Im pete davis, Senior Vice President and past president of the club. The National Economist club was started in 196 by herb stein, the chair of the council of economic advisers and it has met roughly 40 weeks out of every year since presenting leading economists talking about issues of the day. Today were very pleased to mark gold wine of the committee for responsible federal budget to talk about the return of trillion dollar deficits. Before i introduce mark, let me tell you about some upcoming programs. We have dr. Alice rivlin on february 1st at a luncheon right here at the chinatown garden talking about fed policy and maybe a little bit about the budget. Shes a former vice chair of the fed and, of course, the founding director of the Congressional Budget Office. We also have commitments to speak in february although the dates havent been set by the current chair of the council of economic advisers kevin hasset and also the Congressional Budget Office director. Mark gold wine is one of the sharpest young budget economists deficit hawks at 33 years old. Hes had a lot of experience in the budget arena. He worked on the simpsonbowles commission in 2010 and he was deputy staff director of the Super Committee that followed that effort in 2011. Hes got a b. A. And ms in economics from Johns Hopkins and also teaches there. And at university of california d. C. Finally, mark has is a new father and so this topic is very appropriate in hope that his kid and our kids dont pay more than they have to. Mark goldwein. [ applause ] well, i appreciate you saying that im one of the sharpest budget hawks but seems like thats a pretty small universe so thank you all for having me back again. I didnt eat anything this time. So no risk of anaphylactic shock. Those of you who have seen me speak before when i made it past the eating phase of the speech know i often come make a depressing presentation about our unsustainable longterm fiscal picture and the inability of congress to do anything about this. This is going to be much worse. If i was doing this presentation a year ago, this is probably what i would have shown you. I would have shown you where our physical situation was which is that there we go. Which is that President Trump entered office with higher debt as a share of the economy than any president in our history save harry true man. Debt was already 77 of gdp. Its about twice the historic average. It is a record outside of world war ii and there was good reason for having high levels of debt after world war ii. The minor recession that preceded it. We also had plain to pay it back whereas when President Trump entered office, we had a plan to continue to increase debt levels. Apologies for this category name. I guess in the power point email, we lost a figure here. But this is what our deficits looked like. A few years ago during the peak of the Great Recession when we were passing major stimulus bill and the t. A. R. P. Rescue package, deficits peaked at 1. 4 trillion. They had been coming down. Coming down to still high levels but coming down. But this year in 2017, last year, they reached 666 billion. If i was coming in the beginning of this year, i would say this is a bad situation. This is a situation where we have a deficit that is high and rising year after year headed to 1. 4 trillion back to its record by 2027. Now, this is what i would have said at the beginning of this year. Of course, sorry, excuse me. I also would have said we have all major trust funds on a path towards insolvency, the highway trust fund, the medical Hospital Insurance fund 2025, Disability Trust fund 2023, old age trust fund, 2031. Talk to the trustees you get slightly different numbers but the theme is the same. All major nonfunded trust funds are on paths towards insolvency. Even if you dont care about the debt, these need to legally be reconciled. Theyre Revenue Sources with their spending. Our fiscal space was diminishing. Historically, no one knows how much fiscal space is. Nobody knows where the threshold is where we wont be able to borrow anymore. Probably there isnt a threshold. Theres a period where the borrowing will having higher consequences. If we use debt record levels, since the 70s, we have had about 70 of gdp in fiscal space. We could borrow another 70 of gdp and still not have our debt at record world war ii levels. That space space has declined dramatically as a result of the Great Recession and continued enactment of tax cuts, conflicts abroad and its projected to continue to climb as a result of the aiming of the population, Rising Health care costs and rising Interest Rates. The end of last year, we passed legislation that makes all of this worse. We passed a major tax cut bill that depending on who you ask will cost somewhere between 1 and 2 trillion. The official estimate says even on a dynamic basis after scoring, this legislation will cost almost 1. 1 trillion over a decade. If you look at other scores from other outside organizations at various versions of this bill, they come to order of magnitude the same conclusions. No one out there says this tax bill, not a single analysis says this is going to be revenue neutral not one not even from the administration. Pretty much all say its going to cost more than a trillion. I have to point out this is a trillion dollars with a number of gimmicks bringing down the cost. For example, all the individual provisions pretty much expire after eight years. A number of business provisions expire or get harsher over time. So if you actually assumed we kept doing wa were doing, assume basically that 2018 law was continued, the legislation would cost more like 2 trillion. So thats going to change where we are relative to where we were. And it turns out ive had my staff and team run the math. The changing is dramatic, more than you would think when you consider that we only added 1 trillion or 2 trillion to a 14 trillion debt stock. Excuse me for all these values but in 2017, our deficit was 666 billion. That already should be a bad sign, right . 