 Good morning. I'm David Wessel. I'm Director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution and I'm joined this morning by Bill White who Unlike the man he ran against as for Governor of Texas can actually remember three things or we're going to see if you can remember three things I don't think Rick Perry has written a book yet has he? He did one about how great the Boy Scouts are Controversial well actually it is controversial now Bill White of course is now associated with Lazard But he has a distinguished career in public policy even though he doesn't like to call it that as deputy energy secretary in the Clinton administration and then of course as the mayor of Houston for as long as the Houston Charter lets you be mayor but Because you didn't have enough to do you decided to write about the entire history of the U.S. fiscal situation in this wonderful new book and I'm gonna think I this wasn't gonna be my first question But now that I ask myself what in God's name of all the things you could write about you've done so many different things in your life Led you to write about this topic Well, I worried about it You know, I think at least from now until the end of the last baby boomer retires in 2030 It's going to be the dominant issue that overshadows so much of both domestic and foreign policy in the country and Then I was looking for a good book And several good books and I didn't quite find that book. Of course. I wind up writing a book So Basically, this is a work of history. So when you look of course across More than two centuries of U.S. policy on taxes and spending in debt Yeah What are the two or three? Lessons that you draw that you think have relevance to us today People managed to balance the budget to pay for routine expenses during normal times and still get reelected. That's one lesson There's a widespread belief You can hear about it. They've quite a bit in this town. Well, of course, I know what's right But you know, I can't get reelected or the party couldn't get reelected people managed to match federal commitments with federal resources for most of the nation's history and barred only for extraordinary purposes and so You know, I don't think people woke up in December of 2000 or January of 2001 and decide they didn't care about the kids anymore Or they wanted to be dependent on foreign creditors I think there's still the possibility of aligning the federal commitments and resources And I wanted to tell the story about some heroes who did that So well, let me ask you about that Who who do you think are the big heroes in history if you go all the way back to? Madison and Gallatin and stuff like that. Well, you know, I like the I like the early guys in part Not simply because they're you know household names or icons but because you sort of strip some of the issues bear of the Clutter of the contemporary, you know day-to-day debate the tax extenders of the Betsy Jefferson thought that we ought to have Consider at least a constitutional amendment so that you preserved opportunity for the next generation And you did not have a situation in which people disguised the current cost of government Oh and Resulted it more limited opportunities for the next generation a constitutional amendment that would require basically everything to be Expire after every 19 or 20 years. Well, you know, this is the problem with all the constitutional amendment proposal says You can have a conception But unless you could put it into words that are you know cast in stone in the form of a constitutional amendment He thought there ought to be some dollar amount which is about the amount you could pay off in one generation He didn't believe in defaulting on the debt, you know from one generation to another but he and Madison Agreed that there would be principles that would be Clear enough to be visible to the eye of the ordinary politician About when this nation should borrow And those principles were it was deliberate they came up with those principles and all the uses of that after you know hundred and sixty years after 1820 were the same as they did between 1790 and 1820 No, in other words, they established the limits and principles for the proper use of federal debt early in the Republic and They reflected the great values of the people at the time We wanted to make a better life for our kids that hey look You didn't have a bunch of people with economics degrees in college Only a tiny percentage of the population even had a college degree But people understood that if you borrowed that money now You'd have to pay it back with interest later on down the line and somebody would have to pay that interest But I mean the US what Jefferson imagined a much more agrarian society the federal government Was minuscule then compared to what it is now The revenue came from tariffs they they the government benefits didn't even exist. So is Is that are those lessons really relevant to where we are today? Well first just as a point of fact You know and this is not it's just one of those things that people forget about The government was not minuscule literally the federal government Do a greater extent than today? owned I'd say probably most the wealth of the country why it owned the lands, right and the great benefit program was the sale and often Subs die sale. They were loan forgiveness massive loan forgiveness and say 7th 1820 1821 They even call the relief act So back back then so the the federal government has always been pretty big actually its deposits the federal government's Deposits were so large that they could make or break any financial institution in the country It was it held a far larger percentage of hard current or the currency of the country than it does today But the basic principle You know doesn't change There's a book that's recently come out by a French economist Thomas Piketty that illustrates a very important point and in that point is that Compound interest can be a wonderful thing for people who have money to invest in their creditors and There's a flip side of that. It can be a very bad thing for people who are debtors so Jefferson like Piketty and many today Madison they were concerned about the issue of income inequality. They believed that if you had a nation where The tax revenue was dedicated to debt service and couldn't provide public service Like education and infrastructure. It would be worse off. Most Americans would be worse off and Strip bear that principle still applies today. Would we be better off today? Ask yourself. Would we be better off today? If all federal revenues the entire federal budget were for debt service All other things being equal or would it we'd be better off if we could use that money for? improvements that that benefited the public as a whole doesn't depend what you borrow the money for In that circumstance I gave you why you borrow the money is important But it would have to be borrow the money as opposed to tax And I can think of very few circumstances where it would be beneficial for us to have borrowed so much money that as in the case in the early