SENATOR MARK WARNER ON THE DEFICIT

Transcription

1 SENATOR MARK WARNER ON THE DEFICIT THURSDAY, MARCH 1, 2012 WASHINGTON, D.C. WELCOME/MODERATOR: Moisés Naim Senior Associate International Economics Program Carnegie SPEAKER: Senator Mark Warner (D-VA) Transcript by Federal News Service

2 Washington, D.C. MOISÉS NAIM: Good morning, and thank you very much for being with us today. My name is Moisés Naim. I m a senior associate at the International Economics Program here at Carnegie, delighted to welcome you here; delighted, Senator Warner, to have you here, too. Future historians are going to puzzle about the lack of proportion between the deficit and the problems it engenders, and the potential risks it creates and the inaction that this society and this political system has displayed in that in tackling it. The list of reasons why this is an emergency is well-known and constantly repeated. And yet nothing happens, until something will happen and it may be too late and all of the very bad things that we know happen when discontinuities and imbalances explode are (inaudible). So that s an initial puzzle. Why is it that we know so much about how bad this is and we are doing so little to tackle it? Why? And therefore, the corollary to that question is how to change that? [00:01:19] The second is the second surprise, of course, is that this behavior has been enabled by a very benevolent international financial system. Money managers and fund managers around the world are the ones that are allowing this situation to continue, which is again a puzzle, especially given all we have seen recently about how quickly what seemingly stable situations become highly unstable and painful. I m thinking, of course, about Europe. And so those are puzzles that have consequences, that will touch peoples lives, that will define power relations in the world, that will undermine or boost sectors, social groups and so on. Senator Warner has been at the forefront of this theme for quite a while. He is one of the original members of the so-called Gang of Six, which is a bipartisan group in Congress that is trying to do something about it. He will not accept it or recognize, but insiders in Congress know that he is like the ringleader of the of the Gang of Six. As I said, it s a bipartisan group in which everyone is the same, but we know that there are (primos?) in their parties and there some senators that energize and rally more than others. [00:03:02] And as they say, Senator Warner doesn t need an introduction. He has been a successful entrepreneur, a governor who has to balance a budget. And now as a United States senator, he has taken a very significant leadership position and leadership behavior on this very, very important issue. Senator Warner s going to give us a share with us his thoughts and vision about this thing. And then of course we re going to have a conversation with all of you. Senator. SENATOR MARK WARNER (D-VA): Thank you. Thank you (inaudible). (Applause.)

3 Thank you, Moisés. Let me first of all apologize for being late this morning. One of the advantages of being the senator from Virginia is that I actually get to sleep in my own home each night, as opposed to so many of the senators who live far away. That s a good advantage. The bad advantage is I have to drive through northern Virginia traffic to get here. And I was so excited this morning, because I thought, oh, I m going to be there early. And then about the bridges, things started getting bad. So I apologize about being late. Second, Moisés said that, you know, Mark Warner is one of the Gang of Six, and he may be one of the ringleaders and he wouldn t acknowledge that. The reason you can tell that I am maybe one of the ringleaders on the issue of debt and deficit it is because particularly during last year when this last summer when this issue was very big, every time I would walk along the hallways in the Senate and another senator would come walking the other direction, the senator would see me and go the other direction quickly, because they know if I saw them, I would grab them and say we have to we have to fix this. What I want to do this morning and I will do this very briefly because I want to get to the conversation, and because I looked over the list and I know we ve got friends from China, friends from Greece, friends from a number of other international embassies here I do want to take a moment and at least briefly and be careful when a politician says briefly on anything and take you through a bit of the just the data points around the problem. And then I want to try to kind of take on some of the assumptions of why we re not acting on this problem right now and hopefully leave you with a little bit of a hope. [00:05:54] I m hoping this is the clicker that works. OK. I m hoping this is the clicker oh, OK. Did I go back there? Let me technical assistance. If we can go back one. I wanted to just I d gotten can we go back on this one second? Here we go. Back here. Can I do that? Nope. Now going to the wrong direction. We can go back two. Back to the beginning. There we go. OK. Oftentimes, you know, politicians in this country say it s like people suddenly woke up to say there s a deficit, there is a debt. This slide points out that this is a problem that is going to get exponentially worse, but that over the last 70 years in the United States, every year but about five of those years couple years in the early 70s and then around 2000 the United States of America has run an annual deficit. That s how we ended up now with $15 trillion in debt. The point here is that every year that we run a deficit means that it is not just the Republican problem or the Democrats problem or it s not Bush s wars or Obama s stimulus, that this is an issue that has been a structural problem that s growing. I often point out when I m talking to groups around the country that the real problem of our deficit in America is not a problem of the Republicans or the Democrats, but the real cause of our deficit are the doctors, and that s because with increasing medical technology, we are living much longer and our entitlement systems were not set up for people to live this long. [00:07:43]

