Transcripts For CSPAN2 Economic Policy Discussion 20240713

Director of the center of the National Independent business. And i am delighted to introduce the vice chair of the white House Counsel of Economic Advisor. Preparing for the session i found that we have a foundational commonality and he is originally from sweden, im originally from minnesota, the land of american. He stopped a bit short of the minnesota border and currently on leave from the university of chicago where he is the professor of Public Policy studies at the University School of Public Policy. In the Freedman Institute program on research and healthcare markets and policies within the Health Economic initiative. Before rising at the university of chicago he served in several positions including his role as Senior Advisor to the head of food and Drug Administration and as a senior Economic Advisor to the head of the center for medicare and medicaid services. He also served as a healthcare advisor for john mccain during his president ial campaign. Thank you so much for joining us today. To start at the 74th edition of the economic report of the president was released last week which is says on wikipedia the chairmans rights, all 300 pages im sure. If you would please share some of the highlights of the report. This is the report you can download for free at the white house site, im gonna talk a little bit about the main theme, obviously i did not write the report, its about 435 pages and effort that takes place over several months, im gonna go through the main theme, if you want the bottom line of what pa has done or in general our twitter account white house d. A. Has almost daily updates from all of our activities and on the bottom lines on the economic report of the president. So basically there is two themes in the report that are the main theme on how the Trump Administration agenda which we take to be four pillars, one is taxcut per capital Economic Activity in the third is basically freeing up Energy Innovation in the private sector in the fourth being renegotiating trade agreements more fair across the globe. The two main themes in the report that gets a lot of chapters, the first thing what weve seen in the expansion after these policies were implemented under trump is very different from the expansion after the Great Recession. The second theme ill get into those numbers, the second theme we laid out is about the last three years of the economy as opposed to the previous part of the expansion has really been inclusive in terms of growth in the real benefactor the people are doing better are the lower end of the distribution. So let me going to how we document, we document in two ways essentially why this expansion is different, this part of the expansion is different from the earlier parts, usually when you have a recession you have early growth directly after the recession that is pretty rapid and it levels out to normal growth after that. That is opposite of what happened after the Great Recession where we have essentially a pretty slow growth initially and we panic celebrated growth for the last three years. This is in spite of the Monetary Policy that was stimulative in the early part of recession. We have rate hikes since 16 and have them coming down three times since then. But essentially we had more easy Monetary Policy in the beginning of the cycle then in the end. So the two ways we show its different on the earlier part of the expansion, we look at what the people say would be the continuation of the obama economy in 2016. So people obviously forecasted in 2016 what they saw and 17, 18, 19 look like. In fact the main goal is the forecast under current law to say obama policy what the future would look like. And if you look at that, its basically a pessimistic forecast. Because people generally had to believe that in recessions the longer you go into expansion the harder it is to do well. So what happened obviously was different than that, they predicted the Participation Rate would fall at an increase in the unappointed race would rise and decreased to 3. 6 currently. They predicted wage growth of lowincome individuals very low whether it accelerated et cetera. So i think this last week this comes to a head where the president calls this job basically and people wanted to claim this is a continuation of the obama expansion. But it is kind of a con job because those people in 2016 or now are claiming its a continuation of the obama economy when they themselves in 2016 says something different, theyre pretending to be someone else and they actually are thats what a con man is. I think that is actually something worth noting, no one predicted this performance and given current law in 2016. The second way in which the later part of the expansion differed from the first, if you look at just the data of the second part of expansion compared to the first is very different, for example labor enforcement participation shrink in the early part of the expansion in the house picked up in the last three years, same with homeownership, same with inequality, inequality is basically narrowed the last three years as opposed to widening before that. That kinda gets me to the second theme of the report which is inclusive growth. If you look at inequality both in income and wealth, that has taken a turn for the better of the less three years. So in income inequality if you look at wage growth, all across the board in terms of Disadvantaged Group or the lower end or the bottom half you have had a reversal of the disadvantage groups growing faster compared to before 2017 when they were groins under growingrowing slower. Obviously e increased labor demand but also deregulation, deregulation has been progressive in a sense that weve seen larger gains of the share of income from deregulation of poor individuals that weve seen for rich individuals. Thats an important component of why we think the regulation is important. Thats all the income inequality, the wealth inequality you see in a normal growth of wealth in the Bottom Health of the Wealth Distribution, 15 times faster than the last three administrations. So 47 growth and wealth among the lower half of the Wealth Distribution to benchmark that, this is great, is generating selfsufficient in the development dependent into benchmark that against other things we do to try to help the poor, about. 6 trillion larger than the largest is high Poverty Program which would be medicaid, food stamps and cash transfers. Any given year, its a big deal in terms how much the poor are gaining. Therefore theyre coming out Welfare Programs basically by not qualifying which is how we want people to come out as opposed to not being ineligible for other reasons but pretty much every means for the Welfare Program we see people gaining enough income to become more selfsufficient. So this is kind of the belief in labor demand is probably the best antiPoverty Program we invented by man i would say in the selfsufficiency is something that the forgotten minimum we talk about their administration is a big deal in terms of how we see the economy turning in their direction. There are some additional risks, those are the kind of two main things that some additional risk discussed in housing regulation that we believe are extremely inclusive intrusiv ink and california in the housing regulation has led to not enough supply the restricting the supply and having very high prices in those areas and the question is, can one on the state and local level get a deregulating prices which is deregulating that supply to meet the demand better, its very important gordon forward that given people are working more and earning more and we have a housing boom in connection with a low interestrate so will have a demand increase that is produced essential in those areas and you need supply to see demand than what we are doing, its very concentrated in certain areas because housing becomes very expensive and homelessness is a huge new york and california problem in other areas where housing is not regulated. Lastly, this report in terms of risk as a first report which is