New york city who is helping us to h great and educated guide fr teachers speeded you canan finih watching this if you go to our website at cspan. Org. We will live there to take your life to a conference on federal spending and debt. Current debt, which is around 100 of gdp is at a level we havent seen since world war ii and is a growing cause of concern. Tackling this problem presents a variety of challenges. Today were fortunate to have a group of very smart and accomplished people who are going to share their insights. Well get to hear a variety of perspectives. To do this, we have a mix of panels, discussions and speakers. Well hear about the economic and fiscal challenges caused by the debt. The impact of debt on invests and consumers, the roles played by Social Security. Approaches for analysting fiscal policies and finally a discussion of potential policy options. And a number of dimensions of the debt challenge. For our first panel we have two distinguished speakers, arguably the two best economists to address the challenges around the fiscal policy and Debt Reduction. The robert d burch, and burch center for Public Policy and finance and alan has been deputy chief of staff for joint committee on taxation and has been advisor to several Government Agencies and institutions. A distinguished fellow of the American Economic position having previously served as an executive Committee Member and vicepresident of that association and as editor of its journal of Economic Perspectives and American Economic journal, Economic Policy. Alan is also past president of the National Tax Association from which he received the Daniel M Holland medal. Phil swagel is the budget Director Office since june of 2019. Served as assistant secretary for Economic Policy at the Treasury Department where he with as responsible for developing a wide economic issues, including policies relating to the financial crisis and the troubled asset relief program. He has served as chief of staff and senior economist council of economic advisors and at the reserve board and International Monitor fund and previously a professor at the university of Marylands School of Public Policy and a visiting color of the American Enterprise institute and what that, i leave it to you two. Thank you. All right. Susan, thank you so much. Thanks to ai and brookings and wharton and for arranging this and devon, thank you. We should turn this into a fiscal summit and solve the problem with the group in the room. All right. So, i have a couple of slides, which, okay, good i can see them there and these are on the cbo website. Im going to go through the slides pretty quickly just to sit some of the highlights and then talk broadly at the end about some thoughts on deficit reduction. And then ill you know, i think alan and i are going to hope to leave lots of time for discussion and questions. Okay. So theres a sense and this is, you know, the usual slides from cbo. So this one shows the deficit, the y axis as issue as percent of gdp, and so, theres some things that, you know, are known and familiar and that the deficit is wide and the next slide will be debt and that will also be familiar. I just want to take on some highlights here which is that the deficit is wide, even though the economy is doing reasonably well and thats unusual. Were past the pandemic and the fiscal response in the pandemic is mostly behind us and there are still outlays going out, of course, but the emergency 2020 fiscal response is largely behind us and yet, the deficit is still wide. This is a case before the pandemic and you can see before the spike, in 2019 we had a structural deficit. The economy was wrong, people throughout the Income Distribution were seeing rising incomes and we had a structural deficit. So, thats, you know, thats both familiar, but is just different. Its different than the large deficits weve had in the past. You know, the other thing you can see in the chart is the, you know, rising share of net interest outlays in the deficit. And you know, one could say, well, the Interest Rates have come up a bit, but in the future, the Interest Rates could go back down and thats not a problem and we all know about sort of r minus g challenges. And the challenge is that r minus g will help some, you know, if that goes in the right direction to help with moderate primary deficit, but the primary deficit is no longer moderate and its not set to be moderate out into the future. Now, the numbers here are based on our february, 2024 budget and economic outlook. We are working now on the Spring Update. The spring goes through june 20th so im pretty confident it will be spring, but late spring and so there will be new numbers and im going to talk about some. Fiscal numbers in things that are, you know, already public. So im not going to go into the analysis we havent finished, but i think the bottom line is that the next update is going to show a wider deficit and there are things that we know already that make it that the fiscal situation is probably worse than it looks. And this is already, you know, its already pretty difficult, but its probably worse than you know, its more difficult, worse than it looks. The second chart again is familiar showing the debt to gdp ratio, going off to infinity. You know, i promise it doesnt get better if you go past 30 years and you know, we have now what we begin to call the 250 problem. Which is what some point, right, the debt to gdp ratio can get to a high enough value that you kind of have to look at it and think really, is that like is it meaningful at that point and weve decided to our y axis at 50 gdp. This didnt have it, but a few negative shocks and then you can get a worse debt to gdp ratio and of course, you can imagine negative shocks to the numerator, the denominator, the debt being worse and gdp lower and then you really face the 250 problem. Of course, theres more debt and higher Interest Rates than these that were more vulnerable to further shocks. And so, cbo published an update to our rules of thumb work book. Theres an excellent spread sheet on our website and you can basically use that to say what if i make changes to the baseline and generally the economics so i did that and you can show that 50 basis points of higher Interest Rates so if the yield on the 10year treasury is 50 basis points higher than what cbo had in our last forecast, from december of last year, and it comes out to an increase in the deficit of more than 1. 6 trillion dollar over the next 10 years. So it gives you an indication of the sensitivity that we have and so the risk of worse fiscal outcome. Im going to talk a lot about dollars so when i said 1. 6 trillion dollars over 10 years and my charts are in share to gdp makes sense, but policy makers think in terms of nominal dollars. Ill try to speak both languages. All right. Let me briefly diverge into good news, which is, you know, not always what people get from cbo these days. So, this is a chart that shows the change in the 10year deficit outlook from the prior baseline, from the 2023 baseline through what we put out in february of 2024. So, from may 23 to february of 24 and you can see that the 10year deficit went down and theres a variety of changes in there. The biggest improvements came about because of the fiscal responsibilitiability responsibility act and the cap in spending and subsequent legislation and crs and appropriations that essentially have emboied those caps with certain judgments and we make no assumption about what a future congress will do. By statute theres a rule projecting spending forward. Using that mechanical rule. 2. 6 trillion, and so the fra was 2. 5 of that. Now, there are other changes, the last line is the technical changes and a large part of that is reestimated costs of the green tax provisions in the 2022 rec sill reconciliation bill. And it looks like those costs are going to be much higher than was originally estimated so this is offset some of the bugetary improvements, but on net, from baseline to baseline, theres an improvement. Now, whats not in here and ill have a whole list of things that are not in the projections, but you can see one already thats not in here and thats that we recently enacted a security supplemental. 95 billion dollars to ukraine, taiwan and israel. Thats not in here because that was enacted after the february 24 numbers were locked down. And so, its 95 billion added to the 24 deficit, but by statute that will be projected forward into the future and rise will inflation. So, just mechanically we know that the next baseline update that we publish in june, will show a wider deficit of course, up to future congresses to turn that into to decide whether to turn that into actual spending. Good. But anyway, this is the good news slide. So, well see if i can come back to the good news. Okay. Actually, im sorry, this is also some fiscal good news. So this shows the labor force, again, comparing our may 23 baseline to the february 24 baseline and it was a democratic projections and Economic Projections are at the foundation of the budget baseline and this shows had an important change that we made in the demographic projections and theres a chance to the past, so the past is not what we thought it was, because we realized in doing the work on the demographic updates toward the end of last year, we realize theres a disconnect between the numbers from dhs, the department of homeland security, on the number of immigrants who are released into the interior of the United States, those numbers seem to be disconnected from the population statistics that we get from the census. And you know, not a criticism of census, they do a great job, now, its a difficult thing when things are changing so quickly and for sure theyll get there. So this is not a criticism at all of census, but the demographic updates of the surge in immigration has a huge impact on the Economic Projections, and therefore, on the fiscal projections and this is just one view of it, looking for the change in the labor force. Theres over five million additional workers in the horizon the 10year budget window. I should say in our projections we have a surge of immigration going from 2022, when it started through 2026. We actually dont know when its going to end, so you know, whats the base is of saying 2026 was a little bit of were really not sure, you know, because there are many factors behind the surge, conditions here and conditions in the source countries. Regulatory decisions, policy decisions, social media. Lots of, you know, lots of things and its something were just going to have to keep watching and keep our eye on and see how long the immigration surge goes. Now, theres many impacts with immigration and what we have in our budget baseline is a relatively narrow view of immigration, its the cbo view. Right . The cbo, our job is the federal budget. So, theres, of course, enormous impacts on the state and local governments from the surge in immigration and thats not in here. Its not in this chart and its not in our bugetary statistics because were certainly aware, socially and politically important, if you live in denver and you know, the local government or local city groups are very important to you and i want to start by saying its not in here. And the other thing thats not in here, its not in here meaning the slides im going to show, impacts on immigration on Discretionary Spending, things like the border patrol, for example, is funded by Discretionary Spending so theres no cbo doesnt have a view about what a future congress will do in terms of providing resources to, you know, to agencies funded by Discretionary Spending. Again, thats not in the budget baseline, if the immigration surge results in Discretionary Spending in the future and that will be additional costs and well tally them when Congress Enacts it. First, of course, its the macro and its the gdp gdp impact and of course, the surge of immigration means a larger labor force and thats whats shown in the chart and that contributes to gdp. Our initial tally that we did for the february baseline was about a 7 trillion impact on gdp nominal gdp over the budget window. And that translated, according to our models, into about a trillion dollars of additional revenues, again, over the budget window. Some of the outlay impacts are in you know, were already in the budget baseline and anything through the tax code, theres a delay in most immigrants and eligibility for many of the federal benefits, but thanks to the tax code is a new immigrant coming through the surge, such as someone who comes in through humanitarian parole they generally have Work Authorization within a work and many get it at six months and many soon thereafter. So someone who gets, say a frl benefit through the tax code, whether its the tax benefit for employer sponsored insurance or you know, a tax credit, theyre in the baseline already that he have woo got. Many immigrants have a multiyear period before theyre eligible for certain benefits. For example, medicaid, theres generally a fiveyear waiting period for many coming in through the surge before theyre eligible for medicaid benefits. Theres certain emergency ones sooner, but that varies by the type of immigrant, which program they come in and which benefit. Thats the work that were doing now and that im hopeful that were going to, you know, have in the spring baseline and put out lots of material with that, is what are the outlay implications of the surge of benefits. The surge of immigration. The outlay impacts of the surge of immigration, and just to say a little about cbo process, well, if you think about it, what are the whats the cost, you know, the cost of medicaid to an immigrant seven years from now or an immigrant who arrives in 2022, six years after. So in 2028, four years from now . Right know that we have to know whats the income of that immigrant because medicaid is means tested and you have to know which state are they in because the eligibility for medicaid by expansion and nonexpansion states and Affordable Care act. Thats the work were doing is making projections from today Going Forward, or from 2022 Going Forward, from the surge Going Forward of the income impacts and so its distributional impacts of the surge of immigration. Were working as well on the productivity impacts and some of the immigrants will Start Companies and this hell learn, theyll contribute knowledge, theyll have patents and effects on longterm gdp. Were looking at that, and looking at the impacts on gdp and on inflation, of course, immigration affects supply and demand. It affects labor supply and demand. Immigrants buy things and the immigration surge helped to loosen the tight labor market, but contributed to demand. Were looking at the balance between those two. All right. Just a few last remarks and then i will lets see, good, turn it over to alan. This slide is from our longterm budget outlook and it shows changes in the competition of outlays over the next 30 years. So this is from 2024 to 2054. And the top chart in a sense is a mirror of the first chart i showed on deficits, and the net interest outlay and this is the same thing over the 30 years. Over the 30year horizon, the increasing shares of overall federal outlays is projected to the net interest outlays. And i say before, more interest outlays in our calculations, its about the increase, its not just here, but the dollar increase over the 10year budget window is twothirds from higher rates and one third from more debt. Good. Okay. And then the talk and again, familiar. Familiar from my first chart and new, the rise in new interest outlays and a period Interest Rates were low and policy makers just did not worry as much about the flow costs, you know, the carrying costs of the debt. You know, then the bottom of the chart shows the rising share of mandatory spending in outlays. And again, i think this is familiar, its but its worthwhile to see and you can see at the very bottom, the Major Health Care programs, a lots of that is medicare, medicaid, there are subsidies for the Affordable Care act and other things in there, and represents the aging in the population and strong growth in health care. And then Social Security. Social security, of course, you know, the bulk of the increase and the share of gdp in the next 10 years and then it moderates and then the increase there over the 30year horizon is smaller. Okay. I have a couple of other charts on actually one last word on this chart and then im going to skip back to my first chart and just make some general remarks and turn it over to alan. This looks at population growth and this is again from our demographic outlook and the point i wanted to make is that that orange spike, you can see the immigration surge through 2026 and from 2040 on, the net population growth in the u. S. Is projected to be entirely from immigrants. And given the fertility rates, you know, we projected its around 1. 6 now and we promminged to go up somewhat and still remains so much lower than it was before the financial crisis, so, okay. Im going to skip over my last chart its on the website about about gdp. And well close with a few broad points. So my term of art for the budget situation is daunting. And theres a sense in which its yet more difficult than we show in our bugetary projections and im going to tick through some of those reasons. So, certain provisions of 2017 tax act expire the end of next year. Jct has estimated that extending just the individual income tax revisions, the ones that expire, 3. 8 trillion dollars over the next 10 years including the interest costs on the provisions and the key line, thats in the budget window that goes through 2034. Of course, if legislation is enacted next year, well, then the budget window will go to 2035 and that 10year cost will be more. It will be one more year with the full cost and the year at the beginning that doesnt have the full cost. So, you know, were already at 3. 8 trillion dollars to extend the personal provisions of the 2017 act. And its more than that. And of those dollars, more than half of them are for households with incomes below 400,000. Even if they want to extend part, its still very challenging. And i mentioned before that our projections by law showed Discretionary Spending increasing with inflation, but that means that Discretionary Spending in the baseline declines as a share of gdp. And of course, judgment, cbo, the cbo makes no normative judgment what the appropriate policy is. How much should be spent on the border patrol, housing, national parks, all much those things. If future congress decides at that Discretionary Spending should keep pace with nominal gdp rather than declining. That would increase the deficit by more than 1. 3 trillion over the next 10 years. And then i mentioned the security supplemental thats 95 billion this year and then inflated out with inflation. A Monthly Budget review last week, the Monthly Budget review for april. Administration has announced it will record credit reestimates in 2024 of more than 100 billion dollars. 74 billion for Student Loans and 33 billion dollars for loans from the Small Business administration, so thats 100 billion dollars of additional deficits coming from the past that will show up this year that are not yet in our budget projections, of course, we dont know what future credit reestimates will come, those could be from policies that were previously announced, but not fully booked or not maybe fully modeled. There could be changes from economic conditions. Could be cost of future policies. The administration has begun spro, speak Petroleum Reserves and recorded the next few years, were not sure when. Well put them in our pro j ex projections when they show up. Medicaid outlays from april to october, the first part of the current fiscal year are down by 1 compared to the same period last year. But that means that Health Spending is running at least for medicaid is running above our previous projections because we expected them to decline much more substantially than that as people left medicaid following the end last march of the pandemic era continuous coverage requirement. And well have updates on medicaid and the other Health Related outlays in our Spring Update and were also going to publish comprehensive update on coverage and this is the High Water Mark of Insurance Coverage between the enhanced subsidies for policies on the acas changes and medicaid continuous coverage. We have the budget window, multiple hundreds of billions of dollars, a gap between the Resources Available to the system and the benefits that have been promised. Medicare is not much further behind. So since the fiscal situation is daunting, i left the debt to gdp chart on the screen for a variety of reasons ive gone through is that the numbers are yet more challenging than what are reflected in our most recent projections. Well have new projections coming out in june. All right. So ill skip ahead. Okay. Perhaps this is gilding the lily, given the tenor of phils comments, but this is mine. Im starting from the, you know, the base of information you get from what cbo produces and what phil said and phil has covered a little of what i was going to say. As he said at the end, things are daunting is probably an optimistic way of describing the situation. Im going to highlight things of my comments in terms of thinking about that. When we look at we hear everything that phil said, but when we look at the picture that he had up at the end of the debt rising smoothly, we sort of forget that projections always are smooth and myth is never smooth and should tell us something about the future. So, the first thing is to highlight what phil mentioned about tax cuts and jobs act. And so this is from a recent from last week, the document they updated estimates that cbo produced of the cost of extending the provisions of the tax cuts and jobs act. If you add it all up, not just the individual provisions, if you add it all up, its about four and a half trillion dollars and if you look the at National Debt projected in the cbo baseline through 2034. This would represent close to a 10 increase in the National Debt relative to the baseline. So, this is not a small difference. And we need to keep in mind, as phil pointed out, that the difference of opinion in washingtons in terms of what to do about the tax and jobs act, isnt should we have a tax increase or extended tax cuts, its what fraction of the tax cut is going to be extended, more than half or all . And you know, in recent histories, when there are differences of opinion in washington, everybody can agree on a tax cut. And so i think regardless of the configuration of government after the election, i think you need to expect we should expect a substantial tax cut, at least measured relative to the baseline. And so thats already going to put you well above the cbo baseline Holding Everything else. The second thing i wanted to focus on is immigration. And i borrowed two of the slides that phil showed you here. The only difference between the version he showed you and the version im showing you is that ive highlighted some of the text. And having to do with immigration. The fact that this there was a big surge, unexpectled, in a couple of years ago, a big surge in immigration, thats been happening and its really, you know, we were wondering for a while, you know, as we were thinking, well, the economy is at full employment and were hitting 200,000 jobs a month, where are all of these people are coming from, now we have some idea. Weve had a big surge in immigration. Its basically allowed the economy to continue growing much more quick than we were anticipating a years or two ago and even being at full employment weve had much more rapid growth than one would normally expect under those conditions. And the other aspect of this is, you know, again, all of this Going Forward, all of this projected to the extent that the population is relatively stable, all the growth were going to get in the population is coming in immigration. Given the low rate of per filth fertility and negative population. And ive highlighted here in the green box the period just before the pandemic to remind you that the circumstances regarding immigration were quite different at the end of the teens under the previous under the Trump Administration and its pretty obvious that whatever a second Biden Administration would do regarding immigration, which is hard to predict, a second Trump Administration would have much lower immigration. I mean, thats not a secret. And so if we imagine immigration not simply getting over the surge as is being forecast here in the cbo baseline projection, but going back to where we were in 2018, 2019 in terms of the rate of immigration, i mean, i think thats what you could predict, and who knows, perhaps even in a second Biden Administration given that there have been crosscurrents even in the Current Administration about immigration policy and i think that that is would have very big effects on the economy. You know, were clearly not going to have the kind of growth thats being projected if we have a sharp clamp down on immigration, and the fiscal implications are more complicated because you know, theres costs and benefits to this in terms of additional immigrants, but i think largely, in terms of Economic Activity, largely