October 24, 2014

Fiscal Policy On Autopilot: Can We Regain Control

THE CONCORD COALITION

“FISCAL POLICY ON AUTOPILOT: CAN WE REGAIN CONTROL?”

 

 

WEDNESDAY, FEBRUARY 23, 2005

11:30 A.M. – 2:30 P.M.

THE NATIONAL PRESS CLUB

WASHINGTON, D.C.

 

 

PARTICIPANTS:

 

DAVID M. WALKER

COMPTROLLER GENERAL OF THE UNITED STATES

“21ST CENTURY CHALLENGES: RE-EXAMINING THE BASE OF THE FEDERAL GOVERNMENT”

 

C. EUGENE STEUERLE,

SENIOR FELLOW, THE URBAN INSTITUTE

 

MAYA MACGUINEAS,

PRESIDENT, THE COMMITTEE FOR RESPONSIBLE FEDERAL BUDGET

 

ROBERT L. BIXBY,

EXECUTIVE DIRECTOR, CONCORD COALITION

 

MR. BIXBY: (In progress) – it doesn't really matter what sort of short-term changes we make; in the long term, we can't sustain this track.

 

Unfortunately, the issues that tend to get discussed in the annual budget debates don't deal with those, and I mentioned, you know, a few of them. We could – no matter how tightly we strain discretionary spending, it wouldn't be enough even to close the short-term gap, let alone have a significant impact on the long-term gap.

 

And as far as the Social Security Trust Fund is concerned or the Medicare Trust Fund, these are basically promises made from one part of the government to pay another part of the government. They do not address the more fundamental question about how much these programs are going to cost over the long term, what mix of priorities we're going to have to fund over the long term, and how the economy is going to be strong enough over the long term to afford all the promises that we're making.

 

Private accounts for Social Security have, ironically, a similar problem in that –as the president has acknowledged – whatever one thinks of the merits of private accounts and just as a matter of full disclosure, I think that they do have a role to play in Social Security reform, but they don't alone address the long-term fiscal sustainability of the government.

 

So if we shouldn't be looking necessarily at – and I'm not saying we shouldn't look at these things; I'm just saying that we're not going to be able to solve them with little tweaks here and there. So what should we be looking at? Well, if today's fiscal policy is unsustainable, what is a sustainable fiscal policy, and what should we do to go about achieving it?

 

Today we'll explore these questions with some people who have spent a lot of time thinking and writing on this subject. We'll hear from Gene Steuerle of the Urban Institute, who is one of the nation's most insightful thinkers on long-term fiscal policy, and we'll hear from Maya MacGuineas of the Committee for Responsible Federal Budget and the New America Foundation, who has offered a number of creative ideas – in writing – to address some of these long-term tax and entitlement issues.

 

And we will hear from the comptroller general of the United States, David Walker, whose agency, the GAO – Government Accountability Office – has just issued a major new report. You should all have one of these: “21st Century Challenges: Re-examining the Base of the Federal Government.” In it they ask a number of provocative questions; the sort of questions that one can ask when you have a 15-year term. (Laughter.) They are exactly, though, the sort of questions that we're going to need answers to to figure out how we achieve a sustainable fiscal policy.

 

Let me begin by laying out the scope of the challenge that we face. I'll start with the bad news and then progress to the really bad news. First, looking at the immediate situation facing Congress when it returns, we have a projected budget deficit this year of about $400 billion. That might not be such a big problem if we thought it was going to be a temporary phenomenon, but it doesn't look like that will be the case. If you simply follow the CBO baseline forward, you do get back to a surplus by the end of the decade, but of course that assumes that all the tax cuts we have enacted recently are going to expire and that discretionary spending is held very tight for the whole decade, and that we don't have any more funding for the war in Iraq and Afghanistan.

 

So the Concord Coalition has put together what we think is a more plausible scenario that actually ends up with deficits totaling over $5 trillion over the next ten years and getting wider by the time you get out to the end of that time. The reason why that's so significant is that at the end of that time is when the demographic pressures of the baby boom generation begin to hit the budget, and you begin to notice it in the CBO baseline now. In the second five years of the ten-year outlook, you begin to see the pressures from Social Security, Medicare, Medicaid. You can begin to see it in the growth projections – the economic growth projections from CBO.

 

So these things that we have been talking about for years as a long-term issue really now have become a short-term concern. They are actually beginning to have the first effects on the budget. In fact, I think if you look at Social Security, Medicare and Medicaid in the CBO baseline, they grow by 25 percent just over the next ten years, and that's just for starters.

 

At the Concord Coalition what we like to do there is look at the long-term situation and there are many ways to do that. You can look at trust-fund measures, you can look at present-value methods, summary measures of everything the government is going to do over the next 75 years, and what the likely revenue stream is, and make a present-value calculation. But what we like to do is concentrate on the year-by-year numbers. In other words, you have to look at the path of fiscal policy: what is going to happen not just in some 75-year summary, which might be fine for smoothing out peaks and valleys, but when you have a situation like we have now where you have short-term deficits widening into larger and larger deficits, you really need to focus on whether it's current policy or whether it's reform plans, what effect is that going to have on a year-by-year basis, and do we end up with a sustainable policy.

 

Clearly right now we don't have one, and the problem is illustrated by some recent simulations run by the GAO. They do what they call their baseline extended scenario, which just says let's take the CBO baseline and – beyond ten years and see where current policy is headed. And the baseline extended scenario doesn't look that alarming. It shows that spending rises from about 19 percent of GDP now to 22 percent by 2025. Well, that's high, but it's – you know, it's not over the cliff certainly.

 

By 2035, though, it gets up to 27 percent; by 2045 it's up to 32 percent; by 2055 it's up to 40 percent of GDP. What they assume is that we can restrain spending to around 19 percent of GDP, which calls for well beyond normal spending restraint, which will bring us back to surpluses inside a ten-year period. But the deficits begin again in the 2020s and, you know, before that; get to 7 percent of GDP by 2035 – 30 years from now – that's pretty serious. By 2045, they're over – they're about 13 percent, and over 20 percent by 2055, at which point the GAO model basically goes over a cliff because the debt relative to our economy is way up around 275 percent of GDP.

 

Well, clearly that's an unsustainable path, and what they assume about revenues – and it's important to remember this – is that they assume in this baseline extended scenario that all of the tax cuts enacted recently expire, and that discretionary spending is constrained to just inflation over the next ten years.

 

So that's – those are two pretty optimistic assumptions politically, and yet, it's still an unsustainable path, and it becomes unsustainable sometime around 30 years from now, and you know, that doesn't mean you wait for 30 years before you address it.

 

But there's another path they do that I actually think is a little bit more realistic, and not in the sense of what the end result will be but just reflecting what current policy is. If you assume that the tax cuts don't expire and if you assume that discretionary spending (the annual appropriations) keeps pace with economic growth, and all benefits are paid as scheduled, the numbers look an awful lot worse.

 

Spending under that scenario, by 2045, goes up to about 60 percent of GDP, and the deficit – I mean, this is so astronomical it's ridiculous and you'd never get there – but the deficit that year is 42 percent of GDP. Debt held by the public is 500 percent – (chuckles) – over 500 percent of the economy. Well, obviously you're not going to get there, so what it's telling you is that even under this scenario, which I think is not a bad reflection of where current policy is headed, where this autopilot fiscal policy is taking us, by 2025 – which really isn't very far away when you start thinking about it. You know 20 years – 20 years ago, I remember 20 years ago. It didn't sound – it didn't seem like all that long ago to me.

 

The deficit is over ten percent of GDP. The debt held by the public is over a hundred percent of GDP and we're clearly in an unsustainable situation. I go through those numbers – we all know they're going to change – I mean, we all know that long-term projections are uncertain. But one thing that's not uncertain – and this is the crux of our problem – is that we have an infrastructure of entitlement programs, many of which are geared towards health care and retirement tied to aging. We have an aging population and this unprecedented combination of factors – entitlement spending geared to aging, and then the aging of the population – is leading us into this situation that we've never had to deal with before. So the budget, when we turn to what we do about it, we have to think beyond some of the conventional ideas that we've had in the past.

 

Just to run through a couple of them – I'm all for re-instituting PAYGO, and applying it to tax cuts. I'm all for discretionary spending caps. But keep in mind that PAYGO was intended to prevent the deficit from getting any worse. It doesn't address this sort of a problem. It doesn't say how do you start rolling some of this stuff back, so you have a sustainable fiscal policy. So in terms of addressing the short-term deficit situation and stop digging the hole, those are good solid budget-enforcement mechanisms that I think we would do well to reinstitute.

 

But we have to think about ways that we can either roll back the promises that we've made to – and here's where we really get into the hard choices – you're either going to have to roll back some of these promises, raise taxes to unprecedented levels, or borrow. And ultimately, borrowing becomes unsustainable. So we have some very fundamental choices. Not acting is a choice, but eventually somebody is going to have to deal with this problem. So even if we don't have an immediate crisis, we've sown the seeds of a crisis and letting somebody else deal with it is a violation of our generational duty. These are the policies that we've put in place, it's our duty to correct the situation and not just leave it to somebody out in the 2020s and 2030s and hope that something good will happen.

 

I'm going to turn now to some of our other speakers who will have their perspective on this and then when David Walker comes, we'll be able to have him discuss the new GAO report. Let me turn first to Maya MacGuineas of the Committee for Responsible Federal Budget.

 

MAYA MACGUINEAS: Thank you, thank you very much, Bob, and thank you for holding this forum today. Clearly, the fiscal path that we are on is unsustainable and we will certainly have to make choices, and tough choices, they will have to be confronted. The only question is whether we will choose to make them or we will be forced to make them and it's quickly looking like the country's hand will be forced is becoming the more and more likely scenario. But the budget is the right place to start in thinking about this issue, and what needs to be done, and what changes need to be made.

 

And if you just take a step back for a moment and think about what budgets are, I think, in many ways, that has been lost in the whole budget process that we go through every year. A budget is the reflection of the national priorities and it is a decision – and it reflects tradeoffs – about how to disperse the limited resources that reflect the nation's values. And I think one interesting thing – I sometimes teach classes on the budget and I have a lot of pie charts – one interesting thing is if you have a pie chart that shows how our resources are spent, I'm not sure whose values it reflects. I mean, clearly, it reflects ours as a country. But it's very hard to defend the budget as what a lot of people think a budget might do or should do. And in many ways, that's the result of the process by which we create our budget.

 

Another important point about budgets is that we are spending more of our energy promising away the future, which leads to a lack of flexibility and there's no doubt, anything – the many lessons drawn, clearly, from September 11th – one of them is that you need flexibility in a budget, because you never know what new challenges and/or opportunities will present themselves. And it's important not to pre-budget away all the choice we're going to have to make down the road, because we may have greater needs for security than we do now, they may be less – we may have greater needs to clean up environmental damage, they may be less. We don't know, but you want a budget that allows you to make choices.

 

It, therefore, seems unwise to have pretty much any of your budget on automatic pilot. I guess there's one exception, which would be interest on the debt. That's automatic, you have to pay it. But everything else needs to be put to the test of scrutiny by budgeteers in Congress, and the public. We need to rethink over and over, are these the right priorities? Given that we are spending a dollar here, we can't spend the dollar there – is that how we want to spend our limited money? And I think taking as much of the budget off of automatic pilot – which really comes down to the entitlement programs that consume two-thirds of our budget – I think taking as much of it off of automatic pilot would be the wisest choice we could make.

