 Mae'n ffawr, rydyn ni'n gweld i'n fyddechrau i'r Wir Yd. Rydyn ni'n fyddechrau i'r Wir Yd, yn gweld pob yma, ac mae'n ffawr i'r Wir Yd yn gweinio'r relai panfair i'r gweld i'r Carneg Imelon, ac mae'r Berthynor i'r Llywodraeth. Mae'r carneg Imelon i'r ysgrifennu yn Australia, ar hyn yn Adelaid, a mae'n ffawr i'r carneg Imelon i'r gweld i'r gweld i'r wneud. Felly, mae'n gweinio'r lluniau gweithio'r gweld i'r Cambrer, Byddwch yn y ffordd ar y ffaith o gydych chi'n gwirionedd gan Oeddon Canolion. Felly we'n defnyddio eu cyf nodogi yn y ffordd. Wel, unrhyw gweithio i'r sweddo'r ystyried o ddechrau'r Ulygrinig a Gweithgoedd Hysbywatch Llywodraeth, yn unid dysgu ychydig iawn o gael. I hefyd y stef yn gwneud bod awardedio ar gyfer y maeddo hwyl. Mae efallai ni wedi'u gwneud y Cymysgol Pwg Ddylgrinig Pwg Pwg Pwgicking i'r holl yng Ngxt-fyffr. There are a project director on the Newest National Academy of Sciences and the National Academy of Public Administrations commission on US fiscal future. I am sure you are here because you have no illusions about how severe this kind of fish school challenge is. We are over lunch looking at some of the numbers. Its divvying up to visualize 1.4 trillion US dollars. 1.4 trillion Australian Dollars. Ieithaf, oherwydd, y cwm yn ystyried i chi i ddweud ymelliant. Mae'r rhan sy'n adon, ac sy'n rhan fyddwch i'ch bod yn dwylo'r llyfrwyngu. Mae'r pethau ystod, sy'n ystyried i chi ddweud, fe nad yw eisiau ysgrifennu. Ysgolwydd Llywodraeth yma sydd ar ddiwylo'r $1.4 trillion i ddod yw'r ddod yng ngyrsgol nawr. Yn ni'n ddod y cwrs, dwi'n ddweud o'r ddweud o'r ddweudio'r ddysgu'n iawn. Mae'r ddweud o'r ddweud oherwydd. Ond mae'r penderfyn llawer yn y Holyfodol $100,000 ar ôl perlwni ddechrau US, a oes cyfafodol $45,000 ar ôl serfau US yn y Lynyddoedd. ymweld yn llygwyd a unreciaddol yn thynd i'r UK, Ond rydyn ni'n ddim… Nid i'n cael ychydig rydych chi ddysgu'n ddarydd yn y Llywodraeth, Ond rydyn ni'n ddysgu'n ddiddordeb yn perthwyng ar y gwirioneddurol Ac mae'n cael ei ddaraf i fynd i'r bod Diolch yn y llygwyd. Rydyn ni'n cael sydd yn y problemen maen nhw, I need to say, and over to you Steve. Thank you. Thank you, Mark. It's a pleasure to be in Canberra. It's my first visit. Looking forward to talking with all of you. Probably wonder why I come all this way from Washington D.C. to talk about our problems. I think the answers and the title there, we're looking for help. Austria is a good role model actually for the U.S. Much less debt than we do, among other things. The challenge facing the U.S. is really it really consists of three nested or interlocking problems, and I'm going to talk about each of those in turn. Each of those problems is a 10 on a 1 to 10 scale of difficulty I would say, or close to it. And the U.S. must solve them all and fairly soon. We're not going to escape with our dignity, our economy, and our power intact. And I believe that Australia will notice the change, if only because the U.S. economy's weight in the world is such that it will affect the world economy and its reach and its commitments around the world are so many that when we can't keep those commitments there will be a change. I won't try to characterize the change, but it will be substantial. So we hope that that does not come to pass, not only for those reasons because of what would happen, what would happen in the U.S. So let me describe the three problems quickly together and then I'll talk about each one. First at the core is a fiscal and economic challenge. I'd say this is the problem. And second surrounding that problem and blocking action is an institutional failure which is the failure of the budget and policy making process in Washington. And therefore a reform challenge, how to make that process work again. And third surrounding the other two challenges is a political challenge. And that's in this case the toughest kind of political problem which I'll describe. Toughest kind of problem for leaders to deal with and to talk candidly to the public about to voters. They have to lead and they have to convince themselves first and their peers and the public to change course and that's going to be difficult. So let me talk about each of these in turn and I won't give you a lot of numbers and statistical analysis. What I would like to do is use a metaphor which is a nautical metaphor. This is basically having thought about it for a while a problem in navigation. If the federal government were a big ship it would be headed for the rocks. If the fiscal course therefore is unsustainable we need to change course. Herbstine, famous economist, late Herbstine said that if something can't continue it will stop Stein's law. And this is one of those situations. So the first challenge then is to stabilize and lower the publicly held debt. There is a cumulative debt limited by statute in the U.S. at $14.3 trillion. Now that we understand what a trillion dollars means I can use that figure. And a good part of that about $10 trillion currently is publicly held. That is it's held by private investors both in the U.S. and abroad. About a little less than half of it is held abroad by governments as well as private investors. And most of that matures within three to five years fairly short term on average. And that portion of the debt, that $10 trillion will surpass 70% of the size of the U.S. economy by the end of this fiscal year which is the end of September. That is it will equal or surpass 70% of GDP, the gross domestic product to give you and that's the reference point. How big is the debt to the U.S. economy? And it will continue to rise because it takes a long time to change course. This is a big ship. You can't turn a big ship quickly. So under the most likely set of policies it will approach 90 to 100% of GDP by 2020. And these amounts do not include the amounts held by lower