In a household that is growing, aging and expects its inevitable doesnt say lets decide today the house we will by 30 or so now and let sign a contract. In many ways thats 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 what the best way to spend those revenues are. Howd we get out of this bind . Economically its simple. Politically its difficult. Basically the democrats must simply give up on trying to control the growth of progress. They have to cut back on things like Social Security benefits. Im saying with have to give up on is the builtin growth in spending largely dominated in health and retirement programs, the builtin growth in spending prepared to give up on controlling it today. Let us decide tomorrow whether its the best use of resources. Republicans have to give up on the builtin growth in tax subsidies that often have the same prominent nature, Home Mortgage Interest Deduction that grow as a but richer and richer houses. They need to let us in the future determine whether thats the best use of revenues and at the same time republicans have to be willing to raise the taxes to pay bills as we go a long. Tax cuts that are paid for is nothing more than leaving for the future. With that restored at the commission would again turn its attention to an agenda of investment. I think we would start begin focusing on children were i think we take we are shortchanging the future. I think we would 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 that we need to let voters decide. So mike and i think of the 21st century in no small part with flexibility is doing for the young what the 20th did for the elderly, and we make children a major focus for the future. Not just talking about the next year or two. Those of you who work on Early Childhood education realize the restraint with that in getting resources. The constraint is basically all these other commitments. Its not that we cant afford to do these types of things. So having set the background i want to turn to the four Major Political deadly economic problems and the three deadly political problems i think all these commitments have put upon us. To be clear as outlined, im not going to cheat, not going to use phony math. There such a thing as yogi maribeth yogi berra math. 90 is physical and the of have this mental. We will go to these numbers in what help will be a very honest with. So the first in the economic problem is one im not going spend much time on it, simply wouldve rising and a sustainable levels of debt. Some people point to world war ii. We have been there once before in excess. With rising level of debt with a slight difference between what happened in world war ii and what happened today. Right now our debt is scheduled to rise into the future, again regardless of in some ways our economy. Its scheduled to rise. After world war ii it was scheduled to drop dramatically, edited that over the next urges but it dropped dramatically partly because of the troops people and the spending was reduced and because taxes were raised during world war ii, raised on a permanent level so they start paying down that debt over time. We havent done that. Now we have these derivatives in the future for this rising and assist in the level of debt. Youve read a lot about that but when you read less about is a little complicated is weve also boxed in our ability to respond to emergencies and needs. Let me again think about the economy in western europe today. They western europe today. Gave up backtoback recessions. So when they responded to the first recession they tried to respond with fiscal stamos, tried to provide more resources to try to do with recession. The second recession because their debt levels were so high they had very little response at all. Many economists think thats not really the right way to respond recession but if you let the debt levels rise high enough to make these commitments in times into the future edge of little flexibility. We have much less flexibility in the United States today to respond recession. But it could be more, it could be a natural catastrophe. We just boxer cells in and responding to those needs. The third deadly economic problem i other to talk about what were doing to children, look at the federal and state and local levels you will see what were spending on shown as a percent of the economy is basically state of decline. Ill show you more numbers on this in a moment but this reduction spending on children, reduction of investment on infrastructure, our budget is more and more budget of a supersize to provide us with higher and higher levels of consumption but not in ways that promotes work and savings and productivity. So in some sense its a budget for a decline nation one that promotes consumption ever more an investment ever less. The final deadly political or economic problem is simply absurd hard to fix programs we have this extra their level. A lot of reforms that take place over time, Public Programs dont come from dynamic changes. And it comes from the fact that the program doesnt have builtin growth, the economy expands, the program basically just waynes in importance to those of you who might be someone with welfare reform in the 90 so we had a big debate over welfare reform and 96, but if you looked at what was reform the program called depended children, fitch of the social welfare budget in the 50s and 60s but it was down to 10 by the time they reformed it another programs like an earned Income Credit or wage subsidy and replacing it independent of that reform. Thats the type of reform you can achieve even without having to reform the program itself. Its a program that does have builtin growth. It just waynes in imports. Associate with these problems are three deadly