% of GDP in terms of our debt right now.
So talking about stabilizing it at 60% suggests that we need to
start reducing deficits and keep deficits down to an economically
sustainable level, so that the debt to GDP ratio doesn't get to
the 100 or 200% of GDP. Do economists know that if you
get to 100% of GDP debt that suddenly the economy's going to
implode? We don't know where that level
is. We don't know where that level
of debt is where all of the sudden those investors loose
confidence in the US government's ability to honor
the debt. So why do economists talk about
60% or 70% of GDP? Because it's right around where
we are now, and we know we're still okay now.
Honestly? We know we're still okay right
now. We don't know where on that path
that I showed you that went up to 300%, where are we going to
reach the point where we're off the cliff.
Honestly, we don't know. So the safest bet is to try to
stabilize it right where we are right now.
That means, get the deficit down to something lower than the rate
of growth of the economy. Not eliminate it.
Notice that I'm not saying balance the budget today.
Concord Coalition news flash, we are not a balanced budget
organization at all times. You know, ideally over the
long-term, that's what we'd like to see.
On average, over the longer-term, we pay our bills.
But at any point in time you don't have to run balanced
budgets. >> We're trying to keep the
questions on mic. So wait until I bring the
microphone to you. >> You said that we were able to
finance out deficits in the past because we've had a lot of
people willing to invest in our bonds, and therefore we could
have low interest rates tied to that.
And because we have low interest rates, hopefully we can keep
inflation low at the same time. If that starts to grow, what we
see is deterioration. It won't be off the cliff.
It will be a slow bouncing down a decline, let's say as interest
rates have to be higher, so people finance the debt, and
inflation rises accordingly. One of the panaceas is, hey,
don't worry about of kids and our grand kids, we'll just
inflate that debt away. But I don't really see that
happening. Could you comment on that aspect
of it? >> That's not a really good
scenario for-- Yeah. Did you say we didn't have to
worry our kids and grand kids? [inaudible]
No, I mean, that's not really a cure because that still erodes
that value of our resources. Right?
So it hurts our real long-term economic growth.
It is not avoiding having the burden placed on our kids and
grand kids in terms of a weaker economy in the future.
I forgot to mention another factor that has kept interest
rates low. It's not just that foreign
investors have so much savings to lend to us.
It's also that, during the years of the Bush tax cuts over the
past decade, monitory policy was accommodative.
Very accommodative, like the fed kept, you know, putting money in
to keep interest rates low. So it was like this perfect,
awful storm of things that came together to keep interest rates
and the cost of borrowing really low, and then the sub-prime
mortgages were there. It was just everything was
keeping interests rates low. You didn't need to give
Americans yet another reason to borrow too much.
You know? It's like the
live-for-the-moment-American didn't need to be given cheaper
money. >> Okay, kind of working off
that same concept. At the end of World War II our
debt to GDP was 108%, but at the end of World War II there
weren't any other functional economies in the world.
How does US ratio of debt to income balance out when you
start looking at places like China, who's worried because
they're only at 9% growth this year.
And the whole EU business where they're going to be going off
the cliff in the same business as Greece.
What's the relative way to come to--
Well, okay, that's a great question.
Over the past decade we did have sort of a disparity in the
savings rates globally. So that there were some
countries that had very high savings rates and here in the US
we actually had a negative savings rate, overall saving
rate, for a while. I mean private plus public.
Our national saving rate actually went negative for a few
years in the Bush administration.
That is leveling out a little bit now because we actually see
less of a savings glut now globally than we did ten years
ago. So that's why economists are
worried. Because, even if we can keep
continuing the attract global capital, there's less global
capital around now. Some of these other economies
are faced with the same problems we are.
It's sort of like globally there's this debt crisis, not
just within the US anymore. Everyone knows, economists all
know, that there is not this infinite supply of capital.
We've been sort of behaving over the past decade as if there's an
infinite supply of capital because we could keep attracting
it from abroad. But even the global supply of
capital is limited. That's why we've got to be
keeping up our space program, I guess.
