Eugene steuerle argues recent budget decisions have hampered the ability policymakers to solve many of todays problems. He says education, Public Welfare and housing policies are affected the most. This hour and 10 Minute Program starts now on booktv. Well, welcome. Im in a shaker dusky. Im a senior fellow here at the Humphrey School and faculty director of the public not private leadership center. We are happy to host this event today. What we are going to do is have a presentation by dr. Steuerle, some comments by a senior fellow here at the Humphrey School, our [roll call] and then some questions from you and some answers from dr. Steuerle. So let me introduce dr. Steuerle. See eugene starley mr. Richard b. Chair at the urban institute and a columnist for the government we deserve. Yesterday said the assistant secretary for tax analysis, president of the national tax association, chair of the 1999 Technical Panel at rising Social Security and its methods and assumptions. Economic coordinator of National Organizer of the 1984 treasury study that led to the Tax Reform Act of 1986, president of the National Economics club. Educational foundation, resident l. At the American Enterprise institute. Fellow executive at the Brookings Institution economist for financial times. Dr. Steuerle is the author, coauthor and coeditor of 15 books in over a thousand articles and traditional testimonies. His own recent book that i hope you got a copy a few analytes i resent budget decisions have not only hampered policymakers ability to develop an effective approach an effective approach is to todays intractable problems, but have serious repercussions for Critical Service that is such as education, Public Welfare and housing. Ill invite dr. Steuerle up at this point demand i will introduce comments afterwards. Dr. Steuerle. [applause] well, thanks, jay. Its an honor to be on the podium with you. Greatly admiring you as well. Its a pleasure to join you. A special thanks to the public and Nonprofit Leadership center at the hubert Humphrey School of public affairs, the greater twin cities united way of the Minnesota Council of nonprofit for helping to organize this. One object to appear today and i hope i achieve the object is and the rest are details. The object it is simply to convince you that we live in a time of extraordinary possibility. I want to put to bed this argument that we live in a time of austerity. The arguments for a sturdier man that arguments about a straitjacket with tight around ourselves. I will spend a lot of my talk explaining the straitjacket. As i explain it, audiences take the message is being very negative about what we are doing or not doing. I want to be clear this is not an issue or a foreign attack or some disease that was unknown to us that most of the fiscal issues we talk about today are simply arising from a straitjacket we tied around ourselves. In fact, the straitjacket to do with good things happening to us such as living longer have an utter halt here. If you go with that message come i can go see some great possibilities to go far into the future. Words sometimes be interpreted in funny ways. They often get misinterpreted. Im reminded of some misinterpretations to take place in church and synagogue bulletins for the wording is correct, the misinterpreted. One of them is please remember to put your contribution in the collection basket along with the person you like remember. Another was Eliza Mcgillicuddy fan i will not pass this way again much to the delight of the congregation. My favorite was the youth are performing hamlet in the basement tonight. Common pleas early and watch the tragedy unfold. So the United States has always been a nation of crowd you can achievement spurred by a sense of mission and destiny. And its been that way for almost the beginning is when governor John Winthrop told his shipmates aboard the arabella in 1630, for you must vitter we shall be as a city on a hill the eyes of all people upon us. Thats embarrassing. [laughter] with its language is often very much misinterpreted. Winthrop is not arguing why are a city on the hill. The wisdom of the shipmates arguing over whether they would have low enough taxes. He was in arguing whether theyre entitled to 20 years of retirement once they settled on the city on the hill. He was talking about working together for the destiny of the nation to be. And i were not for ourselves, posterity. Over the next for centuries, the United States and its people created the worlds first modern functioning democracy. We led allied nations to the jury. We won the cold war as well. We eventually removed most of the elderly from poverty to sell its expanded civil rights and opportunities. We developed one of the richest nations known in history. Fastforward to today to a time of political disarray and pessimism. Our economy generates, if we do the numbers break on our economy generates about 140,000 per household in Gross Domestic Product or income. Even higher than it was before the great recession. If you look at what government does today, add up all the numbers and even a spinning at the federal and state levels any divide by number puzzles come you get about 55,000 a household. Project forward a little bit. Take number such as those by the congressional budget office, which by the way projects Slower Growth in the future than we have in historical terms. Our Gross Domestic Product 10 years from now be about 25,000 higher than the spending level and mentioned that about 55,000 coming subsidies, state, local, federal everything is about 65,000 or more. Probably a little, but actually it is not far from the number in either case. And yet we complain that we are a poor nation, that we are trapped and we cant do anything. I dont think the numbers tell that story at all. In fact, i think the numbers belie that story. The challenge after challenge after educating children to taking care of infrastructure and highways, to basically just investing more in our future, we seem to be at a stagnant area for a stagnant state. And something that cant do philosophy on large and past government deficits and some blame it on the fact we have political leaders may be from one party, maybe for the other. These are often is interpreted. These actions can the question of a political actors are doing as well as the deficit are symptoms of a broader disease. The disease at