HBO History Makers Series with Erskine Bowles

Tuesday, April 24, 2012

Erskine Bowles discusses his career in U.S. government and current economic challenges facing the country.

The Home Box Office History Makers Series focuses particular attention on the contributions made by a prominent individual at a critical juncture in international relations.

MATTHEW WINKLER: Good evening -- to the HBO History Makers series with Erskine Bowles.

I'm Matt Winkler. And I would just like to say welcome. This is an event on behalf of the council that we have to enjoy, with gratitude, Richard Plepler and the Home Box Office for their very generous support for this series.

The History Makers series focuses on the contributions made by prominent individuals at a critical juncture in U.S. foreign policy and international relations.

It would be helpful if everybody, if you haven't already done so, turn off your mobile phones and other devices. Don't leave them on vibrate. And this will help us enjoy the sound better. And I would like to remind everybody that this is on the record.

Everybody is familiar with Erskine Bowles, so let me just say how lucky we are to be with you, Erskine, this afternoon. And that's because I don't think there's anyone with your experience in finance, government, education, health care, who has engaged four generations of Americans and illuminated all of them with your integrity.

And so I'm wondering, as we begin tonight, Erskine, you've seen Washington operate for two decades in good times and bad times. I think in 1995, you surprised Bob Rubin and Tim Russert both by negotiating the balanced budget. So now, just focusing on the deficit, when you look at the climate today, why is it that the problem is so urgent and a solution so elusive? (Laughter.)

ERSKINE MR. BOWLES: I should get Pete Peterson up here to answer that.

I think today we face the most predictable economic crisis in history. Fortunately, I think it's also the most avoidable.

I think it's clear, if you do simple arithmetic, that the fiscal path that the nation is on is simply not sustainable. And if I had to give you an analogy, Matt, I would say that the deficits are truly like a cancer, and over time they are going to destroy our country from within.

And why is it critical today? I'll give you one easy piece of arithmetic. If you take the total revenue that came into the country last year, not 20 years ago or 20 years from now, 100 percent of that revenue was consumed by our mandatory spending and interest on the debt. Mandatory spending is principally for the entitlements -- Medicare, Medicaid and Social Security. That means that every single dollar we spent last year on these two wars, on national defense, on homeland security, on education, infrastructure, high-value-added research, every single dollar was borrowed. And last year, half of it was borrowed from foreign countries.

And that is a formula for failure in anybody's book.

And if you just kind of think about the opportunity costs of just the interest on the debt today, and even at these current low rates, we're spending more on interest alone -- and we spend about $250 billion a year now, just to put it in perspective -- than we spend at the Departments of Commerce, Education, Energy, Homeland Security, Interior, Justice and State, combined.

And if interest rates were at their normal levels in the 1990s, or the first decade of this year, we'd be spending over $600 billion on interest. And we'll be spending over $1 trillion on interest alone before you know it.

So I think it's a real problem.

WINKLER: So -- (laughter) -- I mean, given your work on this issue on the deficit commission, which was actually a rare, bipartisan group that actually produced a plan with shared pain, do you, in some ways, feel betrayed by both Paul Ryan and President Obama?

BOWLES: Another good question. I'm so glad I came. (Laughter.) Betrayed? No. It's no secret I was disappointed when we brought our plan to the president that he didn't embrace it immediately. And the president, as Al Simpson has said -- and I don't know how many of you all know Al, but he's like the greatest partner anybody ever had -- but Al's been equally candid about this in that he felt the president would have been savaged by both the right and left if he had embraced it.

And the president felt that he'd have much better chance for success if he used the plan as his framework for his negotiations with Speaker Boehner over the summer. And I think if those discussions had worked out, he would have looked like a political genius. They didn't.

I felt he would have been better off to embrace it, but that's not the path he chose to go down.

WINKLER: And what about Paul Ryan?

BOWLES: I don't know how many -- how many of you in this room have met Paul Ryan? More of you should meet him. He's only 42, I think, but he is one of the smartest guys I've ever been around. I've always thought I was good at arithmetic, but this guy can run circles around me. He is honest, straightforward, sincere. And if you look at his budget plan, it's just like Paul, it's an honest, straightforward, serious plan.