surprising that discusses the Opioid Crisis, its been going on for ten years now or more, it is really something that the president is very concerned about from day one and in the report we argue its a really important component of the open crisis of how it was financed is partly an economic phenomenon. Because if you look at potentially how much the government finances opioid prescription, first of all there was a prescription wave of the crisis and then the market got big enough for illegal innovators to improve quality and reduce price which is what fentanyl is about but if you look at the early part of the prescription epidemic, really that would highly subsidized by the government so we went from about 15 of pills being government announced through Public Programs to about 67 of pills being government financed during the period. So to think of other addictions, alcohol and cigarettes, we taxed those addictions, this is essentially weve been subsidizing this addiction with well intended programs obviously that are aimed to Something Else which is subsidizing the medical use of opioids which is not harmful, people dont die from medical use of pain meds about words. But at the same time we subsidize the nonmedical use of opioids which is what kills people in terms of an addiction. So this i think, this growth or epidemic would not be feasible without the subsidence, if you look at the middle of the prescription epidemic it cost about 50 grand to buy an addiction out of pocket for years. If you buy a lot of pills when youre addicted, its not like your copay when you go to pharmacy and is 20. Its basic if you were buying these outofpocket, the amount of pills you would need at the prices they were going it would cost about 50 grand to keep up with your yearly addiction which is infeasible for a large part of the population who are addicted. I think the government was important to basically provide the secondary market of nonmedical use of opioids during this period. In the report lays out that transmission. Thats part of the threat that we talked about on the report and Going Forward one of the things in the future that might be important to think about. I will stop there and will take questions. Thank you for your remark. A reminder your app on your phone or ipad or computer, submit questions that you have, i will start off with one myself, the economic report and annual gdp growth through 2030 if all the recommended policies are enacted, the Administration Proposed budget depends on the level of growth to shrink deficit Going Forward but without it deficits increase considerably, how concerned are you about the real possibility of this happening since past prediction of gdp growth by the administration have not been realized and it assumes no recession during the forecast. Which seems unlikely. In terms of related past addiction, we are pretty close, if you look at the report we document the errors of pastor administration in terms of forecast errors. The Trump Administration is lower than the other administration, reagan essentially, if youre concerned about the forecast, you should see the areas of 5 roughly that took place in the early part of the expansion where people thought those programs would be very beneficial to the economy. Weve been up a little bit, compared to other administrations weve been up a lot less but up to start. Its also important to understand what the difference between the white house and the c. B. O. And wall street with bluechip. The white house projection by definition are different because they include all potential Administration Policies and probability one of those policies happening. C. B. O. Was a probability of 0, they assume current loss, no new Administration Policies get implemented and bluechip is in between, will these actually happen or not, they cut them in between c. B. O. At 0 in a probability of one, the administration is always higher than c. B. O. And bluechip because thats the nature of whats been predicted. Thats important to keep in mind when you hear how we compare to other forecasters. In my worried about the deficit and debt . Im less worried than the current front runner in the democratic party, if they get power id be a lot more worried given the policies that senator sanders has proposed in terms of the revenue which we cannot collect some of these policies is not even feasible to collect that amount of revenue upon the programs they are proposing. The common argument against the tax cut was that basically it was not a tax cut for the wealthy and he drew a hole in the debt. I think both of those arguments, theres a lot of evidence now suggesting are both not consistent with evidence. The first one, i just told you, the lower end are converging with upper end so certainly yes wealthy individuals benefited the poor individuals who were faster than the wealthy individuals, inequality is falling. The second aspect that i drove a hole in the debt, if you look at c. B. O. Revision to the revenue forecast due to improved economic conditions, that essentially implies that the tax cut paid for itself with additional revenue according to c. B. O. s numbers. What has happened is really the spending military spending the president correctly has changed that but its really spending opposed to the tax cut reducing revenue. What ultimately we care about is a debt relative to the size of the economy you might even have deficit spending in that ratio shrinking over time as the economy grows fast enough. We believe that weve now put in place, the trade agreement, tax cut and deregulation, thats a reform for that future growth to take place. Thank you. In talking about the increase in income for lower distribution, this is a question from the audience, laster 28 out of 50 states rank the minimum wage, how are you able to distinguish the wage growth due to the Administration Tax cut and deregulation and simply change in state law. Some people have incorrectly argued that the bluecollar boom that we talk about in the administration is the lower and growing so fast. Its a Government Produced boomed and a sense of minimum wage across the country are raising in a lot of states. It turns out that is quantitatively qualitatively correct but quantitatively unimportant. Only about 2 of people among the working age are minimumwage levels and we basically have analyzed and come up with a quantitative that this is not a big deal in terms of affecting overall wage programs. Shifting a bit to tariffs and trade, tariffs and trade uncertainty continues to be a Significant Industries including agriculture and manufacturing to name a few with the negotiation of the phase i deal with china complete the certainty on a resolution, how significant of an impact do you think the trade dispute with china has in the next year in 2020 . A without any renegotiation there will be uncertainty as to what that leads to and that is what we have seen in terms of investments. However the overall effort is going to have problems as sort of the longrun return and benefit compared to the short run issue with renegotiation so i think we see that in the benefits they will dominate any sort of journey we have had in the market the last couple of years. I also think people misinterpreted it created leverage for us and when you hear the discussions it kind of misses the point of how they have been used to generate a large rate of return so that is an important point. We are going to get rid of some of the uncertainty and that will be very beneficial and also the agreements will be in place. The real threat is the coronavirus. We dont know yet. We are taking a wait and see approach to see what will happen before we start looking at the implications of it. Those that were infected time and we are taking strict measures and put forth a control policy. In forms of combating any impact here and in terms of the impact on the economy thats been exaggerated if you look at the influence on the average 40,000 americans each year so thats a big deal relative to the numbers we were talking about. In 2018 in the high growth here you cant vaccinate against the