American Debt: Causes, Consequences, and Fixes

Thursday, May 24, 2018

The American Debt: Causes, Consequences, and Fixes symposium was held on May 24, 2018 in honor and memory of Peter G. Peterson, who passed away on March 20, 2018. Peterson served as Chairman of the Council on Foreign Relations for twenty-two years, and was a passionate advocate for fiscal responsibility and avoiding what he believed was an unsustainable national debt. This event was underwritten by Steve and Roberta Denning and the Sage Foundation in appreciation of Peter G. Peterson and his impact on and leadership of both the Council on Foreign Relations and this country.

Twenty-One Trillion and Counting: How Did We Get Here?

This is the first session of the American Debt: Causes, Consequences, and Fixes symposium. The symposium is held in honor and memory of Peter G. Peterson, who passed away on March 20, 2018. Peterson served as Chairman of the Council on Foreign Relations for twenty-two years, and was a passionate advocate for fiscal responsibility and protecting the United States from what he believed was an unsustainable national debt.

This event was underwritten by Steve and Roberta Denning and the Sage Foundation in appreciation of Peter G. Peterson and his impact on and leadership of both the Council on Foreign Relations and this country.

RUBENSTEIN: Welcome, everybody. My name is David Rubenstein, and I have the honor and privilege of serving as the chairman of the Council on Foreign Relations. My immediate predecessors are Carla Hills and Bob Rubin, and they are here. And their immediate predecessor was Pete Peterson. And we wanted to have a symposium to honor Pete because of his great commitment to fiscal discipline and reducing the debt and dealing with entitlement issues. And we thought, as an appropriate way to do that, we would have some seminars or symposiums today, discussions about those issues.

And let me just put it in context if I could. Abraham Lincoln famously said that God must love poor people because he made so many of them. Surely God must really love the federal debt because he made so much of it. (Laughter.) We now have the federal debt—you’ll hear these numbers a little bit later, but they bear mentioning at the beginning—the federal debt is today $21 ½ trillion.

Now, some people say, well, it’s really not that high. It’s only $16 ½ trillion because we’re dealing with the external debt. The external debt is only $16 ½ trillion. Well, depending how you want to measure it, it’s either 73 percent of GDP or 105 percent of GDP—very, very large. And of all the developed countries, we are the only one over the next five years who are projected to have debt increasing. The others are projected to have debt decreasing.

So we’ve always had debt in our country. When the Revolutionary War started, we incurred a lot of debt. And as you all know, the capital of the country was New York. And the reason that the capital is not New York now is because a famous dinner was held between James Madison, Thomas Jefferson, and Alexander Hamilton at which it was agreed that, in return for the southern states agreeing to pay off the debt, which was largely Northern debt—the Southern states had already paid off largely their debt—we would move the capital further south.

The debt at that time was $70 million. Since that time we’ve almost never been without federal debt. Sometimes it was as high as 110 percent of GDP, during the time of World War II, but that was a time of unusual circumstances.

Some of you may remember the Carter years, when I was in government; managed getting inflation to 18 percent which is hard to do. But one of the things we didn’t do was get the federal debt very high. We left office with federal debt of only $700 billion. That was thought to be high, but $700 billion is all we had.

During the Clinton administration, actually, progress was made. And some of you may forget this, but there were serious—there was serious concern that because we were paying down the federal debt so rapidly, there would soon be no treasury bills against which to measure corporate debt. We don’t have that problem anymore.

The result of our spending more and more money is we have this very large federal debt now. During the George W. Bush administration, it increased by about $4.7 trillion; under Barack Obama, about $6.8 trillion. And recently, while people in Washington, where I live, like to give lip service to paying down the debt, we managed to pass in Washington, D.C. a new tax-cut bill that some of you may be familiar with, and that will add another 1.5 trillion (dollars) to $2.3 trillion over 10 years to the debt, not to mention the increase of the spending caps, which will add another $2 trillion to the debt.

So over the next 10 years, to the 21 trillion (dollars) —$21 ½ trillion (dollars) we have, we will add about $14 trillion of debt.

Now, all of you, judging by the looks, will probably not have to pay all of this yourself. (Laughter.) Your children and your grandchildren will be paying this, and your great-grandchildren. So it’s a serious problem for all of us, because actually we’re going to squeeze the retirees to a great extent.

We have now a situation where the money that comes into the federal government basically just pays for entitlement programs and defense. We don’t pay for interest. We don’t pay for discretionary domestic spending anymore, because we only—we bring in about $3.1 trillion in revenue and we’re paying about $4.1 trillion out. So if we continue this trend, our country will not have even the credit rating we have today, which is not even AAA any longer.

So it’s unfortunate that not much has been done about this the last couple of years. But it would be much worse, in my view, if Pete Peterson hadn’t been bringing this to people’s attention. All of you may know that Pete was a person that came from very modest circumstances. He grew up in Kearney, Nebraska, the son of a restaurant owner. And Pete learned from that early days that if you save money, you can get something that you deserve, but if you borrow money, you can have a very unfortunate situation.

And it was said that view, that he learned from the Greek restaurant that he worked around the clock—and his father’s restaurant never actually closed; it was open 24 hours a day—he learned that you work hard, you get somewhere. You don’t work hard, you’re going to pay the price at some point. And his view was, when he became an official in the government, that actually we have to make certain that we pay down our debt.

Now, Pete didn’t have to do this. Pete was an extraordinary person. As you may know, he was the CEO of Bell & Howell at a very young age. He went to the government as special assistant to the president of the United States, President Nixon; became secretary of commerce, then president of Lehman Brothers, and then was one of the founders of Blackstone, a very successful company, obviously.

And as a result of all that, he became the epitome of the WASP establishment, even though he wasn’t a WASP. So that shows you how talented Pete was—(laughter)—to convince people that he should be the head of the WASP establishment, being—holding positions as important as the chairmanship of the Council on Foreign Relations, but he was not a WASP.

So—but when you get to be as important as Pete was, you don’t have to tilt at windmills. You can just take a pretty easy life and you can just say, look, I’m the chairman of this, I’m the chairman of that. I’m wealthy. I can have an art collection. I can play golf. I can have a great time with life.

But Pete actually said I really want to tilt at one windmill. I think it’s really sad that we are borrowing so much money that ultimately our children and our grandchildren are not going to live in a very prosperous country. And he wrote books on this. He devoted his life to it. He created the Concord Coalition in 1992. In 2008 he created the Pete Peterson Foundation, whose sole mission is to remind people of the importance of paying down the federal debt and dealing with entitlement reform and fiscal discipline.

And it’s my hope that, in Pete’s memory, people will do much more than they’ve done before in actually doing something about this, not giving just lip service to it. And to the extent that this country accomplishes anything in this area over the next five or 10 years, I think to some extent it will be due to Pete Peterson’s leaving behind a great legacy.

Michael Peterson is running this foundation, and this foundation is one that I think will do more than any other single thing that I know of to really make it clear to people we cannot continue to borrow. We have to do something about the entitlements, or otherwise this country, which we all love so much, won’t be the great country that it once was.

So, with that scary notice and scary words, I’d like to introduce—I guess it’d be Pete—Richard Haass is going to conduct the first of the seminars. Is that right, Richard? So why don’t I ask Richard, who is our distinguished president of the Council on Foreign Relations—been president for about 15 years now—Richard would come up and introduce the people who are going to be on his panel.

Thank you very much. (Applause.)

HAASS: Well, thank you, David.

And it’s great to see so many of you here. Michael, great to see you, and Tara, and Alexandra.

I just wanted to say, when I got here, Pete was the chairman. And for four years we overlapped. And that was one of the highlights of the decade and a half I’ve had here. And as David said, what made Pete extraordinary is that he excelled in so many different worlds. You know, most of us would be happy to excel in one. The rare person I know excels in two. But to do business, finance, government, and philanthropy, and to be so extraordinarily successful in all, and also to be a producer of ideas that work their way through the society, that’s remarkable. That’s five different areas, impressive by any and every measure.

And while we thought of what we could do, we thought this would be perfect, because Pete’s the only one I know who actually thought a meeting like this would be fun. (Laughter.)

BERNSTEIN: I wonder why all these people are here? (Laughter.)

HAASS: What else can I say? So, look, we are—what we’ve done is divided this into basically two chunks. And we may not be totally disciplined, but we’ll be mostly disciplined. This first session, which will run just under an hour, we’re going to really look at the question of where we are. How did we get here? And what I really want to do is spend most of our time on the so what. What difference does it matter? Dick Cheney could not join us today. Dick famously said that deficits don’t matter.

So one of the questions, I think, for us is to what extent do deficits and debts matter? And, if so, how, and how much? Because it sounds—you know, when you deal with the scale of 21-plus trillion (dollars) now, growing at the rate of over a trillion (dollars) a year, the question is, how long does this go on, and with what effects while it goes on and thereafter? So I want to focus on that.

The second panel, which Bob Rubin is going to preside at, is really going to emphasize what do we do about it? What are the options for—to the extent that we do think this is an undesirable or unsustainable trajectory, what are the options? And not just the abstract ones, but I know Bob wants to look at what are the politically, to some extent, realistic options for dealing with it, to the extent there are?

AUDIENCE MEMBER: That’s a short panel.

HAASS: (Laughs.) It could be a very short-lived panel. That’s true. Let’s—yeah, I know you all have bowling league tonight, but I will get you out in time.

So we’ve got three real talents up here. We’ve got Maya MacGuineas in the middle, and she is the president of the Committee for a Responsible Federal Budget. That must be a small committee these days, but it is a—

MACGUINEAS: Well, it’s sort of a laugh line. The name is a laugh line.

HAASS: Yeah, I know. Sorry. Cheap shots. I’ll try to limit it.

Jared Bernstein, who’s the senior fellow at the Center for Budget and Policy Priorities; and Nathan Sheets, who’s the chief economist and head of global macroeconomic research at PGIM Fixed Income.

All three of these people have had backgrounds that in some ways, like Pete’s, have spanned more than one world. And so when I thought of who we could collect here, they were at the top of my list. And every once in a while we get extraordinarily fortunate.

So let’s very quickly deal with where we are and where we’re heading, the all things—because, if you haven’t looked at it, there’s a lot of good documentation. The CBO regularly does an update on this issue. And just recently also Goldman Sachs put out a really good piece of analysis called “The Budget Deficit: What’s the Worst That Could Happen”—ever uplifting. But, again, so there’s a lot out there. So I don’t want to spend a whole lot of time.

But let’s just begin with the question of—almost descriptively, which is—which is what do we need to fill in the picture, 21-22 trillion (dollars) now. Again, it’s accumulating at the rate of more than a trillion a year. You recently had, you know, various legislation passed and so forth. But what is the—where are we, and what’s the trajectory. Do you want to start?

BERNSTEIN: Thank you. I will.

And first, I’ve got to say, I’m just so happy to be here. I won’t take long in this part of my discussion because I know we want to get to the substance, but it’s an honor to be here honoring Pete. I’m amazed you’re all here to talk about this, so thank you. It’s not what I would expect on a beautiful afternoon, but great crowd. I see a couple of old Treasury secretaries scattered. I don’t mean they’re old. (Laughter.) I mean they used to be Treasury secretaries, scattered throughout the crowd. (Laughter.) So it’s a really impressive group here.

HAASS: You were right the first time. (Laughter.)

BERNSTEIN: Yeah, I guess I was.

So I don’t like throwing around all these trillions. I had a couple of conversations with Pete, one or two in my—and we disagreed. But, man, he was a great listener. And while we disagreed, he really listened, unlike people often at that stature. And I was so impressed by his interest in my viewpoint, and it’s probably one of the reasons I’m here today.