In my dealings with him when he was on our commission, he could not have been more straightforward with me. Whereas most people think it was revenue that kept him from agreeing to our plan, it wasn't revenue. He could have gotten to a reasonable place on having a more-balanced plan. But he was simply unwilling to do a plan that didn't have much more significant health care reform than what we were willing to put forward.

I can be more specific on that. We proposed about $500 billion worth of cuts in health care, to where the Affordable Health Care plan is, or "Obamacare" or whatever you'd like to call it. The Democrats, at that particular time, believed that the pilot programs and the cuts that they had in the health care program would slow the rate of growth of health care to GDP-plus-one.

Our commission didn't believe that, so we put forward another $500 billion worth of cuts, hoping that that would slow the rate of growth of health care to GDP-plus-one. And we said, if it didn't, then we'd have to take more drastic measures, and those drastic measures would include such things as a premium support plan, which Paul had advocated.

Paul very much wanted to see the premium support plan be adopted now. For those of you who aren't familiar with that term, a premium support plan is simply a defined contribution plan as opposed to a defined benefit plan.

And Paul wanted to see us block grant Medicaid to the states on the theory that one size doesn't fit all, and that the governors could individually control the cost of health care more adequately and cover more people at less cost if they could have their own complete control of the Medicaid program in their states.

We didn't think that was such a great idea to do that all at once. And so what we proposed in lieu of that was to test it in 10 states, test it in a small state, a large state, an urban state, a rural state, and see how it worked. And if it worked, great; if it didn't work, then we wouldn't have thrown out the baby with the bathwater. It is being tested, by the way, in Rhode Island, and it's working quite well.

And on Medicare, he did want to change it from a defined benefit program to a defined contribution program, just like lots of businesses have done today, because they couldn't control the cost of these benefits, and so they instead put forward with a defined contribution plan where they could pass along the increases to the participants.

We, again, felt that was a step too far at this point in time. And our recommendation was that we would only go to something like that or to a single payer plan if in fact the cuts we put forward didn't slow the rate of health care growth to GDP-plus-one.

WINKLER: You're still doing this, so you must believe that you have a chance of succeeding, as you did in '95, although in '95 you had some advantages. You were arguably much closer to the negotiator-in-chief, the president, and represented him. Today, it's obviously a lot different. Why do you think you will ultimately get this done?

BOWLES: Because we have to. I did negotiate that balanced budget in 1996. And to get that done, I had to spend months and months locked up in conference rooms with Newt Gingrich. And you all owe me a lot for that! (Laughter.)

But we did have two sides that were willing to put partisanship aside and to pull together rather than pull apart, and do what they felt was right for the country. And we did negotiate a deal that did lead to a balanced budget.

I do think that sometimes we get too much credit for the work we did in 1996, because I think it really was a result of the work that was done at three different times: first under President -- the first President George Bush in 1990, and then some work that President Clinton did in 1993, and then I think we actually finished the job in 1996.

But I think, you know, all you have to do is look at the cliffs that we face at the end of this year in December, when you have not only the Bush tax cuts expire, but you have the patch that's been done to the AMT, you have the payroll tax expiring, you have the $1.1 trillion worth of cuts that are coming about due to the sequester which occurred because of the failed supercommittee, and you have what's called the doc fix.

And if you add all those up, it's probably $7 trillion worth of economic events that are going to occur in December. And there's been little-to-no-planning for that.

And in addition to that, you're going to have another one of these debt ceiling events that we're going to face in December.

So I think we have to face up to this. And I think if we don't, I think the markets are going to punish us severely.

WINKLER: So when is that going to happen?

BOWLES: Well, somebody asked me the other day, you know, how could interest rates be so low now if I was so concerned about this future problem with these economic events, and I said it's because we're the best-looking horse in the glue factory. (Laughter.)

And I think today the world is focused on Europe, and probably rightly so. And I think we're being given a pass today because people don't believe that we're going to let these events transpire without doing something significant about them. And I think if we don't deal with them at the end of the year or don't set up a process to get them done in 2013, that people believe, then I think we'll rue the day.

WINKLER: But why should we take the pass that's given to us right now? As you say, interest rates are low, stock market is reasonably calm, in fact it's up this year in the U.S. so far. Things are looking reasonably good, so why should we do this very difficult --

BOWLES: Again, because we have to. We've simply made promises that we can't keep. You know, if you think about the needs this country has and, you know, our ability to deal with them with our current state of finance, you know, we have an infrastructure that's, you know, crumbling in many places, it's badly in need of repair. We have a health care system that's absolutely crazy.