new strengths and seasonal flu you think you are protected against everything but youre not. It might have been a fraction of the strain that they come back. Its important to keep in mind the diseases that can be vaccinated against. That doesnt mean the economic effects wont have an impact here effects in the wait and see approach. Going back to the Opioid Crisis that you mentioned are you suggesting they Affordable Care act contributed to the Opioid Crisis do you think there is something with that . Most a lot of times are associated with a lot of pain so you have Pain Management in portland but either program has this effect and its obviously to fund the medical use of Pain Management it is the nonmedical use so how do you slow down the nonmedical use in the growth of the prescription card that is to become as it has now declined under trump and the sword of reversing the trend and part of that is to limit the nonmedical use of the. Because the market became so big about it on prescription opioids there were great illegal innovators somewhat happened essentially as it became much more potent and cheaper at the same time so you think about it and the price went through the floor and that innovation became possible because there was a huge demand pool of customers sitting out there with a Higher Quality product thats important to keep in mind for the Mexican Border about 90 of heroine and fentanyl comes through the southern border and that is one reason the president is very focused on trying to shut down the influx of drugs on the border not only through the wall but also through ports of entry that are monitoring the influx. What do you believe is the biggest threat in the next five years and you cant say senator Bernie Sanders. Thats too easy. We are continuing to lay out. The policy gets reverse and whether it is senator sanders or another candidate that is the biggest threat out there. Thank you. We are out of time. [applause] [inaudible conversations] thank you all for joining us today bright and early on the first day of the policy conference. Im very pleased to welcome somebody that needs no introduction. Currently the director of the congressional Budget Organization the Economic Policy during the financial crisis he also served as the chief of chif staff and a senior economist at the council of economic advisers at the white house and was at the imf and Federal Reserve board. Hes been a professor at northwestern Chicago School of business and university of maryland. Join me in getting a warm welcome to phil. [applause] thanks everyone very much. The founding of the 45 years ago he was sworn in as the first director of and in a sense it is hard to think back to when she started theres no blueprint or guide and other countries didnt have these independent Budget Office is that the parliament and legislature is separate and distinct from the executive branch. It is incredible how much that is still the case. Her decision that it would be nonpartisan for the fourth and analysis but not policies and so that is what i tell members and staff and the rest of my colleagues that the congress will get our analysis but they are not going to get our opinion and that is all because the way they started the organization. We have a little bit more about alice rivlin and some quotes from her so please go ahead and take a look at the website for the history as well as the economics and budget. I will talk first about the economy and the budget situation and i will try to be relatively brief. The way we do our Economic Outlook is based on current law we put forth a baseline that congress uses that they scored against and knowing that the economeconomy isnt fiscal situn under the current law is the right way to do it. Its important to keep this in mind if you think about early 2017. And the tax cut at the end of 27 teams with the outcome of horse and 2017 and 2018 was stronger than the forecast and said that is not a surprise with what we have done and its got the insight of john maynard keynes. In a way that is a good way to look at the Economic Outlook and the most notable part of that is the strong labor market and the Unemployment Rate and of course we see the Unemployment Rate today below the natural and gradually rising back up as the economy slows but you can still see it is going clear element of the market and another one of course is what is happening with wage growth. It it has some nice patristics if you can see the wine shows the wage growth at the bottom and its excavated notably. At 2019 we saw some deceleration of wage growth so its obviously something we are looking at to evaluate the economy. A key question is how much is left in the economy but also what it means for Monetary Policy. We dont tell the fed they dont give advice. We try to have a value of what they will do but we are focused on the same questions as other people are. How many people turn to the labor force and out of the labor force and why and try to look at the causes. Is thahis disability, addiction, Mental Illness many social ills wrapped up together that go at the same question when the labor market is strong as it seems to be today and what accounts for the millions and tens of millions still on the sidelines and its something we are looking at carefully. A challenge of course is the demographics are going against the u. S. As i think Everybody Knows we are an aging society and that has an important effect on the growth and economy. It is reasonably good we see a pretty solid growth going below the potential asset returns back down and then over the longterm rate of 1. 7 and of course that is influenced by the demographics in a way that i will talk about in just a second. Going back to our view of gdp growth to see what is happening here you can see at the bottom its Labor Force Growth and a key challenge facing the economy as the slowing growth of the labor forcforce and this is of coursey ive highlighted the importance of understanding what happened in the u. S. Labor force and when the labor markets are strong why are people still on the sidelines. Then the productivity growth which i think we all understand is pivotal to the forecast so what we have here is returned to so much stronger productivity growth than we have seen in the period since the financial crisis but not quite as strong as the period before so there is a little bit of a reversed meaning here and its something that we are looking at very carefully try to understand what is happening with productivity growth and we have to understand what is happening to the investment and the depreciation and so on so we are looking carefully at that and they have a fantastic macro group many of whom are here today so we as a group are looking at this carefully. And again this is a conventional view of inflation. Thats what we seek to be in inflation has been running below the target and then settling back to the target. This is a pretty benign view of the economy and i think you can see all the economic slide site up so far. It slows down because the longterm factors but settles down. The Unemployment Rate is below and rises gently back to the national. Then inflation goes over the target for a little bit and then again settles down. So its a very benign view and the forecast was completed before the outbreak of the coronavirus was widely known so as you can imagine something we are tracking carefully as well. I dont have much to add other than we are tracking it carefully. Im going to skip over this to show you what we have with the longerterm Interest Rates and again this is a very conventional view of Interest Rate base remained lower over the past several years and the ceo had previously projected and weve taken on board so i started as the director in the beginning of june and since im the director we have twice lowered the path for Interest Rates which is a huge impact on the outlook so that comes to about 188 trillion over the ten year outlook s slithers additiol spending and lower revenues. Its pretty daunting but the low Interest Rates have mattered. He can see in the chart over the next several years