diagnosis and named retaken us over several decades and that is the extent to which both Political Parties have attempted more and more to control the future. Now controlling the future so much that basically it hope i straitjacket around what we can do. So in recent decades both parties have conspired to basically respond with a series of Public Programs and create new ones that automatically grow so fast that they observe every dollar of revenue that government would ever have both under current laws and under tax increases. They also conspire along the way to cut taxes so we dont pay our bills and everincreasing interest cost on our dad. The resulting squeeze basically puts current and future generations to the test because it basically says they can choose their own priorities. We as their parents or grandparents generation will determine out for them. They cant reach for their own stars. They can even decide with the current needs are. We have determined in the past with the future needs of this nation are. Consider these two historical forces that talked about. On the one hand i talked about how rising economy makes more resources to do things and ive also talked about the squeeze on the basic function of government. So together these diametrically opposing forces have essentially forced us to what i believe is an h. Or turning point, an historical turning point, one from which we will not proceed. I make this argument a much more detail in the book to explain to you how i think we got to this turning point. What is required to move through this turning point, the points which we must restore flexibility of the budget is nothing less than a freeing up resources so that we can again the choice is for the types of needs, the types of demands that the public saw in the past and that they are going to again see in the future. Along with Economic Growth that makes those revenues possible, i think we can go this way. Put another way, the question is nothing more than how do we constrain the promises we make the constrain all are possibilities going forward. Imagine a business or household that today signed contracts for everything is going to do for 20, 50 or hundred years in the future. Its not that microsoft or apple or other companies dont expect to grow and dont expect to have more revenues, but they dont send contracts today for the type of plan they will buy 50 years are now or even necessarily the type of employee they are going to try to hire. In a household that is growing, aging and expects it to double doesnt say lets decide today the house we are going to buy 30 years from now unless i do contract work. In many ways that is exactly what government has done. If you think about it, its just a silly notion because we dont see the future well enough to predetermine the best way to spend those revenues are. So how do we get out of this bind . Economically it assembled. Politically difficult. Basically the democrats must simply give up on trying to control the growth of programs. Im not saying i had to cut back on things that current Social Security benefits. I am saying what they have to get up on is the builtin growth in spending largely dominated in health and retirement programs that builtin growth in spending and let us decide to borrow the best use of resources republicans have to give up on the builtin growth and fat tax subsidies that often have the same permanent nature, Home Mortgage interest reduction. They have to get up on the automatic growth in the future determined the best use of revenues and in the same time republicans have to be have to be led have to be willing to raise enough taxes to pay bills as we go along because deficits, tax cuts that are paid for are nothing more than bills left to the future. With the budgetary freedom restored, the nation would again turn its attention to an agenda of investment. I i think we restart again focusing on children where we particularly are shortchanging the future. We return to an agenda of mobility, efficiency and fairness. Whether the government becomes bigger or smaller as a percent of the economy to me as a secondary issue and one we need to let future voters decide. So my dream i think of the 21st century in no small part as flexibility to infer the young at the 20th did for the elderly have the elderly and that we make children a major focus for the future. Not just the next year or two. Early childhood education realized constraint we had for resources for the investment. The constraint is basically all these other commitments. Its not that we cant afford these types of things. So i want to now turn to the four Major Political deadly political problems that i think all these commitments have put upon a. And to be clear, as i outlined, and not been achieved. Im not going to use phony math. Theres such a thing as yogi berra math. 90 of baseball is physical in the other half is mental. So we are going to go through these numbers and what i hope will be a very honest way. So the first economic album is one of which are all familiar with. It is simply that we have rising and unsustainable levels of debt. Some people point to world war ii. What is before or an accessory had a rising level of debt. But theres a slight difference between what happened in world war ii and what happens today. Right now our debt is scheduled to rise into the future again regardless of in some way as our economy as is scheduled to rise. After world war ii is scheduled to drop dramatically and it did that over the next 30 years. It dropped dramatically because the troops came home and spent most producing a drop dramatically because taxes were raised during world war ii when i permanent level so they started paying down that debt over time. We havent done that. Now we have these in the future for this rising and unsustainable level of debt. So youve read a lot about that. When you read less about is a little more complicated that weve also boxed in our ability to respond to emergencies in needs. So let me again about the economy in western europe today. Theyve had backtoback recessions. They responded to the first recession, they try to respond with fiscal status and provide resources. The second recession because debt levels are were so high they had little response at all. Many economists think thats really not the right way to respond to you that the debt level is raised high enough make these