 

So what I want to do is just put out a couple of ideas, not even necessarily the solutions, but to get the discussion going and to try to break the mindset that there should be any givens that we make in the budget today that will certainly be there tomorrow, and we don't know what tomorrow holds. The first one is a recommendation that the Committee for Responsible Federal Budget has included in a whole report we have on budget process reform, which you can find on our website, and that has to do with capping entitlements. Discretionary spending, in the ‘90s and currently, has caps – it's supposed to abide by those caps – but most of the budget has no cap whatsoever. Most of the budget doesn't go through the annual appropriations process and if you qualify for benefits, you receive them. That's the automatic pilot part. The Committee – I should say, our committee is made of many of the smartest minds in budgeting, the [former] heads of OMB, CBO and the Fed – and there's some division on the board about whether entitlement cap makes sense and there's a lot of division in public about whether it does. But certainly it's worth discussing whether we should say, there is no reason that the claims that Medicare, Medicaid or Social Security or veterans' benefits have on the budget should trump those of education or environment or the areas that fall in discretionary spending. Perhaps they should all be competing on a level playing field and an entitlement cap is one way to possibly get at that.

 

On the topic of entitlement caps, though, there's a whole other area of the budget that is basically akin to entitlement spending, which is tax expenditures. We now do, probably, more of our budgeting through the tax code than we actually do on the spending side. And most of those tax expenditures are also on automatic pilot. If you qualify for your home mortgage interest deduction, you're going to get it. If you qualify for the deduction in employer-provided health care or pension benefits, they will be made. There is no limit to how much we can have in tax breaks. And if we're going to think about capping some of the spending areas that are on automatic pilot, you'd also want to look at the tax side, where so much of this budgeting takes place, and think about if there are ways to cap those tax entitlements.

 

A second idea has to do with dedicated taxes is – Bob talked about trust funds, which is one of the areas of the budget that most needs to be reformed because it's so confusing – but something that's also similar is that we have dedicated taxes for many of our programs. One that leaps out clearly is the payroll tax for Social Security. And in the tax program at the New America Foundation, we've developed a proposal that would replace the payroll tax for a number of reasons. The payroll tax is regressive, it's only on wages, it kicks in at your first dollar, it hurts job creation. But also, by replacing it with a tax that we think would be superior, which would be a progressive consumption tax, it could, in many ways as we decided to create it to, break the link that creates the entitlement feeling in a Social Security program. So you could have your Social Security benefit based on your lifetime income, it could be a flat rate benefit, there could be all sorts of different ways we calculate benefits, but not having it as clearly linked to the revenues that support the program might pull back from the notion – and no offense to my grandmother who may be watching – but that my grandmother feels that she deserves every dollar that she is going to get from Social Security, even though she long ago took much more of the program than she's paid in and perhaps – just perhaps – that should be part of the discussion. All the parts of the budget that are being paid out to different people should be considered when we're thinking about how to come up with a grand fiscal bargain that we're certainly going to have to [make].

 

A third option is how we structure our programs. I'm just going to take Social Security and this issue of price indexing versus wage indexing, because it's been discussed recently. Social Security right now is benefit-to-wage growth. So the program basically grows with the economy, and some people have suggested that one way we could close the fiscal hole in Social Security is instead to index the program to prices, which would mean it would only grow as fast as inflation. That might be a good idea, it might be a bad idea, but what it does show is that you could index programs that are on automatic pilot in a way that they would grow much more slowly than they currently are. It's quite similar to actually how our tax system is, where taxes – because of how the tax brackets are indexed – continue to push people up in higher tax brackets and revenues, as a share of GDP, gradually grow over time. So my thinking is, if spending didn't grow as fast as GDP, and taxes grew faster than GDP, rather than having politicians come to Congress to do what they don't particularly like doing – balancing budgets, raising taxes, and cutting spending – automatic pilot at least would lead to a situation where what politicians were discussing is what tax cuts to give and what spending increases to give. Frankly, that's what they're discussing anyhow, but we don't have the fiscal environment that permits it. So it would be better for the programs that are indexed, to be indexed as conservatively as possible, thereby allowing the debate to be one that is more in tune with the political reality that it is easier to give things away than take things back to balance the budget.

 

The final thought has to do with how much we promise for the future. Right now, entitlement spending, as Bob talks about, is on a course to grow probably by fifty percent of the budget. We know that's unsustainable, we know it can't happen, but we don't know how those changes will be made. It seems to me that there should be some kind of a limit to how much we're willing to promise in the future that's linked to how much we're willing to pay today. Why is it that we have a social security system that is promising to pay benefits that would require an eighteen percent payroll tax when we only are willing to pay a twelve percent payroll tax today? What if we were to limit the promises we make in the future so that we can't promise beyond what we're willing to pay today? Future Congresses would still have choices – they could expand programs, they could shrink programs, they could shift our resources around. But it seems to me to be very reasonable to assume that you shouldn't promise away the future's taxes beyond what you're willing to put forth on your own today.

 

Now even going into the whole third rail of entitlements is kind of dangerous territory. It's not a discussion as a nation that we're comfortable having yet. There are a lot of promises of what people won't do, of what things they won't touch, rather than the things they will. And one of the arguments that entitlements need to be on mandatory spending is that they're necessary for people to plan for the future. These systems have an intergenerational compact aspect to them and that's very important for sort of the communal buy into these programs. But I would argue, there's so much uncertainty due to the fact that we have over-promised, that it's not working. So, just for instance, who knows how much they're going to get from Social Security, and of those people who might know the answer to that, who is confident that that is actually the benefit that they will get? So the whole point of having these programs set so that you'll be able to plan for the future, I think is now failing, because we're making promises that we can't keep. So the security that that inter-generational structure and those future promises is supposed to bring is no longer effective.

 

I put that out there merely because it's tough to talk about scaling back on these promises or rethinking the way these programs are structured. People are worried that it will undermine some of the political support for them, and that's a risk we have to be wary of. But I would just say that the political security that is supposed to come from the current structure isn't working, along with the clear fiscal, budgetary, and economic failures that we currently face.

 

Just to end, I want to point out – budget process is not the solution to the problems that we face, policy choices are. There is no getting away from real policy choices on the revenue side and on the spending side. And what we need right now clearly is a major bipartisan budget deal that confronts the problems we have both in the short-term and the long-term and that takes, as the starting place, that everything should be on the table – defense, homeland security, discretionary spending, entitlement spending, and revenues. Everything needs to be on the table. Realistically, however, given the polarized environment, I think the time is to be building the foundation for that bipartisan budget deal and perhaps getting budget process ideas out there, rethinking some of the ways that we do our budgeting in order to create a budget that is as reflective of our national priorities, both for today and for tomorrow, and assuming that one of those priorities is letting future generations make some of their own budget decisions as well. I think this discussion about new kinds of budget process mechanisms at least could be a helpful one to start. Thank you. (Applause.)

 

EUGENE STEUERLE: It's an honor for me to be on the podium – share a podium with – Bob Bixby and Maya MacGuineas. Their two organizations are in my mind two of the finest, most non-partisan, exemplary organizations in this town. I keep thinking as I watch the – whatever it is – ten, thirty, fifty million dollars that's now being plugged into two sides of the Social Security debate – sort of pro individual accounts and sort of anti individual accounts – just how much better a dialogue we might have as a nation, if we could put one-third or one-fourth of that money into other organizations and really pull the public into a dialogue about just what we want for the future. Bob has asked me to try to focus my talk a bit on budget rules and how we might change them over time. He talked about them also and Maya certainly made a number of comments that are similar to mine. I confess that I'm trying not too much to resort to that old line or that old saw about everything has been said, but not everyone has said it.

 

I'd like to start, however, by taking us back a little bit to thinking about what it is about the current period that is really unique and different from really any other budget period in our past. I mean, politicians have always wanted to identify winners and not losers. They've always had a tendency to create a deficit at some level. What is it that makes the current period unique? And I think we have to go back to thinking about what it is on which we focus, and my first, I guess, criticism in part – and it's of ourselves and myself – is that there's something inherently wrong about focusing on the deficit. I mean, government does not exist to reduce its own deficit. You know, you can't think that the members of the Constitutional Convention were sitting around and said, gee, we need to create a federal government so we can reduce our deficits. I mean, government exists to do a purpose, and so it's not very salable – it's very hard to sell the public on why we need to reduce the deficit. I mean, the deficit, if you want to, you can think about it as a crude measure of whether the government is saving or not saving and yeah, we need to focus on that. But we also want to make sure we're providing good health care and wage subsidies or Social Security or whatever else we're trying to do in Defense. That's the purpose of government, and when we focus on deficit, we're focusing on a tiny residual so the deficit isn't the problem. Something more is at hand. The deficit is the symptom of the problem.

 

Now there's a second focus we have which actually – which I think does get a little more to the current period and how we've created some of our problems is we've long focused on a deficit of zero. And I could give you a lot of economic arguments why, in a short period of time, zero may not be exactly the right target. But given normal economic growth and under a variety of circumstances, a focus of a target of zero is probably not that bad as an economic measure. We could argue about whether we should put more saving aside for a lot of purposes like pensions, but it's not that bad for short run policy purposes, and there used to be these huge debates over whether we wanted Keynesian policy or counter cyclical policy or something like that. That's not the problem. What is unique in the current period is we don't just focus on a deficit of zero for today, but now we've gotten to three-year and five-year and 10-year budgets, and if you want to, 75-year budgets in Social Security and projections in Medicare and Medicaid. And we have now gotten to the point where we start enacting legislation to aim not for a deficit target of zero today or the next few years to deal with short run cycles, but for 20 years from now. And we'll claim, well, gee, you know, if we get the deficit down toward zero in ten or twenty years, that would be very good. But think about it. The economy over this period of time is growing. Over a period of about 30 years the economy is doubling, and assuming the tax rates haven't changed that much, revenues are doubling in that period of time. So if we aim for a deficit of zero 30 years from now, if that's what we think is good budget policy, we have already put into the budget how we're going to spend revenues twice as large 30 years from now. So imagine if we, as a household, did the same thing, you know, where we have jobs and we hope to have two percent wage growth over time, imagine if we started signing contracts today for the house we're going to buy 20 years from now not just with our current wages, but the wages we expect to be 50 percent higher in 30 years or we started signing contracts as a business for the equipment and the plant and everything else we were going to buy 30 years from now. Well that's what the government has gotten itself into. So even if we succeed in getting the deficit to zero in some budget projection for all future years – say we had the budget deficit of zero for this year and every year for the next 75 years. Well, a lot of people say, gee, we've solved our problem. We haven't solved it at all. What we've done is we've foreordained in the budget where government's going to go. We've taken democracy itself away from the public. It's almost like we treat the public as if it's a set of adolescents, and we do not want it to be able to vote on what it's going to do with its future revenues, its future growth. You know, we're the parents today, and we're going to legislate today how people have to act in the future.