666 billion is certainly bad luck. Abprior to the tax cuts by 2020, it would reach about 800 billion. So deficits were growing but slowly about the pace of the economy a bit faster. This is what the deficit looks like when you just add in the tax cuts and jobs act as written. By 2020, we have above trillion dollar deficits. Thats two years from now just from this bill well be at trillion dollar deficits. But of course, congress isnt done add together deficit with this tax bill. We already know for certain almost for certain theres interest in passing a Disaster Relief package. And in dramatically increasing defense and nondefense caps passing see quester relief. There is talk for offsetting a portion of this but those would be well into the future mostly and if you read most press reports, sounds like theyll mostly be phony or nonexistent. Im assuming 100 billion of Budget Authority a year which i think actually is a conservative estimate if youve read some of articles yesterday. Theyre looking for more than 100 billion of sequester relief. Even with that trickling out by 2019, next year we have trillion dollar deficits just by passing see quester and Disaster Relief. Theres more on top of that. Remember in 2015, we had the p. A. T. H. Act that was going to end all tax extenders . No longer were we going to budget for the tax code one year, two years at a time . Remember last year, 2017 when we said, we need to allow for 500 billion of tax cuts because we would have done it anyway by extending extenders even though we already said theyre supposed to expire. Even after the tax act, members of congress, particularly the senate still want to pass an extenders package, probably about 20 billion of further tax cuts on top of what we already have a year. On top of that, theres legislation to continue delay of the medical device tax, the Health Insurance tax. Last time around 2015, these has bipartisan support. Added to the legislation is also a hiatus on the employer mandate to match the repeal from the tax code. Add all this together, and next year were now at 1. 1 trillion of deficits. Bottom line, trillion dollar deficits arent something in the distant future. Trillion dollar deficits are likely to occur next year. I cant tell you with certainty. The economics will be different than what cbo project. Who knows how people have already tax planned the first year of the tax code. Pretty definitively, trillion dollar deficits are on their way back and with high likelihood theyll be here next year. What about the longterm . As i said, by 2019, well have 1. 1 trillion of deficits. If we assume this twoyear sequester relief package, temporary extenders, temporary Obamacare Tax relief, the tax bill, et cetera, were at 1. 5 trillion in 2027. Other than the tax bill, all the things i said why two years. We only assumed two years of see quester relief. Then spending will be cut 100 billion. Give me a break. Were not going to let defense fall 5 billion. I also assumed the tax is only for two years. I assumed the tax bill as written. Even though it has the individual provisions expire after eight years, it randomly decides were going to amortize research and experimentation after four years and it is a number of other changes that sort of sunset and sunrise in an arbitrary way unlikely to be sustained. Lets assume as you of this is extended. Congress continues to act as they acted last year and i suspect theyll act this year, a current policy baseline. Now were at 2. 1 trillion of deficit by 2027. Thank you. 2. 1 trillion, scarier when i have the right number up here. 2. 1 trillion of deficit by 2027. Thats basically the cost of continuing on our current path with these tax cuts with extenders with delaying Obamacare Taxes with see quester relief. I didnt assume there would be continued disasters each year although i dont think its unreasonable there will be further deficit increases as a result of future disasters on top of this. Under something very close to current law, by the end of the month, well be headed to trillion dollar deficits next year and 2 trillion deficits within a decade. Thats not something weve faced before. As i said, the highest was 1. 4 trillion in the heat of the Great Recession and a lot of that was onetime payments weise recouped, fannie mae, freddie mac, t. A. R. P. , things like that. So what does this mean debt to gdp . I mentioned it is already higher than any other time since world war ii, already about twice its historic average. Even prior to the tax cuts, debt to gdp was rising from 77 of gdp today to 91 . After a decade. That might not sound like a lot to you but it sure sounds like a lot to me. That would be unprecedented to have a debt already so high and continue to rise. As a result of this tax cut bill alone, debt is likely to rise to 96 of gdp. If we add in other policies, were talking about 98 . If we assume everything is extend extended, the scenario i showed you back here, debt would reach 108 of gdp by 2027. In other words, we would exceed that world war ii record not because of a war, not because of a great depression, but because of our own choosing because congress continued to spend more and tax less without consideration of the fiscal consequences. Remember i said its a lonely lonely universe of budget hawks out there. Some might say the tax cuts will create tremendous growth and this is a static estimate. I added in dynamic scoring and reran the numbers. Its better. Only 105 of gdp. We might not hit the world war ii record till 2028. Not exactly a debt to gdp is actually the measure most benefited from higher gdp. If you think about it, revenue and deficits and spending to gdp, theyre not going to be affected very much. Even the most generous measure for looking at increase in gdp not a major change. Why not a major changing . A big reason is that