levels of government by state and local governments who also have substantial debt. In order to include trillions of dollars of unfunded commitments that are not currently financed and will be converted to future debt after 2020. And that's a very large number. I won't give you a number because it's too far out but the present value of that is quite large and it's driven substantially in the near term the next 10 to 20 years by demographic changes which are more or less inevitable. The aging of the population, the shrinking of the workforce relative to the size of the dependent population during that period. So as the debt moves higher that as we approach the rocks we move obviously into greater danger. There's a danger that a ship headed for the rocks will actually founder or it may run aground much in the manner of the Japanese economy. Japanese have a very substantial debt. So we could end up on the rocks if we don't change course or we could end up with our economy stagnating for a decade and little or no economic growth and that would compound the problem. So how close is too close is one problem for the captain of the ship and observers to try to wrestle with. Old people have used as a benchmark including the European community 60% using somewhat different measure of debt by the way, 60% of GDP as kind of a standard but there's no scientific way to arrive at an exact number and there's no magic number. It's like the problem faced by a ship headed for the rocks. How close can you go and still be safe? Well that depends on the tides, depends on the winds, it depends on a lot of things that you can't predict. So it's a matter of judgment and a seasoned ship captain will know have some idea of just what is, how close you can go to a leash or how close you can get to the rocks. So we were working starting about three years ago I was working with the study committee of the National Research Council and the National Academy of Public Administration on this problem and by then it was pretty well understood that we were on an unsustainable path. I think people in Washington understood it. In fact every year the President's budget printed analysis said exactly that. As did the Congressional Budget Office, their counterparts for the Congress. So the MacArthur Foundation funded this effort to bring experts together to look at what do we do about this and they spent most of their time not just describing the fiscal challenge but thinking about different sets of policy changes, different ways we could change course and avoid the rocks and the good news out of that effort took two years of study is that there are many ways of avoiding hitting the rocks. There are many routes that won't hit the rocks and at that point they laid out a whole illustrative range of possibilities some of which on the low end appeal to people who believe in small government and low taxation and those could keep the budget about its present size but balance it over time and at the high end something approaching the level of several European countries where the government is a much larger share of the economy. So there were many paths to avoid hitting the rocks. As time has gone by there are fewer and fewer options. As I said it's a matter of judgment how close you can get to the rocks but one thing is certain the closer you get the sharper the turn you're going to have to make to avoid the more painful the policy choices and the fewer the good choices and the fewer options to gradually introduce new policies such as changes for younger people that would allow them to plan for retirement on the basis that their pensions and medical care are not going to be so generous. Those would be fairly easy to implement but they wouldn't necessarily avoid hitting the rocks as you get closer. Instead it's more likely that we're going to pitch some things overboard and it'll be more of a violent turn because of where we are now and where we are headed. When we started doing this work in 2008 we were on the verge of a serious financial debacle and a great recession in the US and somebody said that as we went into that period that we didn't know how far we were from a potential fiscal crisis but we were now five years closer and two more years have passed since then and other things have happened. I asked him where are we now and he said well maybe we're 12 years closer. We still don't know again it's a matter of judgment we still don't know how far off how much time we have to deal with this. But it's already too late to avoid deep pain certainly and right now we're looking at a need to find over the next ten years four to five trillion dollars worth of savings relative to the baseline relative to the course that we're on given current policies. So our options are narrowing. As they narrow they preclude making new investments that would help in the future sustain economic vitality and economic growth especially in the face of the drag of a declining shrinking workforce which is certainly going to slow productivity and economic growth in that period of time. So we may not have that set of options. Obviously if we could grow faster in the future that would help relieve the pain over this long period of time but that may no longer be an easy thing to do to add money to the budget for those important investments whatever they turn out to be maybe difficult when all we really have room to do is to either raise taxes or cut spending from where we are now. So as you delay and politically the easy thing is to delay and say let's take one more year let's wait till after the next presidential election. As you delay you also add to the eventual cost. Not only is the turn sharper but the absolute dollar amount that you need to save is greater and that's true for a couple of reasons. One is another cohort and another aged cohort of people