commitments in times into the future. Much less flexibility. It should be a national catastrophe. We box ourselves than respond to todays needs. The third problem i alluded to a little bit when i talked about what we return to children if you look at the federal and state and local levels, usc will be spent on children as a percent of the economy is basically a state of decline. More numbers on this in a moment. The reduction in spending on children, reduction of investment in infrastructure, our budget is more and more a budget that basically tries to provide us with higher and higher levels of consumption, but not in ways that promotes saving and productivity. In some senses a declining nation that promotes consumption nevermore and consumption never last. The final economic problem is its very hard to fix programs for the extraordinary level of commitment. A lot of reforms that take place dont come from dynamic changes. It comes from the fact that the program and as the economy expands the program wanes in importance. Those of you might be familiar with welfare reform that we had the big debate over welfare reform and 96. It is a program called families with dependent children better than 50 of the welfare budget in the 50s and 60s. It was down to 10 by the time they were farmed it and other programs like an earned Income Credit for already replacing independently of the reform. Thats the type of reform you can achieve without necessarily having to reform the program itself. It just wanes in importance. With the sports are the economic problems or three deadly political problems. The first is that we basically remove fiscal democracy from the hands of voters. Particularly true for the young who are boxed in to supporting the types of spending we have decided in the past they need to have them take the vote away from them and elected official. A second is the Political Parties trapped in what is classically called a prisoners dilemma. Im not going into other details of the prisoners dilemma, but it might be familiar to some of you who saw the movie a beautiful mind. This was designed by john nash who came up with something called pain theory. In my simple version if you leave and act independently, you lose. That is exactly what our Political Parties believe today. A very interesting article by the name of jude vranitzky. He wouldve article in the midst of an 80s. Jude was a member of the wall street journal editorial page. The wall street journal wall street journal editorial page is sometimes called extreme supplyside economics. Jude wrote this article called to to santa is very. So what did he say . His argument was that democrats have been santa claus for all these many years. This is the mid70s. Remember from 1932 to 1974 the republicans had the presidency for eight years mouser Dwight Eisenhower and they werent sure they wanted to claim as a republican. They hadnt had the house of representatives at all. Over the course of six years they had those before 60 years. Shes argument was that democrats are santa claus, we are not santa claus. We are screwed because were worried about deficits. We need to cut taxes. The same way the democrats increased spending so we can be santa claus, too. I would argue jude to what he wanted by the first decade of the century was spending increases and tax cuts and wider and wider deficits. I provide some numbers in the book alumnus. So we had these two santa claus is operating at the same time. If you think that, it was entirely wrong. If youre on the giveaway side of the budget, you can win and if youre on the take away side, youre going to be on the losing side. Youre not only going to lose politically, but you will lose economically. Republicans began to believe that and started offering tax cuts without paying for them. Democrats had the same philosophy. They believed in 93 when bill clinton help but the budget agreement they might exaggerate the extent to which this happened has jude exaggerated the story. When he enacted the agreement, have them list the house of representatives for the first time. Not only did they lose the house of representatives, the less politics. A few years later they got george w. Bush getting a tax cut. So they lied and they lost. I think there is some truth to this that or more as the politicians decided they have to operate on the giveaway side of the budget and started making more and more promises, promises started going more and more to the future and that led to many of our current problems. If you think about it now, there is the third deadly political problem, which is closely related to the politicians in a position where to go for what theyve got to on a promise. Today, if they want to inaction a new argue with the dataset, i dont care which side of the aisle. If you want to do something new, the numbers are there. Youve got to renege on some promise to the public and think about the past president ial debate in 2012. So we have president obama and governor romney are gearing up for medicare. So president obama says governor romney, you want to enact this voucher programs and try to constrain costs. That will cut back on benefits for the elderly. You are going to really hurt the elderly and you shouldnt be doing this to cut back on better care. Governor romney said to president obama, in order to pay for obamacare we give Additional Health insurance to the nonelderly, you cut back on things youre doing and medicare. To cut back on prices in the past you will to provider. That is horrible. So both politicians are basically arguing you, my opponent are reneging on this promise and medicare and that anybody who looked at the numbers news that he was growing at an unsustainable rate far faster than the economy. You have to do something there. And yet if you lead in arguing to do with this issue that you lose. So what they now turn to a couple chart to try to work quantitatively prove my point. This is a chart i developed what they call it, tim roper onetime peer recorded fiscal democracy. Its actually very simple. Its nothing more than the percent of revenues left after you take into account all the promises are ready made in the past. Instead of terms mandatory programs. Mandatory programs are those programs the legislature doesnt have to do anything about. They continue automatically and congress could never do anything in the mandatory programs would