negative to the extent that we have a big decline in immigration. Obviously depends on what happens to the composition of immigration as well. Interest rates. Phil alluded to the fact that Interest Rates are going up. These next these next two pictures come from the paper i did with bill gail recently. The national nominal government Interest Rate is just based on looking at cbos projected interest divided by the projected debt. Not the rate of any given one, but prediction the average would be on the debt the next 30 years and then you have the growth rate of gdp and as phil mentioned, the i think we have been focusing on a lot in recent years is the difference between the Interest Rate and the growth rate. And under the this most recent baseline projection, cbo has us going for many years more with the Interest Rate below the growth rate which all other things being equal is a positive saying in terms of the rate at way debt accumulates. High primary deficit will overcome this in terms of the debt, but worse if the Interest Rate exceeded the growth rate. In terms of where were going, phil talked about the spring of 2023 and spring of 24 largely due to reductions in projected spending. This was the bad news in the change which was the increase in the Interest Rate being projected Going Forward. This year, relative to last year, which is higher. But the other thing to keep in mind, and what, you know, to look for in the next version of the cbo baseline is this, which is this is the market year on 10year treasuries since the beginning of 2024 until last week. And its really gone up substantially. Now, of course, 10year yields are only one component of the interest of the debt service because of the shortage structure of the National Debt, but this is obviously not going to be good news in terms of what the next cbo forecast tells us about debt service. Its going to be a lot higher. Taking of course, taking into account, also, the fact that Government Spending is going to be higher because the cbo baseline is just generally very optimistic about what is happening to Discretionary Spending and as phil mentioned in recent weeks, weve had two major shocks upward in the defense bill and in the and in student debt relief. And one has to assume that more of the same is coming in both of those areas, if not in other areas as well. And thats going to make Discretionary Spending, the Discretionary Spending over the next several years much higher than its projected in the recent cbo baseline. The other the final point i wanted to make has to do with shocks and that smooth projection which you see here. So, here is historical debt to gdp and the projections, its a different color, but its basically the graph that phil was showing you in the debt to gdp ratio and i wanted to make an observation, which is, if you were to describe sort of what shocks to the Economic Situation caused the debt to move significantly, its you know, you would describe the path here as one where in good times, at least since the you know, the early 2000s so you look at the last 22, 23 years, you know, since the end of the dotcom bust recession, and in good times, the debt to gdp ratio doesnt start to move very much. You might have hoped that it would go down with good growth and no negative shocks and that would have been true in the 1950s, but since theres so much underlying push upward through entitlement programs, for example, that keeps you from gaining any ground and so, the debt to gdp ratio, in good times in full employment just sort of stays constant. And when you have a recession, things really go badly and you know, our last two recessions admittedly were not garden variety recessions,neither of them, weve had sharp increases in the debt to gdp ratio, after each one, debt to gdp ratio just stays constant after that and then you have a shock and then stays constant. So you might think that things can be worse than projected, things can be better than projected. And given that those things would sort of balance, that the trajectory that the baseline is showing of the debt to gdp ratio is going up is a good guess. I think thats wrong. I think the way you think about it is if things go well, remember, cbo doesnt project they dont predict recession. So that rising debt to gdp ratio thats good times, thats not average times. Thats good times. If that happens were not even going to be staying constant the way we have after recent recessions. The debt to cbo is going up. It going up or going up a lot and those are the two possibilities and given that, still may need to rethink that ceiling of 250 for his graph because otherwise hes going to have to a footnote explaining why the end of the series is cropped from the picture. Thank you both. Right now wed like to take questions from the audience for the next nine minutes and then we have a hard stop at 9 50. Your graph, going back to the 90s surplus, showing the surplus under zero and interest. Yes. Beside taking that surplus all wrong, political and trying to find a way he could find a trillion dollars. Where does all of this interest come from in the 90s while the surplus is there . I have a lot of political stuff on that. Oh, sure, sure. So you know, since its budget arithmetic, even as the debt to gdp was going down in the second half of the 90s, theres still debt, theres still, you know, Interest Rates and we still had net interest outlays, so it was still there just much smaller, the share of gdp. But maybe this is im sorry, thats the the more substantive response is had that scenario been played forward, you know, had you know, the deficit essentially gone to zero or negative, then the net interest outlays, of course, would have gone smaller. At any point there may have been some federal debt or outlays, but inaudible its an important point that i think it goes with what alan said, also, just the difference in outlook from the 2000s. And those are the charts that you started in 2000 and you skip the really good years of the fiscal years of just before that. Thank you. Good question. I see rich. Can you talk more about the 250 problem . What makes you latch onto that number and not something smaller and i mean, is there any sort of research that suggests that thats the sort of Tipping Point . I mean, people like japan, i think theyre above 250 and say, well, 250 may not be a problem, but anyway, just expand on that a little bit . Maybe ill say a little. At the very end when alan when he finished with that, i think in my head, well, you know, whatever the footnote that he suggested, we could put that in japanese or you know, its not belgian, its flemish or french. Youre right, theres no hard and fast point at which the debt becomes impossible at which market will look at it and say, thats it, that was the straw or the piece of legislation that made me give up and the u. S. Is in an enviable position, certainly compared to the rest of the world. So the 250 is not you know, its not a normative statement as with all things cbo. Its just a, now, the idea is that at some point, we have to think about what our models are telling us, as you know, the debt rises and the carrying costs of the debt rises and we havent gotten there yet. We havent thought it through. We will and you know, something were thinking about, but thats all it is, its just a at some point we know we need to think about things differently, yeah, actually i was going to say one last word and now on the y axis that sometimes when people dont start the y axis at zero, thats how to mislead with your charts, and sometimes, cbo we do it and we always put these like checks, i think the word on the axis to indicate a break, but i think thats something we might be thinking about in the future. I want to add two quick things. First of all, from japan especially, you need to be careful between the difference of the growth and the net debt. Japan has all the numbers that phil showed you are a net, net, thats publicly held debt and i think in japan a larger share is held internally within the government. So, its still much higher than it is in the u. S. , but i dont think its quite as high as sometimes suggested. The other thing i wanted to say about all of this, in terms of where it ends, i usually think of the, quote by Rudy Dornbush the named economist, crisis take longer than you expected and then they happen faster than you expected and thats not very helpful in terms of talking how far we can go, but i dont think one can be sanguine about things being calm, that it will take a while for them to unravel because i think once they start unravelling, they can unravel pretty quickly. And id like to add one more sentence and the next question. We could be in the other direction, just have some good news. If theres something that gives markets more confidence, i suppose we could have the opposite of rates going down, if markets are just in a sea of some sort of deficit. I guess i would take a little bit i think one of the things causing the Interest Rates to go up, in fed terminology, the fact that our star was higher than a couple of years ago, the National Rate of interest where the fed is going to be setting the federal funds rate to keep it, and have a noninflationary position and we were thinking a few years ago, we were thinking about secular stagnation and the big decline in the National Rate of interest what the fed calls our star, i have a sense that theres a general consensus in the profession na we probably overdid it in terms of thinking that it declined and so, certainly true that confidence and fiscal responsibility would help keep Interest Rates down. But i dont think were going to get as much of a bonus from low Interest Rates as we got a few years ago. And two, here and then in the back. A question. You showed a chart on 2017 and large deficit as a result and talking about whether 50 of that i know the republicans argued that the tax act generated revenues. Is this the dynamic or constant chart that shows those additional revenues. Can you explain that . Im glad you asked that. So, in 2018. April of 2018, cbo published analysis of the 2017 tax act that included that dynamic analysis. And it that analysis showed that about 20 of the you know, the cost of the tax reductions was offset by the dynamic, you know, the positive dynamic feedback, so the improved incentives present stronger gdp growth that flowed back into revenues. So, you know, in cbos analysis, the tax act didnt pay for itself, but there was positive feedback and the initial impact on the economy seemed to match what was in the cbo analysis, Business Investment, accelerated early in 2018, you know, the challenge had been, you know, there was a series of trade policy actions that had the opposite affect on Business Investment and so of course, the pandemic and then, you know, the period of very high inflation starting in 2021, and since we tax nominal income basis, high inflation, number of nominal dollars of revenue will be high and reflects inflation and not the tax act. And so, is that the challenge, we know theres a lot of interest in dynamic analysis and were working at cbo to be ready to analyze that and of course, wed follow the house rules, but we will do, you know, we will do much of more of this dynamic analysis as theres, you know, legislative proposals to, you know, regarding the 2017 act. And 20 of the tax cuts came back thats right, ill repeat the question. What he said was our analysis showed that about 20 of the cost of the tax cut was offset by the stronger revenue generated at the time. Thats right. And making assessment to what the effect on the economy was overall with respect to the tax cuts. That was based on our projection at the time of the tax cuts. You know, we havent gone back and weve done that and again, the intervening event would make it just really challenging to distinguish the tax act from the trade barriers, the pandemic, and then the high inflation and thats the challenge. Thanks so much, phil. Thanks, alan, for coming today and well take a 10 minute break and then resume at 10 00. I just want to thank you. [applause]. [inaudible conversations] [inaudible conversations] [inaudible conversations] [inaudible conversations] as we just heard the conference and federal spending and debt will continue shortly. Hosted by the American Enterprise institute and the penn charten budget model and burch center for policy and finance. The next panel called a view from the street includes the jp morga more as we continue on cspan2. [inaudible conversations] joined now by the National Chair of from the National Committee, courtney. Thank you. First tell us about the College Republican National Committee. It was founded in 1982 by a group of College Students in michigan, since then grown to all 50 states, plus puerto rico and guam. We have chapters on College Campuses our mission is to, number one, get republicans elected at government and greater Republican Party on campus. Are you affiliated with the Republican National committee . We are in a sense, recognized as the National Collegiate arm of the Republican Party, but were not financially supported by them or pay any dues either. How are you financially supported . 100 by donors. We dont charge dues to our members. We know how hard it is to be a college student, famously broke, and we dont require that our chapters pay money to us, were 100 supported by donors. How big is your staff . We have a staff of about six people. I am both staff and board, sort of like a chairman and ceo. So im chairman of the board and i run our staff. And have you started kind of officially campaigning for former President Trump even though hes not the official nominee . Our goal is down ballot and were working on holding the house and flipping the senate. We cant start doing that until the primaries are over. We are totally outside, independent, in the primary process, we dont weigh in on that and most states havent made their nominations in the down ballot races yet. Were holding off on that at this time. And i want to ask you kind of what youre hearing on College Campuses about the main priorities for this years elections among College Students . I think the concerns among College Students are very similar to those of the general population and start by saying that College Students are not a monolith much like any other voter bloc. What concerns one college student, may not concern another. That being out. A lot of College Students are concerned about the economy right now. The economy affects the economy in a way that it doesnt older generation. We dont have a whole lot of Financial Capital built up yet so the economy is a huge issue for us, absolutely the number one issue. The other issues were hearing about are Border Security and along with that, National Security. Theres a poll put out by harvard, its they polled 18 to 29 year olds, so what they found was 53 say they will definitely be voteening the president ial election. I dont know how you feel about that number. But well talk about that. President biden leads former President Trump by eight points among and then among likely voter that lead expands to 19 points, but they mention the economy as you said, but also reproductive freedom being a top issue. What are you hearing about that . Thats certainly an issue for a lot of people right now and it varies so much state by state. Our primary concern from a National Perspective is primarily focusing on the economy. We dont take a stance on the issue of reproduction, of abortion, and of course, were primarily prolife, but we welcome people into our ranks who are pro choice because we say, you know, were a big tent party. There are only two parties in america and they have to be fairly big to focus on the electorate. Come on in, youre a republican. One of the big issues, at least attracting National Attention is the protest. The pro palestinian protest. I want to play you a section of what House Speaker mike johnson said on columbia universitys campus about what he thinks should be done there. My intention is to call President Biden after we leave here and share what weve seen with our own two eyes and demand that he take action. Theres executive authority thats appropriate. If this is not contained quickly or threats and intimidation, there is for the National Guard. We have to bring order to the campus. Were better than that, ill tell him the same thing. What is the house going to do . Youve what is your plan . The house has been investigating a number of these campuses, there is a nexxis to federal funding. If these campuses cannot get control of this problem they do not deserve taxpayer dollars. Youve seen our Education Committee and have an oversight hearing and brought the president s of the universities to testify under note and youve seen accountability begun there. There will be much more on that. There will be adjustments to the federal level. This congress, and i genuinely believe there is bipartisan agreement on that, will stand for what is good and what is right. It does not matter if its in our faces were going to do what is right by america. We respect free speech and ideas and theres a way to do that in a lawful manner and thats not what this is. I want your reaction to that. He said two things that they should call the National Guard in some cases on College Campuses. I want your opinion on that. And the idea of stopping federal funding for some universities. I think its appropriate in some cases to call the National Guard. Weve seen some wild protests, i believe at columbia, theyve had to cancel commencement because they cant get the situation under control. Theyve really let this spiral out of control and in some instances it is appropriate to call the National Guard to restore order. Its not fair that students are going to these universities in fear of their safety because of these protests. We are in full support of peaceful protest. I cant think of anything more american than peacefully protesting. Few things more american, i should say. But that ends where the peace ends. Once they become violent, its inappropriate, its no longer a peaceful protest and it needs to be shut down immediately. And we will take your calls for courtney hope brit of the College Republican National Committee. If youd like to call in. By party. Its not something people or focus a lot on right now. I think College Republicans are mostly focusing on getting through the end of the semester but politically their focus on issues more than on legal concerns. Speaking of economy a a big issue for College Students is loans and Student Loan Debt. What are they saying about that . Are they looking to President Biden to forgive Student Loan Debt . A lot of varied opinions even among republicans. If you believe it. There are opinions they should be some level of student loan forgiveness and opinions there shouldnt be any. Total blanket student loan is not what republicans calling for. The Biggest Issue is we need to address a high cost of education cost. We can forgive all the Student Loans enabling coming through would still than have this problem. We got to address cost of higher education. It has ballooned far outpacing almost any other area may be with the exception of healthcare we really need to address that first before a decision of Student Loans. We do need to address that is a. Whats the best way to do that . It will take a varied approach, complex to address Student Loans. Some some love for get is pry appropriate. Weve forgiven a of other loans and i think certain of the measures like reducing the cost, reducing Interest Rates, reducing some of the fees associate with them. Its going to take a really fullspectrum approach for us to address this appropriate. We are going to go to the phones. We also have a line set aside for students and college administrators. If youd like to call in on that line that is 2027488003. That is same lines you can use for texting. We will start with the bill in fairfax, virginia, independent. Caller yes. Im curious about the student protests and who is actually funding them. I dont know whether your caller has any thoughts about that but it seems to me that if republican want to keep the border issue of life rather than addressing it they might also want to keep this issue alive rather than addressing it. They want to make it worse. Trying to understand consumer and debt issues from the perspective of wall street and business more generally. And on this panel is michael feroli. You of his bio anybody elses bile with you. I be really briefed. Michael feroli as chief economist at jp morgan, has a background in Federal Reserve, u. S. Congress, joint Economic Committee and so forth. You can see that and his bio. Michelle meyer is chief economist for mastercard, also background in banking, bank of america, barclays capital. Torsten slok is a a partner ad chief economist at apollo pic of you dont get his daily blogs you definitely should be signing up. They are fun, informative, short come sometime. It which makes them fun. You should definitely signed p for those. And Lisa Abramowicz is, run over from her show on bloomberg surveillance, every morning from 6 a. M. To 9 a. M. On bloomberg tv and bloomberg radio. She will be the moderator of the session. Thank you so much for doing that. Thank you so much for having me. Welcome everyone. We desert all the result we should be worried about the deficit, climb above two and a 50 and how basically a massive problem. Talk to a lot of people should come speaking with steve eisen his famous from the big short last week and is said the deficit is been a concern for 30 years, it is never matter. If you want to bet you will be wrong. Heres the market perspective why it matters and why people care. I love the panel, i love these guests, torsten, you do put our charts and want to start with you mapping out from the market view why the deficit matters in terms of dollars and sense that had to be paid out in the near term. I think as we just talk about and as we shall come when something continues to grow than we do probably need to Pay Attention to it at some point when the debt could become an issue. I think there are three double ways of tackling this on market perspective that we should really get whats going on with treasury auctions. Whats going on with how much of that is maturing which is what this chart is showing, specifically if you can see in the chart, i i know three lin, topline is market interestbearing public maturing and when your list. Let scale about 9 trillion, that rolling over. If you add to that the deficit which is a bit more than 1 trillion, then you 10 trillion, and other line shows that share of gdp. You can quickly figure out that it has grown quite a bit including more recently. So the first point is whos going to buy the comment that . I know this sounds like a typical question but treasure auctions becomes important to look at what is a ratio, how much, it was for participation in a lunch of and statistics come out. First, reason why its very important reason of these markers reflected spin, this is yes then maybe this is not good be a problem and it will most likely be a problem in the near term but nevertheless, we do need to do our homework all of us. I think about what are the did the matter that come in the pipeline . Another way of looking at is look at auction sizes. Across the you curve have also been going up and again have the chart in mind phil swagel was showing, risk approaches tend to go up. Is your new colleagues on right about almost every week theres a lot of questions okay, it auctions isaac of what does that mean particularly as chair gdp . Another way showing that treasury issuing, visit from Treasury Advisory Committee across the ucurve orange bar shows you what is total sizf issuance or five your notes in 2024, 20 tranthree. You can see this year auction sites will be on average, 41 bigger than what they were in 2023. 