4 The fact the most important fact to take away from this is that particularly in the last few years, if you have no other fact that you take away, federal spending in America right now is 25 percent of our GDP. That s an all-time high. Revenues are at 15 percent. That s a 70-year low. The only time during these past 70 years that there has been budget balance or surplus has been when revenues and spending had been between 19 ½ and 21 percent. So it doesn t take a Carnegie scholar to realize that if you re spending 25 cents and only collecting 15 cents and your budget balance has been at 19 (percent) to 21 percent, you ve got to decrease spending and increase revenues. Oh, OK. I can do this. This is, very briefly, the fact that the only reason we are not in further crisis stage at this point is because interest rates are at an all-time low. Every hundred basis point increase in interest rates will increase the deficit, over a 10-year period, $1.3 trillion. And I say this with some trepidation. I know we ve got, as I looked at the invitation list, I think friends from Greece here and others. I feel a little bit bad that in America right now, it seems like the American rallying cry, particularly after our the failure of the supercommittee and the failure of the Congress to reach a budget agreement last summer and we haven t seen the kind of catastrophes take place that were predicted, it seems like the American rallying cry has become, At least we re better than the EU. I m not sure that is a long-term financial program going forward. But if we ever saw interest rates spike, you would see the deficit dramatically increase. You know, this again points out the problem that, you know, on any kind of spending basis, spending all-time high, revenues (all-time?) low if we re going to get anywhere close to that 18 (percent) to 21 percent where you see where the lines get close or the lines have actually passed, it s going to take increase in revenue and decrease in spending. [00:10:07] This goes to my question about, you know, the retirement age and the time of our the challenge of our around entitlements. You know, we ve got a multinational crowd here international crowd here. I don t know if anyone knows do you know who set the original retirement age of 65? MS. : Bismarck. SENATOR WARNER: Bismarck. Good answer. Good answer. And Bismarck set when he was premier of Germany, he set retirement age of 65 because at that point in the 1870s, 1880s average life expectancy was mid-50s. (Laughter.) So it wasn t a bad deal that the government will give you a check if you outlive the actual (inaudible) about 10 years. Even in this country when Roosevelt set 65 as a retirement age in 1934 for Social Security, average life expectancy is 62. Now, thank goodness, average life expectancy is 80. I hope by the time that my young aide, Nathan, gets to that age, it ll be 90. But this means that the underlying financial assumptions around entitlements not that it s Democrats or Republicans fault it just needs to be changed. [00:11:19]

5 Drives this point home more often and I I m a Democrat, so I get you know, the challenge from a broad basis, Republicans have to deal with revenues; Democrats have to deal with entitlements. Those are our third rails. And I get a lot of folks on the Democratic side say to me: Oh, you know, Mark, you re wrong. Social Security is sound. Social Security goes into dramatic we re already paying out more in Social Security benefits than we re taking in. In 2036, we would have unless we make changes now, you ll see a dramatic cutback in Social Security payments. And again, it s not anyone s fault; it s just math. When I was a young man, you know, 16 workers for every one retiree. Today, there are three. In 2025, there ll be two. It means the underlying finances just don t work. This one is very a little too busy, but it s important to point out, because I think that most members of Congress Democrats, Republicans don t really understand how in our country we raise money or where we spend money. And if you go out and talk oftentimes to the American people, they will say, well, you can solve this problem by just getting rid of waste and fraud. (Cellphone rings.) It s all right. I heard the cellphone ring. I am before I was in politics, I was in business. And I was the co-founder of the cellular telephone company Nextel (laughter) so the rest of people may have heard an annoying sound; when that goes off, I hear cha-ching, cha-ching (laughter) so it s OK for me. But this slide is important because it shows a couple of points that, you know, where spending growth has come in the last 10 or 20 years in America, it s not because America is spending more money on infrastructure. I see our friends from China here. China has a percentage of their GDP of spending much more on infrastructure than America. America is disinvesting in infrastructure. America is investing less as a percentage of its GDP in education, less in research and development not things that you should do if you want to stay competitive in the 21 st century. [00:13:30] Where our growth and spending is coming is two or three areas. It s coming from entitlement programs, because we have an aging population. It s coming from increased spending in defense, because of the changes after 9/11. And in our country, we ve created a whole new area of spending that didn t exist, called homeland security. And the biggest area of spending is this category right over here, which most people don t even think of spending, and that s spending in the tax code. What do I mean by that? That s spending in terms of tax breaks, tax deductions. You know, we the American income tax raises a trillion dollars a year. The American income tax system spends $1.2 trillion a year in income tax deductions. That s just government spending by a different name. You could cut everybody s tax rate in half and raise more revenue if you got rid of all the tax deductions. Now everybody nods until you realize that means home mortgage deductions, charitable deduction, health care exclusions, things that are quite popular, but it but if we re going to have a debate about how we raise revenues, looking at government spending through the tax code is something where we have to we have to look. And those are some of the largest ones there on the right.

