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Good afternoon and welcome to todays to today's meeting of the Commonwealth Club of California. I am Tom Campbell, the Bank of America, Dean of the Haas School of Business, University of California at Berkeley. And I am the moderator for this program. Today's program is part of the Charles and Louise Travers Series on ethics and accountability. It's being held in association with the New California Network. We welcome our listeners on the radio and we invite everyone to visit us on the internet at commonwealthclub.org. Today we will be dealing with the budget. It's a very appropriate topic as this morning's news carried the story that the national debt is now in excess of $9 trillion. We set a new record, 57 percent increase in the national debt over the administration of the current president. The numbers of years that we would take to pay back the amount of money currently owed - just the amount of money currently owed, not the unfunded liabilities at the rate that the United States has been is in excess of 300 years. I am also privileged to have been the finance director of the State of California, and the comparable number for the State of California is slightly over 80 years. But our focus today is on the National Front. We are featuring palaces affiliated with a project called the Fiscal Wakeup Tour. It's a joint public initiative by the concrete coalition which I think you know as a national non part as an organization advocating fiscal responsibility, and the budgeting financial priority's project that the Brookings Institution, and the Heritage foundation. Purpose of this tour is to explain in plan terms by budget and the analysts of all sorts of perspectives are increasingly alarmed at the nation's long term fiscal outlook. Although the Congressional Budget Office, the CBO is projecting that the annual budget deficit will be declining this year for the third time in a row to $158 billion. Our panelists today are here to talk about what they believe is an unsustainable long term fiscal outlet projecting a 10 year base line deficit of 5.10 trillion. Members of the fiscal wake up tour may not necessarily agree on the ideal level of spending or of taxes or of debt, but they do come together on the following points. One, we can't solve this problem by announcing that we are going to cut waste fraud and debtors. You can't just talk your way out of the problem. Second, that the best way to make the hard choices is a bipartisan process that does not exclude any option. And third, that public engagement and understanding are vital to find solutions. Our speakers today also are united in pointing out, that this is not just a fiscal problem; it is a moral problem from the point of view particularly of the intergenerational transfers that we take from our children. The panelists David Walker, Controller General of the United States, Mr. Walker became became the seventh Controller General of the United States, a 15 year term at November 9th, 1988. He is a CPA and has a certificate in management from the Kennedy School. Dr. Isabel Sawhill Senior Fellow in economic studies at the Brookings Institution. Dr. Sawhill was the Associate Director in the Office of Management in Budget, OMB in the Administration of President Clinton. She holds her PhD from New York University Graduate School of Business. I pause to emphasis that her degree is in a business school. This is a good thing and it should be encouraged. Dr. Sawhill is the mother of Jamie Sawhill, a PhD candidate in the business school at the University of California at Berkeley at the Haas School where I am Dean. Alison Fraser, Alison is the Director of the Thomas Ro Institute for Economic Policy Studies at the Heritage Foundation. One of the Ro institute's priorities is the reform of the entitlement programs. Robert Bixby, executive director of the concrete coalition. Concrete coalition has organized this tour, so we owe them all a debt of gratitude for putting all of the strategic tactical aspects together to make this a success. The coalition itself was founded in 1992 by former senators Warren Rudman and the late Paul Tsongas. The panelists have asked that we go in the following order that Robert Bixby will start off on the subject of why we need to focus on these issues, then David Walker will speak next on the long term challenges, Isabel Sawhill on "Why this dead matters and possible solutions" and Alison Fraser then on the choices that we face. Let's now begin with Mr. Bixby. Thank you very much and thank you everybody for coming today. The first thing that I want to do is, assure all of you that none of us are running for President. After you hear what we have to say, you will probably understand why? But a lot of people who are running for President will be coming through California looking for your votes and that gives you a special responsibility and we know it's the one that you take seriously. So we are here not for your votes but to try to pursued you that one of the key criteria in assessing the seriousness of Presidential candidates or candidates at any of the Federal levels is whether they appreciate the magnitude of the challenges that are coming out, the need for tradeoffs, and the advantages of