15th Annual Roundtable on the President's Budget and the Economy

---

ROBERT REISCHAUER, Urban Institute: Let me welcome everybody to this, the 15th annual Urban Institute Roundtable on the president's budget. This is intended to be very much a discussion among people who have different perspectives and different insights on the budget and fiscal situation facing the nation.

We have asked a handful of people to have very brief introductory comments. Their briefness will be monitored both in low-tech ways—which is this, which says your three minutes is up—and in high-tech ways—which is the meat timer from my kitchen, which will go "bing" and indicate that you're done. And we have several of our participants I know who have to leave for other pressing engagements. Alice is going to talk to the board at AARP and probably repair the damage I did yesterday. And Maya MacGuineas I know has to go to her board meeting while part of her board stays here. (Chuckles.) And Bob Greenstein is headed off to educate America on "The Diane Rehm Show." But we will start off with sort of brief observations on the budget and what people think. If you have something that relates directly to what the presenter was talking about, particularly if you have a different perspective, I'll recognize you at that point. Otherwise we'll just go through the individuals.

I'm going to start off with the dean of this topic, Alice Rivlin, and give her the first crack.

ALICE RIVLIN, Brookings Institution: Thank you, Bob. Here we are again, talking about the budget.

My view of the president's budget is, I'm afraid, negative. I think this budget is, to put it mildly, disingenuous, unrealistic, and irresponsible. Irresponsible because it puts the U.S. on a track to large, sustained budget deficits over the next decade. It is not a do-nothing budget with respect to deficits. It adds to the long-run deficit problem by making the tax cuts of '01, '02, and '03 permanent as well as by proposing some other measures like tax-free savings accounts that are structured to add substantially to future deficits. And it does all this at a particularly bad moment in history when we are facing, quite soon, unprecedented demographic shifts and moving into a period of known, not uncertain, but very foreseeable upward pressure on spending for retiree programs, and at a time when we are already heavily indebted to other countries.

Now, sustained growth in deficits will tend to raise interest rates and reduce growth just when we should be making every effort to grow faster to ease the demographic burden. And worse, large, sustained deficits at this moment risk destroying the confidence of foreign investors in the United States, which we need so badly, ruining our image as a well-managed country that knows how to act in a fiscally responsible manner. And that creates a risk of unknown magnitude and unknown timing of a plunge in the dollar and even conceivably a financial crisis.

The budget is disingenuous because it pretends to take deficits seriously. If you say you're going to cut it in half in five years it kind of sounds like you could cut the other half in 10 years, but that is not happening in this budget. It builds in the deterioration after the five-year window. And moreover, it makes no provision for known costs, including some that the administration knows are there and is certainly advocating, like fixing the alternative minimum tax, which happens only for one year, not for its lifetime like the costs of Iraq and Afghanistan after next September, like some tax extenders, like funding the modernization of the defense budget, and like transition costs on the Social Security proposal.

So that's why I think it's not a great budget.

MR. REISCHAUER: Okay, thank you.

And do we hear a view from the other side? Let's turn now and ask Chris Edwards. Do you want to say a few words?

CHRIS EDWARDS, Cato Institute: Thanks. I agree with much of what Alice said. The big story, you know, is certainly the deficit, and unlike the Republican Congress in the 1990s, President Bush has no plan to eliminate it. Now, high deficits wouldn't be a serious problem of course if these were normal times for the budget, but they're not. They're extraordinary times with the baby boomers retiring starting only four years from now.

Now, everyone has their favorite entitlement statistic. Mine is if you take Medicare, Medicaid, and Social Security, those programs combined will rise by $54 billion in costs this year. Ten years from now those three programs will be rising by $130 billion a year in costs. Deficits of course push costs onto future generations, but the other thing they do, from my perspective, is they put President Bush's tax cuts into jeopardy, which I think is a real problem. Bush's tax cuts, in my view, are not just about taking money from the public sector and putting it into the private sector; Bush's tax cuts help solve real problems in the tax code. The double taxation of dividends is something that, as economists have pointed out for decades, causes real problems. It causes corporate management problems for example. On the AMT [Alternative Minimum Tax], repeal or reform is not just about giving more money back to taxpayers; it's about solving a real complexity problem in the tax code.

Now let me pick on President Bush for a few minutes. As everyone would probably agree, Bush has been usually inconsistent in his budget policies, supporting small government on the tax side and big government on spending. And a lot of his statements are remarkably inconsistent. In his official statement on the omnibus spending bill that passed a couple weeks ago, he lauded the bill for funding some of his high priorities but he called on Congress to cut wasteful spending. But of course the omnibus was stuffed with 8,000 pork barrel earmark projects. It was a perfect opportunity for him to veto a wasteful spending bill.

Bush in recent weeks has repeatedly told Congress it needs to make tough choices, but he, you know, proposes to launch, I think, a nutty scheme to go to the moon and Mars over the next decade or two. That's not making tough choices. And not enough tough questions are being asked about Pentagon spending, I don't think. Pentagon spending has risen about $150 billion in the last there years. That's even aside from the war supplementals. Defense spending is big government. Just like other types of government spending, it sucks money out of the private sector and reduces economic growth.

The federal budget, I think, could be balanced by spending cuts. Just looking at the big picture, if total federal outlays were frozen this year, the budget would be balanced easily by 2007. Of course, people say entitlements are on autopilot, as if no one controlled them, but of course Congress does control them. It can cut entitlements any time. I think with Social Security, even reforming Social Security with private accounts, I think we should start cutting it. I think we should raise the early retirement and the normal retirement age. And the final point on that is that Americans in the future will be a lot wealthier than Americans today, and so that's why I think, you know, the government can start withdrawing on transfers from things like retirement and education.

MR. REISCHAUER: Thank you. Actually you had two minutes left, but the elderly just—(laughter)—reprogrammed this with a virus and cut you off there when you began cutting Social Security.

MR. EDWARDS: They can't program their VCR but they can do that.

MR. REISCHAUER: (Chuckles.)   Let's go to Rudy.

RUDY PENNER, Urban Institute: Well, we've heard a lot of complaints about the budget and the inconsistencies, and I think what's going on here is that President Bush is trying to satisfy three discordant groups, and that may be a political impossibility. He desperately wants to keep his conservative base enthusiastic, and they're very angry about the recent expansion of government, as manifested by Medicare prescription drugs, agricultural subsidies, and the rapid increase in domestic discretionary outlays outside spending on homeland security. He's not absolved from blame because the appropriations responsible for much of this surge were enacted before he took office.

Modern conservatives tend to worry a lot more about the size of government than they do the size of deficits, but the second group, moderate Republicans, worry more about deficits and less about the size of government. They have the potential to be a major force in the Congress, but under Bush have acted as though we have a parliamentary system. They're getting restive, however, and they could cause trouble.

Last, there is the relatively nonpartisan middle of the population who really like government programs so long as they don't have to pay for them. The budget throws various bones to various groups. The conservatives get slow growth in discretionary domestic spending; budget balancers get a promise the deficit will be halved, and particularly popular programs, such as elementary and secondary education and health research, get some increases in budget authority. Even the National Endowment for the Arts is treated well and is an anathema to most conservatives.

But arithmetic constraints rule budgets and the bones that are thrown don't have a lot of meat on them. Highways provide a perfect example of the contentious nature of this budget. Surface transportation outlays have soared in the recent past—64 percent since 1997—thus contributing to the soaring aggregates that make conservatives angry. But 2005 budget authority is below that of 2004, thus angering the moderates who so badly want more spending that they're willing to raise gas taxes to get it, something that Bush could not possibly advocate without losing his base. And of course this area is a prolific source of pork, something beloved by politicians of all ideologies.

In the end I suspect Congress will resolve part of the conflict between the macro goal of reigning in the aggregates and the micro goal of making popular program additions by moving money from defense to other functions, but they won't be able to do much of that. As a result I think Bush will have a very uncomfortable election year. He can only make his base happy by using the veto vigorously to control spending, and that's going to make everybody else unhappy.

MR. REISCHAUER: Rudy's been practicing all night. (Laughter.)

Let's see if we can go down into the weeds a little more and go to Joe Antos. (Chuckles.)

JOSEPH ANTOS, American Enterprise Institute: Definitely in the weeds.

You know, this is supposed to be a pretty calm time for the health budget—passed the Medicare bill last December and—you know, nothing was going to happen this year and suddenly here's this new cost estimate. So how much does it cost—$395 billion, $534 billion, or something else? We don't really know. It's pretty clear that this really is a don't-ask-don't-tell policy. The political forces clearly wanted to have this bill pass. And it's clear that people in the administration and the central actors on the Hill knew that they were spending a lot more than $400 billion. We could ask, what did they know and when did they know it? It's not a very interesting question. The real question I think is, could we have known it?  And the answer is, of course we could have known it, and of course most of us did know it.

