Prescriptions for a Solvent Future

Prescriptions for a Solvent Future

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United States

Budget, Debt, and Deficits

Fiscal Policy

Monetary Policy

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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