We spend twice as much as any other developed country in the world on health care, whether you talk about it as a percent of GDP or on a per-capita basis. And that might be OK if we could afford it, and it might be OK if the outcomes were any good. But if you look at most outcome measures, we rank somewhere between 25th and 50th in such important measures as, you know, infant mortality and preventable deaths and life expectancy.

And anybody who thinks those 50 million people who don't have health care insurance don't get health care, you know, you're just wrong. They get health care, they just get it at the emergency room at five-to-seven times the cost it would be in a doctor's office. And that cost doesn't go away, it gets cost-shifted.

And then you think about, you know, our education system. You know, I just spent the last five years as president of the University of North Carolina, and I can tell you that the product that's being produced by our high schools is in no way globally competitive.

I just got back from a trip to China and to Singapore. And in China, I went to a 6th grade classroom where those kids were taking algebra and English. If you -- in Singapore, 44 percent of their 8th graders this year scored at the most-advanced level in math and science on the international tests. In the U.S., less than 34 percent of our kids are even proficient, much less at the most-advanced level, in reading, math, science or writing.

And you know what happens to those 8th graders in the U.S.? For every 100 8th graders, 58 graduate from high school, 38 go to college; 28 come back for the second year and 18 graduate from college. We're just not going to be globally competitive unless we improve our education system, unless we tackle the need for our infrastructure, unless we invest in high-value-added research.

So I have lots of reasons to be concerned.

WINKLER: But let's come back to the people with the most at stake. And you know, you brought up the markets a few minutes ago. Is the greater danger for the U.S. a sudden change in the bond market sentiment? You know, as investors become worried about the country's ability to repay its debts? Or is it the continuing absence of the market reaction that you're talking about, which will allow this continued, gradual worsening?

BOWLES: Well, I believe the markets are definitely giving us a pass today, Matt. But I think the chances, if we don't deal with this economic cliff we have in December, and set up a process to deal with it over the first part of next year, then I think the markets will react. And I don't think there's any way to get around it.

I think you'll at first see interest rates begin to climb, and then I think you'll see the availability of credit, because people will become really concerned whether or not the U.S. is going to stand up and stand behind its economic problems.

WINKLER: And speaking of Europe, the U.K. has aggressively targeted deficit reduction, you know, and its economy is now contracting and it's under-performing its record from the Great Depression. What do you see as the lesson from the U.K.'s experience with these austerity policies?

BOWLES: Well, it's kind of interesting. You know, in the U.K., they adopted a program that was similar to some of the things that we recommended on our commission, but had at least one big difference. The U.K. set up a plan to meet their -- to reduce their deficits and balance their budget, where the resources would come one-quarter from revenue and three-quarters from spending reductions. That's exactly what we did. We recommended to reform our tax code, broaden the base, simplify the code and get rid of the tax expenditures, and use part of the money to reduce the deficit and the vast majority of the money to lower rates.

But we reduce the deficit by about $1 trillion over 10 years from reforming the tax code, and then we cut spending by $3 trillion. So we had the same kind of breakdown in where we'd get the resources from.

We also recommended a cost-benefit analysis on the various big programs, which is a big part of the U.K.'s plan.

In addition, they also raised their retirement age. And that's something that we recommended in the Social Security plan. We recommended raising the retirement age one year 40 years from now. We wanted to give people a chance to get ready. (Laughter.)

And they also said that they were going to slow the rate of growth of health care spending to inflation, and we said we would lower it at least to a rate of growth of GDP-plus-one. So that was similar.

But the big difference is that they wanted to get to balance within five years. And we felt that was too much, too quick, and that would disrupt what we believed was still a very, very fragile economic recovery. And I think that's proven to be right. We had a much longer plan in order to get to balance so that we wouldn't disrupt a very fragile economic recovery and we wouldn't have to make cuts so severe that we would hurt the truly disadvantaged or we wouldn't be able to make the kinds of investments we need to make to compete in a knowledge-based, global economy.

WINKLER: When was the last time you spoke with the president about the deficit? And why didn't the president embrace the commission's recommendations?