6 [00:14:56] So the assumption has become, you know, nothing is going to happen. And there are four assumptions that are governing the kind of conventional political wisdom that says, you know, nothing is going to happen anytime soon on debt and deficit. And I think each of them are partially wrong. First is that the particularly the assumption that is that is conventional wisdom in Washington right now is, well, this is hard issue; of course, we can t do this in a presidential election year. You know, when I ran for the United States Senate three years ago and I got hired for this job, I didn t get the memo that said you get to take election years off. And maybe more people would run if they thought, well, you get six years; every four years, you get one year to take off. It s crazy. I mean, how many of you are from a nation other than America? Raise your hand. Raise your hands, please. In your countries, are you taking is your government, are your people, is your economy taking this year off because it s an American presidential election year? No, I don t think so. So the notion that China or Brazil or Europe or India are taking an election year off because it happens to be an election year here in America is it s crazy that we are going to have political gridlock this year simply because it s an election year. And frankly, the election campaign now that seems to be more talking about, you know, contraceptives and whether it s a good idea or bad idea to go to college doesn t necessarily enhance America s image in the world. But I think that we cannot afford to take every four every fourth year off from dealing with policy. The second presumption is that, don t worry, we ll do it next year, because it ll be easier. Well, at the end of this year, here are the things that are going to happen. Whether President Obama is re-elected or whoever happens to be this week s Republican nominee is elected, no one can honestly believe that this was going to have an election where either the Republican or the Democrat is going to win the country by 55 (percent) or 60 percent of the vote. There s not going to be a landslide election, unless maybe one or two of the more extreme Republican nominees get in place. [00:17:35] But you know, so it s going to be a very tight campaign. There s not going to be dramatic changes in the Congress. You know, even if the Democrats were to lose the Senate, it s going to be by one or two votes. And as we ve seen in a Senate now that requires 60 votes to get anything done, it s not going to mean that one party is going to suddenly have it easier to make decisions. One of the things that I find so frustrating is let me just make an aside here particularly with some of the new members of Congress who refuse to compromise on so many issues and then say they want to support the American Constitution I scratch my head because I think that, you know, one of the things that make the United States unique from many of your home nations is we have a system of government in the United States that was set up to be slightly dysfunctional. And I mean that in the sense that, you know, our Constitution sets up an independent House, an independent Senate, an independent presidency. And by the nature of the system, they all have to work together to get anything done. There are very legitimate forms of government,

7 parliamentary systems of government and others, that says if you win an election, you get to make all your decisions. In America, because we stagger elections and stagger terms, you know, it always will still we ll recognize and compromise. So the idea that after the presidential election any of these choices get easier just is crazy. What also makes it crazy is that each day that Congress fails to act, we add about 4 ½ billion dollars to that $15 trillion debt. So the size of the debt, the choices that we make get harder and harder after election. [00:19:29] And then finally, what has almost become conventional wisdom is that, you know, the crisis that will happen at the end of the year will make it easier to get things done. At the end of this calendar year again, for those of you from abroad who don t follow all of American economics and policy, here are the things that are all going to happen: the Bush tax cuts will expire, which actually adds about over 10 years, about $5 trillion in revenue. The payroll tax cut holiday will expire, which is a cost of $100 billion a year which, by the way, I voted against 10 days ago, not because I don t think we need more stimulus but because it wasn t paid for. Capital gains and dividend rates will change. [00:20:22] And we set up when the supercommittee was not successful, the consequences of the supercommittee s failure was, there would be automatic an additional $1.2 trillion in cuts that everyone in politics says, oh my gosh, if that happens, that will be awful because these are not targeted cuts; they are cuts still just in domestic spending and defense spending. And people aren t even planning for how we adjust with that. So you have this crash coming to happen at the end of the year. And conventional wisdom is, well, it that will force people into more thoughtful action. How many and I know we again, we have friends from abroad here but how many people in this room have ever saw the American film Thelma and Louise? It was a number of years back. (Scattered laughter.) Well, do you remember the end scene where the women are in the car, and they re put their foot to the accelerator, and the car is racing towards the cliff, and for immediate chaos if they go over the cliff? Well, that is kind of what we ve set up in the political system, this crash that s going to happen at the end of the year. And coming out of a campaign where we may have two presidential candidates who spent the whole campaign calling each other names, and then a series of super PACs coming in and spending hundreds and hundreds of millions of dollars trying to polarize America the idea that immediately after that, everybody s going to say, oh gosh, let s come together and find common ground and fix this, I think is not a bet that we as a country should take. Third issue and I m again, two more comments, and then I want to make sure we get plenty of time for questions is that there is a theory and by very legitimate economists, and they will point to I mean, they ll point to Greece; they ll point to Spain; they ll point to Portugal that says, the idea of doing a deficit reduction plan now, while the economy is in a slow recovery it s too fragile to make any choices.