continue. The devil pay automatically. They include most of the retirement and Health Programs for Social Security and medicare and things like that. Heres the percentage of revenues left after essentially after you take into account mandatory programs. Something happens here in 2009. For the first time in u. S. History, every dollar of federal revenue had been committed before congress walked in the door. Every dollar of revenue have it committed before they walked in the door. Everything they do it, everything they voted for they had to pay for out of a deficit for the program. For recovery from the recession had a little leeway, we go right back into that period. I developed this chart partly because they wanted to explain to people why this deficit problem was not the same as in the past. The future wasnt built in whereas today it is. So this actually leads me to the second graph that sort of the longest lines. This is about a traditional budget look like in the past. Here you can see revenues rose with the economy. The economy is growing, revenues rise. Whether its a terrorist or income taxpayer it doesnt have builtin spending. Im not saying you have surpluses in the future. Under current law, the deficits starting out in the situation. If you ran a 10 year budget projection in 18441950 or almost any historical year, it wouldve showed massive surpluses in the future. The job of the Legislature Part would stop that from happening because of the Creative Economy economists call in the fiscal drag would come because youve got all this money coming in at the idea to get the revenues that to the public or to spend more. So move forward to today and now we have this automatic vending grows so fast that what we had notes in, now we have the current deficit still. We have rising deficits in future under current law. Congress could look away. It could do nothing and you often end up with these deficits. That puts us into the bind is explained with all these economic and political problems of having to renege on promises made to get this budget in order. So that leads me to the last sort of major examples i want to give, which have to do with how this plays out in a particular program. Ill give you some example above fiscal policy has changed in some of these Retirement Health and tax programs are talked about. Look at Social Security for instance. People retire for about 11 years more than they did in the program was first created in 1940. It turns out this is actually quite easy to achieve through the last half of the previous century, largely because we had two groups entering the labor force. The baby boomers, which were coming out quite dramatic rate in women. So these labor force were provided to workers deployment we need it. It us to retire, particularly men to retire at earlier and earlier ages where Life Expectancy expanding by six or seven years. Fastforward to today and all the sudden the women have caught up with demand. The baby boomers are now not honoring the work force is. They are dropping out of the workforce and now you have the extraordinary pressure unemployment and the economy. So 11 more years of retirement have created a problem and again almost all this almost all this happened not inadequate because we never adjusted the system and were living longer. To give you another example in Social Security and medicare i ran some numbers at the urban institute, but today the level of benefit promised her a typical couple is about a million dollars. That is the average Life Expectancy is roughly 20 years per person when they retire. You basically provide the level of benefits 40,000 or 50,000 year and you could do a level benefit of a billion dollars. Those of you in the room in your early 40s, the benefits promised to grow by 1. 4. But are essentially the growth in government is largely going at it happens automatically in those programs. As a result, if you look at the budget when this is a simplified example. This is what current policy would do in the budget. Tenure should know its not like the budget is getting smaller. These mandatory programs grow from 19,000 to not 29,000. So they grow about 10,000 over the spirit of time. This is federal spending program. Have you encountered the tax subsidies. As a result, partly because of discretionary programs not growing in being cut by three sequesters, we ended up having cut most of about a thousand dollars. So thats basically how the budget started being divided up in current laws the money is going to the mandatory programs, not discretionary programs. By c. Richard evolved through Social Security, medicare not having children. If children. If all the growth in income we expect, they will get 66 of it. Interest on the debt will get 37 . Those who do not 66 plus 37 ads to more than 100. Defense was going to decline. Its actually negative 9 pure children is growing 2 . Basically the rest of the budget is zero growth. We spent roughly a trillion dollars more per year in children get another and we will have declines in other ways. So id like to conclude this discussion on and much more positive note. As i say, if we think about allocating this money in ways we want, if we think about the possibilities before us, if we think we are poor because we only had Government Spending on 55,000, we think thats how we have and its only going to grow to 55,000, we have misguiding ourselves. I dont care whether you think thats 65 or 62 he went to republican or 70, it is still a substantial amount of money. If we decide exactly how we want to spend that money. I believe for the future we need to decide the children and young people deserve some share of this rising economy. So the opportunity before us is a grand one. Moreover, time constraints as i say or not due to some out for us are bad things happening to us. They often come about because we are living longer. Is that really bad . We are Getting Better health care, health yearoveryear. I sometimes imagine him sitting in the ways in a Committee Room and someone is busy week so we found this cure for cancer and we in the audience back there feeling good. We might live longer or relatives are going to live longer. A look behind the podium and the legislature are sweating and say my gosh, look what this is going to do to Social Security and medicare. So a lot of the things we are talking about causing our fiscal problems are for good things