tax, even good tax reform can only do so much to grow the economy. The reform we got you know, let me step back for a second. When we started embarking on this tax reform conversation, say in 2016 when the house released their better way plan, their plan was something most economists would say is incredibly pro growth. They wanted to replace the Corporate Income tax with business consumption tax of sorts. Effectively creating the marginal tax rate on new investments as the virtually zero, zero for regular returns. At least they wanted to dramatically reduce individual rates. They wanted to do this all in a revenue neutral wray over the longterm. And they limited most tax breaks in the process. They eliminated most tax expenditures. What we ended up with and it was permanent. We ended with legislation instead of moving the Corporate Income tax to consumption tax, mof it to a smaller Corporate Income tax. Instead of reducing individual rates they didnt at all simplify and complicated the individual rates. Instead of paring back many big ones this he elementsed one tax expenditure pare back one other big one and then made a number of smaller changes to varioustach expenditures. And they did it all at 1. 5 trillion price tag and added to the debt which is going to work against economic growth. Lower rates are good for growth. They did it in a way that was temporary. For all these reasons, when jct analyzed the tax plan, what they found is it would boost the economy siftly in the first couple years and we might get a gdp a percent higher at its peak but they found it would be only. 1 to. 2 hifr. The growth effect is not. 4 some were saying we would achieve but rather. 01 or. 01 increasing growth a year. Does jct know exactly whats going to happen to the economy . Absolutely not. If you look at other models, most come to the same conclusions, to the conclusion that the tax bill is going to grow the economy by at best. 1 a year. Those models that ignore the Economic Cost of debt or assume the tax bill is made permanent even if its not get us a little bit higher. 2 or. 3 maybe. Its not going to model. Theres one claim of. 35. The highest is. 3. Theres no one who thinks the bill is going to dramatically change the economy. Its going to have a modest positive effect. It would have a better effect if they cut more tax breaks, moved to more consumption tax. That was kind of a long diatribe to basically say dynamic scoring is not going to matter that much because the tax bill is not going to change fundamentally the size of the economy that much. Even if it did, it wouldnt have huge effects because higher growth results in more revenue and more interest spending, more Social Security spending, et cetera. But especially at these numbers we dont see a big dynamic effect. We do see a fiscal situation that is now way harder to get out of. I know many folks have talked about balancing the budget. That was technically the goal of the president. It had been the goal of house and senate republicans. A much more modest goal that president obama put forward a goal that i think is probably insufficient for the longterm is to stabilize our current debt to gdp ratio where it is, in other words keep it at 77 of gdp. We can run deficits each year so long as the economy grows at the same speed. Thats basically say wiig want to keep debt at its Current Record high levels. What if we have another recession or war . Now it would require 5. 4 trillion of deficit reduction after taking back the money from the tax cuts and economic growth. We would need 5. 4 trillion of deficit reduction, thats up from 4. 1 prior to the tax bill. For some context, the president s fiscal year 2018 budget included 3. 6 billion of spending cuts. A lot of cuts theres no way theyre happening. A lot of them didnt have enough detail they could happen. For medicaid it said save 610 billion in medicaid. Even if we take all of that as a gimp, the president s 3. 6 trill deficit reduction, only 2. 9 billion on net. The house version of the 2016 version to move forward with the spending cuts reconciled 20 billion of them. You can see how far away we are from 5. 4 trillion. President obamas final budget had some spending cuts. It had a lot of tax increases. The combination of those tax increases and some spending cuts, just the gross, not the net, was 4. 1 trillion. Again, not enough to get to this 5. 4 trillion. So its hard to see the path to even stabilize it at its current level. Then if we take this a step forward and assume theyll continue to pass sequester relief, theyll extend the tax cuts and the obama hiatus. Wed need 8. 7 trillion in order to stabilize the debt at current levels. In other words, if we continue to do what it seems Like Congress and the president want to do, theres no plausible path to stabilize the debt at current levels, at least not over a tenyear period. At best, maybe at a higher level. I ran 90 for just fun. If we want 90 , remember, 91 is the scary number before the tax cuts it would cost us between 1. 7 trillion and 5 trillion. So we just made a tough job of deficit reduction a whole lot tougher, and i mean again for politics, which id love to talk about, but a complete disaster for deficit reduction, frankly. Heres our new reality. Spending and revenue are diverging rapidly. If we continue down the path where we extend everything, by the end of the decade well have spending at 24 plus gdp and knew below 17 of gdp. Norl in other words, revenue well below historic average, spending four points above historic average. I dont know anyone who thinks that is sustainable. The drivers interestingly are much the same with one difference. Rising Social Security costs, rising medicare costs, and rising medicaid costs accompanied with declining and flat discretion naary and manday spending. Interest was the Fastest Growing part of the budget before, but now with high debt load, interest is going to rise even faster. We project