Republic Most of federal tax revenues went to pay debt and this is why during World War two which involved a colossal federal commitment the American people Understood and in leaders of both parties that you had to pay taxes In 1945 the last year in many ways of the height of the mobilization for World War two Taxure revenues were covering the same percentage of the federal budget as they did just a few years back in 2010 Let's go. I'm gonna I'm gonna push on the minute, but let's go back to the heroes. All right, so I Jefferson's a hero but look there's a lot of people in your book a lot pick a couple pick a couple of others Albert Galton here imagine 1793 Somebody walks in he's not poorly dressed, but they're not fancy dressed like most of the senators It didn't run for the Senate. He talks with a heavy accent French even yeah, heavy French accent It's hard for people to understand what he says he walks in as an excuse unlike most of the people who talk And he makes a motion almost as soon as he gets there and the motion is that he wants to see He wants to look at personally the schedule of the interest payments and the debt service went when interest is due What the expenses itemized list of the expenses and revenues for the federal government for the last three years It passes unanimously people wonder what he's up to Hamilton goes crazy. He says he's overworked He views this as a sign of distrust that this member of Congress wants to look over the detailed ledgers of the federal government of the United States The Senate kicks him out because he can't prove that he's a citizen I mean you don't want to prove that he's a ring of for me Citizen but they didn't know who they were messing with because this Albert Galton You know people they in the early Republic Well throughout both UK and UK and the various colonies they looked up to Voltaire and Rousseau as these icons Intellectual icons of the century to Galton. They were family friends He'd graduated the top of his class at the top school on the planet earth Which was in Geneva and he developed some principles that allowed us clear accounting The use of trust funds to with dedicated revenues Pays to go budget planning these principles were used for the 12 years that he was Secretary of the Treasury To reduce that you know balance the budget in normal circumstances And the other one I mentioned is John Sherman, you know, this is a 19th century figure and is important because for Imagine you're at the 1855 Republican Convention in Ohio. Yeah And really it's not a Republican Convention at all It's called the anti-Nebraska Convention and it has people who call themselves anti-Nebraska men and they were this man There were no nothings or anti-immigration. There were people who are wigs like John Sherman. There were various There were Democrats. There were free soilers and This group got together to nominate a slate of people for state office Who were opposed to the extension of slavery into the territories of the United States? Sherman presided over that the whole nation was watching at the time because Ohio was a third largest state the fascist growing state in the nation by far the only one that held its election for governor in an 1855 and at the end of the convention Sherman manipulated his wigs look like they lost but he got what he wanted which was that The various people who were on that ballot had to agree to run and call themselves Republicans He was as much a father of the Republican Party in this country as anybody else, but he thought That it was wrong To reduce taxes and finance that tax reduction with that He worked hard After the Civil War were his more famous brother William to come to Sherman Was such a brilliant general to pay down the debt after the Civil War because he in the early Republicans thought that it deserved this nation to allow people to have sacrificed their lives for the future of the country and And They're not to finish that job by paying down the debt after the Civil War I think some people may find that a contrast to the opinions of some now right right I mean as I recall the charts almost every war we build up a lot of debt and then it comes down relatively quickly afterwards the Afghan Iraq war seems to be an exception. It wasn't the only reason that we have a lot of debt But it went up and then it went up again during the Great Recession We don't seem to have figured out a way to bring it down. Yeah, and one of the let me point out One of the things after World War two one of the things that was explicitly talked about is if you didn't If you well, we we went into surplus right after World War two. I mean you cut federal spending Severely the economists all predicted that we'd go into a long-term severe recession when we cut spending we didn't Which ought to give some right but they because they didn't they didn't appreciate just all this pent-up demand in the economy is returning with GIs and we'd had rationing so they had all the savings and It was both the both the they cut federal spending at a time that the economy consumer demand was really taking off And investment I mean I could give you a number of different reasons But I could say that on the case of late pent-up consumer demand you could say Today well, we should have pent-up corporate demand with the cash on the balance sheets of the American corporation So it wasn't that there was something, you know, totally unique But there was this issue of some pent-up demand but we cut the budget right if that were in part and here is a point because People understood that we needed to use that credit was precious and if there was another war down the line We needed to have that credit Today according to CBO productions if you add up the cost of the Wars the direct cost so the wars of Iraq and Afghanistan the VA cost and some of the other costs that are scattered throughout the federal government For veterans related benefit plus the interest plus a compounded interest on that interest by 2020 We're going to be paying an interest expense for those wars The same amount we did pay for the wars themselves in 2007 the height of the water Okay, so any heroes in the 20th century? Yeah, I mean, you know plenty of them And yeah, but but I can take pairs it you know often in the 20th century They come in pairs, but some of the ones that I concentrate on throughout this narrative Are Truman and Taft back after World War two Clinton and Gingrich in the 1990s would be an interesting pair. Well, let's take that one. Why do you say that? Oh? The balance budget principle Gave each of them a framework for Having people within their own political parties make trade-off between spending and taxes so After the 1994 election where there was still this impetus from mr. Perot's initiative on the debt and presidential campaign in 1992 both President Clinton and Speaker Gingrich who in 1995 was as you remember there was about nine months there where he was He was as powerful as any speaker has ever been Capitol Hill and then They both agreed on the goal about budget Within their parties both