happening to us in a very bad way weve adjusted in the economy. In our history weve always managed to explain these problems. Whether we spend more, cut taxes so on and so forth, we go again to the beginning. After the revolutionary war, the great fiscal crisis that hit the nation was that we were not able to pay her bills. We werent able to pay our state does. We were able to pay our debts to friends and other countries with by road. The great fiscal crises of those days were what led to the enactment of the constitution and the creation of treasury and basically got a viable government. It was a fiscal crisis that led to this doing very good things for ourselves. You may remember one of the stories were George Washington basically appearing before the troops, they hadnt been paid and they were ready to march on the capital and he goes before then. They were loyal to them and he puts on his glasses and said hes grown by so this was a time of crisis, but he was a time that led to great opportunity. Fast forward a little bit beyond that. Hamilton basically comes in an annex increases far greater than what the british would impose upon us. Jefferson comes in and cut taxes and leaving the stairs. If iran decides to spend our money because he had the opportunity to buy this territory called louisiana. So its always had a history going back and forth between spending and taxes. It was the creation of flexibility that allowed us to go forward into the future. So i really invite you to think about this is a positive opportunity. We are nation. I talked about our riches in terms of money, but the impoverished we are in terms of the people of this nation and even the political process, as bad as it is, how good it is relative to what most countries in the world have. Extraordinary possibility and we basically need to take this fiscal straitjacket off of ourselves. Thank you. [applause] great. Stimulating comments. Thank you much. Let me now introduce our [roll call] , codirect her of the Human Research collaborative at the Humphrey School working to advance Multidisciplinary Research on Child Development social policy. He previously served at the Federal Reserve bank of minneapolis as Senior Vice President and director of Research Associate economist at the open market committee, monetary policymaking body for the Federal Reserve system. That mustve been found. Ours essays on Public Policy issues have gained National Attention from her Research Interests including banking and financial economics, monetary policy, monetary history of the economics education. His work on Early Childhood development has garnered numerous awards including those from the George Lucas Educational Foundation and the Minnesota Department of health both in 2007 he was also named 2005 minnesotan of the year by minnesota monthly magazine. Art has been visiting professor of economics at Boston College from the university of chicago in university of minnesota. Mosers and adjunct professor of economics in the mba program at lincoln college. Come funds will china and of minnesota Carlos School of management. He serves on several nonprofit boards including the Minnesota Early Learning Foundation greater twin cities united way, ready for k. And Advocacy Organization for Early Childhood development. Please welcome our [roll call] [applause] i think that introduction is longer than my remarks, but thank you. It shouldnt surprise you when jean starts talking about more resources for Early Childhood education especially for a most horrible kids, i am on his page, by his boat eugene asked about me to a few comments and he called me about a month ago to ask me and i looked at the title, dead dead men ruling and i couldnt put the book down. In down. I dont know if that says something about the book were me but i found it quite intriguing. My view of the book and what gene is trying to get across to this opportunity we have that we really are very rich country. Ive made this case where the state of minnesota, one of the most successful economies in the world. Theres a lot we can do. Its a question of how we design Public Policy to maximize the return. That is not as easy as it sometimes looks. So i took away two themes, closely related games are jean spoke. The first one is weve got some bad rules in place. Weve got some entitlements, promises we are making to current old and future generations. Its clear we are not going to be out to keep suv through chance but to get a sense of how he got caught in this trap. The first theme, which i strongly endorse, theres some real problems with our entitlements in particular talking about Social Security and medicare. But there is a second closely related in. Not just that we have bad roles, but then she gets into the question of rules versus discretion, but i used to think of as rules versus fiscal freedom or fiscal flexibility in it reminds me of the debate when i was a graduate student here in 1967, Walter Heller is teaching here and he brought a close colleague of his time in Milton Friedman. The two of us had the debate about rules versus discretion, rules versus flexibility. So the second game i am going to part company is cheating a bit and im going to argue be careful what you wish for. It is not clear we want to let the political system have this much flexibility as gene might be suggesting. Ill give some examples. So theme number one, Milton Friedman used to like to say theres no such thing as a free lunch, guys. If we are going to spend all this money on day care, Social Security, the current old generation, it is going to come from someone in is going to come from investments in education, public infrastructure. We have made promises. It is clear we cant keep. Economists talk about opportunity costs all the time. It is important that we recognize a pda, you wont be let to db. We dont often hear that in our political system. We often hear in government spends money but a great thing they did because you can see the new building but dont get me started. You can see the new stadium and this looks like we are promoting the economy. Nobody looks at the other side of the legend said we are taxing other businesses. If youre spending more money on entitlements and Social Security, it means the young generation is paying for things we cant do. Its a very Important Message that comes across very loud and strong and convincing in jean spoke