with longterm and shortterm but again they are lower than what they had previously and it makes a big difference. What are why might they go lower or higher and what might that mean if its hard to know which words to use we are not going to scare people about the budget deficit but they are trying to describe it accurately and honestly i think daunting is now the term of art from the congressional situation so if you want a metaphor and you go down to a slope you havent done before and you are at the top and looking down, lets think about this as we have the budget outlook over 12 trillion as far as the eye can see and over 4 of gdp. And having lowInterest Rates helps as i just said the primary deficit in the u. S. Is so large that it is yet to rise even if they remain low as they are so it is a challenge and the conventional reasons this is a challenge given the Interest Rate and we borrow from foreigners so its kind of creeping problems in the situation and of the more difficult one to know about is the longerterm vulnerability as the stock of debt rises it makes the u. S. More vulnerable to the situation. They reflect upward and its higher but that is a more difficult situation. On the other hand i think we all understand that a the u. S. Is trusted around the world and we have seen that the last couple of weeks as the outbreak has become more serious so this is not a crisis it is a challenge to be addressed over time. This is pretty well known that gap spending revenue and 50 year average is on the spending side and revenue side and you can see at the bottom you go back above the 50 year average but one thing important to keep in mind is at the end of 2025 essentially all the aspects of the income tax expired and referred to the 2017 wall and i will show you in a moment it is a pretty big impact on the revenues. So i will show that in the secona secondand then the others the spending and you can see that is rising above the historical experience and set to continue. The elements that are going to change on the next ten years and the topline tax revenues. The provision will have an important effect. Since the act, theyve been tracking the impact on the fiscal situation and the most recent update we revised down the Corporate Income tax received over the next ten years. We did it for a variety of reasons which may be that the interest of time we wont go through with more explanation on the website and im happy to talk about it if anyone has a question about it. Now on this chart you would see that it is set to rise but overall the discretionary outlays are projected to decline over the tenyear budget window. This is just a mechanical calculation. Its from the koran flaw is projected to rates of inflation is set to decline but you can see it reflects both the larger stock of debt and rising Interest Rates and combination of those. The challenge on the spending side is actuary spending. I will break that down in a second. It is a combination on the two main factors one i alluded to before and second is the growth of the healthcare cost and in fact pieces of the federal budget and its the demographics into Social Security outlays are set to rise and they go to about 6 of gdp over the next couple of decades into Social Security will be relatively stable and reflect up again. Something important to keep in mind sometimes the fiscal outlook and societal outlook dont go the same direction. We pay careful attention to the demographic factors and in terms of the rate in the u. S. It has gone down. The first reaction we have to remind ourselves and then hear the second line you see whats going on with medicare and medicaid spending. This is a chart with a lot of linelove oflines with a simple d if that is the nature of the government is changing and set tsentto change further over the decades so you can see that if you go vertically down the page you can see on the top left into the second column has been doing the same. Discretionary spending has been seen shrinking as a share of the economy and the individual income tax and Corporate Income tax shrinking as a share of revenue but the real change is on the spending side. This is the last one that is the kicker and its going to an unprecedented place. Its daunting. That is exactly it by 2050. Due to the change in the law and the tax act is extended or other things it would be larger than us. For example, at the end of 2019, the appropriation bill at the end of the year changes th the l and coding repeals into certain taxes on the healthcare side that was active in 2010 has never gone into effect, its never actually told still in our outlook and repealing the one provision of a large impact way out into the future. It had a big impact on the situation its a strong labor market and death situation that is going historical i will leave that to their. Feel free to submit questions i will get them up here but im going to start with a few of my own. When you were appointed last year many of the economist econn the previous administrations were congratulatory and economists wrote you are a smart economist willing to confront hard truths so now what i gleaned from your presentation is that they are looking at my eyeball this by 2030 we have as much debt to gdp as we did in world war ii which is phenomenal given that we are not in a war. We have the rising Interest Payments that reductions in the longterm Interest Rates are so there is a potential. There is a potential for the race to be higher. They also have the fact congress would let a 2017 tax act expire and personal tax rates would rise. That is a question in my mind and so it could look a lot worse. You are an academic and youve done a lot of work on this. What would be your recipe for controlling this exploding death situation and very large deficit . Thats the challenge is that it is so large it is going to take a societal effort. Its not something that is just a few little to be to be or we would have done it so that is the challenge thinking about how we as a society dont need to do it quickly its not like tomorrow things are not going to be a problem we look at what is happening in the markets and see the Interest Rates moving well. The other good thing is as a nation we have the ability to use fiscal policy whether its on the spending side and we are going to do the analysis and make sure the math is right. What they have one more thing the challenge is a generational one the longer we wait they dont bear their share of the burden. Its not putting the burden on our children which is true that the current generations are not sharing the burden. Its spot on because the generations that followed world war ii also paid for it financially as well and that means generations today are avoiding their share of the burden. Thats how we pay for some of these mandatory programs like Social Security and medicare and so on with a payasyougo system. Other countries have chosen different paths and we now have a demographic deficit they are facing instead of the boom. What do you think of the Current System is there a potential for shifting away from the pay go system . There are proposals that have been put forth. The chairman of the Senate Budget committee and the house Budget Committee chair and mr. Nz from wyoming and senator white house put forth by partisan budget reforms and its a very interesting proposal and is worth careful scrutiny. They dont have a view about what the right budget process is because we will follow the process and follow the law whatever Congress Says it is. On the challenge i should note is on the page outside as opposed to not paying for new spending or lower revenues but its also a 50 year just meant more difficult for the imbalance so its like a low hanging fruit being taken away. The projection for the corporate revenue you mentioned you might say more about that. What is that coming from and why has it been less than what we thought . If whoever controls the slide can put up a slide on the Corporate Income tax to rewind a little bit further. With our income between corporate earnings on the one hand and labor on the other hand