In fact, at least by July there was a public disagreement between the actuaries at CMS [Centers for Medicare and Medicaid Services] and CBO [Congressional Budget Office] about what the take-up rate would be, what the enrollment would be in the new private plans. It didn't take too much arithmetic at that time to realize that if CBO was right—you know, we'd stayed within the $400 billion—but the policy wouldn't work. If CMS was right, gee, the policy would go gangbusters except we'd spend a lot more than $400 billion. So we clearly could have known, all the signs were there, and those of us who are in the weeds of course knew it.

The estimating differences have been recently explained by CBO in a really great letter to Chairman Nussle. It's a delightfully bland letter that shows how relatively small differences in numerous assumptions can add up to wildly different cost estimates. The fact is it's true: reasonable people can make reasonable assumptions and arrive at wildly different results, particularly because in this case there's no relevant past experience to guide the estimates.   Nonetheless, Congress I think could have known if they wanted to know. Certainly conservatives argued that—although it was probably treated as a political statement rather than an analytic one—this is a lot more than $400 billion. And in fact, they're right in the sense that this is an entitlement; this is an expansion of entitlement. It's a guarantee of payment for new benefits forever. So, clearly, whatever the number is, $534 billion is an underestimate.

What about the rest of the health budget? Don't expect to see much there. Times will get a little tougher if the administration—a little tougher on the states if the administration does bear down on these creative financing schemes for Medicaid, but the uninsured will have to wait for another year. I think the big question is, will competition slow down Medicare spending? And there are several threats. Excess regulation, across the board budget cuts could bring us back to a replay of 1997, 1998, and 1999 where we saw private plans flee a program that was no longer profitable. And of course there's always the pressure to approve drug benefits. The uninsured will have to wait until next year.

MR. REISCHAUER: Okay, thank you. Just so this isn't too much of a love fest—and I see, you know, you giving your analysis and Jeff's shaking his head in agreement—let me just disagree with something you said, Joe.

What Joe was talking about is the estimate for how many people are going to participate in this Medicare Advantage, these new plans, and in July there was an estimate done by CMS and one done by CBO of the House bill, and CMS had a lot of people in these private plans but they had the private plans saving money. CBO had private plans costing money but the good news was very few people participated. And what happened—I don't think you could have looked at July and said, therefore we know the answer in December. Because what happened between July and the final bill was that we upped the payments to the private plans even more and removed the competition element. And so even CMS had to say that participation in private plans was going to cost more than people staying in fee for service. And so that was the surprise and sort of the magnitude of that, and nobody knew how big that was going to be.

MR. ANTOS: I agree, although when you look at the CBO explanations, they really—

MR. REISCHAUER: We aren't supposed to agree; we're trying to get a fight going here. (Laughter.)

MR. ANTOS: They tend to dismiss that. They say that most of the extra cost is buried in the drug benefit.

(Cross talk.)

MR. REISCHAUER: Yeah, right, but you didn't talk about that.

MR. ANTOS: And furthermore—again, in July, if you know that CBO is in charge it doesn't make any difference what the administration says. You look at those numbers and you say, okay, well, CBO definitely thinks this is going to cost money: more enrollment equals more cost.

MR. REISCHAUER: Let's go to Brian.

BRIAN RIEDL, Heritage Foundation: Generally we at the Heritage Foundation consider the president's budget a step in the right direction where leaps and bounds are necessary. We see the budget as a general belt-tightening budget. It generally preserves the status quo, makes modest cuts. This may not be enough.

If you take the CBO baseline, add in the tax cuts, add in discretionary spending growing at the historical rate, add in the war in Iraq and the future costs of that, we get deficits approaching $600 billion by 2009 and over a trillion by 2014. In that context, restraining spending and balance the budget requires more than basic modest belt-tightening; it requires an overhaul of spending. It requires us to take a look at what government does, what works, what doesn't and do some things that are quite different than what we've seen in the past.

This means that to get spending under control, everything must be on the table. We see the Medicare bill as something that must be reopened to reasonably get spending under control. The farm bill from 2002 should probably see another look. Other entitlements should be looked at. The Highway bill certainly needs close scrutiny, and going to Mars may be a luxury we can't afford in this budget context. But the path to get spending under control must include, above all things, budget process reform.

As David Walker wrote yesterday in The New York Times, "The budget process right now includes no real accounting for future liabilities. The process promotes a 'spend now and worry about the cost later' approach, as we saw last year as well when lawmakers passed a bill that could cost $400 billion in the first 10 years, could cost $2 trillion in the next 10 years. No one really knows, but there's no real plan to pay for it."

So this credit-card approach to spending is leading to what we see as a coming entitlement crisis. Using the CBO's intermediate projection, they have projected that rising entitlement costs will lead federal spending as a percent of GDP to grow by 5 percent by 2030 and 13 percent by 2050. We see that as unsustainable.

So we're looking at ways to reform the budget process, to build the costs into the system now, to account for future liabilities now so that lawmakers can do the right thing and not have the incentives to spend now and worry about the costs later.

MR. REISCHAUER: Gold star. Do you want to cede your 24 seconds to somebody else? I don't know how to make this thing go to zero. It doesn't apparently. Since you were on process, let's turn to Allen and see if he was going to say anything on that issue.

ALLEN SCHICK, University of Maryland: Well, you know, when nothing else works, when the budget is a mess, they look to the process and say, let's substitute process change for substantive ones. There's one process change that I want to begin with, and I hope I'm not impolite, and that is in the very back of the budget it says "image credits." And this is a budget about image. And you turn the pages: a picture of Bush, a picture of Bush, a picture of Bush, a picture of Bush, et cetera. So this is a photo op, sound bite budget, and we're paying for it.

Now, the president has proposed process changes, some of which may be adopted. One is to extend BEA, the budget enforcement rules. On discretionary, the key thing over here is that he did not propose a sub-cap for defense, which means that it is likely Congress gets some cover—puts on discretionary caps. It will substitute domestic spending for defense spending. I don't know why the White House didn't do that.

On the PAYGO part, the White House wants to sever the symmetry of taxes and spending—say, let's require that spending increases in the mandatory accounts be offset, but no equivalent to offset anymore in taxes. And that's something which won't fly and probably shouldn't fly—certainly shouldn't fly.

There are two other process changes the White House proposed. One is that it's argued that the baseline should be restructured so that temporary tax cuts, such as enacted in 2001 and 2003, should be factored in to the baseline. And this is what the White House says—this is a quote: "The provisions that were extended were clearly not intended to be temporary." This is retroactive reconstruction of their history, et cetera. I have one proposal over there: factor temporary cuts into the baseline as permanent, but do it retroactively for 2001 and 2003. Let's reopen that legislation.

The same thing should apply for the other thing. The White House says that "a point of order should lie against any legislation which increases long-term, unfounded obligations of major entitlements." And they specifically say, let's apply that to Medicare. Well, we don't have to reopen what happened two or three years ago; we can open what happened two months ago. In other words, this is another example of blatant inconsistency. They cut taxes, they increased Medicare, and having done this damage to the budget now they're saying, let's clean our hands through process changes but not applied retroactively.

MR. REISCHAUER: Thank you. Let's stay on this topic, and I want to turn to Richard Kogan, who I think might elaborate a bit on what the suggestions in the budget have—the ramifications of them for Senate rules.

RICHARD KOGAN, Center for Budget and Policy Priorities: Allen, it's perhaps worse than you suggested. The rule that they're suggesting with respect to considering temporary tax cuts as permanent tax cuts would actually make perfect sense, not only had it applied in 2001 and 2003, but if it were to apply prospectively. But they don't propose it apply prospectively; they propose that it apply only to the 2001 and 2003 tax cuts, not retrospectively, so that they would get to extend them for free.

Moreover, the reason that they were made temporary to begin with—though not as temporary as they actually could have been—was the Byrd Rule, a provision of the Byrd Rule that says, that reconciliation bills cannot increase the deficit—cannot cost money—outside the reconciliation window. Therefore they cut off the tax cuts. By rescoring these continuations as though they didn't cost mostly money, then you could put a continuation of them into a reconciliation bill.

Now, what is the significance of this? Well, the significance of putting something in reconciliation is that a reconciliation bill is the only bill that cannot be filibustered. So the sole purpose and sole effect, as far as I can say, see, of that proposal, is to make sure that continuation of the tax cuts they have already gotten can be done by majority vote, not by 60 votes, whereas any new tax cuts that they want they wouldn't apply that rule to so that the could make them temporary within the Byrd Rule, and also do them by majority vote.

MR. REISCHAUER: Thank you. Stan Collender.

STANLEY COLLENDER, Financial Dynamics Business Communications: Okay, thank you. Before you hit the button, given the depth of budget knowledge around the table I think if you do this again next year, someone should be designated to go to an undisclosed location—(laughter)—just so that you don't wipe out the entire—the potential of wiping out the entire budget knowledge in the country doesn't happen at the same time. Anyway—

MR. REISCHAUER: Okay, clock's running.

MR. COLLENDER: Thank you. (Laughter.)

I kept wondering why the State of the Union address was moved up a week. Usually the process is the president does the state of the union, the economic team is all over the talk shows over the weekend, the budget comes out on Monday, there's a blitz for two or three days with the economic team and perhaps the whole calendar going forward, and it allows the administration – any administration to basically dominate the news for a week until the rest of us get a chance to read what they've done and start to do our own analyses.