that theres opportunity cost here in several prices we are paying now. Weve got a rich economy. Weve got wonderful opportunities, but it is not clear the way we allocate these resources the best way. So promises we cant keep, bad rules is what i would say and that was the first overriding thing that comes across very well in this book. These ideas and going to change the language a little bit of looking at time consistent rules versus time inconsistent rules where we can keep the promise of coming up im going to argue that these time inconsistent rules have a lot fiscal flexibility. Let me give you the classic one and by the way, these ideas came out of a love work by a man that was at the university of minnesota and won the nobel prize for this work in 2004 and has language brought this language in the. Theory of time consistent rules let me give you the classic example and why you dont want this flexibility. Lets just take russia today. Mr. Putin says you come to our country and we are going to tax the capita capital that but med. They start investing in russia in five or six years down the road he changes his mind. We are going to take that capital and argue you didnt earn whatever rationale he makes and he basically stands with that capital. Fiscal flexibility in sending the taxes guess what happens in the future, guess what happens to the russian economy. Who is willing to invest if the Fiscal Authority has that much flexibility that they can change a capital games so its an interesting comparison between russia and the chinese economy. The chinese economy seems to have come up with a time consistent rule on capital so you see lots of Foreign Investment and lots of capital investment. And you talk to the entrepreneurs and they are pretty confident they can keep their profits in their factories. The chinese are not going to come as putin would do in russia so that is the classic example why you might want rules in place that really do tie the hands of the Fiscal Authority so they dont start changing the rules because it has implications for future generations in terms of Economic Growth and investment and new ideas etc. And i think russia and china might be a good example of why you want to search for time consistent rules and limit the amount of fiscal freedom that you have. He uses the word balance and we might be in agreement you want some fiscal freedom but to be careful how much you wish for and that is a classic example. The second one i want to touch on is too big to fail. This is our financial industry. For many years we argued the ruling please had way too much discretion. Way too much discretion for the Federal Reserve and treasury to come in and bail out banks if they take on too much risk. We argue this for many years at the president of the bank in 2004 wrote a book too big to fail and we argued in that book if the bankers know they take a lot of risk they win the details taxpayer loses you will take that back anytime. You are encouraging a whole lot of risk taking. And the rule in the place was supposedly we are not going to bail out the banks that everybody knew the fed and the treasury had this ability to come in and bail out bank the bs and we argued that in the 04 we should do instead and put some time consistent rules in place that say if your bank gets in trouble, the president of the bank and the executive of the banks you are gone. Stockholders gone. Uninsured depositors maybe we wouldve back some of you but you would have to take a haircut so that we put a number of people at risk with their own skin in the game and we argued that would help prevent a financial crisis. That was ignored. Its ironic and has a book out right now that doesnt mention anything about what he wasnt giving in 2004. But there is a rule to pay time consistent rule in the place i think paul voelker is our doing this today we dont want that kind of fiscal flexibility to allow because again if they think that we are going to come and bail them out is a moral hazard and there are incentives to take on a lot of risk. We saw it when i first got involved in the 80s in the industry they pretty much had access to the government bailout and they took advantage of it. So, there is another example where if you are were a littlet careful on how much flexibility you want to allow. And it is a tough issue but generally speaking on the side of the rules that are time consistent and commitment that we can make and we do tie the hands to some extent on the Fiscal Authority finally the third example i would give in to this is when ive been involved in, this is fiscal freedom, fiscal flexibility at the state and local level. I know what jeanne was talking about the National Level that we have all kind of fiscal flexibility when it comes to Economic Development. Cities and states use that power all the time to woo her in each others business across the city and state lines. The New York Times estimated how much money is spent by individual states were individual counties where individual cities in trying to do or each others businesses across the political lines. They came up with the number 90 billion in this country gets spent on doing what . From a national perspective, its moving jobs around. Youre not creating one new job, but i know youve heard this in the name of Economic Development and i understand from the parochial point of view sure minnesota would like to live where the Automobile Company or Software Company or major hightech company in minnesota from california and wisconsin. Of course california and wisconsin would like to lower them back and that is what goes on and its what economists call the zerosum game. It does violate a time consistent rule to the congress is not enforcing the clause in the cities and states arent supposed to be interfering so we need a time consistent rule to end this flexibility. We did get a bill introduced in congress in 1999 that would have ended this dating war overnight and it was time consistent. Everything was fine, but it shouldnt surprise you the media introduced the bill and paul and senator mccain were going to introduce it in the senate and the sports lobbyists killed it. Shouldnt surprise you. So there is another form of fiscal flexibility that i would question. I would like to tie the hands of government and say if you treat all businesses the same come you cant pick winners and losers because you dont