[laughter] I think that we've reached our
limits in terms of global capital and people have to
realize we are now bumping up against the glob el capital
constraint, not just the US capital constraint.
The good news is, the good news is that, I think Americans are
starting to realize that interest rates, the cost of
borrowing is high and is dangerous.
Even if it's not high right now, ignoring the future cost is a
dangerous path that we're on. >> I don't know if you used the
word stimulus in your talk or not, but I'm interested in that
idea. I noticed that Conservatives
would argue that tax increases would have a counter-stimulus
effect, a depressing effect. Liberals would argue that more
borrowing, at least in the short term, might have a stimulating
effect. Don't you have to talk about
those ideas in making these predictions?
What are your thoughts about those notions?
Right, so the CBO projections are based on, they include, an
economic forecast underlying them.
Some of the recovery of the deficits, like in that chart
that I showed you, the historical and then the
longer-term projections, or the projections going out over the
next ten years, a big reason why we go from this open jaw of
deficit to that narrowing is because of the economic
recovery. There's some assumption built
into the CBO budget projections of the economy getting back to a
full employment economy over the next few years.
That is an assumption, right? It's a projection.
At CBO budget projections are not just an accounting exercise,
they also include a forecast, an economic forecast underlying
them. Stimulus.
There is good deficit spending. Not all deficit spending is bad.
At the Concord Coalition we have emphasized that it is entirely
possible to do effective deficit spending in the name of
stimulating demand for goods and services today, while being
fiscally responsible. Not just over the longer term,
but today. My definition of a fiscally
responsible tax cut, and there really is such a thing, is a tax
cut that has a very high economic bang for the buck.
Which means that it is going to stimulate demand enough to be
worth it's cost in terms of deficit financing.
How do get a tax cut that's not worth it's cost in terms of bang
per buck? You give a tax cut that goes to
households don't consume most of their tax cut.
You know, you want to stimulate demand in the short term.
You want people to go out with their tax cuts, or transfers,
and buy good and services. A bad tax cut for stimulus
purposes would be one that goes mostly to high income households
that will not spend it. And one that gets put in place
permanently when the purpose was to stimulate the economy in the
short term. How do we go from a
justification on deficit spending in the short-term to
stimulate the economy to permanent deficit finance tax
cuts that are bad for the long-term growth of the economy?
A lot of politicians think that there's no distinction there.
That if deficit spending is good now, it must mean that any kind
of deficit spending is good now. At Concord we have stressed that
it would actually be possible to reduce deficit spending now and
have more effective stimulus. In other words, take deficit
spending out of the forms of spending our tax cuts that have
not done very well at stimulating demand, put it into
the forms of spending, or tax cuts, that we know are better at
stimulating demand. You could reduce the deficit and
get a better effect on the short-term economy.
And you wouldn't be committing to permanent deficit spending
that might be completely, or relatively, wasteful.
We have stressed deficit spending is essential in the
short-term. we do not want to see a balanced
budget this year. We have never said we wanted a
balanced budget during a recession.
We want effective deficit spending in the short-term that
doesn't commit us to permanent deficit spending that will
ultimately hurt the longer-term growth of the economy.
When the federal deficit was first envisioned by Hamilton,
it's been around that long, there was an idea that there was
a salutary effect of national debt, or a theoretically
efficient level at which you want a debt.
Do you have a sense of that, or an outline of that?
It is great that the federal government can run deficits.
You know, look what happens to state and local governments that
have to run balanced budgets. It's very constraining.
It's very limiting in terms of what you can do with economic
policy. You can't really invest in
things that have up front costs and longer term payoff.
So it's great that the federal government can run deficits.
When the state and local governments can't, the federal
government should be there to deficit spend when deficit
spending is needed to keep the economy at a level of economic
activity where unemployment is not going to be so high.
Deficit spending is good. Economists like the ability to
run deficits because the was we call it allows you to smooth
consumption over time. Okay?
We don't like that our income fluctuates or is uncertain, so
when a household is able to borrow, in tough times, it's a
good thing, if you know you're going to be a job next year or
your income is going to go back up next year.
