muslim world will be for galvanized against us and more young men will flow to the battlefields wherever they are and more will take up arms in the united states. >> host: michael's new book will be in bookstores in february 2011. >> glenn hubbard argues that president obama's push for higher taxes and more regulation is exactly the wrong thing to do to improve the economy. the event hosted by the american enterprise institute in washington, d.c. is 90 minutes. >> good morning, i'm arthur brooks, and i'm delighted to welcome you to this morning's session entitled how to reclaim american prosperity featuring.
it has been under relative sustained attack for sometime. most people agree, and the proponents of free enterprise have taken on the challenge of this with great vigor. they made remarkable gains for free enterprise and pointing out the adequacies of our current public policies. in the future, free enterprise advocates need to have a full set of policies, however. they need to say what we need to do as opposed to what we should stop doing. we need to face the threats in an honest way facing the nation and set america free as a nation of entrepreneurs, but we need to find a practical way to do this. glenn hubbard who is the featured speaker today and his coawe thur have the pollties for america. they detailed them in a brand
new book some of you have seen entitled" seeds of destruction" it was plushed last months by the ft press. glenn hubbard is not a stranger to aei audiences. he's the dean of the columbia business school, former chairman of the counsel of economic advisors to the president, prolific lecturer and speaker, intellectual, and an economic advisor. he's here a lot, and we are delighted by that. here's here today for a presentation of his new work by a panel that you see before you here today that features ramesh ponnuru, carmen reinhart, and the panel will be moderated by our very own head of economic policy studies, kevin hassack. please join me in welcoming
glenn altschuler [applause] >> thanks very much for that kind introduction, and thank you to a big audience the day after thanksgiving to talk about economics. the book i wrote with peter is a -- when peter and i sat down to write to -- the book, it was an idea on common ground. peter is a democrat, i am not. what we did was try to search for ideas that were both intellectually important to the two of us, but also had a chance of happening. the first interview i gaffe when aworked at the treasury drpt in the 1990s was to david wessle,
and he asked me about the timeframe for completion of the corporate tax integration study that the treasury was then doing, and i had been handed the economic stewardship of, and i said, you know, i think this interview -- it's 1991, i think it will be ready when my son goes to college. the "wall street journal" noted the interview and said my son was 9 months old. i will note my son is in college, and we are debating dividend tax cuts, so policy moved a little faster than i thought, but this is policy that is more than just waiting for a generation. now, in setting the stage of the book, just make a couple of observations, and then maybe a moment on what the book is about. the first observation is that amity is right. she was right about many things
and she was kind to write the forward to the book. she said the 1950s are very interesting. republicans want to live there, democrats want to work there, and i think what she meant by that observation in the sense in which she was right is that the 1950s in popular imagination are a kind of healthier time for many conservatives. there's memory of better growth for much of that decade, for all of us, i think there's a memory of the shared prosperity of that growth, and the importance of the sense in which she is right in the policy mix we'll talk about today tries to advocate is what set of policies both give us good economic growth and broadly shared economic growth, so she was right. now, the key was wrong. like amity being right, the key
to krushev was wrong. one of the famous kitchen debates between vice president nixon and cruschev was over what indicator was the sign of a prosperous economy, and how do you find that out, and two, the answer was obvious, and it was rocket thrust, a symbol of soviet power and his version of growth. like president nixon after hemming and hawing defined colored television as his indicator. when i talk to young people, i remind them that in those days, this debate happened in the year i was born. in those days colored television is like talking about the ipad today. he was talking about something quite important, but the real answer to why he was wrong and
why nixon got it wrong a year later with senator kennedy is that economies that have better innovation and growth wind up with both colored television and rocket thrusts. the growth is the answer. now, the book is not a doomsday book. i know it is fashionable, and every time i have lunch with pete peterson, i'm reminded of this discussion to have a root and branch discussion, and there's call that nism in my talk with you this morning, but this is not a doomsday book. rather it takes the metaphor of the season, but it is the ghost of christmas future from a "christmas carol" pointing to things that might be, but don't have to be. we are interested in long term problems, but we will not be offering a kind ofly --
liquidist eat your medicine. we are still living through and use this as a moratorium cro come as why we have gone astray. what i want to do is use the financial crisis that had its largest impocket in the 2007, 2009 period, but one in which we are clearly still living today as a microcosm, and i want to talk at the risk of oversimplifying about two versions of the financial crisis so as to nod editorialize, i'll tom them a and b. now, the a story i'll describe as mildly victorian because it reminds me of my mother, and my mother always believed that where there was pleasure, pain could not be far behind, and the victorian story is like this.