political problems. The first one is basically we remove fiscal democracy from the hands of voters. Its particularly to for the basically boxed in to basically supporting the types of spending that we have decided in the past they need to have in taking the vote away from that and elected official. The second one is the Political Parties are trapped in what is classically called a prisoners dilemma. Im not going to go into all the details of the prisoners dilemma but it might be smart to some of you who saw the movie a beautiful mind. It was designed by john nash who came up with something called paying 30. And the prisoners dilemma my subversion is if you leave and act independently you loose. Thats exactly what our Political Parties believe today. Interesting article, in the mid 70s. He was a number of wall street journal editorial page. The wall street journal editorial page is sometimes called extreme supplyside economics. He cut taxes almost no matter what their level. Jude wrote this article called what did he say when dashing to side with the democrats have been santa claus for all these many years. This is the mid 70s. Remember that from 19321974 the republicans had the presidency for eight years and that was for Dwight Eisenhower and they werent sure they wanted to claim him as a republican. They have had a house of representatives hard at all. I think the course of about 60 years they have a house of representatives for for all those 60s. Judes argue was the democrats were santa claus reef were losing, we cannot santa claus. Were screwed because we werent about deficits. We need to stop doing that. We need to cut taxes the same with the democrats increased spending. So we can be santa claus. Thats we get the to santa claus but i would argue he got some ways by what he wants a first decade of the century with spending increases and tax cuts of every sort all going towards wider and wider deficits in ordeanorder of magnitude we nevd before in the history and i provide numbers in the book. We have these to santa claus operating at the same time. If you think back, it wasnt entirely wrong. He was arguing you kind of give wayside of the budget you can win budget you can win office and if you office and if youre in a quasicommie decide how youll pay for things you will be on the losing side. You will not only lose politically but you loose economically. Republicans begin to believe that. They start offering tax cuts but without paying for them. Democrats have the same velocity. They believe in 93 when bill clinton helped enact a budget agreement, might exaggerate the extent to which this happened just as jude exaggerated, with the inactive this agreement and help have them loose the house of representatives for the first time in about order you to not only did the loose the house of representatives they lost politics but what do they get two years later . They got george w. Bush getting a tax cut. They believe they lead and they lost. I think theres some truth to this, that more and more politicians decided that operate on the give we side of the budget, and start making more and more promises, those promises started going more and more to the future and that led to many of our current problems. And if you think about it now, theres a third deadly political problem which is not closely related, put politicians in position to move forward and get to renege on the problems. So today you want to enact something we want to do with the deficit, want o have a tax cut,i dont care which side, if you want to do something you the numbers arent there to be able to get there, youve got to renege on some promise to the public. And think about the past president ial debate in 2012. You had president obama, governor romney arguing over medicare. So president obama says, well, governor romney, you want to enact a stock of our government to which we tried to constrain cost. That will cut back on benefits for the older. You will really hurt the elderly and you shouldnt be doing this to cut back on medicare. Governor romney said to present obama, in order to pay for obamacare we get some Additional Health insurance to basically the nonelderly, you cut back on things youre doing and medicare. You cut back on prices in some the cost to provide figure cutting back on medicare and thats horrible. Look what you were doing to the ugly. So both politicians were basically arguing you, my opponent, are reneging on his promise in medicare. And yet anybody to look at the numbers knew that it was growing at an unsustainable rate, at a rate far faster than the economy. You have to do something theyre and yet if you lead in arguing to do with the issue, then you lose. So let me now turn to a couple charts to try to more quantitatively prove my point. This is a chart that i developed with a colleague, tim roper, and i. We call it a fiscal democracy index. It simple. Its nothing more than to percent of revenues that are left after taking into account all the promises of already been made in the past. That is, in technical terms mandatory programs to Credit Toward Program for those programs that the legislature doesnt do anything about. They just continue automatically and congress can no to anything in his mentor programs will continue. They include interest on the debt, they automatically. Include most of the retirement and Health Programs both social good and medicare, defense and other things. Heres the percent of revenues left after essentially after you take into account mandatory programs. Something happens in 2009. For the first time every dollar of their revenue had been committed before congress walked in the door. Every dollar of revenue committed before they walked in the door. For everything they did come everything