kind of using cb objections fundamentals, we project by to 20 40 well spend more on interest than total discretionary spending, defense and nondefense combined. And well be headed a few years later to spend more on interest and debt than we spend on Social Security. Just think about that. Social security is our single largest Government Program right now, and its our third Fastest Growing program. And within 30 years or so, excuse me, within well less than, that well be spending more to just service our past debt than we would on the entire Social Security program. This is where were headed. And of course i cant help but mention thats trouble for debt. That means the debt ratio weve run upwards of 160 of gdp by 2040. This is not a pretty picture. I know theres a lot of folks out there that say people like me, you know, the dying breed, overstates the importance of the debt. Interest rates are still low, no need to worry. Maybe there was a case for that when debt was at 40 , 50 , 60 of gdp. I dont know very many people that reasonably think we can allow debt to rise to 150 of gdp with no consequences, with no crowdout weather no financial risk weath, with no c in Interest Rates, with no political need for future austerity. This is a really troubling path if we choose to go down it, and we took the first major step the end of last year. The bottom line is, and id love to have the whole second half for questions because im sure you have a lot and a lot to complain about as you can tell, this used to be part of the presentation where i said but not all hope is lost, we still have the opportunity to make things right. Im not going to say that, but i am going to tell you what we need. The country needs a fiscal turnaround, and they need one fast. The first step is we have to stop making things worse. We havent yet done that 200 billion twoyear budget deal. Im not saying defense doesnt need more resources. I believe it does. Im not saying nondefense doesnt need more resources. But maybe they dont need 100 billion total and maybe we could offset it to the part of the budget thats growing quickly. Thats how weve done every other sequester since it came into place in 2013, the oba Obama Boehner deal. They all replaced the sequester with other savings. Some of them played some games but not just deficit financed it. We dont have to do that. We dont have to deficit finance disaster spending. Just because its important doesnt mean its not important to pay for. The opposite. If somethings that important, it should be easy to find less important priorities. My organization put out something last year called the mini bargain for the budget and it afforded 150 billion for disaster offsets, half from reallocating existing funds that are maybe low priority but could be used in the highway space, the block grant space, in the farming, conservation, subsidy space, et cetera, the other half from mitigating things with indirect causes of Disaster Relief, tax breaks that are tash ets for fossil fuels, things like that. Its not hard to find 100 billion if you want to. Its not too late to recreate a culture of paying for things, recreate a cull chature that i were extending these tax cuts, maybe we can extend some of them and hold back on others or maybe extend some and pay with further base broadening. Thats step one. If all we do is dont make things work from this point, its a 35 percentage gdp difference by 2040. Thats a pretty good start. Number two, we need more revenue. At the beginning of this year, you know, i came in organizationally, we came in and said republicans have unified government, they should have the opportunity to fix it. Revenue neutral tax reform and fix the debt on the spending side, they should have the opportunity to do that. We shouldnt predict date exactly what they have to do. But now weve cut revenue dramatically and are on a path to cut it more and not only below historical average and current law, but basically below what its needed for a minimal amount of fiscal sanity. A few years ago, republican budgets were talking about revenue of 19 of gdp. Thats a reasonable ultimate target to get to. Were headed to 17. 2 of gdp on our current path. Its not enough revenue to pay for our current government let alone our future government considering the age of the population. Lastly and most importantly, i think, entitlement reform is as important as ever, maybe more. Not saying we need more spending cuts. What im saying is we have three major programs Social Security, medicare, and medicaid three of our four largest programs, three of our Fastest Growing programs all rising unsustainably, all in need for reform for their own sakes, all in need for reform for the fiscal picture, and the fiscal picture just got a whole worse, making the need to reform these programs more urgent. Of course these programs are cost driven primarily by the aging population. Rising Health Care Cost is an important factor, but its not the primary factor. We dont control the cost of Social Security and medicare as long as we have People Living longer, people not having enough kids, immigration where it is, and baby boomers continuing to retire. So we have to get these programs under control. If not for our debt maybe for her, thats my daughter, juliana. Thats her Social Security card. Shes wearing her onesie, the day she was born. Shes smiling because she cant see her onesie. And we have a simulator on our website where you can basically plug in what year you were born, she was born in 2017, and see how old you are when the Social Security trust fund runs out of money. Shell be 17 years old when it runs out of money. At that point, current law says her schedule of benefits will be cut by 27 . Im assuming she has average Life Expectancy, average wages, shes really fit, so i think shes going to have aboveaverage Life Expectancy. But for the sake of argument say she has average Life Expectancy and wages, thats 