So I don’t like throwing all these trillions around. I think that’s kind of scare tactics. I think you really have to look at things in terms of GDP. So in over the next 10 years, cumulative GDP will be over 200 trillion (dollars), if I want to throw trillions around. So if you’re thinking about, you know, large numbers in the numerator, the deficit or the debt as a share of GDP, you also have to account for the size of the economy. That doesn’t mean we don’t have a big problem, but I find these trillions to be disembodied. So I talk about this in terms of GDP.

Now, the deficit as a share of GDP is around 4 or 5 percent right now, about 4 percent this year going up to 5 percent next year. Here’s how out of whack that is. Historically, when the unemployment rate has been as low as it is right now, about 4 percent, the deficit as a share of GDP has been about zero. We’re turning Keynesian stimulus upside down. We’re injecting a great deal of fiscal stimulus, both mostly through the tax cuts, but also through a recent spending plan, into an economy that’s already close to full capacity. So this is a very weird and fiscally reckless experiment. So I don’t want to suggest that I’m not concerned about this. I probably am more of a dud than many of the folks here. But I am concerned, and I don’t like this experiment.

The debt as a share of GDP right now is somewhere in the mid-70s, and according to the CBO, it’s going to go up to around 100 percent over the next 10 years. I think Goldman expects it to grow a little more than that, as do I, because I think there are some fairly sunny assumptions in that getting to 96-100 percent in 10 years, one of which is some of these tax cuts sunset. And by the way, I spent a good deal of time yesterday and today thinking about how we got here, so I hope we get to weigh in on that question a little bit, because I think the sunset games that we’ve been playing over the last 10 years or so are implicated. But if they extend those tax cuts—and just today Republicans were talking about doing so—that would of course make these numbers worse. So, averaging debt-to-GDP ratio over the next 10 years, when we’re 4, 5, 6 percent per year, taking the debt up from around 75-77 percent of GDP to around 100 percent of GDP. But it could be worse than that if we continue to pursue reckless tax cuts.

HAASS: Want to disagree with any of that?

MACGUINEAS: (Laughs.) No, I’m probably going to reinforce that, starting with just a real appreciation for Pete Peterson. And I actually in my early 20s was here working in New York, starting off in a career that I thought was going to be a Wall Street career, and became really interested in how the markets respond to what’s going on in Washington, D.C., and how the two of them don’t really talk to each other. Then I read two things: A Congressional Budget Office report, which is awesome—the CBO, not only is their stuff really interesting; they’re very good writers—and I read Pete Peterson’s book, and it’s a book that he always jokes that people would say once you put it down, you could never pick it up. (Laughter.) Which could not be farther from the truth. It was not only excellent and scary, it had these great charts. So it was a really visual book. So Pete Peterson’s book, many, many years before I even met him, actually caused me to switch careers out of the world of finance into really worrying about budget deficits.

And I think the biggest thank you is working with Michael Peterson. So Pete’s son has taken over this—not just this foundation but really this whole fight with us. And there are some of us that have been working this issue for a long time, and it’s really nice to have Michael as a partner in all this. So very appreciative of that.

Also appreciative of both David and Richard, who are maybe the first two people I’ve heard who’ve made the debt funny. And I kind of see like a standup routine that we could get going to get more attention, because it’s hard to find people who can crack actually amusing jokes in the field.

So to reinforce mainly where Jared is, one interesting fact is that President Trump actually inherited the worst fiscal situation of any—and don’t get mad at me because I haven’t finished the sentence but—of any president other than Truman. Now I did say that once and people got furious, because it somehow was as though I was saying that came from President Obama, which could not be farther from the truth. President Obama inherited one of the worst economic situations of any president and had to deal with this whole situation that had been put forth in front of the administration and took so much time, energy, and hard work. And sort of one of the lessons is, presidents come into office with a whole of agenda of things they want to do, and also an agenda of things they have to do because it is there in front of them. And this president walked into a situation where the debt, because of many choices made before, is twice the historical average, at 77 percent of GDP. But the last time that it was higher than this was right after World War II, and then it was projected and did go down very rapidly as the economy grew and we were able to recover from that. This time it’s projected to grow massively over the coming years and then at the end of the decade be somewhere between slightly below, slightly above 100 percent of GDP.

So we are about to have trillion-dollar deficits starting about two years coming back for every year, forever. We’re about to have a debt that will be as big as the entire economy. And one real warning signal is that interest payments in the federal budget are the fastest-growing part of the budget. So we’ll get to why you worry about this, but this could not be a worst prescription for what we—in this country what we need is a comprehensive economic growth plan that figures out how you grow the economy, and do so in a way that works for a lot of the citizens. Having a huge overhang of debt is a real drag on being able to do that.

HAASS: We’re getting ahead ourselves. I want to save the implications.

MACGUINEAS: OK, so we don’t really care yet. We just know there’s a lot of big scary numbers.

HAASS: We’re going to care in about 10 minutes.

MACGUINEAS: Scary numbers. (Laughter.)


HAASS: So, Nathan, why don’t you—is there anything you want to add on where we are and what trajectory we’re on, or do you want to—you’re ready—

SHEETS: Just one very brief comment.


SHEETS: That in addition to the federal debt that we’re talking about, the state and local governments have another 35 percent of GDP of debt with some very difficult pension obligations that are likely to accrue. And those pension funds are not funded. So we’re focused on the federal government. But when you look at the broader government, it’s pretty concerning as well.

HAASS: Great. And that’s actually a subject that we’ve had quite a few meetings about. Dick Ravitch and others have enlightened us about that. Let’s slightly turn the corner to how we—what’s driven this and what will drive this going forward. So let’s hold off, again, the what’s the implications.

Let’s talk about, if one were going to attribute responsibility or causality, why don’t we start—we’ll go the other way around so, Nathan, we’ll start with you. How would we attribute the causality or responsibility? I don’t mean in a political sense, though we can. But what’s driving the numbers?

SHEETS: Yeah, I would say, bottom line, over the last 20 or 30 years, we in the United States have wanted to spend, on average, federal level, at about 21 percent of GDP. Through that same period, we’ve wanted to tax at about 18 percent of GDP. And I think that’s where we have been as a society and that’s very much where Congress has been. It probably oversimplifies it, but in some sense you could say that 21 percent of GDP is the lowest level of expenditure that many Democrats on the Hill have been willing to accept. At 18 percent of GDP is the highest level of taxation the Republicans have been able to accept. So when I look at where we’ve been over the broad sweep of these past decades, I think it’s our society, it’s both parties. I think that to one extent or another, all of us are to blame. And what worries me is that as a result of these tax measures and the spending measures that David referred to, that gap between expenditure and taxation is likely to widen out from about 3 percent of GDP, where it’s kind of trended over the past decades, to about 5 percent of GDP. And I don’t have any kind of narrative as to how that’s addressed.

HAASS: OK, we’ll say—I think that’s Bob Rubin’s problem. We’re going to save that for later.

BERNSTEIN: He fixed it once before. (Laughter.)

HAASS: So I mean to what extent—I mean, Maya, I’ll turn to you. Let’s break it down a little bit on the spending side. So if there is this gap between taxation and revenues coming in and spending going out, one of the comments one hears that it’s not so much discretionary spending. It’s not even so much defense spending in many cases. But more than anything else, it’s entitlements. So to what extent is this an entitlement issue?

MACGUINEAS: Yeah, so, well, the growth in the budget will come from the aging of the population and healthcare costs and interest payments. So 82 percent of the spending growth over the next 10 years will come from mandatory spending on health, retirement, and interest. So that’s clearly where the growth is.

How we got here is still a little bit different because the deficits we’re about to face in the next couple years, over 50 percent—and this is what’s so frustrating, because it’s so self-imposed right now. It’s not the result of a downturn. It’s during a strong economy. Over 50 percent of the increase in the deficit has come from the legislation that we’ve just recently passed. So it’s driving the immediate situation as we’ve passed a huge tax cut—not tax reform, as we’ve been talking about for years—but tax cut with all sorts of exaggerated promises about what kind of growth it was going to generate.

And then, rather than that, people were concerned that that was going to put more pressure on spending restraint. Actually, what it does is it opens up the floodgates. And so shortly after that we passed a huge spending bill, which if you were to make permanent over 10 years would be almost as large as the tax cut. So, again, 55 percent of the upcoming deficits come from immediate legislation that we’ve just passed, and the other portion is, because we have growing healthcare costs, because we have an aging population and because we’ve put mandatory spending programs that—we don’t have nearly the same amount of oversight. So when you say that’s the big drivers, it is. And it also doesn’t get attention in the budget process. Every year, when there’s a breakdown in the budget process and we’re going to shut down and there’s all the craziness that’s going on, those fights are over that one-third of the budget.

The one thing I will say about discretionary though is, for a number of years there we had the sequester. And I would say, you know, discretionary spending wasn’t the problem before, and it’s certainly not now. It’s probably too low with the sequester. But we just increased discretionary spending so massively in one round that it’s now a problem again, too. So, luckily everything’s a problem again. (Laughter.)

HAASS: There we go. No—it’s like foreign policy. There’s no shortage of material.


BERNSTEIN: So I have a pretty different set of views on these issues. First of all, the—according to the CBO—whose numbers I think we all pretty much endorse here, so, you know, it’s nice you’re all playing from the same—singing from the same hymnal. You know, over the next 10 years the Social Security shortfalls, about a percent of GDP, and the tax cut, about a percent of GDP. Now then you can start adding on the medical expenses. That’s about a little more than a percent of GDP. And then the interest expense, that’s 1 ½ percent of GDP. So that accumulates to a significant fiscal gap, no question.

But again, I think if you look at these things from that perspective, a 1 percent shortfall of GDP in Social Security which is equal to the tax cut kind of tells you right away where the problem is, and that’s where—that’s my answer to how we got where we are. I think how we got where we are is a function of bad economics and bad politics.

Bad economics comes in two flavors. One, just a very deep embrace of trickle-down supply-side tax cutting, this notion that tax cuts pay for themselves. I’m here to tell you that that’s not the case. But it’s also—I’m also here to tell you that the people who push that fairy dust are incredibly influential. And in fact, I would argue that one of the most influential living economists is Art Laffer, who drew the Laffer curve on a napkin, lo, these many years ago. And one of his acolytes, who’s a very aggressive supply-side economist—happens to be a friend of mine, although we disagree on everything—is now chairing the National Economic Council, Larry Kudlow—another very—so economics problem number one is an embrace of trickle-down supply-side economics that is economically deeply bereft. It’s gotten us into a terrible fiscal mess, as was just described by my colleagues.

Now, economics problem number two kind of goes the other way, and that’s on us, a lot of those of us who’ve been I think guilty of something I call deficit attention disorder. And this is the idea that we’ve been so outspoken about the down—and we’re going to get to, you know, the why, why is this a problem—but we’ve been so outspoken and warning everybody so much about the downsides of these deficits, and they haven’t materialized. So particularly I’m talking about this notion of crowd-out, that public-sector borrowing crowds out private-sector borrowing and leads to higher interest rates. Well, it turns out there are just tons of moving parts in that equation. And these large deficits that we’ve been running and other countries have been running haven’t always and everywhere—certainly not here in the U.S.—shown up as higher interest rates. And I think that’s really hurt the credibility of the Pete Peterson side of the argument.

And then, on the political side, I think there have been a couple of really very serious political problems that have gotten us where—probably the most important or certainly the most important is just the absolute refusal of Republicans to raise any revenues. That guarantees, in my view—I don’t think you can do anything on the—anything approaching suitability on the spending side. If one party refuses to raise tax cuts—to raise taxes, to raise tax revenues, you’re going to be in this soup no matter what.

And just to leave the Democrats not unscathed, Democrats say, oh, no, no, no, you can raise taxes on a very narrow group at the top of the income scale and nobody else. So I think that’s better than the Republican view from the perspective of addressing our fiscal problems, but those political problems have put us deeply into this mess.