 

And we do it through very arcane mechanisms. A lot of it has to do with the third area of the problem that I want to talk about, which is – and both the previous speakers have talked about – which is, sort of, the notion of entitlements. And it's not so much that entitlements are permanent, which is bad enough because entitlements then always have an advantage over discretionary programs. The entitlement program always has an advantage over the educational program, the spending on children, the spending on wage subsidies, the need, I think, as a society to address a lot of new needs we have as a society, whether it's terrorism or children on the street or the fact that we have a school system that's designed around a 19th century model of having our kids go home in the summer so they can take in the crops or get off at the middle of the afternoon so they can do their chores. Those are problems we have as a society, but those problems, to address them, we have to get a majority – a supermajority in some sense – of Congress and the president to do anything about them. We have to get both houses of Congress to pass legislations and the president to go along or two-thirds of both houses.

 

On the entitlement side, it's just the opposite: to slow down growth where we've foreordained our future, we have to get the same supermajority so it's not a level playing field. And, yes, we could argue, for instance, a narrow issue. We could argue whether Social Security benefits should grow up with wages as the economy grows. I think probably they should especially at the bottom of the income distribution. But foreordaining it for thousands of years into the future as our current law does says that has a priority over wage indexing teacher salaries or wage indexing salaries for workers in airports who are trying to give us protection. I mean, we need to have some flexibility in the budget, and we give one part of the budget flexibility and take it away from another's. That causes our problem.

 

And I've done a set of projections – I'd be glad to share them with you outside of this room -- but it shows that if you take just the growth in Social Security, Medicare, and Medicaid – all good programs, but programs that have open ended growth – you add that to Defense at a lower level than today and you add the interest cost on the deficit, that absorbs all revenues of government by 2014. This is not a problem when the trust funds go and start going in imbalance in 20 years or start reaching some other point of lines crossing in 10 or 20 (years). This is a problem today, and it's reflected in the President's own budget. Every major category of the budget – I've taken every major category of the budget. The first four years of the Bush administration, we increased spending in those categories as percent of GDP. We went on – at least by my measures – a spending spree unlike any in our nation's history. And by spending spree I'm counting both the tax cuts and the spending increases, you know, farm bills, drug bills, tax cuts, defense. We didn't pay for any of it in a remarkable turnaround as a percent of GDP.

 

And now you look at his budget for the next four years. Every major category of the budget except for health and retirement spending – every major category, the projection is – or the request of Congress is to go in exactly the reverse direction: spending increases, spending cuts. And even tax increases are in there indirectly because of the Alternative Minimum Tax. So this pressure on the budget is facing us today, and the reason it's become so intense today is because of the unique circumstances we're in with respect to the baby boomers, which hid a lot of this problem when they filled the ranks of the workforce. 2008 they start dropping out, and at the margin – at the margin as they drop out of the workforce they have a big impact not just because they increase the spending that's going to be made on them, but of course as they drop out of the workforce, it slows down the rate of growth of the economy. And we're moving very quickly to a world where a third of adults are scheduled to be on Social Security and another sixth of the economy – or whatever it is for people in other programs – we're going to an economy where close to half of the adult population, not just the child population, are going to be largely dependent upon government. To me, that's not a progressive society that's deciding where to orient things towards needs. We're basically starting to subsidize a great many people who could contribute more. And again, it's the revenue side as well as the expenditure side.

 

All right, so if that's the problem that we have sort of tried to foreordain the future, how do we fit budget rules into this world? Well, let me be clear about it. Budget rules are very crude,; they're not very exciting things. But, in fact, they often drive policy in ways we don't think about it. Take, for instance, the rule – the so-called Byrd rule – that prevented the president from getting his tax cuts implemented beyond a certain period of time. So everything – most of the tax cuts are all temporary. We now have a huge debate over whether to extend or not extend the tax cuts. Now we could think that's a good debate or a bad debate. We could be for it or against it, but it's clear that that debate in no small part is driven by the fact that that rule – that little rule that nobody really wants to pay attention to was sitting there. And I would argue with you that if you think about it, every piece of legislation Congress enacts that involves money usually has some rule behind it.

 

Now it might be an implicit rule. It might not be an explicit rule. The implicit rule might be, as we did in the '90 and '93 budget agreement, we were going to reduce the deficit by $500 billion over five years. There's nothing that said Congress had to pick that rule, but it was a rule – in this case an implicit one – that drove the process. We all remember all the games that came around it, you know, let's put money in a six-year – let's do this. So every large body of people, of legislators if you want to, operates under a set of rules under which they enact things, and these rules can become vitally important. The president for his tax commission says he wants it to put forward a revenue neutral proposal. That's a budget rule that's saying what they can talk about, what they can't talk about. So these budget rules are enormously important, and they really play out in all areas of policy. The rules also, when we deal with the budget, almost always center on some numerical target. You know, a deficit of zero is a numerical target -- 500 billion (dollars) over five years is a numerical target.

 

Revenue neutral is in some sense a numerical target. So they often pick some numerical target, and so when we enact rules, we actually want to think out a little bit whether those targets are good ones. An example of a target that's technically not a very good target was one we adopted in the mid '80's where we said, “Well, let's aim for a deficit of zero regardless of what's happening in the economy.” This technically came under something called the Gramm-Rudman-Hollings [Act] – the original types of rules, and the reason it didn't work very well is because it turned out that the economy changed over time because we either had large increases in growth or declines in the growth rate; all of a sudden that deficit target just bounced all over the place. And it became not a very good numerical target technically even if over the long run, over some economic cycle, you might have thought about it as being a good one. It was replaced later with the so-called PAYGO rule, which was technically a viable target because that said, “Well let's just aim for a deficit reduction of a certain amount that gets us to a certain target under some assumption for what the economy is going to do, and if the economy changes, we're not going to care about that anymore. We're just going to keep that same set of assumptions and operate in that regard.” So then the target became something that was more doable, more viable technically, more usable. And in fact, as many people in this room know, that was the rule we adopted in '90 and '93.

 

Now, Rudy Penner and I have done some analysis of these budget rules at the Urban Institute and are continuing to. And our look back at what happened in 1990 and 1993 tells us that although this so-called pay-go rule was very important for constraining action after 1990, what also happened at the point in time in 1990 and 1993 was there was a political consensus over what to do. And there was a hit taking upfront. By political consensus I mean that both parties got to the point that they were willing to do something. In 1990, it was partly because of things that were happening in the financial markets, of fear that the economy was going to crash. In '93 it was partly because, again, there was concern over the deficit, and President Clinton had run on the notion he was going to do something about the deficit, felt compelled to do something. I'm not going to claim that either of these agreements actually led to that much deficit reduction relative to what we need today, but they did work. And they worked because at least upfront there was this political consensus.

 

But I also want to be clear that this political consensus lead to most of the hits – by hits I mean the legislatively identified losers – as being identified at the point of enactment. The pay-go rule tried to enforce what had already happened in '90 -- $500 billion deficit reduction – or 1993 -- $500 billion deficit reduction actually. There were some games played so it wasn't quite 500 billion (dollars), but whatever it was, those hits, those saying, “Okay, we're going to increase the gasoline tax a modest amount or we're going to take away this deduction or we're going to reduce the rate of growth of spending of this particular item,” – those hits were taken upfront, and then the pay-go rules reinforced that consensus.

 

So I want to be clear it's not necessarily enough to adopt some rule that just stops Congress from doing new deficit increases. You often need to, as we did in 1993, to take the hit upfront to identify the losers upfront and take the political hit.

 

Now, do we have such a consensus today? Well, we're not anywhere near to that, and in part it's because, as I mentioned a minute ago, for about the last seven years we've really been on a spending spree or probably more appropriately labeled a giveaway spree really unlike any in our nation's history. We've never had that turnaround in percent of GDP from surplus to deficit or increase in deficit. We've never had that big an increase in our nation's history other than World Wars. And so it's really hard now to turn this battleship that's been constantly on the giveaway side of the budget towards thinking about what it means where we actually have to – we don't have much more to give away. And it's playing out today both in terms of deficit reduction issues. It's playing out in terms of systemic reforms because systemic reforms like Social Security reform, tax reform identify losers just as does deficit reduction. And that's a very different world, and we need to figure out how we're going to get some consensus and some leadership about doing things about them. As I said, that political consensus essentially eroded around 1997 when we started abandoning the budget rule in particularly the years after that.

 

Now, I want to go on to the issue that Maya raised in part and that's the issue about whether something like some deficit reduction agreement – '90, '93 – plus some pay-go rules would be enough today. And it's not anymore. And it's not because this entitlement growth, which we've had for some period of time, has now absorbed larger and larger shares of the budget. So if you're growing faster than the economy and faster than revenues, it's one thing when you're 20 percent of the budget. It's another thing when you start becoming 50 percent of the budget. And so what we have to do today, which is even more difficult in some sense politically than what we did historically, is we have to deal with those growing entitlements as well. They have to be part of a budget consensus and a budget package. And what types of rules might be required there? Well, there's one example of a rule which I will call sort of the mandate proposal approach.

 

This is actually contained – a lot of people haven't paid attention to it – it's in the Medicare bill that just passed – the drug benefit that requires the president to come forth with a proposal when general revenue support of Medicare exceeds some percentage – 45 percent – of a budget. It says the president's supposed to come forth with a proposal and Congress is supposed to give that proposal expedited attention. Now nothing may happen. It's not clear the president is going to be thrown in jail if he doesn't come forth with the proposal, and it's not clear what would happen to Congress. That's the mandate proposal approach. There are countries like Japan, which has used that for some time whenever their Social Security system is in balance. They're supposed to do something about it. They've never done enough, but they have used it, actually, to try to do some things.

 

A tougher type of rule, and one that I think we're going to have to go to, is going to be more along the lines of an automatic adjustment approach. You know, we can debate whether our Social Security commissions or Medicare commissions or whatever we set up are going to enact reform. I think given that they are now over half of the domestic budget, it's not clear to me there's any one reform with these systems that's ever right. You know, if it's that big a part of the budget, we actually should be examining them on a fairly continual basis. And so what we may need to do is in the midst of these examinations is have a rule that says, notwithstanding the above, notwithstanding anything Congress may do, we will try to figure out some ways of making sure that this growth – this eternal growth faster than GDP in these programs cannot occur. And so automatic adjustment approaches might be something like whatever you think of wage vs. price indexing, a technical term on how we adjust benefit, growth, and Social Security over time, you could have a rule that says, as long as Social Security actuaries project deficits, we will use price indexing; and whenever the deficits go away, we'll go back to wage indexing.

 

My own bias is – I don't think that's a preferred rule -- in particular if we don't wage index some minimum benefit at the bottom to protect the bottom 30 or 40 percent of the elderly. But that would be a type of rule that could work. A preferred rule I would have, if we're going to do Social Security, might be to say that, as long as the system is projected to be in balance, we will ratchet up the retirement age gradually over time by one or two months a year – by the way this is the early retirement age as well as the normal retirement age – we would do that every year as long as the system is in balance. The reason I think that's a preferred rule and the reason I think we want to pay attention to how we design these rule is that if you can bump up the retirement age, it ends up to be much less of a benefit cut than does things like price indexing or wage indexing or other types of rules that just cut benefits across the board (audio break, tape change) -- a tougher type of ruling, one that I think we're going to have go to, is going to be more along the lines of an automatic adjustment approach. You know, we can debate whether [Presidential] commissions, or whatever we set up are going to enact reforms. I think, given [entitlement programs are] now over half of the domestic budget, it's not clear to me that any one reform of the system – (inaudible) – and those initial revenues means that you need much less of an actual lifetime benefit cut than if you don't get the additional revenues.