2023. Again this may a minute matter. Things should be fine if the son of commence demand thea problem. Bio i only to sleep at another dimension, one very important issue is also have biggish of this is tbills. As youve seen this chart tbills as then as a share of also been rising. More and more of this is short. Bottom line is to say yes, we do all worry about the debt levels rising in the shared gdp but one very important way of looking at this look at whats going on in the structure of debt coming to the market and most important how auctions absorbing this. In other words, what are the metrics come out of the auctions suggesting whether theres any more strengthened by debt or whether theres any weakness and by that. This something could be scary and it fits in with the thing. Yet a lot of money that is been raised by the company has gone directly to the physical transfer to the private sector. Its helped bolster the exceptionalism weve been talking about. Michael from your Vantage Point how much is this an negative and how much is what this money is going to actually been a positive for the u. S. Economy . [inaudible] it definitely i think helps come helps economy. Its what the fed is been trying to accomplish. That may be, world treasury and why has the economy been resilient [inaudible] i think its hard i dont think you can avoid the fact [inaudible] that helped offset some of this. I i mean good if it is working r if you waiting for balance growth [inaudible] great if youre reading for the s p to keep rising which is essential a lot of people. Michelle, you really get incredible research in the run up to the financial crisis with Mortgage Rates and mortgage debt. There was this belief crises happen in private sector debt not publicsector debt of developed market countries. Do you think this time to be different was is basically a great fiscal transit that is allowed consumers to retain the resiliency and every credit card data point should be coming out . Yes so theres a few things that unpack. The first one this idea of private sector in balance versus public sector. There is a distinct difference. With the financial crisis the housing bubble that led to the gfp, it was a severe. Once you have this brief setting of collateral of crisis it was clear crisis. Thats not the same story certainly in the u. S. When it comes to sovereign debt when you think about the collateral. When you think about the u. S. And the dollar being the reserve currency. Its more thinking about how this highlevel debt and high level of Interest Rate they go with it feeds into the economy and shifts what we may be seeing in terms of Economic Growth. So far i think were still in an environment as michael sat around this physical transfer. The economy has seen a good amount of support coming out of the covid period from the time this onetwo punch of fiscal stimulus, with monetary stimulus. Monetary side pulled back but the economy has been able to withstand highlevel Interest Rates remarkably well. You could argue part of that mightve been probably was because you had a lot of fiscal support. You have those tax transfers right to consumers. You had chips act, a greening of infrastructure. When will look at some of our hyper local, we see the areas in the u. S. Where the chips act has been filled in creating significant things are manufactured economy and job creation and Consumer Spending. Its not just the immediate transfer payments. Has been some transmission to the economy that has potentially could have more meaning longerlasting effects . We have to see demand store but youll could also make the case had a think about the supply side and become as result the physical support. Michael, how would you respond to get in a sense some of it is good debt being used to transform the economy in new ways to address new economy . Look, i do want to say the support for in 2020 was, that the entity. Almost fatal and agrees that was necessary. Chips, and ira depends on your politics but some would serve the see that as an investment. I think you could take this out and still be looking pretty large number on the debt. Which raises this question, at what point does he economy become unsustainable . Document id of 250 of our race questions if you could probably be to the moon if you start to special get a downturn which you want to explore in the second. Theres a question of if there a benchmark light in the sand where it becomes overly punio the government . Is a something youve studied, talked and . The challenge is which is of no way that is so started my career at the imf down the road and the person youve learned is higher debt levels in particular when you reached exploited by debt levels will eventually begin to cause some problems. It may be a financial crisis but certainly all kinds of other things. Maybe spend more money on Interest Payments and it may also ultimately of the countries mean something for Exchange Rate. A lot of different dimensions were higher debt levels could have an impact. The most critical thing for the u. S. At the moment is think about also so we dont know when that time is, well then we should probably you watch has a go along whether were going to the point are not. One has been very, very pronounced in the less several of these the last decade is weve seen a shift in the buyer face biggest it was foreign officials buying, china and others find you his treasures. They were buying treasuries thats how much because of the yields but because it were to keep their exports competitive. In other words, they wanted to keep making sure my shirt was cheap and if that was the case well then they could do what they could to make sure they limit how much the r d was appreciated and at first it would make sure the Exchange Rate didnt go too much, they did that by buying dollars and filling their own eccentric. They are no longer doing that because they have a list of other problems. We no longer have the yield and we seen a shift in the data that the buyer and a less obvious when Interest Rates have gone up happen household, insurance and all been buying because of Interest Rates going up. The risk is if this is shifting from to yield sensitive bar, then they over the next decade or two again open at this risk that we no longer have this simple buyer that was buying no matter what because finance has no number, not the same number of dollars to recycle but now relying on households, Pension Funds, Insurance Company better by because they like the yield. What happens when the fed cut rates is they are less inclined to buy. Thats an important dynamic also in the last five, ten years that his change in transit who is it actually bind u. S. Treasury. One of the reasons why people watching the auction data every week. People say those people worry warts but this question of okay, whos coming into by and is this a line in the sand what people are going to buy because of the deficit . Michelle, at what point does it become punitive for consumers . Right now were seeing incredible resilience. How much of it is a timing issue, a lot of money and have locked in debt obligations versus something they really this could be the new normal and thats fine . I think theres a few dynamics that are in play when you think about whats happening. First, yes, as the fed is g interestrate meaningfully that if you look at the Debt Service Ratio for aggregate for household, it hasnt increase that much. Thats just above or more prior to the printed despite Interest Rates being higher. Part of that is because this unique nature of the Mortgage Market with 30 fixedrate mortgages. Thats the measure. Her households if you just purchased a car, just purchase a home or you have been in that you are feeling that debt service increased. As a result shifting in terms of prioritization of purchasing power. The bigger story for the consumer has been the strength of the labor market. That is been the number one factor that is leaving to this exceptionalism in the u. S. Economy. The labor market continues to show, seeing improvement in labor force. Not only is a demand, also more supply for labor and thats keeping wages increasing. For the consumer figure to think about their debt dynamic. They have to be careful about that, but a lot of consumers still love a good amount of purchasing power to go out and engage in the economy. That is very much still in play and we see that very clearly when we look at the Consumer Spending ten. Michael, five years ago people are complaining if rates of the Rose Companies would be blown up because at these little interest costs. Debt structures, to michels point, we havent seen it, theyre expanding. Is this something that sustainable . If we stay around 4. 5, 6 on a ten year yield thats fine. If we are 5 fed rate thats fine, they can survive. Yes. A lot of companies refinanced in 2020, 241. Last spring we may have begun to see something breaking with the regional banking crisis. That was shortcircuited by the fed and the treasury come supposedly getting uninsured deposits and shortcircuiting that. I would say many of us are still a little puzzled by the fact. Maybe that wasnt the only break we would see in the cycle but the longer reduced to hear the more firms will have to we talk about on the show the time the refinance, it is little but it keeps getting pushed out a little bit by you to come right now its hard to see that. [inaudible] another with asking this question is how much have higher rates slowed Economic Growth . This is getting back to the same question we started with. Im going to ask it five giveaways i think theres a couple things. Growth is doing well and rates are high. Its kind of like almost rephrasing the question. Go on. That doesnt tell you anything about the economy. One of the things the fact that strong immigration is temporarily boosting the essential gdp growth and will you think of as strong, when we had strong gdp growth Unemployment Rate has risen half a a percentage but which may tell you it may be a little softer. That has to one part of the story. The fiscal has to do one part of the strike. Just generally the postpandemic tailwinds had longer likes them without a lot of the things are going to be 30 interesting. Over the past year where you seem really outsized employment growth in the second half lecture was government, primary date and healthcare. Those are probably the two least interest in subsection i can think of. Some of it is retiring a getting back up after very sharp reduction from the pandemic. That normalization probably stretched on longer. One way of rephrasing, i say the question is also, i think why rates have not worked the way we thought it would according to whatever model you think is a fatal one. I think it has been impacting those that are weak. In other words, and so was that have a lot of debt have been impacted. For example, firms look at it, look at venture capital, and by soffer, tech and growth, areas where a lot of debt and very little cash flow, very little earnings, very lower revenue. If you have the revenues come Interest Rates going up a going to virtue a lot more. Think of this confirms that are triple c in some cases be having much harder impact because higher debt levels. Likewise for households come households that have a lot of debt and dont own s p 500 committed other home, they have also been experiencing more distressed in that sense it is the most highly double that of impacted by because everyone above that locked in a interestrate in mortgages, locked in an credit rate which is investment route of credit markets. That means broadly speaking racing except for those households and corporate entities that have the most highest levels of leverage. Michelle . This goes to the rally that this is not a uniform story for an economy. And i think thats been the case throughout the cycle. The pandemic impacted parts of the county very regularly. Think about the early phase of the pandemic with the experience travel economy, leisure was in a very deep recession of the last for a while while the goods economy burst into expansion and then that reversed. The same story now really holds. That could be contributed widest been disconnect between what service might suggest an sentiment versus overall spending trends is theirs of the aggregate which is to very much showing continued expansion versus where you are seeing some of these pockets of stress and challenges and Interest Rates cerniglia portents for the reason why this become increasingly political and a question of what happens if you hold cohort tickets left behind and drop off further added come when the respite economy is expanding. Michael i would ask you this raises this question of fed independence and is certainly not necessary from politics but at what point will the fed be called into kind of monetize this debt in a way to keep rates lower to kind of cater to seems like theres been a bit of a shifting line in the sand in terms of whats the more important kind of mandate, whether its inflation, whether its a growth, how patient the will be with inflation coming down. Isnt that something that you see in the card . No. I mean i think, the short answer is undercurrent construct i think the fed can retain independence and not be pushed into some done what to do. Weve seen news reports about that may be [inaudible] if we get to that i will have to revisit my answer but right now my answer is i think this fed, the personnel in place, can afford to be solely focused on the inflation and an opponent. Which again goes back to this issue of if thats the case and there is a real evidence that he had you can really. 2 of the sort of uniform downshifting in growth. At what point do they need to and at what point is a debt overhang pewter to do growth . Torsten i would ask you this. Typically history whether it was japan or other economies there was a feeling more debt ledges slower growth. Lisa and develop markets. Disinflation and was part of the reason we had a low rates. Why is this a different this time . Well, think the Interest Rates is just i think two things. Partly because consumers are 95 in 30 affix mortgages so it means a lease on a mortgage side makes up about 35 of the debt is therefore less sensitive. What encourage during the pandemic to lock in the debt levels at much lower levels and what they did before and so, therefore, investmentgrade credit in particular, everything fixed rate also has still fairly Long Duration my comes to Interest Rates really not mattering at least to the nation. Depending on where you live but broadly speaking the next year or two. Interest rates since that has gone down. At the same time we have is a significant tailwinds on the chipset, a flesh reduction, and for such think more recently without a significant easing of financial conditions. Start talk about rate cuts and still type of rate cuts, that has significant rally the s p is up since november 1. Remember consumption lusher lasher was about 19 truly. We have been given a windfall of roughly 50 in a very short time. That is not surprise on retail sales including on wednesday could be quite strong because the consumer is still powering ahead that only because of the fiscal but because of easing financial conditions. I would say those two things, less interestrate sensitivity and significant tailwinds coming from both fiscal and easing financial conditions are the reason why the economy is in there. Is part of the reason why it seems like all systems are go into that thing so it will not be a sharp dropoff. Albert r bock headed as this when you start type of what happens when theres a downturn. How much fiscal room the u. S. Government have to respond to it and how much does that create a new paradigm for the debt trajectory . What your cisco i was so with you, michael in the sense of how much more severe of a downturn be Going Forward if there isnt the fiscal impulse . If there is, what does that mean for kind of the haven bid of treasures come this question do people go there if the government will be raising by raising debt . I i would just say in regardo your question building of some of the charts torsten has shown is that while we have increased nominal that issuance dramatically, intermediation fast act increased . In terms of zero Balance Sheets. This is looking back ten, 15 years. Theres also a concern here not just that the treasury would have to issue more in a recession but that isnt the infrastructure that is intermediate, that he should get way that would guarantee that we would all have some problems perhaps that echo what happened two years ago. For many years ago. And look, i think that just means if we have fiscal shock, might have shock observe in a market. Another concern to build on. Searches to sit on that for a second because ive been made fun of forcing you could face the are you saying we could face that and you . For different reasons. Please. It would be for different reasons. We dont have the same community here but i think the idea that you have what would otherwise be a negative announcement not catastrophic defeat on self to set the market can sufficiently digest that in a weight may have 15 jacob. Because of volatility is intermediary acting as a buffer to kind of pushing some of the volatility in the pricing. Mr. Shulkin what is your view . All off another perspective around the question or if theres a recession weakening or downturn, what is the policy response . When you look back to this question precovid, it was very much the case that the feds hands are somewhat tied. The burden is going to be sold on the fiscal side. I think we can reverse that now. The Federal Reserve has read a lot more policy space. Interest rates are high. If mr. Easing and the cycle what did you think about which may be a debate as you point out that it do think they will. They will likely go slowly, be careful and be, anticipation, cant go back to his overcoat to the extent to where you have another recession or crisis they should be more space for the Federal Reserve to cut Interest Rates and support they come very, very quickly which could provide perhaps a little bit less of the burden on the fiscal side. There is a difference relative to what work prior to this to the covid shock. Torsten do you agree it could offset some of what the fiscal going for . A lot of debate about this issue that if rates are high, about who owns fixed income is getting a castle and could be reflected some just dont do well. The response of course have policymakers react, lets agree if you have a rising debt level and you have a pretty significant deficit, then your full ability in case a of shos just higher than normal. What the response they cant would be whether the fed ultimate would be, we hear various stories come with you to begin, different points of what will fiscal response because the nature of the shock is depends by still think we can quickly agree if you have a rising debt level the way phil swagel was pointed to and at saint unhip deficits even in a good economy at 6 of gdp, thats just just making you more vulnerable to different types of shocks that would begin to have more significant implications for how would you respond, the idea of infrastructure is in place to handle an expansion of the debt load, expansion just treasury debt market . Frankly, where the buyers i come from itself from the same kinds of buyers in the same way. Is that a real concern that will lead to some measurement. Is one way to address a look at this chart which is again, socalled neutral issues in every this is their forecast of what to think a neutral issue scenario would be issuance across the yield curve . The treasury seemingly thanks the only jabbar should be higher in a front of ucurve. So look at third a year government bonds alter the way to the right. As you can see the prediction is issuance will be around 300 million. Why doesnt treasury to say whats issue a trillion . Because obama is the Pension Funds, they would say really get 100 in every month, so if you come with 200 in supply, we cant in supply, we cant buy all that supply. Thats why the goal of the purpose is to sit down around the table and say maybe we will not be able to fish is much, much more than 300, therefore that a limit to how much there is. For example, from the pension to mary so thats why another way of answering your question is try to set a think about okay, so if there is some limits on demands demand for duration, well maybe thats the reason why the orange bar is also high. Of course the more high the bar is an affront the more your enter this risk the markets spent so much time thinking about how much is coupons, how much is it tbills . Tbills has been going up and the more your tbills still ball grows in front, the bigger and bigger gets which is what the green line initially, the more is the risk of your citizens what the fed is did because tbills are short confed raises interest come lower Interest Rate, it becomes important. The most extreme case when a joint did i miss in the 1990s and we just have crisis in thailand, the average maturity weight of the debt at the time was two weeks. Them into dont want a Government Debt that is a very, very short duration. In this case five, six years and uk is more like 20 years but the more that starts to shrink they can raise all kinds of questions the market. The short answer is it all depends on where on the curve with the buyers be willing to buy and well that then become something that could interfere with fed policy if its too much of the fronted . Still everything is good and everything sent and we will probably be for quite a significant amount of time but if you want to do your homework in this area this is a place to look for who are the buyers across the different segments of the yield curve. At a time when janet jim has been doing a good job at managing. Maybe pushing to the fronted and not necessarily cause sort of undue increase in yield and the long end. Michelle from your Vantage Point, if yields stay with it are here on the long end, lets just say, what does it do to the Housing Market Going Forward given the fact so may people been waiting to move or not quite a because they have a mortgage might be about 3 . The Mortgage Market and Mortgage Rates are much more closely tied to the longer end of the curve. Tenure when you think about the duration of household and homes. But look, i think its been interesting even with Interest Rate remaining high we start to see some pickup and home sales already. Yes, theres mortgage lockin where if youre sitting at 2. 5 rate, really hard story to say im going to give that up. But time passes and new homeowners come in. Theres a segment of churning happening and is already underway if you look at the leading latest housing sale numbers. Part of that is in part because of the lack of inventory thats out there as well. Much of the increase in home sales this come from new building, as homebuilders are seeing opportunity to add inventory with his demand and people need those homes and had to take higher interest do that. Look, just higher level of Interest Rate is going to create some challenges for the Housing Market inevitably i dont think it prevents for the growth and expansion i dont think the lockin is across the board. I think its a natural move in Housing Market which is already underway. If you look at the housing cycle, i think its been fasting to see this play out because you have three strong growth in home sales when we are very low levels of interest come out of the pandemic when the fed is hiking home sales fell, Housing Construction though, residential investment was attracted gdp growth throughout the second half of 21, 2022 but by the end of last year the housing circle, housing cycle or turn positive. Even for the fed serta cutting Interest Rates. Last quarter residential investment was a big contributor, last two quarters. So yes lower Interest Rates would help but no, if we stay at this level at all the meets the is permanently broken. As a footnote, remember up more than 7 yearoveryear so of home price go up against a fortune thats a good leading indicator of inflation data. Giving housing has a weight of 35, 40 , if home prices going up and in a worstcase if only i and other indicators start to flatten out, starts to her, and the fed has the fundamental question can whistle inflation after 2 without a slowdown in the Housing Market. Was the increase in prices is fascinating for a variety of reasons nothing from market policy book of i can say the attorney Housing Market, current homeowner have a lot of positive equity now. People are downsizing, even expecting an increase in interesting because of that. The same time for new folks entering Housing Market using the combination of both high Interest Rates and high hee price of the debate on how you participate in housing your very different perception of the assessment of Housing Market. What a mystery is crisis. Not hearing that the Government Debt burden is some outgoing to act as huge wet blanket and growth that has been what sumter puts it is exceptional albeit slowly. Michael from your Vantage Point, going to cut ask is questionable more time because its the ultimate question thats underpinning when do we start caring about this . Nudges from a political sphere because people say the reason why we dont have crisis because there are enough people who worry about it. From your Vantage Point is there a lot of, yields or in terms of volatility in the treasure market where it becomes an unignorable track on growth spurt yes. I mean we heard the first panel. They accurately summarize theres no clear threshold which we are silent in danger. I guess what i would say over the past two years,. [inaudible] real, not inflation. Boot up about 200, 225 basis points 25 basis points. Now, this could be our stop at a think again if you look at professional forecasters, longterm growth expectations have been unchanged at the same low level they were at the end of the last cycle. So if theres some sort of, its hard to say that is being driven by some newfound euphoria of longrun Growth Prospects. At least in theory. It could be perhaps where only saying embedded in real Interest Rates the crowding out effect with which would push rates are but that shouldnt come that is linear. I think you get to a crisis again we can talk about perhaps some the excel events. Again that might be, bobby if you want to catch it up maybe it would be some [inaudible] some fiscal policy and not coupled again. Lets go there to the election later this year, which is part of some kind of fiscal announcement. We heard of the weekend from donald trump that the upper class will get a tax cut in the middle class would get a tax cut, the lower class would get a tax cut