8 [00:22:38] Again, I don t I don t agree with this now because we will make these choices; we will either make these choices on our own timeline, or we ll make them as we ve seen some of our friends in Europe get forced to make them when the bond markets said no mas ; you have to make them immediately. And the plan that we have laid out says, we don t have to immediately cut back all this spending or immediately cut back or raise additional revenues overnight. We have America has the largest economy and currency reserve currency we have more time than most other countries. So all we have to do is put a real plan in place over a 10-year time horizon that will phase in these cuts, phase in these revenue increases. And any plan that we ve talked about also includes new tools for growth: an infrastructure investment bank, a tax code that s predictable. These are things that actually I think will help increase confidence. And I personally believe that the value of having a significant at least $4 trillion deficit reduction plan, that both raises revenue and decreases spending and has the confidence that it will be enforced, would do more to create job growth than any single government action. Right now in this country we have trillions of dollars in private capital sitting on the sidelines, waiting for some predictability. And as well, we have literally trillions of additional capital from many of your countries and others coming to America as kind of haven of last resort, but still sitting on the sidelines, waiting to see if we can get our financial act together. So I ve told all these bad things, then one good point, and that is: The fourth reason why people weren t on top of you know, we can t do it in election year; it ll be easier next year; the recovery s too fragile the fourth reason why people say it can t get done is that people will say, well, there s just not enough bipartisanship. And to some degree that s true. I was very saddened to see the decision of Senator Olympia Snowe, a senator from Maine a very, very good senator, someone who puts country ahead of party time and again decide not to run again. And if you simply read from the outside and follow Congress, it s all negative, negative, negative. [00:25:07] There are a growing number of us. It s not just the Gang of Six that are saying, we re ready to do the right thing. The Gang of Six became we had 45 senators by November that were saying, we re with you guys on a big plan. Even in the House and the House is always a little bit crazy even in the House we had a hundred members, Democrats and Republicans, saying, we re ready to go. I absolutely believe, if we can get a plan particularly based somewhat on the so-called Simpson-Bowles plan, and I can go into any as much detail as you d like on that that there will be the majorities in the Congress that will realize that the price of doing nothing, or the price of simply listening to those on the extreme who don t want to find common ground, will not triumph over those of us who will actually put our country back on the right path.

9 So what am I what am I doing, and what is the gang doing, and what are we doing? Right now we are finishing drafting the Gang of Six or the Bowles-Simpson legislation. It will be you know, people sometimes now say, oh my gosh, this bill is 800 pages long. Well, you don t change the tax code, you don t change the entitlement system, without a long bill. We are we are drafting that, number one. [00:26:25] Number two, we in groups of two and three and four, we re sending Democrats and Republicans out to talk about this issue around the country. Here in Washington people are focused on politics only. Around the rest of America, people want us to actually get stuff done. So we were in Boston last week; we re going to New York; we re going to Minneapolis; we re going to Seattle where we re trying to encourage the business community, we re trying to encourage the media to say, this issue is not going away. It still becomes, I think, the most important issue for our country to address, because I m not sure we will solve energy, education and all the health care, the host of other issues, until we can at least get our country s balance sheet right. And, number three, one of the things that we re trying to do is encourage the business community. One of the great disappointments I had last July was when Congress performed so badly, and we went through this embarrassment of having our country s debt downgraded and the politicians not being able to reach any real grand agreement you know, the politicians those of us who are elected deserve the vast majority of the blame. [00:27:40] But I make this point as someone who has spent 20 years in business to my friends in business, that they bear some of the responsibility as well because business leaders in this country did not step up and demand and say, I am willing to give up my company s particular tax break if I can make sure that we actually put a financial plan in place that s going to get our country back on the right path. So part of our challenge as we build this national campaign is to get business leaders and we now have about 25 of the top CEOs in America who are standing up and saying, we will be part of this campaign so that, when the interest groups who say, don t raise my don t raise any more revenues; don t raise taxes; don t change the entitlement programs because those voices will be heard. Unless we also have a group that says, no, we have to fix our country and that will take the business leaders who create the jobs who drive the economy being in being with us in that fight then we won t be successful. The good news is that we are finding folks all across this country ready to step up. So I am you know, I hold some hope that we could actually see a window I want to make a not necessarily a prediction; I know everything I say, particularly in the land of digital video, will come back and haunt me at some point but there is at least some small opportunity late this spring to see some significant action. It will either be because of one or two occasions one which I hope doesn t happen. One would be that if the European crisis, you know, does not work does not the solution around Greece and others, and we

