 I'm Michael Atlinger, I'm the Vice President for Economic Policy at the Center for American Progress and I will be moderating this panel. I caught a bit of the last panel and we're going to be moving from guns to butter I guess or swords to plowshares or something. You know as we talk about how we're going to deal with the fiscal cliff, whether it's going to be a grand bargain or muddle through or whatever happens, there are a number of programs that are undoubtedly going to get particular attention that are going to be real hot potatoes for one reason because there are programs that the government does that are very much the public's very aware of and they're things that are very much in the political discussion. You know for people who are pushing for substantial budget cuts in general one phrase you hear is getting entitlements under control and I think what's notable about that phrase is it doesn't have the word social security or medicare in it and it implies that something is out of control and what we will be getting into on this panel I think in part is what happens when you actually get beyond that phrase and it becomes a very different discussion. I think the other thing to note is that you know one thing is when you get into a fiscal cliff deficit discussion there's a natural gravity towards making the numbers add up and make that look I've done this several of us have done this making the numbers add up is really easy if you abstract it from the consequences and you know I think that what this discussion really is going to end up being and be forced to is what our society and economy really need and some of that is our programs like the entitlement programs but also it's things like you know dealing with bridges and roads and infrastructure and all the other things that the federal government does so that's what we're going to be moving the discussion to and we have a great panel I'd probably say that even if it was sort of not true but it happens to be true in this case and in the order they ended up in my notes I will introduce the panel. Mark Schmidt is a senior fellow at the Roosevelt Institute. Before that he was an executive editor of the award winning American Prospect magazine. He was a senior fellow at the New America Foundation. He also directed a program at the Open Society Institute where he showed the good judgment of funding some of some of my work. He was also policy director to Senator Bill Bradley and advisor to the senator's presidential campaign. Michael Evelyn right here is the Whitehead senior fellow at the New America Foundation. He's a bestselling author and my copy of land of promise is almost at the top of my my pile and I'm actually very much looking forward to it because he's an excellent writer. Michael's been an editor or staff writer for the New Yorker Harper's magazine in the New Republic. He's published and appeared and spoken pretty much everywhere and written everything. He's a much a you know in terms of writing everything for much a claim serious and important works on history of history to a prize-winning children's book. Monique Morrissey who you can probably figure out which person that is has been with the Economic Policy Institute since 2006 where we were colleagues for I don't know a year or something. She previously worked at the AFL-CIO's Office of Investment in the Financial Market Center. She holds a PhD in economics from American University and her areas of concentration in her ample research and writing include retirement security, executive compensation, the Federal Reserve and financial markets. Lastly, Sheryl Schweninger directs the New America Foundation's Economic Growth Program in the Global Middle Class Initiative. He is also the former director of the Bernard L. Schwartz Fellows Program. Sheryl was the founding editor of World Policy Journal and the director of the World Policy Institute at the New School. He also served as program coordinator for the Project on Development, Trade and International Finance at the Council of Foreign Relations and he's also a senior fellow at the World Policy Institute. So that's the introductions. I thought they warranted some elaboration since they are a very accomplished panel and I think we're going to kick it off with Monique. Thank you. I have my notes on a PowerPoint but there are no charts and if you can't see them it's okay. It's basically notes to myself. But my title is Avoiding a Not-So-Grand Bargain and actually Jamie Galbraith used the analogy that I was going to use which is you're getting the hard sell from I was going to say timeshare, he said condo, you could say rug dealer, you could say a car dealer. But his point was and a lot of other people have mentioned this is that when you're getting the hard sell it's time to stop and think. I would go a little further and I'd say when you're getting the hard sell you know you're not getting the best deal you can. So in fact don't stop and think, walk away, see what happens and then come back. And my particular focus even though historically I've looked at Federal Reserve stuff or something like that really these days it's been a lot on retirement and social security and so I'm particularly concerned with social security. I thought I was going to be taking the last slot and so I was just going to plug in holes where people hadn't made particular points on tax expenditures or something like that. But as it is I'll try to give a little bit of an overview and then just go specifically about social security because one of my preoccupations is that many progressives even are at this point convinced that social security really is in trouble and also that in general that there's a big problem with aging and demographics. And I think that one of the reasons that the other side wants to deal very quickly right now is because you know for people who are anti-government ideologues you know the new deal programs are the jewel in the crown. If they can they try to frontal attack with privatization and now they're trying to shrink it down and they you know they don't need you don't really need to have private accounts formally you can just keep shrinking social security and then talking up the need for more retirement savings and you know publicly subsidized retirement accounts and you come up with the same thing. And so I would say that you know in particular if there's one thing I want to accomplish today is to convince you guys that there is no rush on social security should not be dragged in and if the Democrats do one thing right it should be you know make sure that that's social security and the new deal programs in general are left out of any bargain. But first let's see how do I the I also because I'll be skipping over a lot of the stuff very quickly. I'm putting a plug for EPI publications. I also neglected earlier to thank our host which I very grateful to be asked to participate here and and we all are very much like minded. But I wanted to say that the fiscal obstacle course by Josh Bivens and Andrew Fieldhouse is a very good overview of trade offs and it's also well written which most economists don't write very well and I would so I would say that if you just want a little bit of a quick you know a rundown of some of the issues and trade offs and the other thing is that EPI helped the Congressional Progressive Caucus on the budget for all. This is an example of many kinds of things that EPI works on. The point is that you know if you're worried if you the main point I'm going to make today is that it's all politics. It's not economics and these kinds of things demonstrate that there are you know ways of reducing the budget long term and that don't require you know that are not they're not the sort of economic constraints that we've been told about with the aging population. We need to do this. We have to you know those trade offs and this is a short term budget I mean medium you know a 10 year budget window but it shows one way of doing it and Becky Thies is here and so if you are more interested in that