BOWLES: Well, the last time I spoke to the president was February 3rd. I spent about an hour and 45 minutes with him one-on-one where we talked about where we are and where he might go. Since that time, I've spoken to most of the members of the economic team. I spent about an hour with Secretary Geithner last week. So I've had plenty of contact with the administration.

I was surprised that the president didn't embrace our plan. You know, I had spent a good amount of time up front, trying to define success with him before we entered into the negotiations at the commission. And I felt that we brought back a plan that was balanced, that was bipartisan, that was reasonable. We had broad support. We had six U.S. senators on our commission, sitting senators, three Republicans and three Democrats. All three Republicans voted for it, and two out of the three Democrats did. And the rest of the support was really amazing. It was all the way from the far left of Dick Durbin from Illinois, to the far right of Tom Coburn from Oklahoma.

And as I said, it had both revenue and real spending cuts. And I thought he would embrace it when I brought it back, but he didn't. But he really did think that taking the strategy he took would give it a better chance of success than if he had embraced it and been savaged by the right and left, because all the recommendations we made are painful.

I mean, there's no easy way out of this problem. You know, you -- you know, the cuts are going to have to be real, and they're going to have to be deep. And we're going to have to face up to the fact that we've got to make real changes in our defense program, in our non-defense discretionary spending, in our health care spending and in Social Security if we're going to actually be able to move forward.

WINKLER: So putting it on fast-forward a bit, the Simpson-Bowles plan was recently defeated in the House, 382 to 38. Why did it receive such little support? And why was the House able to pass the Ryan budget?

BOWLES: Well, because they had the votes. (Chuckles.) We had encouraged Jim Cooper and Steve LaTourette not to go forward with the plan at this point in time. We didn't think it had any chance of passage now. I don't think anybody did. But they had been -- those 30 or 40 members of the House had been very supportive, and we weren't going to walk away from them at that point in time.

I know Tom Coburn told me -- he said, Erskine, don't worry about this. The first time I brought up the bill to recommend that we not build the bridge to nowhere, I got a grand total of 15 votes. And so everything is timing. And this plan was brought up at a time when each one of the parties had their own individual plan out there. And naturally, the members of the parties are going to vote for their own plan.

I do think that we have a significant chance of success. We have been spending a good part of the last year putting our plan into legislative language. So it's gone from 67 pages to over 800 pages. (Laughter.) And it's a nightmare to do, but it absolutely is necessary.

We've been having it fully costed out. And what we hope to do is, if a chance arises between now and end of the year where we can -- it can come up for a vote, then we think we have a real plan to put forward and not just a framework. But we think the likelihood is that it's going to come up during the lame-duck session. And you can't start to get ready then; you've got to be ready when the time comes up.

WINKLER: You know, you make it sound like you really think Simpson-Bowles, which hasn't gone anywhere so far, is going to be the framework for the solution.

BOWLES: Yeah, I think it's -- I think it's the gold standard, and I think most people recognize that you're going to have to have a balanced plan that has some revenue. I think you find great support on both sides of the aisle for that revenue to be generated by reforming the tax code, by broadening the base and simplifying the code and eliminating most of these tax expenditures and using the vast majority.

As an example in our plan, we use 92 percent of the money to reduce rates and only 8 percent of the money to reduce the deficit, 8 percent of tax expenditures. We have about $1.1 trillion of back-door spending in the tax code. If you eliminate that spending and use 8 percent of the money to reduce the deficit, that's about $100 billion a year; over 10 years, that's $1 trillion.

And we also recommended at the same time that we take the corporate rate to 26 percent, and we put forward a territorial system so that that 1.2 (trillion dollars), $1.3 trillion that today is captured overseas can be brought back to this country to create jobs over here.

I think there's pretty broad agreement that suffering like that is the way it's going to happen.

If you look at the Ryan plan, Paul Ryan basically wants to use 100 percent of the money to reduce rates; we use 92 percent of the money to reduce rates.

He didn't use any of the money to reduce the deficit.

If you think about the other side of the coin, spending, you know, we have to cut defense spending. You know, we spend more on national defense today than the next 15 largest countries combined, and that includes China and Russia. You know, we are bearing a disproportionate responsibility for global, world peace. And I just don't think America can afford to be the world's policemen.

And if you kind of think about it, you know -- you know, as an example today, the U.S. has a treaty with Taiwan that we'll protect them if they're invaded by the Chinese. There's only one problem with that: We'll have to borrow the money from China to do it. (Laughter.)