what we went through was a period of excess and private markets in their ire ration in this case excube rains caused this in bubbles, and the damage then happened in economy was deepened by the wrought in the financial system, poor incentives, lax lending standards, and results a loss of wealth of financial institutions of investors, of taxpayers. the cure in this story is well, let's get back to normal in the way we get back to normal. there's a couple of ways. one is countercyclical policy, to prime the pump, stimlace ourselves back to a reasonable trend growth quickly, and the second would be to rush for financial safety. we've seen this most recently in se the dodd-frank legislation that prizes a move to safety. now, the b explanation is
somewhat different. the b explanation says the financial crisis really didn't start in 2007. it actually was the product of quite a long period of time of long term structure imbalances. principally, although not exclusively, in the orientation of the american economy, so much toward consumption and little towards investment. that mirrored was mirrored by a policy orientation in key parts of the world that played the mirror role also to their own debt triment at the same time in which this imbalance is occurring and at the same time causing it in the united states, where a set of public policies exacerbate the consumption. i'll be specific as i go, but since we're talking about the
financial crisis as a microcosm, most of this had tuesday with excessive focus on the housing market to the debtment in talking about other forms of consumption or more importantly investment. story b, like story a, realizes that the shocks whether they were just the bubble in story a or the long term imbalances in story b, deepen their effects in the real economy through financial propagation, in particular the banking crisis, the shadow banks crisis in the united states, but the cure in story b is very different than in story a. it emphasizes structural reforms that would tilt the ship much more toward investment in a way from ab an excessive emphasis on consumption and tackle financial reform to balance two things, a
natural concern over safety in the aftermath of what we went through, but also a healthy concern of vigorous innovation in growth. now, this idea of a financial crisis as a met fore for this tension in what's going on in u.s. policy between the short term and the long term tees up really two themes that i want to track about that -- talk about that are a center in the book this morning. the first theme is that we have been through a series of policies sometimes deliberately, more often unwittingly than papering over long term problems that exacerbate in fact short term problems. a clear example of this is a housing bubble where rather than addressing long term problems in capital accumulation and in sluggish at least in the past decade, a growth of money wages,
we instead resort to cheap credit and financial interventions designed to target a growth in the housing market. i'll come back to that. the second example of papering over the long term to focus on the short term comes in the tax area where our repeated failure to be serious in talking about tax reform isn't just something that causes academic economists pain, but it leads to crazier and crazier short term policy. i'll come back to this in a couple minutes, and we are living through this drama today. another area is financial regulation where our inibility or unwillingness whatever it is to tackle long term problems of too big to fail, of the housing finance system in the united states, have led us to paper over problems in the financial system each time leading to a
different bubble, and then finally, entitlements where our repeated failure to consider what's wrong with social security and medicare two programs that play an actually very valuable function, a heart in the american economy, have led us to focus on rounds and rounds of discretionary policy with very little success, and very little success with either political party that proposed it, so theme number one that i'll argue as papering over the long term or the short term, theme number two i'll come to several times is about principle over principle by which i mean when we talk about reform in washington, we typically talk about principle spelled pal. we're talking about amounts. this is secretary geithner saying we have to target a size of a current account deficit to notions that the particular measures of the budget deficit,
a primary deficit, the social security program, whatever we talk about, have to be of a certain size. that discussion often happens with unfortunate inattention to principle spelled ple which is exactly what we want fiscal policy to do. how do we think about saving an investing in the united states? what role do we really want entitlements to play, and what role should our tax system play? the consequences, peter and i argue, have been a couple of problems. one in the here and now, and one that is scarier in the future. in the here and now, if you look at the decade of the 2000s,s first decade of the 21st century, we argue that a growth deficit relative to the growth we enjoyed in the prior part of the post-war period, probably led to as much as 10 million fore gone jobs. the thrust of the book is not
that we need a new stimulus package to bring those jobs back, but that our repeated error to focus on the long term cost us those jobs. the bigger issue we argue is not so much the mistakes we made, but the mistakes we might be making. that is our now failure to address entitlements, now failure to address tax policy and financial reform and so on could retard the country's fiscal position and growth position to the point that we can no longer provide the services americans take for granted by which i mean defense of the country and the free world, other public goods relating to research and education, all of these are imperilled by a fiscal policy and a growth policy that are off track. now, i said this is not a doomsday book nor is it a cook book.