she was at one point I agree I actually tried to get her to be here instead of me because she works on Social Security and she works on budget issues so she's more of an expert on these things. So okay this is kind of obvious but as I mentioned I don't think and one thing I wanted to mention is one of the issues is you know the long term real challenge is projected health cost inflation you know just you know as many people have pointed out this my theme is everything is politics and one of the things that's political is the decision about what is considered a realistic projection or not. This has become very very politicized. So for example the same people and this includes supposedly a political non-partisan actors like the center I mean the Congressional Budget Office will project forward unsustainable and this was mentioned earlier but unsustainable health cost inflation and meanwhile when they do their more realistic projections they will cast doubt on cost containment measures and so another so there's a there's sort of this bias built into these projections and this is always something to keep in mind you know that projections you know the decision about what's a realistic assumption or not is very political and it includes you know supposedly non-partisan actors like the Congressional Budget Office which does a lot of good work but now I this was partly for my own purposes this is an extremely simplified you know I wanted to it's a very very cynical idea of what the Republican priorities were and the Democratic priorities were going into this you know grandmark bargain negotiation and I already realized that I'm there's an error in there because I was just told by the last panel that the Republicans aren't really that hardcore these are supposed to be priorities in terms of averting cuts and defense spending and it's a cynical perspective I say so they what Republicans want is they want cuts into you know in government they want to shrink government drown it in the bathtub famously separately from that they in particular want to get you know get rid of the new deal and substitute you know what EPI with Jared Bernstein EPI previously called you know the year on your own society so the Republican vision was an you know an ownership society where and that the Democratic vision and one way to look at it is the Democrats historically have been in favor of social insurance which historically has been much more cost effective and the Republicans historically have you know wanted the same subsidies funneled through private means and of late actually the Democrats have been complicit in this expanding the size of government in in in health care and other areas but doing it in a way that sort of buys off private industry at the same time and it's very expensive so it's not you know if we really are in a belt tightening mode it's important to keep in mind it's not just the Pentagon that has not done things very cost effectively I'm a big fan of the recent health care reform but it was you know one of the strong points was not cost containment and in in addition the cost containment measures that were there were not viewed as credible and so that was a political decision partly but partly it was it was a function of how it was done and you know again I'm being cynical I say the Republicans it's not so much that they are in this this is this you know there's Republicans are not a monolith although they're closer to being a monolith than the Democrats but some Republicans genuinely don't want to increase taxes on the middle class and genuinely don't want to double dip recession but I'd say that the way that the party the revealed preferences of the party in recent years has been that they're much more concerned about the wealthy and you know than they are about these things the Democrats so we're told now I mean it's a bargaining position you know the president has gone all out saying what they're one thing that they really want out of this is tax increases on you know it's to reverse the Bush tax cuts essentially on the wealthy and you know be as the party in power and as a responsible party they don't want to go into another recession and they also you know have also drawn a line in the sand at the 250,000 I would say that's not middle-class but that's another issue whatever they won't go below that and and they generally aren't you know don't want to drastically shrink the size of government in general and they go along with some things that I would consider to be you know leading to the end of New Deal programs but they're not it's not a you know something that they would generally prefer but that's the danger point is you know how many Democrats are sincerely worried about the deficit and are and believe genuinely believe that it is important to cut the social insurance programs to achieve that the so the danger so you know objectively the Democrats have the upper hand because if you you know the thing that happens automatically the main you know is the is the expiration of the tax cuts and so you know as somebody pointed out earlier that says it's sort of part of it is it becomes it's semantic you now call you're not you're now arguing about who gets you know who gets tax cuts restored as opposed to talking about a tax increase which when you talk you know with Republicans might be something but it's you know that the tax increases would be a done deal which is an argument again for not trying to strike a bargain before these things take effect the thing where the Democrats are vulnerable is again all if the even though it is a slope it is going to hurt the economy it's not going to happen overnight we're not going to go into a major recession overnight but it you know the Democrats clearly don't want to sacrifice unemployed workers and every you know in the economy as a whole to you know and so that's that's where they're vulnerable and and this is hyper simplified I mean I don't even mention you know that the tax increases not just the Bush tax cuts but it's the payroll tax cut which I can talk about later and you know it's a unemployment is another big factor there the extended unemployment so the you know sort of an point okay well okay I'm going to skip ahead but just a couple of points to be made here you know we're you know economists are all glad that now they're sort of our Keynesians are glad that there's an implicit you know the whole discussion around the fiscal cliff implies that that you're a Keynesian that you really believe that the economy is going to go south if you if you close the deficit even though it's not usually stated in those words you know a couple of a couple of details are you know yes generally speaking all else equal you close you short you reduce the deficit you will have a you know contractionary effect but the how you do it matters a lot if you actually you know that famously the tax cuts on the wealthy were not very expansionary versus tax cuts in the middle class actually what even better than any of that is spending on states spending on infrastructure which is another thing this panel supposed to talk about the you know extended unemployment these things don't cost very much and they have a big effect on jobs so and then the other point as this is a point that my boss the research director dpi Josh Bissman's makes out you know is that since a lot of Democrats really do believe that deficit reduction long-term deficit reduction is is important and there's you know some literature that points to that you get to the point where the debt as a share of GDP you know then all of a sudden things go bad for the economy and looking carefully at these studies they're not they're not really very credible but in any case the point being that even if you believe that even if you believe that debt to GDP at a certain point becomes dangerous for the economy you know this assumes that you've got full employment and so it's a high-class kind of problem you can worry about that then you know it's not you know what we've got to worry about is