10 see contagion spread across Europe and if the markets then come the United States and say, OK, you have to fix your problem now. The other opportunity would be if the Republican nominee is selected relatively quickly, and President Obama and the Republican nominee, say in May or June, both decide on their own: Do they really want whoever is the next president to have the first action item of the next president to have this train wreck of all of these tax breaks ending and sequester coming, as well as the requirement that the next president will have to raise the debt ceiling $3 trillion and you saw what happened when that circumstance happened in July and August of If they have to do that as the first action item out of the box, that will really weaken whoever the next president is. So there may be some opportunity for them to say, well, at least let s start putting a framework in place even before the election. [00:30:24] What we want to do is, we want to have that plan ready. We want to have the political support ready. And if even if there s not that window in the spring, we want to make sure that, when the train wreck starts happening when Thelma and Louise s car starts veering for that cliff that there is an exit off before you get off that cliff, where we ve got a plan that will say, here is a path out of out of this challenge. And it is a great challenge. Let me not underestimate it. But in any kind of historical context I mean, this is not defeating communism. You know, this is not putting a man on the moon. This is not a challenge and pales in the challenge the choices that are being made by our friends in Greece or even our friends in the U.K., where they waited too long to confront the crisis. We still have the luxury of doing this on our own timeline, but only if we act. So my thanks again to the Carnegie Endowment for the opportunity to be here, and I look forward to trying to respond to some of your questions. Thank you all very much. (Applause.) [00:31:34] MR. NAÍM: Thank you, Senator. Very well comprehensive and persuasive. One of the surprises again, another surprise around all of this is how a new change in behavior has been to accidents. We know that there s nothing like a scare to get people out of bad habits. The way to stop smoking and start exercising and dieting is surviving a stroke. And this economy did survive a stroke, and yet the bad habits are there. Behind your strategy for change, there is a lot of one important assumption seems to be that if you just explain, and show these numbers, and give the Thelma and Louise metaphor of the car over the cliff, people will get it. And therefore people will change their habits, and you will create the political support to change the situation. Yet you have to deal with a large number of colleagues of yours in both in the House and in the Senate and in the House that have signed a pledge never, ever to raise taxes. And the Grover Norquist approach is you know, it s just, we don t accept any compromise on this.

11 So these are what is your political strategy to change that? You know, we love economics. SEN. WARNER: Right. MR. NAÍM: What we have been lacking is, what is the political strategy to change the incentives that have until now made it impossible to solve this problem a political strategy that needs to go beyond showing the numbers and trying to persuade people? [00:33:18] SEN. WARNER: Well, there I think there s three-part strategy. One is, we still need to continue to not just show the numbers to policy elites. We need to show the numbers in a much broader way to the American people because I ve never made a presentation to any group anywhere in Virginia or around the country, and this you got the short version today; the if you go through the whole approach, that people don t say regardless of whether they re Democrats, Republican yeah, that makes sense. Yes, we need to do something. And what we have lacked so far in the political debate and one of the great, I think, missed opportunities the president had after the Simpson-Bowles report came out was not necessarily to embrace Simpson-Bowles, but to have spent the first three months of 2011 explaining the problem. If you explain the problem and show, this is not the Democrats fault or the Republicans fault you know, if you get out of the political blame and really just say, part of this is just because, thank goodness, we re living longer; and here s how we re spending; and here s how we re raising money I think people will get it. Remember that the last time America faced this crisis this is not the only time we have we had exactly this same debate, you know, late 80s, early 90s and I say this with you know, with appreciation to our friends from China you know, 20 years ago America had declining manufacturing, increasing deficits, emerging Asian nation at that point it was Japan instead of China you know, but we sometimes forget in American history that the person who helped educate Americans was really Ross Perot. We kind of need that education process still, number one. Number two, you know, I think the Grover Norquist pledge signing is very destructive. But I also believe that Grover Norquist is in many ways is a paper tiger. I was governor in Virginia; I had a 2-to-1 Republican legislature. We made these same choices, and I had an overwhelming number of Republicans who voted with me in fixing Virginia s budget. [00:35:38] And Mr. Norquist s organization came out with wanted posters and threatened all of the Republican members they all won. And now we re already seeing even in the Congress we re seeing people like Tom Coburn very, very conservative member; one of the Gang of Six from Oklahoma stand up to this kind of bullying, and more and more