will have retired in that period of time and the typical policy change proposal for programs affecting the elderly is to hold harmless those who are at or very near retirement. So if you hold those people harmless and it's another group of people who retire without being subject to the reductions in their pensions or their medical care that is a permanent extra cost. There's also the permanent extra cost of having to bear the debt service on a higher mountain of debt that is accumulated in the meantime. So we did simulations with the study committee of these things and found that it was a fairly substantial absolute increase in cost as well as risk from delay. So how close can we steer to the reef and how long can we wait without a violent maneuver. Those are the problems that people are wrestling with now. The biggest problem perhaps with waiting is not what I just talked about but really that the margin of error diminishes and there are out there we don't know what they are but there are out there black swans events that are unpredictable and large in their consequences but could easily throw us onto the rocks during this period of time. So if you run along a lee shore for some period of time the longer you run along that shore the more likely it is that a stray gust of wind or storm or something else is going to put you in an unrecoverable position so it's that risk. It's not easily quantified obviously. Now debt changes fairly slowly so it creates the illusion that you have time but some things that can affect debt and also your overall spending position is change much more rapidly interest rates change much more rapidly relative to revenues. That ratio can change very rapidly. In fact we have historically low interest rates in the US today are virtually effectively zero and therefore it creates the illusion that you have low debt service. It masks the amount of debt and therefore the potential risk that you have but those interest rates could increase by two or three fold. In fact even with a robust economic recovery they are almost certainly increased by that magnitude over the next few years and with the short term debt duration of debt averaged three to five years and a doubling or tripling of interest rates on that debt you could very quickly squeeze the other parts of the budget and force even more drastic choices in that period of time so it's really if you're looking at this in terms of risk as an economist or a fiscal planner you need to consider that ratio which is much more volatile in the short run if on top of that investors get a whiff of danger I wish they could at any point and at a risk premium to your interest rate the interest rates could rise as they have for example in Greece and other European countries along the Mediterranean that could rise very rapidly for that reason as well so you could have within three to five years as debt rolls over and has to be refunded a very dramatically different demand for spending simply to service that now much larger mountain of debt and you get into a downward spiral from which it's very difficult to recover some economists having looked at the history of financial crisis that often turned into fiscal crisis because the public sector absorbs more of the risk and more of the debt was taken on by the private sector during those periods will have estimated that when debt gets above 90% of GDP and again people use different measures of debt so this is only a very loose measure a rule of thumb becomes much harder to recover and the economic drag from simply being at that level of debt makes it even more difficult to recover now the US is in a somewhat different position than other countries because it has been the world's reserve currency it's been a store of safety and again it's looked like a safe place to put your money when European countries look less safe so even more so perhaps in the last couple of years can masking perhaps the nature of the problem that we face for now some people have written in the United States about the possibility that investors would wake up and realize that US is in fact a risky place and that risk premium or surge in interest demand demands of people who are willing to buy our debt would send a signal to policy makers that they need to do something but the history of that is not very encouraging and particularly since the US is the world's reserve currency it seems that it's more likely that the market rather than sending an early signal that would help the politicians react and take the tough choices they need to take is actually going to lag and that's been the pattern for many of these crises in the past and give us more rope rather than help us focus so that's the core problem and we can talk about that during our conversation period after this let me talk next about the next layer of problems which are institutional this is the set of problems I've been working on as study director for the peters and pew commission on budget reform for the last year and a half the US has a broken budget process in fact last year it didn't pass any of the appropriations required to finance annually appropriated programs until the middle of the fiscal year until the middle of this fiscal year they didn't pass any in the previous congress by the time the fiscal year began last October and it was only after an odd hook centralized negotiation between the executive branch and the congressional leadership that they finally agreed on a package of spending cuts of about $38 billion that they were able to get approval for permanent approval for authority to spend for 40% of the budget halfway through the fiscal year so just one indicator of the extent to which the current process is broken and there are other indicators but if you just look at the process it's very short sided it is completely lacking in