 

So that's a type of role you can do in Social Security. The ones for health care are much, much tougher, but, you know, so far we have never set up a Medicare commission anywhere that's actually required to sort of stay with their budget, that says notwithstanding everything else we do about what goods or services we provide or what prices we're going to allow for goods and services, if we're not within a budget we're going to gradually ratchet down prices within that system. That's a really tough rule but those rules are possible, and in fact at some point they are inevitable. At some point they're inevitable because if we think that at some point we do want to spend more on education or on children or on a lot of other items in the budget, we're going to have to say that other parts of the budget cannot grow forever faster than the economy and faster than our revenue growth.

 

I sort of left out another tough part of the issue which is, well, how do we pull taxes into this, because you can't really deal with just spending on the side without dealing with the taxes as well. Again, many people in this room know full well that we can hide in the tax system all the spending programs we want. So simply trying to figure out budget rules with respect to what happens to spending and not dealing with taxes at the same time just don't work, that somewhere or another we have to figure out what to do about taxes.

 

Now, for the most part, taxes aren't scheduled to decline forever faster than the economy the way certain spending programs are, but taxes are also now at an all-time – at least a 40, 50 year low as a percent of GDP in terms of what we collect. And indeed we may have to do more to actually – to increase those taxes. And we probably do, at least in my view, have to deal with how much or how far we're going to go in extending the tax cuts we've had so far. A grand compromise, it seems to me, and the one that's almost inevitable if we're going to free up this budget and create a more level playing field, is to create these automatic adjustments in some of the entitlement programs and then adopt something like a PAYGO rule for tax cuts which says that any tax cut that we have, on the side we're also going to have to pay for, either in the form of other tax increases, or if you want to we could pull in other parts of the budget as well.

 

It seems to me that is the grand compromise. It's the one that neither the left or the right, the Democrats or the Republicans accept now, but it's the only way I can see that at some point we're going to free up the budget, free up money to spend on what really are definitions of our current needs, whether they're our children, or terrorism, or the new needs we identify as a society. We're going to have to sort of get more control over these parts of the budget that are so highly favored that they don't have to have the review that we give to these other basic functions of government.

 

I finally want to conclude with some notion that this is not all bad news. You know, sometimes we get trapped into these budget debates, thinking that these budget problems are really severe problems. I mean, most of the budget problems we have are things we've created for ourselves because of good things happening to us. You know, we're richer as a society so we think we can have more tax cuts, and we get more health care and we live longer, and then we design these budget rules that make these good things happening to us to appear to be a budgetary problem.

 

I often sit up in the Ways and Means Committee room, and I have this dream where somebody from the National Institutes of Health comes in one day and announces, eureka, I've found this cure, though very expensive, for cancer, and all the members of the audience are sitting there and feeling pretty good about this. Something really good happened to us. We're better off as a society. And I look back behind the podium, or whatever, and there are the members of Congress and they're commiserating among themselves and wiping their foreheads from the sweat and everything else. And I say, what's going on; why are they so upset? And he says, well, this cure for cancer, you know, my gosh, people are going to live longer, the Social Security budget is more out of balance, Medicare is out of balance – (laughter) – this is a horrible thing happening to us.

 

I think the basic budget problem – I, again, want to be clear about this. The basic budget problem is how can we have a budget process, a set of budget rules, that allows us to allocate resources toward what we really believe are the new problems we have as a society, the new needs, or the current needs we have as a society, toward those things that voters feel that today they want to emphasize more than, say, voters in the past. You know, we can't continue to treat future voters like they're adolescents where we're going to control their future, and that's the budget dilemma. And I think there are rules, tough rules, that we can enact that would free up this process to make it a more democratic and independent process.

 

Thanks.

 

(Applause.)

 

MR. BIXBY: Well, thank you very much, Gene. You're entirely too rational.

 

I think that Dave Walker is here now so I will introduce him.

 

Dave, just to fill you in where we are so far, we have concluded that too much of the budget is on autopilot and that the course that the autopilot is taking us is going to go over a cliff in 20 to 30 years, that controlling discretionary spending isn't going to be enough; even balancing the budget isn't going to be enough. The trust funds won't bail us out; private accounts won't bail us out. The budget process might help but unless there's a political consensus, that won't work either, and we're far from a political consensus. We're not going to grow our way out of it so some tough policy choices have to be made. You and I aren't going to make those tough policy choices but we can ask the right questions – (chuckles) – and that's what your report is all about. It's a terrific report.

 

Dave Walker, as you know, is the Comptroller General of the United States and he's had extensive experience in government and in private industry on pension issues. As I'm sure all of you know he was a public trustee of Social Security and Medicare from 1990 to 1995, and in 1998, when the Concord Coalition and the AARP joined together to do Social Security forums at the request of the Clinton administration, the idea was to get the two groups that didn't necessarily see eye to eye – didn't see the problem the same way on Social Security. And so, one of our first challenges with Concord and AARP was to figure out some people that both groups trusted to tell it straight, and the first name that came up was Dave Walker, and we both agreed and we spent a little bit more time on the other names but Dave's was the one that we agreed to first and he participated in those discussions.

 

Dave, the forum is yours.

 

(Applause.)

 

DAVID WALKER: Bob, thanks very much for the opportunity to be here. I appreciate it very much. I almost feel like, given that summary, that I should say, let's just go to Q&A – (laughter) – because a lot of that sounds very familiar. But I do have a few remarks that I'd like to make at the outset, and I'm at that unusual age that I don't need my glasses to read although my handwriting is difficult enough no matter whether I have glasses or not.

 

If I can, today's topic is very, very important. I think in the interest of full and fair disclosure, each of you should know that since today's forum is sponsored by the Concord Coalition, that I've been a longstanding member of the Concord Coalition – dues-paying member, I might add – and I've long had a great deal of respect for the Concord Coalition's dedication to taking a nonpartisan and bipartisan approach to the very important issue of fiscal responsibility, an issue that has been important since the beginning of our republic and one that George Washington, who was the father of our country, felt very strongly about, and I'll come back to that a little bit later in my remarks.

 

You know, Concord, for a while, thought they might actually go out of business, believe it or not, because in the late 1990s, as you probably recall, we had a period of not only current on-budget surpluses and unified surpluses, but projected budget surpluses for a number of years into the future. But I recall vividly testifying before both the House and the Senate at that point in time – and feel free to check our website, which is www.gao.gov, to check the veracity of what I'm saying. But the fact of the matter is I recalled very vividly to say, well, there are two key words you have to keep in mind with regard to these surpluses, at least the ones that were for the future: first, projected. They may or may not come about. And number two, temporary. We know we will face recurring deficits, even at the time that we were having those current and projected surpluses because of known demographic trends and rising healthcare costs: the retirement of my generation, the baby boom generation, and escalating healthcare costs.

 

And so therefore, prudence was appropriate and balancing fiscal risk was essential in order to properly discharge our stewardship responsibility to our children, our grandchildren, and future generations of Americans, and also recalled what my mother taught me – and many of you may – your mother may have taught you this as well – don't let the money burn a hole in your pocket. Well, it burned a hole through the pocket, through the floor, and almost through the Earth because we are now in a situation where we not only do not have current on-budget surpluses or unified surpluses; we no longer have projected surpluses, and we are experiencing large and growing deficits, which deficits are structural in nature in many regards. We have not begun to address the beginning of the demographic tidal wave known as the retirement of the baby boom generation, which we will start to experience in 2008 – which by the way, is the first year that the Social Security surplus starts to decline and therefore place additional pressure on the rest of the budget – and ultimately will end up growing through the passage of time.

 

In fact, Concord, back in the days of surpluses, actually retired the debt clock. Now, I'm not sure if it's come back yet but I would respectfully suggest it may not even be the right measure anymore because when you're dealing with trillions, it's really, really difficult for people to relate to trillions. I mean, let's face it; most people have a difficult time relating to billions much less trillions, and of course a trillion is a thousand times a billion. So if you can translate a billion into something you can relate to like roughly the fact that $1 billion is roughly the cost of 10,000 Army troops. So a trillion dollars is 10 million Army troops. So you pick you number, multiply it by a thousand and maybe it'll help. But I think part of the problem is that we're dealing with such mind-boggling numbers that it's very difficult for most human beings to relate to, even well-educated people who have financial backgrounds.

 

So the days of surpluses are over. We face large and growing structural deficits. But frankly, one of the concerns that I have as I look back as fiscal 2004, and one of my responsibilities as Comptroller General of the United States and head of the Government Accountability Office, GAO, is to be the signing audit partner on the audit report for the consolidated financial statements of the U.S. government, which, for the 8th year in a row received a disclaimer of opinion, I might add. But the fact of the matter is if you look at the audit report for last year, which is on our website – again, www.gao.gov -- you'll find out that fiscal 2004 was such a bad year that even though we were going to disclaim an opinion on the financial statements, we include an emphasis paragraph in our audit report to draw attention to just how bad 2004 was.

 

And let me give you a few numbers because as a certified public accountant, among other things, a few numbers are in order. First, on budget deficit, $568 billion; unified budget deficit, $412 billion, of which less than 25 percent related to Iraq, Afghanistan or incremental homeland security costs. Last year we not only were not in a recession and haven't been since November of 2001, but we had very strong economic growth. So if we are not in a recession and we have very strong economic growth and less than 25 percent of the unified deficit has to do with Iraq, Afghanistan, incremental homeland security costs, then what does the other 75 percent relate to? But more disturbingly, in fiscal 2004 the federal government's liabilities and total commitments increased by over $13 trillion in one year -- that's a “T” as in trillion – went up from about $30 trillion to about $43 trillion plus, primarily but not exclusively due to the Medicare prescription drug benefit, whose cost alone was estimated at $8.1 trillion. Did anybody want to know that number? Did anybody ask that number? Was that number debated? Absolutely not. Eight-point-one-trillion dollars is more than the entire debt outstanding of the United States since the beginning of the Republic in 1789, indicative of the challenge that we face.

 

But again, trillions are very, very difficult to relate to, so one of the things that we've tried to do at GAO is we've tried to translate it in some numbers that maybe people might understand a little bit better, like $43 trillion is about $350,000 for every full-time worker -- $350,000 non-tax-deductible. The average family income is about $42,000. Forty-three-trillion dollars is roughly 90 percent of the total accumulated net worth, including home equity for every American in the United States. So theoretically, if we confiscated 90 percent of the entire net worth of every American in the United States, that would help us be able to deal with liabilities and commitments we've already made, but those liabilities and commitments are growing every day. Hopefully the net worth is too, but you can't necessarily count on housing prices to continue to do the good things they've been doing lately, at least in certain parts of the country like Washington.

 

But looking forward, we do clearly face a large and growing long-term structural deficit, as I mentioned before, primarily due to known demographic trends, and as someone said in the past, demographics are destiny. Those numbers you know with a much higher degree of certainty than certain other numbers that underlie projections. And as has undoubtedly been mentioned by some of my co-panelists here, 60 percent-plus of the current federal budget is on autopilot, and it's increasing as time passes.

 

So we are clearly on an unsustainable path, and the status quo is both unacceptable and imprudent. While additional economic growth can help, our projected fiscal gap is simply too great, given reasonable assumptions, to grow our way out of the problem. There's absolutely no question that tough choices are going to be required. It's going to have to involve entitlement programs, other mandatory spending, discretionary spending, and tax policies. And to a great extent, as I'm sure has already been mentioned, mandatory spending is not adequately addressed at the present time. And furthermore, tax preferences aren't adequately addressed. In many years, the total cost of tax expenditures exceeds total discretionary spending, and yet it's off the radar screen. You just don't see it.