acting sooner rather than later. Now if you have been following the Federal Budget closely as I am sure you all have; you might have heard some good news. For the third year in a row revenues have been up and the deficit has come down. So you might ask why are we traveling around the country issuing a physical wake-up call. Well, the reason is simply that we are not looking in the rear view mirror. We are focused on what's coming ahead. And it doesn't take a crystal ball to see that we have got some problems on the horizon. Our nation is undergoing a dramatic demographic transformation to an older society. And we are doing that against the backdrop of steadily rising health care costs, and steadily falling national savings. That is a very dangerous combination for the future health of the economy. Now, let me just throw out three facts to consider and to sort to tea-up the discussion. First, on the current budget situation; the three biggest Federal Entitlements Programs are Social Security, Medicare and Medicaid. They comprise 42 percent of the Federal budget. That is, before the baby boomers begin to retire which wont began to happen until the next year? Think about that by the way, the first baby boomer is going to cash a social security early retirement check next year. So those little kids running around in coonskin caps about to retire. And I was one of them, so the second key fact is demographics. Over the next 25 years, the number of people percentage of the population age is 65 and over is projected to go from about 12 percent where it is today to to over 20 percent. That obviously is going to put increase pressure on the three programs that I mentioned which are already 42 percent of the Federal budget. Now if you add on to that, the third factor which is raising healthcare cost then things get really problematic. Because healthcare cost have traditionally arisen faster than economic growth. So every year they take up more of the budget and more percentage of the the economy. And if you look at healthcare cost and say, "what if healthcare cost continue to grow at the same rate over the next 40 years as they have over the past 40 years; where would we be?", well at that point just two programs in the Federal budget; Medicare and Medicaid wouldn't take up as much of our nation's resources as the entire Federal budget does today. That is, about 20 percent of the economy or 20 percent of GDP is the economist like to say. And others speakers who will pick up whatever going, but obviously changing course is going to require some very difficult choices on programs that people really care about and on Federal Taxes, which people obviously really care about. So that means if the American people need to be a vital part of this conversation and where we go, and that's why those of us on this Fiscal Wakeup Tour going around in the country. We often show a picture of Paul Revere on our travels because he really symbolizes what we are trying to do, which is just spread an alarm. We are not preaching gloom and doom. Far from it, we have faith in the American people and we have faith in the elected leaders, that if they understand the facts, they will address the key problems in advance of the crisis. But in order to do that we need to spread the alarm and get people to understand it. We don't as it was alluded to, we don't all agree on the right solutions we come from different perspectives. And that what I think what makes the message so powerful because we we can agree whether we have left right, liberal, democratic, republic and conservative independent whatever you wanted to say. The number is just don't add up and so alternately it becomes a matter of arithmetic and not a matter of ideology, and we all on the panel agree on that. I think it's important to focus too on the fact that they really aren't quick fix solutions to this. We all get outraged by waste front of new stories that we read about in the paper and we all think economic growth is a great thing and it is and we want to keep the economy growing strong over the long term but regarding on the waste front abuser, a booming economy is not going to get to solve this problem. It is going to require a bipartisan solution, bipartisan corporation the willingness to put everything on the table and it's also important to remember that this really isn't about numbers fundamentally it is a moral issue. It's about the legacy that we want to leave to future generations that are what we were deciding now. What kind of a structure we are building for future generations to live in? Right now the structure is unsound it's our job now the generational stewards to fix that problem. Thank you very much. It's a pleasure to be in San Francisco, one of the worlds most beautiful cities. You know, we live in a great country, in United States we are much to be proud of we are much to be thankful for, we are number one in many things but not all things. But we face a range of very serious sustainability journalism, Physical health care, energy, the environment, education, immigration in Iraq, just a name of few. Our current path is unsustainable. We are here to talk about the physical challenge which is over arched is everything and as you all know bad news flows downhill. So the federal government has a physical problem and that's going to affect State Local government, it's going to affect the independent sector it's all of them going to affect American families. The budget composition is changed dramatically over the last 40 years. 