260,000 she stands to lose over her lifetime with no warning. We have to fix these programs for our fiscal situation, but we have to fix them for the folks that are going to count on them in a way that gives people time to plan and adjust, and time is running out quickly. You know what i mean . She has 17 years, and thats really how much we all have if you consider most change s exemt changes 5 5 and up or 60 and up. We need to fix the entitlements, get more revenue, stop making things worse. Maybe we can stop its dramaticize and over time get it down the right track. So, thank you very much. Thank you very much for your presentation. You didnt say this explicitly, but there was some good news in the charts you were presenting, and that is no more recessions. So my question for you is on the slight chance that we will have recessions in the future, which is actually a near certainty, what is going to be the impact of another kind of what ill call ordinary recession, not like the last one but a milder resgs on yocession on your numb . What kind of modeling have you done . Sure. We have a paper. We have a paper called running on empty . And its a paper on fiscal space. It goes back from our old debt rising to 90 and what happened with a recession. Basically the story was we could withstand one recession but not two recessions or not one big recession over the tenyear period without getting our debt to records. Now of course any recession will get us to record levels because were hitting record levels even without the recession. One thing i will say for cbos baseline is while they dont preproject recessions, they account for some risk of recessions. They assume the economy in the second half of the decade is every year a little below potential. Their rationale for that is on average recessions have been a little longer deeper than booms have been long and high i dont know how booms work in terps of their gap. But so they sort of account for it in an indirect way. Average recessions are a little worse and booms are good. They account for an average recession, but if you look at how the economy is doing now, first of all, they dont fully account for the boom were experiencing now, but i hope alex talks about this and others that are more attuned to watching the variables of the economy, it looks now kind of what it usually looks like a year or two before the recession, when everyone says the economy is doing great, normal, everything is stable, we found a new way to have low inflation and low employment at the same time. When people start making those claims, it usually means something bad is about to happen. Robert schroeder with international came from the fi markets. They have a way of exacerbating or exaggerating some of these effects. We understand that s p and moodys might be offering some downgrades for u. S. Debt very soon. When that starts to happen, we see Interest Rates rise. How would that start to dramatically affect any of these outcomes . Yeah. Great question. So i do agree that Financial Markets can have magnifying effects. It works in both directions. Right now the Financial Markets are tampering things, which isnt necessarily a good thing because theyre keeping Interest Rates artificially low. To anyone who thinks thats rational, i have two words for you bitcoin. Right . Like now what happens if theres a downgrade . We had a paper a few years ago, i wish i could remember the name of it, around the last s p downgrade. We had to study downgrades from aaa to aa plus or the equivalents on the others, and basically what we found is internationally theres really minimal effect of that first downgrade, eve n a second downgrade. The third and start a bigger effect. When s p did downgrade the United States a few years ago, there was an increase in interest for u. S. Bonds because it made the entire Global Financial system a tiny bit more uncertain so, where do you go in uncertainty . Even though the most certain assets just became more uncertain, its still more certain than everyone else. So ironically we had slightly lower Interest Rates with the downgra downgrade. I dont expect that to happen again because Interest Rates are moving in the other direction. But nor do i expect the downgrades will cause some kind of big panic. If they did cause a big panic, its not as hard as i wish it was to imagine there being a fiscal crisis. The chance of the United States of the insolvency crisis, we could just have one if its selfinflicted or things got really out of control. Near impossibility. The possibility of a financial crisis driven by fiscal is significantly higher. If there was a panic and the United States had to raise its Interest Rates, suddenly the 14 trillion of outstanding bonds would become less valuable and folks would sell them off nap. Thats the real risk if theres a mass selloff of the safest, most plentiful asset in the global economy. You could see serious repercussio repercussions. Im hopeful thats not going to happen in the next couple years, but i wouldnt bet all my money on it. President trumps top priority for this year is evidently infrastructure. Infrastructure, right . Yeah. And he is proposing to finance 200 billion with federal spending and then hopefully attract four times that amount in private financing. Could you talk about what that means for future deficits . Yeah. Well, first of all, im glad that you dropped the number from a trillion to 200 billion. Thats an 800 billion improvement. But in other ways, thats a 200 billion loss. The Congressional Budget Office has looked at the evidence and kind of generic set of infrastructure they found that the Debt Financing, the negative outweighs the positive gdp effects. There are other positive effects on our welfare, but in terms of gdp, the positive effect of infrastructure is real but small, probably smaller than tax reform. When they ran the numbers they said if you pay for infrastructure say with the gas