you vote for they had to pay for out of the deficit or out of cutting back on some of the program. I wanted to explain to people why this problem is not the same in the past where as in the past you could be profit year after year but the future wasnt going to be profitable. Were asked today it is. So this chart leads me to a second graph that sort it along these on but this is a traditional budget look like in the past. Here you can save revenues rose, revenues was with economy. Overpaid of 25, 30 years the revenues double. Spending is discretionary so does have builtin spending. Im not saying that you will have surpluses in the future. Im saying under current law. Ive got a deficit starting out, but the future doesnt have it. Run a 10 year budget projections in 1840, or 1950, of any historical year it would show massive surplus of any future. The job of the legislature was to stop it from happening because of great the problem becomes often called the fiscal drag. We used a debate that. The fiscal drag would come because you of all this money coming and yet to decide whether to give the reference back to the public or to spend more. So move forward to today, and now have this automatic spending growing so fast that what we have builtin can now have a current deficit but rising deficit in the future under current law. Congress could walk away. It could do nothing, almost nothing and you end up with these widening deficits. That puts us in this bind i was going with all these economic and political problems of having to renege on these promises made to be able 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 particular programs. Ill do some examples of a fiscal policy has changed, particularly in some of these Retirement Health and tax programs i talk about. You look at Social Security. Today people retire on average for about 11 years more than they did when the program was first created in 1940. It turns out that this is actually quite easy to achieve through the last half of the previous century, largely because we had two groups of the labor force. The baby boomers which were coming in at quite dramatic rates, and women. So these insurance for providing workers. It allowed us to retire particularly man to retire at earlier and earlier ages, particularly wrote to door Life Expectancy which was expanding by six or seven years during this period of time. Fast for today and all of a sudden the women have sort of caught up with the man. The baby boomers are now not entering the workforce are hitting their prime earning years. Theyre dropping out and then you this is sort of pressure on employment and on the economy that we havent seen pics of these 11 more years of retirement has created a problem that, and again this almost all happen automatically because when of adjusted to the fact were living longer. Give you another example. Adding Associates Get medicare iran numbers with my colleagues at the urban institute, but today the level of benefit from Social Security and medicare benefits promised to difficult couple is about 1 million. That is, average Life Expectancy is roughly 20 years per person when they retire. Longer living of the two, its close to three decades. He basically provide this level of benefits, 40 or 50,000 a year for that long period of time. For those of you in the room who are in your early 40s, the benefits promised ago at about 1. 4 million. Those in your 20s, the benefit will grow to perhaps 2 million. Thats essential with the growth of government is largely going, and it happens automatically in those programs. As a result, if you look at the budget in the hole, its a simple example. This is what current policy would be in the budget. You will see in their tenure so now, its not like the bite is getting smaller. Mandatory programs grow from about 19,029,000, so they go about 10,000 over the period of time. This is again federal spending programs. I havent counted state and local programs and havent had a tax subsidy. Those programs as result partly because of discussion programs not going and then been cut back to sequesters, we end up having a cut in those of about a thousand dollars. So thats basically how the budget started being divided up in current law. The money is going to be mentor programs, not to discussion programs. This is by the my fever chart of all of them showing how come to associate and medicare and medicaid, not counting children, of all this growth in income the government will have they will get 66 of it. Interest on the debt will get 37 to those of you were good enough know that 66 plus 37 adds up to more than 100. It will decline by about 9 , that is negative 9 of children is growing about 2 so basically the rest of the budget has basically got zero growth. He we will spend roughly actually more per year, children will get none of it and will have declines in other ways. So id like to conclude this discussion on a much more positive note. As i say if we think about allocating this money in ways we want, if i think about the possibilities before us, if we think we are poor because we only have Government Spending that money order of 55,000, federal, state and local levels of tax subsidies can we think thats all we have, and its only going to grow to 55,000 therefore we can do it in in the future, we are misguiding associate editor what you think that 65 or 62, republican budget or 70, you know, is a substantial amount of money if we decide, if we decide exactly how we want to spend that money. As ive made a strong argument 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, the time constraints, began as a theyr they are not e outside force like disease or war. They often come about because of good things happening to us like we are