the discipline that a fiscal rule that people had either accepted or enacted as a disciplining standard such as a balanced budget requirement would impose or a fiscal target or goal would impose there's no discipline from those sources it's a stove piped and disaggregated process and there's no regular review of major parts of the budget about 60% of the spending programs are on autopilot they're so called mandatory entitlement programs and they're not reviewed on a regular basis and we have in the revenue side of the budget and the revenue code we have special provisions that treat income from certain sources or used in certain ways differently than other income and those shelter those uses and sources from taxation and cumulatively they take about $1.2 trillion of potential revenue out of the revenue base so they function like spending programs and because they don't look like spending they seem to reduce the size of government but they also subsidize particular activities they have become a very popular device and they escape scrutiny in the annual process there's no regular process for reviewing tax expenditures $1.2 trillion which in total is more than the income tax revenue that the government collected last year so the budget process is broken down and even if we're working better it would not be up to the task we face now which is not a standard short term deficit problem but a long term problem driven by demographics and driven also by the rapid rise in medical costs not just for government but throughout that whole sector for the foreseeable future so this commission has recommended and its report getting back in the black which was issued in December of last year a series of reforms or changes in the way that budget process works including putting in law a medium term target for the debt recommendation two years ago was that we stabilized the debt at 60% of GDP by 2018 we're now approaching 70% of GDP and it will be a while before we can turn the ship so it's going to be difficult this commission has also recommended enacting a long term fiscal rule to balance revenues and spending over an economic cycle on average essentially a balanced budget requirement that would bind leaders to that standard so it would re-establish what had been a consensus in US policy that except in periods of war or other emergency budgets should be balanced which is a common sense notion or close to it fiscal rules function to bind leaders to good policies when they are facing short term temptations to deviate since this is a nautical theme to use a nautical metaphor Odysseus asked his crew to bind him to the mast as he approached the island of the sirens and plugged their ears so they couldn't hear the calls and said if you know I struggle to get free, bind me tighter 80% of the developed countries around the world have a fiscal rule either in statute or by consensus or in their constitutions as the Swiss do that's not an option for the US because it takes too long and uncertain a path to try to amend the US constitution but they could put it in statute the commission made various recommendations to strengthen the process that taken to account the fact that we have an unusual system of government where power and responsibility for the budget are shared and fought over by two branches of government the congress and the president they are like two captains on the bridge fighting for control of the wheel all the time so we have to take that into account so there need to be separate requirements on the president to submit a budget that is adhering to the fiscal rule and will meet a medium term target for the debt and then there have to be processes that discipline the members of congress in both the house and the senate to do the same the president has to sign the result so there has to be that so it will be very difficult to enact these kinds of reforms but institutionally they are probably required in order to solve the first problem it's again keeping with the metaphor it's like rebuilding the ship while it's under sale but this has to be done at the same time the thing that would be helpful in this situation is for there to be enacted some sort of fail safe trigger that would automatically adjust spending in revenues or tax expenditures if leaders fail to act appropriately in a certain period of time a trigger mechanism is designed not necessarily to be used but to be so unpleasant in its prospects that leaders have the incentive to act responsibly to avoid it and that's another proposal and there are many others in that package so that's the second problem the second layer problem and then the third challenge the outer ring or sphere here is the challenge to political leadership and to continue the nautical metaphor this requires keeping the captain on the bridge or captains in this case since we have divided authority between the congress and the president we have at least two people fighting for the wheel while down below the crew is threatening the mutiny and is split into factions and one part of the crew wants to go in this direction to avoid the rocks and another part wants to go in the other direction so the crew is basically split into feuding factions at this point this is the toughest kind of political problem for leaders to deal with because in the short run it involves pain for almost everyone every major reform that you can think of is less difficult because there are usually winners and losers that's difficult enough when there are winners and losers but in the short run here there are only losers because everyone is going to have to take some of the pain in order to solve this problem so that magnitude one side also has taken the position that none of the solutions can involve an increase in taxes so already they've said that a solution that would be necessary and involve