I know the stated reason for moving the State of the Union up a week was to get in between New Hampshire and Iowa and to break up the Democratic domination of the airwaves, at least of the news, but I think there may be another story. I talked to producers in all the Sunday talk shows. Nobody from the administration or economic team was offered to any of them this past weekend. That's an unusual situation when an administration's got a budget coming out and would like to get out ahead of the news and spin it the way they want.

The Monday blitz that we typically see, there was very little news coming out of the press conference. It looked as if they were trying deliberately not to make news. And the rest of the week has been virtually nothing. I'll bet most of you don't know that John Snow testified in front of the House budget Committee yesterday afternoon, because there was virtually no coverage of it. This is the secretary of the Treasury talking the day after the budget comes out.

You put all this together and the State of the Union address might have been moved up in part because, as you put this whole process together, they don't want to be talking. This is an administration that doesn't want to talk about the budget. They don't want to talk about the economy and the budget issue because, as Rudy suggested, it's too difficult, and their polling ratings on these things are too low. What they need to do, and what they actually did in their budget a little bit, was move the debate away from the economy, away from the budget, and to terrorism, homeland security, and the war.

I think what this means as you go forward is that, yes, this is not much of a budget. They tried very hard not to make a whole lot of news here. Second, I don't think we're going to see much of a budget debate. They don't want a debate this year. They don't want to be discussing these particular issues, which is why, Allen, I know you think that—you said that you thought the budget process might be—some of that stuff might be enacted this year. I would guess, one, they don't have a whole lot of time; two, the administration doesn't really have a whole lot of interest in having a debate on budget process, simply because it will start to raise a variety of issues.

And I think also it means that things like the Transportation Bill, the Energy Bill, and certainly appropriations, to the maximum extent possible those decisions will be put off till next year, or if not next year, at least till after the election. In fact, I think as we sit here today, the word that everyone should keep in their mouth, the phrase is lame duck. If you remember the old Groucho Marx show, "You Bet Your Life," a secret word would come down. If you said it the duck would come down and you would divide an extra $100, that is the phrase I think that will be the secret word for the rest of the year, which is do as little as possible on the budget now, wait till after the election. And the reason is very simple: the best way to avoid a public food fight before the election is to have it afterwards.

MR. REISCHAUER: Is this going to be one of your budget questions in your newsletter, and we can sign up for how we think it's going to come out?

MR. COLLENDER: Actually, it was in the column this past week. You missed it. I'm sorry.

MR. REISCHAUER: Because I'll take the other side of that.

MR. COLLENDER: Yeah, okay.

MR. REISCHAUER: I know Maya and Bob are going to have to leave shortly.

Maya, do you want to give us a perspective?

MAYA MACGUINEAS, Committee for a Responsible Federal Budget: I think the points I would emphasize are that there are three important things, as I saw it, in the budget, that now the administration does recognize deficits do matter, and accordingly they pick a fiscal goal that they lay out a plan that they claim would achieve. I think they do a good job of describing the entitlement problems, which they did in the previous year's budget as well. And then I do think the process issues are important, particularly because it goes beyond just spending caps and PAYGO.

I would love to end there, but there are "buts" to each one of those three points. First, the fiscal goal—I think it's probably unrealistic because of all the things that are left out of the budget, which everyone will talk about and knows about, but you can just go through the laundry list of things that aren't included in there, from the AMT to defense spending to whether the growth assumption are realistic and whether the administration will back them up. I also think they then, after they recognize the entitlements problems, leave all the changes necessary to address them outside of the budget window. So, great to recognize them, not so great to postpone any of the necessary policy choices.

And I think this budget could have been greatly improved in terms of that entitlement reform had they at least put in a placeholder for Social Security reform, something they've been saying for years they're committed to doing, and they were willing to do with Medicare. And likewise I think, given the new Medicare estimates, it was—they had some responsibility to come up with new numbers for how to pay for the additional costs in the Medicare bill since they had said the $400 billion was something they would stick with.

On the process issues, I just think it has to be stated strongly that there are a lot of good ideas in there; they have to apply to revenues as well as spending. It's just you can't start with this asymmetry that we're going to only restrict spending and ignore taxes. It seems to me a nonstarter.

Finally, just on the budget windows, the use of five-year budget windows seems particularly useless when you're talking about the kinds of policies where the real costs are in the out-years. And so you have things, like the prescription drug bill, like the extension of tax cuts, and like retirement saving and lifetime saving accounts where you need longer budget windows to be able to look at the costs.

So I would just conclude by saying, given that it's probably unrealistic that they meet the fiscal goal they lay out, given that the fiscal goal probably isn't aggressive enough if you also want to tackle entitlements problems, we have to, as other people have mentioned, put every single thing on the table. It's time to stop saying that just because something is defense of homeland security it's exempt from scrutiny. We have to stop saying that entitlements are exempt from scrutiny, and we have to relook at taxes.

MR. REISCHAUER: Thank you. Bob?

ROBERT GREENSTEIN, Center on Budget and Policy Priorities: I'm going to talk about process reform and discretionary spending.

I think process reform could end up being one of the biggest battles of the year on Capitol Hill. What the administration proposes, I think, is really a perversion of budget process reform. We've heard about the proposal to direct CBO to score extension of the '01 and '03 tax cuts as having no score, and we've also heard about doing PAYGO for entitlements but not for taxes. What we're going to see, I think, is if you're agribusiness lobbyists or Medicare providers of agribusiness, you're going to go to K Street and say, look, I wanted to expand this particular entitlement. I can't pay for it. Just design me a tax break, a tax expenditure that does the same thing through the tax code.

In the area of discretionary spending, if you look at discretionary spending, it's only risen—domestic discretionary outside homeland has risen about a third of a percent of GDP. Over the last four years it accounts for maybe 5 percent of the swing from surpluses to deficits, but it's the one area singled out in this budget. More than people understand, the increase in '05 is not 0.5 percent; it's 0.1 percent for domestic discretionary outside homeland, and 0.5 includes international increases in it.

More importantly—and virtually no one knows what I'm about to say, for reasons I'll explain—the budget has big cuts in domestic discretionary spending, but they don't start till '06, and what the administration did was it changed the way it does the budget books and it removed all the account-by-account numbers for years after '05, so you can't find them unless you have the 1,000-page OMB computer run, which Richard Kogan has and has gone through. And what Richard found was that in—

MR. REISCHAUER: We'll be selling copies of it out in the hall afterwards. (Laughter.)

MR. GREENSTEIN: It's made available to the budget committees, it's not secret, but hardly anybody has it. What you find when you go through it is that most domestic discretionary accounts throughout the entire budget are cut in '06, in most cases below the '05 and '04 levels in nominal terms. Many of the programs the administration takes credit for expanding in '05—Title 1, the WIC program, NIH—are cut in '06. And Richard has found that the total '09 level for domestic discretionary outside homeland in budget authority is $50 billion below the '04 level adjusted for inflation. This isn't small.

Someone said—maybe Allen—that, oh, well, they'll just cut defense more. The key here is—my first reaction was, who cares about out-year numbers; we appropriate one year at a time. They are proposing five-year binding discretionary caps that would lock these numbers in. It would be a unified cap on defense and domestic combined, but their defense numbers, CBO has found, understate the out-year costs of their own multiyear defense plan and they leave out of the out-year numbers continuation of the war on terrorism.

So the final thing I would just say here is you could argue for cuts in domestic discretionary as part of a larger package with shared sacrifice, but since all of the cuts in domestic discretionary by '09 combined save less than the tax cuts just for the richest 1 percent of the population, and the tax cuts as a whole are several times the discretionary savings, what you really have is that all these discretionary cuts are really used to finance the tax cuts. And with that kind of imbalance I think we'll see a huge battle over this.

MR. REISCHAUER: Thank you. No comments?

Bob Bixby?

ROBERT BIXBY, Concord Coalition: Thanks, Bob.

Stan sometimes asks interesting questions like, if you were to give this budget a title, what would you call it? He asked that recently. I was thinking about it—and this has sort of been alluded to by others, but when you look at how the administration, correctly in my view, assesses the bleak long-term outlook—something that the Concord Coalition has been arguing for years—and if you look at the proposals made to address it, or the budgetary proposals, I come out with a title that's something like: here comes the tidal wave; let's go for a swim. It's fundamentally inconsistent. If you really believe that you have a serious long-term problem, then we ought to be doing something about it now, and the budget ought to reflect that, whereas in fact there's a lot of good rhetoric and numbers that I fully agree with about the seriousness of the long-term challenge, but nothing in the budget that proposes to do anything about it, and the budget policies, quite arguably, make the situation worse, because whatever you think about how we should address the long-term budget problems, and God only knows, there are many different approaches to entitlement reform, Social Security reform, Medicare reform, I've never heard a proposal that said, let's spend the next 10 years running up about five more trillion dollars worth of debt.