the president's budget and the budget that was proposed by the Republicans had to accommodate You know you had to make hard choices and then after some battle Those choices framed the public debate concerning those trade-offs It turned there was a very specific trade-off never nobody knew exactly the answer It turns out that the public weighed in by the end of 1995 in favor of paying somewhat higher personal income taxes and preserving the current structure of Medicare But it was uncertain until there was that crystallized debate concerning that trade-off before for the public And they wind up over the next several years putting that agreement together with their resulted in a balanced budget and They and they both deserve credit for that Now if I read your book right you think some you see 2001 is a turning point not in the right direction So we have 200 years of American history, and then we veer off in the wrong way So what happened? Basically the link between spending and tax policy is broken Recall what you and I just talked about the balanced budget principle Aside from you know its macroeconomic significance or its public finance significance Which is different than macroeconomic how much money are you going to pay on that service versus public services in the future? That's public finance significance It has this normative ethical political science of you know a society what Paul Douglas a senator former economist called The ethical dimension of a balanced budget was making sure that your commitments match the people the public's willingness to pay When that link was broken in 2001 when each party Had a spending policy and a tax policy and there was little relationship between the two Policies We we've been in that state ever since So you're talking about we had we we came into the beginning of the decade with a surplus Turned out some of it was a bit transitory the result of a tech bubble that produced a lot of capital gains so that the projections turned out to be overly Optimistic we had 9-11 which led us to spend money that we hadn't anticipated and then the wars and then we as if that weren't enough we compounded that with Medicare prescription drug benefit that had no visible means of support just borrowed to pay for and that finance tax gets right now What happened to the Gallatin Taft Gingrich Clinton Bob Rubin Dwight Eisenhower politics you you've argued and other people have to that good policy is good politics and For generations. I mean there's this wonderful YouTube clip which I recommend to you if you haven't seen it of Everdirks and talking about the debt ceiling With in a way that Everdirks was definitely not made for TV You know like he he does the Rubio thing and takes a drink of water right in the middle of the thing But it's made for radio. He definitely was made for radio Well, maybe it was made for TV because he seems the most authentic and genuine and he says you know if we just keep raising the Debt ceiling a million dollars out of me. It seems like a lot of money But so what how do you why did the politics change is it did the politicians change? Did the voters change? Is it the advent of Medicare and a whole era of entitlements in the great society? What what's your analysis? Well, the first thing I'll say is the politics shifted a bit on both parties in the past if Somebody if one party had attempted to disguise the cost of government with debt and Borrowed for routine operating expenses the other party would have been all over with a balanced budget plan and The party who watered from fiscal discipline would be concerned about its future viability at the polls So one of the first lessons and it was really a lesson. They may have learned from the mid 1980s when you had Some borrowing and President Reagan was overwhelmingly reelected, but few people remember the Democrats in Congress I mean in Congress there was a big Democratic majority voted for Congress that year so Neither party at that time in that night in that particular election. There wasn't a sharp contest in 1984 election There wasn't a sharp contest over the debt the Republicans went first and Realized after what happened in 1995 1997 that they serve smaller government If they defined that as the big things the government spent money on defense and Medicare, for example Wasn't going to sell so Might as well try to sell You know tax cuts as smaller government. Well, that's ridiculous, of course You don't reduce the size of government by cutting taxes. All you do is increase debt You know you make spending easier because now the cost of that spending is less visible to the people who are paying the price and At that point the Democrats had a choice of doing what President Clinton might have done or They chose to say that they were Fighting and had succeeded in open quote saving close quote this in that program because Tom delay basically You know he wanted to get these appropriations have passed through there's almost no dissent on appropriations for the six years at the beginning of the decade starting in 2001 and appropriations sailed through Congress with almost no dissent and So that they said well, we're able to get the the programs that we value and they even though they were being Paid for in an unsustainable function. So in a way both Members of both party were able to go to their primary voters now and Acclaimed that there was victory, but it was a hollow victory a hollow victory because The lower taxes did not signify a smaller government a hollow victory because the social safety net was financed on an Unsustainable basis and we're still at that point. We haven't changed very much. Yeah, we haven't changed Now let me just push a little bit on historical metaphors Yeah, you can always pick one that works for whatever argument make and There aren't people who argue that yes The debt and particularly projections of the debt a decade or two out are rather alarming Particularly since debt relative to the size of the economy is much higher now than it was a decade ago twice as high But they say I don't think this is a caricature Be careful of your timing that this could be 1937 1938 we could be in a position where the economy still hasn't fully recovered and that That we need we had we need to avoid premature Deficit reduction because it'll hurt the economy in the long run We'll end up with more debt relative to GDP than we have now and these are the people who found the sequester Somewhere between outrageous and bizarre So are they wrong? Is this the wrong time to be cutting spending and raising taxes? Now or are they right and to the extent that they say don't do it now But make make decisions now to make yourself commitments to do this in the future I don't see the they you know, I could get pretty taken. I Do not see they paralleled to 37 38. I think you had remember you did both have a contraction by the Federal Reserve So you had to change the policy by Federal Reserve. I think that Somebody who you followed and he wrote an excellent book by the way about Bernanke in the Fed. I think that the Fed Did a