is we have t the data on the Tax Collections into the Corporate Tax revenue is lower than it would have been expected given where the corporate profits were and it turned out that the data was lowered so it resolved a little bit of mystery but also somewhat lower impact on the outlook. We have additional modeling work that we did on the effect of the Research Experimentation with and attacks treatment for the revenue and then it changes in regulations that affected the International Aspects of the tax act so we dont interpret the regulations we just observe the impact regulation on taxpayers and in this case Corporate Taxpayers and is twofold. One day repatriated profits from overseas faster than we had projected in our april 1 18 analysis. And th second, the revenue is en lower. Its faster but lower than it had been anticipated so w we brk that into the projections of it is those three things. I dont have the slide so i will recapitulate them. Buthe data is on modeling the cb and expected repatriation into the behavior in response to the changes in regulations since. What about the impact of tariffs does that explain the corporate process . We dont make that connection directly but we do follow very carefully. We have an excellent analyst so we look at this basis on the prices in the u. S. And then we go from prices to quantities and output and it has a meaningful impact so we calculate the hire since 2018 with the effect of about 1,270 per household. For each household we recognize that Business Investment beyond the direct impact on households. If we were to get further rounds of the trade deals we would have phase one and if we were to roll it back to where we were im not sur sure where thas realistic that if we were, what kind of impact do you think that it would have on the growth projections . If would be a positive, thats for sure and the Administration Trade Agenda would be positive to the economy created hard to know exactly how much and how quickly. We still have that. We still worry that theres a lingering impact othere is aline investment so it may be a positive showing not enough to change the outlook. There is a lot here so in the february 2020 Economic Outlook survey there was a lot of concern about the deficit and debt and we are economists after all. Somebody had a question about the tax. Is that part of the solution to reducing the deficit and even if it were is it politically feasible . Is runs into the way that alice rivlin set us up. We would provide an analysis of the. So if it were proposed or enacted, they were working together with colleagues in the joint committee on taxation would analyze it and of course in charge of the analysis of the tax policy and then we would look at the affected the economy. We still have to look at the static effect and also the dynamic effects and theyve done some nice work looking at the dynamic legislation on the economy. Theres one on Immigration Reform they did a dynamic scorer of that and it makes sense. We are set up to do that. We wouldnt get our opinion of it. Its not even the positive and negative they have to do a normative analysis. U. S. Productivity growth and productivity growth i think you had even the 24th year ago rising from 1. 1 to 1. 5. The immediate followup is what could we be doing to get back to where we were in the 90s and thats a little bit surprising because we have had the deregulation. The tax act boosting the Capital Formation there is this sense in which we saw the initial response to. The negative investment and Capital Formation of the trade policy but we would expect that it would continue to support further investments in capital accumulation and productivity. Advice i can go into to answer quickly on the policy side one thing it is difficult to know we know some things are going in the direction and they recently put out a report that goes through different categories of federal investment so thats one end of the increas then the inch Capital Formation and productivity. Theres a question here about what lessons should we be drawing from the experience of japan with large deficits and debt and if you are not a student of japan, the japanese economy, feel free to pass that. Theres a variety of lessons one is the impact of demographics. Facing the demographic challenge would have a considerable impact on the growth in japan. That is a lesson we can learn. On the other hand the fiscal situation looks to be different. Its not clear that is the most for the u. S. With respect to the Interest Rate comes from this distinction since we do have a considerable part of the capital refers to be expected to have a meaningful impact in raising the Interest Rate. The hypothesis that as you age other societies would want to bring back the resources for the consumption of the countries. This brings us to a number of source funding for the debt. Should we be focusing on debt as a percentage of gdp or held by the public month by the Federal Reserve. We look at the operations of the Federal Reserve for the remittances that have been hire since the financial crisis. To avoid the internal operations within the u. S. Government that is what we see a in the nature of the fiscal challenge. I guess the last question here is about potential gdp and it is entirely related. What else can we do to raise the potential gdp, 2 growth isnt bad. What should the u. S. Be focusing on after the next election or should they be focusing on to raise the potential gdp . It is exactly the right question to end o and on becauss in turn equity a longterm challenge and maybe this is the academic in me or the instructor i think that is the production function as all of us do every day. Boosting the Capital Stock labor force and as a nation we have the ability to change the. It is a new sort of report we put this out on immigration and it looks at who and then the role and the contribution to the economy into the share of the population of so people want to come to the u. S. And maybe this is the right way to end as the best confidence that people want to come here. [applause] good morning everyone thank you for being here. I think that we have kicked off our policy conference 2020 vision examining policy prescriptions in an Election Year so we heard from phil this morning and now we are about to move into a discussion on fiscal policy and growing fiscal imbalances global and domestic and we have a terrific panel for you. I want to thank the institute for its focus on these issues for their support over the years and for this session in particular we appreciate your partnership very much. I will now handle over two jeff holland for research at the Peterson Foundation to moderate the session. Thank you. [applause] thank you all for having us on behalf of the foundation i want to say how happy we are to sponsor the event and also here in the great fiscal policy agenda topic including this one on Global Policy perspectives suite of the distinguished economists i will introduce them first and they will each be giving a five minute set of remarks. As a reminder please send questions in. Ive got the ipod so we will be taking questions during the session but they introduce of to panelists first we have the economic counselor and director of the Research Department of the International Monetary fund. Currently on leave of Public Service at the Economics Department where she is a professor of International Studies and economics. Research focuses on macroeconomics and also a Numerous Research article on exchange rate, International Financial crisis, Monetary Policy and emerging crisis. Coeditor of the book of economics and was the editor of the economic review. Sheikh serves as the codirector of visiting with the scholars and member of the Economic Advisory panel of the reserve bank of new york from 2015 she also served from the ministry of finance. Shes received her phd in economics from the university in 2001 after earning a ba from the university of washington. The second panelist keith is now the professor at the school of Public Policy Georgetown University and has more than 25 years of Public Service most