to the full overcome everybody gets a tax cut. How does this factor in . Are tax cuts good debt . Is something that the deficit in a way that is positive . Go ahead. Well, first of all, i mean does not just, i think both parties will probably want to expand most of the expiring provisions, particularly as the relate to personal debt crisis. If phil swagel were still he would probably tell you a lot of the dynamic effects that he mentions in terms of how it boosted growth came from investment tax incentives. That is intelligence, smaller part of the overall tcja but the children you get the experts. I get at least in the model. I dont know, i mean im not enough, im not Political Savvy enough to know the processor i guess thats not just the physical kind of thrust here. Its also, i would go to you, its also the idea of records of who stays in power comes to power, two incumbents essentially, the probably be more tariffs. Well probably get an announcement tomorrow it would probably be more social policy bring it back, trading inefficiency inherent in some of the supply chains for National Security purposes. How much does it increase in inflation outlook that adds to this potentially star with a premium for the accident that the u. S. Has . With inflation already the last seven months beginning to show signs of moving higher, and adding at top of that of course maybe not in the near term but down the road will of course raise all discussions about maybe the level of inflation is higher because defense spending are other arguments that could save these are the reasons why we should expect maybe firmly higher. Thats why the fed review its upcoming if you want to raise inflation target which is a question we all debate all the time. It does become really, really important because its the framework that has to do the right one for dressing a lot of these moving parts were talking about. I know were getting to the point where people can ask questions but michelle, final word. Well, i think you both mentioned are star rising because of longterm Growth Prospects who could be because of higher inflation but butk it comes to the same point which is where probably in an apartment where Interest Rates are likely to be higher for longer. Potentially in part because some of the good reasons, the structural changes that the economy underwent in the last two years and it also made it very, very clear that the u. S. Consumer at a lot of the corporate on i could have been able to withstand higher Interest Rates very well which also supports this idea potentially higher for longer. So the point out and made in the panel before, this concept we had participant in the of secular stagnation very low levels of Interest Rates, permanently, that i think has been really, really challenge and we are all i think an agreement around that. Questions . [inaudible question] i didnt hear much talk about wages but if youre talking about the Interest Rate it seems like the probably be all the higher wages now under policies, minimum wage. People thought more spending when, not necessarily getting their excess spending taxed out yet. Seems like that would be a factor bidenomics, higher Interest Rates than thats new income maximizes that they start spending it. Thats what might get into trouble. Does anyone want to take that. Im happy to talk you about whats happening around the weight of from it. Its been stronger if you look at today at what measure look at but wage proxy running 5 year over year basis. Which has been fairly rod based. Thats in the point is really important when you think about the resilience of this economy and high Interest Rates. Wage growth at 5 is running about underlying cpi. Theres positive real wage growth which is empowering and supporting the consume and i think a big factor for why theres been some ability to absorb higher levels of Interest Rates. To me, to the second part of the question, paying attention to the markets is critical and the ability of the come to continue to handle the debt level here to others want to weigh in . For torsten slok, thank you for coming. First, as you know and october Interest Rates on the tenure with up to 5 , and i wonder if you would agree that the loss of the duration buyer is in itself shot across the bow in terms of a bloating confidence in the u. S. . Im looking out obvious he not in the short term but in the intermediate term over years as youve suggested. There is certainly one of you on the street that the way this is going to unravel, as it did, with the problem with the auctions, fed has to monetize, coupled with financial repression, higher inflation and great spirit would you agree with it. Was you, so very important discussion is exactly as you are saying that if it would come to a point where rates which it up, not necessarily like in some emerging markets, south africa when your crisis but to score higher and higher and so much, with the fed begin for Financial Stability recent or other reasons to intervene to try to limit how much Interest Rates are going up . I agree with what mike was saying at the current construct out of think that would be the response from their side. But odyssey if they do have an economy that will begin to fall apart, and this may be a result of whatever reasons rates are going up that i do think they would like to do and europe, they didnt say for Financial Stability reasons to save the economy we will now be stepping it in providing more. I do think this definitely dont like that to get to the point just require a fairly sharp duration and come meet the Unemployment Rate going up quite substantially cheerily justified that type of response. So i dont think they will do that unless theyre absolutely forced to do it. All right, thank you. Question on, theres more talk i think about perhaps a very concentrated increase in the tax rate on the ultra wealthy. I dont know if that would be be. 1 aware but for small publishers wanting, with a be primarily symbolic and sort of political gesture or could actually have an impact on the debt trajectory and how to economy looks Going Forward. Was michael, want to take it . Im sorry, im [inaudible] i have seen that either. Havent seen that either. Thank you. This has been a great discussion. It has been mainly just focus that. I want to bring the rest of the world in it. One is, whats happening with the aggregate supplier city and that in the rest of the world and house at affecting the u. S. Wax and second, we talked about, or you talked about how like how far can we go, whats the d star type of issue . Collation is other incident of the country could happen in other countries, war in the middle east, oil prices, Something Like that they could materialize, materially affect how far we could go with our debt . At least i mean with my funny european accent, i still think europe, youve seen private for buying has been quite strong because European Investments are looking at their own backyard and saint wow, it is rates here and Growth Prospects are not that great for me i should take some of them in and invest in u. S. Treasuries. Call it the decoupling of u. S. And European Business cycle, its almost a new source of buying for u. S. Treasuries. On the other side jeff of course china slowing down. That has meant almost the opposite the chinas fewer dollars to recycle into treasuries. Important and global firebase, broadly speaking away from china and more towards european private buyers. But from a global savings perspective, the u. S. Still is exceptional and all the other things that of course going to this discussion and for that reason if theres high growth in u. S. , if we have higher Interest Rates, that probably means capital will continue to come to the u. S. The question is just whether thats exceptionally smooth continue and what would be the reasons why this could be undermined. Which is a very important part also this debate, namely to what degree of foreigners are prospective in treasury auctions. Thats why as an important part of, look at what is for participation in treasure auctions which comes out literally with every single treasure auctions of what is advertising for foreigners for buying u. S. Government bond . Michael you want to weigh in . [inaudible] the current account deficit can be thought of as how much Global Forces domestic Interest Rates. The use current context, not as large as was prior to the event in it still pretty large. Pushing u. S. Interest rates down. So under rstar would be even higher. One more. You had your hand up. Thank you. Keep talking. Thank you guy really appreciate the look into the treasury data. I monitored the pretty close to suffer question torsten and also from michael. Thinking about, well, at what, i mean we also want to know sort of at what point should we start being worried, the data, the ratios are still strong even though auction sizes are very large and continue to be large [inaudible] so what are to also ask, you talked about the foreign buyers at auction. Also over the last ten, 15 years we seen a large Investment Funds buying a lot more at auction. Wondering if you have any kind of thoughts about that . I would appreciate hearing. The second question also to michael about the intermediatio intermediation. Thats really Something Else a look at and just wondering kind of what, not necessarily at this point saying a lot, a lot of trouble with that. But with the fact that dealer Balance Sheets have change for many years. Such is wondering what you are saying and also considering the feds toolbox if theres any other sort of opportunities . Just on the first part, when Interest Rates went up there were really three new buyers that emerge because they like high Interest Rate for. Number one was households. Households have been significant bias the treasury. Also significant buyers of credit because they have for years in some cases decades been waiting for high level of yields. So thats the board, household demand in the particular Long Durations but the curve is in much stronger since march 2020. You also see Pension Funds have also from long, long time been waiting for highlevel center street. What pension fund are doing at the moment is they are finally fully funded because all the equities are no bring up to 100 in terms of funding. That means they are now saying the way things have recently kodak basically laid off a whole page in a forested we can our assets and liabilities and no longer worry about corporate pensions, the rates were not fully funded and, therefore, Pension Funds have also become significant buyers when Interest Rates went up and finally the insurance companies, Life Insurance comes also been significant buyers because anyone selling annuities at the moment will expend a lot of sales because a lot of retirees like higher cash flow and when Interest Rates went up that meant cash flows into Insurance Company with higher. They have also been significant buyers of treasuries and a fixed income. That brings you back to the point, mainly that okay but all these people suddenly appeared out of the woodwork and said now would like to buy love treasuries because a yield level so high. What if the fed begins to a medically if Interest Rates . Will this buyers sell . Was a move around . Will become to equities are cash . A lot of things that makes this discussion much more worrying because you have certainly a whole new set of buyers compared which had before. These buyers only came in because the level of yields without went up so much. Michael, quickly. I would say, i disagree all is well. We have had the past decade a few events. On days like today when we dont see any issues, is because the hsg survived a lot of liquid and the return off is an event. I wouldnt say everything is fine but. I guess with the fed could do one would details veto , im offended that because a ak with my book. In light of the other question, the idea of distinguishing accept treasury purchases into market functioning purchases and qe purchases. Have done that maybe they would have kept to be going quite so long. Theres reason why. We have to go. Thank you so much. This is been terrific. Thank you so much. I love we are color coded. We did that on purpose. Thank you so much. [applause] we will take a ten minute break. Were running a few minutes behind. We will get back your at 11 05 hard. [inaudible conversations] [inaudible conversations] as we heard at this conference on federal spending and debt will continue shortly. It is hosted by the American Enterprise institute and the penn wharton of budget modele Brookings Institution. Coming up next the conversation on Social Security. More live coverage when it starts here on cspan2. [inaudible conversations] [inaudible conversations] we are joined by the National Director of the medications for the College Democrats of america welcomed the program. Guest thank you. Glad to be. Host tells but the College Democrats of america. Guest the College Democrats america the official arm of the democratic National Committee and Democratic Party. We hold to make seat on the dnc and we have three levels of structure at the National State and campus level. Our executive board consist of 11 members, carly ten. We have a vacant position. Our board is responsible carryout the decision of the organization representing the organization to the party and with state federations that represent members of the state level to the National Council which is like a legislative body for the organization that helps make decisions alone with caucuses the Identity Group such as the jewish caucus, lgbtq in womens caucus in many more. Finally we have the backbone of our organization which is campus chapters across the country at many College Campuses that helped organize, to elect democrats up and down the ticket. Host you are filled with the democratic National Committee . Guest yes, we are. We have president and vice but hold two seats on the democratic National Committee, what interaction to have with the Bike Campaign . Guest Bidenharris Campaign has a Student Branch of campaign on its student for bidenharris and were closely with them to help an old might elect democrats. Host your funding what is that come from treacherous largely funded by donations and not come we dont get a ton of funding from dnc but for the most part we are funded by donations. Host talk about your personal background, i got involved, what you doing now . Guest thats a great question. When i was a sophomore i was very heavily involved in high school we speak and debate and that sparked the interest in politics and being involved in the elective process. Thats i got involved in High School Democrats america and then once i graduate high school i i knew i want to stay in the space and being a voice of youth in the Democratic Party and so now im here with College Democrats as vacations directory also communication chart for High School Democrats of america up until last fall. Host your current refreshment at nyu study Public Policy. What do you hope to do . Guest i know i want to go to law school after graduating. Currently i work as a congressional intern on capitol hill. I try to get a glimpse of all the different aspects of the Political Landscape i get as much experience before decide what it really want to dive straight into. Host we will take your calls for our guest, sohali vaddula. If you like to call in, the lines are by party, democrats 2027488000. Republicans 2027488001. Independence 2027488002. We also have online set aside for students and administrators. That is 2027488003. You can use same line to texas. Lets talk about what colleges are thinking about and what their main issues are going to be this election season. Guest i think a right issue thats important is the conflict in the these. Aside from that reproductive rights, Climate Change and can control are important issues because they affect a lot of us. Reproductive rights affects people of my age and older people as well. Aside from that weve seen School Shootings at both College Campuses in high School Campuses, School Campuses in general and that affects young people most i would say. Climate change is something our generation is also concerned about because the way that Climate Change and Global Warming are being played out like with these winter storms in key ways. Its important we take care of her plan and thats important to us. Host how are College Students feeling about the Biden Administration and if President Biden has been addressing their concerns . Guest a lot of us see the Biden Administration isnt doing the best job of addressing and representing youth voices. At the same time the Biden Administration is doing or has done the most for young people like when it comes to student debt loan cancellation or pushing for things like the introduction reduction come sorry, Inflation Reduction Act which is the biggest piece of Climate Change legislation history. That is a huge win for young people everywhere and also supported, i know harris is going on a tour and that is been very, very influential for a lot of young people and its good to know they are listening to us. Theres always room for improvement in the party and to support we use our voices to speak at a voice our concerns. Keep in mind when talking to them that after talking to students and other school as well, the minority of businesses are using violence with the larger message of the movement and its important we dont contribute to that. This idea of antisemitism on College Campuses is not feeling safe work targeted or attacked. Your thoughts on not. Antisemitism is unacceptable. We have an Organization Standing against and we will do everything we can. We stand against any form of hate in any shape or form including and not limited to antisemitism. Want to read that statement you put, we are committed to the reelection of racism every corner of our nation. We reserve the right to criticize our own party when it fails to purpose of these voices. We are well aware from november the white house is taken mistaken right of bear hugs energy shoulder strategy for all americans who want to see an end this work. Watch from a young people are finding a solution within the party because it no longer completely represents. It will not always be one 100 . Theyre not just voters hurt turnout for the. Young peoples voices are not taken for granted i hope you will listen to us live like reelected. Once hear from President Biden working at columbia university. No place in america for antisemitism. No place for speech or violence of any kind no place for racism in america. I understand people have strong feelings and deep convictions and in america protect the right to express that but it doesnt mean anything goes. There needs to be done without violence or destruction or hate and within the law. Ill always dependently speech and stand up for the rule. Has the protest or student to reconsider . No do you agree i want to ask you about the question he got, have any of the protest caused you to rethink your policies toward israel and he said no. Disappointed many people both in organization and out including myself and its sad we are sometimes unheard and i urged President Biden to address this because its the right thing to do and at least consider what we are saying. Is also asked about the National Guard on campus. Speaker johnson said in some cases there is an appropriate rule forgot. And cases of violence in the minority of protesters should be addressed appropriately. There are many instances weve seen were actually aggravated the situation so its important to keep in mind its necessary and what is unnecessary. From illinois, independent line how do you really feel about biden answering questions to the democrats republicans asking questions about what choices to make supporting israel. Biden turns away you say you want to raise funds yet they are not listening to you for republicans either. Wanting Different Things from the party in this one preferably the party. We are coming back in the next panel here is on Social Security. Organizers thought we would highlight this particular topic because of the timing and its a big over. Deputy commissioner of the administration and robert kerr policy director of the Hudson Center also social expert is a resident so we serve a couple of years ago on the panel and aside from the moderator who agreed to take on the task of moderating, i really appreciate you and before that Reduction Task force. It so much. Thank you for having us here today for this important event and deeper. Weve been working on this issue for many years. We ran on task force in 2010 that is the shadow and a few of the recommendations on Social Security and the secretary of education is president who committed to fiscal policy. One thing we are going to do is link the policy to the money policies stakeholders care about and explain why it needs to be invested. We are going to zero in on Social Security and i had a fantastic group of folks here that help folks understand worried biden and where we might be going and what it could look like. Our work with the program in the two of them. Package to resolve Social Security packages. The situation has only gotten worse we continue to work on this issue. Many members of congress are trying to work toward solutions almost and very few are eager to get out there but we can remain cautiously optimistic memory be movement and the importance of vice. As a recent survey showed 80 of americans are worried are extremely worried Social Security will be available for the and thats understandable given the headlines but also a little perplexing benefits will be paid out so people shouldnt be buried worry that it will be all you could talk about how Social Security financial security. Will rely on it for security. We know what Social Security benefits are but we dont have great get. What percent of households rely on it for half or more of their income. It is crucial and 10 million more puzzled so its an important program. I think Social Security benefits progressive in the sense with higher earnings are benefits from their prior earnings. Imagine the rest of the retirement they look at retirement essentially learning in the lowest income receiving Social Security benefits so you wonder why they dont stay very much when you go to the middle and toppers 25 the door outside role Social Security retirees in this industry telling people its working pretty well last week Social Security projections a bond, nothing is different than the year before and if you could level we dive into the dark about where the government and why it is so i sometimes say you read the New York Times article mark you pretty much know what you need to know this is. And it is the main challenge and Social Security is a Retirement Program and often we think about finance, assume those emerge Retirement Program trust find something out and you are facing cash flow or people around dollars. The obligation is around 85 in the last of the disability system was the least wellfunded caching Disability Fund and the retirement. Let me put Social Security in context you think about the challenges, is one of the one places following current law its paying out one 100 full Social Security is learned to not a different topic the details so we have a system where its based on formula sought to be payasyougo but if the demographics trained you can no longer afford casting vonnegut. The subset of automatic increase in tax but its a formula we will have to do something and theres not enough coming in and you look at society, more people and its not going to be enough to finance agreement and focus. The retiree in their i think its about three to one editorial three to one parameters for the program. Its important to remember its because the coloring and the one thing thats not true is people are think longer so its not an annual income sense so that changes how you think somebody claiming benefits this year get the monthly benefit through percent higher so it goes back to the 70s so there is income replacement terms for thinking real dollar terms erect when you think about the elderly, its rising with everybody elses standards energy philosophy. We have things looking over this list 70s and 80s and talk about the parallels. One key difference is the problem is bigger and i would think two additional points for things that i think are different in the broader context of the federal budget, its overall in worse shape going back to the first session that is around one 100 projected even higher by the time Security Trust funds run dry. In the light 70s early 80s, its like a third less room to maneuver any scientist but i think its fair to say theres more Political Polarization the concern was that we were able to do it is important someone reading them ranking the dental is something will have to give in the rocky legislation but in 1979 projections for 30 years and what happened was recessions but trust fund at that time was very small so you dont have a large trust fund in the list is session, you can have a system that appears they thought partially because they already have close to so it was much less thing you have to do now. Have to do between two and four and a half times. Was a larger problem to have the same run right there is a Recession Program define now we are almost transition