pain for everyone has to exclude that set of policies so we are in a difficult situation the public is highly distrustful of leaders and public institutions and in fact in surveys it's at a record low, trust of leaders is at a record low it has nothing to do with who is in power it's a long term secular trend toward distrust of leaders and the atmosphere is poisonously partisan in Washington and around the country generally leaders have looked on addressing this problem candidly and head on as a political suicide mission so how can they be convinced otherwise this is a political problem of the first order for a government that is designed partly to make it difficult to enact big changes that's how it was designed and especially in the current political environment a ship has only one captain ideally democracy has many or may have none leaders are not going to be able to act and act in time unless they gain wide public understanding of the risks and the costs of not acting but there hasn't been that kind of dialogue yet so while the public has now raised its awareness and it has rated this problem close to the economy's inability to create enough jobs as the top problem or problems facing the United States they have not yet agreed on a solution or really contemplated what the implications are for them and what they're willing to accept and there needs to be that dialogue probably before we'll get to a solution in January a bipartisan commission appointed by President Obama reported and came up with a plan endorsed by 12 of the 18 members including Republicans and Democrats that would save $4 trillion over 10 years essentially doing most of the work that needs to be done but that has not yet been endorsed by the president although he has indicated general support for a framework that would be consistent with that there are also bipartisan efforts in the Senate involved five or six senators from both parties to come up with a similar plan there are ongoing negotiations now which I'll say a little bit more about led by the Vice President Biden behind closed doors to try to fashion some sort of package and an action is being blocked for two reasons principally in addition to the one, I mentioned one of them which is one party has been captured by the idea that revenues can never increase so that's currently blocking action and one of the politics of health care, the health care piece of this is the biggest piece because it's the biggest driver of the long term problem as a demographic element as well as cost element and the Republicans who now control the house and the chair of their budget committee Paul Ryan have introduced a package that would eliminate the largest medical care program for the elderly Medicare and replace it with a voucher that would only partly pay for the medical needs of the elderly and doing so essentially has polarized that part of the debate and caused the other side to come to the defense of Medicare which is an extremely popular program and that has made it more difficult to compromise so in the short term we seem to be blocked at the same time we are facing an artificial crisis where maybe it's a real one because there's a statutory limit on the debt and we are now approaching that limit in fact we actually we are at the limit of $14.3 trillion but the treasury has some fancy footwork that it can do to keep loft and avoid having to default on the debt for some period of time probably until the end of July or early August according to the secretary it's hard to know I think you probably know the old road runner cartoons where the coyote is chasing the road runner and runs off the cliff and for a while he's suspended in midair and then he looks down don't look down if you look down you'll fall well we're kind of there we're suspended in midair we're off the cliff already on that one so that puts some pressure on leaders to act and they are trying to ridge this partisan golf this ideological golf behind closed doors in negotiations it's going to be very difficult on the other hand we can't go much longer without at least a technical default on the debt so it's a tenuous and somewhat exciting situation that we're in at the moment and maybe some people will say it's an opportunity that the official crisis of this sort might be the best opportunity we'll have between now and the election of the next president to take a bite at least out of this problem if it can be agreement and this has been true the pattern of these closed door negotiations too that have developed in lieu of a functioning budget process and a responsible dialogue between leaders and the public the pattern has been that people do in the last minute come to some kind of agreement that lets them save face and get to the next crisis which might be a little farther down the road and we may see that so I don't make predictions ordinarily and I wouldn't try to predict this one but it's possible that we may end up with some sort of package maybe on the order of a trillion dollars or more of savings combined with an agreement to impose some of the some form of fiscal rule or caps on spending or target or triggers of the sort that the Peters and Pugh Commission and others have been recommending to impose future discipline and to require that within the next few years at least leaders come back together and find the rest of the solution so there's an optimistic view that in the situation leaders in a democratic context can lead, can frame the debate and alter the public's perception and expand their tolerance for the kinds of difficult choices that have to be made. Paul Posner, a friend of mine and a colleague, has written a paper about how, called Does It Will It Take a Crisis, it argues that it is possible through leadership and compromise to come up with an agreement for a shared responsibility