But that seems to be the path that we're on. The Concord Coalition, CED [Committee for Economic Development], Van Ooms worked on it, Richard Kogan worked on it. We did a report back in September that looked at sort of where is current policy taking us—not what we were recommending, but where is currently policy taking us, and we came out to a figure of around $5 trillion, I guess, over 10 years, and that figure hasn't changed much. It's gone up a little bit. Richard did a calculation that came out to $5 trillion. I did something that—actually I did one that was $2 billion different from yours—(laughs)—I think so. We do discretionary different but we come out to the same place.

So, to me, if the fundamental challenge is defined right, why aren't we doing anything about it? And that's the fundamental failure of the budget. I think that when you look at what's in the budget, the five-year window, I agree with Maya, I think—to say something positive about the budget, I think that it's good that the administration has made deficit reduction an explicit target. They're on the hook for that now. And so I think that the debate has perhaps changed. Having set that target, I think it's not anywhere near ambitious enough to try to cut the deficit in half over five years, and I don't think the plan that they've set out for getting there is particularly credible, because they've left so much out: as others have mentioned, the cost of the operations in Iraq, AMT reform.

And I've been cut off like the five-year budget window, which is another gimmick. (Laughter.)

MR. REISCHAUER: But I think the message will be continued as I turn the mike over to Gene Steuerle.

EUGENE STEUERLE, Urban Institute: You know, by the beginning of the president's term in 2001, at least budget experts like the people in this room were well aware that the budget, despite its surpluses, it looked quite nice on a temporary basis. The budget was on an unsustainable path. The health and retirement programs were scheduled to grow faster than the economy forever, and they were running into a revenue constraint that basically kept revenues at about the same percentage of GDP. They were temporarily high but we all knew that that was due to an unusual level of capital gains and few other items.

So what did we do about this between 2001 and 2005? Well, basically we decided we'd exacerbate the situation. We enacted a lot of revenue cuts and then we expanded Medicare, not just through the drug benefit that a lot of people noticed, but in fact we relaxed a lot of controls that we had put on at the mid and late '90s to try to get that under control.

And then what did we do about domestic programs? Well, domestic programs we allowed to expand as well, although I think, as Bob Greenstein will point it out, it was selective, if you look more closely at where the expansion was. So basically we decided that we were in the eye of the storm and it was time to let the sand out of the sandbags; it was time to have fun.

Now, many believed that one reason this was able to happen is that the day of reckoning was far off. A lot of people decided the budget day of reckoning really has to do with things like when the trust funds go belly up, and items like this that stretch way out into the future. But if you now take the Social Security, Medicare, and Medicaid budget, keep it on its current path, and if you assume that defense stays at about the same percentage of GDP for a while—and by the way, I think CBO is wrong in assuming that under the most optimistic assumption defense still declines as a percent of GDP—but let's keep it at about the same. Then what does the current budget tell us? Well, it tells us that if you balance the budget, or at least you spend your revenues, there are absolutely no revenues left, no revenues left for any domestic program, any other domestic program by about 2012. The crunch is on right now.

Well, eventually people had to respond to it, and the president does, in some cute ways, respond to it in his current budget. What does he propose to do? Well, if you look closely at it—and I'll give you a chart here—he basically proposes, directly or indirectly, to reverse almost every policy, at least in terms of spending and revenues, that he's enacted over the last four years. You look at revenues; revenues were way down. In fact, he counts on revenues to go way up, and it's not just that we have some additional capital gains that might come along, and other things like that; it's actually the fact that he's going to allow a lot of what we might call bracket creep into the alternative minimum tax and other taxes to move a lot more taxpayers onto the tax roll and pay higher taxes.

He also proposes a number of revenue items in this budget that just are not going to be enacted. Congress has already rejected them several times. The savings incentives are rejected by many people in his own party, as well as groups like the Profit Sharing Council. The Charity Bill has gone nowhere for about three years, and so one and so forth. And if you look at every other category of the budget—science, natural resources, energy, transportation, education, training, every single one, as a percentage of GDP they were up in 2001 to 2005, and they go down between 2005 and '09, with the one major exception, as we all know of health care.

MR. REISCHAUER: Thank you. Having listened to this and not pretending that if I were to give my three minutes it wouldn't be the same message that we've heard in various forms, given by virtually all the speakers, I'm really struck by how this is a room filled with unrealistic people. You know, we are sitting in the midst of a presidential election year, and what we're seeing is this big problem out there and the president should forcefully come forward and say one of two things: you know, I was wrong; we really can't afford these tax cuts. Maybe I wasn't wrong in 2001, but I'm wrong now, given what's happened to the economy, what's happened to changing priorities, and we've really got to rethink the hallmark of my administration. Or we want him to say, no, we're going to stay the course on taxes and I'm going to cut the bejesus out of a bunch of programs that have tremendous political support in the country, and vote for me. And I'm thinking, you know, if the president sort of satisfied this group—he wouldn't have satisfied this group; he would have satisfied half of this group if he went one way and half if he went the other way. And that's about all the votes he'd get in November.

And I'm thinking, you know, why are we getting so riled up about this, because Stan Collender is right—

(Off mike.)

MR. REISCHAUER: (Laughs.) Yeah, am I losing my crucial faculties here? (Laughter.) No, Stan is right. They don't want any attention paid to this budget because the real budget is the 2006 budget. That's when the administration really has to come forward and face these questions. And we're sort of presenting a bunch of unrealistic expectations.

Now, I might be all wet, and so I thought the right person to turn to now is somebody who's been there in the White House making these kinds of calculations for a president—you know, different genetic makeup maybe, but we'll ask Gene Sperling to imagine what he would recommend if he were in the situation of telling the president—Bush—how should we go forward for the 2005 budget, knowing that we have a split party, knowing that we have an election coming up?

GENE SPERLING, Center for American Progress: Bob, I will try to phrase what I was going to say towards your question, but I'm going to close where you're leaving off, which is I want to mention what I think the political culture—the political environment of fiscal discipline needs to be. And I think it really goes to this one area of only doing PAYGO on the entitlement side. It is not just—and this is the critical thing—it is not just kind of a numbers calculation, that it's harder to get it if you do it on the entitlement side but not on the tax side. It is about creating the symmetry and equity that allows a political environment of fiscal discipline.

I want to mention two events in the '90s people don't talk about much, and it's going to be bipartisan. One, when Kasich and Domenici put their budget out in 1995: huge tax cuts, but the budget battle was how they were going to pay for it. Everybody forgets that Clinton and Gingrich did not disagree on the notion that you had to pay for new initiatives. That was a bipartisan commitment. The second thing people forget is the first way that President Clinton enforced Social Security first was going against his own party on using the surplus for the Highway Transportation Bill. Had he not done that, he would have had no legitimacy in going at the tax side.

So what we have now is that if you don't have that symmetry—in other words, if people like me aren't willing to say, yes, you even have to pay for increases in Head Start, and if people on the other side aren't willing to say, yes, you even have to pay for tax cuts that you like, then you never have that political environment.

Three things to look at: prescription drugs. We, at the end, supported locking prescription drugs, connecting them with Medicare reform. Do you know what a joke it was to go up to Democrats after you had a $2 trillion tax cut that wasn't paid for and said, now, suck it up and pay for Medicare prescription drugs. You've killed the political environment to do it. Can you imagine people having to tell their constituents that they need to take Social Security reductions to save it when the year before you've just given $100 (thousand), $200,000 a person to people who make over a million dollars in tax cuts?

And now it's the same on this NDD [non-defense discretionary]. I mean, let's face it. When you take out homeland security and all those things, NDD—no, we call it now National—we've just, at the Center for American Progress, called it NSD, non-security discretionary. If you take that out, it is a minimal increase. You cannot focus all on that; you cannot ask sacrifice on that at the same time you are having this large tax cuts.

So, Bob, I think I have the exact opposite lesson from you. I think if President Bush said, you know what, we are at a time of a Social Security crisis and a new Homeland Security crisis, and this requires everybody on every side to put their priorities on the table. I am going to suspend some of my tax cuts just for the most privileged in our society and I'm asking Democrats to come to the table at the same time and agree to fiscal spending restraint. I think rather than political suicide it would guarantee that I would be spending the next four years at roundtables like this instead of back in the U.S. government.

MR. REISCHAUER: That was what Bill Gale calls "an answer-related discussion activity."   (Laughter.)

Gene?

MR. STEUERLE: I wonder if there is a political lesson that we're not going to know until the end of this election. I mean, the Clinton administration, they took their big budget hit right up front, paid a lot of costs but then swung through the next electoral cycle. This administration seems to think we're going to spend our money, whether it's on the spending side or the tax cut, up front, shoot our wad up front, and then down the road we're going to start trying to pay the costs. And I'm just curious how this is going to play out politically.

MR. SPERLING: Well, look, I think that they, in their own way, were following it. Their logic was, you do something big in the first year, as President Clinton did. Their thing was rather easy, tax cuts instead of deficit reduction. But you just keep doing things. You hope the economy gets better and you assert causation. And I think that is as much the strategy that you've seen, is just—and this is what you're seeing.