living longer. Is that at quickly Getting Better healthier, healthier every year but i sometimes imagine im sitting in the ways and Means Committee room for some tax writing Committee Room and so he says he read it, we found this cure for cancer and we in the audience is sitting back to feeling good. We might live longer, our relatives will live longer. I look back in the podium and the members of the legislature are sweating and wiping her brow say my gosh, look what this will be dissociated and medicare. The trust fund will go out of balance. A lot of things we are talking about causing our fiscal problems are for good things happening to us in the very bad way weve adjusted in the economy. In our history, weve always come back and forth in terms of whether we spend more, cut taxes councitaxes, so its afford fore go back to beginning. After the revolutionary war, the great fiscal crisis hit the nation was that were not able to pay our bills. We werent able to pay our state gets, not able to pay debts to friends and other countries from whom we barge. The great crises, the great fiscal crises of those days is what led to enactment of the constitution, the creation of a treasure, creation of tariffs so the treasury pays about a viable government. It was a fiscal crisis that led to his doing any good things for ourselves. You may remember one of the stories of George Washington basically returning before the troops. The officers, they hadnt been paid and theyre ready to march to the capitol to demand their wages. He goes before the. They were loyal to him and he puts on his glasses and said hes grown blind in the service of this country. So this is a time of crisis but a time that led to great opportunity. Fast forwarded beyond that, hamilton then under the treasury basically comes in and has tax increases are greater than the taxes the bridge would impose upon jefferson to know and cuts taxes because he doesnt believe in these terrorist. Later on he decide to spend more money because he had this opportunity to buy the sole territory called louisiana. So weve always had this type of history going back and forth between spending and taxes but it was the creation of flexibility that allowed us to go forward in the future. I invite you to think about this as a positive opportunity. We are a rich nation to we are talked about richness in terms of money but think about how rich we are in terms of the people we have in this nation, given the political process, bad as it is, how good it is relative to what those countries in the world. We have extraordinary possibility before us would basically just need to take the fiscal straitjacket off of ourselves. Thank you. [applause] great. Stimulating comments. Thank you much. Let me now introduce art, a senior fellow and codirector of the Human Capital Research Collaborative the humphrey school. Art is working defense multitudes in the research on child element and social policy. He served at the Federal Reserve bank of minneapolis as Senior Vice President and director of research and an associate comes at the federal open market committee, mantra policymaking body for the Federal Reserve system. That must have been fun. His Research Interests include banking and financial economics, monetary policy, monetary history of the economics of federalism and economics of education. His work on Early Childhood development has guarded numerous awards, including those from the George Lucas Educational Foundation and the Minnesota Department of health both in 2007. He was also named 2005 minnesota of you but minnesota monthly magazine. Art has been a visiting professor of economics at boston college, university of chicago and the university of minnesota. Most recently he was an adjunct professor of economics in the mba program in china and university of Minnesotas Carlson school of management. He is past president of minnesota economic association, served not probably going to minnesota Early Learning foundation, greater twin cities united way, ready for k. Early childhood the element. Please welcome art. [applause] think that introduction will be longer than my remarks, but thank you. It shouldnt surprise you when jean starts talking about more resources or Early Childhood education, especially for our most portable kids. Im on his page, buy his book. Gene asked if i would make a few comments, and called me about a month ago to ask me, and i look at the title, dead men ruling, sounded pretty interesting and i couldnt put the book down. I dont know if this is something about the book or about me, but i found it quite intriguing. In my view of the book and what gene is trying to get across to the public this opportunity that we have, that we really are a rich country. Ive made this case for the state of minnesota. This is one of the most successful economies in the world. Theres a lot we can do. Its a question of how do we design Public Policy to maximize the return. Thats not as easy as it sometimes looks. So i took away two themes from, closely related themes from genes book. The first one is weve got some bad rules in place. Weve got some entitlements, promises that we are making to current, old and so future generations. Its pretty clear we are not going to be able to keep i think as you read through genes book to get a sense of how we got caught in this trap. So his first theme which i strongly endorse, or some real problems with our entitlements in particular would talk about sosa security and medicare. But theres a second closely related same come not just that we bad rules but then gene gets into this question of rules versus discretion, what i used to think of, or rules versus fiscal freedom or fiscal flexibility. It reminds me of a debate when i was a grad