pretty good job in the in the period of 2000 You know caught 2008, you know after beginning September to that that one Jackson the whole meeting after that I think the Fed has done a pretty good job The Treasury was trying to stem the flow that was it was sanitizing the gold flow that was coming in from Europe Right and in contracting the currency as well so I don't think really physical policy was Leading the charge on that and when you look at the percentage of the government I just don't think that's quite plausible. We had not seen I will say there's an analogy there We hadn't seen a housing recovery, but I don't think how how much you you know How would I say it how much you spend on a Military procurement program or this has a whole lot to do with the housing cycle. So I would say Now's as good a time as any national income. Is it an all-time high national income was not at an all-time high in 1937 national income is it an all-time high? Yes, there are some people who have not benefited from the growth in national income for the last 40 years But barry having the government borrow more money doesn't solve that problem if that problem would have been solved By the government bar and money you think it would have been solved between 2001 and 2010 Well, but if the economy is operating with a lot of slack if there are a lot of unemployed people Surely it's not the best time to be doing instant tax cuts and instant instant tax increases and spending Well, I mean, I don't know about that. That is to say if you borrow for wars and a severe downturn and you look at math and economic history When do you retire that debt? Only when unemployment is at four point five percent and why Moreover, I'd say if you look at the elements of that What that unemployment consists of there are some issues on labor force mobility and Where we are in revival of the construction cycle that to me are largely Independent of whether we are borrowing money to pay for Medicare and then imagine dial forward in the future Suppose we do have an economic downturn That is severe economic downturn and we're using 45 to 50 percent of federal funds revenues to pay debt service Because we didn't think that we could stop borrowing until Unemployment reach four point five percent and then finally I'm gonna say there's no scenario no scenario that we have in which If somebody said okay by 2020 we're gonna balance the budget and this is we're gonna do it Plausibly assuming that we are going at one point five percent real growth per annum. I don't see any of those scenarios out there You think that's all we can do one one and a half percent growth maybe do real real growth, right? It won't be out of line with you know, Dave when there's little little net growth in the working-age population seeking work Then and in Europe that population Europe Japan Korea That population net is declining There we could be in for an era of slow growth. All right, but if I came to you and said look For a number of reasons some of them Good some of them bad the federal government can borrow money for ten years. It's something like two and a half percent And it's hard to argue that we've overdone. We're not like the Chinese We haven't overdone it on infrastructure spending and we have a lot of Unemployed construction workers Doesn't it if I told you I want to borrow another hundred billion dollars to Fix airports and or build broadband networks or repair bridges Which will pay off in the future in terms of more productivity Isn't that qualitatively different than saying I want to borrow another hundred billion dollars because I don't want to raise taxes to pay The salaries of today's employees or today's Medicare beneficiaries, isn't there a big difference between those two options sure and But but let me just say the way If somebody this comes up time and time again from people who I can always consider myself progressive from progressives You know, don't you believe that there are investments for the future at such a Yes, but you know There was a qualification what you said you said an extra This year we're going to be borrowing about 700 billion dollars in the federal funds budget the federal spending and revenues apart from the trust funds dedicated trust funds So if somebody's saying well, I mean first of all it would just be a complete fabrication and myth To think that a significant portion of that or Certainly earmark was in the education and infrastructure If we want it and then there's something else about infrastructure and That is in business if you borrow money every year and maybe a somewhat increasing amount consistently every year then the case for doing that with capital spending with that is Less than it is then if it's an extraordinary expense and something else with business on the business analogy a Business if it did use that every year to finance that capital expenditure Then the rationale for us doing so is it's going to capture the full benefit of that capital expenditure in its revenues going down the line And it will be able to contain the debt by paying down the debt Public finance what a lot of people this is just a point, but it's important These infrastructure projects are not designed. They could have a high social return on investment But that doesn't mean that they're going to pay for themselves with increased tax revenue in the future. Why is that? The reason is that we don't tax You know 90% of the of the economic growth of the country our effective tax rate Is it's a small percentage of the increase in the net income of the country resulting from a capital project? We put it another way let's say that you build a bridge and The bridge more than pays for itself has a high social return on investment, but that doesn't mean that it generates they the Revenues to the federal government that can pay for for the debt service on that bridge And and but what's wrong with making investments that have a high social return on investments? I mean Abraham Lincoln did I agree completely and so I say Go to the next what's wrong with paying taxes to do so right now. That's that's when you you you propose Thinking about the federal budget differently, and I completely agree with you that the way We think about the budget in the grossest terms and the most simplistic terms has a big Effect on the policy. I mean you can just see the politicians scurrying around to prevent the SSDI the Social Security Usability Trust Fund from running out of money as if That's kind of the problem as opposed to the problem being the problem But I was intrigued that you think that we ought to divide the budget into what you call the federal funds thing Which is the taxes that come in the spending goes out for today's operations and then the trust funds Which are dedicated taxes for things like Social Security and Medicare? But you don't do it and my question really implied that we ought to think about Operating in capital and it's okay to borrow for capital needs, but not okay to borrow for operating. Why is that? Oh It probably add about 10 pages to the book and was