It's really good to be able to keep up your consumption.
It's nice to be able to eat, right?
The federal deficit is a good thing, the ability to run
deficits. The only problem is that when
you get to a level of deficits that are too high, then they're
not sustainable. Your question about is there a
good level of debt, most economists believe that there is
an important role of the federal debt.
Treasury bonds are still considered the safest form of
investment. It is good to have something
safe to invest in. It's good to have that safe
investment that the world can turn to and relay on it's
return. But there's a difference between
keeping some amount of debt, and by the way, when we wrote that
Life After Debt section that never saw the light of day in
the Clinton economic report, our conclusion was that the
government should probably keep some level of debt around.
There were things that we could keep borrowing for.
What did we say? We said we should keep borrowing
for things like longer-term investments, like
infrastructure. That's a good reason to borrow.
We argued in that section that never saw the light of day, that
we should keep some amount of debt around and we should borrow
to fund infrastructure or longer-term investments.
We knew that those would pay off.
That's a good reason to borrow. Borrowing is not bad per se,
it's when you borrow too much and when you borrow for the
wrong things. It's just common sense.
Like when families decide whether it's worthwhile for them
to borrow. It's great to be able to borrow
as long as you don't do it too much and you do it for the right
reasons. Just think of that's what we
need to do in Washington. We need to get to that mind set
that I think a lot of families understand.
Question over here. >> I was a member of Concord
Coalition in the early years. >> Yeah?
I discontinued that. >> Why?
You've got high-profile bipartisan people who are on
that organization and economic sense that you make seems so on
target. Why is it that the Concord
Coalition has so little influence, at least from our
vantage point, on public policy? >> Because we're very small
and we're a grass-roots organization.
I like to think that we are having a little bit more
influence these days because more ordinary Americans are
aware of the deficit issue. We're a very small group and we
rely on public education and outreach.
Our strategy is not top down as much as bottom up.
We're a grass-roots organization meaning that we believe the best
way we can influence policy makers is by making the
people that vote for them very aware of the issues and very
aware that there are good reasons to borrow money and bad
reasons. It's mobilizing the masses to
ask the politicians that are campaigning for your votes, when
they promise things that are too good to be true, you should ask
them, how are you going to pay for that?
What about the deficit? Is this really free money?
What does this mean for my kids' tax burdens or services from the
government that they can expect when they're working-age adults?
Why don't we have more influence?
Well, I wish I knew that answer and could just snap my fingers
and change things, but you know, we're pretty much a shoestring
organization. Life is getting easier for us.
You know why? Because of the Internet.
There's a lot that we can do through-- This is such an
important issue for the young people.
We're actually doing a lot of great things on the college
campuses, trying to fire up college kids about this.
It's their future that really is going to be affected.
We are trying to mobilize a lot more and network.
You know, we do the whole Facebook thing and the twitter
thing and, yeah. We have young people that
actually work for us and know how to do these things so it's
wonderful. We do need more membership.
If any of you are on Facebook, join our Facebook group.
Honestly it's a great way to keep--
We do have thousands of members right now on Facebook I think,
and we do post all of our issue briefs and we ask that people
spread the word to their families and friends, their
communities. It's very easy.
We even provide chart talks, like if you want to take some of
these charts and go talk to your community center group or your
PTA or your Kiwanis Club, you can take these charts which we
can provide to you. We have them up on-line.
There's a whole section on Concord's website on how you can
help. Honestly, we rely on very cost
effective means of influencing policy makers.
It's mostly getting people aware enough to start demanding that
politicians start doing the more fiscally responsible kind of
thing. >> We have a question over here.
You had a lot of comments and opinions on the Bush tax cut.
I was curious if you had anything similar to say about
Herman Cain's 999 tax plan? [laughter]
I got into a little trouble on my blog about what I said
about Herman Cain's 999 plan. Let me just clarify for the
record that if you label a tax policy as Neanderthal, it
doesn't mean you're labeling the person that proposed that
policy. [laughter]
Contrary to what is being written out there about me on
Conservative blogs, I am not a racist.