years and years and years of less than full employment and okay so since I had I will skip ahead to very quickly I would just like to get to my social security the the thing about social security is people have been convinced and this is why they want to deal and they want to include social security is I think that we've reached the high point of scare mongering on social security people are really convinced that social security and Medicare together you know are gonna are going to you know bankrupt us in the future and health you know Medicare it's all health care and it doesn't you know if we don't solve that problem we've got a problem whether it's a government spending or it's private spending so we've got health care cost inflation is the number one problem the aging is really not that big of a problem with social security we've saved money in the trust fund to get us past most of the peak boomer retirement years life expectancy growth is so moderate as a factor compared to other things that once the baby boomers retire cost is a share of GDP level off you can't with your naked eye see any growth I mean there is a little bit of growth because of life expectancy but it's very minor the chief actuary of social security will tell you that if there's a demographic problem it's the drop-off in in births not you know and in population growth which has to do with immigration and the birth rate and not with life expectancy and for the record I'm in favor of a gradually increasing the payroll tax to offset increases in life expectancy because it would be so slow and so modest that it wouldn't be much of a tax increase and it would sort of shut people up all together but usually of course it's used as an excuse for raising the retirement age which is an across the board cut and well beyond what would be necessary to offset growth and life expectancy and you know I have written a lot about this issue so I would just refer you to other stuff I've written because it does it is very hard to convince people this is not true it's true life expectancy at birth has risen very much since the early days of social security but a lot of other things have happened in that time notably you know influx of women in the workplace people working longer already you know that have tended to balance off the sort of demographic issues and it turns out that a big reason for this that this the social security shortfall has emerged has actually had to do more with slow wage growth and wage inequality so more earnings above the cap and so one minute okay okay and so the last point I make then will be that the well that I'll make two last points one of them is that you know the other reason that social security and Medicare tend to be hit is that people look at it and they're like okay social insurance or mandatory spending is a 14 percent of you know of GDP you know discretionary spending including military spending is nine percent you know that's where you have to go where the money is but what gets left out here is tax expenditures which are about eight percent of GDP and sort of don't don't they're not considered spending their reduction in taxes but that is where there's a lot of waste Democrats have been complicit in it you know a lot of for example why cut social security instead of talk cutting subsidies for 401ks two thirds of which go to the top 20 percent of the population and in general that's the case for most tax expenditures very very lopsided very wasteful very inefficient and today's New York Times had something about how the you know that it was actually something that the Republicans were pushing during the election and the Democrats are now easing up to it and there's no reason if somebody tells you you know that social security is the third rail you know that why is it why is it that the home interest deduction or the you know 401k subsidies are considered untouchable but social security really isn't I mean it's because Pete Peterson has spent a lot of money and I should own up the DPI you know has also worked with Pete Peterson on stuff like this but we don't agree on this but you know to try to scare people about this one particular pro and convince people that it's you know we have to touch that third rail I'm just going to wrap up with this to be provocative I generally speaking this has been of a love best everybody's agreed I want to give Bruce Bartlett a bear hug I don't think he's here anymore since the way I sound he probably wouldn't want it although I don't think I'm contagious anymore I've had this cold for about a week but there are three areas I think that are important where you know progressives disagree and people on this panel disagree we disagree with cap we disagree with center on budget you know potential areas and it might be interesting to discuss one of them is generally speaking the importance of deficit reduction I mean I've laid it out we tend to be dovish on this I don't think it's a problem for a long time to come not really worried about interest rates the other area is you know as part of that is one area that where a lot of progressives are willing to cut social security is by reducing the cost of living adjustment EPI is actually behind a statement right now we're trying to get PhD economists to sign if you haven't signed already we're releasing it later this week but we have about 300 people signed on to something you know saying it's it's a cut in benefits and it's a it's a particularly bad one it goes to the most elderly beneficiaries disproportionately but the reason that some progressives favor this is because it would also increase revenues because the same thing would happen on you know in terms of marginal tax brackets so this is an area of disagreement another area of disagreement is whether to you know extend the payroll tax cut and within my own organization there's disagreement there you know we all want we're worried about the economy it's one way that they do it but I do believe it's a Republican trap to make you know to make it seem like to cut the you know it could turn out to be something hard to get out of but thank you very much thank you what makes a bargain grand we according to press reports President Obama would like to have a grand bargain the most familiar template of a grand bargain is the Simpson-Bowles plan written by the two co-chairs of the Presidential Commission on the budget whose members rejected the very plan that the co-chairs wrote this is now being pushed by a coalition called Fix the Debt funded by the billionaire Pete Peterson and to the tune of more than 30 million dollars funded by a number of corporations particularly in the financial industry but not exclusively that the basic template of that in similar grand bargain deals is that in return for averting the fiscal cliff averting what some have called more accurately the austerity bomb in the near future Congress will agree to long term cuts in entitlements which do not include tax expenditures even though people are entitled to them but they do include social insurance programs as money pointed out social insurance Medicare and Medicaid so in all the different versions of a grand bargain long-term cuts to social security and Medicare and Medicaid are considered part of the deal whatever the other details of the deal may be and well why is this urgent we are told that we need this grand bargain because we have to deal with the immediate explosion of the public debt that has occurred not just since the financial crash of 2008-2009 but also in the last decade so if I get this right thanks to the Center on Budget and Policy Priorities has done this very useful chart showing where the components of the explosion of public debt in the last decade have come from you may not be able to read it basically it's the Bush tax cuts and the unfunded wars in Iraq and Afghanistan which were funded exclusively by borrowing rather than by a mix of borrowing and taxes in previous wars make up an enormous chunk of it the rest is revenue that was lost from the recession