getting a small percentage But you know I and when I served in the administration back in 93 night for I think there's merit to a capital budget I think cities and states have capital budgets. I will say that One of the reasons why cities and states The debt for cities and states has gone and only half the federal level in the last 40 years Is that they have a mechanism by way by which you can enforce that and that is they have You know bond issues that are approved by the voters that identify the capital projects by by source and then Including many progressives you get many progressives who are saying that I'd say that they call almost everything in an investment right whatever it may be your foreign investment. Yeah, they're the Consultant told them that people like investments, but not spending so they call everything investment Okay, and then finally I've talked to a lot of people about I won't do it right here and bore everybody That's watching us about the capital budget. Actually there the Congress passed a law. There is a capital budget. You can find it in budget documents on the White House website and Very few people understand what's in there and then what do you do? How do you treat military procurement within them? Is so basically at the point is great in concept But once you try to implement it you end up with a whole lot of thorny issues that prevent you from ever reaching the benefits of the concept and more over more over real Capital expenditures that would have a social ROE that would be analogous to the historical Barn we did for the Union Pacific Railway for the Panama Canal would be examples where we used that right well in the past Those as a percentage of the overall budget of the United States Our spending United States are very small right, but I think that's a problem not an excuse for I I would agree with you, but I go back to my point if the point is well listen People wouldn't want to you know people are so ignorant that they wouldn't want to pay for that stuff with taxes Even though they ought to so let's do it with that. I Think we ought to make the case that people don't pay taxes. No, I don't think that's there I think the argument is that it's easy to explain to people that we ought to in when when the economy is Operating normally we're not running the worst depression since the Great Depression We should raise enough money and taxes to pay The operating expenses of the government and the benefits were paying to people today So that you shouldn't be borrowing to pay Medicare to my parents right, but that just as And I'm actually I say some hesitation because I'm basically allergic to the family metaphor because it leads you to some stupid things Yeah, just as it it doesn't make sense to use your credit card to buy Groceries that is to borrow to buy groceries, but it may make sense to borrow money to For a house for a house or to pay for your college education We could we if we had the principle that we raise enough money and taxes to pay for operating expenses in today's consumption Today's benefits, but we borrowed for things that investments with all your caveats about I will define everything in investment That doesn't seem like anything wrong with that not not at all and actually that's the way Cities and states do their right, right, and and when they and when there was a loophole on that because of the the the Unreported are the unfunded pension liabilities that they tried drove through that loophole But in general right the principle that cities and states apply is you pay for operating expenses, right? And then you can borrow for capital expenditures with voter approval when it's explicitly discussed isn't part of the problem We have now that It's not we're doing. Oh, we're not having a problem Raising money now we seem to be able to borrow almost unlimited amounts of money although much of it comes from abroad We can't count on that going on in the future as you point out the debt has gotten very big And we're not fighting a war anymore And so we doesn't give us much head room if we want to go up again But that the the if you look forward a decade or two a lot of this has to do with what the trajectory of healthcare costs Exactly because so much of that is paid by the federal government and we have so many people 10,000 a day crossing the threshold and becoming eligible to Medicare. What do you think would be the Best way to get a grip on that now. What would you do either? So we have enough revenues to pay for a future health care spending or we have lower growth And that's probably the most important question the most important I could add on if I could just highlight that question. I Don't care where you fall in the political spectrum The fact that debt service costs and medical services are rising at so much faster The national income and our schedule to rise so much faster national income for the next, you know for a long long time means that You know the traditional conservative for let's just cut taxes or Or you know, let's preserve or expand domestic programs Those things are being going to be squeezed out of the political dialogue in the debate But the first thing to do is to have a national discussion of what I call pay as you go Medicare Medicare was never intended to be debt finance. It makes no sense Makes no sense to add an extra level of interest on the medical bills that are going up fast enough That makes no sense. It makes no sense for a generation that has fewer medical needs Or today we have fewer medical needs then we will In 2030 we're the number of people over 85 is more than double what it is today as we're sitting here right now That's the opposite of insurance insurance is taking risk and shifting it from the risk from Population where greater medical needs to a healthier population not vice versa The American people support the concept of Medicare They're suspicious about the use of government funds if we put money into a trust fund And it could be used only for that purpose in the past People have felt more comfortable. I as a taxpayer would feel more comfortable Then when it went into what people with some would consider a black box where you didn't know where the money ever went And finally in Medicare tax itself is the broadest-based tax of all. There's no deductions. No credits It covers more of GDP than anything else So I think that that a place to start would be how do we pay for Medicare and for those people who believe as I do That there needs to be reforms to bring down that cost curve There's no better place to start than assigning a price to medical services in the form of taxation that people can see Simply sweeping the tough choices Under the rug where the use of debt Is unacceptable and we'll have an adult conversation concerning high-cost procedures high-cost patients ways to enhance the efficiency and delivery of medical care if There are consequences financial consequences if people just think it's somebody who wants to have a death panel because they want the Meddling in the lives and we're gonna have a hard time