student here in 1967. Walter heller was teaching here and he brought a close colleague of his, Milton Friedman and the two of them had this debate about rules versus discretion, about rules versus flexibility. So im going, the second thing, im going to argue that be careful what you wish for. Its not clear we want to let the political system have as much flexibility as gene might be suggesting. Out get some samples. So the number one, Milton Friedman used to like to say theres no such thing as a free lunch. It was going to spend all this money on medicare, Social Security, on the current old generation is going to come from somewhere. Its going to come from investments in education, in public infrastructure. And weve made promises its clear we cant keep. Economists talk about opportunity cost all the time but its important that we recognize if you do a youre not be able to db. We dont often do that. We often hear about when government spends money what a great thing they did because you can see the new building. Dont get me started. You can see the new stadium. And this looks like we are promoting the economy. But notice that the other side of the ledger. Where did that money come from . We are taxing of the business. They would have created jobs. If youre spending more on entitlements and medicare again and Social Security come it means the young generation is paying for it. I think its an important message. I think comes across very loud and strong and convincing in genes book. But theres opportunity across your answers from real prices that we are paying now. Weve got a rich economy. Weve got wonderful opportunities but its not good way we are allocating these resources. Were doing it in the best way. So promises we cant keep, bad rules is what i would say, and that was the first overriding theme and to think again that comes across very well in this book. So the second theme get my notes out here. Its not so much about, its not bad rules versus good rules. Its really about rules versus discretion to gene calls it fiscal freedom. We are losing our fiscal freedom because we have some rules that ties us down. If we have bad rules, weve got to fix them. But what about rules themselves . What about the opportunity to put rules in place by some of the dead men . Is this a bad or good idea . Have we gone too far or whatever . Let me suggest that rules can be very important and be very important to run a sex the successful economy. These ideas im going to change the limit a little bit, looking at time consistent rules versus time in consistent rules where we can keep promises. Im going to argue that the time in consistent rules are rules that have a lot of flexibly, that have a lot of this complex but and i give you three examples where thing to be uncovered with all these flexibly. So they give you the classic wonder by the way this is can these ideas came out of a lot of the and a lot of work by admin binding of ed prescott who won the nobel prize. Is language of this language and history about time consistent with the let me give you classic example, taxing capital. Why you dont want this flexibility. So lets just take russia today. And mr. Putin says, yeah, we dont want for investment in this country to come to our country and we will tax capital maybe 10 . A bunch of from start investing in russia, believing putin and five, six years down the road he changes his mind. Were going to take that capital, we will argue you didnt really earn it family, whatever rationale he makes heavy basically up scones with that capital. Fiscal flexible in setting tax. Guess what happened in future . Guess what happens in the russian economy. Whos willing to invest in that income in the Fiscal Authority has that much flexibility that they can change Capital Gains taxes, or taxes on capital its an interesting comparison between russia become and the chinese economy. The chinese economy seems to come up with a time consistent will on capital. You are seeing lots of foreign investment, lots of Capital Investment and you talk to the entrepreneurs and theyre pretty confident they can keep the profits and keep their factories. The chinese are not going to, as putin would do in russia. So thats the classic example that prescott uses is why you might want some rules in place that really do tide the hands of the Fiscal Authority, so they dont chart dont start changing rules because it has implications for future generation in terms of economic growth, in terms of investment, in terms of new ideas, said it. 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. Uses the word balance and we might be an agreement. You want some fiscal freedom here, but be careful how much you wish for, and thats a classic example. The second one i want to touch on is something that i did a lot of work on for many, many years, and that was too big to fail. This is our financial industry. For many, many years we argued the rule in place at way too much discretion. Way too much discretion for the Federal Reserve and the treasury to come in and bail out banks if they take on too much risk. We argued this for many, many years but the president of the bank in 2004 wrote a book, too big to fail, and we argued in that book, look, guys, if bankers, especially the large banks know if they take a lot of risk, heads they win but hails the taxpayer loses, you are the ceo that company, you will take that anytime. Your encouraging a whole lot of risktaking. And the role and place was not a time consistent rule. Supposedly will not bailout these things that everybody knew the fed and treasury had this fiscal, call it fiscal freedom, fiscal ability to come in and out of these banks. We argued in 04 that what we should do instead is put some time consistent