simply as individual payroll and income tax receipts and corporate income tax receipts went down a little sliver for federal spending on the TARP the bailouts of Freddie Freddie Mac and the Fannie Mae federal unemployment insurance and so on so if you look at again from the Center on Budget and Policy Priorities if you look at this chart to see well where was the explosion in Social Security Medicare and Medicaid spending contributing to this you can't see it you can't find it even with a microscope it's not on there social insurance has not contributed at all with the exception of automatic stabilizers during the recession and Medicaid to some extent unemployment insurance to the present crisis it's two wars a recession in tax cuts which disproportionately benefited the rich we are told again and again that we have to urgently deal with this demographic tsunami that's a tidal wave of costs which are going to escalate in the near future in bankrupt America because we can't afford spending on the elderly on Social Security and Medicare well I think if you're a oceanographer or even a mere surfer none of these and this comes from the Washington Post none of these actually look like a tidal wave so it's I know it's kind of small it goes out to 2040 if you just look at the top two health care spending public health care spending Medicare and Medicaid and Social Security the second chart you look at Social Security as Monique said earlier it goes from a little less than five percent now to about six percent by the middle of the 21st century that's not exactly a tsunami that threatens to destroy our civilization and calls for immediate urgent action what it means essentially over half a century we need to either raise revenues by about one and a half percent of GDP or you on the alternative if you want you could cut Social Security's benefits by that amount or you could have some compromise or you could think about reform within the context of the retirement system as a whole and arguably as I would suggest in expand Social Security which is the most stable part at the expense of reductions in the volatile and unstable part of our retirement system which is tax-favored 401ks which have done a terrible job compared to Social Security these are all debates worth having we have decades to have them it's true by the 2030s when the trust fund is exhausted there will be a drop and Congress presumably some years in advance we'll have to deal with it do we have to deal with the Social Security as long-term financial outlook in the lame duck session in the next couple of weeks before the holidays or even by July 4th which some of these deficit reduction efforts have said is their deadline evidently not there's more of a problem from a fiscal point of view with the rise in Medicare and Medicaid costs but even this here we have it going up to 10 percent by about the year 2040 10 percent of GDP from under 5 percent today that's not insignificant that that's you know significant amount of GDP do we really are we confident that we know what share of GDP will go to health care whether it's channeled through public programs like Medicare and Medicaid or through the private sector in the year 2040 AD I think not but in fact this chart since it ends at 2040 really does not serve the purposes of scaring people because saying it goes from a little less than 5 to about 10 in 40 years is not terribly frightening and apocalyptic and for that reason the scare mongers and the doomsayers about Medicare and Medicaid typically use a chart that goes out to the 2080s where as James Galbraith said in the panel earlier this morning that way you can have these costs extrapolated up to 40 percent which is scarier than 10 percent in 40 years 40 percent in 80 years you know conceivably I don't I don't know if anyone's done the experiment maybe you could project it up to the year 2200 AD and show that it would be 200 percent of GDP right the point is due to these projections well yes we will have to act at some point or unless new technology or delivery system reform or something solves the problem which is quite conceivable is it really urgent that we try to settle this problem to the extent that it's a problem between now and the holidays or in the spring of 2013 again it would seem me a rational person would ask you know this is kind of like saying well you know your parents had cancer when they were 60 so as at the age of 20 you should go ahead and have that operation just in case right you know just to make sure it might develop in 30 or 40 years well then why is it and this is ultimately a political question it's not an economic question why is anyone talking about fixing Social Security and Medicare in the next six months or the next for that matter five or six weeks as part of a grand bargain why are you discussing this and even if there were a few irrational people saying these sorts of things why would anyone take it seriously well I think this shows the answer this is one of the ways that you can cut Social Security benefits that have been discussed as a possible part of the grand bargain Monique mentioned another one raising eligibility ages there various ways you can cut it this is using a chain CPI consumer price index it's an alternate measure of inflation I'm not an econometrician I defer to the experts on what is the best measure of inflation the point is this actually appeals to individuals and organizations who want long-term Social Security cuts because it gets the results they want it essentially by calculating inflation differently you allow inflation to erode the real value of Social Security benefits over time now notice that the erosion of Social Security benefits by chain CPI is accumulative and it gets worse and worse as you get older so when you're 65 it's so less than 1% if you live to be 95 assuming the system has been adopted then it's nearly 10% cut in your benefits compared to today so you know I'm not going to debate the merits of this there you know you can make the case in favor of it I'm just going to make a political point if you had a separate national conversation on what to do about Social Security over three or four years and there was no rush and there was no deadline and there was no sense of urgency and you had commissions and they came up with proposals then there was legislation in Congress I think it would be a lot more difficult to sell this to the public right to say that you know we're not going to talk about any other aspects of the budget all we're going to talk about is Social Security and our plan is to cut Social Security benefits through stealth inflation tax by 10% for 95 year olds vote for us right I don't think that would be very popular and the same can is true of a lot of other Medicare reforms which involve not reducing the price of medical goods and services in the US which are overpriced by OECD standards not improving delivery system efficiency but just rationing assets if you had a separate freestanding national conversation with no deadline no sense of urgency what to do about the future of Medicare and Medicaid and one group just set up said we want massive permanent rationing of access to healthcare again that's not going to go anywhere so if you favor cutting entitlements like Social Security and Medicare and Medicaid you buy methods like this it makes perfect sense for you want to bury this in the fine print of legislation on another subject like averting the fiscal cliff it's just like putting a writer on a defense department bill for something that has nothing whatsoever to do with the defense department that is I think that the groups in the United States which for ideological reasons in the case of some parts of the financial industry for pecuniary reasons want to cut social insurance and force people to buy more private for-profit sector products like annuities or private health insurance they know they can't win this argument if the grand bargain is unbundled if these are separate debates their best chance is to first of all create