right, right? Yeah, the prospects for an adult conversation on health care, but I wouldn't sign wouldn't particularly invest my IRA on that Thing but basically what you're saying is if we had an identified tax for Medicare And it rose with Medicare spending that would probably be the best way to force reform of the system because people would say holy cow Yeah, yeah Before we turn to questions Let me ask you one other thing about so you had some experience in the energy department I wonder if you think there's some kind of win-win compromise that could deal with the Mounting debt that we face inadequate revenues to pay our bills and the global warming question is there is do you Imagine some day and then in the foreseeable future while you and I are still alive We're somehow a carbon tax descends from somewhere and becomes a solution to more than one problem Yes I should stop you there because every other thing you said yes, I'm optimistic, but and then you make me depressed So how does that happen? Well, I think that I Mean this is one of the ironies of the political system that Much of the energy business Who people have a stereotype is you know, you know, it's a bad guys in popular movies on this issue Think that there should be a carbon tax if that's Administered that's imposed and administered and it's predictable in advance as a matter of fact Exxon has a You know at the beginning of the year a global forecast the next 20 30 years of global energy needs and in order to do that They assume There is a carbon tax that is imposed because they think that if the world is serious about this problem And there's enough evidence we ought to be That sooner or later we're going to have a carbon tax imposed one problem that you have quite frankly is this you know You know, mr. Grover norquist and these people who've hijacked the idea that Pain for government with debt is conservative And it's not so Once you get past that Conservatives traditionally have favored consumption taxes rather than taxes on Investment and productivity in a carbon tax will be one means to get there This is why that this was considered an energy tax by George HW Bush and their you know debates in 1989 1990 Reminds me of what Larry Summers once said about the VAT when When the conservators realize it's regressive and the Democrats realize it's a money machine then we'll get it I Think we have time for questions and there's a microphone. Why don't you if you have one? To take the mic and tell us who you are Worked on a transportation consultant bill. You know I care about infrastructure. Yeah, and you've talked about it a bit But we're facing at this point the highway trust fund actually literally going broke in July Yeah, nobody seems to have an idea what to do about it We've thrown general funds borrowing into it for years talked a bit about a capital budget Yes, talked a bit about maybe stronger trust funds. Yeah, how about user fees? They're more responsive to what's being used and then another idea much of what we spend is actually just fixing what we have Could we put depreciation into the general budget and try to cover that? and Gentleman asking the question by the way Dave is one of the most knowledgeable people in transportation the whole country Served as deputy secretary of transportation when I in the Clinton administration. I would say first That the public has always understood some of the benefits of infrastructure Our budget problems are not caused by excessive spending on infrastructure in the United States at all levels This is one reason one in a day where I was a little concerned that some people I talked to Have the impression that there's a lot of money being spent on infrastructure where there's not so it's almost I won't say a rounding error in the budget, but it is a very small percentage. I Think the use of trust funds for infrastructure paid for user fees is something that has a good idea You know president Reagan As you well know and 1982 when there was a large deficit that appeared one of the first things that they did was to raise the tax on motor fuels and Put it in the transportation trust fund I think those people who equate Small government with government on the installment plan They know tax anywhere anytime people are short-sighted and in opposing taxes on on Motor fuels that could go into and revive the highway fund and I think that if it was explained Listen, I was mayor of a big house mayor of a city that's bigger than 15 states I would just talk to people back and forth We have transportation needs within the city of Houston about The budget and people were willing to pay for transportation improvements if you told them what the money was going to be spent for I think that the problem is that when the conversation Becomes overly simplistic and the only thing that matters is the debt that it it has led to a situation where we're naive about how we cut spend that it does matter what spending you cut and it does matter what taxes you raise and The if the only objective is fixed the debt You may end up doing that by cutting the already small infrastructure spending even more Unless you kind of emphasize to people that really does matter where you cut spend and what I've tried to do in the book is To avoid the idea first of all, I agree with you and I think we have about two boats And so what I really want to do is say three of work, you know, three maybe in South Texas in the old days, but but what I what I want to say is You know, I think the American people come out about the right way and just like people my community if you went back and forth and I think too many people Who are in Congress, which is the only branch of government has the ability to do tax and spend I think that well, I'm all for reducing the debt, but only if it's done my way right over time There's gonna be pressures and there's other sources of funding besides a federal government by the way for infrastructure And we'll come up with the balance sir James saying this is a kind of funny question about history You talk about the good old days and pointed out that of course in the good old days the US had lots of land so it's old land to finance Infrastructure and stuff like that and I believe you talk about a little bit more I mean the development crowd as they look at developing countries are very much into doing national counting where for example Non-renewable resources as they exploited get show up on the balance sheet and So what was the 19th century where we had lots of land is sold sold out land to pay for things really that an Analogous situation to what where we are now and if it we use modern accounting standards would we have been running a deficit then? Would we but let me only say it was off the balance sheet financing and Then how you account for the opportunity cost for that land? But I don't think how would I say it? I'm dealing maybe maybe I ought to deal with everything on the planet earth In all the social problems, but I'm concerned in the book with one thing How do we have sustainable? financing of the United States In