HAASS: So before I open it up to the increasingly depressed membership—(laughter)—let me—let me—let’s turn to what I think is the most interesting question, which is the so-what question—what difference does all this make? So let me put out a couple of questions, and then we’ll just go and pick and choose.

One is whether we’ve entered the era now of not a virtuous cycle, but a vicious one, where this debt will gradually force us to raise rates, which will increase the cost of the debt, which will cause us to raise rates, so that we have now reached a point where the dynamics are not that—not healthy.

The second question is, you know, 40-odd percent of the debt is held by foreigners—Japan and China being the two largest. What’s the—at what point do we worry about that? Do they—does this have—are there economic issues that could trigger? Or what about political? The United States and China could be heading for a showdown over trade, over Taiwan, over North Korea. Are we reaching a point where debt could be a geo-economic tool used against the United—against the United States?

Thirdly, we enjoy tremendous advantages that the dollar is the reserve currency. To what extent are we running the risk that this amount of debt will put that potentially at risk, that the rest of the world will basically say, hey, this isn’t what we signed up for?

So there’s three questions I put out. There’s lots of other ways you could take the so what, so pick—it’s like a menu. You can pick and choose from that or you can get the special, so. (Laughter.)

Nathan, do you want to start?

SHEETS: Sure. So the reality is that the United States is in a special position. As you said, we’re the reserve currency, we’re the issuer of the global safe-haven asset, which is U.S. Treasurys, and as a result of that, we are able to run policies that, for many other countries, would be unsustainable and would result in significant risk premiums, and maybe even crisis outcomes, and get away with it. As our debt rises, we see secular shifts down in where long-term interest rates are.

I think part of that is that there is a stock of credibility that our grandfathers and our fathers have amassed—and grandmothers and mothers have amassed—that we are slowly drawing down. But the reality is that that stock is enormous, and it’s hard for me to project at any time in my lifetime the world is going to run out of patience with us.

Another factor is if you are a global investor—and these are the kinds of folks that I talk to every day—you know, there’s really nowhere else to go. Europe has its own existential problems, and even apart from that, Europe has really only one big, safe bond market, and that’s in Germany, and the Germans don’t like debt. The Germans are going in the opposite direction, so they’re not—they’re really not issuing very much.

I mean, you look to Japan, and Japan has its challenges as well, and have a 250 percent debt-to-GDP ratio. So then we say, well, maybe China, but China has got a lot of work to do before it’s going to compete in this space in terms of reforming its economy.

So all of these—all of these risks that are articulated are real, and I think that it is irresponsible for us to pursue policies that will bring large budget deficits as far as the eye can see, but I can’t with a straight face really argue that there is some near-term Armageddon out there.

HAASS: Can I just interrupt that?


HAASS: But you used the word—you said it’s irresponsible for us to do this, so my question is why. What makes it—what are you worried that this could bring—even if you can’t set a date, what are you worried that this could bring about that you believe it’s irresponsible to do this?

SHEETS: Yeah, let me just answer that. So as I see it, what these kinds of policies do is slightly raise the probability of some kind of crisis event and, you know, maybe that’s from—before these agreements from point-zero—half of 1 percent, so 0.5 percent to maybe 1 or 1.5 percent. I think that increase is irresponsible. But still, it’s not in my baseline any time that I can see.

HAASS: Do you want to—

MACGUINEAS: Yeah, so for the so whats, I would put it into kind of three categories. There’s economic so whats, there’s lost opportunity so whats, and there’s kind of the—how this interplays with the whole political and the whole national tension that’s going on.

So on the economic front, yeah, it increases the chance of a crisis slightly, but I just don’t think that’s the real concern here at all. I think there are a number of concerns. One is, as I mentioned, I think what we should be focusing on is a comprehensive economic growth plan for this country, and everything from tax reform—again, not tax cuts—but tax reform, regulatory reform, more public investments, immigration reform. All of those are going to add small pieces to our growth, but because of the demographic challenges we have, we need to be pursuing all of those.

One of the ones that could be more effective is a smart, gradually phased in debt reduction plan to bring the debt back down to more reasonable levels. That’s a part of growing the economy.

But I think more immediately—

HAASS: Just let me—I want to interrupt. Why is that a part of growing the economy? It’s asserted. Why is that a part of growing the economy?

MACGUINEAS: So that you don’t ultimately suffer from crowding-out issues.


MACGUINEAS: And that the studies of public, individual, and—government, individual, and corporate debt look at that there is a negative effect on growth at certain points which we’re past. And I’m not talking about Rogoff-Reinhart; I’m talking about lots of others.

But the real concern I would say is fiscal space, right, which is when you have a downturn like we had in 2008, we had debt that was 38 percent of GDP, and therefore we were able to respond, as you have to, which is fighting recessions, fighting the downturn, and not worrying about your ability to borrow, and not worrying about the political environment that says, oh, no, you can’t borrow because your debt is too high.

There’s a real risk that we’ll have a recession, and even if we’re able to borrow, that there will be a political environment that says you shouldn’t be borrowing. So you want to be able to fight recessions.

There’s also, as you’ve said—we don’t want to have a trade war with China, but if you’re going to have one, you really don’t want China to be one of your main lenders. This makes no sense when they discuss the possibility of not lending to the U.S., and that can affect our markets. So that’s the economic piece.

On the lost-opportunity piece, I mean, I’m sure you have many conversations about this here. The future economy is changing so quickly. The pace of change of how our structural economy is changing is something we’ve never experienced in terms of changes to technology, questions about the future of work. It’s so clear that these are potentially incredible opportunities and risks, and you want a strong government that is able to partner with you as you are figuring out how to navigate these things, and make sure that we’re learning in a different way, prepared for a changing economy where we’re not going to be in the same jobs we’ve always been.

And so it’s not just that we’re short-changing public investment, which we are dramatically. It’s that we don’t even have the resources, when a new budget comes up with an idea like wage insurance or more kinds of investment in human capital, to think about those seriously. So that’s a huge problem.

And the third is I think the debt now is a symbol of just how broken our government is. I mean, as much as—I spend all my time worrying about fiscal issues, except that now I’m worrying about something bigger, which is our country seems to be fraying—not just at the edges, kind of in the middle—and that the debt and the unwillingness for our leaders to make hard choices, deal with tradeoffs, tell their constituents anything they don’t want to hear, which is what results in this huge debt, is a big piece of the problem of where our government is right now. And I think as things get tenser—excuse me—and this deficit gets larger, and we have to make hard choices, the political environment that we are creating is going to make it even harder to make those hard choices. So there’s another vicious cycle, I think, in the political situation.

BERNSTEIN: Yeah, I’ve got to say that, you know, very—with respect to my colleagues here who definitely know their stuff, you know, none of that really resonates with me, with the exception of the fiscal space. But even that—it’s perceived fiscal space. It’s not real fiscal space.

I think the so-what problem is hugely important, and I think that by overemphasizing the problem of budget deficits, we’ve really generated some horribly damaging policy, not just in this country, but in other countries as well. I mean, the discussion so far has been really in the spirit of, you know, deficits are really this terrible thing. Well, when you are in a downturn, your question should not be is our deficit too large. It should be is our deficit large enough. And I would argue that while I thought we did some very nice work pushing back on the Great Recession in the Obama administration—of which I was a member and others here were also—I think we pivoted to deficit reduction way too soon in that regard.

So I think you have to be much more dynamic about all of the above, and I don’t see—there’s no—I view the possibility of a default as just about zero when you print your own currency. We’ve known that since Keynes.

I see the interest rate problem as largely unsubstantiated in the data. You know, you mentioned Goldman Sachs. They do very rigorous work on this, and I don’t think they have much of a thumb on the scale. They estimate that the tax cut in the spending bill—which, again, I consider reckless fiscal policy—may have added 30 basis points to the interest rate.

Now it’s not a great thing to add 30 basis points on a—based on this very, very low bang-for-the-buck kinds of fiscal policy but, you know, the 10-year Treasury bill just went up a point over the last couple of months, and the economy is still percolating along. And I think the fact that the U.S. economy is in very good standing, is closing in on full employment, is percolating along with a low unemployment rate—now there are problems that—they have to do with inequality, and weak wage growth for certain groups of workers, and people and places who are left behind—things that all require, by the way, investment. And that’s where the problem is: government investment. That’s where the problem is. The problem is not any of these abstractions about crowd out, and government dysfunction, you know—and yes, government dysfunction really stinks.

This is not—the problem is that when you have a deficit and debt of this magnitude in such a strong economy, that you’re not going to be able to make the investments you need to make in order to offset the structural problems of the type I was just ticking through. We can’t invest in training, we can’t invest in kids—our kids today, not our grandkids. The austerity today shortchanges our children today in the interest of our abstract children generations from now.

The problem with our deficits and debt is that we are unable and unwilling to make the political choices—and I agree with Maya; these are hard choices—and here’s where the dysfunction does come in, this absolute refusal to raise more revenues—largely a Republican problem, but Democrats cooperate too readily on that—this absolute refusal to raise the revenues we need.

I’ve tried to argue in my few minutes with you here today that whether it’s Social Security, or healthcare, or education, or investment in training, these are manageable problems. These are not problems that are beyond our reach. But we’re going to have to raise more revenues to do so.

We can talk about spending cuts, but spending cuts will never get us where we need to go. Instead of—and Nathan quoted exactly the right numbers. We’ve spent traditionally 20-21 percent of GDP. We need to go up to 22, 23, maybe 24 (percent) for a decade or so as old people like me filter through the system, and then we can come back down. These are the demographic pressures.

But I consider these all manageable problems. I don’t think they’re existential, I don’t think they’re unfixable. I do think they are unfixable with our current broken Congress, no question, but a set of political leaders who are willing to make the—take the steps of the type that I am recommending here could solve this problem.

HAASS: Let me ask one last question before I open it up because I don’t—I’m having trouble following one thing—more than one thing, but I’ll highlight one thing. (Laughter.)

What you are obviously saying—at least two of you are saying—it’s bad what’s going on, but you can’t quite pinpoint exactly when we reach Malcolm Gladwell’s tipping point. So if someone were listening to this conversation and said, imagine you had a political outcome which wouldn’t allow us to raise taxes a whole lot, but just imagine we could increase spending, and the spending was smart in ways that you thought were smart.

So instead of running a trillion-dollar deficit, we ran a two-trillion-dollar deficit. Would that reach a tipping point? I mean, what I don’t hear from you is any guidance as to—we don’t like this, somehow it’s bad, but I don’t hear any sense of clear—at what point is—did it become unsustainable or truly counterproductive. And without knowing that, how do we know where to—

BERNSTEIN: That’s a good question.

HAASS: —where we are—exactly where we’re at? That’s what I don’t sense from you all—a clear—well, just imagine we’re running—or a trillion-and-a-half a year—


HAASS: Is—might not—maybe that’s the answer.

SHEETS: Yeah, there is—you are absolutely right. There is no bright line in the sand, and that’s kind of the sense in which I was saying these policies are irresponsible. My sense is that we’re, you know, at these debt levels through the next decades, that we’re going to be able to continue to issue debt, and our rates are most likely—are interest rates are likely to be relatively low. But that’s a guess, and the more debt we have, the higher that probability of an adverse outcome is.

But then, in addition, I wanted to agree with some of the things that Maya was saying, that I was focused mainly on the probabilities of sharp, non-linear kinds of outcomes and crises. But heavy debt burdens can also have an impact on growth today and the performance of the economy today. For example, one case that I think we should all think about is suppose that long-term Treasury rates rise some more in a gentle, incremental kind of way, and suppose you have a 10-year Treasury yield that approaches 4 percent or maybe a little bit more, which wouldn’t be that historically outlandish. What does that mean for debt service costs? And at that point it gets to this issue that I think Maya was really emphasizing about priorities. What might that crowd out from the budget?