rules in place, rules that said if the bank gets in that kind of trouble, the president of the bank, executives in the bank, you are gone. Stockholders gone. Uninsured depositors, maybe we would back some of you but you would have to take a haircut. So that we put a number of people at risk, their own skin in the game and we argued that would help prevent a financial crisis. That was ignored. Its ironic tim geithner has a book out now and doesnt mention anything about what he wasnt doing in 2004. But theres a rule to put time consistent will place will argue to think paul volcker is arguing today that we do need rules. We dont want that kind of fiscal flexibly to allow again if the bankers think that will come and bail them out, its called moral hazard, and theres references to take on a lot of risk. So when i first got involved was in the 80s with the s. And l. Industry. They pretty much had access to the government bailout and they took advantage of it. So theres another example where, if youre careful about how much flexibility you want to allow, and ill admit its a tough issue but generally speaking i lean on the side of rules that her time consistent and commitments that we can make come and we do tide chance to some extent of Fiscal Authority. Finally, the third example i would give, this is one ive been involved with. This is fiscal freedom, fiscal flexible at the state and local. I know jeanne was talking about at the national level, but the same principles but with all kinds of fiscal flexibly when it comes to Economic Development. Cities and states use that power all the time to lower each others businesses across city and state lines. In fact the New York Times a couple years ago when an estimate how much money is spent on individual states or individual counties or individual cities in trying to lure each others businesses across the political lines. They came up with a number, 90 billion in this country is spent, on doing what . From a national perspective, its moving jobs around. Youre not creating one new job, but i know youve heard this comp the name of Economic Development and i understand it from a parochial point of view, sure, minnesota would like to lure a major Automobile Company or a Major Software company or a major hightech company to minnesota from california or wisconsin. Of course, for a wisconsin would like to lower them back and thats what goes on and its what economists call a zerosum game. We argued does violate a time consistent rule but the congress is not enforcing commerce clause. City and state are not supposed to be interfering. They are. So we need a time consistent rule to end this flexibility. I wont get into but we did get a bill introduced in congress in 1999 that wouldve ended this bidding war overnight, and it was time consistent. Everything was fine but it shouldnt surprise you, Paul Wellstone and senator mccain are going to introduce it in the senate and the sports lobbyists killed. Shouldnt surprise you. Okay, so theres another form of fiscal flexibility that i would really question. I would like to tie the hands of government and say, state and local government and say you have to treat all businesses the same, cant pick winners and losers. Thats been proven again 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 Gross Domestic Product we produce every year. But understand the rules of the game are real critical, and time consistent rules that meet because rate of return that are very high i think is the way to look at these problems. I dont think they are easy to solve it economically or politically. But i will argue that one lowhanging fruit that somehow were missing is we should be ensuring that all of our Vulnerable Children have high quality Early Childhood education. The public return on that issued, and the fact were not doing it and fully funding it i think its an interesting political question. Mamaybe gene and i will be ableo get into that. Thank you. [applause] thank you, art. That was good, stimulating thought. I learned some things as you were talking. Lets go to questions. Weve got two microphones, one on either i am. So if you the question and would like to ask doctor stirling doctor stirling, excuse me, please raise your hand. Right there is a microphone. So come on steve kelley, a senior fellow here at the Humphreys School and i guess this is a question both to dr. Steuerle and to art. Im not sure the broken promises bringing is very helpful. Because, for example, we cant afford thats years of insolvency in Social Security. It will cost 1 more of gdp, according to the cbo and trustees estimates. 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 1. 5 times what our nearest industrialize competitors spends per person on health care. So it seems to me that we dont have to break the promises. We just have to change our getting their 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 i think that phenomenon dwarfs any impact from the bailouts or from the 90 billion of economic subsidies that were i agree with art about some of those boys, but in terms of the countrys fiscal future, they are small compared to what were spending on health care. So i think most of your comments are correct. By the way, i agree with most of art, too. I will try to explain in a minute because i think both of us are seeking balance, how you need to be cautious on the other side of the picture. Youre right that health care is the dominant promise thats affecting the federal level, its affecting of the state level. I should say even the we do spend 1. 