light of the fact that there's a limit on the amount of taxes That the American people think the government at all levels should take so I'm focused on that, but is a lesson that There is a myth and I think your question points it out that in in the 19th century The federal government was a whole lot bigger than a lot of people give it credit for and actually if you go back there People considered the federal government an absolute monolith compared to the cities and states or for that matter private enterprise So I was hoping that's responsive To the back Hi, thanks. This is fascinating. I was hoping you could kind of tell us who you are. Oh, I'm sorry Chris Leonard I'm a fellow at New America and I was hoping you could help me understand what seems to be kind of a contradiction and that you hear a lot of Statements that are dead is on an unsustainable path, but in the market It's priced at a level that would make you think there's no way we will default Yeah, and this seems like an absolute disconnect I was wondering you could help me understand why and then maybe where that's headed will this resolve somehow Okay, and I'm going to give you a precise answer that's significant But it's not a sound bike because reality is a little complex What is I don't think we're going to default first of all, I Think there's a tremendous global demand for the dollar and people will you know want to have some Interest rate on those dollars, even if they short term Even if it's a low and a short-term interest rate I think with the maturity of the population the aging of the population Here and in the rest of the world that you're going to see Savings rate that hire that was higher than it was at times in the last 40 years Which will contribute to the demand for treasuries and suppress interest rates Having said all that I'll tell you what's unsustainable What sounds sustainable is that if according to the CBO next seven years that the debt service Goes up from you know say 24% of all the revenues that the federal government receives outside of trust funds The 45% of all the revenues it receives outside of the trust funds They get this you'll have less money to spend for everything else. I mean that may seem pretty radical That's too circular. Yeah, so the CBO assumes that interest rates will go up. Yes, right? Yeah, and there is something that's a bit puzzling if we're led to believe that financial markets are forward-looking Yeah, and you're telling us that the US government the world's largest corporation is running an unsustainable Debt policy one would expect that one of these days the market would be Unwilling to lend money at two and a half percent for ten years And the fact that it says low as it is and has stayed as low as it is you would agree I hope is a bit of a puzzle I mean ever since the beginning of the year long rates have been coming down even though the feds are buying fewer The Federal Reserve is buying fewer bonds So there is something jarring about the the the the statement you make which is true Which is we seem to be on an unsustainable course and the supposedly forward-looking financial markets Which seem to be coming to a different conclusion. Yeah, so I was it for that's a great point I I was defining sustainability as as If debt service is going to consume and I get back to the point on interest rates a higher and higher percentage of the Revenues that the federal funds revenues that revenues outside of trust funds There'll be less of those revenues to pay for everything and so the current level of spending that is not Sustainable the current level that we can't more over I'd say on interest rates just a comment that you have several things going on first is that You know you have had a Massive amounts of purchasing of bonds by the Federal Reserve I Do not think if you look at the you know state policy of the Chinese Government in the central bank that you'll see the same level of purchasing by the Chinese of the Treasuries that you have had in the past and so when you combine those two things and Even a slowly growing Recovery, I think my point was based on a rise in the average Treasury weighted average of the 4.5 percent From the level it is today, which is in line with the historical average But I don't think you have an interest rates by put another way is When I say I'm sustainable, I don't think I'm not saying go buy gold and we're going to default on our debt I think that the the great availability of credit has been a great enabler of our You know disguising the cost of government with debt I think it will continue to enable that cost to be disguised for a while But there will be a consequence and that is that there's going to be less and less tax revenue Just right for everything else. So let me let me I think I got this right Let me summarize the three ways one is this isn't the point you'll make but I'll make it is The markets are not so good at looking forward as they pretend that they could change their mind in a hurry We say they could change our mind and her secondly It's gonna the problem is not that we a big problem is that interest on the debt and debt service will crowd out Spending on other things and the more we run these these big deficits the more of our federal spending will go to pay Interest on the debt half of which goes to the Chinese and the Japanese and we won't have money for the things you value No matter what it is those things you value the government does whether it's defense or bridges and third Counting on the Chinese Continuing to save enormous amounts of money and using it to buy Treasury doesn't seem to be a great long-run strategy for a great More and that the only way that some of the easy way outs are to continue to borrow more than you're paying for interest And then you're running a race against compound interest, and you will never win in that race I think there was one Good afternoon, my name is Larry Giorghino. I'm a management consultant near your history of This perspective on this that I think is really fascinating, and that's the the source of my question. We're now a century into This love-hate relationship with the federal income tax is a national value Is that a real turning point in in the subject you're discussing here today, or is that just a Blip on the radar or our consumption tax and And other sources of revenue debt for example that you were just discussing Are those more important to the American psyche or are they more troublesome or where do we where do we come down on? Financing the federal government in your your historical view Well, I'll make two points, and I hope these are responsive, but maybe they have some contemporary significance And you're gonna have to buy the book to get the complete answer And they have and don't borrow to buy it and that they have and they have to do with tax reform. Okay, I think that tax reform that results in a net rise in revenue is Unlikely and can be and the prospect of which can be somewhere between a deception and a mirage And there's various reasons for that, but I will just say think about it