HAASS: But I’m going to—but, again, I’m going to push back at you.

SHEETS: And would that have an impact on growth?

HAASS: But it only crowds out things if you decide it’s unsustainable—

SHEETS: Right.

HAASS: —to run an even higher deficit.

SHEETS: Well, let me—let me answer the question. If somebody proposes another trillion (dollars), I’d say that’s a big deficit, but I’d also want to hear what they’re going to spend it on.


SHEETS: And there might be a trillion dollars of spending that would add to the deficit if it was in good infrastructure, it was going to raise the productive capacity of the economy, then maybe we’d—you know, it would be good policy.

HAASS: So what you’re—so the—but then a person listening to this conversation would say—would I come away from this conversation slightly more sanguine than they were walking into it on the basis of you’re going to look at the quality of the spending before you say more spending that leads to more debt is, per se, bad, and that we don’t know—and in a funny sort of way, lots of people have been predicting unsustainability. They fortunately have been proven wrong—at least they haven’t been proven right as yet, so in a sense, let the good times roll. (Laughs.)

MACGUINEAS: So before you become more sanguine—(laughter)—

BERNSTEIN: Maya does not let the good times roll. (Laughter.)

HAASS: No. (Laughs.)

MACGUINEAS: No, I mean, but the first thing is that’s the thing about tipping points.


MACGUINEAS: You actually don’t know when they are going to tip. And so I always liken this to kind of like the invisible dog fence, that you know it’s not going to feel good when you bump into it, but you don’t know when it’s going to. And this came from a horrible experience I had where, at a dinner party, someone decided to find out what invisible dog fences feel like, and put a collar—a dog collar on, and it was the most memorable thing I’ve ever watched. (Laughter.) They clearly do not feel good. And so—

HAASS: We call that research here at the Council on Foreign Relations. (Laughter.)

MACGUINEAS: But the question is—I mean, and the second thing that is going on that many of you know so much about, but the global economy has changed so dramatically at this period where deficits have been growing, and in a way that we don’t fully understand.

So I guess what I would say is when you have so many models, theories that make sense about why you can’t borrow indefinitely and that trying to borrow your way to prosperity or putting yourself on a path where your interest payments are growing faster than your economy, and your debt is growing faster than your economy, and that that’s something to worry about.

What I don’t understand is why we seem so intent on finding out where that tipping point is, and I will go back to my main point, which is I just believe it’s a reflection of a political class that is no longer willing to do anything hard. And that’s not how it used to be. And budgets are about tradeoffs and priorities, and it’s not about smaller government or bigger government at all. It’s about figuring out what’s worth doing and evaluating, certainly, the effects on growth, but not making them up, which is something we are doing in our policy discussion right now.

HAASS: Just to make you feel better, I don’t disagree with that. I gave a commencement talk the other day about slow-motion crises, and by the time you realize you are—


HAASS: —in the crisis, it’s too late. And this is—this is in some ways the—one of the best example—worst examples of just that.

Let me—we’ve got about 15 minutes left. We’re going to run a few minutes—

BERNSTEIN: Can I just speak to that?

HAASS: OK, but we’ll—this will take away from our 15 minutes.

BERNSTEIN: Oh, OK. No, go to your 15 minutes. (Laughter.) I’ll work it in. You made me feel guilty. (Laughter.)

HAASS: So—good, I succeeded. (Laughter.)

Raise your hand.

BERNSTEIN: I liked your question. That’s why I wanted to speak to it. I’ll get it in there.

HAASS: I know you will. (Laughter.)

Raise your hand. We’ll—keep your question short, let us know who you are, wait for a microphone, and we’ll do our best. I see—yes, sir.

Q: I’m George Hoguet from Boston.

My question is for Maya, but maybe our other panelists would like to comment. I’m wondering if you could say a little bit about the unfunded contingent liabilities of the United States. You mentioned the pension problem, but if you look at the Pension Benefit Guarantee Corporation, FDIC, many, many others, how big a number is that? How worried should we be about that, and what is your view as to whether some of those options might actually be called at some point?

MACGUINEAS: So, I mean, the problem here is that in so many of our programs—our intergenerational programs—we have promised, to the tunes of tens of trillions of dollars more in commitments than we have, on our current revenue path, a plan to pay for. So the difference between what we’ve promised—whether it’s in Social Security, or healthcare benefits, or state pensions—and what we’ve put aside to fund them is a huge, huge gap. And I think—again to go to sort of the political issue—one of the reasons this has happened is it is so easy to make very generous promises for the future and not back them up financially. And we’re seeing that. What really concerns me is what is going on in the pensions. I actually went to my board and said, we need to start looking at the states, and they said, you are called the Committee for a Responsible Federal Budget, and until you fix that—(laughter)—why don’t you not worry about the states—which lets me off the hook—(laughter)—says Dick Ravitch has to fix all this.

But, I mean, this—the imbalance about how much we promise is a huge concern. And again, I would go back to it’s a huge concern because those are real promises we’ve made to people but at a time when our budget should be so much more nimble than we ever imagined it would have to be because there really are all these challenges that could be opportunities for this country, this economy, and the world, but you’re going to need government as a strong finance partner for all of them. And if we’ve pre-committed to all these programs in a way that it’s very hard to make any changes to them, that means our budget is kind of cemented into promises from the past.

HAASS: OK. Yes, ma’am.

Q: I’m Hillary Wiesner.

A basic question from Economics 101. We were taught that when you are a debtor nation, you always devalue currency. Talk about slow-motion crises. We’ve been talking as if a dollar is a dollar is a dollar. What about the devaluation of the dollar factor?

HAASS: Why don’t you take that?

SHEETS: Yeah, I’ll take it. So there are a lot of different factors at play here. One sort of theory of the case is that we have twin deficits, and as the federal deficit, as the government deficit blows out, that that then puts downward pressure on the current account, as well, which then brings with it a weaker dollar.

Again, the flip side of the reality of where the United States is, there is substantial foreign demand for U.S. assets, and as we issue these assets, foreigners have been happy to accumulate them, and that has been a substantial offset to the current account deficit and the weakening of the dollar that would result.

We do have a problem. Our current account has been out of balance for several decades, but I think that has more to do with our domestic saving and investment, and private sector particularly. But having a more disciplined fiscal policy would help take some of the pressure off as well.

BERNSTEIN: So there’s—I wanted to make a quick comment. There’s no historical correlation between the value of the dollar, and the deficit, and the debt. It’s just not there.

Now a guy who I think works here—Brad Setser—is that—am I right about that?

HAASS: Uh-huh, yes.

BERNSTEIN: He has made a—he has done some interesting—oh, is Brad here? Hello, Brad. (Laughter.) So he could tell you about this better than I can. But he made—he said something that made sense to me which is that, based on some dynamics that are currently strengthening the value of the dollar—the dollar is getting stronger—one of the things that leads to a stronger dollar is relative performance: our economy is doing better than many others, our Federal Reserve is raising interest rates so that leads to a stronger dollar while other central banks are doing much less of that.

We’re also closing in on full capacity in our economy. I keep saying we’re coming—closing in on full employment. Some people say we’re past full employment. It’s very possible that the combination of the strong dollar—which tends to boost our trade deficit because it makes our exports more expensive and make imports to us cheaper—in the combination of kind of capping out on the economy’s capacity, could end up having the trade deficit work like an absorption mechanism or a pressure valve for some of the extra demand that’s going to be in the economy. In other words, the combination of all this fiscal stimulus of full employment and the strengthening dollar could actually lead to a bigger trade deficit so it stimulates demand in other countries instead of here, which I think is a really unfortunate outcome, and it’s sort of what I was talking about when I, you know, I like the idea of the unemployment rate coming down even further, but, man, I definitely wouldn’t have done this kind of fiscal policy to get there.

HAASS: The president’s enthusiasm for that increased trade deficit will be—


HAASS: —unlimited. (Laughter.)

Bernard Schwartz.

Q: Do I need—(off mic)?

HAASS: Yeah, you do.

Q: I’m not against controlling expenses in the government to make it more valuable and more important. I am against not borrowing more money for productive assets. Not one of you have mentioned what the element of the productive assets are in this equation. If I went to the bank tomorrow and said that I owed $20 trillion, and I went there to borrow money, but I had $40 billion—trillion of productive assets, I’d get my loan. Not one of you have mentioned the fact that our productive assets are huge in this country in relation to our debt, and I don’t know why there is any concern. The so-what question is the real question.

HAASS: Yeah, that’s a good point. Did you want to—

SHEETS: But I—in some sense, I think Jared did emphasize that by talking about the importance of thinking about these numbers relative to our GDP. And GDP is a measure of our productive capacity.

BERNSTEIN: But GDP leaves out a ton of wealth.



SHEETS: Yes. The corollary to that is when I think about the lives that our children and grandchildren are going to have, this debt is certainly part of that. But the biggest part, the dominant part is what happens to productivity. And if we’re able to pursue policies—public sector or allow it to grow in the private sector—that support productivity, that’s going to—that’s going to swamp all of this other stuff. And if there is anything that right now leaves me somewhat pessimistic, it’s the productivity growth in the United States over the last six or seven years has been very soft. But productivity is part of that long-run, productive capacity of the economy, which gets at the assets that you are talking about.

HAASS: Yes, ma’am.

Q: Bhakti Mirchandani, FCLT Global, which is a think tank. Thank you for a fascinating discussion.

A couple of times during the moderated session one thing that came up was the importance of real tax reform. So I would love to know what that means to you. And then I had a specific question on the dynamics of tax.

HAASS: OK, I want to push that—the tax question to the next session just because I’ll get in trouble with my former chairman here. He’s running the prescriptive session; I’m trying to run the analytical session.

Q: OK, so I’ll ask a backward-looking question. So right now corporate tax is a lower percentage of GDP than it has been historically. Do you think that’s part of the problem? Do you think that was a good idea? What are your thoughts on the kind of personal income tax as a percentage of federal budget going up?

BERNSTEIN: Thar’s a great question and, you know, I think we’ve just cut taxes way, way, way too deeply.

I didn’t like the idea of having the highest statutory corporate rate in the world, so I thought we should bring the corporate tax rate down, but the idea that this tax reform was—the idea that it should have been corporate—revenue neutral; that is, it shouldn’t have lost—you know, it was deficit finance to the tune of $2 trillion, a percent of GDP over ten years. That’s a tremendous waste. So I think that we are collecting far too little revenue in all sectors—in the corporate sector, in the personal sector. Certainly, you know, other countries collect a lot more from the sales, from the retail sector with VATs, and this, to me—if you—there’s no way out of this problem—I guess I just can’t hammer this—and this will be the next session—without generating more revenues.

And I saw Bob Rubin on the way in when we were walking into the building. A friend of mine just shared a calculation with me. Those of you who do this analytical thing, do this at home—try this at home. If you keep the Clinton tax parameters, the ones that were there when Bob was around, and you keep them intact, and you let everything else change exactly the way it has changed since then, your debt to GDP, instead of being 77 percent, would be about 40 percent, which is about what it was—that was kind of the—before it started climbing. Your deficit as share of GDP would be in the 1 or 2 percent range.

So it’s the Bush tax cuts and then, on top of that, the Trump tax cuts that are the main implication that our—the main criminals here in this problem that we are trying to deal with.

MACGUINEAS: And let me—let me just agree that I would have said prior to tax cuts/reform that we should have been focusing on bringing the corporate tax rate down to increase competitiveness but not nearly to the point where it is. I don’t think that there are very many corporations who were expecting or even asking for this low a rate, so I think we went way too far.

I think we neglected to broaden the tax where there are a ton of reforms that could have been done which would actually be pro-growth in many ways, and—I’m just going to sneak this in—carbon tax—just saying it for the next panel. (Laughter.)