12 members Republican members saying, you know, the oath they took to the Constitution is more important. The third thing is and this is maybe where we get to the hardcore politics is that most of the way that we have talked about raising revenues has not been through raising tax rates, but it s through tax reform where you actually could see lowering of tax rates, but you eliminate or cut back dramatically on tax deductions. And that actually generates more revenues. People say, well, how is that possible? It s because 60 percent and you can do this in a progressive way 60 percent of Americans claim no tax deductions. You know, they get their standardized deduction, but they don t they may not own a home; they may not have a charity they give to. So if you if you take away and cut back on tax deductions, it s the wealthy who actually even they pay a lower tax rate, but will actually pay more taxes. And there is at least a technical way that some of the Republican my colleagues can say, well, I ve not violated the pledged; I m just growing the economy and growing the base. So there ll be a little bit of dancing I think there ll be a little bit of you know, we need more explanation that these are the real choices. And I think you have a growing sense that these kind of absolutist pledges and let me say it s just not on the Republican side; there are Democratic organizations who say, if you do anything to touch Social Security or anything to touch Medicare, you know, they will be equally attacking. But the math just doesn t work. MR. NAÍM: Thank you. Your questions, please. Sir, in the back. Q: Yes, sir. [00:37:46] MR. NAÍM: Just tell us who you are and your affiliation, if any. Q: Yes. My name is Roger Cochetti (sp); I work with companies in the technology sector. And I d like to begin, Senator, by thanking you for taking a lead on an issue like this, which is terribly important to the future of the country. Anyone who s had even passing contact with American politics knows that there are a hundred other flashy issues any politician could latch onto that are easy to get a press conference or attention on, and this is not one of them. So thank you for your leadership on this. SEN. WARNER: Yeah, you guys are the only people I can talk to with my slides, because other people s eyes glaze over from (laughter). Q: But I do have a couple of comments from and I d like you to react to, and a question as well. The first is, having had a couple of conversations with people in political life on this issue, I have a sense that there are two secret thoughts that many policymakers have about this. And I d like you to react to them, because nobody s thought about this issue more than you or dealt with more policymakers on this issue than you. [00:38:52]

13 The first is that we really have more than 10 years. You said, because of our role in the world, we you know, the world will lend us money. And I don t believe for a moment, by the way, that the lenders are benign. The real issue, at the end of the day, is an underlying belief that they will keep lending us money at low interest rates forever because what else are they going to do with their money, eat it? Invest it in Indian government bonds? So there we are and for a long, long, long time, more than 10 years, we ll be the best investment of capital, and as it s as it s collected, it s got to go somewhere. So we can keep going the cliff may be there, but it s decades away. And second is that, you know, all these automatic things that are going to happen the sequestration, the repeal of the Bush tax cuts actually are a little bit of bad medicine that tastes bad, but you ll get over it. And when you come out of it, you ll be stronger. So let the good times roll. Let whatever happens happen on January 1 st, and then we can reinstitute the whatever spending resumptions or tax breaks that we want on a on a selective basis. So if you could comment on those two. SEN. WARNER: Great questions. [00:40:15] Q: Just one last point, which is that Lyndon Johnson was fond of saying where you stand on an issue depends on where you sit. And the problem, you already point out, on this issue is that where you sit if you re interested in the issue is sort of what am I getting? Am I getting defense spending? Am I getting Social Security? Am I getting education benefits? I m getting something. And so all the people who aren t getting something want the other people s benefits to be taken away. In a sense, the constituency that you re speaking for are the people who are younger than 30 years old, or maybe younger than 20 years old, maybe the people who are not born yet. I mean, they don t you know, that and I would just suggest that as you think about the outreach for this, all the people who have a vested interest in continuing to get the benefits that they re getting, are ones that are going to say, yeah, I agree with you, but not of course mine. It s all the others, take care of those. The people who have an interest in the bigger issue are the people who are younger. Those are the ones who really will pay the price for what all of us older people are getting. Thank you. SEN. WARNER: Let me let me all very, very good points. And on the first point, you re probably right that we may have longer than 10 years. The reason we think in 10-year increments and again this is for our friends from abroad the scorekeeper, the referee for Congress spending or taxes is a group called the Congressional Budget Office. And everybody has a critique of them, but they re the referee. And everything they measure is 10-year increments. [00:42:02]