tax, you get a little bit of boost in growth. If you deficit finance it youll get a onetime boost but youll get Slower Growth because the Debt Financing youll crowd out more private investment thats productive than youre going to create productive public capital from the standpoint of gdp. So i dont expect a big economic boost. Now, if they can find the right way to leverage the investment and the leveraging is important, trying to get more money, but i think the way the leveraging is important is if it can bring Market Forces to better types of investment. I think people are overstating how much we can leverage to get more net investment and understanding how much we can leverage to get wet better overall investment. If we get the best kind of investment, maybe we can get a little bump. But at a time when debt already looks like youve seen my pictures when debt already looks like this, were really not sure we should be Debt Financing yet another thing. And every single thing, every individual thing you could make the argument this ones worth it because its special. Thats how he got here, folks. Were creating a culture where were addicted to debt. At first we were just addicted to existing debt. Now we need more fixes every time. 2015, we just need one Less Health Care bill then well be done. Then one extenders bill and well be done. We have do this because its a disast disaster, because its tax reform. We have to raise the defense caps. We need infrastructure. Were addicted to debt. And every time we feed that addiction were making this worse both by the numbers but also i think politically. Can you turn back to page one . Page one. Yeah. Where you announced yourself. Oh, yes. Sure. Theres probably a faster way, right . But here we go. Yeah. The first would be there might be a lot of linkage in just gaining revenue because the funding for everything constantly being cut. Now you have passthrough businesses so doctors and lawyers and others can gain the system and pay far less. And in other ways there might be many loop hopes, especially the bill wasnt, you know, tightened that much to prevent that. So it could be a lot of lost knew. And the second, how come treasury rates have not been going up far more than they have now . Yeah. Second question first. Bitcoin. Treasuries havent been going up because treasury rates are basically based on the situation it is today. I dont think that the treasury markets are nearly as forward thinking as we all imagine they are. They are starting to rise some. The fact that the Federal Reserve holds 3 trillion of treasuries including 2 trillion of long term certainly helps the situation. The fact that europe is such a mess and our Exchange Rates are doing well certainly helps the situation. Theres a lot of explanations for why Interest Rates havent gone up. I also think separate from the debt situation global Interest Rates, the global average Interest Rates are just declining. Theyve been declining for 30 years with bounces and booms. I do expect Interest Rates are going to rise, but i dont know when or how. As to your first question, yes, a lot of leakage in this tax bill. Sometimes its accounted for specifically. In the passthrough, they try to do some estimates. Sometimes they do it generically. They use their microeconomic elasticities are proxies for people getting around the tax. With that said, were trying to find states to find ways against the state and local tax deduction. If i was betting i would bet that jct underestimated the revenue loss on the conventional side. Id also bet they underestimated the revenue gain on dynamic to some extent because their model doesnt really have the ability to account for gains from allocated gains other than between real capital and other capital. But overall i imagine theres going to be more leakage than jct expects, which also means more offsets of course in the future to pay for more things if we ever go back to paying for stuff. Still there. So carried interest isnt a tax break before i make this comment, but i was astounded when i looked through the legislation and i found that they repealed i was only able to find one tax expenditure that was frul fully repealed in addi to other things people say we should repeal. Thank you very much for your presentation. You just mentioned in passing carried interest. And you said it wasnt a tax break. Well, now we have in the code a provision i believe that distinguishes between assets held, you know, three years or less in terps of c s terms of c interest. Can you go into it . Does it mean actually at this point we do now have a carried interest tax break that we didnt have a month ago . Good question. When i said it wasnt a tax break i meant in a formal sense its not a tax expenditure. Carried interest is depending on is a loophole to use that tax expenditure. They made a slight modification for carried interest with longer Holding Periods. I assume what theyll do, because there have been years and still some longer Holding Periods in the Capital Gains laws that will slightly reduce the Capital Gains number. I dont think it will make it its own tax break. Almost anyone can hold a stock for longer, and certainly if your job is to hold stocks its pretty easy to do that. Any other questions . Did i depress you all enough . Let me coming back to the cost of the debt, as you mentioned, weve had an abnormally low nominal Interest Rate in recent years, and i think the expectation is as the fed shrinks its Balance Sheet and quits depressing the long end of the curve that we will see nominal rates rise particularly for longerterm debt. What have you or what assumpt n assumptions did you make in terms of estimating the costs of debt based on what the Interest Rate impact is going to be of a shrinking fed Balance Sheet . Great question. All the numbers here are based on the congressional Budgets Office assumptions, which assumes Interest Rates go up about two Percentage