The story is we inherited a perfect storm: a slowing economy, 9/11, and corporate scandals. We kept taking tough action—you know, tax cuts is tough action—and if things ever get better—like if the U.S. economy ever recovers—you know, if your football coach has a strategy and you go 0 and 14, 0 and 14, and you finally win a game, you assert that your strategy is working. And I think that is basically the strategy.

So I don't think it is a mentality of thinking about fiscal discipline or long-term issues. I would say that for them they would hope to assert causation for the economy getting better, come back, and then use the fiscal problems as a rationale for very significant Medicare and Social Security reform for his legacy that the Republican Congress will reject as being about his legacy and not their own political fortunes.

MR. REISCHAUER: Len?

LEONARD BURMAN, Urban Institute: I guess this is following up on recent discussion. One thing that strikes me is that—the idea that any kind of tax increase is off the table, with the exception of closing loopholes, and there are some loophole closers in the budget today, which is not a bad idea. But this is a very dangerous ideology, and it seems inconsistent.

I heard the OMB director, a couple of days ago, describing the spending cuts, and he said, well, you know, some of these programs have already served their purpose, so therefore it makes sense to cut them. Others of them are duplicative and others just don't work. And it makes sense to cut all those programs. But there is a whole lot of spending that runs through the tax system. This isn't a radical notion; it's been around for a long time. There are huge subsidies to the oil and gas industry, tanking. We have all sorts of social programs that run through the spending side, and the only one that the administration will even come close to touching is the EITC, which they have a sort of visceral dislike for.

There are—I mean, we have this thing where we basically—we get the Republicans and Democrats to agree that the spending program will be run through the tax system, and then it's an entitlement that will last forever, no kind of oversight at all. It doesn't make any sense.

I just want to point out that there are a couple of handouts on the table that we put out with respect to the budget, and they all have sort of a common theme, which is that they're sort of time bombs in the budget. One has to do with the AMT, which is only taken care of for one year—which people mentioned. That's a huge cost that has to be addressed and it's not in the budget. It also hides a lot of the costs of making permanent the 2001, 2003 tax cuts. There's a second one on the issue, having to do with 2001, 2003 tax-cut extensions, which are huge costs, most of which is outside the budget window.

And third is on the savings incentives, which are actually scored as raising revenue in the budget, but in fact, they could very well lose a lot of revenue over the first ten years. It's LSAs [Lifetime Savings Accounts]—if everybody who could benefit from LSAs takes advantage of them, they could cost somewhere between $100 and $200 billion for that alone in the first ten years, certainly over the long term, but we're taking all of these savings incentives that—currently the way they work is you get a deduction now and you pay tax in the future. We're converting those into tax-free accounts now, but they're tax-free forever, so we're shifting revenue from the future, when we'll really need it, to the present. And we're also doing it on very unfavorable terms. All of the rollovers, which were the big—they're actually scored as raising, in net, $21 billion over the first five years. Every dollar that the government raises from a rollover into one of these new accounts costs $1.30 over the long run in present value terms. So we're borrowing on really unfavorable terms and hiding it in this tax subsidy.

Alice?

MS. RIVLIN: To build on the symmetry point, this group around the table may be very politically unrealistic, as you pointed out, but it is the group that will be called on if the Congress and whoever wins the presidency ever gets serious about cutting the deficit. And we tried that at the Brookings Institution—Belle may want to say a few more words about it—but we tried answering the question, what would you do if you had to balance the budget—meaning the unified budget—in ten years. And the major lesson that came out of this exercise—we heard a small-government plan, a big-government plan, a better-government plan, as we called it—but the main lesson that came out of this exercise was that, even if you take everything that Chris and Brian talked about, unless you're willing to cut entitlements right away for people who are already retired, you can't get there, even to that soft target of balancing the unified budget in ten years without tax increase.

WENDELL PRIMUS, Joint Economic Committee: (Off mike)—I would argue that what the Republican Party lacked was a Bob Dole ten years ago. I mean, we quickly recognized the '81 tax cuts had gone too far, and it wasn't members of the Democratic Party; it was Dave Stockman and Bob Dole, and they provided a mid-course correction—maybe not in an election year, but you know, a good part of the '81 tax cut was rescinded, and I think that's the real problem; that there weren't the people in the Republican Party telling the White House to change its tune.

A couple of other comments—on the CMS thing, I think this is the first time in my memory that the administration has really stopped the actuary estimates from being made available to the Hill, and I think that has real implications inside the Beltway institutionally for the Social Security debate that may or may not be coming. I also think, in terms of PAYGO, one little thing there is you have to—it doesn't apply to revenues, as it should, but it does apply to the tax credit. So they put out there saying tax credit proposal, which I don't think will do much, but they say identify the office—we're not going to—we'll help you identify them, but that is subject to PAYGO—that part is.

And I guess the final thing—you know, we said they put deficit cutting on the table, but even over the next five years, let alone in ten, their budget actually increases the deficit by 80 billion. And my final point is there was a vote last night in the—on the House, this issue of jobs and unemployment comp, which I think is a misplaced priority. You know, Isaac Shapiro of the center wrote a paper that says it's the highest—a record number of [exhaustees] without qualifying for additional assistance. The House agreed last night in a somewhat symbolic way, but we'll see where that goes. It's another place where I think the priorities are misplaced.

WILLIAM GALE, Brookings Institution: Thanks. I want to start it where—at a point that relates to what Wendell said, which is that the budget is hawked as cutting the deficit in half over five years. It actually cuts the deficit by less than the current services baseline does. So literally doing nothing would have been a better deficit-reduction package over the next five years than the administration package.

The second issue has to do with making the tax permanent and linking that to entitlement reform. One of the numbers that Bob Greenstein, Richard Kogan, Peter Orszag and I and other have put out to compare the long-terms cost of making the tax cut permanent to Social Security and Medicare reform, over a 75-year period, making the tax cuts permanent reduces revenues by more than the combined shortfalls in the Social Security and the Medicare trust funds, and so it's—making the tax cuts permanent is a fiscal problem of the first order. It's just as big a fiscal issue as Social Security and Medicare. So when we talk about long-term entitlements, we should talk about making the tax cuts permanent as well.

Then one thing that struck me in the budget numbers is the increasingly prevalence of foreign-held debt. I just want to raise some of the numbers here: 37 percent of the public debt is now held by foreigners. That's an all-time high as a share and, of course, an all-time high in dollar terms, too. Eighty percent of the public debt increase in the last two or three years was purchased by foreigners. The purpose here isn't to be xenophobic; it's to say we're borrowing extensively from other countries to finance the deficits that we're creating. We're seeing this in a weakening dollar, we're seeing this in the increased debtor status of the United States. The net international investment position is now a negative 25 percent of GDP. Roughly speaking, that's opposed to a positive 10 percent of GDP about 25 years ago. So I just want to raise that as an issue that people might want to talk about.

The last point is we've talked—a number of people have said everything needs to be on the table. There's an issue sort of lurking beneath the surface here, which is the no-new-taxes pledge. More than 200 members of the House have signed this; 37 members of the Senate have signed it, and the president of the United States has signed it. And—(audio break)—spending cuts alone, designing tax increases that don't cause people to violate the no-new-taxes pledge is going to be a very component of that, because it's hard to imagine that 200 members of the House are going to violate this very simple pledge that they signed. I think there may be ways to do that, but in terms of budget process reform, that's sort of a new element that needs to be thought about in how one designs a tax package or a deficit reduction package.

ISABEL SAWHILL, Brookings Institution: I was trying to think about the Reischauer-Collender thesis here that this is a stealth budget that's just in—that this is a stealth budget just to get through the election year and then in—for the '06 budget—after the election there will be something new and better that they will do. But I'm trying to think, what could it be? And I can't see any positive scenario here, and so I would challenge people around the table to tell me what that positive scenario is. I mean, one could imagine that, yes, after the election then is the time to tackle entitlements, for example. But, you know, given that their major proposal is to privatize Social Security and that the transition costs are huge, et cetera, I don't see how that gets us anywhere. And so, I then say to myself, we're going to have fiscal irresponsibility as far as the eye can see—it's not just an election year phenomenon.

Then the next question: is there any way that the public is going to become outraged about this during this year as part of the debate—the election year debate. And right now it seems to me that, outside of this room, the public believes that the tax cuts and the deficits are a positive thing to some extent because the administration has the bully pulpit and they're saying this creates jobs, and of course, in the short run, it may. And it's very hard to get the message across to the public that deficits can be a good thing in the short run and a bad thing in the long run. And the rather difficult and complex arguments, very impressive arguments that we've been hearing around the table this morning are not going to get out to the public. So I'm feeling very pessimistic about all of this and I wish somebody would give me a more optimistic scenario.

MR. REISCHAUER: (Off mike)—but Don, do you want to speculate about what might happen next year?

(Off mike.)

DONALD MARRON, Joint Economic Committee: I will—what was your phrase, Bill? An answer resembling a something or other?

(Off mike.)