 

So I think it's important to keep in mind that on today's path, which is imprudent and unsustainable, time is working against us, because unlike the miracle of compounding for investments, where the miracle of compounding can work for you, the miracle of compounding where you have debt on debt is not a good thing. It actually works against you. And because of this situation and because of this, it's a matter of increasing concern that I think every American should care about, because in the final analysis, our financial condition and fiscal outlook is not about numbers. It's about values – for example, prudence, fiscal responsibility and stewardship, just to name a few. It's also about people – for example, our children, grandchildren and future generations of Americans.

 

And while our current path is unsustainable and the current base of government is obviously not in shape, I think it's also important to understand that the current base of government – by that I mean policies, programs, functions and activities, to a great extent, much of it is out of date and not well-aligned with 21st century realities. In fact, many government programs, policies, functions and activities were designed to address conditions that existed in the United States in the 1950s, in the 1960s, and they have not been subject to fundamental review, reexamination, reprioritization and reengineering since they were put into the base, and a tremendous amount of time is spent in this town every year, debating whether or not we're going to end up plussing up this program a little bit of cutting this program a little bit and not enough is spent on the base.

 

The fact of the matter is the base is not only unsustainable, it is unacceptable because it is not well-aligned to meet 21st century challenges and to address 21st century realities. So that's exactly what this report is about -- this report the GAO issued last week entitled “21st Century Challenges: Reexamining the Base of Government” – because this report really does several things. One, it says where we are, where we're headed – which is not a pretty picture – and it raises a number of questions around 12 different categories of government spanning all three dimensions that I mentioned before – mandatory spending including entitlements, discretionary spending and tax policy – to raise a series of 200-plus illustrative questions about the base of government that need to be asked and answered in light of where we are, where are we headed in 21st century realities.

 

We didn't give the answers, although in many cases GAO has done related work, and then in other cases I'm confident that Congress will ask us to do more work to come up with some options and to talk about the pros and cons of various courses of action, and we didn't give the answers because we're not elected at GAO, and ultimately it's elected officials who are responsible for determining what the right policy choice is, and since our agency is a professional, objective, fact-based, non-partisan, non-ideological agency who tries to do things not only in accordance with those values but in a fair and balanced manner, we think it would be going too far to propose what the answer is, although we have a lot of information that I'm confident would be helpful to the Congress and the executive branch to determine what possible courses of actions might be.

 

And the third thing that the report addresses is, where do we go from here? But let me just answer three questions before I conclude and then we can open it up to Q&A. And let me say, every American who cares about their country, their children and their grandchildren should read this report. This is where we are, where we're headed, and the tough choices, at least from an illustrative standpoint, that are going to have to be made. And sometimes the truth hurts, but that's what my job is, to speak the truth.

 

Now, some people ask, why GAO, why now, and what do we hope to be accomplished by this report. First, why GAO? Well, GAO is the only agency that has a statutory responsibility that has been in the law for several years to audit the consolidated financial statements of the U.S. government. We have that responsibility. I am the person who has the responsibility to sign the audit reports, so I have a statutory and a professional responsibility with regard to this, which I take very seriously and we as an institution take very seriously.

 

Secondly, GAO has decades of experience, institutional knowledge and expertise based upon the report work that we've done for the Congress and things that are pending at the present point in time.

 

Number three, we have a very broad and somewhat longer-range perspective, in part because of the knowledge and expertise contained within our agency and in part because of the long-term tenure of the Comptroller General where you have an opportunity to look longer-range and to take on tougher issues by having a 15-year term. In addition, we're positioned well because we're a wholly owned subsidiary of the U.S. Congress, and when GAO speaks, Congress listens.

 

And last but certainly not least, I believe GAO has the institutional credibility to deal with these issues, because we're the agency that does our work on a professional, objective, fact-based, nonpartisan, non-ideological, and hopefully fair and balanced manner.

 

Why now? As I mentioned before, fiscal 2004 was a very bad year from a financial and fiscal perspective. Secondly, our long-range budget simulations have worsened significantly. And thirdly, from a personal standpoint, I have two children and two grandchildren and it really bothers me, the direction that we're headed, and I see them every week and I believe it's part of my responsibility to do what I can to try to help make sure that we address these challenges such that we continue the long-standing tradition of the United States of trying to leave things not just better off for future generations and for our children and grandchildren, but better positioned for the future. We are at risk – we are at serious risk of not doing to them what our parents and forefathers did for us.

 

I think why – what do we hope to accomplish with this report? Well, we hope that not only that the Congress will pay attention and consider it as they deem appropriate in their agenda setting for oversight, for authorization, for appropriations, but we also hope that the executive branch will pay attention because ultimately the executive branch is responsible for running government and managing government, and I think not only the responsible political officials but responsible career officials have to take this seriously, should take it seriously to try to end up being a positive force for change because the crunch is coming. The crunch is coming on the budget for defense and homeland security as well. And while they have largely been given a pass of late, there are billions of dollars of waste in defense and homeland security every year – billions. The crunch is coming. Nobody should be exempt from this fundamental review and reexamination. Nobody should be exempt.

 

And so I'm hopeful that this will be useful, both to the Congress and to the executive branch, but the bottom line is, in the final analysis, elected officials are the ones that are responsible for determining whether, when, how best to act. But the numbers are clear and compelling: the time to act is now. And while I believe it's going to take a number of years, maybe as long as a generation, to put us back on a prudent path for future generations and for our children and grandchildren, the time to start is now.

 

And let me close by referring to two former presidents and patriots of our country, the first being George Washington, who I alluded to before. George Washington felt that the most important personal attribute that an individual could have was courage. He also felt that the most important institutional attribute was fiscal responsibility. I think the time has come for us to heed Washington's timeless words of wisdom. We need more people who have the courage to tell it like it is and to address large and known and growing problems before they reach crisis proportions. And we need to return to fiscal responsibility as a nation and as individuals.

 

The second person that I'll close with is arguably my favorite former president, and that is Teddy Roosevelt, who has many famous quotes, but one of the most famous, which hangs on my wall in my office, is “Aggressive fighting for the right cause is the noblest sport the world affords.” Please join me in trying to speak the truth and to spur action in a way that will help save the future of our country, our children, and our grandchildren. Thank you.

 

(Applause.)

 

MR. BIXBY: Okay, let's open it up for Q&A.

 

Jim. We have roving microphones.

 

Q: Jim Klumpner, Senate Budget Committee. I'm always astounded when I go to one of these budget confabs that the room is full of budget wonks and we even talk about budget process, and the word “reconciliation” is never even mentioned. There's all this focus on PAYGO and the caps. Is there any sentiment amongst the panelists for changing reconciliation so that it is reserved for facilitating deficit reduction matters rather than what it's been used for in the last several years routinely, which is to facilitate deficit-increasing measures?

 

MR. BIXBY: Anybody have a take on that?

 

At a similar event I answered a similar question – from you I think? (Laughter.) Yeah, I mean, reconciliation was designed to make the kind of hard choices that we're talking about here, and unfortunately in the last several years it's developed into a way basically of – what would you call it? – a fast track for cutting taxes, and that's not the kind of tough choice that we need to make to get us out of this situation.

 

I would also add to that if you take last year as an example, last year I think it was about 15 billion (dollars) in earmarks that were added in as part of the reconciliation process. And not all earmarks are bad but not all earmarks are good either. And in order to pay for those earmarks there was a .83 percent rescission across the board that was applied to other government agencies, I believe with an exclusion of defense and homeland security, but pretty much everybody else was in on that decision. And that obviously creates some very perverse incentives which could end up getting much worse, because as budgets get tighter, that means there may be incentives for people to do more earmarking in order to maximize the chance that what they want done will get done. At the same point in time, agencies will be expected to do more with less and have less flexibility over the resources that they have.

 

And so, this is an issue that is a large and growing concern. They've grown significantly over the last few years and it's an issue that needs to be on the radar screen and discussed and debated as well.

 

MR. BIXBY: It also shows that things can change when a rule is put in place and people observe it for a while until they figure out how to game it, and then it can actually work against its original purpose. And it kind of goes to one thing that Gene and Maya talked about too, which is budget process rules do work best when they're enforcing a political agreement that's already been made, and we're kind of having budget enforcement in the abstract right now, and that really does facilitate game-playing on that.

 

Yes, sir?

 

MR. STEUERLE: Just one note here –

 

MR. BIXBY: Oh.

 

MR. STEUERLE: I think it's beyond reconciliation; it's the broader question of policymaking, I think within Congress in general. We've always had a nation where there's been a substantial amount of logrolling and we've always had a nation where lobbyists had a substantial influence on the process and that's not going to change, but I think what has changed is the removal, to an even larger extent, of an initiation of the process with some nonpartisan analysis of what a bill might be. You know if what happens – and think the last tax bill was representative of this – what happens is we largely have a bill crafted together by lobbyists who often represent legitimate interests but do not represent the public interest. We don't have a marker to even start with.

 

And so I worry about even more broadly than just what's happened in reconciliation as a way to sort of get in some of these special interest provisions that David mentions. The same thing happened in the tax bill that passed within the last legislative session. It's happening again and again. Treasury is not up there proposing how a bill should be put together. The Joint Committee on Taxation, the Congressional Budget Office, the offices we create who have enormous knowledge are not often brought in at the level they used to be to actually help at least put an initial plan on the table that was meant to be in the public interest so that then the logrolling takes place. But it's the second stage, not the first stage of legislative design.

 

MR. BIXBY: Yes, sir.

 

Q: Yes, I'm Al Milliken (sp), affiliated with Washington Independent Writers. Going beyond the politics, economics and statistics of what you are each doing, have you each emphasized enough the moral, ethical and religious values relating to the consequences of our nation's leaders and public servants' irresponsibility and sin?

 

MR. BIXBY: Well, I think David addressed that at the end. This is not a green-eyeshade issue. That's something that the Concord Coalition has felt very strongly about from the start, and that was certainly something that Paul Tsongas used to talk about quite a bit was the duty of one generation to another and how this generation could be the first to leave a weakened legacy to the next generation of Americans. So that's something that we do tend to stress, and you're absolutely right; you start talking about numbers and it's really not just about numbers. The fundamental problem here is if some of these bad numbers come to pass, it means a bad economy, it means living standards improve slower, it means we can't afford to do the things to make investments in human and physical infrastructure that keep the country going.

 

So it is a matter of ensuring a better, higher living standard for future generations and doing something that our parents and grandparents did for us to leave us a better world.

 

MR. WALKER: I would just come back to say it's really not about numbers; it's about values and it's about people, and if you don't end up putting it in those terms, you're not likely to get meaningful action in a timely manner. And so I think it's important to put it in those terms.

 

MR. STEUERLE: I think we have to be careful here too to not let us as voters off the hook. I mean, to the extent we say the only people we are willing to elect are people who make promises that are not paid for, and when elected leaders or political leaders try to stand out in an election campaign and we defeat them as soon as they say that we might have to cut back on some benefit or increase some tax or make government pay for what it's going to do, we often get the government that we deserve and elect.