Points over the next ten years. Theyre well below their historic average but well above where they are today. They say they hold the Balance Sheet in nominal dollars. I dont have the exact numbers, but we didnt make any alternate assumptions to what cbo assumes. The question i think is, particularly taking a look at the size of the debt, is that the rate of growth of the debt is going to become increasingly sensitive to what happens to longerterm rates particularly. Im wondering has anybody done any modelling that looks at alternatives that would have a higher nominal rate if, in fact, we get back to what we used to think was normal sh. Thats a great question. Like all the questions, we do have a paper for it. I cant remember what its called. Google it. Its about 1 trillion added to the debt. I think you bring up an important its onehalf over ten years and more as you get further because it compounds. And that was before we added a bunch to the debt, right . So its going to be worse now. I think something the point youre alluding to, which i think folks would say we can always solve this later, well wait for the markets to say this is a problem and solve it. I think folks dont realize when your debt is really high, small changes in Interest Rates can have a big difference and Interest Rates move really fast. Big changes in policy only have a small difference and they move slow, particularly when your longterm debt is driven by things like rising cost of Social Security and medicare, right, where we have political limits. No ones going to nominally cut benefits for current beneficiaries. I doubt well even slow the growth for current beneficiaries. These kinds of plans will be phased in really gradually. Yes, we can raise revenue more quickly, but that has its limits especially if the economy is not doing well. I think folks say wait for the markets to be scared are underestimating how hard it is to change that debt curve and how easy it is for that Interest Rate curve to change in the other direction. Continue to have debt . What if Exchange Rates change . Have you analyzed that . I havent analyzed it, but i think the u. S. Treasury bond is separate from all the economic industries, the u. S. Treasury bond is the safest asset in the world. Anything causingproblems, if were talk about i think this legislation, the tax legislation is likely to widen trade deficits. I think that higher deficits, budget deficits, are likely to increase foreign direct investment, so i dont know what the net effect of that will ultimately be. Unfortunately. Marc, those of us who served on the Congressional Budget Committee always talked about the process not being the problem, the problem is the problem, but i guarantee that congress at some point is going to try to bail out by shoring up the budget process. Could you talk a little bit about that and whether thats likely to help . Yeah. Thats what i mean, i think that famous line is from rudy penner. I always attribute it to the former cbo director. I always believed that until basically this year. I think the process is the problem too. We chose to you know, members came in calling for revenue neutral tax reform. Were they going to use some gimmicks . Probably. Were they going to use dynamic scoring . Sure. Thats reasonable. The process brought them to a 1. 5 trillion tax cut. Its really a 2. 2 trillion tax cut. The same process that was supposed to get the Super Committee to come up with a major deficit reduction plan, failed at that miserably, instead led to these stupid sequesters that weve at least replaced with semismart pom lics in the past and now were letting go for nothing. I think increasingly the process is the problem. What im worried about, what youre alluding to, pete, is we focused solely on the process and forgot the actual problem and maybe even focused on the process with some stupid ideas like a constitutional balanced budget amendment. You think a change in the constitution is going to get that . Even the constitution is not that powerful, right . So i do worry about it being a distraction. At the same time, maybe we just have to start over. The budget is a joke. The last time we actually used the budget resolution for its purpose sort of in 2009, really in 2005. I mean, we stopped every year the budget resolution has become less and less connected to what we actually spend and what we actually raise and how we legislate. So i do think its time to fix things, to change things. On the revenue side, to you mentioned consumption taxes. Canada has enacted a consumption tax at a time when its deficit and debt were quite high and it has stabilized the fiscal situation quite dramatically. Is this an option on capitol hill or within the constituency broadly defined, the political constituency broadly defined, or is it something that is beyond the pale . Basically every country has a valueadded tax. The United States has some consumption taxes. Mostly state and local level, sales taxes. The closest we probably ever got to a consumption tax was this year when the republican initial republican plan for a destinationbased cashflow tax was effectively a partial consumption tax issued through the corporations. Basically, i mean, the way i tell my economic students is income equals savings plus consumpti consumption, right . So if you make all investment, which is equal to savings, deductible, and you make all borrowing or interest borrowing nondoes ductable, you have a consumption tax. For good measure you do the border adjustment so youre getting consumption from foreigners and keep the wage deduction so its not outrageous, badabing, badaboom, we almost had that. But they couldnt afford the expensing. When that was removed there was no room for the Interest Deduction and we were left with the same Corporate Tax. Could we go to a more traditional valueadded tax . In theory, sure. I dont think theres any political appetite for it right now. In 2010 