know how to do and that has been proven over and over. If you follow the dollars its pretty much welfare for the rich. So, let me just summarize. This is an amazing economy. We have an incredible amount of growth statistic product we produce per person every year. But understanding the rules of the game are critical and time consistent rules that need economists at every turn with very high i think is the way to look at these problems. I dont think they are easy to solve economically or politically but i will argue as some of you know that one below hanging fruit that somehow we are missing as we should be ensuring that all of our Vulnerable Children have highquality Early Childhood education into the public return on that is huge and the fact that we are not doing it and fully funding it i think is an interesting political question and maybe we will be able to get to that. Thank you. [applause] thank you. That was a good stimulating thought. I learned some things as you were talking. Lets go to questions. We have got to microphones. One on either side so if you have a question that you would like to ask, please just raise your hand come and write their get a microphone to you. Im a senior fellow here at the Humphrey School and this is a question both to the doctor and art im not sure the broken promise framing is very helpful because for example we cant afford to have 75 years of insolvency of Social Security. It will cost 1 more gdp according to the cbo and the trustees asked. So we can keep that promise. We just have to reduce some benefits or increase taxes in order to cover that. We can keep people healthier but we probably cant afford to do it at one and a half times what our nearest industrialized competitors pence per person on health care. So it seems to me that we dont have to break the promises, we just have to change how we are getting there and the biggest factor is that we spend 50 more on health care or worse outcomes than any other industrialized country and maybe you could address that because the phenomenon dwarfs any impact from the bailout or from the 90 billion of economic subsidies that were. I agree about some of those points but in terms of the countries fiscal future, they are small compared to what we are spending on healthcare. I think most of your comments are correct and i agree with most of art, too. I will try to explain in a minute because both of us are a balance of how you have to be cautious on the other side of the picture. Youre right that healthcare is the dominant promise thats affecting the federal level and the state level. I should say by the wa way even though we do spend one and a half times what other countries are spending they are facing the same issue and in most of the countries they have Health Care Rising faster than Everything Else and they are facing fiscal problems worse than ours. They dont have the same budget but interesting enough theyve gotten to the same problem of having done so much on the it se giveaway side of the budget projected into the future that it has left little flexibility to move forward. So i agree it is dominated by health care. I might disagree a little bit on the question of Social Security. Maybe i wouldnt disagree. We would have to talk about it. The Biggest Issue has to do with the number of years of retirement we are providing. Its not the annual benefit. I dont think it is all that high. I do worry about having automatic growth in the system and the wage index so your appearance would get higher benefits and you live longer. I dont think that should happen automatically because i think there may be other priorities. You should decide overtime. But maybe you dont. The very few people recognize and assist them when they go to the trust Fund Balances and i even did to this briefly the impact of the labor force. We are scheduled as we go towards 2032 have close to one third of the Adult Population of Social Security who are retiring for about one third of their adult lives. Enddoublequote findable in the economy where you had that increasing the retirement. You have all these other had alr interests in the workforce. It is a labor force problem in this country and other countries and im also not opposed to raising taxes as a part of a solution. The problem is raising taxes to go from this purpose as opposed to Early Childhood education, so i would qualify on the retirement site more. And i could go to other examples. A lot of the tax subsidies have the same issues on the deductions. Deductions. Its builtin growth that i worry about. Its not the level of benefits but in the shorthand responding to art i think that you could setup the right type of rules that i am objecting to our in his language and consistent in time consistent rules. I would say you dont want to listen to just economists, and neither of us say if i just get all of those programs so they are just at the state level and absorb all of the growth in the future that still takes away the flexibility i think you need to have rules that have flexibility. So i would say that it is time inconsistent to have something where the debt rises as fast as the economy with no change in the future. That is also inconsistent because it doesnt take into account the economic dynamic if you have to figure out how to accommodate the change. As you were talking about Social Security you mentioned that the benefits changed. As a way back when when Alan Greenspan was the chair of the Federal Reserve he was appointed by gerald ford to do and and. And come up with changes to make Social Security actuary of the sound coming and they didnt they went a long way changing the rules to make it time consistent so that indeed people were confident that what we promised we could produce. Produce. And over time we have raised the age and weve made other changes that are relatively easy to make time consistent and i think we are close to doing that. Having a time consistent rule doesnt necessarily mean that is the best way to tax people and invest in a particular initiative. I think i would rely on economists to do costbenefit rate of return and analysis. My mom is 94 and i see a lot of public money going into her end of your life and i know a lot of public money should be going into earlier years. All of this research and Brain Development and learning and help told us we should be investing in those early years which we are not