So we're going to have to make some cuts in defense. We're going to have to cut some of the non-defense discretionary programs. And I think there is some agreement on that.

Health care is going to have to be reformed. We can't keep -- we can't afford the current health care system that we have.

And you know, we're going to have to reform Social Security. And you know, we can take these steps and make relatively small changes today and put our fiscal house in order. And if we don't, we're really in for a tough time.

And so I think most people think there's going to have to be at least $4 billion of deficit reduction. Four billion (dollars) is not a made-up number. Four -- excuse me, 4 trillion (dollars). Four trillion (dollars) is not the minimum -- the maximum amount we need to reduce the deficit. It's not the ideal amount. It's the minimum amount you need to reduce the deficit to stabilize the debt and get it on a downward path as a percent of GDP.

WINKLER: What's the one thing you've done to date that you would say -- (inaudible) -- this is the History Makers series. What's the one thing that you would say, for you, is the most significant?

BOWLES: You mean in my career? I would say the thing that I am probably proudest of is, you know, people always think, you know, I should, you know, be pleased to have had a chance to participate in negotiating the balanced budget in 1996. But what I felt the proudest of was the fact that we -- that we got health care insurance for 5 million poor kids at the same time we balanced the budget. I believe that you can do the right thing and also be fiscally responsible.

And that's why I so much want us to take these steps today to put our fiscal house in order. I think if we do, America could compete with anybody. And I think if we don't, we're well on our way to becoming a second-rate power.

WINKLER: At this time, I'd like to, Erskine, invite the members here to join the conversation.

And I would just remind everybody that this is History Makers, so if you could keep your questions focused on Mr. Bowles' experience to date. And please wait for the microphone, and speak directly into it. And if you don't mind, please stand and identify yourself and your affiliation. And if you could just limit yourself to one question and keep it concise so we can maybe address as many as possible.

Yes, back there.

QUESTIONER: Malcolm Wiener. Thank you very much. About a year ago, the phrase on everyone's lips in Washington for one week was "value-added tax." Chris Matthews even did a riff on it. Yet your commission didn't go there, nor did it suggest higher taxes on gasoline. May I ask why?

BOWLES: Part of that's right. First of all, the week before our commission met, the Senate voted, I think 85 to 14, to not have a value-added tax. And you know, I kind of got that as a message -- (laughter) -- that the chances were not so hot that we would actually get a value-added tax through.

I think there are many pluses to a value-added tax. You know, I think it's -- (inaudible) -- have the tax that way that you could structure in a way that wasn't regressive, so that you didn't tax wages or you didn't tax capital. And if you -- I think it would help our exports. So I think there are many things to recommend a value-added tax.

The -- I'd say the principal reason we didn't is nobody was talking about taking our current income tax and putting a value-added tax on top of it. They were talking about taking the value-added tax and greatly reducing the income tax and trying to structure it so it was not so regressive. And again, we felt that was doable.

But the Republicans on our commission, I thought, made a very strong point against it that I hadn't thought of. And I think they're probably right about this. And that is, if we have an income tax, no matter how small, and a value-added tax, what we're going to end up with is two engines of revenue. And these guys in Washington, I swear to goodness, won't be able to stand, you know, the chance to use them both. And over time, we'd probably end up with too much coming out of the economy with the two combined.

And that's -- so I think there would be broad support for a value-added tax if you would get rid of the income tax completely. But I don't think you'll ever see a value-added tax that's combined in some form with an income tax.

WINKLER: Yes, sir, in the back.

QUESTIONER: (Name and affiliation inaudible.) In your perspective of the long history you've had dealing with the government, do you ever sit and wonder whether democracy really can't work, that it only works so long as the people can keep -- (inaudible) -- the Congress and that the elected represents can keep giving out goodies in the form of lower taxes or social services, and that once you ask people to sacrifice, then the system breaks down?

BOWLES: There's been a lot written about that over the, you know, over the last several decades. And it does cause you considerable concern.

But you know, I'm -- you know, I actually ran for public office, and I have a great distinction of probably being the worst politician in the history of North Carolina. (Laughter.) And I have empirical data to prove it.