14 So 10 year is an artificial timeline. Matter of fact, the real problems happen in the second 10 years not in the first 10. But even the challenge I have is the concern I have is you re probably 70, 80 percent right that we may have little more time than we anticipate, but if the chance is even 10 (percent) or 20 percent, and none of those problems none of those problems self-correct; we add that $4 1/2, $5 billion a day to this problem why take the chance that you and I could both be wrong and we could say we could wake up the way we did in the financial crisis when it looked like, oh my gosh, the markets could freeze and we see an interest rate spike, and the interest rate spike has such a dramatic negative affect on our economy? I mean, Greek and Italian bonds were selling at, you know, close to German bonds a few years back, until they weren t. This is not something that we ll glide into. It will be we ll be fine until the market turns. So from a chance of both why take the risk and the fact that this doesn t self-correct, you know, I would act now rather than later, number one. Number two, the idea you are, again, absolutely right that if we do nothing if Congress goes away for a year and a half, from a pure deficit standpoint, it ll be the best news possible. Probably Americans would kind of like it too. But I do think here is where Krugman is at least partially right, that if you suddenly had all of the Bush tax cuts automatically reinstate themselves, all the sequester cuts automatically take place, then that would be such a dramatic jolt to the economy that it could dramatically slow the recovery. I do think there would be you know, and this goes again back to Moisés first question, you know, if you have the Bush tax cuts go away for everyone, payroll tax cut go away, but if the Bush tax cuts in particular go away and the rates reset, then for the Grover Norquists of the world, if you cut taxes from those rates, maybe it s not a tax cut. That s a cynical view, but you know, but there is and it does the Democrats you know, the Republicans hand (is their?) strength and now we re on revenues. The Democrats hand is the closer it gets to the expiration of tax cuts, their hands get strengthened. [00:44:46] And on the third point, I just you know, intellectually you re right that most of the argument benefits will be for the youngest. But I absolutely believe, you know, that Churchill was right when he said that you can always count on the Americans to do the right thing, after they ve tried everything else. Well, we re kind of at that stage of, you know, having tried everything else. You know, whether, you know, America you know, the remarkable thing about America, I think, is not only how I we respond in moment so crisis, but the fact, you know, no other country other than America would have rebuilt our adversaries the way America did after World War II with the Marshall Plan and helping in Germany and Japan and elsewhere. [00:45:40] You know, so I do think there is a sense in America they will do the right thing if we can make it feel like it is truly everyone has skin in the game. And that s why the current political debate that says, well, if we just tax millionaires more, or if we just get rid of

15 these free riders who are trying to get too many government benefits, when we have it blame that s not what Americans will respond to. Then they will stay with, I got mine, I don t want to touch it. But if we could make a plan that say, OK, everyone s going to put a little bit more in. Those who can afford to put more in are going to put a little more in. But even, you know, one of the reasons why I think, even on the Bush tax cuts, even, you know, for people above the poverty level, they ought to at least be putting something into the federal income tax system, even if it s $20, $50, $100 a year, so that we can make the argument that this is truly a national crisis that everyone has to step up on. And that attitude of a national crisis is what I think the country is yearning for. We you know, we are all disgusted with the political debate. You know, this debt debacle has become a proxy for whether our institutions work. And what America needs right now, I think, more than from the economic standpoint, more from the growth policy, but they need to believe again that our governing institutions are up to putting country ahead of party. And this is that issue that can, I think, make that happen. And it on a relative basis, again, what this is the part that makes me just so frustrated is that the ask we are going to make of the American people because we have this ability to phase this in over a period of years is so small compared to the ask being made of the Greek people or the people the U.K., the Italian people, the Spanish people, you know, who waited too long. And it s why, again, I just want to I apologize for taking so long on this but it s why I also just absolutely reject one other part of the conventional political wisdom in town, which is, well, things have to get worse before we act. [00:47:56] How many more lives do we have to put in jeopardy? How much worse do we have to make things happen so that then people have to give more or have more sacrifice, when this is the most predictable crisis of our lifetime? There you know, you can argue that perhaps some people didn t see the financial bubble crisis coming. Well, there will be when this crisis hits, there will be no rational policymaker that can say, oh my gosh, I didn t see it coming. MR. NAÍM: Thank you. I think we are running out of time, but SEN. WARNER: Let me take one or two more because I (inaudible) MR. NAÍM: -- let me take two more questions here please. Q: Great. Thanks. Nelson Cunningham with McLarty Associates. Good to see you, Senator. SEN. WARNER: Hello, Nelson. [00:48:43]

16 Q: You know, one of the flashpoints on the revenue side is the notion that we have to subsidize capital gains and investments by giving them a lower tax rate. And I hear the intellectual arguments, and I hear them. I wonder sometimes, well, why don t we want to subsidize work, because it seems to me work is also something that we want to encourage. But what I really am troubled by on the capital gains and dividends side is that we don t say: We will only subsidize it for investments made in the United States. If I take my money and I invest it in China, and I create lots of jobs in China, and that spins off a dividend or capital gain for me, I get the full benefit of this tax subsidy. I wonder if one way for us to begin challenging the notion that we have to have this giant hundred billion dollar a year subsidy for investments is to say, well, let s at least target it to investments and dividends that come from the United States and investments in the United States and not overseas. Maybe that s one way to just start getting away at the onion. MR. NAÍM: Why don t we why don t we take a few questions. Q: By the way, and I m not a protectionist. And I want to create (inaudible) MR. NAÍM: (Inaudible.) SEN. WARNER: Yes, why don t we take a couple questions and I ll answer them both, yeah. MR. NAÍM: That s a very good question. SEN. WARNER: Yeah, that s a very good question. MR. NAÍM: You down here please. [00:49:55] Q: Thank you very much, Senator. I have been concerned for a long time about the medical expenses. And I think that we have two holes, you mentioned one of them. The doctors keep, you know, finding new ways to take good care of us SEN. WARNER: Thank goodness. Q: (Chuckles.) That s right. SEN. WARNER: Please don t take away the idea that Warner was for death panels. Q: Oh yeah. But also, there s no limit on what a what a business can you know, how they can allocate the medical care medical benefit relative to salary. Seems to me that one way to deal with that would be to have a voucher or a certificate or whatnot for every single person in the U.S. And then we would not we would have more Social Security income out of (chuckles) the and more state tax revenues out of that came out of that.