40 years ago 43 percent of the federal budget was for the defense and only one percent was for Medicare and Medicaid. Last year 20 percent was for the defense and 19 percent was for Medicare and Medicaid. 40 years ago the congress got to decide how the two third of the budget would be spend, last year it was 38 percent, stated differently 62 percent of the budget was on autopilot, that cannot continued. By the way of that 38 percent a vast majority of that is what the federal government supposed to be doing under the constitution. National defense home home land security, traditional system, congress, foreign policy, treasury executive of the president. Those who are all in discussionary spending they are being squeezed more and more. You know sure term deserts have come down and some people think would be the problem is Iraq and Afghanistan, the global warm terrorist and that's why we run in deserts that's not true. Last year we spend about $100 billions in Iraq that obviously didn't help, but our operating cash deficit was $434 billion. So we can get out of Iraq tomorrow when it is not going to come close to solving our problem, and in fact we haven't yet faced the Tsunami of spending which is a retirement that baby boomer generation in relating escalating health care cost, that will start next year and will build overtime. In the last six years alone the nation total liabilities and unfunded commitments for self security Medicare, the difference we what we promised and the dedicated payable taxes and premiums that we have to deliver on those promises have increased from $20 trillion to $50 trillion in six years, of the 50 trillion 32 trillion is Medicare, 6.4 trillion is self security, and 8 trillion of the 32 trillion is new Medicare prescription drug bill. $50 trillion is $440,000 per American household, median household and coming America's less than $50000 a year. Therefore on our current path each American household has an implicit burden mortgage of $440000 but no house to back mortgage. And it's growing faster than that wealth of Americans. You know, state local governments have the wrong problems. This is not just federal problem GAO they should report that in a last year that showed probably last month, that shows that within in the next ten years state local government going to start facing escalating deficits are primarily due to four reasons number one, medicate cost. Number two, under funded pension plans. Number three, unfunded retiree health obligations for state local workers, and number four, additional infrastructure needs and a firm maintenance on infrastructure, bridges, streets, water sources and etcetera. So this is really a national problem, its not just the federal problem although the federal problem is you know, as the dean mentioned that Campbell mentioned is is greater but you know, he talked about 300 and some odd years for the current debt. That's a good news, because the Tsunami of spending is about to ready to hit our shores and yet we are still partying on rather than getting serious. We have got educate the public, we have got to make sure that the first three words of the constitution come alive, we the people, we the people are responsible on the cannibal for elected officials do or do not do. They have been dancing too long. It's time to start working, that we need to start making tough choices soon or around the later because time working against us. The longer we wait the bigger the change is going to have to be the less transition time that we have to make it. We have got improve transparency is to where we are over headed, re-impose tough budget controls tougher than we had in the 90s that took us some doubts and surpluses, they have all expired. We form self security, health care, and tax system and re-examine, re-prioritize and re-engineer the base of government because most of governments are based on the 1940s and the 1970s, and a lot of us just flat didn't work, and some of them on desired priorities is they used be. The sooner the better for the reasons I have articulated is not just about numbers, I will give you a lot of big and bad numbers, it's really about values. How about the word stewardship, as stewards we have a responsibility not just to leave things better off when we left and when we when we leave it and then we became but better position for the future. Further words about people and for me it's about my three grandchildren. They are going to pay the price they are going to bear the burden if elected officials don't act. They are too young to vote, they don't have a voice and so I am their voice. In summary this nation has four deficits, a budget deficit, a balance of payments deficit, a savings deficit and the worst of all a leadership deficit. And that cross sectors and it is also is a bi-partisan problem. We need to get serious soon, and we need to recognize the reality that if we want our future to be better than our past, we need to start making some tough choices so, if we want to keep