But I think the people normally get it right. And whereas you can certainly get more done and get more done much more quickly in an autocracy, all you have to do is go to China this week and go back next week and see the enormous change that can occur in a relatively short period of time. But I think the off-balance-sheet liabilities you have in an autocracy are pretty great. And so I wouldn't trade our system for anything.

WINKLER: Yes, Tom.

QUESTIONER: Tom Glocer. Erskine, I want to take you back to education, of which you know a lot. If we can't throw money at the problem, which evidently we can't tonight, what can we do to get more bang for the buck from our education system?

BOWLES: I think we can get a lot more bang for the buck. Let me give you two examples, Tom.

When I first became president of the university, I was very concerned about the product coming out of K through 12. And you know, nobody wants to take responsibility for the fact that so many of our kids are not receiving the education they need in K through 12.

But I think that we were not only part of the solution, hey, we were part of the problem, because we produce most of the teachers. And so what I wanted to do was to see how we could produce, not just more teachers, but better teachers, and more math and science teachers.

And so how could we improve the quality of teacher education at the university? And I turned to the people at the university, and I said, look, let's see if there are any federal programs that we can use to improve the quality of teacher education. You all take a look, and come back and let me know what's there.

And there were some programs, there were 82. You know, now, do we need two or three good programs? You bet. But we don't need 82.

Another good example of how we can kind of use our money more wisely. You know, I think most people here would believe that we need to invest in research in this country if we're going to be competitive in a knowledge-based, global economy so that the next new thing is created here and not over there.

We do $1.5 billion worth of federal scientific research at UNC every year. We're one of the largest research universities in the country. Is all of that research high-value-added research? Not even close, no; nor is it at the 3,000 other colleges and universities in this country that are doing research.

I'm often reminded of what the great Nobel Prize-winning scientist Ernest Rutherford said when his Nobel project was running out of money. He turned to his team and said, hey, we're running out of money, now we've got to start thinking! (Laughter.)

It is true, that's what America is. We're running out of money, we've got to start thinking, we've got to use our current resources more wisely. You know, we've got to make choices, we've got to set priorities. We've got to make the tough choices.

And I believe if we do that, we can get a lot more bang for our buck. So it's not always just more money, it's really using the current money we have, far more wisely, and there are lots of examples in education I could give that you can do that.

QUESTIONER: Michael Kavoukjian, I'm from White & Case. I was wondering what your views are on the Fed's policy of quantitative easing and the prospects for inflation if we solve the budget crisis and if we don't solve the budget crisis.

BOWLES: You know, people always ask me what period of history the current situation reminds me of. And I'm not really reminded of the '30s. I'm more focused on 1918 and the Weimar Republic. You know, when you think about what went on then, you know, they fought that great, big war. And they financed it all with, you know, with a credit card. We just fought two wars and, you know, financed it all with debt.

You know, they had deficits as far as the eye could see. You know, we've got trillion-dollar deficits as far as the eye can see.

They manufactured money to bring down unemployment. That's what I think the QE programs are.

And they de-valued their currency. We've done that.

And I don't think the results were so good.

I think we definitely will have real inflation. You know, we have two choices, you know, here. You know, we can either step up to these problems and meet them and do it over a reasonable period of time. And if you look at the plan that we put forward, we didn't have big cuts in 2011 or 2012 because we didn't want to disrupt what is clearly still a very fragile economic recovery.

But we did make significant cuts in 2013 so that we could get spending back to pre-crisis levels, to levels that were there in 2008. That's one way, a combination of revenue and spending, to meet our problem.

The other way is to inflate our way out of a problem. I don't think that leads to a very happy result.

WINKLER: Yes, sir.

QUESTIONER: Joseph Chamie. You mentioned that we're running out of money, and there's no easy way out of the problem. But in 1996, you had projections for Social Security and pretty good projections for Medicare and so on. You knew those costs were coming. Now we have a problem. What has happened? What are the major forces that have created this problem, aside from the predictable ones on Social Security? We knew the baby boomers were going to retire and we had these costs. What are the major forces that created this problem? Who is responsible, especially as you're trying to convince the American public that we need to do something now?

BOWLES: Yeah. I think I'm responsible. I think everybody who has served in public office is responsible. You know, we haven't -- you know, we simply made promises that we certainly can't meet. And you can do it in a very responsible manner.