doing so you can have time consistent policies but then you have to start asking where is the best Public Investment and i think as gene was arguing very forcefully we have way overextended ourselves in the area of the later years and that is a mistake. Amistake. So i think you have got to face. What is known as the dual mandate that came out of i think the Foundation Many years ago the idea that the gift of health care you have to mandate. You cant define any person based on initial conditions. Theres a market failure and that is the best way to correct it and if you look at the Current Initiative that washington is trying to implement eve even the various implantation problems that is a key part of their program and i think that is the way to eventually give time consistency in the program. Its hard to take down the political situation and how do you make these commitments . You need a constitutional amendment. So that we know that we can count on the rule being execut executed. We have a good time. I want to turn to the tax policy more because you didnt spend quite as much time on that as you did in the spending side that you had a lot to do with crafting the tax reform in the middle 1980s as a staff person economist and department of treasury. So as to look at the problem on the tax side, could you elaborate what you think some of the more Serious Problems are and what is the better tax code to address that concern. I need the tax cuts that we dont pay for as it is shifted for in the future. So i dont think that we count in our budget correctly, you know, we do tax code that we show the distribution and we shall all of these winners come up with the corresponding set of losers come if it isnt matched by spending cuts thats what you want. All youve done is shifted the bills to the future. So it would be like we put more of our credit cards and orchids and we say we are better off because we were close or Something Like that. You asked the question about the structure of the tax system that relates a little bit to the first concern about trying to come up with consistent rules. And i would say the Broad Spectrum basically the rate reduction is appropriate that as you try to have the maximum base it is partly a love spending probably doesnt belong in the tax code which is consistent with what art was arguing about to set up the rules and how the tax is going to function on a more permanent basis and the things you need to decide with a little more discretionary basis to put that off on the spending code. Some exceptions but for the most part that is what you want to do is broaden the base. I would also say as i alluded to im also bothered by the fact that they grow automatically, so i think that we are forming the introduction is one of these complicated pieces of analysis and i wont go into the reasons but one of the reasons as complicateit iscomplicated as ia home outright you get the direct tax break. If you only cut back on the mortgage deduction or favoring existing home owners so you have to cutback in a deliberate way that you dont want to have it grow automatically. So whether it is the mortgage deduction or the exclusion or a lot of pension benefits or pension systems, by the way, the home market subsidies the bottom 60 of the population of income only get about ten or 12 of the benefits. So here are these programs that are supposed to be favoring bigger retirement for people from supposed to be favoring homeownership and basically subsidized income people and who are the people that have the most needs so there need so the amount to be done in the tax system. Perhaps an indirect way of saying this is about one third, sometimes up to half of all spending is in the tax code and the subsidies and that hides the benefits from the public and they tend to be made permanent. In a lot of cases they just dont belong there. I have kind of a future question which is sort of a new reform that is being promoted partly agreeing with the essential point that we lack the political will to tell some of these problems were these serious fiscal discipline, so is there a way that we can finance the social services. An example would be the state of utah. They are issuing the social impact to pay for Early Childhood education because the legislature was not appropriate the funds. Its financed by Goldman Sachs and the feeling is they will capture the future savings. They even plan to sort of reduce the special referrals by 90 so that is where the savings come from by investing now in the special education. Could you just comment on the pros and cons of this approach . We have mutual friends that work on these issues. Rob is pushing this at the National Impact bonds and in the state of virginia. Im not a big fan of the social impact bonds. I will give you an example. The mall of america got 250 million for their expansion. Is there a shortage of retail space not that i know of. Did they have to come up with social impact bonds to show the return on that investment . Why is it that our most vulnerable kids we have all this research to show. Why cant the state just fund backs minnesota creates 280 million in the product every year. We need 150 million a year. And with 150 million a year every child born into poverty would have a scholarship to go to a highquality program. The return is enormous on the savings in special education and savings on retention in the first. The Health Care Benefits are enormous. They require you to document every savings and then feed the savings back into the system. Its a very complicated system. Its not easy to administer. Why is that on us for their Early Childhood and mall of america gets 250 million . So, i dont think i think that is a way for maybe the political system to marginalize us one more time and say we can do it that way. And they are doing great things. Im not saying its worth the effort but as we go to scale and we are pushing to go to scale we are showing the return on the investment is strong and we have to figure out a way to lobby. One thing i threatened to do in the state is to take all of our children and moved to chicago. That didnt work. And threatening to leave didnt work. We have no leverage. We have to find a way to make it more transparent and we are trying to do that. Thats the way we are going into the social impact bonds and a bunch of nonprofits got together and we created the many mines