America great we need to make those first three words of the constitution come alive we the people. Thank you. As you can hear David Walker doesn't have any passion about he said all, let me elaborate on the question of why deficits matter and why we all need to be concerned? Basically four reasons, the first we has already being talked about, its David's three grandchildren and all the other younger young generation. The second is exploding interest on the debt, $227 billion every year, just for interest on the debt. That's about the $1000 of your taxes that's being you are marked just for interest and it's the fastest growing part of the budget by far. Third, our increasing dependence on foreigners, we are basically consuming more than we are producing, we are borrowing the difference from abroad, they could go, they could withdraw their support at anytime, and that would be a huge problem. Fourth, we have a missed opportunity here to invest in the future. If you think that the nation's future depends not only in the matter of debt that we are accumulating, but also on the kind of investments we make now in education, in health care, in transportation, in telecommunications and other kinds of infrastructure to help us stay competitive. Then this lack of resources is doing double damage to the future. So what are the solutions, first of all social security reform, three quick points about that. The average American is going to spend one third of their added years in retirement, we can no longer afford that. We could back in the 1930s we can't in the 21st century. We need to rise the retirement age. Secondly, most Americans are taking early retirement almost three out of every four Americans retire before the age of 65 that may surprise you. We need to encourage people to work longer. Third, social security was never meant to be more than just one leg of a three legged store the other legs were to be employer pensions and individual savings. We need to encourage more individual savings and David said we have a savings deficit. One way to do that would be to have to require personal accounts on top of social security. And that's an idea that bares further discussion. Health Reform, when we talk about this physical Tsunami that's coming; it's all about healthcare. That's the big driver here. The problem is not just Medicaid and Medicare; it's the entire healthcare system. Those costs are affecting that not only government budgets but also employers and ordinary Americans. So, this is a huge topic and we can't go into it any detailed in a very brief time I have. But let me suggest the possible elements of a solution. One, a basic package of healthcare for everyone. I say, basic not catalog fold type package. Second, much more emphasis on paying for performance; for what works to improve our health as supposed to an open-ending commitment to fund whatever consumers want. Third, more income relating of government benefits and perhaps a gap on total government expenditures to help us get serious about this. And fourth, much more emphasis on prevention and co-ordination of care. Finally, tax reform; let me mention three options here that need to be discussed more. First of all, simplifying the system. That means, eliminating or reforming existing existing deductions, credits and other preferences. We spend $900 billion a year on what are called tax expenditure over these various preferences. It also means fixing the fact, that we have two parallel tax systems right now; a regular income tax system and an alternative minimum tax that needs to be fixed. Another option is not to extend all of the Bush tax cuts, particularly those that have gone to the most affluent amongst us. Analysis is done at Brookings and else where has shown rapidly growing inequality in U.S. Society; the tax cuts it and cause that inequality but they are exacerbating it. Third, we could added a new tax to the system; maybe one that's more based on consumption than income; every other advanced country accept ours as a value added tax for example example. Maybe a tax on energy, after all we have in addition to the problems you are hearing about from the panel today, a global warming problem which is also a problem of what kind of legacy are we going to leave for the future. The nice thing about an energy tax is it would be a two forms, it would both deal with global warming and raised revenues for the Federal Government. So, what happens if we fail to act? We couldn't have an economic crisis and we can go into that, or would most likely happen because foreigners went on a strike against the dollar. But we may not have a crisis. This may not be a case of the wolf at the door; this may be a case of the termites and the wood work. And those termites are going to reduce our our standard of living in the future and weaken the nation in a way that may be quite invisible, very gradual and in a sense all they are more dangerous for those reasons. Put differently, I believe they are going to have to be higher taxes and lower benefits in our future. And any Presidential candidate who tells you otherwise doesn't deserve your support. Thank you. Thanks a lot. I am going to talk to you about the choices that we need to look at and examine as an as a nation. But before