HAASS: By the way—

MACGUINEAS: Just wanted to get it in.

HAASS: —our chairman wants to make sure—our current chairman—that the entire next session is devoted to the importance of taxing carried interest—(laughter)—so I just want to—I just want to—I just want to put that on the—on the—actually, I need a show of hands here—

BERNSTEIN: There’s skin in the game there.

HAASS: I need, for one question I have—here’s my issue. We’re supposed to end now. The next session is supposed to start in 15 minutes. And the question is we can go upstairs and have a drink or whatever in that time, or we could just go straight into the next session. So I need a—I want a show of hands. Who would just prefer to stay here? And who wants a break?

OK, so we’re going to go straight—

MACGUINEAS: People who want to talk about the debt more than drink? This is huge! (Laughter.)

HAASS: This is serious. I mean, this is the greatest tribute to Pete that people would prefer to talk about that, so we’re actually going to—we’re going to end this session, we’re going to thank these three stars—(laughter, applause). And we’re going to start the next session, then, in literally about five minutes. We’re just going to have people do that and all that.

You were great. Thank you.

BERNSTEIN: Thank you very much.


Prescriptions for a Solvent Future

This is the second session of the American Debt: Causes, Consequences, and Fixes symposium. The symposium is held in honor and memory of Peter G. Peterson, who passed away on March 20, 2018. Peterson served as Chairman of the Council on Foreign Relations for twenty-two years, and was a passionate advocate for fiscal responsibility and protecting the United States from what he believed was an unsustainable national debt.

This event was underwritten by Steve and Roberta Denning and the Sage Foundation in appreciation of Peter G. Peterson and his impact on and leadership of both the Council on Foreign Relations and this country.

RUBIN: Welcome to the second session of our fiscal discussion. I’m Bob Rubin. I will moderate this. We have a terrific panel: Joyce Chang, who is head of global research for JPM corporate investment bank; Doug Holtz-Eakin, who has been all over the place but was head of CBO at one time—and head of CEA, right?


RUBIN: Both, OK. And Peter. (Laughter.) He’s like Bono. He only needs one name. No, Peter was head of OMB and CBO, as we know, and now is an investment banker of sorts.


ORSZAG: He works for a competitor firm. That explains that.

RUBIN: We’re going to cover a little bit of the same ground, but then we will get to the prescriptions as Richard instructed. But let’s, just for the fun of it, do this to start with. Roughly speaking, the debt is—publicly held debt of the federal government is, what, 15 ½ trillion (dollars) now, or something like that? Fifteen and three-quarters trillion (dollars); some number like that. And that’s, give or take, 76-77 percent of GDP.

Douglas, in particular I think I’d aim this at you. Do you agree that the trajectory, given whatever views you have on growth, is likely to lead us, as the prevailing view, to about 100 percent of GDP 10 years from now? Or do you have a different view?

HOLTZ-EAKIN: Oh, no, it will be at least 100 percent.

RUBIN: Oh, you do have that view. That’s interesting. I thought—OK. Yes, Peter.

ORSZAG: The only thing I’d say is—

HOLTZ-EAKIN: If it’s left on autopilot. I mean, if you just—

RUBIN: Yeah—no, left on autopilot, OK.

HOLTZ-EAKIN: (That’s all right ?).

RUBIN: I thought you had a different view.

ORSZAG: Yes, but—as a central prediction, yes. But we have to understand these things are subject to a massive amount of uncertainty. So the five-year ahead—you know, we talk about the deficit five years out, so it’s 5 percent of GDP. The 90 percent confidence interval around that projection is plus or minus 5 percent of GDP. So what we’re saying is it’s somewhere between zero and 10. So, yes, but with wide bands on both sides.

RUBIN: OK. Just to refine this so that Peter can relate to it—(laughter)—I was talking about the prevailing—

ORSZAG: This is going to be a long night.

RUBIN: —the prevailing view. (Laughs.) OK, to go on, Richard rightly asked the what-if question. And I think there are some aspects of that that maybe weren’t fully covered.

Why don’t we start with Joyce, if you want to, or Douglas or Peter; anyone who would like to start. What if?

CHANG: Well—

RUBIN: Let’s assume, for the moment, that the prevailing trajectory that Peter has difficulty coming to grips with nevertheless materializes? What do we think the effects might be, and how serious are they?

CHANG: Well, I’d just start by saying that misery loves company. There’s a lot of countries that are going to be approaching 100 percent of GDP on their debt ratio. We’re already there in Europe, and even countries that look like they’re relatively healthy that are getting closer to those levels, like Canada.

But I think, just to pick up on the last panel, I mean, we are worried about the size of the fiscal deficit. We have it at 5.4 percent of GDP next year. And it’s twin deficits, so we have the current-account deficit going up to practically 4 percent of GDP.

RUBIN: Douglas.

HOLTZ-EAKIN: Yeah. So can I just take a 30-second detour and just express my appreciation for the chance to be here tonight in honor of Pete, who had an enormous influence on my career. I’ve worked both here at the Peterson Institute in Washington, and I’m also happy to be here because I’ve dedicated my adult life to the proposition that better-educated policymakers would come to grips with this issue. That’s clearly not true. (Laughter.)

But this is how I think about it. And if you just leave the federal budget on autopilot, we see rising deficits, rising debt relative to GDP, rising interest as a share of the deficit. And inevitably we are borrowing just to pay off previous borrowing. And mechanically we are entering into a debt spiral.

World capital markets will look at that and they will draw a conclusion at some point that they have no faith the U.S. is going to fix that, that the probability of getting a fix and not doing that is too low. And we know what happens then. There’s market shutdown of access to capital. There are sharp spikes in interest rates, exacerbating the basic problem. The government is put on an austerity program by its creditors. That austerity program makes everything worse economically, so that the ongoing distress gets worse. You have to raise taxes dramatically because you can’t cut the spending quickly enough. And that’s just a horrific place to go.

Now, everyone always asks, when does that happen, Doug? And the answer is, because we’re a reserve currency, we get a little more rope; because we’re the best-looking horse in this glue factory, we get a little more rope. You know, that’s—

RUBIN: That’s a great line. (Laughter.)

HOLTZ-EAKIN: And so I don’t know when the answer—what the right answer is on when. But I would ask you, why run the experiment? I don’t want to know the answer. Fix it. These are all self-inflicted problems. We should just fix it.

RUBIN: Peter, let me ask you to comment on anything that’s been said so far if you’d like, but let me ask a specific question. You spend a lot of time advocating—this is my recollection—is advocating public investment in human capital in a whole array of areas that we probably need—almost surely need to do if we’re going to succeed economically. How do we do that if we have increasing interest costs squeezing out our budget, et cetera?

ORSZAG: So three comments, the last of which will answer that. The first is—and I don’t mean to be too much of a contrarian here, but I just want to quickly read a sentence—in fact, I could read more than that, but I’ll just read a sentence: Failing to address the nation’s long-term budget gap seems especially misguided, since sustained and substantial budget deficits may induce fiscal and financial disarray, with potential costs far larger than those presented in conventional economic analyses, and since such deficits reduce flexibility to respond to unforeseen events in the future, which is very much the flavor of at least two out of the three speakers on the first panel.

And I would just note, Bob, that you and I wrote that in 2004. So these issues have been—you know, the danger is lurking there. And I do want to just—

RUBIN: And, with all due respect to us, we were right. (Laughter.) If you had a financial crisis now like we had in ’08, with a 76 percent debt-to-GDP ratio, could we respond in the same way we did when you were there?

ORSZAG: Yeah, unfortunately that financial crisis that we experienced was in between when we wrote it and—but correct.

So the second point is these things do depend on lots of factors. So the permanent fiscal gap facing the country, by the calculations that used to be Auerbach, Gale, and Orszag, and now are just Auerbach and Gale, went from 9 percent of GDP in 2010 to about 6 percent of GDP today. And that’s in spite of a whole bunch of fiscal expanding, deficit-expanding policies, mostly because the rate of growth in health-care costs has come down, or the projected rate of costs, of health-care costs, has come down significantly.

So it’s very—I don’t want to be bleeding into where we are going to go in terms of solutions, but just to point out these numbers do kind of move around a lot.

Then the final point, which is the actual question that you asked, I guess I should answer. Look, it’s a lot easier to make investments of the type that Bernard and others support and that I support when you have more fiscal room than when you have less fiscal room. We don’t need to debate the point that it’s come up on the first panel about whether we still have enough room to make the investments today to correctly recognize it would be a lot easier if the debt-to-GDP ratio were at 30 than when it’s at 75.

RUBIN: Doug.

HOLTZ-EAKIN: I’d like to just emphasize two aspects of that. Number one, the sort of topline mismatch between revenue and spending is one of the problems. The other problem is the structure of the budget is all wrong. The big mandatory spending programs, the legacy programs of the past, are crowding out all the discretionary spending, which is national security, basic research, infrastructure, education—all the things the Founders saw as the role of the government and all the places where you can genuinely invest in the future.

And so that’s a serious problem. Even if you’re not worried about the deficits, we should be fixing the structure of how we spend our money.

And those entitlement programs are no longer what they were supposed to be. Think about Social Security. Social Security was invested to insure against the risk of running out of money in old age. And right now it’s scheduled to go bankrupt in 13 years. And so people in retirement will face a 25 percent across-the-board cut in their Social Security checks.

It has turned from insurance against social risk to the—financial risk—to the source of financial risk. That’s just not OK. We need to fix these things for both those reasons.

RUBIN: Doug, if we—you say 13 years, something like that.


RUBIN: Yeah. OK. What do you think will actually happen? Don’t you think we’ll just pay the money out of the general fund?

HOLTZ-EAKIN: We’ve already done that, right. We’ve already broken the link between sort of the payroll tax and stuff. So, yeah, there’ll be a temptation to rob Peter to pay Paul rather than make a decision.

RUBIN: Peter, you used a number before—

ORSZAG: Could we literally rob Peter? (Laughter.)

RUBIN: What is the presented discounted value of the fiscal gap? That is to say, if you take future deficits out for 30 years—debt-to-GDP ratio out for 30 years and you want to solve that today, I had a slightly different number in mind than you.

ORSZAG: It depends on the time horizon. I was giving you the permanent fiscal gap. So what is the immediate increase in revenue as a share of GDP or a reduction in spending as a share of GDP?

RUBIN: Present value for 30 years, yeah.

ORSZAG: Well, no, I was going—I was going to infinity there.


ORSZAG: It’s 6 percent of GDP today. Before the tax cuts, it was, you know, 5 ¼ (percent). If you take shorter time periods, the numbers are smaller, because obviously these deficits are exploding over time faster than you’re discounting that. And so the numbers go up the further out you go.

RUBIN: Yeah. For whatever it’s worth, Center for—Bob Greenstein’s thing, Center for Budget and Policy, I think they use about 2 ½ percent, don’t they, something like that?

ORSZAG: It’s over a shorter timeframe.

RUBIN: Yeah, 30 years. OK.

OK, let’s go for—

ORSZAG: They’re big, regardless.

RUBIN: What?

ORSZAG: These are big numbers, regardless.

RUBIN: These are big numbers, no matter what. OK.

What do you all thing—let’s stipulate that, whatever the full magnitude of the answer is to Richard’s question, the what-if, there’s enough serious concern so there’s a lot to be concerned about. What do you think the probabilities are, in your judgment? And we’ll get to things one can do in a moment, but what do you think the probabilities are that our political system will deal with these issues before we get to the point we’re forced to do so by the severity of the effects?

ORSZAG: Twelve-point-seven. (Laughter.)

RUBIN: Twelve-point-seven, OK. Peter says—Peter says 12.7 percent.

HOLTZ-EAKIN: That’s fascinating because I’m at 12.8 (percent). (Laughter.)