 

MR. WALKER: But I would respectfully suggest that while I agree with Gene on that, one of the things that has to happen before you can end up taking on a lot of these tough issues is that there needs to be more truth in transparency about where we really are and where we're really headed, because the fact of the matter is until people really understand where we are and where we're headed, and the compelling need to make tough choices, they're not likely to give elected officials space to be able to do that and elected officials aren't likely to take the lead because they're going to be concerned about what effect it might have on their reelection chances. I mean, it's understandable.

 

So I think we really need nothing less than a major national public education campaign that is nonpartisan and bipartisan in nature, because you're not going to solve a problem until you agree that you have a problem and until the majority of Americans believe that it's important to begin to act now.

 

MS. MACGUINEAS: I think in terms of values, clearly when you talk about the simple value of we should be willing to pay for what we spend, everybody can nod their head, of course, until, as Gene points out, politicians say that means we have to raise your taxes and cut your benefits, and then nobody is nodding anymore. But the issue of values becomes a little bit more complex when you have a lot of special interests, many of whom believe that their special interest is a public interest.

 

So there are so many groups of people who believe in deficit reduction but don't want to put their special interest on the table. And it happens now that the public interest will only be achieved and reflected by a bipartisan agreement that really tackles some of these fiscal challenges and puts everything on the table. However, we have a low-trust environment in which to do that because the politics has made it so difficult, the special interests have made it so difficult, and people are arguing the values for the special interests when really the shared interests, the public interest, is the most difficult one to achieve.

 

MR. BIXBY: Before we take a question I want to recognize a new member of the Concord Coalition board of directors who came in – former representative, Charles Stenholm of Texas. (Applause.)

 

You came in just at the right time. We were talking about values and making tough choices on the campaign trail and how this was about future generations. And I don't know anybody in the Congress that carried that message longer and more forcefully than you did, and we're very, very proud to have you on our board of directors.

 

CHARLES STENHOLM: I think I proved the basic thesis of the last question. (Laughter.) (Off mike.)

 

MR. BIXBY: Well, we have a lot on the Concord board who – (laughter). No, that's not true.

 

Yes, sir.

 

Q: I wanted to ask – well, Gene brought up this idea about – this is the way I understood – it may not be correct – but that Social Security retirement age would somehow be indexed to life expectancy. Maybe that's not what you were saying, but we are living longer and we're healthier, so people in their ‘70s can go out and work. You mentioned that in the context of an actuary table where – can you amplify – do you know what I'm –

 

MR. STEUERLE: I don't want to get too far off into the Social Security debate, but it's not unrelated to this budget debate. Social Security has been designed, since its inception – well, I shouldn't say it's inception; since, actually, though, the mid-‘70s, to always grow faster than the economy, and through legislation it's actually always grown faster than the economy. It's always absorbed an increasing share of the pie. And it does that through some variety of technical reasons. It's not just that benefits now increase with wages and not prices. We do it for Social Security; we don't do it for educators, we don't do it for policemen, we don't do it for policewomen, we don't do it for a lot of other groups in the country, but for Social Security recipients we say we'll do that.

 

But mainly also is if you do it over a very long period of time, we now retire about five years earlier; we live about four years longer than when the system was first put into place. So now we have, for a typical couple, benefits in Social Security last 25 years. That is, the longer living the two, the benefits are a quarter of a century. We're going to a world where one-third of the adult population of the United States is scheduled to be on Social Security.

 

And so when I examined Social Security – without trying to be partisan or looking for one thing or another – I said, well, if we want a system that's really oriented towards the greatest needs of society, what does that mean? It seemed to me that was the people who were old, really old, and people who generally were poor, regardless of whether they were quite so old or not. We now have morphed into a middle-age retirement system. There is no way that we can say that people with often 17 or 20 years of life expectancy on average – and for well-educated people in this group, much longer than that – that if we retire at 62 or 63, that we're retiring in middle age. And the consequence is not just that we absorb a lot of benefits; for a typical couple retiring today, average-income couple, it's like about $700,000 in Social Security and Medicare benefits. It grows to well over a million for you in the audience that are about 40 – Social Security and Medicare.

 

We're absorbing enormous amounts of resources, and we have to be willing to say, is this what we meant by a progressive society? For those of us who are baby boomers, did we really think what we wanted out of government was a government that was oriented towards nothing more than our own consumption in retirement, which is what is largely scheduled to do within just a couple of decades.

 

And so when I look at it and I say, okay, well, if we have to cutback – maybe we don't need a million dollars of the benefits or $700,00 in benefits, what's one way to get there? Well, you can do sort of benefit cuts across the board but then I worry about the very old, so then I'm not being progressive and orienting the system towards being what I want it to be. And I look at the age of retirement and I say, that's just got to be one of the issues. Do we really as a society think our 20th year in retirement is a greater priority than getting our kids off the street? No public audience – when I go to the types of sessions that Concord and Maya's group, the Center for Responsible Federal Budget try to sponsor – which, by the way, I will mention again, are totally underfunded – (laughter) – but when I go to these sessions –

 

MR. BIXBY: What was that, Gene?

 

MR. STEUERLE: -- there's nobody in the public that disagrees with that statement. There's almost nobody in the public that says, I think my 20th year in retirement is a higher priority than spending money this other way. But if you ask them, do you want to increase the retirement age, all of a sudden we don't have that discussion.

 

MS. MACGUINEAS: Just to make a quick comment on the retirement age, because I have something encouraging to say, which you always look for in these kinds of forums, over the past years I have just been saddened by how quickly people have taken the retirement age off the table. It's almost been a race amongst politicians of both parties to say, oh, no, I promise I'll never touch the retirement age. And it's clearly a sensible policy to at least consider since we're living longer and we're able to work longer.

 

But one of the things that has come out of the recent Social Security discussions as people are realizing and acknowledging that private accounts alone can't solve Social Security or that for people who don't like accounts they need to come up with alternatives, people who used to be very wary of raising the retirement age are starting to discuss it again. So I think what's interesting as you peel back the layers of the Social Security debate, which has sort of been cluttered with focus on the wrong issues and not the tough real issues of what are we going to do on revenues and spending. Retirement age is something that's starting to reemerge as an issue that people are looking at, and that will help with a lot of the entitlement programs if we go down that path.

 

MR. WALKER: Let me give you a couple of past facts and a couple of future facts because I think the retirement age has to be on the table. It needs to be on the table as part of a possible comprehensive solution.

 

Past facts. First social insurance program in the world: Germany, 1870s. The normal retirement age I think was 65; average life expectancy was in the 50s. Brilliant politician – liberal promise, fiscally conservative – (laughter) – Otto von Bismarck, okay? Social Security, 1935: average life expectancy I think around 65 at that time; normal retirement age, 65. Okay, fast forward: life expectancy well into the 70s and increasing; normal retirement age, 65 going to 67, depending on what you are. So that's past – what some of the stats are.

 

Two other things that are important: we're now in a knowledge-based economy where it's brainpower not “brawnpower” that determines value. People have an opportunity; we have a societal need for people to work longer in order to maintain economic growth because we have very slow – (audio break, tape change) -- some of it depended upon what you are so that's what some of the stats are. Two other things – (inaudible, technical difficulties) – we are now in a knowledge-based economy where it is brain power, not brawn power that determines value – (we ?) have an opportunity, we have a societal need for people to work longer in order to maintain economic growth because we have very slow workforce growth that is projected to continue in the future.

 

So from a macro standpoint – for the greater good, government policy should be encouraging people to work longer – underline the word encouraging. There are many studies that have shown that the longer that you stay mentally and physically active, the longer that you're likely to live – all things being – all else being relatively equal.

 

And so there are a lot of reasons where you can say government policy needs to encourage people to work longer. Now, that's different than requiring and that's where you get the great debate about, well, what about the early retirement age and – although I think that should be on the table too because you would be amazed how many people retire at the early retirement age because the government says it's okay to retire at 62. And by the way, employers piggyback on 62 and say, by the way, it's okay to retire at 62, and in some cases encourage people to retire at 62. We have to rethink some of these things. That is another example of a policy that's based – that's decades old and needs to be rethought.

 

MR. STEURELE: One very quick footnote here. It is totally possible in Social Security reform to ensure that – let's call it the bottom 25, 30 percent – whatever it is of the population – are at least as well off in a reform system as they are now. You could create a wage index minimum benefit – you could do a lot of other things to totally make them better off. Whether we have individual accounts or don't have individual accounts, whether we have to cut back on benefits in aggregate or not – and nobody – and this is really bothersome – nobody on either side of the issue puts that forward as a target.

 

You know, isn't the target to protect the really old and the really poor? It's not stated as a presidential desire; it's not stated by the AARP as one of their priorities – you know, where are the people who are saying what do we want out of this system to do and why don't we make that the first priority? And then we can debate the other things and we can disagree on the other things, but let's make sure the system does what it's fundamentally desired to do.

 

And even if increased the retirement age, you could do that in a way that might have benefits for those lesser-advantaged people actually – are at least as high if not higher than they are now.

 

MR. BIXBY: Just as an observation – we mentioned the '98 forums that David was part of. But basically there was a consensus as I recall from that time that hard choices would have to be made. And there was a question of what mix of benefit reductions phased in and if that doesn't get you there, what taxes you might want to look at to bring new revenues into the system.

 

Several years later – now, in this debate, it looks like a lot of people have taken benefit reductions and tax increases off of the table. You hear people say, well, I'm for Social Security reform but I'm not for cutting benefits and I'm not for raising taxes. Well, there isn't anything else left. (Laughter.) So we really do need to get back to more realistic dialogue about that. And remember, cutting benefits relative to what. You know, if you have got a system that is unsustainable, then you by definition have to scale something back because if you look back at those numbers that I was talking about at the beginning, fiscal policy goes off of a cliff. The government goes bankrupt before the trust fund does. (Chuckles.)

 

So we're going to have to think – rethink, as the GAO is trying to get us to do, about what is – what is it that we want these policies to do? How much is it going to cost? And how much are we willing to pay for them?

 

You had a question, Jim.

 

Q: Jim Mittag (ph) from Barons (ph).

 

I get the impression – and maybe it's a misimpression – that you would all favor raising taxes, which is very controversial because the shtick is if you are in favor of raising taxes, you're antigrowth. Looking forward, if you wanted to solve this entitlement problem, how would you go about doing it without derailing the economy? Is it better first to rollback entitlements and then do taxes? Do you do it all at once or are you just assuming that we have to have a period of recession?

 

MR. BIXBY: I'll leap into that first. There is no way we can support the – we do have a spending problem. In the long-term, we have got a spending problem. If you wanted to balance the budget over the short-term, you could do it by raising taxes because taxes right now are very low as a percentage of GDP from where they have been. They are down where they haven't been since the 1950s. So it's hard to argue that you couldn't raise taxes to help balance the budget in the short-term. Excuse me, Gene, I still do sort of go for that goal. (Chuckles.)

 

But the spending pressures from the demographics in the entitlement programs is such that you couldn't raise taxes just to keep with them; it would ultimately I think slow growth and harm the economy. So I think you have to put both the revenues and the spending on the table and any realistic solution is probably going to have to involve both. The timing of it may be different – you know, when you want to bring the revenues into the system and when you want to reduce the benefits. Maybe we can use more revenues now and reduce promised benefits off in the future and that would make for a smoother path.