a completely artificial sense of urgency we have to do all of this now the clock is ticking you know by December 31st or by July 3rd 2013 and second to bury this right to bury the cuts in like some grand comprehensive package which will include tax increases avert the alternate minimum tax avert the sequestration and all of that it is a it I have to say it's a brilliant political strategy it's probably the only political strategy that can achieve what they want because unless they rammed this through in a hurry if you have a mini deal instead of a grand bargain which sets aside the long-term entitlement reform and focuses only on the immediate obstacle course of various issues we will revisit all of these things social security Medicare Medicaid for generations to come but you won't have that sense of urgency and you won't have the ability to ram through a lot of ill considered ill-debated questions in the middle of the night right before a deadline thank you it's always a challenge to follow my esteemed colleague Michael Lynn to serves as policy director for our economic growth programming and has headed up also our next social contract initiative over the last couple years I want to come back to the question that Basel Scarlett's posed to the first panel and in doing so I want to talk about what I believe is the actually most fundamental flaw in the grand bargain as represented by Simpson bulls now if you remember Basel's question is whether there was it's not a trade-off between public investment particularly growth enhancing public investment in infrastructure education research and development and meeting our our social security and Medicare obligations and my argument is that in that this is indeed a false trade-off and moreover that both are necessary increasing spending are both necessary over the next five to ten years for to have a successful economy and a sustained economic growth now the grand bargain proponents would in a sense try to pit people in in generally the center-left community between those who favor increasing spending or maintaining levels of spending on education research and development infrastructure versus people who want to defend the new deal pro programs but in but in fact this only shows or should lead us to to understand where the fundamental flaw is in in the grand bargain position and that fundamental flaw is that in a sense the Simpson bulls framework attempts to impose a failed model of economic growth on us in perpetuity that may not be appropriate now what is that essential model of economic growth well in essence they're calling for for lowering the tax rates as if tax rates and this supply side magic is the key to economic growth yes they're broadening the base by cutting certain tax expenditure trying to increase efficiency but the overall thrust of their their message is to keep tax rates low keep public spending low to prevent public spending from credit crowding out private investment as if capital is scarce in the world but this is not the economic conditions that we face now or that we will face over the next five to eight years beyond beyond eight years I won't venture to extrapolate because as Jamie Galbraith pointed out some of these trends become discontinuous after a certain certain certain point but what I do want to do want to stress here is that this model of economic growth a mild version of the supplied side economic philosophy that is guided economic policy for much of the last decade or two is fundamentally ill-suited for the economic conditions that we will face over the next five to eight years and indeed these economic conditions I would argue call for greater sustained public spending both increased spending on growth enhancing public and investment and increased spending on social security and public funded health care I want to touch on the six trends that I believe will define our economic conditions over the next five to eight years and then explain why in effect I've come to the conclusion that we need both increased public investment and increased spending on social support programs and new deal programs in order to have robust and sufficiently robust economic growth the first trend is the obvious one that we're still in the early stages of a global deleveraging process in the US the the best measures suggest we were near maybe nearly halfway there in household deleveraging but Europe has just begun China has not even begun to confront its deleveraging problem it will have after the build-up of non-performing loans which will become more apparent as we go on so the consequences of this is in the in the US of which we face another three to five to eight years of private sector household deleveraging but also face a worldwide problem of weak external demand that we will we will have a process of paying down debt that destroys demand in the private sector also weakening private investment therefore otherwise we would expect weak economic growth second we have two demographic trends that are intersecting we hear about a lot about the aging problem but in fact in the interim five to eight period year period we have two demographic trends that are going to exacerbate the supply demand equation and imbalance in the global economy and increase the relative weight of savings versus versus demand for investment first we have the emerging economies many of which are already high saving and producer-oriented economies will enter their peak savings and production period yes consumption will increase in those societies but if those patterns fall other demographics the actual proportion of savings will actually increase in those societies the Goldman Sachs study on this two or three years ago I believe is impeccable and everyone should should read it this will occur at the same time that we're having a period of private savings catch up in most of the advanced industrialized countries most of the baby boomers have five to ten years left of earning capacity most of them have under saved many of them are going to be saving more to catch up and because many of them face problems created by repeated market setbacks so you're going to have abundant capital and in particular you're going to have a shortage of fixed income investments which is going to complicate the retirement income planning planning process that means that you'll have an enormous demand for us treasury debt yet in the world partly because you'll have problems in other parts of the world the third trend is that you're going to have the ongoing mechanization and automation of manufacturing and business services not just in the US but but the globally as well and what this is going to do is reduce the demand for labor and and the available of middle income jobs at some point in the US we will reach certain limits about automation and and and even will maybe face some slowdown in productivity growth but we still have a long ways to go in terms of of of the fact that machines are still replacing labor in many parts of our economy therefore labor will be abundant employment and jobs will be very constrained and we will continue to face distributive challenges of pressures of technological change giving rise to rising inequality or continued inequality the fourth trend is that absent a more complete breakdown of globalization we're going to have continued intense global competition in the traded sectors of the of both the advanced and and newly emerged economies which will result or place limits on companies specific research and development and infrastructure investment that means war of the burden for R&D and infrastructure investment actually will fall to government in the public sector in the future simultaneously we're going to have continued financial constraints at the state level in the United States which means that that the federal government will have to compensate for cutbacks at the state level in education and other other necessary investments as well as as support for for social programs finally and this one is slightly more optimistic but