I do that, I just want to set the a little bit of historical context. And that is that the United States has been historically a low tax, low spend, but very high growth nation. That's one of our key doors of success. And these three programs that we have been talking about; social security, Medicare and Medicaid are poised to change all of that as baby boomers begin to retire. Now we are all and the panels agree that there are no easy answers here. But we can sort of breakdown the choices into into three categories. And I want to I am going to talk about those to help you understand the magnitude of the problem. Now the first choice is for us to do nothing. To keep on spending and then us of course is congress not you and I, but how Congress keeps on spending and keeps on borrowing? And if this would happen, we would see deficits in the future as the large relatively speaking as the entire Federal Budget today. And what would that mean if interest rates started to increase just a very, very minor increase in interest rates of like one basis point would literally cost spending to go off of the charge. We would really see a physical melt down that's why we are here to talk about it with you today. Now no one, no one is seriously proposing such a solution, but unless we have real substantive discussion by our leaders in Washington and our candidates, then that is the path that they are tacitly endorsing for us and we can do better, and that's clearly unacceptable. So we have got two other choices here, the second choice is to look at the tax side, and lets and lets just remember that historically taxes have been about 18.3 percent of the economy. That's right about where they are today. And if congress would to solve this problem fully through taxes, we would see taxes climb from this 18 percent level to a 30 percent of the economy over the coming decades. And that would pose real problems when it comes to you know, the future of our economy for growth, for wages for jobs, for opportunity, and just to give you a little bit of perspective that's two thirds higher than a burden we face today. And when we think about tax rates all tax rates would have to triple, nearly triple in order to make that, that's obviously not going to happen. No one is proposing it, but again it gives you a feel for the magnitude of the problem. The third choice is spending. Now, because it's so politically difficult to talk about these problems, excuse me to talk about these three programs. I am going to just set them aside and as I do that one other thing that I like to do is to return to the vision that the founding fathers had for this nation and for federal government, and looked at the functions that are constitutionally laid out, and those that aren't laid out in the constitution, maybe we are have to think about eliminating them. These are just hypothetical illustrations to help you think about it. That I am going to start with NASA. Now I love the space exploration, I think it's exciting. But it's not a function of the federal government. If we eliminated NASA tomorrow, that spending line, it would barely come down. So we have got to make other big choices. Lets start let's add to NASA foreign aid, lets that what we are spending. I think some of those are really good things to do, if you do them the line comes down just a little bit more. But we still have huge physical imbalance ahead of us and in fact if you were to eliminate the entire department of the defense tomorrow, all of the Pentagon, all of our military services, and by the way defense is a core constitutional function. If you were to eliminate it, it would not solve this problem over the long term. So it's clear that we can't nip and talk around the margins, we really need to be tackling these tough problems of social security Medicare and Medicaid. Now, you have heard some solutions already talked about by enlarge, I agree with most of them, but sort of my my take on them is I have got four recommendations, the first thing is we need to change the way congress spend your money. We need to have tough limits set that are unbreakable and we need congress to be able to have the tools to make priorities in an efficient way. We need to revisit this social insurance programs as you have heard they aren't sustainable. We need to protect today's retirees and those people who are close to retiring, but at the same time modernize the programs, so they meet the needs of future generations without undo burdens on them. We need to encourage personal retirement savings both for savings and insurance in long term care. And we do need to reform the tax code. In another way that I will go about it is a little different, I would make it certainly simpler, I would make it flatter, I would make it growth oriented, so we continue to have strong growth. And I would ensure that we move with that whatever we do we can remain with our taxes internationally competitive. And the last part of the solution is you, and by being here you have indicated that you are really interested in this issue, but we can't have any solutions without discussion not just in Washington but here in San Francisco and across the country. So thank you so much for your interest and I look very forward for your questions.