 

But I think – you know, it's not an argument for quote, unquote, “raising taxes,” but we do have to pay for the promises that we are putting in place because the alternative is deficits that eventually get to be so large that they can't be financed. As Pete Peterson, Concord's president likes to say, “You can't finance the un-financeable”.

 

MR. WALKER: A couple of things. One, the gap is too great to grow your way out of the problem; the gap is too great to solve the problem just by squeezing discretionary spending. Ultimately, you're going to have to make changes on three dimensions – mandatory spending and entitlements – and if you don't do that, you won't get the job done.

So you absolutely, positively have to end up engaging in entitlement reform and mandatory spending; you have to continue to look at discretionary spending to make sure that it's relevant for the 21st century, generating results, and if not, then to make adjustments as appropriate; but you also have to look at the revenue side. And I would expect that there are several dimensions that will have to be looked at.

 

Number one, whether and to what extent the expiring tax provision should be extended or made permanent. That is going to be a battleground, okay. I also think that you have to look at tax preferences, which in many years, the aggregate cost of which is an excess of discretionary spending and yet it's off the radar screen, and in some cases, I believe those tax preferences are having very perverse effects.

 

For example, the tax preferences accorded to healthcare I would respectively suggest are decreasing sensitivity to the increase in cost in healthcare and fueling big problems as it relates to the income exclusion from individuals. The fact that individuals never pay income tax on the value of employer provided and paid healthcare benefits, nor do they apply FICA taxes -- and more and more total compensation is coming in the form of tax-free fringe benefits, which has a lot of different implications.

 

And ultimately, you're going to have to just look at what is an appropriate level of taxation in order to pay for whatever government people want because ultimately you need to pay for it, okay. You need to figure out what that is and how best to raise it. And I think there is going to have to be a debate about whether or not – you know, how much should be through income taxes, how much should be through consumption taxes given changes in the nature of the economy, given changes in the distribution of wealth in our country – you know, you're going to have to do a number of fundamental – engage in a number of fundamental changes I believe.

 

But ultimately you are going to have to do all three. And what the debate is going to be about is what waiting – what priority, okay – and that is what a democracy is all about. (Chuckles.)

 

MS. MACGUINEAS: It's an immensely important question because it puts sort of all of the issues on the table. And to be clear, the Committee for a Responsible Federal Budget doesn't take policy positions, per se; but I haven't seen a single plan out there that could be fiscally responsible without doing something on the revenue side. If somebody wants to put forward a plan to fix our entitlement programs only on the spending side, by all means, let's put it on the table and that could be part of the discussion. But so far, the ones that refuse to raise taxes borrow all of the money instead and that is not an acceptable replacement, and that doesn't help economic growth.

 

I think, practically speaking, financing the retirement of the baby boom without increasing tax revenues is probably virtually impossible. Even if we were to start talking about means testing benefits, which is something that isn't as discussed and probably should be, you would still probably need more revenues than we currently have.

 

That said, since higher tax rates does drain economic growth, and at this very time – whereas there is no free lunch – we would like as an efficient tax system as possible to make the painful choices less painful -- you have to think about tax reform along with any tax increases we have. And that could take the form of a number of things but I would suggest that we look at the tax base, which is very much like Swiss cheese just chopped up with holes and targeted tax cuts all over the place – the tax expenditure budget is a fascinating thing to peruse and it has a lot of possibilities for tax reform broadening the base.

 

Secondly, like I mentioned before, I do think a progressive consumption tax should be on the table as part of tax reform because it combines the goals of both equity and efficiency, and there are very few taxes that can do that.

 

Then finally, when you think about taxes in general, you should try to tax more of what you want less of. And there are number of things that we could look at for new revenue streams like environmental taxes or energy taxes, either to raise more money for entitlements or to replace some of the inefficient taxes that we do have that hurt economy.

 

To be clear, the bottom line is that in the long-term, we face a spending problem. The spending is what is going off of the chart in the entitlement programs. However, I think in order to be realistic and in order to facilitate a grand bargain that is necessary, we have revenues at 16 or 17 percent of GDP right now and spending headed towards 30 percent of GDP, when the historical averages are around 20 percent. It clearly makes sense to talk about some kind of revenue enhancements now in the short-term in return for scaling back our unfounded promises in the long-term. That brings everybody to the table and it's probably the best kind of bargain that you could have both for the economy and the budget, and given political realities.

 

MR. STEUERLE: Taking off on Maya's statistics, you know, if a household spends $100,000 and it borrows 20,000 (dollars) to finance it and only makes 80,000 (dollars), how much would we say it's spending? We would say it's spending 100,000 (dollars); we wouldn't say it's spending 80,000 (dollars). The taxes that the government is imposing on the economy are equal to the spending and the spending is at 20 percent of GDP and it's going to 30 percent. That is the tax rate that is – the real tax rate that is implicit in the system because we're going to pay for it either now or with interest payments later.

 

And so that is the tax system we actually have now. I mean, we haven't recognized it explicitly, but it's implicit in every one of these numbers. Do I think that we need to be at that level? Do I think we could operate a government at 17 or 18 percent GDP in a good government? Yeah, I probably do think we could; I think we could have both a more progressive government and a much leaner government. But given the level of promises that are out there, I think it's going to be very hard to get there without some revenue increases in particular because what we're really talking, if you really think about, is cutting taxes from that 30 percent level back down to something that is much more reasonable.

 

I would say that one of the great opportunities along the way has been implied by what David and Maya said, which is that there is a large amount of spending that is hidden within the tax system. So it is possible to go after some of that spending in a lot of ways that avoid increasing tax rates.

 

And if I could make a minor plug here, I recently wrote a book examining the last 30 years of tax policies called contemporary U.S. tax policy and I would be glad to share that with anyone who is interested – just looking at how that has wound through the last three decades.

 

MR. BIXBY: Lou?

 

Q: First I wanted to thank Gene for telling me that I'm still in middle age. (Laughter.) I have a question for David.

 

You talked about an education campaign. Have you thought any about how that might be constructed?

 

MR. WALKER: Yes. I know there is a lot of discussion right now about Social Security. And my personal view is is that we should reform Social Security sooner rather than later because while it doesn't face an immediate crisis, it does have a large and growing financial problem and it would prudent to address it sooner rather than later. But I personally believe the education campaign has to be above that level. Social Security is 3.7 trillion (dollar) of a $43 trillion problem that is growing every day. And I think that our discussion and debate needs to be outside the beltway to try to help educate the American people as the nature and extent, and magnitude of our challenge, the path that we are on, and the consequences of inaction because there are consequences for inaction.

 

I think it's also important to, you know, engage young people because they are the ones that are going to bear the burden if the status quo is not changed. And unfortunately, young people are not as politically active and engaged as they should be, and as some other segments of society are. So I have been trying to work with a number of interested parties both in business, not-for-profit entities like Concord Coalitions, Committee for Responsible Federal Budget, even some groups that you wouldn't necessarily think of like AARP and a few others who recognize that we do have this large and growing long-range imbalance and that people might have different opinions about how you solve it, but ultimately we as a nation have to solve it.

 

My experience in 1998 was the American people are a lot smarter than people give them credit for and if you give them the facts, and if you speak the truth to them, and if you talk to them about different options and consequences of actions and inactions, they will empower you to act. And I think that our situation is so serious now that we need to do it and we need to do it soon – start with major cities and then you end up trying to engage a variety of opinion leaders both in the public sector, the private sectors, the not-for-profit sector, the media, and others – but it's going to take the combined efforts of many people over a number of years to get us to where we need to be but we need to start now.

 

MS. MACGUINEAS: You know, I think there is actually a great opportunity for educational efforts right now because you can see that interest is turning. A few years ago, even when we knew we faced major fiscal challenges, the country was not there yet. It was pretty fun to hear that we could have tax cuts and spending increases, and the party was going on, and those of us in the world of fiscal conservatism were not having a large audience, and I know my friends were not at cocktail parties wanting to hear me talk about entitlement reform, and – (scattered laughter) -- now they will actually listen for a moment or two.

 

But I do think that it's a great time to go out in the country in a variety of ways and to engage people, and people who are not likeminded. The committee has a really interesting thing I think, which is called the exercise in hard choices, which is a budget simulation, which a lot of congressmen take to their districts or different groups do, and high schools do, and it allows people to go through the exercise of both meeting their short- and long-term fiscal goals.

 

And what David was just saying – people in the country come up with what I think most everyone in this room would say are very balanced and practical solutions. They certainly – if they went in thinking we can do this all by cutting international affairs – and most of them don't think that but some do – they come out realizing where the real choices are.

 

And I think it's just important -- as the GAO does so much -- to make transparency one of the key goals and then to engage people who have different interests, not all likeminded, in the actual exercise of how are we going to tackle this.

 

MR. BIXBY: Let me just put in a plug for the Concord Coalition field organization because one of the things that we have always tried to do is have an impact outside of Washington. On a theory that all politics is local, you have got to be able to make the federal budget relevant on the local level. And there is a great deal of interest and so we have always had a field staff. We have one now. I don't know whether Harry – (inaudible) – our field director is in the room (pause), ok, maybe not. But anyway, if you check www.concordcoalition.org, and look for a filed representative in your area, we would be happy to work with you.

I have got about four more questions and then I'm going to try to have short answers if we can. Yes, sir, you, you –

 

Q: Finley Lewis of the Copley News Service.

 

To this basket of solutions that I hear emerging, would it be relevant, significant, or worthwhile to add immigration to the mix?

 

MR. STEUERLE: Do you want to – (inaudible).

 

MR. BIXBY: One answer. Well, I want to try to get in the four – at least four questions that I know.

 

MR. STEUERLE: I had shared something called the technical panel – examining Social Security's methods and assumptions on their estimates, and even if you tripled the immigration rate, it really only made a modest impact on things like Social Security – the main reason because immigrants themselves become old and they also require Social Security benefits. Sometimes they bring in parents. So immigration helps a little bit it's like buffing up the birthrate a tiny bit but not a lot.

 

MS. MACGUINEAS: I would just point out that I think the immigration solution, quote, unquote, “solution,” is also similar to the idea – well, if we can just find a way to grow future generations or increase population, where – those kinds of solutions may make a dent in the problem but they also continue this link that each generation or generation in this country needs to be larger than the previous one, on which intergenerational programs are dependent.

 

And we know that can't go on indefinitely, so many of those solutions in my mind just push the can a little bit down the road – clearly you are going to have to pay benefits to anybody who is contributing to the system so you may buy yourself a couple years of solvency, but it's really more of a structural challenge I think than just looking at how to expand the workers who are supporting retirees.

 

MR. BIXBY: Mr. Stenholm, did you –

 

Q: Yeah, I hope that all of us are not only listening but hearing what the four are telling us today and I hope that those who have a tendency to shoot down every idea that is put forward on Social Security or budget reform will sit back and take a deep breath. And if you're going to shoot it down, at least let it fly before you shoot it because if we always shoot down the ideas of people, we're not going to solve the problem. You know, I'm of the school that the relevant year for Social Security is not 2042; it's 2008. It's when the baby boomers begin to reach age 62.

 

The budget pressures associated with the first call Social Security checks have on the budget are going to make the budget argument progressively more interesting to be solved. And therefore, if that is true, then I want to ask this question: what is the significance of any of today's headlines in which we have the first countries beginning to reduce the amount of the debt they are purchasing from us?