If you listen to Herman Cain himself speak about the 999
plan, I think that's all you need to know about it.
[laughter] To be serious, it's a proposal
for very fundamental tax reform. There are a lot of Conservatives
out there who'd like us to move to a consumption-based tax
system and to a system that's much flatter in the distribution
of burden. That tax proposal would do that.
There are some people who believe that the tax system is
too progressive, the rich bear too much of the burden and that
it penalizes savings. They want to switch to taxing
consumption instead of income. That's the philosophy behind the
Cain plan. It's not very detailed at
this point. >> There's a question over
here too. I think there's a question over
here. There's isn't question over
here, but there is a question down here.
Sorry. >> When people talk about
federal government revenues they seem to focus on income taxes,
but payroll taxes are a similar percentage of the federal
government revenues. People such as me, that earn
less than $100,000 per year, pay payroll taxes on all of our
income. What's the logic behind not
collecting payroll taxes on incomes above, whatever it is,
$107,000? What's the logic behind not
collecting payroll taxes on them?
The logic was because it funds the Social Security.
The idea is that it's payments into the Social Security system.
Because the benefits are distributed closer to
proportionately, the taxes are closer to proportional.
Does it make sense from an overall tax burden perspective?
No. I mean a lot of people that
propose changes to the Social Security program and to tax
policy suggest that one way to do it without reducing benefits
is to eliminate or raise the taxable maximum under Social
Security so that more of labor income would be subject to tax.
Right now, what that does, with a cap of about $100,000, it's a
proportional tax. In other words, it's the same
fraction of income collected from everyone up to $100,000,
but if you're over $100,000, the higher you go, the lower the
percentage that payroll tax burden is for you.
A lot of people believe that that's a regressive tax, at
least at the rich end of the income distribution.
One way we could both collect more revenue into the federal
system over all and do it in a progressive way would be to
raise the payroll taxable maximum.
There are Liberals who don't like-- I don't understand this
fully. I have to admit that I have a
lot of enemies on the Liberal side because I talk about the
need to reform Social Security. I even get hate mail when I talk
about raising the payroll tax cap.
I've been told that that makes it seem like a welfare program
and that when you make it seem like a welfare program by
increasing the progessivity of the tax that contributes to the
system that it undermines the political support for the
program. So I'm not being a friend to
Social Security if I suggest that.
I have a lot of enemies all around, is what I'm saying.
I can't seem to come up with a way to suggest fixing the
admittedly small Social Security contribution to the long-term
fiscal gap. I cannot suggest that without
getting someone really mad at me.
Even more mad at me then when I suggest to let the Bush tax cuts
expire, to be honest. >> Okay, there's a question
back here. >> You talked about Medicare and
I see that as part of a much broader program and a very
expensive medical system that does not provide us with the
best care. Does the Concord Institute have
any proposals for reforming the system such as the single-payer.
We have spoken positively about aspects of healthcare
reform that would help contain costs.
I have to say, we never endorse, at Concord, any specific policy
proposals. Unless it's something simple
like budget rules. Pay-as-you-go rules is one
example of something we are not shy about saying, yes, you
should pay for things as you go along.
If you want to extend a tax cut or expand spending you should
try to find a way to pay for it first.
But we do not endorse specific proposals and people are
confused about Concord that way. I think that we really try not
to be political, and we find that taking particular positions
on very specific proposals that have been introduced by specific
members of congress gets us caught up in the political spin
of things. We do think healthcare reform
is extremely important. And that we should be doing
things to not just expend coverage, but we believe that's
important, but we can't just expend coverage.
We have to be willing to make reforms that actually control
per capita costs over the longer-term.
Those involve tough choices. The reason Concord always has so
many enemies is we can never come up with a solution that's
painless. We can't just say, yeah, let's
just expand health coverage and stop there and somehow costs
will take care of themselves because people will be taking
better care of themselves. I wish that were true.
I wish I could believe that were true, but I don't think it is.
We don't think it is. So we cannot just endorse the
policies that everyone thinks sounds great.
We always have to muck it up by mentioning that we have to raise
these taxes and we probably have to cut some real benefits.