continuing with the theme of abundance we will see the development of energy surplus because of technological advances in in exploiting both oil and natural gas resources combined with with new energy efficiency measures that will greatly reduce us energy use now the u.s. is now predicted the international energy agency predict the u.s. will be the will be the number one producer of oil by 2020 it will also be probably close to the top and the producers of natural gas this will give us the wealth and income at Mike Lynn mentioned one and a half percent GDP we need over the next what is it 15 or 20 years to make up the shortfall in in in social security in four to five percent in Medicare well the explosion of a moving from an energy deficit to an energy surplus will more than half close that GDP gap so we have a a economic conditions that that suggests that the challenges we face are the exact opposite of what the bull Simpson grand bargain would impose on us as a growth strategy the conditions that we're going to face over the next five to eight years with some amelioration if we do the right things are an ongoing shortfall of both domestic and global demand excess capital and labor and and and excess capacity and major many major industries over capacity in many sectors of the world economy a distributive and inequality challenges caused by ongoing automation in those circumstances I would argue we need both more public investment but we also need stronger social security and and public health care programs to ease the distributed challenges but also to ensure adequate demand in employment in the economy so more public investment is needed to create jobs to fill the demand hole and to ensure adequate in infrastructure and research development and training but stronger social support programs are also necessary in or in a demand in employment constrained world in order to fill help further fill the demand hole create jobs and help correct the inequality and distributed and distributed justice challenge in other words we need a growth strategy that is built on public investment led growth that will in fact help crowd in private investment and fill the demand gap that we face both domestically and globally let me make one final point which goes to the politics having said and laid out the economic case for an economic growth strategy that is very different than that would be imposed by Simpson and Bowles I do understand but the problem of political constraints the political constraints on public spending the inability to grasp the meaning of of Stephanie's very important contribution and Jamie's comments earlier today so that in effect we also need mechanisms that will allow us to expand the budget bought budget multipliers if you will and the principal budget multipliers would result from the revival of my what my colleague Mike Lynn calls the public purpose finance in the U.S. Jamie mentioned that private finance many respects is still broken and at the same time we have suffocated our public purpose finance mechanisms the credit of the federal credit programs and guarantee programs that are needed to leverage private capital without putting it on the public balance sheet so I think that one of the most important ideas is to support the idea that Bernard Swartz has long supported which is actually the establishment of the public bank for infrastructure and development which would allow you to leverage private capital and greatly increase public private infrastructure investment at a time where private companies don't want to take it but to do it in a way that doesn't add immediately to the public debt only adds to the public debt to the extent that the risk of these projects not failing to to return so on that point I will thank you very much I'm glad to be here and appreciate being part of this I'm always in awe of Cheryl's ability to put these issues in the broadest global context and really help us think differently about it I want to I think I'm going to start by narrowing it down a little bit and bringing us back to some of the more mundane politics here one thing that I think has it doesn't come up enough in discussions of the fiscal cliff is actually a reminder of why there is a fiscal cliff why are all these things you know hitting at once part of them as we know are the some of the temporary stimulus measures in the early Obama administration and and also in 2011 that were you know temporary tax cuts that were designed to give the economy a boost that are by their nature temporary and should be revisited and you know we may conclude that the economy still needs that that boost and that's totally appropriate some of it is the alternative minimum tax that's always basically always broken and always needs some changes to it the sequesters on on domestic and defense spending are products of the blackmail episode of 2011 when congressional leaders refused to refuse to do as routinely done and extend the the debt limit and created this the sequester as a way to force some action that they had no intention of doing themselves but the biggest part of it comes from the Bush tax cuts and the reason the Bush tax cuts expire is is a sim is an interesting story in 2001 in 2003 in 2001 we had a we had a budget surplus and both Democrats and Republicans wanted to cut taxes Democrats wanted to cut them by about half as much and and put more emphasis on the middle class less on tax cuts for the rich Republicans did not only wanted that they you know they wanted what we have and they didn't want to be in a position where they had to compromise with Democrats at all under any circumstances even though they probably you know a reasonable compromise would certainly have have passed in fact their their their own bill might have passed but they didn't want to risk that and so they used the procedure known as budget reconciliation to pass those tax cuts with just with just 50 votes in the Senate and avoid having any kind of compromise the problem is the only way you can use that process of budget reconciliation is you can't you can't do anything that increases the deficit in what's called in the out years in the years beyond the 10-year budget window so they made them they didn't want them to expire but they made them expire in order to use that process so you have something that begins as a you know deeply aggressive political maneuver that has now turned into as I as Jamie said in the opening and others have said here has now turned into a kind of a different kind of tool one that's designed to force action on some budget decisions that as Mike said would not be the actions we would take otherwise so that by creating the fiscal cliff we're now under the gun in a place where if decisions that are likely to be made on in a sense we're using these tax and other things as leverage to on Social Security and Medicare in particular to force to force some changes that we might not make otherwise such as raising eligibility ages implementing this chain CPI or other ideas that you know there are kind of what you do if you're if you have to throw something together in the middle of the night in order to avoid yet another another blackmail episode so it's really I think it's important to recognize that when you think about the fiscal cliff it's not a natural phenomenon it's something that was created by a series of a series of decisions which which you know many of which should really shouldn't have happened and then you know once we're on the other side of the fiscal cliff not only do we have some room to to think about these issues in a different way there are also some pretty good things that that fall into place on the other side of the fiscal cliff for example people were talking for you know in the campaign you heard both the Romney and at different times Obama has talked about some kind of overall cap on deductions in in in on the directions that individual can take well guess what we had something roughly similar that mostly for high-end earners the two provisions known as peas and