between the two parties and there are patterns for this both in the US, historically and in other countries, other countries may not have the same political system or lack of consensus that we have and then there's the pessimistic view that there will be gridlock and meltdown or we may somehow muddle through which the US usually does. We have those three problems. I've shared them with you. This is appropriately called Rescue in the US from Fiscal Crisis, so if anybody has a rescue plan now is the time to tell me about it and I'll take it back to Washington with you. I'm glad to take any questions. Next thing. Just kick off the first question. Peter. In your band on increased taxation on the tax code. That's been a theological debate. The priesthood on that side would say yes. Anything that smells, walks and talks like the tax increase is a tax increase. Others would argue that's really spending through the tax code so we can define it as spending and therefore it's not a tax increase when we deal with that. By the way, if we were to take those on there would be some gains for that side in the sense that the tax code now is widely recognized as a drag on economic growth in a horror because of all these special provisions in its complexity and very inefficient revenue razor. So we could probably fashion something that would lower rates especially on corporations. The corporate tax structure in the US is not as high as it looks on paper but it's probably a contributor to our lack of competitiveness. That is we could be much more competitive if we would reform that structure. And a lot of republicans understand that. So there ought to be elements there that would appeal to responsible people who want to do something about the tax code and don't want to raise taxes. You might mention of the importance of the reserve currency masking the problems in the United States. So in one way, if they buy oil and everything else is dominated in US dollars, the US can just print more money and keep buying it. Or alternatively, if they don't do something about the problem, having a real reserve currency in US dollars means the rest of the world is going to be affected if the US doesn't solve problems. Is it not? I think if the US doesn't solve the problems, there are many reasons why the rest of the world will be affected dramatically. But to your point, and I'm not an expert in public finance, don't assume that I am. I think that it's not bad. I think that it's not certain that the US will always be the world's reserve currency. I think we have international institutions that can figure out alternatives if they have some time to adjust. So I wouldn't assume that simply because the dollar no longer has the current respect that it has as a safe way to hold value, that that's always going to be true. At least not in relative terms. Hi. You've talked about the institutional failures and the political challenges. What about the willingness of the American public to make these unnecessary sacrifices as you've mentioned because if you look at the poor Ryan care plan, no doubt there were a few touchy issues about it overall, but the principles of it were quite consistent with making savings in the budget. If we look at the message that the American public sent to the Republicans after they even lost a house seat, clearly there's a message that do not touch these things that we like. In this case then can there be substantial cuts if the politicians are going to have to be really careful. Here we can't go there. So where can it cut? It's a matter of changing the way the public thinks about this and allowing them to accept in a more sophisticated way about it and allow them to accept policies that are currently unacceptable. I said the debate about Medicare was polarized, but I think there is a reasonable position or number of them on how to adjust and control the growth of medical costs, healthcare costs. You probably know that the US went through an enormous debate about healthcare reform last year and embedded in that legislation are a number of ideas that will be implemented unless the Republicans block implementation that have real prospects of slowing the growth, at least many people think so. There's no certainty that any one of those will work, but if they do, some combination of them do, that will help solve the problem. There's another set of fairly long list of reasonable proposals that would help gradually slow the growth of medical care costs without imposing unreasonable burdens on the public, the elderly. But I think Paul Ryan's plan has probably been mischaracterized. It's really the reason he had to do what he did to Medicare, or the medically I believe, is because his plan included a very large and costly tax cut for the wealthy. If you first dig the hole deeper and then you try to fill it back up, you're going to have to do some pretty ridiculous things with the arithmetic. That's what I think he was forced to do in order to make his plan achieve the savings that he needed. Hi. Just getting back to the reserve currency issue you raised, I think you noted that as a result of the US dollar being the reserve currency, it's unlikely that in the short term at least in the international investment community is going to send the sort of price signal, ring the alarm bell as it were to the legislators etc to say you've got no other choice as perhaps has occurred in Europe in the last 12 months. I don't know if you agree with that or not. Well, I guess I'm taking it to its logical conclusion, rather than say that that's a problem, perhaps it's the solution. Because if the international investment community is going to be behind the eight ball, then why not term out the next five years of budget deficits to 30 years and have QE3 for five, six until the Aussie dollar is worth about 10 US dollars