recently as the director of the congressional Budget Office. Prior to that, chief economist at the International Trade commission and before that, he was a Senior Research fellow at George Mason University and her the commissioner of the bureau of labor statistics, chief economist for the White House Council of economic advisers and for the department of commerce, Senior International economist at assistant professor at the university of arkansas and International Economist at the department of treasury. She worked on a variety of topics including labor Market Analysis and conditions and measurement macroeconomic analysis forecasting and policy and computational equilibrium modeling. From Purdue University but they turn it over and ou now to you r introductory remarks. Thank you and it is a pleasure. It is a pleasure to be here. This session is about fiscal policy and i would like to make three points and keep it very short. The first point is when we are thinking about what role should the fiscal policy play so we have seen 2019, 2020. We saw the monetary policies cutting Interest Rates and that certainly helped to support the global economy. The estimate contributed about half a percentage point of growth in 2019 and will contribute in 2020. The fiscal policy on the other hand was more unevenly used to. I think its fair to say that many see this space having shrunk and in some areas the question is what happened the next time around and that fiscal policy will have to play a different role. There is two different areas being viewed as having a role to play. One of course is in terms of doing something now for those that have the fiscal space which has raised the growth to deal with the risk of Climate Change and being able to stay on infrastructure and the social infrastructure into giving the very low Interest Rate. But theres also the need to think about for fiscal see place these for the next time around. Its ten rules based in on the other hand the fiscal policy tends to be more discretionary but i think now is a time to think more strongly about how to improve the automatic stabilizers. Unemployment rates go up and showed triggered fiscal spending and you could cover a larger portion of the population. They have to be thought of now and for the first point there is a problem with that in a major part of the world there are developing economies, low income developing economies that have higher levels of debt and that would be the time for them to consult with a through both revenue measures because otherwise if and when they would find themselves in a difficult situation to cut back on the social spending. Thank you for inviting me here. Talking about the u. S. Fiscal policy i will start with a simple observation. A trillion dollars is a lot of money. 14 trillion is a lot of money. So where we are now is in terms of fiscal is unprecedented. We had the longest expansion in history and we are still running a deficit of a trillion dollars a year and next year and the year after that. Things are unprecedented in a lot of ways and in addition to the islamist expansion we have lower than expected Interest Rate and inflation. These are all unusual things into uncharted territory so if you are looking forward, i dont believe we have lifted recessions and we will have another recession at some point. Its turning from the pit showing where theyve never been. I absolutely understand the idea of Monetary Policy because it has zero if you Start Talking about the fiscal policy to complement it, i think that makes sense, but the notion is at least for the United States as an infinite amount. That may be true but i also think in terms of the fiscal policy, we are being very short run oriented. I dont think we are ever going to go without having another recession and i dont think Interest Rates are going to stay low forever or inflation is going to stay under control forever. Right now the debt is looking like its there forever. This trillion dollars we are borrowing another troubling and we will pay it back then and we will borrow another trillion. 30 years or more there is no place to pay for trillion dollars back. So the thing i worry about with fiscal policy is mediumterm and longterm we need to think about those more than we have and im talking about drastically changing things so im talking about having a plan and sticking to it. Having a plan and dealing with the fiscal policy in the medium and long term is important and we are just being very shortsighted on this. If we are going to talk about fiscal policy in the United States, i like the idea of automatic stabilizers. I dont know that we are very good at conducting fiscal policy in a discretionary send. We are pretty bad at it as a matter of fact. But i also think if you have automatic stabilizers, they need to be symmetric. You need to provide stimulants and go the other direction you need to pay back the debt you cant just make it a constant ratcheting up of death overtime. We seem to have forgotten what was the mantra a while ago. It needs to be timely, targeted and temporary and i dont think that we should get away from that. Since weve been talking about the u. S. Fiscal policy lets stop there for now. You suggested economies with unsustainable debt levels would need to consolidate the globalization. Any chance the u. S. Will fall into this category . The u. S. More than any others in dealing with these kind of issues but that said, if you look at the median turn for the u. S. , we are looking at the structural primary deficits for about three to three quarters of a percent of gdp so even in an environment where the Interest Rates are low, they would be expected to stay on a consistent basis and that would increase the debt trajectory. So certainly come and this is considered to have a goal where it is on the declinin decline id that would require one is revenue mobilization. The second is reducing the cost of the services with half as good thought asgood a health oud clearly there should be a way of using technology to improve efficiency and it should be better systems to make sure theres costsharing and that there has to be a better method moving away from the procedural based so that theres a second area where more needs to be done in a third is on tension. We can see an argument why you would want to for a load so all these measures are important of course like i started off by saying the u. S. Has a longer way there is a flight to the u. S. Treasury but this kind of public spending is also carving out the infrastructure which there is a big need for it. Heres a question i dont get to ask very often. We just heard about the outlook for the economy and so do you have anything to add . Label start with a trillion dollars is a lot of money. [laughter] weve been near or above the potential gdp and we still have a lot of stimulus. I think we understand all the little bit of how far off the United States budget is when we run the deficit is a trillion dollars this year we talk aboutd about the 4 of gdp. That makes it seem smaller than it really isnt i would like to add an observation. Its also a spending is 130 of tax revenue this year. We are off by 30 . And in terms of the process, every year we have an annual budget that deals with Discretionary Spending only which is about 30 of all federal spending so if you sat down and did a calculation we know what they are going to be. Its not hard to forecast. We know what mandatory spending is going to be and how much debt we have got so if you take the tax revenue into takeout interest, we are left with under 400 billion left to spend on Discretionary Spending. 3. 