9UNP0658SD_Diane_Lim_Rogers_WordPress

- 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 baby boomer. I'm a young baby boomer, but I'm a baby boomer. 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 brute force correction on this brute 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 there 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 lose 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 lose 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 baby boomers 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 enumerated 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 lose 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 grandkids? 
[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 grandkids 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 upfront 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 its 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 progressivity 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 lookout 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]