essentially in flight UA out of the trouble. Or is that hitting the rocks as it were? I think you would hit the rocks in a sense that investors, while they are late, they eventually when it's too late for rational policies to take effect to avoiding the rocks, they do react. And at that point they very quickly run and interest rates rise or other things happen that are equivalent. So at that point you're in the soup. Professor Redburn, you've indicated that there's two very powerful positions in the United States, one of which presumably the Republicans steadfastly against any tax rises. I should say there's a controlling faction in the Republican party that has created a theology that all revenue increases, all tax increases are bad or poor and therefore they have enough leverage at the moment that they control. You haven't made any reference to the phenomenal cost of America's military presence overseas and given the latest review, I'm not sure by whom, but it was released in our news media in the last day or so that an independent review of Afghanistan's position was that the Karzai administration was in no position to be able to look after its own affairs with a withdrawal of western forces. Is there enormous pressure in the United States to end their presence in Afghanistan both from a financial position as well as from the ongoing loss of US military? Not yet, although that could change very quickly if the perception was that there was no prospect of winning or of a graceful solution within a few years. But I think right now, no. Certainly in the modeling that we did for this first study that I worked on and where we looked at alternative ways of avoiding the rocks in every scenario there had to be reductions in military spending as a percent of GDP, which would slow its growth over the next several decades. That would mean a real reduction in the capacity of the US to do what it has been doing around the world. And since there's certainly going to be conflicts in the future, as they have been in the past, which will involve enormous expenditure, that suggests that we need to first do as much as we can to lower the debt to a safer level to give ourselves the leeway that we're going to need when those black swans, emergencies, crises appear. Not knowing what they are. But we would definitely have to lower defense spending. Yes. Now I mean it in only the narrow fiscal sense. That is, at a certain point it will no longer be possible for us to finance our policies at any level comparable to what we've been doing. So we'll have to withdraw and shrink our commitments both to our own people and to others. That's what I mean. We've noticed that bond markets and the US Treasury market hasn't actually reacted to this increase risk of a default on US debt due to the debt ceiling negotiations. If the debt ceiling isn't raised, what do you think the market reaction will be? Do you think that they're going to consider this more of a political impasse and that eventually the ceiling will be raised? Or do you think they're going to react the way people react today in Europe? That's one of the big debates in the short term with regard to the debt ceiling. And there is a view by people who are much smarter than I am as investors, bond investors, that a technical default coupled with the prospect in the very short term of a major policy agreement that changes course would be seen by investors as not so bad relative to not defaulting by simply raising or not hitting the debt ceiling but simply raising the debt ceiling which allow you to continue on the present course for another few years or however many years before you hit the rocks. So in other words, if they saw government's leadership acting responsibly and passing a package of changes and it meant a technical default of a few days, would you rather invest in a bond where you're going to have one missed payment in the short run but you're sure it's going to pay off over the maturity of the bond or would you rather have a bond that is not going to miss the short term payment where there's a high probability that you're going to make the last payment. So that's the investor's perspective on this and that's one investor's perspective who's smarter than I am. So maybe it's not such a bad thing if we have this artificial crisis that forces people to agree on a big package. But I see that risk will change as the time taken becomes longer to negotiate a package. That's right, yeah. I don't think investors would wait two, three, four months and it has to be a prospect of agreement. Professor Redburn, my question is that if the current high oil price persists how would that actually affect the budget and if that actually caused another short-term downturn in the economy would the government prepare to buy the economy again in the reserve? That's another tough one. That's right. A lot of the planning here is predicated on the economy continuing to recover and perhaps recovering robustly. If through that means or some other means we're pitched back into a downturn then all the choices become more difficult. The options are few at that point to take rational action it seems to me. There is a debate about when you make the turn. When we were looking at this two and a half years ago, the committee decided that none of the proposals that they put on the table as a way to solve the problem should take effect, should have real effects on the budget until 2012, which begins October 1, 2011. Nothing until next year fiscal year. That seemed about right but that wouldn't be right if we had an oil shock or some other disruption to the economy and that would make all the planning and all the things I just talked about much more difficult. I'd like to ask about the political system rather than the economic system. I'm a political scientist so I'm more