5 to four times the amount came out of that process. Thats not even close and it also points out this process on Discretionary Spending that at some point theres going to be some political crowding out. Its going to be so strong you got to recognize your Discretionary Spending isnt going to be much of a solution. You wont be able to cut the debt very much or talk about things like Infrastructure Investment etc. We need to think in terms of a plan to stick to what every year you look at the budget deficit and you have a target and try to make progress. Its the responsible thing to do. Both of you mentioned the debt and deficit already. There seemed to be a general consensus that it was a threat and they took steps to address that is now in the aftermath of the procession theres been some disagreement on both sides of the spectrum. The important danger presented. Can we spend money or borrow to deal with it and would . The important trend in the Interest Rate is just before the Global Crisis and another reflection one was after the crisis and a bunch of emerging market there was a huge appetite for a socalled bernanke savin savings. Theres been the phenomenon of recent aging demographics and reducing the overall demand for investments and at some point it increases equality and reducing the demand in the overall economy so they are the more salient features and why we look at them today with a bit of a different reality of what it was in the 1980s. That doesnt mean one moves to a scenario where the assumption is one can monetize indiscriminately. There is a reason why they stayed low despite all the buildup and debt and thats because the space between the Monetary Policy if that were to be taken away it would be a completely different paradigm and it would be wrong to assume Interest Rates would stay where they are. So i dont think that is a lesson to be learned. Why people are having this take on what is happening within a band again we do have one of the biggest levels of public debt at the time Interest Rates are really low and its these trends pushing Interest Rates now that much. The idea of fiscal space isnt clear to me especially for countries like the United States we have a lot of fiscal space. But fiscal space is a short run and im going to back to my theme short run versus longrun. We have had now for chairs say that the debt is on an unsustainable track. Weve had five co directors say that its unsustainable. In my mind that isnt a short run problem thats being described. At least for me it is a longrun problem. But at least in the, 200 plus probably wont scare you either. But under the policy it is a much higher number. Interest rates are low now. Are they going to be blowing through the years because you dont have to have higher Interest Rates were high Interest Rates to have debt enter a higher level as the decades go by. Its going to get high. So in that sense its always been an issue and its a losing issue and one of the things i get to talk about having more fiscal space. I dont want to talk policymakers now that because deficits and debts or a longrun may be. And i think we are just encouraging the wrong sort of behavior to be honest to not think about this as being something that is a real issue. What in the law yo wall you d to return given historically low Interest Rates alongside the growth of invested in Human Capital and Climate Friendly infrastructure. Which countries fall into this category and can you give some examples . Examples would be germany, then a cost really a toss up korea. These are countries that are taking steps you do see them claiming to more spending so they are but these if you look at germany for instance its declining and given that germany likes of the low productivity growth, no no potential growth d from the pure costbenefit analysis you would make an argument given that you decided if you have to make these investments and trying to raise the longterm outcome growth then this dude and come in, climate and. The importance of raising the growth. They we have high levels of debt and many are concentrated once you start looking at these other economies they are facing high your Interest Rate and the premium is going up. So those are countries that will have to consolidate now where Interest Rates are low globally now will be the time to put in place plans for consolidation and Interest Rates go up and you will be in trouble. I saw you write something down. A few months ago the wall street journal had counterintuitively higher death might be leading to lower Interest Rates and borrowing helped the earnings that made it hard to raise rates. It also made consumers and businesses are likely t more lil back on the economic conditions. This has happened in a number in australia. If you have a comment on what you think might be happening these are not normal times. Under normal times, higher levels of debt are associated with Interest Rates and Slower Growth and i dont think we are going to be where we are forever. We will go back to more normal times so i think this relationship is the other way. We need to think about higher debt being associated with high Interest Rate and Slower Growth. Several people think this might be the new normal. In the sense that i agree with you that seems likely. We live in a world where the debt is high if its just basic supply and demand if we have a world where debt is high and Interest Rates are low if tolls you the demand for holding the debt and why you can afford to have higher levels of debt and low Interest Rate is at this wis phenomena that we have is a reflection of these trends. Its a reflection of the demand for savings and demographics. So the demand for savings that is despite what the we put out e with Interest Rates are low. For the second piece of it, when the financial crisis hit and you have large amounts of debt, that was an environment where it led to a drop in demand and also leads to lower Interest Rates so you could have a situation where if they are borrowing it to rates where there was a sudden increase of course that would have big consequences but again, the argument again i just want to Say Something Interest Rate regardless the fundamentals of what they are this is an environment where raising the rate in 2018 and realizing it is much lower which means the level of demand in the economy is low enough that that would reduce Economic Activities to sustain the level of demand that is needed so what is the underlying trend that is the discussion or is it they are going get out of this socalled liquidity trap and secondly of course if we start going into policies where we completely disregard and talk about the monetizing debt. I know you spoke to the World Economic forum about this. Do you want to summarize a little bit of what the discussion was about . It is a reflection of the fact that the level of demand is so high people just want to hold postinpostings as opposed to ded weve seen that around the world of the investment is quite weak. Thats a reflection of many features but its also the fact how are we going to get this increase in productivity. There is new kinds of innovation happening and that is one possibility. The second is of course if there were to be more of an equal Income Distribution that was raised the rate in the investment and productivity so there are many aspects to this. Some countries need more immigration. You mentioned this a number of times. I will mention you the last recession that we went into it with about 35 of gdp which at the time is considered high. Five years it doubled at 70 of gdp. So we are going to start from a higher level. It would help out and the more we make it automatic i dont think the we are good at discren policy. Part of the problem i think is again a short term. A lot of the challenges the United States face are not shortterm challenges we have some longrun issue is when is where Economic Growth at the labor force is going to grow half a percentage a year so we are talking 2 Economic Growth Going Forward with this event hanging over your head Going Forward and that is my real concern. The constraint in the fiscal policy is real in the short term dealing with the recession and to the degree o that policymakes feel constrained with the could be an issue Going Forward. Given the demographic in the rising healthcare costs what is your solution in the fiscal situation that we are in right now . And we need a plan. To start reducing the deficit, one of the things we havent talked about which is absolutely true is going out of 30 years we have a huge accumulation of de debt. But just as