the fiscal commissioned it and the senate voted 964 there should never be a valueadded tax. We took that as a sign thats probably not an area we should look at. Maybe 2 trillion deficits will change folks minds and maybe theyll realize we dont want to raise corporate we didnt need to cut Corporate Tax rates to 21 . At 25 , we still would have been the most competitive country in the world. Now that weve done it, i dont think well raise it back that much. Theres only so much we can do on the individual side, a few points. Folks may realize we need a new Revenue Source and whether thats a carbon tax or consumption tax or something else, i dont know. Marc, what about a carbon tax . Remember how popular cap and trade was. None of these are pop you lawyer. Your founder said when something cant continue forever it wont . Right . At some point well need a solution to this debt picture because its unsustainable. The politics have increasingly toxic around the entitlements. If they are around income tax changes we may have fewer options and carbon tax may be one of them. At the time i really hated the idea to put forward but ive come to appreciate it, which was when there was talk of cap and trade back in 2009, they propropr proposed first giving all the e permits away and then later auctioning them. At first i said terrible economics, youre rent seeking. But now i realize maybe thats the best chance i have if we create a new tax and slowly rebate it and over time it starts to raise revenue. I dont know. Im not optimistic about anything at the moment. Yefeverybody has to pay. And theres inflation. Do you see an unexpected drive in inflation . It has to be unexpected to work. Yeah. So when youre basically he said the best way not the best way. One option to get us out of this is through a hidden tax called inflation. And if we have a debt thats really high, a onetime big boost in inflation reduces that debt. Heres the problem with that. Setting aside any Economic Cost to inflation for a second, just the fiscal problem with that [ inaudible ]. Heres why i dont think it will be incredibly effective. If you have high debt like we did after world war ii but generally low deficits, inflation is kind of an easy way out, right . Because you can inflate away your old debt and then youre not borrowing more. But if you have high debt and highdef sits and that is as deficits are driven primarily by Social Security, which is inflation indexed, both its initial benefits and its other benefits, medicare, which is indirectly with provider payments, medicaid, same situation, and interest on the debt, which obviously Interest Rates, real Interest Rates are kind of based on nominal Interest Rates are based on Interest Rates plus inflation, if those are all inflation based and you have high levels of deficit, eve an big on a big on inflation will erode your debt but increase other things. The only way it could work is and some countries have done this if you did basically inflation and whats called gradual austerity simultaneously, both had a onetime inflation and a plan to get your deficits under control, otherwise the inflation wont do that much fiscally because you increase your debt future liability. Thank you very much, marc. Thank you all for having me. Some reporting from the hill on the economy, u. S. Businesses ending 2017 with another month of robust hiring while Congressional Republicans and the white house signed off on their tax reform package, a quarter of a million jobs were added in december up from 185,000 in november. Thats the largest monthly increase since march. You can read more about thehill. Com. If you missed any of this conversation, of course you can find it in the cspan archives, cspan. Org. Friday history professors and authors gather for their yearly American Historical Association meeting. Live coverage begins at 8 30 eastern tomorrow morning on cspan3. Also find it online at cspan. Org or listen live on the free cspan radio app. And tonight a special presentation of book in primetime, taking an indepth look at books on American History that were published last year with Erica Armstrong dunbar, brian kilmeade, francis fitzgerald, david grant and utah senator mike lee. Thats become tv on cspan all this week at 8 00 p. M. Eastern. Saturday, American History tv takes you to the annual meetings in washington, d. C. , for live allday coverage 8 30 a. M. To 55 00 p. M. Eastern. Join us as historians and scholars talk about civil rights in 1968, watergate, and the rise of partisanship, commemorating civil war reconstruction in national parks, and the New Birmingham Civil Rights National monume monument. Live coverage of the American Historical Association annual meeting saturday on American History tv on cspan3. More than 200 young people participated in this years Uk Youth Parliament debate in the british house of commons. They debated a number of issues including the need for improving the quality of education in schools. The parliament will now consider the fifth and final motion of the day, a curriculum to prepare us for life. The full motion is printed on the order paper. To move the motion, i call and ask you enthusiastically to welcome from the northeast of england, abigail charlton. Thank you, mr. Speaker. Healthy relationships are just basic knowledge. Finance, well, thats 21yearold mes problem. And politics, isnt that for old people . Well, these are just some of the statements ive heard from my friends in year 11. But credit where its due, i guess were making progress. In all seriousness, these are some of the most basic foundations for our lives, and i think youll agree when i say they are torturous and when they are theyre hidden in assembly or lessons where the bare minimum is seen as enough. Im sorry, but if i put minimal effort into my schoolwork, id to d detenti do detention every day of the week. 88 of people and 90 of teachers believe life skills are as important if