 

MR. WALKER: Well, it's interesting. First, Charlie, I mentioned the 2008 date in my remarks because that is the date in which the first baby boomers reach early retirement age and you start drawing down on the Social Security surplus, which will place increasing pressures over time. So I agree with you that that is a relevant date.

 

You know, it's interesting, in my job, abut 15 percent of my job is international, and I deal with my colleagues from all over the world. And within the last two weeks, I had an opportunity to be Europe and met with a number of my colleagues in the Middle East from Europe including OPEC representatives. And it's very, very clear to me that the recent decline of the dollar is a shot across the bow, and that one of the reasons that all prices are very high right now is because all transactions are done in dollars and if you want to maintain purchasing power and the dollar takes a dive, you need to maintain fairly high per barrel oil prices in order to maintain purchasing power.

 

But I have noted increasing concern privately – and now you are starting to see some things talked about publicly – about whether or not people are going to continue to finance our deficits and our consumptions. And that is one of the concerns that I have. Last year, I – a number that sticks in my head is about 399 billion (dollars) of our new debt was purchased by foreign players. And one of the reasons it's purchased by foreign players is because we have the lowest domestic savings rate of any country in the world.

 

I mean, we can't really finance our own. And if for some reason they decide – for whatever reason – for economic reasons, for foreign policy reasons, or whatever – if they decide that they don't want to continue to do that or if they decide in order for them to continue to do that, they are going to charge – we're going to have to pay a lot higher interest rates – we're in trouble. And we don't know whether or not that will happen. And so to a certain extent, if we are relying upon others to finance our consumption and our deficits, we are ceding part of our destiny, and I think we need to take that a lot more seriously than we have.

 

MS. MACGUINEAS: I think it's worth noting that one of the defining trends of our time that has put us in this problem is the aging of our country and the world. But a second defining trend is that of globalization. And as you pointed out, financial markets are so much more integrated and they will not allow us as a country to stick our sovereign neck in the sand and pretend this isn't happening. So again, either we make the choice because we choose to or the choice is forced upon us and hopefully that is not what we are starting to see the beginning of.

 

MR. STEUERLE: Can I add a note to – (inaudible) – Bob earlier that Charlie Stenholm, who asked the last question, was one of these people who almost spoke truth to power and someone whom I dealt with in Congress, with whom I could disagree, I could discuss items and he always really wanted to listen and learn, and I really respect that greatly.

 

To add what you are saying, just two other little footnotes. One reason 2008 is so important is not just because when workers retire, they go into the beneficiary population; it's the effect on revenues and even the office of management budget – the Congressional Budget Office, project a slowdown in economic growth rate starting around 2008 – now, right now they project it as not being that great, but we don't know; the world has never gone through – never gone through the lack of labor force growth and in many countries decline in labor force growth that we are going to have in the near future. Just precaution tells us we ought to be – ought to be a little careful as we approach those years.

 

As for the foreign debt – just another little footnote – 40 percent of this foreign debt – this several hundred billion dollars of debt is being bought – 40 percent of it is being bought by China and communist – by communist China and Japan, both of whom face severe aging issues – and one country of which – communist China, it seems to me has certain problems of stability that could have ramifications later too. So it's not clear that is a very prudent policy even if it were able to continue for a while.

 

MR. BIXBY: Yes.

 

Q: Marilyn G. West (ph) for Cox News.

 

We are coming into the peak of tax season and a lot of people will be getting hit with the alternative minimum tax. And I'm just wondering, especially Mr. Walker – if you could say anything about is there any way that Congress could address the alternative minimum tax without worsening the deficit? Or they do take up the issue, is it necessarily going to deepen these problems you have been talking –

 

MR. WALKER: If they are willing to somehow cut spending elsewhere or modify – broaden the tax base or otherwise increase revenues or cut spending – I mean, the numbers have to add up. I paid the AMT once myself; more and more people are going to start paying it; and a lot of people are going to be very surprised when they do because it wasn't intended to affect middleclass America, and yet, because of the way that it is structured, it is going to affect more and more people every year.

 

MR. STEUERLE: The Tax Policy Center down at the org – we put a lot of the statistics on AMT including the fact that we're soon scheduled to have 50 percent of households with children on the AMT, among other reasons because children are considered as tax shelters. Congress is going to have to deal with it. It's now giving contradictory commands, though, because it's asked not to let the AMT tax increases go into place, but it's asked not to lose revenues. And at the same time, it's asked to increase the deficit – another size of the tax budget.

 

So it has got three totally contradictory comments: increase the deficit in taxes, do revenue-neutral tax changes, and increase taxes so that we don't have the AMT problem, and that is a tough issue.

 

MR. BIXBY: The Urban Brookings Tax Policy Center, by the way, for those that don't know it, does great work – just putting out a lot of terrific stuff and anybody that wants to check that out it's what – urban –

 

MR. STEUERLE: TaxPolicyCenter.org

 

MR. BIXBY: Dot org, yeah – really good stuff.

 

I think one last question. Yes, sir.

 

Q: The political debate – I'm Bill Welch with USA Today. The political debate is heavily focused on Social Security right now of course. And David Walker, as you have made clear here, Social Security is only a piece – arguably a small piece of this overall entitlement problem. I haven't heard any suggestions here on how to get control of Medicare's growth or retrain it, although if you look at the CPO numbers, the growth rate projected for Medicare is quite large – as far as you can see.

 

What are your thoughts – among the panelists – on addressing Medicare? Is it realistic and could you put in perspective of this overall entitlement issue?

 

MR. BIXBY: Well, they always say never take the last question. (Laughter.)

 

MR. WALKER: Let's talk about some numbers first. Medicare -- of the $43- trillion-plus problem, Medicare is about 28 trillion (dollars), of which 8.1 (trillion dollars) is Medicare prescription drugs. Secondly, Medicare is a subset of the broader healthcare challenge. You know, you've got Medicaid, which by the way is not in the $43 trillion number because the nature of the promise is fundamentally different, okay. You have also got employer-provided healthcare, which is in crisis as well.

 

And so I think ultimately, we're going to have to end up reforming not just Medicare but also Medicaid and the entire healthcare system. We're going to have to do it in installments. I think on Medicare in the short-term, you could look at things like large case management; you can look at how to leverage purchasing power; you can look at trying to move toward some standards of practice that would help to increase consistency, quality, reduce costs, and hopefully mitigate some litigation.

 

So I think there is some things you can do in the short-term, but in the end, I think we as a society are going to have to answer two fundamental questions. Number one, what type of care or coverage – is it in broad-based societal interest to make sure that people have – irrespective of their age, their income, their geographic location, all right – EG, inoculations against infectious disease, maybe some type of preventative care services, guarantee insurability group rates – I didn't say who paid for it – and maybe protection against financial ruin due to unexpected catastrophic illness although that varies based upon your wealth obviously and your income status.

 

We haven't ever done that, all right. And once you do that, then you try to make sure that somehow that is taken care of and if people want more than that, then they are going to have to have choices and come out of pocket to be able to make some more conscious decisions about how much of their resources are they – (unintelligible) -- away off with regard to the type of coverage or insurance that they are going to be able to obtain.

 

I think the second question that we're going to have to ask and answer is what is the proper division of responsibility between government, employers, and individuals. And I think it could be very different than what it is today. And I would commend – if you go to our website, you'll see a lot of good work that our staff has done about trends in healthcare access costs, quality – raising a lot of questions and kind of pointing the way and some of things that I think we're going to ultimately have to discuss and debate.

 

MS. MACGUINEAS: Just quickly I would say Social Security reform is merely the warm-up for a very, very big struggle on figuring out how to reform Medicare. Unfortunately, what we did recently was we made the problem much worse by creating the prescription drug program without any of the needed reforms, and we also at the same time gave away the sweetener, which will help to get people to accept some of the very tough choices we are going to face in Medicare.

 

But when it comes to healthcare – and clearly it's much broader than just the program of Medicare, like David said – it is a discussion we haven't even started; it is a discussion that goes to the very heart of values because it's life and death, and yet it is something we need to learn to talk about as a country – who pays, how much, for who, at what point, for what goods, what services, how are they delivered – and I hope we'll start that discussion as quickly as possible. Hopefully Social Security reform we can get done in a bipartisan manner and build some good capital between the two parties, which allow us to move to this really big and tough challenge.

 

MR. STEURELE: I belong or I have been appointed to something called the National Committee on Vital Health Statistics, which has been heavily involved in this moving towards trying to create electronic health records and personal health records, which we believe would enormously improve the efficiency of the health sector.

 

Nonetheless, improvements like that and some of the ones David made – offered did not necessarily control costs; they may get us more bang for buck, they may give us greater value for dollar, but ultimately when you talk about controlling costs, there are really, I think logically, only three ways you can do it: either the individual controls cost by paying out of pocket; we use intermediaries to decide – whether that is HMOs, health maintenance organizations, or preferred provider organizations, or we would make capitated payments to hospitals or whatever, or the government decides by setting strict price quantity controls and what it offers. It seems to me it's only those three.

 

I disagree with those people who say that we don't know how to control heath costs. We have to choose between those three. I don't think we have to choose one or the other and most health conferences I go to, everybody objects to one or the other. They object to individuals paying because of their equity concerns; Hollywood tells us we don't like intermediaries to take control because there is going to be the wrong set of incentives for profits; and a lot of people – and I've included myself – say that we worry about total government control of the sector because the government might control it well in the short-run, but how does it decide 20 years from now what goods and services to offer.

 

I think that it's possible to move on all fronts. It's possible to say individuals have to pay so much; it's possible to voucherize (ph) – or if you want to make payments to intermediaries that are limited in amount – and we vote every year on how much we want to increase it. And for the remainder of the system, whatever size that is, it's going to be a government-controlled system. It's possible not to leave it as an open-ended box. Right now it's an open-ended box so that we put some controls on – but there are ways to get around it. We lower the price of some good and services; doctors spend seven minutes per patient instead of eight or something.

 

It is possible to have a system that would ratchet back prices to stay within a budget. That would be hard; it wouldn't be the ultimate right solution in terms of where we want to go in medical care, but it would put Medicare on a path where it doesn't have automatic cost growth and that we voted for what we wanted to extend. And I think we have to make those three choices: decide how much we want individuals to pay, decide how much we want to pay out to intermediaries, and decide for the remainder of the system that we will actually put on price and quantity controls that in aggregate actually work.

 

And I think that is a tough political decision; I don't really think it's an economic one. I think we do know that that's what we have to do in Medicare.

 

MR. BIXBY: Okay. I think we'll – I think we'll wrap it up there. Let me just say in closing that somebody is going to have to do deal with the problems that we have talked about. Somebody is going to have the solution. If we are the ones who come up with a solution, it can be modest and it can be gradual. If we put if off, the somebodies who are going to have to come up with this solution are going to have to act suddenly, under crisis, conditions – economically, politically. That is not a legacy that anybody here wants to leave.

 

And so to end on an uncharacteristically optimistic note – (laughter) – I will confirm what Maya said and what Dave and Gene have said about being out there and explaining these issues at town hall meetings and at forums: you can explain these issues; you really don't need to be afraid of them. People love to discuss these issues. And ultimately the American people can handle the truth. So it's time to go out there and start talking about it and that is the only way these solutions – that is the only way these problems are going to be solved.

 

Thank you very much for coming.

 

(Applause.)

 

(END)