now 2012 you had The Republican presidential nominee saying that he was going to raise federal revenues through tax reform And have closed the budget gap that way and right now the Senate is considering a bill if they were to adopt a house bill they revenue loss From the perpetuation of certain tax breaks would fully offset Over a 10-year period the revenue gains from the raise in income tax on the top 1% So, you know the tax reform is an election year talk number two is That the income tax system we have one reason why it's clumsy why it's complex why there's tax lawyers is It's really almost a hybrid of an income and consumption tax If you had an income tax where you said you take your income you subtract your savings and Then we're going to tax that you'd come out mathematically the same place you would with the consumption tax and so we really have a hybrid between the two systems right now and Well, that's a good thing or bad thing I think it's it's the balance that all those tax laws have been signed by a president elected by the people and enacted by Congress with both people we The tax laws are complex because they try to have a balance, but don't you think that the The constituency for consumption taxes seems to be limited to Academics and tax reformers and that in general it doesn't seem like the people are ready to trade the income tax for something else. Yep Sir Mark Trumbull with the Christian Science Monitor I'd like to hear as someone who's been involved in city government as well as federal How much of the how much do we have a big fiscal problem with? things like unfunded pension liabilities and other Obligations and needs of cities and states and how does that factor into your big picture of where America stands Could we? Does that make the problem a lot bigger in scope and and could we be headed toward a? Situation where some states and cities do a lot better or worse than others Well the the last point is absolutely That the cities that have Have to spend much of their personnel cost on people who are no longer delivering services Are going to be at a competitive disadvantage To those jurisdictions that can use our tax revenues to pay for services that are currently being delivered and that's why they how would I say it I'm a pretty progressive person Within five months of being elected a mayor I had a citywide referendum in the nation's fourth largest city on pension reform And I was attacked by the unions and people who said it was You wouldn't believe There was a lot of billification, but I guess 73% of the people endorsed what I have to say now in our state like most states like most states the State legislators are the ones that really write the rules governing what the level I had to put it on the referendum So that I could put the you know fear God and the people and let people know that the public was on our side It wasn't vilifying our city employees. I had TV commercials that said hey I want to pay people more to work well and less not to work That was my commercial and I think people that's what my intention was and that's what I did So but I think it's a serious issue and and it highlights the fact that you need to have clean and honest accounting of accrued liabilities Now the worst offender of this accrued liability of all is a federal government Because when they get that Medicare premium and they get that payroll tax at least the cities have pension funds that Record that accrued liabilities, but you don't find it much in the unifying budget You got to go to the Medicare trustees report to figure out what the accrued liability is Thanks bill Steve Levine with new America Bill I'm interested also in the historical Part of their book and I'm wondering about your sense of the of the dynamics of history so you make the case that in the book that Americans have a certain have had a certain tradition through history. It's changed since 2001 So I'm wondering about how much is history and animating force in itself in what? We're going to see in the in the future here And and it just makes sense makes logical sense that the debate that you're describing must have happened Before in our in our history too, you know a Churchill says something long lines of the father you look back The father you can see in the future and so that's the purpose for what I You know wrote the book and and I would say one thing I did learn is that if there is some candidates in one party or the other who has a Realistic plan to balance a budget and not necessarily one fiscal year in response to your but not overnight But within a read, you know five years four years seven years front-end loaded but not doing it all at once and in plausible Who's talking doing the American people like this or like I did with town hall meetings within the city and other mayors do within their cities that The incumbents have something to fear that of the American people understand that there's no such thing as free and That in the path that people can get reelected using common sense fiscal principles if Neither party fears competition from a balanced budget for the other party If they're competing as they were a few years ago when Ryan had a plan to balance a budget in 40 years and Attacking the White House for having a plan that you know wouldn't bounce for 50 or 60 years Well, there's real no competition on the issue. That's a joke But if you have people who like mr. Pro did in 1992 or you have other times in American history Offer a balanced budget plan, then I think you'll see some support increase for those Do you think there's a chance that the reason we wanted to borrow so much is that? the economy slowed and particularly the growth of incomes the middle class slowed and borrowing everything from home equity loans to the federal government was kind of Some sort of response to not wanting to live within our means because that would have required living with slower growth Well, you know, I'm not we've had slow growth since the 1970s you know twice three times actually Congress came very close to passing a balanced budget amendment to the Constitution voters overwhelmingly Say they support a balanced budget. We Brought the belt the budget sort of end up bouncing in towards the end of the 1990s where Actually during the 1990s the growth in high income was extraordinary compared to everybody else So and then you looked in the 19th century between, you know, 1790 and call it The 1920s and now there's more series actually real wages in the United States did not grow up Did not grow all that much you've had that That there was great in For a hundred years, there's been a problem of income inequality after world and during the Great Depression Well, I'll leave it at that. I think that No, I think what happened recently is that there were each party had a spending policy and a tax policy And the two didn't meet now. Would it be nice to think that things were free? Yes On that note, I think we'll call this to a close Bill Thanks for writing the book and for coming here today and thanks to all of you for participating. Thank you