a preview maybe we can talk about that ourselves so what is the implication of the income inequality . For me i find it more interesting and then come back to the other direction. And to recognize that if you look at these economies about to explain that distribution of income how unequal is it is because of that you do get significant evening out of that reciprocity distribution. And if there is the attack on disposable income that means its less true for emerging markets but then there is a huge role for the equal opportunity and with the infrastructure and transportation and this is important it is important with the productivity and growth to create the diamonds and the economy. And with income inequality so there is a high Income Distribution we know that has consequences for Economic Activity and then to have that direct impact. But in addition to that, it is very important to make sure that the wealthy have to pay their fair share of taxes. That is an important piece so that to have this carried interest provision of that is a low hanging fruit and it is important in terms of international taxation. I dont have a lot to say about income inequality that has been an issue and is growing as an issue. One thing i will point out you want to deal with that at good times having a huge deficit of debt i really do think there is a political economy trade off about doing more with government that running up debt that we have to think about. One more question. Now that you are in the University Setting how will the generation of younger americans be affected by the inability of our challenges . One thing that is obvious right now one thing that government does is we dont spend much money on people that are in prime working age. We just dont and Going Forward that the burden on the young will get higher and higher to take care of the debt Going Forward. I find it interesting to look at what are they in the sixties or seventies a model that look like 30 years from now 30 years from now it will be heavily targeted to Social Security and healthcare we are locking and what the government can do right now. And talk about what could be done for younger americans . And i agreed that we think of what is implied of those generations but it is more different between and it is clearly important but second notch is that level of expenditure and it is important to the spending happens. Without lowerlevel lab deficit. So reaching out to younger people that we have plenty of events where we engage with the young people so i was in south africa and kenya. And then to run in social media. So we are doing a lot. Is that message getting across . Its a lot to think about it is not a blackandwhite scenario we are living where debt is very high. So there are questions that are coming up. Its important for us to engage with them this is what you do when you are in doubt. Turning to psalm audience questions. If Bernie Sanders when one wins looking at treasury secretary how uncomfortable are you with us policy . So to establish that to monetize fiscal spending as long as there is no inflation and the run on us debt. And it seems like this is a winwin. Now to keep in mind with no inflation this is one of the Central Banks have a mandate for output and not about monetizing government spending. But of course the assumption that there would be no inflation and thats hard to maintain. So they do have Budget Constraints it is very much the case you will have to repay that with your resources. I dont think the current environment regardless of how we change. Is it possible with the policy with the balance one of the issues to monetize the debt. It is still there. A huge debt Going Forward high or low Interest Rates. So you have to believe in that fiscal policies somehow. The fiscal policy of the United States is not very good we are thinking very shortterm we are thinking longterm thinking. It is in theory but an observation and not very complete and then to draw some conclusions that relate that inflation will never be a problem again. So overall that we are running a high risk the way things are and will be this way forever. There is a risk. Theres no reason to have this risk we are dealing with shortterm problems. In the situation so with Interest Rates negative and is essential for the European Union what is the hesitation . We looked at 55 countries over the last 200 years and the feature of Interest Rates is the norm rather than the ascent exception. So it is not atypical with that crisis around the world. So there is no guarantee and second if you look at what happened you very often see there is a reversal and that the problem is very hard to predict and so then to work on the assumption that it Interest Rates would stay low. And with that increasing Interest Rates and secondly even if you had Interest Rates and then to easily have that situation. And there is another question for you. What are the policy prescriptions you have mentioned in the gdp of six. 3 percent. What if they are wrong . So again this is the argument of a more stable debt cost. So that is about sustainability. And to raise the consumption tax while putting another spending stimulus it is to be expected where growth is above normal it with that consumption tax. The what many forecast. There was a question of that sustainable trajectory and if you can do that to have the taxes but at the same time that level of demand is not easy to get that mix right as we saw. How feasible is it to raise austerity . That is part of the problem we find short runs. We just do we wont get much now in political season thats why we see a lot of ideas on those that would raise the debt or the deficit Going Forward. In terms of mediumterm planning that led work because it hasnt worked before. And that is the annual budget which we had a hard time passing every year to live in a big chunk of the problem to get that into the political Going Forward but one of the problems and then to change their mind and they do that all the time thats part of the problem. Ultimately it is a lack of leadership the public is not concerned about debt trillions of dollars they are just not concerned about that there is a huge debt and building up to the Great Recession to make heres a question for both of you but concerned about deficits that many parts of the world yet rates continue to remain low. What is the endgame . So this is the point i made previously that the fact the economies that can borrow more at lower Interest Rates this fate despite high levels of debt is the trends that we see as Interest Rates coming down with those aging demographics. And second but inflation also stays low so the question is what will change so we could argue and there is greater policy and uncertainty because this point in time because we see Interest Rates going back up. Second there are countries in the world that are based on Interest Rate because that Exchange Risk is high because it existed many parts of the world and that is why from the question of the individuals and from that perspective and those are very low so the policymakers and not to care about that overall level of the debt with that next generation into the future because of all of the debt and that means mine is a very high rates and thats not the case. Then you see dad immediate backslash in public but if theres no problem then you should Pay Attention to it. We had an opportunity this is the largest expansion on record gdp we have the option if we wanted to to start to address the deficit and debt problem if not now be on the right circumstances then what are . We are making a choice not to deal with the debt and deficit right now at a time when we really can. I worry what we are simply doing is waiting until theres a crisis of some sort and you have to deal with it you have to have some draconian measures to deal with it. If we do that, that just shows to me what we are doing with an eminent shortterm problem and the endgame is to have some leadership and a plan dealing with things over time. We are out of time please join me to think our panelist. [applause] [inaudible conversations]