If you look at the plan we put forward on Social Security, we increased the minimum payment to 125 percent of poverty. That costs money, because we wanted to take care of the truly disadvantaged.

We gave a 1 percent bump-up to people between 81 and 86 (years old). That cost money. And we did that because every Republican and Democrat economist that came before us said that's when people need it the worst because it's when their pension funds generally run out.

But we made some responsible cuts in the program that really would enable it to be sustainably solvent. And if you don't make the kind of cuts that we recommended, or ones similar to it, you know, the program will go broke in 2033. And you know, under law, they'll only be able to meet 75 percent of the scheduled payments. So everybody is going to get a 25 percent cut in their payment.

What we said is, look, what we ought to do is slow the rate of growth in the benefits for people in the top 15 percent.

We recommended that we raise the retirement age one year 40 years from now and one more year 65 years from now when my grandchildren will be eligible for it.

And that we raise the current cap on the payroll tax, which is based on 86 percent of wages, back to its original level of 90 percent of wages.

If you do that in 2020, when the rate -- it's now at 106,800 (dollars), that cap is, it'll be 168,000 (dollars) just on the natural by 2020. Under our plan, it would be $190,000 cap, so you'd be paying the payroll tax on an additional 22,000 (dollars).

We recommended going to a different rate of inflation to what's called the chained CPI because it's a more accurate gauge of inflation, and bringing in, you know, new state and local workers into the plan. And if you do that, then Social Security will be sustainably solvent. We'll actually be able to meet the promises that we're making. If we don't, it won't.

And you know, I don't think there's any sense in kidding ourselves anymore. You know, when President Roosevelt, you know, put forward Social Security, you know, he was a pretty smart guy. You know, the -- you know, you got Social Security when you were 65 (years old). The average life expectancy was 63 (years). That's a really smart guy, you know. (Laughter.)

You know, today, the average life expectancy is 78 (years), and you get it when you're 62 (years old). It's a little wonder we have an arithmetic problem. You know, we have to face up to that.

And to deny it to people, I think, is wrong, and not to use it to take care of the truly disadvantaged is wrong. And I think people in the higher-income brackets can -- they're not going to get a cut, but the rate of growth is going to have to be slowed.

WINKLER: We have a question here, sir.

QUESTIONER: Frank Weil of Abacus. What kind of political calculus can you envision on the first Wednesday, November of this year, that could lead to the grand bargain you've been designing?

BOWLES: Well, I think, you know, again, if you think about the events that are absolutely going to transpire in December, you know, that the Bush tax cuts do expire, that the payroll tax cut expires, that the patches they put forward on the alternative minimum tax expires and so many more people are going to be hit with higher taxes, that these senseless, mindless, across-the-board cuts that came forward as a result of the sequester because of the failed supercommittee, you know, is going to hit, does go into effect, and we have -- it's about $200 billion worth of these for the real doc fix, which is what we pay doctors to take care of Medicare patients -- you know, all of that's going to happen.

And you know, if we don't face up to it, I think the markets will absolutely slam us. I really do think that they don't -- the markets today, a, they're focused on Europe, but b, they don't believe by any stretch of imagination that we're not going to face up to this problem. And therefore, I think they've given us a pass.

But I don't think that pass is a permanent pass by any stretch of the imagination. And we could have another one of these debt-default crises.

I mean, if you look back at this last default fiasco we had last summer, which I thought was disgraceful and it caused us to lose a lot of respect around the world, it caused lots of people to lose confidence in us, but if you look at the credit-default swap market on our debt, you know, the premium on a default on U.S. treasuries was greater than the premium of a default on the debt of Mexico or Panama or the Philippines. That's crazy.

You know, so I think we're going to have to step up to these problems. And I think the two sides are going to have to put partisanship aside and decide to really pull together, do what's right for the country.

And so I think you'll see a plan come forward that will be somewhat similar, you know, to what we've recommended, because there are just not that many choices, that has some amount of revenue that comes from reforming the tax code, but the vast majority will come from spending cuts. And the spending cuts are going to have to focus on cutting, you know -- everything has to be on the table, but it's going to have to focus on the biggest causes of the deficit, which are health care and defense and the spending and the tax code.

WINKLER: Yes, sir.

QUESTIONER: (Name and affiliation inaudible.) This may be reprising a question that Mr. Winkler asked at the beginning. But you had a breakfast with Senator Simpson and Mayor Bloomberg and some other people. It was reported that, since that meeting, was that there would be a financial crisis because it would take that to get the attention of the participants. Would you comment?