5 times more than what other countries are spending, they still and most of these countries have Health Care Rising faster than everything else. They are facing in many cases this could problems worse than ours but itll have the same budget we do but interestingly enough, theyve gotten to the same problem of having done so much on the giveaway side of the budget, projected into the future that it is left of them extraordinary little flex ability to move forward. I agree with you its dominated by health care. Where i might disagree a little bit is on the question of Social Security. Maybe i would disagree, we 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 its all that high. I do worry about having automatic growth in the system, wage index come your wages are higher and you live longer and get more years of recover. I dont think that should happen automatically because i think there may be other priorities. You should decide overtime, but censure out of bounds maybe dont. The big impact that very few people recognize in the system and ago to the trust Fund Balances and i alluded to this brief is the impact on the labor force. We are scheduled as we go towards 2030, to close to onethird of the Adult Population on Social Security who are retiring on average about onethird of the adult laws. As i mentioned that was quite viable in an economy where you have the increasing retirement. We had all these others factors in workforce. I think its a labor force problem in this country and other countries. Im not opposed to raising taxes. Thats also part of the solution to my problem is raising taxes to go for this purpose as opposed to things like Early Childhood education. So i qualified on the retire side retirement site. I didnt tell them will enough but a lot of the tax subsidies, its that builtin growth that i worry about. Its not the level of benefit which in responding to art, i think it would set the right type of rules, a lot of girls i objected to are really in his language in consistent rules or time inconsistent with. I would say dont want night of us who say if i could suggest all those programs with a just and sustainable the theodore all the growth in the future, the celtics with the flex ability. I think we need to have rules that still have flexibility. So i would say its time inconsistent to something were dead only rise as fast as the economy under current law with little change ever in the future. Thats also inconsistent and doesnt take into account the economic dynamic. You have to figure out to accommodate change. Let me, one point, couple comments. So is your talk about sausage duty, you mentioned that benefits change. So way back when when Alan Greenspan before as chair of the Federal Reserve said hey, if you supported, and analysis and come up with changes to make Social Security actuarial sound. Didnt go quite far enough but it went a long way, changing the rules to make it time consistent. So that indeed people were confident at what we promised we could produce. And overtime weve raised the age. We made other changes that look like sosa did relatively easy to make time consistent and i think we are close to doing that. Now, having a time consistent rule doesnt necessarily mean thats the best way to tax people and invest in a particular initiative. I think i would rely on economist did a costbenefit rate of return analysis, to look at where the best investment is. One difficult thing i think for us, my mom is 94, and i see a lot of public money going into her end of your life and i know a lot and off a lot of public money should be going to earlier years but all this research on Brain Development and learning and health all tells us we should be investing in those early years which we are not going. Ukip time consistent policies but that doesnt give you missed the condition that can have to start asking yourself what is the best public investment. And i think as gene was arguing, again i think there forcefully, we have way overextended ourselves in the area of the later years, and thats a mistake. I think youve got to face it. Health care, i think if you look at whats known as a dual mandate that came out of, i think the Rand Foundation many years ago, the idea that stomach the dual mandate was at one has to insurance, and you cant deny any person based on initial conditions, whatever. I think they made a real strong argument that Health Insurance in the market will fail for a number of reasons. Theres a market failure and thats the best way to corrected. If you look at the Current Initiative that washington is trying to become even though this implementation problems, thats a key part of the program. And i think that is what eventually give time consistency by the weight in that program. I think these ideas are important. They are hard. Its hard to do, youve got to make it a political situation but how do you make these commitments . Do need a constitutional amendment . How do you make these commitments so we know we can count on the rule being executed as it was stated . In jennings, i could teach a class. You are willing to admit that . I think we have a good time. I want to turn to tax baltimore because you didnt spend as much time on that as you did on the spending said that you have a lot to do with crafting the tax reform in the middle 1980s, as a staff person, economist at the department of treasury. So as you look at the problem on the tax side, could you elaborate as to what you think what some of bushs problems are and whats the better tax code to address that concern . In my address i made, the tax side, tax cuts, we dont pay for nothing more than taxes shifted to the future. I dont think we count in our budget correctly, you know, we do tax cuts we show the this division in which all these wonders but theres corresponding loses. Its not National Spending cuts if thats what you want. All youve done is shifted bill to the future. So it would be like