MR. MARRON: Answer related discussion. I will echo the folks who have said that the expectation is certainly that politically the fun, the practical and effective discussion of these issues is really an issue that begins on whatever, November 3rd. That there isn't a lot of appetite in a lot of circles to engage directly on these—but having had the mike, I'd like to respond to some of the things that Bill said about making the tax cuts permanent.

And the first is in a lot of circles—and again, this is an election year where cutting taxes and/or increasing spending are attractive things to folks—I think there's a dynamic at the moment where if you don't make the tax cuts permanent you run the risk that they get spent immediately. And that if your focus is on the deficit you may not advance the ball very, very much by letting them sunset, you know. There are many presidential candidates, for example, who want to roll back part or all of the tax cuts and then immediately redirect the money into healthcare initiatives or other initiatives, which may make sense. But again, if you're focused, now on the deficit that's not going to advance the ball very much.

And second, there is the comparison that Bill raised about making the tax cuts permanent and looking at them over a 75-year window. And the concern I have with that calculation—I mean, I trust the math and I think it's probably a fair reflection of what would happen over those time periods—but, you know, the reality is that we've never had any, to my knowledge, permanent tax change in the United States that have lasted for 75 years. But it is a very flexible and fluid thing that changes frequently and I'm not sure that that kind of comparison gives an accurate reflection, right. When we created Social Security we create these liabilities that I think people legitimately think are liabilities that are going to have to be paid. Whereas I think on the tax side making a tax cut permanent is basically saying, let's have the tax cut permanent for some period of years into the future and then in the future when we renegotiate tax policy we'll have a slightly new baseline to work over. But we'll certainly have the opportunity in the future to raises up if that turns out to be necessary to fund the higher spending that will then be coming.

(Off mike.)

MR. GALE: Can I just respond real quick? I agree with all that. The only purpose of comparing the tax cuts in Social Security and Medicare over a similar time horizon is to get the time horizon—is to standardize on that. We tend to look at Social Security and Medicare over these enormous periods of time and say they're huge problems. We look at the tax cut over 10 years, the first five years of which are nothing and the next five years of which the costs are officially held down because they don't the AMT. And the point is, it would be easy, but wrong, to look at making the tax cuts permanent and say, oh that's only a trillion dollars over the next 10 years and then look at Social Security and Medicare and say, oh that's $10, $20 trillion dollars over 75 years. It would be easy to get the impression that those are very different numbers. In fact, they're about the same. Normalize over the same time period, the costs of making the tax cuts permanent is the cost of closing the trust fund short falls. And that's not to say that the tax cut couldn't be changed, you know, 20 years from now. So I agree with that.

MR. REISCHAUER: Jeff.

JEFF LEMIEUX, Centrists.org: (Off mike)—and that was that people in the know sort of knew there was a problem with these estimates. That it was either going to cost a lot more to make the thing work or it was going to—if it was a low estimate that it wasn't going to work at all.   But I was struck going around Capitol Hill by how few people really did know that at the member level, at the staff level. And I'm wondering if Belle is right that we're going to have to do something big in 2005—this will be the year we do the 2006 budget—we're going to have to change things whether it's tax reform, entitlements, spending, I don't know what. But somehow the education level on Capitol Hill needs to be improved and I don't know quite how to do that, other than to try and make the calculations done by budget experts and the opinions and so on just as accessible as possible. Because, you know, the average 25- to 32-year-old Capitol Hill staffer advising her boss on how to vote on something is really getting some talking points that, you know, that most budget analysts on either side on the aisle would agree are untrue. And this happens on both sides. So I would just encourage everyone who's interested in budgetary integrity to try and get the message to the members in as clear a way as possible because they do not get it.

??: You know, even taking at face value the CBO estimates suggest it's just going to be enormously expensive—$400 billion dollars just over the first 10 years but it was delayed for five years until it got started. The CBO director said it would cost a trillion dollars over the second 10. We should also point out that the estimates for health savings accounts, I think are probably low by an order of magnitude because they assume a very low level of utilization. JCT [Joint Committee on Taxation] assume 1 percent of health insurance recipients would be in catastrophic plans by the end of the decade. I heard a couple of days ago over at the Kaiser Foundation that large companies, that accounted for 20 percent of insurees, were talking about offering these plans now.

MR. LEMIEUX: And just to follow up on my comment. I mean, I think that CBO and JCT and the budget committees have a responsibility to explain the sorts of sensitivities and contingencies that surround their estimates in a much better way than they've done over the last year or two. JCT gets numbers out quickly, it's great, CBO sometimes does, sometimes doesn't. But the words to accompany those estimates in a clear and concise fashion that explain, yes, we're saying $395 billion but it could also be $695 billion or $295 billion. Those words just aren't out there and people just didn't get it.

??: Two points over here. The process dictates point estimates rather than ranges. But more importantly, the mood on the Hill was indifferent. There was no education, no numbers that could have penetrated a mood that says deficits don't matter. To the extent that that mood has changed then you can begin talking. And I believe that it has changed on Capitol Hill on both sides of the aisle.

MR. OOMS: This discussion is proceeded very much as though the budget and fiscal policy are sort of in a vacuum detached from the economy and economic events. Now, you know, the administration clearly is gambling—and it's probably a very good gamble, actually, this year—that they will get through the election without there being any significant economic repercussions. But it is a gamble. And I sort of remember my time on the Hill back in the 1980s when quite a different set of economic circumstances were evolving. But in which, as Alan was just suggesting, the mood on the Hill began to change very quickly as a result of that. I think—so, I think there is some short-term question.

I think, more importantly however, the question is whether or not—sort of Belle's notion that you could have fiscal irresponsibility as far as the eye can see. I don't think that's a viable situation in an economic context. And that means that Herb Stein's law that if something can't go on it won't, you know, is likely to appear. We don't know exactly when and we don't know exactly how, although I think the general mechanisms in terms of the exchange markets and the domestic financial markets are pretty clear. But I would just call attention again to Bill Gale's comment that something like 80 percent of the incremental financing costs of the budget deficit are now a result of foreigners being willing to continue to live in a world in which the U.S., alone among all countries, can print money at will. And it's not clear that that will continue as far as the eye can see.

MR. REISCHAUER: Just one comment on that. Herb Stein was right but it's not particularly useful bit of advice. You knew in 1917 that the Soviet Union couldn't persist. It had to evolve or collapse. You didn't know when and you didn't know whether it would go with a big bang that took the rest of us, or in a benign way as it did. And I think Belle's point is this could go on long enough—let's say a decade—at which point, you know, your options for fixing it are very, very constrained.

I have Paul, Susan, Frank, Collender has to do it before he left, and Bob.

Paul.

PAUL POSNER, General Accounting Office: I agree with what you said that there's a growing sense that we have—(inaudible)—long-term effects and the analytical perspectives are buried in two sentences of the statement. That this 10-year period is a lull period and deficits will surely pick up. And OMB has their own long-term model which is buried on page 193 of the analysts' prospectus. The challenge, I think, is how do we create an analytic and political set of budget concepts that are useful and support that longer term focus. And I think that's what was kind of lacking now. And a lot of the process discussion still has to go back to the good, gold days of BEA [Bureau of Economic Analysis]—which is part of let's stop digging the hole deeper. But how do we, kind of, promote a greater sense of urgency and visibility—kind of mobilize the power of shame in a process which can be mobilized—around a set of useful concepts and measures. And I think it gets to what Jeff said. There's a lot of, you know, areas in the analytic agenda—that when we look at tax, notwithstanding the work that Brookings has done, you know—the official tax agencies do not go beyond 10 years in estimating revenues, notwithstanding some present value numbers out there. So there's a whole analytic agenda, I think, that remains.

And then there's the kind of useful concepts to think about. Like, you know, how do we build in trip wires that alert us to the, you know, unsustainable growth of existing programs that helps to supplant the trust fund solvency numbers which are really not useful and distortive. And in that regard, the Medicare—one of the drug bills' possible silver linings is this new concept of sustainability being defined as a program taking over 45 percent of general revenues which should trip in 2008. That will set in motion a requirement for the president to come with a plan. Now whether that goes anywhere or not, this is a speed bump. We don't do, you know, absolute barriers, nor should we. But those are the kinds of things we need, I think, to think more creatively about. As well as think about points of order for new programs that go beyond a 10-year window.

MR. REISCHAUER: Don't hold your breath. (Laughter.)

So as not to let GAO dominate, I'm going to Frank next.

(Off mike.)

FRANK SAMMARTINO, Joint Economic Committee: —point that this really isn't sustainable. And I think what's particularly not sustainable is the current revenues policy. And I think sometime after the election you're going to see some kind of break in the current thinking. I mean, right now we're at a point where revenues as a share of GDP are at a post-war low. And the only reason they're as high as they are is because social insurance taxes are at an all-time high. And we're almost at the point now where we collect more from social insurance taxes than we do from the income tax, which is, you know, sort of unheard of.

I think Wendell mentioned that at the Ways and Means hearing the other day, Secretary Snow was talking about a revenue neutral fix to the AMT, which is kind of, you know, amazing. And I think something will happen and people the momentum will gather and there will be some kind of break in tax policy in the not too distant future.