and now it is change 30, 40 years ago. They will look to reforms and was completely different causes and in 1983 people come back. He could have easily gone back with 2033, looking out for percent or minus 20 forever and policymakers to appreciate logic basket hands. Policymakers. To begin, we talked about given where we are now from is it realistic to think they want to maintain strictly payasyougo fill the gap shows up in 2033 or early two part about wrote products. I think its likely we are not. The money and go out for benefit in the type of tax increase we are going to be acting right before, we dont have time filling and i think we are going to use it also respected. It means move beyond benefits and the payroll taxes resolve Social Security systems were going to end up financing and it does not change the trajectory so i think were going to end up doing that terms arent enough and as the trust fund or software. The thing about general revenue 80s and 1982 there is going to be pressure on the road so once they did the reform 75 years they built up trust funds to send them down about a month for the past 30 years which meant there was a recession encompassing issue so we get to the place little christian talking about Social Security again and then something bad happens you wanted to be. What is Social Security is a lot more optimistic so what it we did enough it will be 25 years instead of 75 years. Its enough of wonder. Some form of revenue things dont bring it back and whether or not they can borrow for the Unemployment Rate i dont know what but king about what the expectation is its going to be wrong. You may be wrong on the other side. Social security we have all of this money. In keeping it more likely to have and recognize it. A couple thoughts in the next nine years. In terms of america and its also important being dramatically unfair something that is often overlooked and how you can time accurately. If i had to make a prediction, or think is general revenue and i consider that a significant protection. One of the conference i have deadline of 203435 defending on how you look at, i think there is a political a benefit of having a deadline like that, it was actually in a situation where incentive is to procrastinate can to issue that so i think there is value in an artificial deadline like that. I appreciate the concern dropping that will get out of whack and we have to make adjustments so it will be quick to have a rule of faith. I do appreciate that. I think there is a risk and opportunity. Adverse announcement we are going to cover the Social Security Going Forward about it at first. At the same time general revenue opens up opportunity. Higher taxes on the middle and upper, higher and higher benefits. Combined security benefits right around three times in Retirement Savings for americans. The issue at some time for higher earners or retire or 96000. And how other countries are like uk, canada and then facilitate that and everybody has a Retirement Plan. This is not an unsolvable problem. In this administration to the right is how and either of us think the tax programs when you intend to find more people substituting people might save a little bit more on the government side close to 200 million a year. On the far end willingness to cut Social Security part everyone. It is a benefit and rollback the retirement payment. Pond whatever form and we can depend on that. At the same time the private side rollout, uk where every worker is a supplementary Retirement Plan the space of a decade the private sector Participation Rate was 86 so it you transition from what we currently have universal counts, it solves your financing problem is a reasonable way to go about it. Hebron about sinema politically and the bipartisan proposals that. That there first thing reducing benefits for higher partners. What i want to say is there is testing and Social Security in the sink back if you are a rare honor, the monthly benefit is going to be smaller because the benefit formula based. One right and Social Security making the formula even more progressive. The nice thing about the way the testing is done, its an average of your earnings, there are some proposals i will be the Current System but i dont think thats the right way to go. The current income during requirement is not as accurate based on current income during requirement taxes. Older people are more sensitive that they are likely to reduce working hours. The existing benefit formula does it right we want to go away increasing productivity. One advantage the advantage of the benefit is not lowering benefit. In this retiree and you look further up be productive 10 , thats where we have the problem so as not just the low end but it gives people confidence. Im going to tell people and reduce a benefit you will save more on your own. I can guarantee you will and retire. Our elderly poverty rate will be 0 we dont have that many poor people but if you are in poverty, its one 100 . To build confidence and willing to take risk if i really half that. Back on the benefit side and we cant just continue longer and longer retirement. And protect them. Early retirement and re go to retire he will benefit so you could and why have an early retirement age general . Think the Retirement Benefits mark it is always true richer people live longer than poor people and you really havent seen you want about this from a they will a long time and make up for it and that your. Normal retirement so its not one 100 . How that happens. I do think it makes sense about getting people to work longer, im not sure this is the best way. This is a political economy, you totally change Social Security from public. The formula is in, i dont actually have an opinion on this, i think we get a lot less as you do that and theres budget amount. The benefits of Social Security reversal and get out. The program for the poor support program in a captiva. Its tested transfer program presently like 1 . The idea benefits is helpful for the strength of the program its one thing to tell people we lower the payment, i didnt burn it when people told and you are to them, i will fight changes and the reality and the projections for people retiring in the mid 2030s. That group on average is premised Something Like 27 higher lifetime passes. They didnt pay for the benefits, we know that. Think there when they are not so ultimately this idea benefits. If its not true its harder to make the changes. The trust from finances and combined with got it worked wonders the security worker benefits and sport delaying benefits leading a plane will not more generous people are living longer so it turns out it could be a big deal for many people so that is the personalfinance site but i do think working longer have to be part of the solution. We are working a little longer but retirement has increased so there are things we could do to facilitate number lines. One thing i looked at business Social Security benefits from the other things i could be proved . Effectively improve peoples individual Retirement Security. Would you talk about who doesnt pay payroll taxes and up later. It is a problem. [laughter] the clergy can and there you go. She died at 58 so figures Government Employees and retirement systems. Social security i get that its range idea and cap force them to participate theres rules in place for the benefit will be on the size of pension. The reality is they are not at the benefit form in the sense of people of i can come and they low income. It would transfer to them and we have provisions in place. And i try to explain it and work out. This is something right off with legislation in recent years because money are having this conversation. Make sure goals are not getting it as a result. People think there Social Security benefits are stripped away treated unfairly but the bill right now would repeal and give them a windfall and cross a lot of funny. It is a bipartisan bill that has a lot of support. The debate is not likely to go away. I like the idea of phasing out 4o1k and ira. Im reminded of the very Important Research in part sponsored by aei led by phil gramm which that anytime you talk about incomes and property, you have to look at the old monopoly of transfer programs of the bottom. This affects the top. As in the Income Distributional there is an african sleeping. We want people to be able to do something save for retirement. When giving money people who have risk of poverty in this type benefit, we are not doing that either but on the economics, what made me think about this is the way it plays out is when you eliminated some up so this framework helps explain why you dont see a reaction to the economic studies not presenting incentives about and are getting to do anything and we have taxes for Retirement Savings out there, home mortgages and not the same, it strikes me as an area where you can look at opportunity getting money medicare benefits. Getting a brother tax advantage and a lot of people agree. There is a tax benefit. Behavioral effect and should we get rid of this . For many European Countries we have even after distribution. But mark. Are going to take lunch the quick break here. Your lunchboxes are out there bring your lunch back with you. [inaudible conversations] [inaudible conversations] is registered this conference on federal spending and debt posted by the Enterprise Institute. The Brookings Institution and tax policy and Public Finance. Map, a conversation on analyzing fiscal policy. More live coverage when begins here on eastbound two. Here on eastbound two. [inaudible conversations]. Alan and i will hopefully lots of time for discussion. So theres a standard to which the usual slides from cbo, so this would chose the deficit, the y axis as usual is percent of gdp. There are some things that i think known and familiar, and thats the deficit is wide. The next slide will be debt and that also will be familiar. I want to take on some highlights here, which is the deficit is wide even though the economy is doing reasonably well. Thats really whats unusual. Were past the pandemic. The physical response of the pandemic has mostly, vessels are behind us. Theres outlays going out of course but the emergency 2020 physical response is largely behind us. And yet the deficit is to wide. This is the case before the pandemic as well. You can see on the chart if you look just before the pandemic spike in the deficit, that in 2019 we also also had a structural deficit. The economy was strong, people throughout the Income Distribution was seen rising incomes. And we had a structural deficit. That is both familiar but its just different, different than the large deficits weve had in the past. The other thing you can see in the chart is the rising share of net interest outlays in the deficit. One could say look, industry to come up a bit but in future Interest Rate could go back down, thats not a problem. Well know about the r minus g type arguments. The challenge is that r minus g helps some if they goes in the right direction, it helps moderate primary deficits but the primary deficit is no longer moderate and its now, the numbers here are based on a february 2024 budget and economic outlook. We are working now on the Spring Update, through june 20. Im pretty confident it will be spring but late spring here so there will be new numbers and im going to talk about some of the physical numbers in things that are already public. Im not going to go into the analysis we havent finished, but the bottom line is the next update is going to show a wider deficit. Theres things we know already that make it, but the fiscal situation is probably worse than it looks. This is already, its already pretty difficult that is probably worth, its more difficult worse than it looks. The second chart again is familiar showing the debt to gdp ratio going off to infinity. I promise it doesnt get that very few go past 30 years. We have no will begin to call the 250 problem, which is at some point that debt to gdp ratio can get to a high enough value that you kind of have to look at and think really . Is it meaningful at that point . We decide to 250 of gdp. Gdp. This one doesnt have it. You do a few negative shocks, then you can get a were debt to gdp. The numerator being worse so the debt being thing worse thg lowered so the denominator being worse as well. And then you really face that you and 50 problem. And, of course, with more debt and higher Interest Rates that means we are more vulnerable to further shocks. Cbo published an update to our rules of thumb workbook, and excellent spreadsheet on a website. And you can basically use to say okay what if i make changes to the cbo budget baselines . Generally to the economics. I did that and you can show that 50 basis points of higher Interest Rate, so if it is a ten year, if the yield on the tenyear treasury is 50 basis points hice higher than what cbo had, in our last forecast was from december of last year, it comes out to an increase in the deficit of more than 1. 6 trillion over the next ten years. This gives an indication of the sensitivity we have, the risk of a worse fiscal outcome. I should say im going to talk a lot about dollars. What i just, its 1. 6 trillion. My charts are in share of gdp which makes sense but policy makers think terms of nominal dollars. Ill try to speak both. Let me briefly diverge into good news, which is not always what people get from cbo these days. So this is a chart that shows the change in a danger deficit outlook from the prior baseline come so from the 2023 baseline through what we put out in february of 2024. So from day 23 to february 2424 and you can see the tenure deficit went down. A variety of changes in there. The biggest improvement came about because of the fiscal responsibility act was enacted by congress, signed by the president last year. That reduced Discretionary Spending, put caps indiscretion spending, subsequent legislation, crs and for your appropriations that essentially have embodied those caps with certain adjustments. By statute cbo projects for Discretionary Spending. We make no perception but what a future congress will do. By statute theres mechanical projecting discretions bending forward. Using that mechanical role that gives you the legislative changes. 2. 6 trillion, so the fra was 2. 5. There are other changes, the last line is a technical changes and that large part of that is reestimated costs of the green tax provisions in the 2022 reconciliation bill. That was done by the joint committee on taxation. The reestimates were also also done by the joint committee on taxation. It looks like those costs are going to be much higher than was originally estimated. This offset some of the budgetary improvements but on net from baseline to baseline theres an improvement. Whats not in here . I will have a whole list of things that are not in the projections but you can see one already thus not in here, and thats, we recently enacted a security supplemental. About 95 billion to ukraine, taiwan and israel. Thats not in your because that was enacted after the february 2024 numbers were locked down. So which 95 billion added to the 24 deficit, but by statute that will be projected forward into the future. And rise with inflation. Just mechanically we know the next baseline update that we publish in june was show and wider deficit. Of course its up to future congresses to turn that into come to decide whether to turn that into actual. But anyway this is the good news slide. See if i can come back to good news. Okay. Im sorry, this is also some physical good news. This shows that the labor force again comparing our may 23 may 3 baseline to the february 24 baseline and it was demographic projections and the Economic Projections were at the foundation of the budget baseline. This shows an important change that was made in the demographic projection. Theres a sense in which if a change to the past, so the past is not what we thought it was, because we realized in doing the work on the demographic update toward the end of last year, we realized theres a disconnect between the numbers from dhs, department of homeland security, of the number of immigrants who released into the interior of the United States. Those numbers came to be disconnected from the population effect we get from the census. Its not a criticism of senses. They do a great job. Its a difficult thing when things are changing so quickly and for sure it will get there. This is not a criticism at all of census. But this demographic update of the surgeon immigration has a huge impact on the Economic Projections and, therefore, on the fiscal projection. This is one view of it looking at the change in the labor force. Over 5 million additional workers in the labor force over the budget horizon, the tenure budget window. And i should say in our projections we have a surge of immigration owing from 2022 when it started through 2026. We actually dont know when its going to end. Whats the basis of saying 2026 was a little bit of were really not sure, right, because there are many factors behind the surge, conditions in the countries, regulatory decisions, policy decisions, social media, you know lots of things. Its something well just have to keep watching and keep our eye on and see how long the immigration surge goes. Now, theres many inpex immigration. What we have in our budget baseline is relatively narrow view of immigration is the cbo view. The cbo, right, our job is the federal budget. Of course a notice impact on state and local governments from the surge of immigration, and thats not in it. Thats not in the chart. Its not in our budgetary statistics cant just because we are certainly aware that it is important politically important, social is important, its important if you live in denver, if youre the local government or local civic groups in denver, for example, is very important to you. Some want to start by saying its not in here. The other thing thats not in your thank you. Without the shoulders of memories, no. And im happy to be chairing this session and doing very little work in so doing, because this is going to be a presentation by Kent Smetters who of course among other things is the faculty director of the penn wharton budget model. And that is going to devise ways talking about. So cant is going to talk, and then we take some time for q a at the end and i will probably throw some questions and myself. If you want to know more about kent his bio were in the winter to what i do want to spend time talk about that now. So as you enjoy your lunch, let me just turn the floor over to kent. Thanks. Thanks, alan. And this particular talk a little bit more academic solid try to level set a little how they Congress Really think about this issue and the bridge and so forth. I will be essentially channeling out our block career and what im going to talk about. Alan auerbach that ebv perfect objective moderator for the session for that purpose. But also in thing assay is called for i out his phone number toward the end. Just kidding. So federal debt. In particular we heard about the 34 trillion the federal debt is in you. The 30 fort wayne dollars debt is not really that alum referred to in japan and other places where this trust funds with the government will come to the undead. What we really care about is the debt held by the public. Thats ultimately what the government owes and veteran 27. 5 children. Its that world war ii levels right now but, of course, one big difference is that it is increasing as far as the eye can see. Thats not the current projection. I will post my slides for people so i will touch a few things on each slide and in particular we have an exploding level of debt. Cbo we both agree at the table also shows the sensitivity of that debt. Some men shall bit about that this morning. Time to talk but right now but we have done calculations like how high can the debt go before Capital Markets cannot possibly rationalize keep on contributing capital . Even, ultimately when you see a spiraling condition like this it really comes down winter capital figure markets to get a . When you start believing that congress will eventually do something about it . Even the most optimistic expectations we calculate debt is about 190 , 200 debtgdp ratio is really kind of that upper maximum. So the debt problem also has been massed a little bit. We think about programs like Social Security masks. When intro rate, Social Security, its going to be through the population growth and productivity growth. That will give the internal rate of return. Thats hot tax bases grow over time, population growth and productivity growth. Thats what sometimes called labor a justice40 really aggressive couple decades ago. Some of that with females into the workforce. They give us a onetime level shift but the stock would be permanent growth effect Going Forward. Were forecasting the debt is likely going to go down quite a bit. Keep in mind we are in the good days and away. We have a capital glut glut, a high amount of capital per person were because of baby boomers going into retirement. Thats not going to persist but that will help mask some of the problems Going Forward. And so, by the way a most as to what about japan . Thats that come up a coup. As alan pointed this out, japan and the United States really are not comparable for lots of different reasons. Our household saving rate is very different in the United States relative to japan. In particular even if you do some adjustments, measure Capital Gains for example, as part of savings, and japans one a few and dozens of sites where housing prices actually lose value through the earth movement. Even if you make those adjustments we still say much less in the United States. In terms of National City they still actually have a higher saving rate than we do when you count for household and subtract public just saving. Let me get now a little bit more into the weeds a bit. Ill try to do this without equation but just pure simple graphics. What is debt really measure . This is a question that alan larry kudlow and others have tried to address. Not surprising, students of marty stoles dying to try to get people to think about this issue as well. Lets consider, is that really measuring much. In particular lets consider a really simple to period model, i shouldve called these periods because each year could represent maybe a couple decades and so forth. In particular we have generation one here who is working year is year one and they retire in here or period two. They are followed by an overlapping generation who when theyre retired followed by a next generation who are working and then they retire in the following year and so on. So suppose we do the following can we do a tax cut where treasury gives one dollar to generations, generation one, index by the working here. And we dont pay for it from generation one. What we do is we simply tax future generations two, three, four, and so on just for the Interest Payments. So we just roll over that one dollar constantly making Interest Payments. Suppose we start and simple world, a borrowing rate of government, 10 growth rate is zero, and just to keep it simple, generalizes and what you have is simply you can see ultimate generation one is welloff. They get a dollar that frees up in terms of year two, 1. 10 because a freeze of money they can then save for your two. Interest rates 10 and within finance of that simply by rolling the dollar over and hitting future generations with a ten cents per generation interest payment. Okay. So far so good. Treasury debt of one dollar. Construct the exact same cash flows without using Government Debt. In particular, what we do is we simply make a promise to generation one working age in year one that when you retire in year two were going to give you a transfer of 1. 10. How are you could pay for that . By taxing the next generations, payasyougo, 1. 10. And by the way, were going to give them the same promise where were going to say when you turn age two at period three were going to give you the benefit of 1. 10. How were going to get that is tax that next generation after them the same amount. Payasyougo. Notice the first generation gets this windfall of one dollar, or year two, 1. 10. Subsequent generations all lose ten cents in present value. How did you lose it . Its because when we have been give 1. 