pep those were those have been out of that effect since the Bush tax cuts they would come back into effect on the other side of the fiscal cliff not a bad thing capital gains tax rate goes up from 15 percent where it's encouraging all the maneuvers that you see if you looked at the Romney tax returns for example all the carried interest loophole the hedge fund loophole all of those are products of the fact that we have such a low capital gains rate and the incentives to define income as capital gains are so high capital gains rate goes up to 20 percent that's not should be at the same level as other income but that's that's in progress dividend rate goes goes up to the level of normal income those are good things on the other side of the fiscal cliff obviously there there are things that we want that you'd want to change you'd want to restore some of the the child tax credit in the and refundable child tax credit in the and and the middle-class class tax cuts and so forth but there's a lot of good on the other side of the of the fiscal cliff and there's also an opportunity there I think to to think and talk about Medicare and Social Security in the in the way that Michael was suggesting with a little more rationality to it I'm often worried that we do treat these programs as you know sacred and untouchable and and I don't think that's really appropriate either some of us there was a lesson that was sort of overlearned in 2000 in 2005 progressives did a very smart thing when president Bush proposed privatization of Social Security they basically said you know what we we we we can't play this game we we all have other interesting ideas about how to improve Social Security we have the Peter Diamond Peter Orszag plan we have a whole bunch of other things they're all good we're not we're just not entering this game we're not playing on Social Security because we will lose if we do that was very smart for 2005 but I think as we as we as we go into a different era different political configuration I think we can have a little more a little more of the courage to say you know Social Security was changed basically it's been changed every other year since the since it was created was changed about six times by Franklin Roosevelt it was changed to adjust you know in many ways to women entering the changed first to eliminate the the the bias against African-American workers change to to reflect the greater role of women in the workplace and so forth been changed dramatically we should be unafraid to to be willing to to change and improve these programs not just to cut their costs but to say what are they doing well and how you know how do we really achieve these how do we better achieve the goals of Social Security and Medicare I last week I read after the election David Brooks wrote a column which had a you know the classic you know you agree with some of it and some of it is absolutely infuriating and and his quote at the end he basically said you know look to the Republican Party your attempt to depict the country as you know half the people dependent on government and half not you know it didn't it didn't it didn't resonate with people and and most people you know they understand that the government can can be helpful to them as well I concluded by saying to Republicans don't get hung up on whether federal government is 20 or 22% of GDP let the Democrats be the party of security defending the 20th century welfare state you be the party that celebrates work and inflames enterprise that's the classic portrayal that these you know what we're defending here is just these crusty old programs all they do is provide security so you know they don't have anything to do with you know actually lifting people up in the workplace nothing could be further than the truth and we really need to get out there and really establish the point that you know real economic opportunity comes from having security it comes from having the security of you know that your health care is independent on your job so you can take advantage of other opportunities of knowing that at least a portion of your of your retirement savings is is secure you know if it was all up to you you'd have to make some of it you'd have to put some of it in the Securist form of T bill something something like that so so that base is really important your ability to take other economic risks and and take chances and I think we really need to to establish that and and on Medicare obviously I think it is regardless of how can of where we see the budget deficit I think a path that puts us to Medicare taking five you know spending five point seven percent of GDP in 2035 as projected and I'm I'm as skeptical as anybody of how projections work but you know we don't want to get to that point that's not a good use of our national of our that's not a good statement of our priorities but there there are ways to get there by properly implementing the Affordable Care Act begins to begins to show which are the kind of cost savings that actually do work and don't work and which can be can be blended into to Medicare and and and also into into into Medicaid to begin to to reduce those costs I it would certainly be I saw the other day Christina Romer said you know raising the eligibility age for Medicare could be okay because you know the the Affordable Care Act is going to cover people up up to that age which is which is my feeling is that might be but we are nowhere near being able to say for sure that that's going to work in a way that will support people in that age and I think we really want to think about in basically saying how can we make these programs work better to allow people to you know take full advantage of their own of their own aspirations and and and really live a better life we really want to look closely at what what's happening what are we doing for people in that age range of say 58 62 up to 65 Jamie Galbraith when I was at the American Prospect but he he we published a great piece by him suggesting that you know with a with the pressures on young the difficulty for young people finding employment maybe we should just actually make it much easier for people to to step most or partially out of the workforce at age 62 without the penalty that that that kicks in in order to encourage that I think that's that's one interesting idea we're certainly seeing a lot of people in that age range with you that's where the you know a lot of the long-term unemployment is concentrated you see you know two-thirds of people are already taking social security benefits at age 62 there's their point where that's economically rational or not I'm guessing a large portion of those people are not making a rational economic decision about how to do that it's just there in a situation at 62 where they need that cash and I think that's a population we need to think about what's a what's a way to ease that that transition from you know the later years of working life towards retirement and possibly some other savings vehicles might be part of that answer within within social security and also think we ought to be willing there's an interesting part of the never touch those security reaction sometimes from progressives is there's a reluctance to really embrace increases in the payroll tax at the high end I've certainly held that view at times because it creates something we think that social security only works because you know basically it's a good deal for everybody it's not it has a certain amount of progressivity in it but not so much that that than anybody is really is really worse off it's not a it's not a massively redistributive program the more you raise the payroll tax of course the more it does become a redistributive program if you're not changing benefits in the same way so that if you're you know if you're raising the ceiling on the payroll tax for example you create some you create a population of well-off people for whom that social security payment becomes a little bit more of a bad deal depending how high you go I've always been