MR. REISCHAUER: Susan? Grab a microphone, grab—

SUSAN IRVING, General Accounting Office: —to some of the points people are making about offers for shared sacrifice and things like that. It seems to me this administration has passed up the chances to cover or retreat with an offer. That is, if protecting our homeland security was the most important thing in the world—it's so important we should pay for it. If going to Mars was, in fact, the way that Americans continue to explore the next frontier and was so important, it was so important, we should pay for it. And that's the way to cover the tax increase if you were going to do that. And they've decided they don't want to do that. So I wouldn't hold a lot of breath looking for something like the '83 retreat, although, I hope I'm wrong.

But also, the other thing I wanted to say is we've—you know, on Stan's point which is lame duck—the other phrase I thought you were going to mention is debt limit. I mean, it looks like we could hit the debt limit right around the convention. Right around, to be precise, the Democratic convention.

(Off mike.)

MS. IRVING: So usually to get that passed we got to attach something to it, right. And if we can't attach a real change in economic policy, we have to attach a process fix, right. So it seems to me the place to look for the next—the other phrase I guess, would be one-year CR. But—we're looking for buzzwords for the year—so I think the next thing to look for is how long we can stretch out hitting the debt limit and we attach to it to get into the lame duck.

MR. REISCHAUER: I wake up with cold sweats that it's a balanced budget amendment to the Constitution. (Laughter) No, we've been there before and tried and trued it appears to the American public to be something that would work.

Okay, Stan, do you want—

STAN COLLENDER:—because I've got to leave. But, Belle, first just some quick comments in response. One, I didn't mean to suggest that after the election the president was going to get religion on the deficit. I think—to the opposite—I think we're about to see a huge burst of fiscal irresponsibility shortly thereafter. In fact, I don't think there's any doubt about it.

Second, Gene, just go back to something you said and then I have a question for you. I think what you suggested what you suggested would be brilliant politics for the president. That is, let's call the congressional leaders, everyone in and let's come up with a deal—I'll give a little. And it's very Clinton in its way of thinking. It's not very Bush in its way of thinking. This is an administration that repeatedly says it doesn't negotiate with itself which means you got to show them you got the votes and you got the testicular fortitude to take them on. Especially with the hard ball they play. So, I'm not expecting the president at all—I mean, I don't even think it's in his make up right now to deal with anybody basically.

But here's the question I wanted to ask. What are the Democrats going to do when it comes up to some of these votes on appropriations bills—assuming there are any votes on appropriations bills this year? Do they vote for the additional spending that they want and that some of the Republicans want and therefore give the president someone to blame for the bills passing? Or do they decide to let the Republicans not—the 40 conservative Republicans vote against them and the bill is to go down? I mean, would they rather have a small increase or education or, I mean—it's an interesting question. What are the Democrats on the Hill do in this environment?   Do they wait and let the Republicans handle it and take the blame themselves or decide to play and get a deal?

MR. REISCHAUER: You know, you don't have to answer that but—and you don't want to, clearly. You raise an interesting dilemma, which is imagine in November that the president's reelected and the Senate and the House have slightly larger—or significantly larger in the case of the House, maybe—Republican majorities. Majorities that are large enough to get through the Senate the things that haven't gone through: the extension of the tax cut, et cetera, et cetera. Can the administration—having said it's going to cut the deficit, you know in half and sort of put done a marker there—with a straight face, come forward with a budget that, in the sense fulfills all of the Republican wishes? I don't know the answer to it but my guess is, not.

Okay, Bob.

MR.BIXBY:—on the Collender-Reischauer thesis here and look at some things that are positive and that—well, there are a couple of things—there a couple of concepts that are put out in the budget that are lacking in the execution but are positive concepts. And I think the challenge for all of us will be when that realistic—or, not realistic—when that meaningful 2006 budget comes along these concepts that, perhaps, can be improved upon. For example, as I mentioned before—I mean it is important, I think—that the administration has crossed a line and implicitly acknowledged that deficits matter. Now we can all criticize their method of dealing with it and the gimmicks that are in the five-year budget and all like that. But once the president is out there saying that, you know, his goal is to cut the deficit that does help change the political debate. And I think there are a lot of Republicans on the Hill—many of whom, you know, that I've talked to—that take seriously. They do want to cut the budget, cut the deficit.

The other concept is PAYGO. I hate what they've done with PAYGO. And everybody has said that, they've sort of stood it on its head. But they have—they're at least talking about a concept, even though they've redefined it, I understand that. But what I'm saying is when that time comes around when we need to put together a credible balanced budget plan or a deficit reduction plan, the concept of PAYGO is there. The other is looking at some long-term budget process. I kind of agree with Paul on this. He's too modest to mention an excellent report he wrote last year on fiscal exposure at GAO. But I think that we should be looking at some of those things to see how we can, maybe not incorporate them explicitly into the budget process, but put some speed bumps, as he put it, along the way so we at least to begin to recognize them.

And then, finally on something that Gene Sperling mentioned. If the fundamental problem is the long-term—and we have to get into the Social Security debate again and Medicare—the way that they've designed pay-go really does present a real tradeoff problem because you can't achieve the sort of political consensus around hard choices that you need if you don't put revenues on the table. There's got to be some sort of balance here. There's got to be some sort of tradeoff. And that's clearly missing in this budget and we're not going to be able to tackle the long-term without being able to put everything on the table. I've worked with Gene and the Clinton administration when we did those Social Security forms with AARP in '98. And the administration—the Clinton administration—deserves great credit for not taking things off the table. There were certain privatization approaches that they did take off the table—what I would call, sort of, you know, the quote, unquote, "extreme" privatization or total privatization—but other than that, they kept things on the table. And President Clinton, even at some of those forums, defended personal accounts as a possible addition to the Social Security system.

So I think, unless you're willing to put things on the table that your party doesn't necessary agree with or you don't necessarily agree with, you can't possibly get the sort of political buy-in and negotiation that we're going to need to solve these long-term problems.

MR. REISCHAUER: Okay. Gene Sperling has to leave so I'm going to let him jump the queue but then I have Bill Gale, Gene Steuerle and Wendell.

MR. SPERLING: Try to be quick, try to be quick. The—just on the politics of what you do in the election year. I don't—you know just as Bob was suggesting—I don't suggest that it is within this administration's political calculus to have taken on hard, you know, these kind of hard choices now. And too the degree which you get the sense of, that they may be hoping to win more by motivating a higher base vote than kind of seizing the center. They're probably not going to go in that direction. But I do want to point out—just to show that it's not crazy—that after George W. Bush, the two most likely, I think, people who could have been president, John McCain and Colin Powell, I think absolutely would have seized the homeland security issue as a way of doing mutual sacrifice. And that it is not at all inconceivable that one could have had a Republican president who could have done more of a "seize the center" and done very well politically. And I still think is an option, though I don't expect them to do that.

But the one think is worth us putting on the table as a post-election concern, is I think we need to look at what the RSA's [Retirement Savings Accounts] and LSA's represent. And I think we need to look at the types of Social Security reform proposals that are starting to float. And these are the kind of free lunch proposals. I mean, the RSA's, LSA's, you know, as I say, we used to have a joke sometimes—Larry Summers and I—we'd come into a budget meeting and he'd see me and we'd say, oh, I know how we can fix the budget deficit this year. We'll just tell everybody they can pay their taxes two years from now at a 50 percent discount this year. Well, I mean that's the point somebody was making before. These things that essentially rob the revenues from the future and put them now will make things look good and create a hull. And they'll be an economic justification: it's going to create new savings, it's a supply side, it will reap corporate profits, even Marty Feldstein supports that. And when you look at—on the Social Security side, the bridge loan concept.

So I want to say that rather than us looking after the election for some kind of great reform, I think that those of us who care about this need to look at both sides. At the kind of free lunch retirement savings programs that will have big drains down the road and not show up in the last 10 years. But my last point on optimism is, deficits seem to matter politically with a lag. This administration did go along with prescription drugs—it wasn't something they were ideologically for, it was politically compelled. So I am not pessimistic that there will come a point where the political environment changes and maybe people get back to that table. Not because they want to, or ideologically think it's a good idea but that the public compels them.

MR. GALE: Thanks. I want to pick up on that point and then relate to the sustainability issue. The—right now the financial markets don't seem to believe that there's a long-term crisis. And it's not that that I wouldn't think that they don't believe that the numbers that get put out in everyone's report are wrong. They just think that some solution will come about. There's this monstrous long-term gap, everyone knows about it now and eventually sometimes policymakers are going to do something about it. They aren't going to let, you know, deficits rise forever. So the long-term fiscal gap numbers really haven't registered in financial markets. When they do—or when the foreigners sort of get the heebie jeebies—that's when the current set of assumptions becomes unsustainable, I think, in a political sense. And until there's some sort of short-term, immediate economic bad news associated with long-term deficits, we aren't going to see anything.

So, for example, in the early '90s and the late '80s it was the current deficit then, as well as the notion that they were raising interest rates—interest rates are fairly high, the economy was stagnating—that led to change. But if the economy's growing, I think we can sit in this room every year and say there's a long-term budget problem and the budget is unsustainable. But if the economy's growing and interest rates are low and inflation is low and foreigners will still lend us money, I don't see a political solution coming about soon. That's point one.