comfortable there. As you would know, one of the big differences between the American and Australian political systems is compulsory voting in Australia versus voluntary voting in the US. What happens if you don't vote? You go to jail in the extreme. The proportion of people voting is much higher in Australia. What would be your imagination of what would happen in America if there was compulsory voting? We see right now that there's a lot of states that are trying to actually make it more difficult for people to vote. What would be the scenario if in the US there was compulsory voting? Okay, well as you know voting rates in the US are higher among more affluent and more educated people. So the conventional assumption would be if you forced people to vote that you'd get higher proportions of people at lower education and income levels but you also would get people who are less involved and have less information on which to base their choices. So I'd say it's somewhat unpredictable but probably the Democrats would be advantaged by compulsory voting. That would be my guess. Interesting question. You mentioned that the US taxpayer is 129,000 in debt per person I'm assuming. I think that is a higher dollar figure than other places in Greece and Portugal and Spain. Is it possible that the US would ask for some assistance from the IMF? That's somewhat circular isn't it? Since we helped to finance the IMF but that would be interesting. I know the IMF has its hands full at the moment with Europe so we hope they don't have to deal with both the Europe and the United States at the same time. I don't know. I don't know what the source of discipline is outside the US political process if there is one. I wonder if I could encourage you to be a little bit more radical in this talk. Sensible people don't see a problem. Sensible people say well you put the taxes up a bit. You cut the expenditure down a bit. You don't get too worried about a crisis. You divide it up into things you've got to do straight away, things you've got to do later. It's all relatively straightforward and easy. Intellectually so what is the problem? The problem is clearly the political process in the United States. How has the political process been evolving? It's been evolving away from a solution that seems to us here. To have one part of the group say okay we're going to cut out the tax option is clearly not the way to go. That raises the issue in my mind is where do you think this political process is going to continue to? Will it move further to the right in a way which does solve the problem? That is you just focus it all on the expenditure side? Or will the right lose its current situation so we just keep muddling or will it swing back? Or take the same question again with a slightly different approach. If you were completely outside and you said this was really a crisis then what happens is governments really do start to swing often. Governments often go right wings governments often get dictators and none of this stuff is really going to happen in the US but some of the equivalent could happen. For example the person who can save us all may well be Sarah Palin because Sarah is likely to do anything quite weird and be radical if she gets enough power in the Senate. In the Congress so where do you think the political process is going to go? Because just listening to you it doesn't sound so it's sort of going to go anywhere. There is an optimistic view. There is political advantage some would say to leaders who can come together around a solution to this. They can all take credit for the solution. That's somewhat like the prisoner's dilemma. Game theory would suggest the reasons why you would want to cooperate but then it requires a high level of trust. We don't have a high level of trust either at the leadership level or vertically between followers and leaders in each party. So it's very possible that that could fail but it's also possible that behind closed doors mature people could recognize that there is a mutual political advantage in negotiating a package and we've seen both patterns. We've seen a number of bipartisan agreements starting with the one in 1990 that George Bush negotiated with the Democratic Congress that included tax increases. After he'd said read my hips no new taxes he violated that pledge and his party lost his support within his own party was weakened and he was defeated for re-election that's not good history from the point of view of leaders having to take courageous steps. I think that is a possible outcome. That is I think based on the history of these things that people could behind closed doors fashion a solution. What worries me is that the public has not been brought along to a point where they will accept the great deal that comes out when the doors open and it's been a near thing in the past when deals like that have been brought to the Congress and if there's enough political pressure brought to bear on leaders they will not vote for it. The leaders their parties will not support it in the Congress and in the 1990 agreement is an example of that as well it was defeated the first time and then it had to take a second vote with a lot of arm twisting to get it through so it was a near thing. This is not predictable in my view. I wouldn't predict which way it will go. If it all goes bad it's even less predictable whether we would see a different kind of political process than we are accustomed to. The possibilities are there for a more radical change in the way we make political choices and the kind of leadership that we have I couldn't predict that. Thank you very much. I made a joke for last speaker that it's a we weren't sure if you smoked or not but we get you some cigarettes anyway but they're not actually cigarettes. I want you to thank Olivia Wenholz for organising everything.