10 to the previous generation, they could have, in fact, had that money and invested themselves and give up the Interest Rate of ten cents. In present value its identical cash flows, everything is exactly the same between these two approaches. But what is called treasury debt and the other one is called what we economists say implicit debt. If you got this exercise i will tell you right now probably the hardest concept of economic special capitol hill is trying to explain to playmakers the meaning of implicit debt. But thats all were doing here. In particular, we have one dollar of explicit debt backed by the full faith and credit versus one dollar implicit debt. Yes, there are some legal distinction between these two, although some implicit debt like so security is indexed to inflation in a way and even wage growth the weight of explicit debt may not be. But either way our job as policymakers, not policymakers, but as scorers and analysis is to look at law as is. And economically why do we care about that . I blew through this a little earlier, but ultimately why we care about debt is because a person order today mention the crowding out effect, in particular if that is being used primarily to find immediate consumption, then that means we are giving at someones deficit. Debt competing with private capital for the same cash flow from household to International Capital flows, and, therefore, you have a reduction in capital because each household who buys that use that as saving from their perspective the fact that if they want immediate consumption fell for it is irrelevant. Think about intergenerational fairness, its exact same cash flows, one explicit, the other implicit but no difference between the two. If you think about issues of clothes, i blew through this, but something idea of we talk about the earlier today. What happens eventually is either congress has to do something really, really big, or if congress doesnt do anything, kind of reminds me of several years ago when a japanese investors what the wharton school, doing executive education for them and they are like, as well as chinese investors, they were like are you going to pay us back . We lent you all this money. I going to pay us back . I said yes, we will pay you back every dime that we promised you. Theres no question. We are not going to default on that. We will make sure to print enough money to pay back every single dollar and time that we promised. The point is that when you think about what is inflation . Inflation is ultimate attacks, a tax on net longduration old labor has to be closure somewhere in the model. He may say this is all good theoretical exercise. Economists have noticed especially if you got grilled into this, Alan Auerbach made this point they musters a goat what they call the labeling issues that it is just labeling but how big a point is this economically . Its a big point. In particular, the current, explicit that is about 27 trillion. However, if you look at the implicit debt, that is about, only for so scared a medicare in particular that you simply ask the question, how much have we given in the form of transfers in the Social Security and medicare people in the past as people see how much i we projecting to give them . Versus how much have the fit into the system, alden properly and present value. The difference is about 62. 7 trillion according to our calculation here. Want to be very clear. Those of you in the weeds we call this a closed loop liability. This is the open group. This is not accounting for shortfalls the future generations that are not currently debt. That never gets even bigger than this. So as a measurement, federal explicit debt is not a great measure. Implicit debt does a better job. Its hard to explain of course, but nonetheless it is simply more comprehensive and better. You may say, or correspond i should say to what ultimately we would think we would care about in terms of economic effect, in terms of intergenerational fairness, things like that. Let me give you an example. Lets look at the Social Security 2100 sources could act of 2100, and in particular im going to look at the original version of it. It was a pretty clean act. Things have changed, do like temporary benefit changes, things like that. Lets put that aside. Lets look at the most original version of just a couple years ago just to make it crystal clear. In particular, the Social Security 2100 act both the salsa could act and penn wharton budget model agree that this basically solves the 75 year problem we estimate is not quite fully solvent in 75 year shortfall. We have different projection assumptions and so forth, but nonetheless we projected mostly solved the shortfall that exist. I have a lengthy study and so forth you can look at if you want more detail on that. As pointed out earlier, almost everybody look at whats called scheduled benefits. In particular even the score keeps her supposed to look at current law as written, we dont do that for so scared medicare. In particular, because if we look at Little Current law that would be slashed benefits by as much as a quarter in less than a decade and were not really, no, we can talk about that. By definition so security would never have problems under current law because we would just cut benefits at the time occluding on 90 old people and so forth at that point. We really look at scheduled benefits. However, heres the thing thats pretty interesting but the 2100 act. It actually did decrease explicit debt. How . Because this is all relative scheduled benefits that in particular when the shortfalls happen in so security they show up as though if its a general revenue shortfalls, as though its future debt that is required to make these payments. But what we show, implicit debt goes up by more than dollar per dollar than the decrease in explicit debt. And how is this happening . Because part of that act actually removes salsas to benefits taxation and that loses some revenue come quite a bit of overtime in the book benefit taxes are with a constructed, index inflation can more people pay the overtime. Tickets are bit of that and the shortfall increases Going Forward. Goes up by more than explicit goes down. As result of that we find it contracts the macroeconomy even relative to peer deficit financing of scheduled benefits. By the way, without almost every reform to Social Security that basically gross economy relatively scheduled benefits come basis one it was generous in terms of giving benefits to older people. It puts it explicit picky mice okay maybe well get the baseline wrong getting. We are not measuring debt correctly because after all were doing implicit transfers. I am saying even a policy change is i getting it right. In particular if you look from a treasure perspective, looks like this is lowering future treasury debt both of the economy and is not even the right Foreign Policy change. Other than that i say its great. But keep in mind explicit debt really reflects a historic compass that a dishonest metric but it reflects history. It was created during a time were lots of Government Spending was more brickandmortar. I would say its pretty samuelson diamond r bock approaching before modern computing methods. Let me go into more. How can we fix this . This is where the history of the common bottle that is often used to analyze this policy. Its a popular growth model, a brilliant man so much comes from frank ramsey, died at an young age unfortunate but he was a growing person into particular is basically as a model that relates capital and labor to output. With this representation of households, this model does not treat debt. In particular there is a zero cost to debt, regardless of the difference between r and g. Just no relationship between the two. Debt is kosice in the model. Heres a little intuition that robber barrow years later gave us for this robert. In particular, i have a typo i will surely to you in a second. Lets go back to our entitlement example of you. Women with the same thing of Government Debt. In particular now what it added here grandparents, parents and you. Suppose now that generation one thats working age, that to grandparents, and you, you are working, you start generation three, kind of your working age, and what we said to grandparents . We said we are going to give you a dollar and ten in transit. How will we pay for . Generation two was a 1. 10, and so on and so forth. You make example as before. But suppose the grandparents were going to leave money to the parents. I havent told you how much capital they have. They will these two dollars to the parents and the government comes along and gives them 1. 20. The grandparents leave two dollars to the pressure the government comes long since we will give you 1. 10 from parents. They gave the money right back. Thats going to follow all the way down the line. When i say the net minus ten cents, the ask around this at the particular the operation, fiscal operations of these transfers are fully neutralized within the family. If this sounds particularly extremist to you, Robert Barrow was one who showed this in 1974 that led to hundreds of papers on this idea about family transfer offset some things like this and so forth, general conclusion is probably not. Any and maybe closer to 13 cen the dollar come Something Like that. But what it did show here was, which i think its a real insight is that we think about the ramsey model, its really a family, a dynasty here. Ultimately in that model theres no role for debt because and it doesnt matter what r versus g is in the framework simpered because there is always going to be money given, given right back across the generations. So also by the way that model since it has like this long representation family here, you can only have one of them. You cannot have any heterogeneity. So for interest and progressive taxes and all that type of stuff you can have that progress is also good benefits. You can have this in this framework simpered because the most patient dynasty, the most patient mafioso found will accumulate all the capital it is no role for anything anybody else. How do we fix this . Heres the reduced form attempt to fix this is what i call, reduced form in particular there simply limited in scope. If have a rule based on say empirical that simply says for every one dollar of new debt lets reduce capital accumulation by icct says based on empirical relationship. The problem is this actually does encompass suppose we leave the assessment of crowding out. It actually doesnt cover simplistic debt. It only covers the explicit debt. An example i just gave you of the Social Security 2100 act or the payasyougo transfers, thats going to still show up as a Debt Reduction thats therefore crucial as a capital increase, positive macro, even though we know implicit debt went up by more than explicit that went down. So its going to miss that. Also some issues on how we can keep the 50 cents and so forth. And that is an average marginal effect. It will is good in the particular range that it was computed and in particular the better way to do is with a more structural, i will talk more about that a little bit later here. So how do we generate a sixyear . We know how to fix. Alan r bock. Thats how we fix that. [inaudible] oh, no. [laughing] but you can. You can download it for free. And i give you my photocopy. Note in the market. In particular, we can computed these models in particular the lifecycle framework, hence the title of the talk you. It simply saying we will explicit a model, model how the public, explicitly model the business sector, government and theres now been does the papers written based on this type of framework. A with the first to take this implement and make a big and do a confrontational computational. At the time thought to be impossible but they, in fact, did it. The whole story behind that. In particular its not what your model. The point is what makes this model i think the real way to set think about fiscal policy is simply being explicit about things. We use this as a budget welcome part of our larger platform. A time to go into a lot of detail. I can have to provide slot slides but the point is we start off with michaels stimulation, 60 some different at the beach, grow, get married come have kids, so forth. Ultimately feeds into overlapping generation model. One reason why we do this is we one realistic demographics of lots of other things. But g model also to michelle in terms of computation. That reduction is something we have been solving more and more. Let me do some examples of how this will treat a few things differently. We posted some analysis, what we call options for policy or federal budget reform. In particular we never made the recommendation which they much like seaview innocent as it were not opinionated way comes to policy. We have posted a brief that basically looks at three different options for trying to reduce the federal debt, and the idea behind is that each one would take at least not kill the economy. So optional and is basically high income taxes and tax of corporations, see how far we could go with that one we dont call it the liberal option but effectively thats a people think about. Option two was how you get rid of, talked earlier about the adjustment. Also another one. Get rid of the employersponsored health adjustment all these get rid of any access are wrote to the Median Health plan out that thats a big so forth. So what happens in this plan, what we show is indeed the economy grows and so forth. If you were to compare this partly because of capital increases the crowding in when death comes out so forth, suppose call bundle three. This is what we dont call it the modified but essentially has a grab bag of Different Things like a valueadded tax, a carbon tax in the rid of some of the deductions and so forth. Also slowing benefit growth and so on. Notice, sorry, hopefully you can see this. Its the total debt over time between the two plans actually goes down more on their bundled 310 of bundle to make. So total explicit federal debt goes down more in bundle three but notice the macro gains are actually smaller with bundle to than they are with bundled two. The intuition behind that is simply that explicit debt is not measuring the change in implicit debt. Implicit debt goes down more still in bundle two, suffered because of the reduction paid to go. Bundle two accommodates things like flat benefit and so forth. We can see even with larger reforms come visit with some of the stuff really shows up. The Real Advantage of the lifecycle framework is, i was a better microphones to macro and back again. It captures things that economists care about. For example, the payroll tax is not like any other tax. Others talk about this with her in particular the payroll tax is not distorting as the same 12. 5 or 15. 3 tax levied on individuals, simple statutory tax that goes than pays for public goods, roads and so forth. The payroll tax is whats distorting some good because you are in wages to pay the payroll tax. If you didnt earn those wages you like its also scaredy benefits. Fact in the rules were r equals g and is no redistribution and there was no differences in lifetime, how long people live and things like that, really simple welcome the payroll tax would be nondistorting the reason is its just giving you a return that you otherwise wouldve gotten Capital Markets. We want to account for that at the lifecycle framework automatically gives you that type of micro foundation. Also, count the fact that lots of times the interactions on the conventional site, how we often show things, is on conventions that sometimes these interactions will be quite negative. I am changing the Social Security retirement age and medicare retirement age. You cant compass things as independent. Because theyre going to have effects across each other. Some increasing the Corporate Tax rate and the minimum book tax rate, those are not independent. They have strong interactions with each other. So often the interaction effect on conventional basis is negative, but would you think about in a macro, you the macro framework as well, i can often be positive. When change distance could affect the tax base and on Social Security as well. Also the lifecycle model can also explain something that is not well understood. That is if you look empirically as a possible weak relationship between debt and Interest Rates. Cbo study on this but most historic debt, alan pointed ts out this morning, is Counter Cyclical in nature as a result, what happens when you actually have a negative shock in economy . Supply goes up but the demand usually goes up as well. In particular, so we dont expect from a countercyclical increase in debt that you will necessarily have a reduction in a capital or increase in Interest Rates because supply and demand are changing at the same time. With a realistically calibrated overlapping generations we can almost perfectly replicate that. This by the way goes to another thing Alan Auerbach and larry kudlow pledges go, generate a data set which you then perform reduce estimates and see if youre replicating what you seen elsewhere. Lets talk about how is Government Debt, suppose Government Debt is immediately consumed versus how if it is infested and so forth. Heres one thing i was simply say about this, is that its true that government investment, if you take that debt and you invest in something that is Long Duration, public roads and things like that, you can actually get a positive return, things like that. However, when you do it realistically, realistically calibrated framework, that high marginal product of capital for government, government capital, actually falls very quickly. Theres no way saying it. You cant just look at the marginal benefits. You have to look at it comprehensively. Let me give you a little bit of an example here, and that is in particular let me dive into this next topic and i will go wrap up in about 15 minutes. That is, what are conventional to spatial tables measuring . This one is, i will not be dogmatic but all will say to decide on this one. But let me give you a couple examples, something just to think through. This is bundle two blown up so you can see things whats going on here. Change in Social Security benefits, flattening the benefit, the retirement age and so forth. You could look at conventional distribution analysis like, for example, suppose we said this is going to begin in 2025. What is the impact on different households . One way of doing that is you could just line up households by their incomes and say how much are they going to win or lose from this from taxes, from benefit changes, all that type of stuff. By the way since this is phased in over 20 years slowly and so forth, you may want to repeat this exercise over time. But the thing thats weird. If you look at those, that particular plan, thus no particular reason the highest incomes, how much are going to lose from this in terms of actual dollar amounts should actually be higher than a bit of a lower income. That the art and conventional analysis. Whats happening with conventional distributional analysis is it ignores lifecycle effects. In particular, why are people in, who would be in the 99th percentile . Typically not retirees. They are people who are higher income while whether work. So even if you sort incomes, include all sorts of incomes can wage income, solstice could income, capital income and so forth, you get a pure lifecycle affect year at the particular looks like the highest income are actually not being hit, even though in dollar amounts they certainly are if you were to look at it that way. Now by the way the other policy bundles come to get something that looks more intuitive. That is if its just tax changes, looks of the more intuitive that the region paid to those taxes and so forth in a conventional type of way. Even if this embellishes, goes too far the opposite extreme. Because what you really care about typically is asking people how much we value this reform before the know exactly what their income shock is. Heres the problem with distributional analysis. It treats everybody, whether youre a twitter fiveyearold making 75,000 feet or our house for household making the same amount, you know, a family of four, they are all treater applet in the the same income bucket. Yet clearly those two families are very different. They also ignore how progressive tax is including solstice. Also provide insurance value against risk its hard to ensure privately. I have a couple papers years ago where i show you can actually grow the economy by going to a flat tax system by getting rid of solstice could and so forth. Throughout the entire transition path from a macro perspective it looks awesome. However, from a well for perspective people are worse off simply because of insurance value of those programs that they provide. So you cant, economists have never thought macro alone was a fix. How do we fix . Asked alan again. In particular this up with the lifecycle framework also provides. At the particular it doesnt simply line of people based on distribution analysis that we catch it was called equivalent variation. In particular basically asking the question, how much would you value this policy change . In particular, suppose we didnt do the policy change. How much money would have to give you to make you exactly indifferent to policy change . For various technical reasons, it incorporates things like risk sharing value of the policy, macro effect on the lifecycle affect and so forth. It can lead to very different answers. Think about the Inflation Reduction Act, which we said at the time, this was before the treasury the competition, electric vehicles and so forth, is we would reduce the debt a little bit, deficits by 260 billion over ten years. It actually grow the economy a little bit of most of this is not that reduction. Its because, in fact, from a static conventional analysis that looks like its all loss, everybody is losing because they are simply paying higher taxes, means more taxes. But for my dynamic basis, most households born future are actually better off in the soviet because just the capital accumulation. Its also less carbon, increases the strength to be selective and clear about things like greek education, who benefits from that . Some people already get it. You dont want to count them twice. Youd want to treat that for individual activity. In case of carbon. Think about, so have read of ths dynamic table, simply insane if, in fact, you happen to be in the bottom quintile, how much does a splendid make you better or worse off . At a particular birth your computer to you if youre aged 40 and lows quintile, this one hurt you 700. That is a onetime payment. But if youre basically im bored, that is you is your 25, you are in future here, this plan even though the model helps you by about 1. 