Point two is much shorter. As Susan's comment that—

MR. REISCHAUER: You only get two points.

MR. GALE: All right. Susan's comment about the debt limit expiring in August—roughly August—and that something has to accompany that made me remember that a lot of the—when we talk about making the tax cuts permanent we're always talking about 2010 and 2014 and the next 75 years. A lot of the provisions expire at the end of this year. That is, they expire twice, basically—at the end of this year and then again at the end of 2010. So at the very least they'll have to, sort of, extend them for a year—get through the election hump. But that's going to make it even more ugly if they're saying, well, the debt limit has been reached, we have to raise the debt limit and we're going to make the expiring provisions extended for another year. They may really find themselves in a bind. It'll be interesting to see what happens.

MR. REISCHAUER: Gene.

MR. STEUERLE: I've also said that the administration's proposals to reduce taxes at some point hit a limit with the public in the following sense: that government does not exist to reduce its own taxes. At some point the public says, well, what I am getting out of government. That's why, in fact, the administration at least verbally—as well the previous administrations—always want to talk about how they're going to change programs for the better. Because government does exist for a reason, it doesn't exist just to reduce its own taxes. But I'd say that the people around the table who are worried about deficits have a similar problem. Government doesn't reduce—government doesn't exist just to reduce its own deficits either. I mean that's one reason for some of the disenchantment with government. So sort of saying, well, we're going to go from a government that only tries to reduce taxes to one that only tries to reduce the deficit doesn't really, it seems to me, sell very well with the public.

And what that means—in my view it gets to a much broader issue of what process reform we really need. If we really need a government, just like we need a business sector, that has slack.   So that the Democratic voters can vote over time on whether they want a tax increase or they want a spending increase, or whatever else it is. And we all know the game that's being played, and played much more on the entitlement side than the tax side, but the tax cutters are trying to catch up. And that is, you build as much into the future as you can because you don't trust these—it's sort of like us not trusting our teenagers. You don't trust these voters to get it right in the future, so by god, we're going to build in continual and automatic growth fast in the economy and into health care and retirement, and hopefully, into tax cuts with LSA's and RSA's and everything else, you know, 50 years into the future so we control the budget.

And that's the process we really have to, it seems to me, get under control. And just simply going back to a process reform that's along the line of the '90 or '93 reform, to me, is just, (a) it's not going to be adequate this time around anyway, we already know that because of the numbers, but, (b) I don't think it's something that eventually sells to the public. And the big compromise is really to—not just do a process reform that gets at what future increases we enact, but how can we get those automatic increases off the table on both the expenditure and the tax cut. If we don't do that then we're back in this battle. Do we want, you know, do we want to fight over whether government's purpose is to reduce taxes or government's purpose is to reduce the deficit.

MR. REISCHAUER: Okay, I have Wendell, Rudy and the last word will be Chris.

Wendell, grab the mike.

MR. PRIMUS: I wanted to respond to Jeff. I don't really think the problem is the—getting information to the 25- to 32-year-olds. I think the bigger problem here is process. I mean, when CMS estimates are buried, when the HSA thing isn't even reported out of Ways and Means but is added at the Rules committee because they know they're lacking conservative votes. I mean and I realize I'm not the one to complain about process. It's not being—it's not fun being in the minority.   But, you know, the '83 Social Security amendment—it was Pepper versus Rostenkowski. The retirement age was raised as an amendment on the floor. There were a couple of, you know, it was a closed, modified rule so that you had kind of major amendments that were—so the bill could actually be structured, not completely openly I understand.

But, I just want to point out that I think the problem here is process more than information. And maybe when the House is so divided—I mean, right close to the middle—you can't expect to have that open rules from the majority. I don't know what the Democrat's would do in that situation. But I think that's where the real problem is.

MR. REISCHAUER: Rudy?

RUDOLPH PENNER: Gene and I have just written a piece that argues that to resolve this long run problem doesn't just take tinkering with historical precedents but really smashing them. And I think it is worth pointing out that if you literally don't extend the tax cuts and if we take seriously Snow and Bolten's notion of a revenue neutral fix to the alternative minimum tax, you would be already smashing historical precedent to some degree in that the tax burden at the end of 10 years would be over 20 percent of GDP—a level that has not been sustainable in the last 50 years. I don't know what the real bracket creep would be on Bill's 75-year time horizon but it's go to be pretty impressive.

The other point commenting on Belle's question as to what comes next—I think it is worth pointing out that's going to be a matter of luck to a very large degree. Everybody should look carefully at CBOs discussion of the uncertainty of these projections. Their 90 percent confidence level on 2009 for the budget deficit—which is really a 70 percent confidence level—spans a range of $1.5 trillion dollars for the deficit. The average error is worth over $400 billion dollars. So obviously if we are now making the average error in an optimistic direction we will probably have a crisis out there if we don't do anything. Conversely, if we're making the average error in a pessimistic direction, people will say, why worry, we'll have a surplus.

MR. REISCHAUER: Okay, Chris.

MR. EDWARDS: There's been some discussion, sort of, about a balanced approach to solving this long-term problem here. Let me just sort of look at politically out 10 years—where will we actually really be in 10 years. It seems to me that there will be large domestic, discretionary cuts. I just don't see any way around that. Ultimately, you know, the level of taxes, it'll be up to the public to determine. I just don't see the whole Bush tax cut being reversed, perhaps part of it will be. And entitlements, it strikes me, aren't the cost—they may be reformed but I don't think the cost impact will really be cut that much. I think domestic discretionary will be cut, you know, but the way—if we don't sort of take that and proactively really look at what the government does, the way it will be cut will probably just be frozen year after year after year.

And here's what I—it strikes me that analysts and legislators sort of a more of a liberal persuasion, seem to me need to get out in front. There's a lot of what the government does really does not help the core constituency of low-income folks that a lot of people are really, you know, concerned about. There's—I mean, just to take one little example—I would like to see, you know, the Democrats and liberal legislators get out in front and support good government reforms that cut programs that don't really help the core constituencies of people in real need. Low-income people don't take Amtrak, they take Greyhound—Amtrak, as you know, almost $1 billion a year. It strikes me that we really need to take a look at the budget, find out programs that don't really work. And, you know, winding the clock back 30 years—some folks like Ted Kennedy supported good government reforms, such as deregulation. And Kennedy, for example, was a supporter of a law back then that had a lot of support to sunset federal programs every 10 years or so.

So, you know, it strikes me that, you know, I'd like to see a more support and an expansion of the Bush management agenda, for example. I think it is a way to find the programs, you know, that really don't work, that we really can scale down domestic discretionary in an orderly way rather than sort of the chaotic way that, I think, you know will happen 10 years from now.

MR. REISCHAUER: Well, just to prove that you never can trust the word of anything to do with the budget, that wasn't the last word. Belle's just been through this exercise and is chomping at the bit to have the last word. But this really is the last word.

MS. SAWHILL: I just was—wanted to say in response to what you just said. That to a large extent I think you're right—that to some extent it's what we tried to do in our exercise on how to balance the budget. We cut spending by a $175 billion a year and across a wide range of programs, both discretionary and entitlement. We did use a small proportion of the savings from that to beef up some high priority areas, but most of it went towards deficit reduction. Of course we had to raise revenues as well. I would point out that the current administration is trying to do some work on figuring out what programs are effective and are well managed versus those that are not. And however inadequate it is—efforts of that sort are, I think they're worth trying and they could become the basis for doing some more radical things, particularly on the spending side.

David Wessel of The Wall Street Journal wrote a piece recently, however, in which he noted that there was very little alignment between the administration said programs had outlived their usefulness or were not effective and where they then proposed to make cuts. So this is an agenda that I think that we could all get on to.

One final point. I am constantly told by my friends on the left that the entitlement programs, Social Security in particular, cannot be cut in the short run because we have a commitment to those who are already retired—or are about to retire—to keep their benefits as they have been promised. But nobody raises this issue with respect to working age families, particularly with those with children. Nobody says, it's not fair to say—to a mother who is on Medicaid, let's say, with her children—we can't pull the rug out from under you next year because you wouldn't have time to adjust to that change. And I'm very struck by the fact that we have a totally different ethic about when we can make changes in programs for the elderly versus when we can make changes for working age adults and their children.

MR. REISCHAUER: I think the calculus has to do with the percent that vote. Anyway, I want to thank all of you for interesting and useful discussion and look forward to next year.

---

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

Usage, posting and reprint of materials on the UI web site:

Most publications may be downloaded free of charge from the web site in PDF format. This information may be used and copies made for research, academic, policy or other non-commercial purposes. Proper attribution is required.

Copyright of the written materials contained within the Urban Institute website is owned or controlled by the Urban Institute. Posting UI research papers on other websites is permitted subject to prior approval from the Urban Institute—contact paffairs@urban.org.

If you are unable to access or print the PDF document please contact us or call the Publications Office at (202) 261-5687.