wary of that but I think in keeping with that with the principle of let's be unafraid to make some changes I think we should maybe be less be less wary of it I think the public is is is less unwilling the public more record the public has more recognition that we do support you know we do have programs that redistribute that support people who have less that that others pay others pay more you see it in the public support for programs like like the state child children's health insurance program I think there's a willingness to accept that so that I don't think we have to kind of cling to the funding model of social security exactly as it is and should be willing to entertain some of those payroll tax increases but all of that is on the other side of the fiscal cliff thank you so I think I guess the format as a people have questions they can go to the mics I just wanted to start off with a kind of a it's not a yes or no because there's three choices but a question just to run down the panel in terms of the fiscal cliff big deal small deal go off the cliff what what what's your preference I would say small deal I might mind we I understand the logic that if you go off the cliff then you know the third week of January you can then claw back you know make tax cuts and all that I do think you have to worry about business confidence and and markets and and that sort of thing maybe that's exaggerated but I would go for a small deal mark off the cliff off the cliff what was the first choice big small cliff I actually think it's a bigger deal than maybe the consensus here because I'm thinking about a lot of the people I know who are barely making ends meet and they're going to be shocked come January 15th when they get their next paycheck and they're going to see fifty to a hundred dollars less and that will mean the difference between making rent paying the telephone bill or not and that's going to have a much bigger you know the there's a business uncertainty but there's also the consumer uncertainty for large numbers of people that are going to be dramatically impacted by even a fairly small increase in the payroll tax and some some increase in in in the withholding I'm saying this also at a time where at least my reading of the economy while we saw some a few encouraging signs we've seen a lot of peaking of economic activity in the July through September period and a lot of a lot of trends that are now turning downward so the economy is also vulnerable so I think it's a bigger deal than then now we shouldn't be rushed into making a bad grand bargain that that's clear but we should be concerned in my view about falling off the cliff the bigger the deal the more opportunity to do good as more as well as the bigger the risk of bad things happening is I mean sort of my perspective I'm for a good deal start there yes I'm very sympathetic with the main messages this morning on one point of fact but to believe in small the budget effect of the Medicare Part T program passed in 2003 the CBP chart showed earlier did not include any budget impact from that blame wars tax cuts etc which is pretty legit even Chuck Grassley Senator Grassley played a major role in passing that law said later when he was asked why didn't we pay for it he said well at the time it was the custom not to pay for things which I think is one of the single most outrageous statements of the last 10 years that was the largest expansion of social insurance programs in a generation it was a really big deal and it wasn't paid for I also was working a lot on legislative transparency at the time it was one of the least read and most ill put together bills major bills that the congress has ever passed or at least in the last 40 years or something and I think it's worth you know even if you believe every dime the Medicare Part D program spends is great my mother benefited and everything I think we should acknowledge that it was not paid for and it's not the way we want to do these kind of programs and I just think as a point of fact it was a big deal and it ought to be counted and I think that CBP chart is actually misleading and wrong I okay I can't I've looked at the CBP chart though not recently I know we had capped at a similar chart and it certainly included that increase in spending it it didn't get its own section but it was in the sort of increased spending under President Bush category well I don't think anyone thinks it will explode you know more than you know like the other programs in general but even but even if that's the case our whole conversation is about how do we pay for this case drugs right not about how much do they cost and this is what we actually have to have a national conversation about medical goods and services in general in the United States physician fees hospital stays pharmaceuticals cost much more than they do in every other OECD country including Canada that's not universally the case but that's generally the case well why is that there is a consensus in the scholarly literature that no one in public life Democrat or Republican you know talking it on TV can ever mention which is that every other industrial country has price controls basically it regulates the prices of medical goods and services by means of something called all payer regulation the government negotiates with representatives of the hospitals the pharma companies and the physicians every couple of years every two or three years they set rates and apodectomy costs this much and aspirin costs this much and then that's what it is in Canada or Germany or Japan until there's the new round of negotiation I've gone for years to discussions in Washington about health care cost reform and it comes up with more general practitioners you know this delivery reform that delivery reform that's not actually the way it's done now not to say that those can't contribute but until we're willing to do with the rest of the industrial world does and that's to have essentially utility style rate regulation of the medical industry treating it as a utility where the government does set prices what we have is a hybrid system where Medicare does this it has its own fees but then you have the private system jacks up prices in order to reach their predetermined targets of what a doctor should make or what the pharma company profit should be and unless we have that conversation the entire conversation is going to be about rationing access to overpriced medical goods and services in America rather than lowering prices without rationing access so I apologize I'm getting the high sign that it's time to wrap up so for those of you who had questions might be able to grab people on the way out so thank you and thank the panelists we all know why on what broad principles and values the election was fought he has nothing left to prove politically this is not a head game and one can be fairly confident he knows that it's about doing the right thing taking the time redefining the discourse and setting a new course of action we at EPS economists for peace and security hope that this symposium has made a useful contribution to that process bringing some clarity to these highly charged and in some cases deliberately confusing questions I think it has made that contribution and that is thanks to the exceptional Christmas and clarity of the participants on our three panels I want to thank them I want to thank the moderators Michael Richard and Stan for doing terrific job of keeping us on course I'd like to thank you and the audience for attending and for your questions for your participation I'd like to thank Josh Friedman of the new America Foundation for his help and assistance with the program and with important parts of the logistics I need to thank Ellie Warren in the back here EPS and our director Teya Harvey who always does an impeccable job with the symposium and finally I would once again like to thank Bernard Schwartz for his support and friendship and help with everything that we do over the years thank you very much thank you all and we are adjourned