17 [00:51:05] And I think also people of my age, I think, need to recognize that our grandchildren are more important than we are, and we need to take a bit less a voucher that is worth a bit less. I think Congressman Ryan was wrong when he wanted to start vouchers with the seniors. It needs to be (all your?) lifelong. MR. NAÍM: Thank you. Over there please. Q: Hi. My name is Michael Feinberg (sp). I m a student at GW. SEN. WARNER: Good. Q: One thing that s been pretty frustrating for me is kind of watching the debate from the administration s perspective. I don t agree with the Ryan plan and I think the video has probably been seen by a lot of people here, between Paul Ryan and Treasury Secretary Geithner, talking about the budget that was put out a couple weeks ago. And they were discussing a chart where that was in the budget, in the proposal from the president that has debt to GDP just increasing indefinitely. So I was curious of how what kind of communication you ve had with the administration as far as long-term deficit reduction, and what they think about some of the ideas that you re working on in the Gang of Six, if you can share that with us. Thank you. MR. NAÍM: Go ahead. SEN. WARNER: OK, nothing like easy questions, each of them. Let me start I ll try to do them in order, all right? I get concerned on the capital gains and dividends. First of all, I don t believe we need a 20 point differential 35 percent to 15 percent on capital gains and dividends. I do think that there is a value of patient capital, that the idea that if you re going to invest in building a business no biased, I was a venture capitalist, Nelson, as you know but if you re going to build a business or you re a small business and, you know, you re not taking out as much money, that you re creating an asset, that that you know, when you sell that asset some level of favorable tax treatment makes sense. [00:53:13] But I don t think it needs to be 20 points. Under President Reagan, capital gains and ordinary income was basically equal. And it was at 28 percent. So, you know, I think this is a dial. Should it be eight point differential, 10 point, 12 point? And it should it kind of track that if for example, if your highest personal rate was 33 (percent), maybe capital gains is 23 (percent). And if your top rate was 22 (percent), then your capital gains would be 12 (percent). You know, so you make it progressive on capital gains. I ve not heard the idea of limiting capital gains treatment to only investments in America. I have to say, that while it would be politically attractive, I might I think I would

18 have some concerns on it. And the simple reason is, I m not sure how you define really what s made in America anymore. (Chuckles.) When you have a supply chain, and I don t think we can reverse this trend, I don t think we should reverse this trend. And when they had the made in America components on the stimulus, well, is it assemblage? Is it parts? Is it the software? That kind of complexity you know, I d hear more, but I think it s a challenge. On the question of health care, you know, two or three quick points. One, my biggest concern with Paul Ryan s plan, I didn t agree with his Medicare approach, but was also the approach that didn t get much attention. But we only spend 14 percent of our federal budget on domestic discretionary spending, which is education, infrastructure, energy, R&D, things that are pretty important. [00:54:55] He would have taken that down to 6 percent. We can t compete. Our friends in China are spending 8 (percent) and 9 percent just on infrastructure alone. So, you know, I have a respect for Congressman Ryan for putting out a bold plan. I don t agree with all of it. But I do think this the idea of move to an individual accountability voucher premium support, you know, has we can t just dismiss that idea out of hand. The challenge one challenge is that about 5 percent of the American population accounts for over 50 percent of our health care costs. Those are the chronically ill. And it s hard to figure out a voucher system, unless you ve got catastrophic coverage on the back end, for those very, very sick people, because otherwise they will run through their voucher entirely. [00:55:58] But there are things we can do, for example, on seniors, on a combined we have a very mismatched payment system on Medicare co-payments. And we ought to combine it all into one so you get a larger single co-payment. But every service you get, you re going to have to have some responsibility as a senior to think about, or and, you know, for younger-than-seniors as well. The one good piece of news that and this goes again and I ll get to Michael s (sp) question in a second the administration has not done a very good job on, because it s so kind of radioactive still, is that as imperfect as the health care bill was and it was very imperfect and there were a lot of things I d like to change in it. I voted for it because I thought the status quo was going to kill us, this would at least shake up the system. But what is happening in America right now and if you talk to any insurance company, any large hospital system, even most doctor systems change is coming. And systems are starting to figure out how we can how they can get paid, not based on the volume of the tests you get or the volume of the pills you take, but on your health care outcomes.