9000. In the case of a Social Security 2100 act will be fined we find is older people like it because they are not directly hit by it. They like the crowd out of capital because it raises Interest Rates, but future generations from those born in future are worse off simply because the increase in implicit debt. You might say okay fine, how do we get rid of the macro stuff . Thats controversial and so forth. You can still do calculations without having the macro. One way to do it is easy calculations. You just simply fix the choices house are making whether we think about this small open economy if you wanted to, and we can now do analysis like lets suppose we raise the retirement age up to eight to 72, two months a year come fully face of in overtime. And we dont account for many macro back about the console account for lifecycle effects. That one should be way less controversial and we can see some positive and there some negatives for future generations. But when the count for lifecycle effects what happens is we get a change, almost everybody is better off through capital accumulation. Partly result, existing market friction known as fiscal externalities and so forth. I realize this is a lot but let me tell you what i think is the real challenge is in the space here. I think arguments against models are not so much arguments about all models that you can incorporate frictions, this is not being explicit. I think theres a large cost of entry into these models. And the fact of the matter is the economist are the ones to blame. We face very few rewards to making our models reusable. We dont care. In particular its very few rewards for making our models clear, reusable, so i call it hide your heisey write in plain sight. Writer really crummy code all you can understand so when you posted as a general question of posted, it was hard for other people to then say this loss of property and use for the purposes as well. Theres also free rewards are making a model that is really comprehensive as well, that includes a lot of different fiscal systems and interaction and so forth. If you want to do serious costbenefit analysis, i think that is what is required. Its often like somebody knows, knows how to run the model, one of the model offtheshelf here. What we need is an integrated platform where the inputs are generated from Something Like a micro simulation and makes this thing really scalable and computable. You say it doesnt open source of the problem. It really does minor in economics because just to be 5000 lines with some fortran code doesnt do much right now if you cant do with the code right now. What we really need is a Strong Software design. In particular i model you can download and run on your pc. Theres probably a pretty small, smallest model. Whats the goal . Apple inc. Enemy. Which create a problem that is accessible. Why not have arguments about assumptions, about what goes into the model. But lets reduce the fixed costs that goes into the model. This requires a collaboration. My student can now come to the mess but because we try to solve these dimensional issues to make the model more flexible overtime. Economist repetitions in eaters and computer such as ali to work together. The head of our Technology Group says great site secretary s great injury. I tell him i think michael colton, he claims it comes from someone else. Ive not been able to find it but nonetheless i think thats exactly right. We need to be a Software Process here so that we have debate on common code also lower the cost. Thats our goal at that penn wharton budget model is was do that and we spent a lot of time really trying to quit a a plam of the people can eventually use. Where nothing yet. I will end with this. Sometimes people ask me, i cant try to put cbo at a business . Its like no. Just the opposite. We are trying to be accomplished not a substitution in the production process. In particular i think absolutely critical part of your kaposi Going Forward. Everybody loves to hate on cbo and the other groups like that. I will say one thing way worse is not having them in particular just look to europe how budget often works there, the policymakers, the politicians will tell the agency what number to come up with. Its a really problematic process of there. But they are busy and academics need to really get involved in these to help and bring that sophistication melissa bring that sophistication with throwaway code. Lets would bring in a platform that becomes reusable. And the United States weve been contacted and is not quite yet but thats what worked on is to really make that base usable by everyone. Eventually by the way were going to start grantmaking process, how use model sets, we will pay you to try to get the framework used and so forth. All right. [applause] kent, why dont you sit it and we can have a conversation and see if we have any questions. I want to just make it. About the first thing that kent emphasize, which is the distinction between explicit, or the comparison between explicit and implicit debt. It may sound to some of you may sound as a carrot and a may sound like well, that something of a theoretical level, may be interesting but how does really affect policy . When i tried to discuss this with my students i i find a vy good realworld example. During the george w. Bush administration there was a proposal, Social Security reform. It was part of the Ownership Society initiative, which would have allowed individuals voluntarily do have some of their payroll taxes redirected into their own retirement accounts, whether they were private or personal. There were different language used to describe but the idea was they would be put into account that people would have control in terms of investment. And an exchange those individuals who got such accounts, get money put into their accounts from the payroll taxes, would have a reduction actuarially calculate n in the future benefits. Meant to sort of offset at least in present value calculation the benefits they would get from the taxes that they were now allowed to invest. And the government in order to keep the Social Security system going because some of the payroll taxes in this payasyougo system were now being put into these accounts, government wouldve had to issue Additional Debt to cover the shortfall. It wouldve been kept as pets were substantial in terms of how much the debt wouldve been created. And there was a lot of concern and discussion about how this was irresponsible policy because it was created all this new debt. But if you thought about it it was really just a substitution of explicit debt for implicit debt. Because what he was doing was it was saying look, if you are promised us a good benefits and you opt into the system, you are getting fewer Social Security benefits but youre going to get your own retirement benefit so youre essentially being held harmless, you may be better off because of something you choose to do, but the government is going to have lowered liability now in terms of the benefits are going to get but it has a higher liability to the people it is just issued bonds to. So what was the effect . The effect was there was a policy change there but in terms of the amount of Government Debt outstanding it was a convergent of implicit liabilities into explicit liabilities. If you have a view of think about these things together, you could understand it as a policy change that substance in terms of Investment Decisions and so forth, but not in terms of the overall liability for the federal government. In terms of economy and carry more weight straight on the one hand eroded over the last years and on the other hand its very Strong Political commitment. There differences in the facilities and they are somehow in this construct. In this dynamic analysis. So what you do to make your model work . In this what they are referring to is in this framework if it isnt sustainable what i like to think so in this model you have to assume 30 some years the government will get its act together. The value added tax in a hypothetical and a progressive income tax and it can matter i do it because it is forcing you explicit about what you are doing. As i said in the past, trying to close the locomotive bob rejection that shows the next 30 years is your 30 and magic happens here. That year we are going to keep it stabilized Going Forward youll get rewards for thing that and we have options to do it. The amount of explicit that by u. S. Investors essentially composite that . This particular configuration and that going up today. It is still what they are in, its making to them and therefore that is bigger. It is true the shortfall the real way is that scales of something. Right now giving a bottom line supposed the rate taxes immediately and forever how much we have to raise tax revenue delete and forever just to have enough money to make our promise obligations and the number is about 33 right now so we would have all sorts of revenue and that is assuming feedback. With the new spending plan we have a tax revenue. Discretionary spending and so forth, is the problem we happened still without macro effects it would be enhanced even more. He faced enormous football in the United States. That is not working so great its a current policy and optimistic assumption and by then, its almost but no return so high it would not be able get away from that is not clear . One thing that surprised me is how showed a range 30 years office 5. 9 less likely three years growth. At the same time the baseline which probably cant happen in the alternative is not 5. 9 lower about realistic alternatives and where we are likely to be if we stick with the baseline. Its hard question and you have to have this concept. The problem is real problem there so click story. Talk in the u. S. And the longterm outlook. We believe in this specification. And it is the opposite of that. Conflict that is problem. Everybody says it can happen in the u. S. It definitely cant. People can change their consumption behavior and demand this so yes, youre right it would have to end. We have run out of time. Thank you. Q. [applause] final. [inaudible conversations] [inaudible conversations] as you want, the focus on federal spending will shortly. Posted by the Enterprise Institute about the budget, Brookings Institution coliseum senate. Commitments are our conversation on spending reform options. More coverage on cspan2. Should. We are going to zero in on Social Security. I have a fantastic group of folks here. We are going to dive into this help folks understand where we beds, where we are and where we might going. What action could look like get around this issue. Artwork this was led by jim lockhart. She but two of them have a company has for financials challenges. Thousand 2016 at the situation has been worse since then. Many members of congress are trying to work toward solutions. Very few are eager to get affect but i think we can were made cautiously optimistic, there might be movement conversations term so went back, onto help you where security is right now. Once Retirement Security. There is a reason survey showed 80 of americans are worried are extremely worried Social Security wont be available for them when they reach retirement. Thats understandable given the headlines but also a little perplexing and even if Congress Action it will be continued to be paid out. That doesnt necessarily you shouldnt be worried but dont worry about will be there at all is a little misconception around this issue. Good talk about how Social Security fact is financial Retirement Security so we can look at where this comes from. s accounts for 30 of the elders and sometimes entire we know what Social Security benefits are but we dont have great theater. All of the households rely on or more from their income 20 the elderly rely so certainly it is crucial and calculates the didnt get Social Security up and million elderly and help to be parts of an important antipoverty and something people rely on project there Retirement Security. Weigh in on five different folks at this distribution. The Social Security benefits formula the sense that people with higher earnings received higher monthly benefits but its a smaller percentage of their higher earnings sometimes to be lower individual to rely more on Social Security and received more generous Social Security replacement. Im see inking a cbo data where they would but Social Security benefits as retirement earnings. The lowest income received Social Security benefits and their retirements of wonder why they dont say very much, best part of it. When you go to the middle, about 50 replacement rate, it is 25 . This explains the role of Social Security for lower income retirees. My cottage industry, the u. S. Retirement system working pretty well. It would happen trust fund. Its very timely because last week Social Security projections for the program and i was reminded nothing is different. But definitely been here before and these networks primed at this you could talk about with the program is and why. If you read a New York Times article and what you need to know Social Security soleimani is and by workers who lived agent for your faith in a Retirement Program and Disability Program and we assume they are merged. And theyve run out in 2033 they are facing a shortfall that is real money. It has been immediately and permanently increased. The reason in the past 1200 part of the program retirement subsidized stability around ten years ago you had the Retirement Program disabilities significance it doesnt totally explain. The Social Security retirement part is the real problem suspect reforms will play out talk about the factors leading to this problem. Let me put this in context. When you think about the challenges they assume it is one place where is not current law benefits hang out one 100 so one it was zeroing in the are a large portion. It is the details of this topic so we have a system for your benefit is based on wages by formula so it can be payasyougo but if the democrats this and you can no longer afford the same effect for the same tax rate. And it is the same demographics. They are a larger portion. There are about five workers for every retiree and down to link to one so the challenge we have changed the terms of retirement age. But its important to remember will be think about this problem is not i am large because guaranty is because of the economy changing not really changes what you think anymore benefits the one place that is not true people are living longer so you have this Social Security is more generous but not an annual income. It is a formula replacing about 40 so that changes how you think about we want this and what is the cause manages the remains constant claiming benefits this year get some of the benefit 40 higher in real terms and goes back to the 70s. Income placement for real dollar terms . Standards of living you want them to have, rising with everybody else and how is benefits rise with wages are it is just to make sure they are not part of have enough to eat and rest is up to private. When it comes to we are looking over this 70s and 80s and you talk about the parallels and differences. One difference is the problem is bigger. Two additional points i think are different and you look at the broader context of the federal budget overall. Currently around one 100 gdp projected to be even higher by this time the Social Security trust fund runs dry. Back in the late 70s, early 80s it was more no more than a third so the federal government finances are overall in worse shape to maneuver in an eligible scientist, fair to say theres polarization today so theres concern about what is feasible. How broadly labeled it so thank you for your patience today. This is the time thats overall pretty good. The top sergeant healthcare retirement and trade policies. The director of the senior fellow economic studies of local sophistication long background in Government Policies including the chief economist Budget Office several years ago. The chair at Brookings Institution and federal academic policy is a lot of work while low blood policy pensions and behavior and physical therapy. The Public Finance team and it is committed to datadriven backspace solutions and all sorts of problems. Many years on capitol hill and the council u. S. House of representatives ways and means speaker ryan. 2016 include brick 32017 is a claim for lost the facts of primary thank you so much and look forward to the discussion. Thank you and i want to thank everyone for coming back of the room is pretty full. Its really what everyone was waiting for you spent the whole morning here. Last night i went to sleep, i was thinking this event is set up perfectly, the sequencing of the panel first the director women will give us the percentage of gdp in which it becomes guns available. There will come in and tell us that night is falling for the last it is in order, the economy will collapse and this cannot both will in the afternoon and saved america and eventually have statues all around the country. The panels for those of you who did not quite go where i laid out and assume we are here to talk about how to raise taxes in the subpanel about policy not politics policy does not operate in a vacuum, its a political something of those work earlier today. I want to talk about ways in which we operate. Ill ask this way, why the reduction so hard, why is School Reform so hard . We basically have two ways of financing priorities. We can finance funding through taxes. It limits a negative impact on probably inevitably reduction in incentives from higher taxes work we can private Spending Priorities to borrow which makes our economy moment. Who gets hurt in benefits from two different ways of financing is really different so if you raise taxes on people, they probably will understand how the taxes were affected they will show the distribution affect and argue for the reflect incidents and such but these are conversations out there in the relatively easy people to the negative effects on the output spending firing, the effects are slow and difficult to figure out the economic effects so it is no surprise have chosen this work barring. When you look at the projection of how their spending to borrowing and it is very large. Effects are negative. Im very confident spending for the tax policy creates a bigger economy over time. The negative effects are modest and slow and a bigger economy. I strong opinions where we will and wont be and how marvins respond. I think the reason it is hard is because one way is salient in the other is okay. We dont have a National Conversation that says these are Spending Priorities among this is the consensus given them its very significant reference, we dont have a conversation saying this is clearly what we have revealed ourselves on, whats figure out how. Any thoughts about . A big reason for personal, Founding Fathers made it difficult deliberately. It is when you need our government to do something they are of the white house and across in benefits you raise taxes on somebody and raise spending, they are aware the benefits of future generations right now. Will go to doctor five not six. [laughter] and even if they could agree on mice, they need a way and there needs to be guaranty of how the codes are. The rest last reason is the public. The public is so good about this data provides no report or any politicians there. The deficits it is the myopic nature. In this earlier but there is something not popular about this make it not priority remember the political and public challenges in mind, we shipped to the policy discussion in part about transition, i will be off my phone my favorite quote i cap memorized no matter how hard i try. Capitalism and Freedom Crisis produces real change. When that occurs, the actions depend on what is lying around. Cap i believe is the basic function to develop alternatives for existing policies keep them alive and available and impossible becomes the politically inevitable in protest of the panel here is not to make politically difficult reality but to keep i guess alive and available so thats start of the highest level work our way around detail what is the right framework instructing table federal budget spending and revenue side and how they should be instructed in the relationship of the relatives in the economy or whatever ventures you pervert. Before we get into specific policies, i like this, may not be consensus on the right data. First, i find it remarkable i think it does come back to why it is so hard and there really isnt a lot of different areas. If Market Perception changes and because of politics in the financial markets, if Market Perception changes dramatically about whats happening they will. Think about how to raise taxes and get Interest Rates down. Make sure theres a lot of wellthoughtout ideas on the shelf and that moment that i think of the challenge is the likelihood of acting well in advance of that moment. This is how much this is what we think distributional composition of the increases should be. A largely political and the distributional one. How we want this to be and they are dumb numbers people have in support. What we need to decide the topic of our revenue we want and then decide how we finance it and then there will be interaction. That is around the edges were really rich country. Numeral the federal government to spend money for the private sector to spend this last where we want the spending to happen so it was not order. Lets figure out how we finance it and with the tip. When you made reference in the welldesigned tax policy relative to the deficits and that alone is an important topic. Its also a question about whether or not its a realistic alternative or just tax increases. Well have a perfect tax code today and its not perfect. If you want to get more revenue out of the system, or were going to make it work perfect or less imperfect . Try to improve the efficiency while raising more revenue . How would we do that . Change the distribution of the tax code for raise more revenue in the future than currently and make it less efficient. Those are the choices so we have with inefficiency and some activity and generating more revenue there is this question of who is making those changes in the opportunities to say okay, given the fact that we agree with these revenues more than ever it is more efficient or we can say need for revenue and i want the system more progressive. I dont like the change in the distribution or these revenues will never get in we need to recognize that is a choice to make and make it less efficient. Its not just how big or small and they ought to be it would be grateful. You mentioned the position and increase productivity or whatever, is that what you are giving out . The budget in particular really unfocused on debt rather than what the money is being used for and take a step back. Depending on oscar. And we are not talking about systems exist only on paper longer talking about this. In the demographics, the projects to rise above. And i think we just dont have the tax system put in place to support spending parities. We can for sure decide around the edges, but listen and bend the cost curve a little bit but when you think about some of those of the big pictures and projected rising deficits because we have big pressures on the federal government and broadbased Spending Priorities so i dont want us to go immediately to narrow, i have a way to change expenditures like i worry that immediately goes to the narrow and ignores i think we do want the federal government generally speaking. I think demographic changes, it is really important probably think about that side and what the appropriate revenue side is. In particular with Social Security its all about demographics. You got and a change in christ and maybe in preference cost of the demographics so the implication is the historical or data may not be the best indicator for what it needs to be but that is the thing we need jack up and the sufficiency only more alert,. You alluded to a question i wanted to ask share of gdp, sometimes people say technocrats and agree on a lot of stuff and theres a political problem onto the policy experts and elected officials on think, to measure whether deficit reduction package increasing or decreasing spending our revenue over the long run this question of baseline operate to look at the balances our current policy gdp, is there even as we saw this person was supposed asked in isnt there disagreement amongst experts about threshold question . I think there is always the case but in particular right now in the of a place where the current is the current law they find it very different. And not act it is urgent. I think our budget experts about disagreement among analysts to look at this, politicians they can diverge radically so they may be looking at their preferred policies. Tenderness very different credit came up earlier in conversation and the benefits are payable and there are important questions public really do say how big the problem list to address this problem when you are proposing a policy, whatever your memorization. What does it mean for the world for the next three decades . Does it matter my priorities are taking about what you individually like on the table. Regardless of what your comparison is look at the projections of the world proposed. Complete hypothetically decided the current level of spending when i was going to get on was the current level of spending the race taxes and spending today and the answer is probably not. Make generally dont keep up with. It can be static because the demographics are ecstatic. The policies should change and maybe will get more efficient when it comes to healthcare and or to gorge ourselves. In the military spending that will create all the tax revenue we need. In the policies in place now if we want them sustainable to be out there. Let me ask a question you will probably be short have questions on. Can we all agree is scary longterm sustainable trajectory federal budget is on is not driven by Discretionary Spending . The baseline and Discretionary Spending will shrink over time can think of that, as offsetting even more unsustainability than it would otherwise appear. Its ironic biggest of the political question. The last three times theyve done deficit reduction going back to 2011 budget control act and the debt limit deal because former Speaker Mccarthy and President Biden they relied heavily on Discretionary Spending even though Discretionary Spending is to the share of the economy of the baseline anyway and to answer, the ghost to the political price challenge that leads to 800pound gorillas in the room. We want to step on their jurisdiction for they will take that off the table and the focus on taxes and healthcare we have already talked a little bit about those things. Im not a Health Policy expert but it is interesting theres a parallel problem between the federal budget and the economy that is not just how spending growing unsustainably in the share of the federal public budget but they are growing on gdp public and private healthcare expenditures. You can say it is quarterback but tired the developed world and continue to grow the share of gdp so there appears to be a relationship between federal budget and overall economy. That say anything where we ought to be looking when it comes to Health Spending the idea but we will cut military right now doesnt seem likely. The idea of cutting interest in Social Security we talked about the last big part of that puzzle. A couple things, host cap you, a couple of things stand out healthcare spending one is the large will of across the legal system and the second is a large healthcare cost income doctors and nurses and etc. So putting healthcare costs is some sense making an attempt to cut incomes cannot make why it is difficult and as technology advances, procedures for use across infinite amounts of money because they were impossible will come down costs have finite amounts of money but then they have those procedures so healthcare expenditures go up so as ive gotten older i become more sympathetic that they nationally rise with income so there is a problem there and i dont know how to solve it. Looks at the budget and says gdp went up by x and healthcare spending was a percent of it. Its always a big number. We had gradually move towards spending, again a ritual to country with gradually move towards spending more on health care. Im also not a healthcare expert, and yet will opine. We all slept and Holiday Inn Express last night. [laughing] so you dont want to be spending this money on healthcare thats worthless, right . We want healthcare spending to be efficient. I think we should do, it is money laying on the