The path that we're on in terms of healthcare is a scary
trajectory we're on, and we don't have a lot of experience.
We've kind of never been here before in terms of raising
health costs. I frankly don't know that our
society is willing to make some of the sacrifices that it might
take to hold down spending to something like-- A lot of people
mentioned Europe is so good at it, at holding down health
costs, well, that doesn't come without cost.
They don't have access to quite as much technology that we do.
They may have to stand in longer lines to wait for services.
It's never true that you can get more for less money.
That's a universal problem in this federal budget debate.
Question. >> Given your perspective, do
you believe that the resolution of the Great Depression in the
1930's was more because of governmental policy or despite
it. In other words, were Roosevelt's
programs beneficial or not? >> Okay, well, personally I
think they were beneficial. That's not an official position
of the Concord Coalition. I don't know what our position
on Roosevelt's policies are, actually.
[laughter] Yeah, like I said, there are
good reasons to borrow money and good forms of government
spending and worse forms. I would prefer, as a mother,
that we would do more government spending in things that grow the
economy over the longer-term. I would like to see more
government investment in industries that would otherwise
not flourish without public support, because they have a
public goods aspect to them. Anything that is related to,
like a cleaner environment or better health care or
better education. Those are things that have
spill-over benefits, what economists call external
benefits. That the benefits aren't just to
the private person who buys those goods and services but to
society more broadly. If you just rely on the private
sector, the idea is that we tend to under-spend in those areas.
That's a role of government, is to fill in where the private
economy needs a little encouragement, to divert more
resources there. That, in my mind, is a good area
of public subsidy, is in the areas of public goods.
But, like I said, I don't want to speak for the Concord
Coalition on behalf of addressing the Roosevelt
policies specifically. >> We have time for one or two
more questions.
Could you speak a bit about the costs of military spending
and two very long wars? >> The questions about military
spending, obviously, that worsened the outlook.
We obviously didn't have the cost of those wars in our
projections at the end of the Clinton administration.
I actually don't know what the latest estimates are.
I think of that war spending as maybe a trillion dollars over
ten years. Maybe a trillion and a half over
ten years. Yes, that's a far cry from, I
think the original estimate was maybe 150 billion dollars or
something. So yeah, that was an unexpected
expense. The CBO projections and their
baseline extend that spending throughout the rest of the
ten-year budget window. Most people are fairly
optimistic that that spending is gradually going to draw down
over the next ten years. That was one of the adjustments
that worked in a positive direction between the current
law baseline and the Concord adjusted baseline.
Yes, it didn't help. A lot of people argue that was
money-- It's not just the fact that it added to the deficit,
but that it diverted resources toward war rather than
productive-- Yeah. Hopefully, we're getting past
that now and we can, you know, do better with the money that we
do have at our discretion after the cost of the war.
I haven't heard a word tonight about energy costs.
I think most serious experts, including the International
Energy Agency, expect a downward curve of energy availability.
Or at least a greatly less exponential rise in energy
availability which most experts expect some kind of serious cost
increase over the next decade. So serious that we might revisit
the '73 and '79 crises. It would seem to me that you're,
sort of, vague ideas of what we might need to spend money on,
really aren't so vague at all. We need a major re-adjustment
starting now to adjust to this highly probable event, much more
probable than global warming. Perhaps you could comment on
that. >> If we're concerned about
rising energy costs and energy dependence there's a way we can
address both the fiscal challenge and the energy policy
challenge, and that is to become less reliant on fossil fuels.
A lot of economists who believe that the government needs to
have a stronger role in environmental policy and energy
policy, and at the same time we have to reduce the deficit, have
suggested turning more toward environmentally motivated taxes
that European countries rely much more heavily on than the US
does. That is typically thrown in to
lists of different sources of revenue that we might consider
in the future. I think we need to start by
reforming our income tax. We should look at our current
tax system first and then think about what additional tax bases
we might need to add to provide more revenue and be consistent
with other policy goals apart from just reducing the
deficit. >> Time for one last question.
Over here. >> I've got a short question.