CHANG: Well, I’m going to talk about our recession model, because we have the risk of a recession this year, you know, pretty low; 18 percent. But we have that rising to 40 to 50 percent over a two- to three-year period.

RUBIN: Forty to 50 percent?

CHANG: Forty to 50 percent over a two-year period, looking at high-frequency data, looking at profit-margin squeezing, wage pressures. And I think the concern is, if you were to have a recession, which is not our base-case scenario, you would actually have the worst budget balance in 50 years going into a recession.

RUBIN: Well, that’s a very interesting—so 40 percent or thereabouts.

OK, if either of you were back in the positions that you were in in the government when you were there and we faced a recession with a debt-to-GDP ratio of 80 percent, let’s say—just use a number—what would you do?

HOLTZ-EAKIN: We’d end up doing exactly the same things. Like, what do Republicans do when recessions hit? They cut taxes. And that’s exactly what would end up happening. And they would argue that, yes, it increases the probability of a bad outcome post-recession because of the higher debt load, but we can’t leave people in distress right now. And they’d do it anyway. I’m not happy about that, but I think that’s the honest answer.

ORSZAG: I think that’s right. And the question becomes, which the previous panel struggled with and we can’t give you a precise answer to also, is at what point do you hit the dog fence, the invisible dog fence?

RUBIN: Yeah.

ORSZAG: There would be a higher risk of that today than there was in 2010-11. But you don’t know where it is.

RUBIN: But that was my point about the comment that you and I wrote, that it sort of was right, just—OK, good.

You didn’t—neither of you answered my question, which is, if you take the trajectory that we all seem to agree on, what do you think the probability is that our system will deal with this before it’s forced to by the severity of the—

ORSZAG: Well, let me comment on that, because it partly interacts with—

RUBIN: (Inaudible.)

ORSZAG: Yeah, OK. It partly interacts with where that line is, and we don’t know where it is—by the way, because it depends on investor confidence. It depends on the alternatives. It depends on all sorts of things that you can’t fit into a precise model and that vary from situation to situation, so there’s not one threshold. We don’t know where that is. So you can’t really answer the question because you don’t know how much running room you have.

I also come back to the uncertainty of the deficit projections. Why are they uncertain? They’re uncertain because the deficit is extremely sensitive to economic growth and to the rate of health-care cost growth in particular. And so do I think that we have any hope of a serious deficit-reducing bipartisan package over the next 10 years in the absence of a fiscal crisis? Basically no.

Do I think it’s possible that we’ll have a spurt—I wouldn’t bank on it, but is it possible that we’d have an acceleration in productivity, that the growth rate and health-care costs will continue to be as low as they have? That’s possible. So the problem may get pushed out, not because of anything that happens in Washington but because of other things that have big effects on the deficit being highly uncertain, and there’s some chance—now, that also means the world could turn out, you know, on the down side, much worse than we currently expect. And that’s why you don’t want to be taking this risk.


RUBIN: Oh, Joyce.

CHANG: I mean, we have U.S. growth coming down at the margin next year to about 2.2 percent. But we took potential growth down quite a bit after the global financial crisis, and we’re just not seeing the productivity gains that we’ve had previously, even with CAPEX growing, you know, 6 to 8 percent, you know, globally.

So I’m not so sure on the productivity gains. I’m more concerned on, you know, the growth outlook, and that you’ve also had structural changes in the economy and what that means, particularly as other central banks begin to raise rates, like the ECB at the end of next year, and what that picture could look like.

RUBIN: Joyce, let me ask you this. What is now your long-term—

CHANG: So our—

RUBIN: —non-inflationary rate of growth of the U.S. economy, roughly?

CHANG: So we’ve been, like, roughly over 2 percent, in that range. But we haven’t been able to break out of that.

RUBIN: That’s about the CBO number.

CHANG: And the tax reform—I mean, we think that added about .3 percent to GDP, of which only .1 percent went—is going to capital expenditures; so very, very modest.

RUBIN: You think it adds .3 over—

CHANG: Over two years.

RUBIN: Over two years. Goldman Sachs, I think, had it as 12 ½ basis points over five years on average.

CHANG: Yeah. So this is—if you were at the peak of this, I mean, this is actually the longest U.S. expansion you’ve had since World War II. It’s the 11th year in the stock-market expansion. I mean, one risk is what happens with asset prices.

RUBIN: Let me ask one more question—


RUBIN: Yeah—

HOLTZ-EAKIN: —actually answer your question, at least tell you how I think about it? So, you know, there’s a famous saying that if something can’t go on forever, it won’t. And so this can’t go on forever. So the things that are the current politics that keep it like this are going to have to change.

Now, how could that possibly happen? Well, somebody has to be for entitlement reform, for example. No one’s ever been for entitlement reform. Someone has to be for it, someone besides me, because, you know, that’s not going to change anything. So, you know, how does that happen? Well, the defense and non-defense discretionary crowds are getting squeezed, and they know it. And they have to say, hey, make some room in the budget for us. And there does now exist in Washington that Non-Defense Discretionary Coalition, the single worst-named coalition in the history of Washington. (Laughter.)

I’ve spoken to them. And they’re there to make the case that if our research universities are going to have adequate funding, then we have to come to terms with things. So some of these politics can change where you start getting things that used to be just off limits and unthinkable; at the edges they start getting niggled at.

As I said, Social Security itself is not in great shape right now. You know, fixing it might become a bigger priority. You know, the threat of default might spur things more. And so much of the spending is locked in by the large programs that, you know, the younger generations can’t get the government to do what they want. They can’t spend on worker training in an age where there are all these technological advances. The infrastructure stuff gets all balled up. There’s no money.

All of those are pressures that I think might be more powerful than people realize. And, you know, I think we—on the tax front, you know, we really needed to do a business tax reform. I think the status quo was untenable. I think the centerpiece of what they did are the corporate reforms, particularly international pieces. I think I’ll give them a gentleman’s C on what they did with the passthroughs. They flunked the individual side. And they should have done it in a deficit-neutral fashion.

But they’re going to have to come to grips with raising taxes. Republicans are going to have to understand that.

RUBIN: Let me ask you a question, Doug. Let’s assume, for the moment, that our corporate rate was just noncompetitive globally—


RUBIN: —which it was; I agree with that. Should they have done it when it was totally deficit-funded, or should they have paid for it?

HOLTZ-EAKIN: I think they should have done revenue-neutral reform. I think the House started off—

RUBIN: Yeah, OK.

HOLTZ-EAKIN: —on the right page, and then the administration dragged them off and—

RUBIN: Yeah—(inaudible)—said, OK, so that’s that.

Let me ask you this about entitlements. And maybe, Peter, I’ll ask you to answer this too. Jason Furman, who used to be head of the CEA, says—but I don’t know if this is right or wrong—that if you put in place reasonable health-care reforms to the national health-care system, not the entitlements, not the federal system, that you could substantially reduce the rate of growth of federal health—sorry—of national health-care costs, and that would feed through to Medicare and Medicaid and solve a fair bit of our total fiscal gap. Is that true or not true? And, if so, what other kinds of changes do you have to make? And go to the political economy. What’s the probability you can get them done?

ORSZAG: Well, first, it is correct. And I would just say, I mean, honestly, I think—

RUBIN: See, that way, Douglas, you could actually get the entitlements without changing the benefits.

ORSZAG: Well, that’s where I’m going. I think—I think with—again, the books that have been written—I’ve written some of them—on all the traditional budget options are not—

RUBIN: Have they sold well?

ORSZAG: Yeah, they have not sold well. And they’re not particularly useful in today’s environment. You’re not going to get a significant increase in the individual income tax on the middle class. It’s not going to happen. You’re not going to get a big Social Security reform, in my opinion. It’s not going to happen.

I would prefer to put a little bit more energy into the other things that are going to materially move the fiscal imbalance, but without that being the primary focus. So, for example, carbon tax, which has other benefits and has motivated in other ways, $25 metric ton of carbon is a trillion dollars over a decade.

In health care, which is even bigger, there are tons of things we could do to continue to keep the growth rate of health-care spending much lower than it has been historically. It involves three things, basically. The first is taking a lot of the excess utilization, especially in Medicare, out of the system. And that requires changing the way we pay for health care, moving away from just paying for volume; paying for value.

We are in the midst of that transition. There’s a little bit of kind of two steps forward and one step back, which is the way it should be. But if—in the health-care sector, people are moving. The expectations are changing. And, by the way, Medicare spending per beneficiary has fallen for seven years in a row on a real basis, far beyond what anyone would have predicted, largely because of these expectations and changes in how hospitals and doctors behave.

The second thing that we could do is for private insurance, which would then affect the tax base, because private insurance is tax-deferred—the biggest opportunity has to do not with utilization but with prices. So the reason that health-care costs vary across the United States in Medicare is almost entirely because of how much health care is delivered in different parts of the country. The reason that employer-sponsored insurance varies across the country—the majority of that variation comes from the price paid per unit. And that has to do with a lot of factors.

But there are many things we could do, from better enforcement of the antitrust laws to more radical proposals. For example, any insurance company is—doesn’t have to pay more than 120 percent of the Medicare rate. You would immediately eliminate a lot of that variation. That may have more costs than benefits. But there are things that one could do.

And the final part has to do with taking out a lot of the administrative costs. So there is a lot of back-office functions that are replaceable as technology evolves and the system digitizes. And I am a big optimist over the next 10 to 15 years in terms of the value that we can obtain from health care with potentially significant opportunities or improvements in the long-term fiscal imbalance that comes from that. And I think that’s far more promising than going back to the old ledgers of, you know, we’re going to raise the middle-class tax rate by 300 basis points. That’s not going to happen.

RUBIN: Does that cause you, Peter, to have a different view of the fiscal trajectory than we started the discussion out with? Remember, we said it would—that CBO was projecting roughly 100 percent 10 years from now.

ORSZAG: Well, no, it comes back to this is why I’m not—I’m very concerned and would love to be on the, like, let’s get a deal done. But in the absence of that, there are other things that we could be doing that have lots of other benefits anyway. So let’s go do those things.

RUBIN: No, but—well, OK, but I guess my question was really this. Given the potential that you have just outlined from health-care changes, that change to our national health-care system, does that—if that were to occur—well, two questions. One is, what is the political economy of getting those done? And then, if they were to occur—yeah, well, Douglas—(laughs)—I mean, that is question one. And question two, if it does happen, how much of a difference might that make in that trajectory?

ORSZAG: Well, again, it could make a significant difference in the trajectory. I mean, the—the primary reason—there’s a little bit on the interest rate. But the primary reason that long-term fiscal imbalance, the figures that I quoted earlier, came down was because the rate of growth in health-care costs has declined significantly from what it was 20 years ago and what was embodied in the projections as of, you know, 2007 or ’08.

RUBIN: OK, but—

ORSZAG: Now, on the political economy, none of this is easy. But everything’s relative. It’s a lot easier than a middle-class tax increase. It’s a lot easier than a value-added tax, in part because what you’re doing is you’re trying to shove the system and then get the private-sector part to respond to new incentives. So it’s not easy.

One of the difficulties is when you take spending out of health care, it’s someone’s income. So that part’s not easy. Nothing’s easy. But the benefit is—or the opportunity is, A, there’s so much waste in health care that you can do a lot without harming outcomes; and secondly, that the rate of growth remains so significant that you can curtail that growth rate without an absolute decline.

So I think there’s—I’m not diminishing or trying to downplay the difficulty. But again, we’ve got to grade on a scale here, and this is a lot easier than any of the other options that we’re going to talk about.