sidewalk, fine. Lets say we should do that. I have ideas to cut administrative costs, but the hamilton project has put out proposals, but i will just say thats money on the sidewalk. I think the two other questions are, maybe three other questions. One, im not sure its absurd. This is related to the point bill was making. As we get richer, we spent an increasing amount over and above how much typically on healthcare. You can say but that can happen forever. And i will say oh, for petes sake. Like, they can happen for a very long time. And as we get richer. Maybe thats just what weve decided we value, seems kind reasonable. Ive then you have to ask how much do we want the federal government to do and how much do what the private sector to do . Need you can say okay if we actually, accepting that there is a distribution of income and people are going to have different access to healthcare to bid on what their income is, we can decide we want a a bud, we want a federal budget where we spend this much in healthcare and no more, and then we need to recognize we are saying you, individual person sitting over there, you get this much healthcare and no more. And maybe what we are really saying is if you have lived your life differently and been luckier and higher income of all the money you and will, then you couldve gotten healthcare but thats cold comfort to the person. We need to be clear were saying for that person you get this much healthcare and no more. Now, we do that in all sorts of different respects in terms of federal policy. So like im not saying that is at all beyond the pale, by the dont think we need to remotely have the maturity as a country to have that conversation in a transparent way and say we are going to tell these poor old people that they need to go to hospice. Thats the hard thing about if we simply want to have the federal government does this and this much on health care no more, then i think thats arco station where having, or to have. A couple of thoughts. First on the discretion appoint under you want to get anybody in on that. In the baseline cbo projects discretion is going down but thats like their rule, increases only with inflation, not with gdp. The problem we face may be larger if Discretionary Spending grows in in a manner but thats an annual decision by Congress Starting from zero. If congress does nothing, discretion spending is zero, its only if congress decides to enact more right, right, right. That said, its not the driver of a problem. It is the thing where saying. What ill say about healthcare, i mean, i think one, bill, your point about wages, doctors and nurses salaries, so important to the fact understand why we struggle so much theyre also helps explain whether so much focus on the nonwage part of healthcare reform. Its all about like drug spending because thats that someone wage, some as prophets or Something Like that. Because of the difficulty in saying no, doctors are not going to get another 5 boost or whatever it is. Thats what huge percentage of the money is. That problem is big part of the problem. I which is also say, two things could be true. Could be the case as we age and her demographics shift and as we become wealthier and preferences shift towards more healthcare, that is true. That is happening. And its also the case that the incentives of the program might also be contributing to the growth of the program. Its going to be pretty hard to undo the demographics, at least in federal policy. We are going up to do with that. We are going to have more old people in the future that we had in the past. But we do need to think to what extent are there ways to change the incentives in the program so that lawmakers dont simply keep voting to give raises to doctors and nurses all the time because that feels good to them. To the extent we can slow the growth of the program to those types of mechanisms we can mitigate some of the train we have. Let me shift gears here. I think theyll weve all proven our healthcare expertise. I was going to say taxes, but i want to take a little bit of a broader look. I think all of our careers until a few years ago the word taxes and revenues were pretty much synonymous in 98 , 99 of federal revenues came from taxes. However, we have now in recent years learned about these things called tariffs. We always knew about tariffs but in the past, tariffs were trade policy. They were Economic Policy, they were National Security policy, Foreign Policy but they were not budget policy. They were not fiscal policy. They were too small in material to really be part of those conversations. Weve had a little bit of talk about welldesigned tax policy, and we could do a whole panel on that because theres crazy tax expertise of it. I dont want to miss the opportunity to talk about this of the kind of revenue that is now increasingly becoming a material component of the federal budget. Our last two president s are the two most common in my view, the two most protariff president s since herbert hoover, from fdr to obama we had a bipartisan White House Level consensus on free trade. And that is changing. And, of course, trump is more protariff than biden by a long shot but i think biden is a clear number two cents, i mean going back to fdr who was a free trader. And now were talking about hundreds of billions in tariffs that already in place in the ten year, over ten years, raising hundreds of billions of dollars in tariffs. I know that certain people in the trump inner circle always fought. Thought. They sought in the context of the tcja and the tears they came shortly after that. They see it now in the context of the campaign talk, by continuing to cut taxes but imposing a general 10 tariff and maybe other even higher tariffs in some countries like 6 on china. Even though the news stories dont tend to talk about those two things in the same articles, you could article says a trump said he will cut taxes and you get articles that say trump said hes going to raise tariffs. There are people in his circle who see the to tie together as a swap. From a Public Finance perspective they want the federal government to rely more heavily on external tariffs and less heavily on integral taxes. Obviously i think the biden folks dont go nearly as far, but they have left very substantial loaves of tariffs in place. Do we need to start thinking about tariffs as a fiscal option, as a deficit reduction option Going Forward . As as a subset of taxes even. We dont. [laughing] but others clearly are. And i think its unfortunate that on the question and ability question, sort of orders of magnitude, you know, the levels of tariffs that former President Trump is talking about relative to the expiration of tcja. Were getting into territories of like we could pay for tcja extension with former President Trumps tariff agenda. Maybe not quite but its at that speed is same order of magnitude. Talking trillions, that hundreds of millions of dollars in the past. Trillions Going Forward over the budget window and potential tariffs. Tariffs are bad. I appreciate your point about President Biden coming in second but President Biden a sort of a status quo strategy with respect to tariffs which is very distinct strategy and not nearly as destructive as the proposals that are coming out of the trump camp. I am someone who is that a couple times times a welldesigned tax system. This is that it will i mean putting a 10 tariff on everything coming in to the country susceptible to fund tax system. I dont quite understand the scores that ive seen because i cant, its hard for me to contemplate an economy that would stand those tariffs. I dont think those scores tend to incorporate a lot of behavioral response. I am a dynamic score person in many regards, this visitor like this one. If are going to talk about this amount of tax revenue on this network of the tax base i dont get it. Like, i dont it. Its funny, you were talking about how it feels like a bygone era. Tariffs are so, its so this idea okay, were going to raise tax revenues through tariffs because Economic Activity is really okay. You know, the only way we can really know how much Economic Activity there is this a go to the ports and see what we can see with our eyes, see the stuff coming off of the ship onto the port. Like, theres a reason tariffs played a significant role in our economy a very long time ago. We now have a much more efficient way to raise revenue. So i think rather than seeing tariffs as as a way to solver fiscal issues, i think its more, i mean, the arguments i think i can at least grapple with our tariffs as industrial policy. Its so much, like, i believe that one of the things the tax system does, like i believe one of the things fiscal policy does is influence the composition of output and basically has an additional policy aspect to it. Always been true. I think its true now and we just need to be clever about how we do it. I think tariffs as industrial policy, like, its, i again its really narrowly targeted. I was going to say, to do tariffs even if the chance of doing it fairly, effectively s industrial policy gets it targeted. Its super narrow prick you probably want, like, like i can see reasons. I can see the way some countries as if omitted tariffs as part of industrial policy in a way that is that longterm gains. But like like antidumping. Yeah, or hey, we really need to call this one industry because, were going to do it through tears for a time until it goes and gets mature. But you know, we are, we are, if this were the one thing that was keeping us from the frontier of really perfect tax policy and additional policy, i would be on board with that but we are not. This is not the low hanging fruit. So as a tax policy, tariffs are a terrible idea. They are brought on for tax purposes to try to manipulate the trade balance. But the trade balance, they dont have that effect. The trade balance is going to depend on the difference between domestic saving and domestic investment, and if the tariffs dont change that its not going to change the trade bills. You can use the simplest macroeconomic identity equations to show that. In terms of their incidents, one of the apparent attractions of tariffs is that they tax people elsewhere. They tax foreigners, but they dont actually do that. They raise costs for american consumers. They raise costs for american businesses, and they, you know, the appeal may be strategic for National Security or industrial policy, but there is no tax policy argument for it. Lets then shift to more of a comfort zone and welldesigned tax policy. Lets just go down the line. We will start with bill, go towards me. Would love to hear thoughts on some ideas, some options that you consider to be and will see a much intent is we have, welldesigned tax policy options. If you want to throw in some welldesigned nontax policy options that you are a particular fan of, please feel free to do so as well. All right. So the first option has to be getting the irs the money to enforce the tax system. That is going to actually make money by funding the irs to the level it needs. After that you can go in various directions. Personally, i would favor a carbon tax over the various subsidies we have for clean energy vote on revenue grounds and simplicity grounds. In terms of a broad revenue raiser, i would like to see a valueadded tax, which partially funds a universal basic income. I wrote a paper on bad for windy, or for j i guess a couple years ago, for hamilton. And then we need to do, if are going to put in a broadbased tax like that, we need i think to raise taxes on the wealthy and that involves either taxing gains at death and or converting the estate tax to an inherited tax, which a significant revenue potential there are other things, but our time is limited. So im sorry. Let me come to want to add one more thing. Given the difficulties in cutting spending, a notion that the records of spending and no one came up with really great ideas on how to cut healthcare spending. Given that its going to be difficult to do a whole lot on the spending side i think. So i think a fair chunk of our Fiscal Consolidation is going to have to come on the tax cut. Sorry. I think thats the world i would pretty happy to live in. Im a little, bill would have to convince the carbon tax and valueadded tax can coexist. But bill can consist the other. I wasnt sure if that was a both or and even or. Later in top of the other layered on top of each other. Site will not repeat any of that stuff. I think, i think i, i didnt think in 2016 the individual tax rates were terribly high. And i thought our economy could withstand those tax rates. So i dont, like, as long as, like, bill has passed me the magic wand and a dont have to worry about politics, i think we should let all of the lower tax rates in the 2017 tax act facing individuals i think we should let those expire. And i think that we should raise more money from corporations, raising the Corporate Tax rate would be a good start. Not back to what it was pre2017 tax act, but raise it. I totally appreciate all of the Economic Modeling done by many of the people in this room, showing a negative fiscal effects of that but i also appreciate that corporations are very clever at making sure that money, that the prophets ever actually make it into taxable income. So i think its a secondbest of her first kind of issue. And i think we should get smarter people than me to figure out ways of improving the International Tax system and do more to become similar to just make sure that we dont have u. S. Multinationals actually paying taxes to other countries. Can i ask you clarify question you said to let the rates expire from the tcja but to keep all the things that never the tax base, like the doubling of standard deduction. Is no, no, no. I like, i very much like the higher deduction. What about the offsets mortgage interest and so i think raising standard deductions mostly have worked. So lets not worry about mortgages. Im perfectly happy to get rid of, i mean, the salt stuff, im on the side of good enough. What were the other questions . Okay. I think that answered it. I think thats it. Ill say a couple things. I agree with him strongly agree with bills first few suggestions. Or three may be that we need to fund the Tax Collector so they can collect the taxes that are due and properly owed for sure. I dont know exactly what the level is but somebody should figure it out. We should give them the money and resources they need. I totally agree with taking out the subsidies for clean energy and green energy and replacing it with carbon. His issues are large. Thats a lot of money right there. Probably will not solve our problems but those to make issues alone are like children deb fischer. Isnt a carbon tax bill if it works correctly designed to eventually raise a zero . Only if you think the optimal level of emissions to penny what but theres a question if it incentivizes what people are trying to incentivize for carbon tax, then its sort of like tobacco tax, right . It will decline as Revenue Source overtime. It may depend on the rate. And the responsiveness. I would also say that i dont see, theres a point i think i was trying to allude to earlier like this issue around changing the tax code as the way or the time to raise more revenue. Which is certainly, we can do that. Sort of kill two birds with one stone. If you both of those objectives. I think it makes a a problem e difficult though. In a political matter. And i think theres some people might argue this is the moment to increase the tax code. People might make the opposite are you pretty might say the argument i was make, if you want of more revenue we need to have a system that is flat affect that would be more efficient. Lets push it the other way. Or you can come in the middle and say lets try to hold relative constant thing but how we can raise revenue. There are ways we could raise Revenue Holding the tax code relatively calm and that would be recognizing the fact lots of taxpayers have income thats not taxed. The Health Insurance benefits are not tax. There are excluded. So by brink for example, bring in employerprovided Health Insurance into the tax code we would raise come to bid on how you structure it, tons of money. And for each taxpayer they would pay at the marginal rate. It would be consistent with the progress of your taxco. Its not perfectly true because but those types of ideas were changing the indexing of the tax code. Not to make it more perfect but to generate more revenue would be something that would hold constant tax code. I would think about trying to find ways to raise revenues by broadening the base in a broadway. As sort of my first bit. To build point we will have to do this mostly on taxes will be hard to do on spending. That kind of gets into the issue of theres a lot of spending through the tax code and im not come this is a question i want to see if we have any ideas questions come this and putting out there that there are ways to reduce the extent to which government distorts the economy that raise revenue rather than cutting spending. And with that i will stop asking questions and see if we audience questions. Am i calling on people . Im afraid a lot of the history of the proposals to tax capital games to death has been lost. I was in the closeddoor meeting and out ways and Means Committee in 76 went out he had the votes to the Capital Gains tax at death and the number two democrat sam from florida said no, no, wait a medic and youre going to force all the family farms to be sold. Well, theres a lot of you are family farms now, and most of the agriculture is big corporate farms. The scf, survey of Consumer Finance from the fed, showing a tripling of wealth since 2010. Isnt that an argument for a Capital Gains at death . Yeah. [laughing] if you did in the Current System you would probably want to make some adjustments to estate tax so you are not doubling the tax. But something, the composition of stage in the top 1 are over 10 million, a very substantial share of those estates consist of unreal as Capital Gains. Im not sure if its 40 or 50 but is Something Like that in that group. That income is never taxed under the income tax, right, because its given basically a step up. You could do carryover basis instead, but that means that mean that the tax for hundreds of years. [inaudible] well, right, true, too. I feel like people argue, well, people argue for wealth tax, annual wealth tax. Thats three hard to do just administratively. But is a reckoning happenings at death with estates and theres no reason to give that, the angel of death loophole. It just doesnt score as well because it is so far in the future. Carryover basis. No, no, no. Anything about estate tax because its, you know, i made the issue with farms and businesses are not that big and can be dealt with. Right in particular it reduces the lock in a fact of life because people are holding onto assets that they know they can pass taxfree at death. I think it has a lot to offer. One side issue is that gifts are treated on a carryover basis. Unless you want to get into this. But there are site issues. [inaudible] i just had a quick question hopefully. Im hopeful the panel might be able to discuss it a little bit. As a part of reform can we agree to be more truthful to the American People about what the actual deficit of our country are . In 2022, we reported a 1. 4 trillion budget deficit, when the actual bottom line loss to the country was 4. 2 trillion. Last year we reported a 1. 7 trillion budget deficit when the actual was 3. 4 trillion. If anybody doubts my numbers just look at the annual Financial Statements for our country and you will see it in there. Now, thats on an accrual basis of accounting of thats defined as the actual bottom line of the country. So when washington start telling people what a real loss is versus what the cash basis loss was when the cash basis number in my view issue issued bo figure what our Debt Financing needs to be. Also, when you looking at the Financial Statement take a look at the Balance Sheet. Theres one point, theres 70 trillion worth of liabilities built upon that Balance Sheet that are not part of the 26th or 27 trillion of debt outstanding that we will have to incur debt from. So anybody want to field of that or give me your thoughts on it. Wouldve been a Perfect Question for kent. [laughing] hes in the front. Get him afterwards. [laughing] ill jump and just have one thing which is, i think the calculation, this partly goes to the conversation that alvin and kent had earlier. I think when we think about alan implicit liabilities and add up all of the liabilities on that part of the Balance Sheet, i think one has to be careful to also add, i can remember it was alan orton gordon kent tyt you actually want, he made a useful denominator. You can either make that denominator like a like t value of gdp. You can even more narrowly make it a net present value of all revenues under current law. But i think if youre going to do one of these things were like oh, on the lefthand side of my Balance Sheet in red i have this really big scary number. I think if you want to make that have economic meaning then you have to talk about whats on the righthand side of Balance Sheet, which is a a whole lot of output. Taxable income, or potentially taxable income. Can you solve the problem by showing the net, the liability . Did you get to like physical gaps calculation basically. I think kent was showing a net number. There is a really hard problem on communicative these issues i think. Im pretty sure i dont know what 67 trillion means. 67 trillion come like i just kind of shut down and didnt really worry about it. What if i tell you if i stacked about up to the moon, like does that help . Thats right. I dont know how far the moon is either. [laughing] no. Alex makes an important point. With that, the average american start type telling but trih a 1 trillion or 100 trillion, it becomes a meaningless number. I think that nobody is one of the charges, the biggest challenge we face is how to communicate these problems in ways that are salient to average people. Slightly more sensibly. The other thing i will say from a a time at cbo, im surrounded by my old cbo colleagues making her happy. At my time at cbo, i mean, as we thought, we thought a lot about how to effectively committed these issues to policymakers. And you show a projection of current law where under current law debt to gdp after 30 years is going to be, i cant did member, 150 , 130 . Did you say but i know, i know i know, i know will get them to act. Lets do debt to gdp under current policy. I know what will get. What if its current policy and we put in an alternative scenario for Interest Rates are even higher . At a certain point, if 100, if that as a share of gdp rising 50 overtime was going to get their attention, like, is 70 going to get their attention . 80 . Like, its common we, i always my personal expense was ever scary you projections were not going to do the thing that broke through all of the political hurdles where we started. I think quicktime for one more question maybe if there is one. Back here. This has been a great day, great panel. Let me ask bill gale. I found interesting youre looking, going to other kinds of taxes. Not relying on the income tax for your ideal world. V. A. T. Tax. I believe that is considered a consumption tax. Everything i hear or been taught is the truth the best way to go. However, would you pair that with the retaining the current income tax . And also just from all of your experience and personal judgment, i am curious, what do you think is the highest level that should be appropriate for a high earner marginal income tax ask as you know its already at 55 in high income states. For income over 1 million. Approximately. Thank you for the question. I do think we should retain the income tax. I think we could push the top rate up above the high 30s for the federal statutory rape. I am aware i dont, i dont think it, im not talked about 70 Something Like that. I think theres theres room there but i did but that is a top priority because i feel like its too much of debate in d. C. And this applies not to just issue but especially the next year. Too much of the debate is going to focus on tcja and do we extend this, to extend that, do we cut back . And not enough is focused on there are all these other ideas, all these ideas that Milton Friedman said were on the shelf, and that personally we all take personal pride in putting on the shelf. I would like to see the debate be much more expansive than just do we extend 25 , 50 or 100 of the tcja. Okay. Thank you all. I think problem solved, right . Turned back over to kent. Lets thank the panel. [applause] thanks much for coming. I know you want to get up but i do want to thank the staff here at aei, john mathis, for the hard work putting this together. Hope we can do this again sometime soon. Thank you. [applause] [inaudible conversations] [inaudible conversations] conesreturns to different unadjusted business and vote. The hou back at nn vote on legislation toill reauthorize fopams for five years. Current pgrs are set to expire friday at midnight. Membsill consider bills requiring event ticket sellers to disclose a total ticket price includins. 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