theyre just been working with but more on her credit cards and say hi, we are better off because, while we worked less. Something like that. You asked a question about the structure of the texas in which relates to arts first concert about trying to come up with consistent rules. I think abroad spectrum of because i know but basically base broadening and rate reduction is appropriate. You try to have the maximum base. Partly a lot of spending probably doesnt belong in the tax code which actually is a summit to what art was arguing about trying to set up a set of rules a fire tax system will function on a more permanent basis, things you need to decide a little more on the discretion basis, but that off and that appropriate and other people Pay Attention to debt. Theres some exception to a discomfited when you get to investment side of the budget but for the most part thats what you want to do is broaden the base. I would say that in terms of the tax subsidies, im also bothered by the fact that they grow automatically. So i think we are forming is complicated pieces of analysis and i wont go into all the reasons, but one of the reasons, if you own a home outright you get a direct tax break to if you dont have a Home Mortgage. If you only cut back on the mortgage deduction you to existing homeownerhomeowner s over new homeless. You got to cut back on and some sort deliver way but you dont have a grow automatically. Whether its the Home Mortgage Interest Deduction or the health exclusion of a lot of pension benefits, Pension System which by the way our Home Mortgage subsidies to the bottom 60 of population in terms of income only gets about 10 or 12 of the benefits. Here are these programs that are supposed be favoring better retirement for people, supposed to be favoring homeownership and basically just subsidize higher income people and they dont do much for the people who are the people of the most needs. So theres a huge amount to be done in the tax system. About a third, sometimes its been up to half of all spending is in the tax code and these subsidies, and then hides these benefits from the public. Many of them shouldnt be made permanent in a lot of cases they just dont belong there. I have kind of a futurist question, which is to have a new reform that is being promoted partly sort of agreeing with your essential points that we lack the political will to solve some of these problems or be series about fiscal discipline. So is there a way that we can finance some of todays social services . An example would be maybe utah. Theyre issuing social impact bonds to pay for Early Childhood education, because the legislature would not appropriate the funds. Its financed by goldman sachs, and the feeling is they will capture future savings. They even plan to sort of reduce the initial referral by 90 . So thats where the savings comes from by investing now in special education. Could just comment on the pros and cons of this approach . We have mutual friends who work on these issues. Rob was pushing u this at the national level, social impact bonds. So im not a big fan of social impact bonds. Ill give you an example t. The mall of america got 250 million for their expansion. Is there a shortage of retail space in not that i know what. Did they have to come up with social impact bonds to show the return on that investment . Why is it that are most vulnerable kids, all this research that shows can why cant the state just funded . Find it . This state, minnesota great 280 billion in product every. We need 150 million a year. With one of 59 a year, every child born into poverty would have a scholarship to go to high quality early a program. The return is enormous in terms of savings on special ed, savings on retention in first grade, fewer kids being retained. The Health Care Benefits are enormous. And social impact gets republican because they require you to take a document of every savings and keep those savings back into the system. Its a very complicated system. Its not easy to administer. Why is that on us for Early Childhood, and mall of america gets 250 million . So i dont think i think thats a way for me be the political system to marginalize this one more time and say you can do it that way, and theyre doing great things but im not saying its not worth the effort as an experiment but i think as were pushing to go to scale the earth we are showing the return on investment is strong. We have to figure out a way to lobby. One thing i threaten to do in this is to take all of the poverty children and moved to chicago. That didnt work. Threatening to leave didnt work. We have no leverage. These kids dont vote. We have to find a way to make it more transparent, and were trying to do that. Thats the way were going to instead of social impact bonds, weaker something called many bonds which is is simply lobby for the kids. Who else would do that if we dont do a . Just a footnote. I largely agree with art. I think social impact bonds are an interesting experience that i like the can to try to there is a danger for the Childrens Community in the sense it is the only part of the budget that has to prove its getting very, very high rates of return and yet the vast majority of the budget producing i would argue negative rates of return, talked to hundreds of billions of dollars every year producing that doesnt mean theyre not good program for a purpose but to not having to productivity. So you got to compete by proving everything you do its is very high rate of return. The programs of negative return dont have to prove anything. You getting this box, and unsustainable budget already, youve got to prove that youre doing well and the programs that are cag
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