Can you give me two or three of your favorite accounting
gimmicks that the government uses that we should be on the
look out for? >> Okay.
The easy one is expiration. It's weird that you can just
propose something and then just arbitrarily say it will go away
after a few years. Tax cuts routinely get extended.
You should never believe that a tax cut is temporary unless it
is so obviously a temporary tax cut designed to stimulate the
economy. That's why a lot of economists
feel like a payroll tax cut or holiday, if it were really big,
would be so obviously a temporary measure, that it
actually might be more fiscally responsible.
The perversity of that, if you catch it.
Like, make it big enough that it has to be just temporary.
Then it will really go away. Sunsets.
Another gimmick is putting in place a program that collects
revenue at first and pays out benefits later.
You collect the revenue to fund the program early in the budget
window, and then you pay out the cost outside the ten-year budget
window. Then it looks like it reduces
the deficit when, over the long-term, it actually way
increases the deficit. For example, the so-called Class
Act, which was part of the healthcare reform bill.
Secretary Sevilla, the HHS secretary just declared that
it's non-workable. That was a program where we were
expected to collect premiums up front and then not start paying
out benefits until over the longer-run.
Over the ten-year budget window it looked like it reduced the
deficit. Over the longer-term it was
going to increase the deficit. They couldn't find a way to work
out that program. They, literally, within the last
few days, announced that they weren't going to go through with
it. Roth IRAs.
Conversion from a deductible IRA to a Roth IRA.
In a deductible IRA you deduct the cost of your deposits into
the IRA immediately but you pay taxes later on.
A Roth IRA you don't get to exempt the initial contributions
but the returns are tax-free later on.
If you suddenly allow a bunch of deductible IRAs to become Roth
IRAs you switch the timing. Even though over the long term
it's no different. You actually might loss more
revenue because higher returns in the future wouldn't go taxed.
But if you allow more IRAs to be converted from up-front
deduction to longer-term exemptions, you actually reduce
the deficit, when over the longer-term you actually
increase the deficit. That was two gimmicks.
Sunsets, and the timing of inflow verses outflow.
I don't know. Sara, can we think of a third?
Trust fund. Yeah, oh god.
Do we have to raise that now, when there's one minute left?
[laughter] I don't want to say the trust
fund's a gimmick, but the money's not really there.
We wrote it down somewhere that the money's there and we are
honoring that. [laughter]
That should count for something. For trust funds we don't really
lock up the money and that's the problem.
If we go back to candidate Gore, a lot of people made fun of his
lock box proposal, but I loved it!
I said yes, yes, yes! Lock it up!
That's exactly what we should do with the surplus.
We didn't and there it went. [inaudible]
That you couldn't count surpluses-- What would you do
with the money? You'd actually invest it.
You'd actually hold it in an account.
It wouldn't just be an accounting device.
You would not be allowed to run deficits that borrowed from that
amount of money. [inaudible]
Yeah, you would hold real treasuries with it.
That's what we have, isn't it?
Or any other kind of investment.
I wouldn't even have to be treasuries.
A trust fund could hold real-- >> Doesn't a trust fund hold
real treasuries? >> It hold IOUs.
[inaudible] Oh, no!
We need another whole three hours for that.
[laughter] [applause]
Thank you very much. If I could ask you all to sign
up on our e-mail list if you want to be included in Concord's
e-mails. We send e-mails out every week,
a newsletter called the Washington Budget Report, and
it's very entertaining as well as informative.
It gives you all the latest happenings in Washington with
the federal budget issues, and gives you links to different
documents that we put out or videos.
It's a way for you to keep up with our activities.
We also have brochures, fliers, and if you're at all interested
in the issues that I laid out for you today, I would love for
you to help us spread the word. Tell people we're really not as
scary as we might be portrayed on TV.
We are not austerity people. We're also not European-level
taxers. We're neither of those things.
If you would go on our site and give us feedback and let us know
if you want us to come out to your community and speak.
Sara is closer by than me most of the time.
Thank you so much for having me. You guys were an awesome
audience. Thank you.
[applause]