RUBIN: Douglas, let me ask you—that sounds right. You know, Richard—(let’s take it back to an interesting ?)—I’ve said this to Richard before. It seems to me the fundamental problem in our country is a dysfunctional political system. And all this comes right back to it. I wonder what the Council’s role in that could be in trying to help contribute to the national discussion. Maybe there is a role. Maybe there could be one. Maybe there couldn’t. I don’t know.

HOLTZ-EAKIN: I think that’s actually really important. I mean, think about it. The American public—the average person is blissfully unaware that there’s a budget problem at all, because for eight years Barack Obama told them there’s nothing wrong with the federal budget we can’t fix by taxing rich people. And for the past 18 months, almost two years, Donald Trump has told them, hey, there’s no problem at all. No one has told them the truth about what’s going on out there, and they are utterly unprepared for any significant change to the social safety net and the tax system. They are.

ORSZAG: I totally disagree with that. I don’t think the problem is that people aren’t aware vaguely that there’s some fiscal problem. It’s that they don’t feel any impact from it today. So you can go out—and Maya does a great job doing this—say there are all these deficit projections. Until people feel it, they’re not going to act on it.

RUBIN: Yeah. But on Douglas’s point, do you think—I mean, it’s one thing to talk about the people in this room and this segment of our society. But do you think if you went out across America—

HOLTZ-EAKIN: This is not—(inaudible).

RUBIN: —there’s the kind of awareness that you’re speaking about, Peter?

ORSZAG: I’m quoting—that it’s 15.2 trillion (dollars) versus 4 trillion (dollars), no; on the sense that there is a large, long-term fiscal problem, yes.

RUBIN: OK. Well, you may be right, but it’s also possible you’re wrong. (Laughter.)

ORSZAG: Thank you for that insightful comment. (Laughter.)

RUBIN: I try to be useful. I knew we were going to upgrade the panel—not upgrade. I mean, we’ve got a terrible panel. I knew we were downgrading the moderator, so I’m proving that. (Laughter.) OK.

HOLTZ-EAKIN: A little while back we spent Pete’s money doing fiscal wakeup tours, like going to places in America—

RUBIN: Yeah.

HOLTZ-EAKIN: —standing on stages, talking about this. They have no clue, I promise you. The people who showed up are the people who care, and they don’t have a clue.

RUBIN: Let’s focus—OK. Let’s focus on the carbon tax for one second, because that’s obviously an enormous amount of money. But one of you take this; maybe, Douglas, start with you.


RUBIN: It would be regressive. So the Democrats are all going to say, well, if you’re going to do it, then you have to declare a dividend to the people who are being regressively damaged; whereas people like us would say—people like, well, other people would say that it should, in some measure, be used for deficit reduction. How do we deal with that problem?

HOLTZ-EAKIN: I’ll just be real honest. Everyone has their moment of political pessimism. This one’s mine. I’m fundamentally optimistic, despite the world we live in. I do not foresee a stand-alone carbon policy—tax, cap and trade—passing the House, passing the Senate; I mean, signed by any president in the foreseeable future.

You know, I was advocating McCain’s cap and trade all around the Republican primary. You need Kevlar business suits to do it.

RUBIN: (Laughs.)

HOLTZ-EAKIN: It’s just not—it’s just not in the feasible set. And so fine-tuning the way it works, I don’t think, is the issue.

The moment it could have been usable was in a genuine tax reform that was revenue-neutral, because it would have gotten to revenue neutrality. And you could have had the sort of classic coalition of the disgruntled—the Republicans dragged to the carbon tax because they need the money; the Democrats dragged to a lower corporate because they wanted a carbon policy. And that was the window, and it—that’s why I don’t think they ever should have given up on revenue neutrality. (They ought to have ?) forced it.

RUBIN: Joyce, when you all put together projections—because you do, because that’s your job—so now you look out two or three years and you have a 40 percent chance of a recession, you say. And then you look beyond that and you have a long-term rate of growth, whatever that may be. How do you take into account this whole debate about our fiscal position, its effects?

CHANG: Well, I do think that, just going back to what you can do and what—one thing I do want to talk about is deregulation, because I do think just—the ease of doing business, particularly at the—we talked about the federal level, but at the state level and at the local level, the deregulation is something that I don’t think has as much controversy as some of the things that you’ve just—that we’ve necessarily talked about, or that there are aspects of it related to the ease of doing business and licensing that can be done.

But, you know, when we put the forecast together, I mean, my concern is, you know, the demographics, which goes back to the productivity outlook; the fact that potential growth has come down quite a bit since the global financial crisis; that, you know, the structure of the economy has changed. And, you know, we’ve done a lot of work looking at things like the corporate repatriation. But about 80 percent of the money that’s overseas is in tech and pharma, so you’re not seeing the investment boom that a lot of people had talked about.

So I think you’ve got to put demographics into this. You need to talk about education and infrastructure as well. It’s very hard to see how you can actually make a dent with infrastructure when you have a fiscal deficit that’s going to be nearly 5 ½ percent of GDP.

RUBIN: I have one more question. Then we’ll turn it over to all the members who are here.

HOLTZ-EAKIN: Can I say a word about deregulation?

RUBIN: Absolutely.

HOLTZ-EAKIN: I think we’re running a very big experiment on this front. I mean, so I run a think tank that’s an over-21 day-care center, and we have—(laughter)—an intern program. And so we bring America’s bright young minds to Washington and make them read the Federal Register every day. And some die, but you can get more interns. (Laughter.)

And so we add up the self-reported, by the agency, cost for the private sector to comply with the regulations. And we’ve been doing that for years. And the Obama administration issued a costly regulation, at an average rate of 1.1 per day, for eight years; total self-reported cost of compliance accumulated to $890 billion, over $110 billion in regulatory cost increases.

The Trump administration, from his inauguration to the end of fiscal 2017, raised that total by exactly $5 billion. In a way that I did not think was possible, they shut down the regulatory state. And then they did something even more dramatic. They put every agency, the 24 entities in the regulatory budget, they put them on a budget. Here’s the number that you’re allowed to increase the regulatory burden in fiscal 2018. All those numbers are zero or negative. They’re planning to take it down further.

Now, that doesn’t say that they’ve learned how to write better regulations. It doesn’t say they’ve chosen the right way to do this. But in terms of the impact of the burden of regulation, this is an enormous sea change. And I’m—

CHANG: It is.

HOLTZ-EAKIN: I’m—I think, you know, there’s a lot of anecdotal notice—evidence that people have noticed; that the NFIB surveys all show the small-business community is ecstatic about this. And we’re going to see if it translates into better economic performance. It’s a big deal, and I don’t think people realize how big a deal.

RUBIN: You know, it’s interesting, though, Doug, I mean, I remember President Obama, somewhere around 2011—I could be wrong—issued an executive order saying cost-benefit frameworks should be applied to all regulation. Unfortunately, they didn’t do a hell of a lot with it. But the question is, is this being done on a rational cost-benefit basis, or more or less ad hoc?

HOLTZ-EAKIN: So they put the budgets on these guys. Then they asked—

CHANG: I know.

HOLTZ-EAKIN: —OMB to do a unified measure of costs so that agencies can’t game it as much. And then the agencies began gaming it. So, you know, it’s highly imperfect. It’s in an initial stage.

RUBIN: All right, one more question; then we’ll go to everybody else. Doug, in 20—let’s see—no, in the last year of the Clinton administration, the year 2000, revenues were 20 percent of GDP, I think. I think that number is right. It’s roughly 17 percent now, or thereabouts. I think it’s being projected next to 16 ½ percent or thereabouts. I may be slightly off. I’m not much off.

If you go to the Republicans in Congress and you say you’ve got a deficit—you’ve got a fiscal situation that you all have argued against for as long as you’ve been in Congress, and now your revenues are at 16 ½ percent when they were at 20 percent—when they were at 20 percent, we had one of the best economies in the history of our country—don’t you think we should do something about it, what do they say to you?

HOLTZ-EAKIN: There are two kinds of Republicans. Some are deficit hawks, but many are not. They’re spending hawks. So they don’t care about deficits. They care about spending. And so they’re like—

ORSZAG: And that’s most of them now.

HOLTZ-EAKIN: And it’s an increasing fraction. Yes, absolutely. And so many of them will go, what? And that’ll be the end of that conversation. (Laughter.)

RUBIN: OK. Now we’ll—

HOLTZ-EAKIN: I mean, that’s where we are.

RUBIN: Now, Douglas is—we’re going to have questions. The thing I’ve taken most away from this whole thing, the whole two hours, is that we are the best horse in the glue factory. (Laughter.) That was absolutely terrific.

Questions? Comments? Anybody? Yes, sir, way in the back.

Q: Hi. My name is Les from Alpine Capital Advisors.

My question is on the asset side, not the liability side. So you could probably guess the question I’m about to ask. So if countries like China, Canada, Chile—if all 50 states and all sort of defined-contributions run by corporations, if they all invest in corporate securities through traditional or alternative investments, why can’t the U.S. government think about even—or is there any support in thinking about investing in corporate securities to boost the asset side of the equation?

ORSZAG: I’ll take a first crack at this. I mean, this idea typically comes up in the context of the Social Security trust fund. And to evaluate whether you think here’s any real benefit, as opposed to just a kind of shuffling of the deck chairs, you do have to ask the question do you think the higher expected return to stocks is just compensation for extra risk, in the same way for the trust fund as for other investors? And, if so, on a risk-adjusted basis, are you gaining anything or not?

Even if your answer to that is yes, there is a gain, then the question becomes if the trust fund invested in equities switched its asset mix, would there be some corresponding reduction somewhere else? In other words, you’re taking some of that excess return away from whoever is lucky enough to be enjoying it today? And is that desirable or not? And that’s before you get to all the corporate governance and other concerns.

So is it doable? Yes. I mean, you have the Canadian pension plan as a prime example of all the concerns that people typically articulate with regard to it will be politicized; it won’t work; blah, blah, blah, blah. Frankly, it’s working fine. You need some degree of independence and you need a clear set of objectives for the investments. But it can work.

I’m not personally sure it’s worth the hassle factor once you kind of work through all the analytics of it.

RUBIN: Doug, do you—

HOLTZ-EAKIN: As it turns out, in, I think, 2001 or 2002—I forget exactly when—the federally managed Railroad Retirement Fund began investing in equities. And so now you can compare performance in something that has an equity holding to something that’s in Treasurys. And it’s actually performed better even through the financial crisis, you know, and all that.

So that’s the allure, and that’s what people would love to have happen. I’m thoroughly opposed to this idea, because what you’re proposing is that we nationalize a great many firms and industries. And I’ve seen the Congress’s income statement. And do you really want them to control yours? (Laughter.)

RUBIN: There is a point to that.

Yes, sir, way back—I can’t see you, but way back there.

Q: Louis Geeser (sp). I am a credit analyst, concerned citizen, and concerned parent.

I have a proposal that could represent potentially a virtually instantaneous cure to, if not the deficit itself, at least the deficit attention disorder that the panel noted. As we all know—

RUBIN: Could I make one suggestion?

Q: Yes, sir.

RUBIN: Still try to make it brief, and then we’ll respond.

Q: Sure. Bonds and debt securities that are registered trade in book-entry form and are settled DTC, including Treasury securities, we ought to immediately exclude Treasury securities and go back to certificated bonds like this. And the effect of this would be—this is one of the last bonds that was printed in bearer form. It’s machine-stamped by Secretary Simon from 1976. And the immediate effect of this would be to have piles of paper up, you know, beyond the size of the Empire State Building.

And if we go back to 75 years, when you actually have to hold a piece of paper in your hand, it might actually bring attention on the part of many people who don’t understand the problem. You know, think about going through a toll booth—

RUBIN: I got it. So in the age of the internet—I’m not disagreeing with you. I’m just raising a question. In the age of the internet and AI, you’re suggesting we go back to paper debt? A possibility. OK.