BOWLES: Well, I think -- almost nothing big or important, and I won't say smart, happens in Washington without a crisis. And we've got a crisis that's coming up in December. I mean, if you think about having $7 trillion worth of economic events occurring in one month, and there's been almost no preparation for that, can you imagine having something of relative consequence in your businesses that were going to happen six months from now, and you weren't doing anything to prepare for it?

Yeah, I think we've got -- I think we've got the crisis, you know. And I think if we don't react to it and we don't set up some responsible plan to deal with it, you know, over the next year, then I think the markets will reward us for that.

QUESTIONER: (Off mic.)


WINKLER: Erskine, we have a question from a national member, Robert E. Grady of the Cheyenne Capital Fund, Wilson, Wyoming. And he asks you, over the last 20 years, the U.S. economy has grown 157 percent, Medicare has grown 363 percent, Medicaid has grown 571 percent. How can we cut the unsustainable growth of Medicaid, which puts tremendous pressure on not only the federal budget, but on state budgets as well? Is it as simple as implementing a co-pay requirement and some modest deductible?

BOWLES: No. As I said earlier, you know, we spend twice as much as any other country in the world, any other developed country in the world, on health care, and our outcomes are not so good. And the 50 million people who don't have health care insurance get health care, they just get it at the emergency room at, you know, five-to-seven times the cost it would be in the doctors office, and that cost doesn't go away, it gets cost-shifted, and it gets cost-shifted to you in the form of higher insurance costs and higher taxes.

I believe that, you know, that -- and this is what we recommended -- that everybody ought to have health care insurance, but you as taxpayers shouldn't pay for anybody to have a Cadillac plan, that we ought to provide a darn good Chevrolet, but not a Cadillac plan. And that nobody ought to have first-dollar coverage, that everybody needs to have some skin in the game.

And therefore, we combined Parts A and Part B, and we set up a $550 deductible, and then had a co-pay of 20 percent until you had paid $5,500, and a co-pay of 5 percent up to $7,500, and then you had catastrophic insurance above that. That would lead to very big savings, as Mr. Grady implies.

But if everybody is going to have health care insurance, then everybody has got to have a medical home. And if everybody has got to have a medical home, that means that, as an example, we've got to have more primary care providers. That means more primary care physicians, more nurse practitioners, more physician assistants. And that means universities like mine need to be incentivized to produce those kind of medical providers as opposed to the specialists that we're doing today.

In addition, if you're going to have everybody eligible for this great prescription drug benefit, then, you know, where it's available, it ought to be generic drugs. But for sure, you know, if the taxpayers are going to pay for this, then you ought to have the ability to negotiate with the drug companies.

It's crazy that Medicare pays 40 percent more for the same drugs that VA provides its participants. You know, you the taxpayers are paying for both of them. This gets me in trouble with my other Democrats, but you know, having had the public hospital in North Carolina report to me as president of the university, I can tell you that anybody who doesn't believe that providers of health care, doctors and hospitals practice defensive medicine, you're crazy. They do. It is the culture of the institution. And therefore, we have to have real malpractice reform.

We've also got to start paying for quality, not quantity. And we've got to do something about this whole end-of-life scenario without talking about death panels.

If we do those kinds of things, we can severely bring down the cost of health care. And I believe we can reduce it to the rate of growth of GDP.


QUESTIONER: Peter Steel. Erskine, you've shared some of your experiences in government and education with us. You've also served on many corporate boards, some of them in very troubled times. What would -- how would you describe from your experience the state of corporate governance today?

BOWLES: Better. I think a lot better than it was before the crisis we went through. It was a real wake-up call for a lot of us who were directors. And I think we realized that we had to be more vigilant, that we had to have more structure. I think some of the additional regulations that have come out of Washington have actually been helpful, not that I'm a great fan of government regulation.

But I think, by and large, the governance that we have today in corporate America is vastly improved from what we had just several years ago, based on my experience.

WINKLER: I'm afraid, Erskine, we're out of time. But on behalf of the CFR and the History Makers series, can I thank you for sharing with us.

And here's hoping your good work and wisdom will prevail.

BOWLES: Thank you very much. (Applause.)







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