Other questions or comments? Byron. Byron, as you know, is a very distinguished predictor of what’s going to happen in the world.

Q: With that lead-in, I don’t know where to go.

I do want to point out one thing. In the year 2000, the federal accumulated debt from 1792 to 2000 was $6 trillion. And the blended interest rate on that debt was 6 percent. So the debt service was 360 (billion dollars). Today the debt is 21 trillion (dollars), and the blended interest rate is a little above 2, and the debt service is 450 (billion dollars). So the debt—the debt has more than tripled, and the debt service has only gone up 25 percent.

None of you in Richard’s panel or in this one have talked about the prospect of rising interest rates. I think the fact that—and Douglas, you mentioned the prospect of that as the world recognizes that we’re not quite the financial entity we once were. If interest rates rise, all the savings that we’re doing on health care or carbon taxes or anything else you’ve brought up so far would be immediately negated.

Is that something we all should worry about, or are interest rates going to stay low forever?

HOLTZ-EAKIN: If your anxiety closet is not yet full, add that, yes.

RUBIN: Byron, I think it’s immensely concerning. Actually, I would use—it’s interesting you use the 21 trillion (dollars). You’re using the—you’re including the debt in the Social Security fund. I kind of—I would use 16 trillion (dollars) as just the federally—you know, the publicly held debt of the federal government.

Q: But even if you use 16 trillion (dollars)—

RUBIN: Oh, no, your point is absolutely right. That same point is valid.

CHANG: And I think it’s—the question is, if you look at two to three years, what does this look like? I mean, we’re already seeing how the market’s reacting to going above 3 percent. But right now, if you look at J.P. Morgan’s global government bond index, still about 20 percent of it has a negative yield. So right now nobody’s really focused on this because we’re not in a synchronized cycle.

But I think my question is, two to three years from now, if there’s a rising recession risk, if growth is still stuck in low gear, if other central banks are also beginning to raise rates, all those questions will come into play. And it goes back to the points made in the first panel. You do need to have some fiscal space. You need to have the space to have policy tools that can work.

But right now why is there not as much focus on it? Because, you know, QE has meant that you can—you—I mean, the default rate—the predicted default rate is at a low still. You know, everybody’s borrowed longer term. But you still have much of the world who thinks that buying at 3 percent is still quite attractive, because a negative yield is the alternative.

RUBIN: Joyce—oh, I was going to ask her, but I won’t. Yeah. Is it Chuck? Yeah, Chuck Price (sp).

Q: Thank you. Thanks, Bob. Chuck Price (sp) from—(inaudible)—Trust.

And Bob, this is a question you and I have discussed. I ask more from a budgeting standpoint. If you’re a corporate CFO, you think about your term structure of the debt. But the government doesn’t. And initially they talked about issuing longer-term bonds. And where we are today, that’s one of the big issues we face from the deficit. Why can’t CBO get out of its—or could CBO change the way it plans and think about longer-term debt structure as part of a defeasance?

ORSZAG: I can take that.

I mean, look, there’s some tension that arose over the past decade between what I would say is traditional debt-management perspectives, which should frankly move to the long end as quickly as possible when you’re in this exceptionally abnormal period of very, very long—low, long interest rates, and then the macro policy objective of trying to offset part of the downturn, stimulate the economy. A lot of the Fed’s operations were counter to—in other words, trying to keep the long rate low, which would be the exact opposite of what you do if you’re pushing the term structure out too far.

So there was not perfect clarity on those two things, and we wound up sort of doing, you know, a little bit of one hand doing one thing and at least the desire to, from a different perspective, move in another direction. But I frankly think—and you have other people in the room who are closer to it—that the reason that Treasury did not move out just, you know, whole hog to the long end was a macroeconomic objective, as opposed to a debt-management perspective.

RUBIN: I think there was a political factor, too, Chuck. When I was there, it was obvious we should grow. We should go out as long as we could. On the other hand, that would increase interest rates and increase deficits on our watch. Right, Jack? And we didn’t want to do it on our watch. We wanted to let somebody else worry about it. So we borrowed short term; doesn’t sound noble, but it was what we did.

You disagree or agree?

LEW: If I can, Bob, I mean, we actually lengthened the weighted average maturity substantially.

RUBIN: Yeah, you were there.

LEW: During—yeah, when I was there—during the beginning of the economic crisis, the only way to get money out quickly was through shortening the debt, doing a lot of short-term bills. If you look at how it got lengthened, it was in a very orderly way.

If you do the arithmetic and look at what it actually costs you to borrow long versus short over a long series of time, you’re making an assumption that the short-term rate is not an accurate reflection of what the current cost of money is. And the long-term rate is actually ignoring what the sequential short-term rates would be.

When you run it out on a careful analytic basis, there’s a high chance that if you just lengthened all the debt, it would cost you more than getting the very low short-term rates. Now, that’s changing as the short-term yields are moving. And I haven’t done the analysis with the current yield curve, but it was not at all clear that that would have actually saved us money.

RUBIN: Could I ask you a question? You’ve been around the political system more than anybody else in this room, because you started when you were young in Congress and just stayed until you became secretary of the treasury. What do you think—

LEW: I got old, like everybody else.

RUBIN: Well, you know, life goes on. But what do you think the probability is that our political system will deal with this set of issues? And whatever the answer is to Richard’s what-if question, I think we all kind of agree that somewhere out there, even if we can’t identify where it is, there’s just a heck of a lot of risk in this thing, including some risk right now of not being able to do public investment. But what do you think the probability is that we will deal with this before we’re forced to by conditions?

LEW: Well, I think if you took a snapshot right now, the probability is very low. But I think that would have been true before all the other moments when the deficit became an issue of pressing importance. It wasn’t that we were on the brink of a crisis. Deficits don’t put you right on the edge of disaster. There were political changes that made it in the ’80s and ’90s, you know, in the time we were there in the Obama administration become a real issue.

I don’t think we know what the political pendulums will be. I think the kinds of choices we’re talking about are terrible choices. They’re not going to be made in our political system unless there’s a feeling of political urgency. I think the notion that we’re having this conversation at a moment when we’re in the ninth year of growth, with 91 or 92 months of jobs growth consecutively, it is almost unimaginable that, you know, what Doug suggested about the willingness to just put an infinite amount on the credit card in a downturn will materialize.

We didn’t see it at the height of the financial crisis. We had to trim our sails in terms of how much stimulus we did. In 2010, 2011, 2012, we needed more. The political system ran out of willingness to borrow more. And I think we’re in rough shape. The Fed is going to bear the lion’s share of responding to the next economic downturn.

So if you wanted to add a little bit of immediate urgency as we’re late in the economic cycle, one ought to worry about what happens when we hit a speed bump, which—I don’t know if it’s next year or the year after. It’s not in the infinite future.

HOLTZ-EAKIN: Just to be clear, I wasn’t suggesting that we put an infinite amount on the credit card.

LEW: No—

HOLTZ-EAKIN: I suggest they’d run—I do think they’d run the conventional playbook.

LEW: I think conventional playbook meaning you do a tax cut; you do some spending. But if—

HOLTZ-EAKIN: And then—

LEW: —if—

HOLTZ-EAKIN: And then the—

LEW: But if the economy needs a trillion dollars and you do $100 million, you know, it doesn’t solve the problem.

RUBIN: Yes, sir.

Q: My name is Stephen Blank.

It’s hard to suggest that we’ve been too optimistic in the discussion, but, in fact, I think you are, because not only what’s coming up, which you’ve said, but we face, in the very near future, huge demands in terms of infrastructure, in terms of education, in terms of dealing with climate change. There’s going to be quite an enormous amount of investment. One can say this all can come from the private sector, but I think that’s whistling Dixie.

How will these—dealing with these huge changes in the very structure, the physical structure of our economy, in the intellectual structure of our society, how are you going to fit that in to the model you all are talking about?

RUBIN: Let me give you my one-sentence answer and then we’ll let somebody else answer. That would have been my primary—well, not my primary—it would have been one of my answers to Richard’s question. We even today can’t afford to remotely do what we need to do, and yet we’re going to be more and more squeezed as interest rates become a larger—cost a larger and larger part of our budget. So I think you’re right on.

Anybody else?

HOLTZ-EAKIN: I guess, you know, a lot of the discussion takes on the flavor of, you know, we’re going to have the apocalypse unless we do X, Y, and Z. I don’t think that’s the likely scenario. I think it’s closer to what Jack was saying, which is we’ll muddle along. And maybe capital markets will say you’ve got a problem. You’ll say, all right, so we’ll jack up some taxes and shade back the discretionary spending again and just, you know, sort of, you know, undercut the performance of the economy. And it’ll—the more likely scenario is one of bad performance and stagnation than the apocalypse.

Q: There’s more likely to be a tipping point in infrastructure and education than in anything we’ve talked about.

RUBIN: I’ll give you another one. We were lucky enough at the Council to have a woman named Daniela Rus, who’s the head of the AI lab at MIT, here for a panel not too long ago. I moderated it. She said that China has massive commitment of AI. We don’t have the federal—well, we don’t have the vision either. But leaving that aside, we don’t have the federal resources to even begin to remotely match what, according to her, what they’re doing. And that’s a tremendous threat to our future, to your point.

I think we have time for one more question, comment. Yeah. OK, final question, comment, or—

Q: I’m Ken Bialkin.

RUBIN: Ken, you want to stand up?

Q: It’s been a long time since I studied economics in Michigan. I studied with Richard Musgrave, who went to Princeton, fiscal policy. If this conversation was being held with the same background and knowledge that we have in 2008, when the country was going through a very severe financial—not recession—

RUBIN: Yeah, a crisis.

Q: —what would the remedy should have been in 2008 to save us from a lot of hurt that was experienced as a result of that recession?

RUBIN: Peter.

ORSZAG: So, I mean, look, the primary thing that should have happened is what did happen, which is a very aggressive fiscal response.

I think, coming back to Jared’s point earlier—and this is a reflection, actually a lesson here—while there were people, including Jared and others, that pointed out that the recovery from this kind of crisis would be long and painful, the traditional macroeconomic models at the time were all suggesting a kind of V-shaped recovery; so we’d bounce back pretty quickly.

And the result of that was that the stimulus was designed to be temporary, timely, and targeted, which was exactly not what it should have been. It should have been extended. And a lot of the criteria, including on infrastructure—it had to be shovel-ready—was inappropriate, given the nature of the problem that we wound up facing.

So two lessons from that. One is, when macroeconometric models—in this case they left out basically the financial sector—when they leave out the primary cause of the problem that you’re facing, be skeptical of the macroeconometric models. And the second is that you can buy cheap insurance.

So I still believe that what we could have done—it would have been perhaps unusual at the time—is build in more automatic stabilizers in 2009 or ’10 so that, as the economy took longer to recover, the stimulus would, you know, by itself grow bigger. And we wouldn’t have been charged that much by the Congressional Budget Office or others for building that in, because, again, all the models assumed that the automatic stabilizers basically wouldn’t last very long.

So I think any future administration facing an unusual downturn, not a Fed-induced, interest-rate-led recession, would be wise to basically lean harder on automatic stabilizers so that you have a degree of insurance, basically. If the world turns out better than you expected, the thing kind of disappears naturally. And if it turns out worse than expected, you’re getting ongoing support in a way that we basically did not build in.

RUBIN: Let me wind up by suggesting that we should all remember, as David and Richard said at the beginning, what Pete did on this issue and what he devoted much of his life to, particularly in his later years, and taken inspiration from that to try to do whatever we can to affect the political economy on this set of issues that’s so—at least I think probably all of us or most of us agree is critically important to our future.

There is a reception in the Rockefeller Room upstairs. Is that right, Richard?

HAASS: Yeah.

RUBIN: A reception in the Rockefeller Room upstairs, and you are all more than welcome. Thank you all. (Applause.)


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