if i had a silver bullet, i would certainly tell you. there are important levers for growth. i'll talk about these in the interest of time. on the one hand, you look at the list like this and say it's familiar, but it does have an eerie feeling to it. all of the things i will mention and that you see on the slide represents structural factors in growth. if you talk to economists, they are the kinds of factor u you might here from history in the industrial revolution, what they try to tell you about growth creation and growth more than sadly talking to current practitioners who think about what it takes to move gdp this year. there are only ten, but ten consistently worthy of mention of free markets which peter and i have a discussion in the book that's the benefits of
competition and political transparency. free trade which is much in vogue in discussion, but not really in practice. the benefits of free trade that we talk about in the book are not so much the ones you hear often which are variety and consumption, but ones you hear less often, the importance of free trade and productivity growth to the nation, and being an important part of a policy piste for a nation that too long has run large current account deficits. the third is vibrant entrepreneurship. here we tackle in the book that all entrepreneurship is about construction. much of the fear is precisely because of the met fore of creative destruction. destruction scares politicians. we argue in the book that most of what is featured in entrepreneurship in the past
have century or so ago looks more like what you think of as nondestructive creation, new markets, new instruments, new ways of doing things with a different kind of policy emphasis. fourth, we need some saving in this country. the notion that we can finance investments simply by turning to the international capital market works at moments in time where we found out in many moments in time for a long period that al jay bra, you don't -- algebra and fifth, raising savings, we need a financial system that works well in translating saving to investment. this has been one area in which the u.s. has excelled in much of the post-war period despite the problems that we know about from the financial crisis. this is a good news story, but a
story that is imperilled begin public policies on finance and not its aspects for mediation in investment. innovation is critical. it is not just about labor and capital, but about the speed of innovation, and again, policies fixations on ever-higher marginal tax rates and higher rates of gdp put that in pearl. the rest of the factors are intuitive. we need it invest in human capital. we have an energy policy that has not blunted the effects of oil price shocks on growth on either the supply side or demand side. health care is not just an issue for the obvious length that we would all like to be healthy and healthy people produce more, but for the length that efficient health care financing is important for the budget and for economic growth, and then finally w i have a small part in the book to manufacturing,
something out of fashion. apparently in much of washington discussion, manufacturing matters too. in no small part for r and d, but it's celebrated by economists, a shop floor example where you have to have the facility here. they are talked about, but seldom practiced in washington. in fact, what we have done in the last couple decades in both political parties is champion consumption over investment, build a financial system around consumption, and pay insufficient attention to trade. now, what do we do about this? i'll mention these and then do a handful of little case studies. peter and i outline what we call a seeds of prosperity blueprint. this is not a cry in your beer book. if you look at all of these and say what one or two things tie them all together, it's a couple. one is you have to put the long
term first. as i'll argue in a moment, that is not saying eat your spinach in the short term. there can be important short term benefits from putting the long term first, and the second lesson is don't use a single instrument to hit two octoberives. the two objectives sometimes championed by the two political parties, but certainly two reasonable october -- objectives to talk about are growth and fairness. the two points in the book are about several things. i'll talk about a few this morning, but happy to answer questions on any. one is recasting monetary policy. we argue in the book that monetary policy has gone astray in recent years. excessive focus on the short term with too late regard for long term objectives of monetary policies and excessive plight to
littization. the argument for the stimulus has been used too many times and we are trying to attack a structural problem with cyclical measures. the one in italics i'll come back to. it's moving to tax reform. free and trade policy is how do we champion the benefits of free trade for productivity in jobs, and how can we try to focus on trade agreements in fact rather than just sending the leader of the free world to seoul to mention their name. i'll mention a specific example in a few minutes, but there is a smart path to greater energy independence that falls squarely in the middle of arguments you hear on the two sides. social security has got to be the center piece of any near term fiscal consolidation effort.
we'll give you a plan. health care, we took a very wrong turn in recent policy by focusing on a short term concern rather than the long term concern which is cost. most economists speaking to them about health care irrespective of their political persuasion tell you if you get costs under crold, you can improve access. few tell you to start the other way around, but that, of course, is what we just did. medicare and medicaid needs to be repaired follows from that kind of health care debate. we'll talk a little bit about preventing another financial crisis. now, in putting the long run first, i'm going to choose three examples, and if there's time, i'll talk about energy as well. i'm going to pick three main examples. tax policy, social security, and financial regulation. these are three of the areas in the seeds of prosperity blueprint, and i pick the three
because they all fall into a trap. in each case, policy is admired in a trap that is not because people are not intelligent. it's because they have constrained the problem simply to think about the short term and not the long term, and here, let me start with tax policy where again under both republican and democratic administrations in recent years, we have slipped into what peter and i call the consumption trap. the consumption trap or the more money in people's pockets trap to quote my former boss, president bush, in talking about tax policy changes, that trap centers on the marginal ability to consume out of tax changes in the near term as the touch stone of evaluating a tax policy. now, that has a couple of issues with it. one, is economists tell you it
is very short termed focused and becomes to whether you are no whether you are talking about a marginal tax change which is modest in most economic models versus a marginal capacity in a long term tax change which is larger in most economic models. it is also problematic because it leads you to miss an argument about the centrality of marginal tax rates themselves in judging tax policy. in the intuition that's familiar from a first lesson in public economics that the distortions of marginal tax rates, and the higher is marginal tax rates. why this trap has been important by both sides allowing them to fall into the more money in peoples' pockets trap, we are in
a debate whether high income people will or won't save more of the given tax cut rather than focusing on the effects of marginal tax rates on saving investment on entrepreneurship or failing to realize that about half of people called high income or the top 1% of u.s. taxpayers are business owners and it's not a consumption problem they are solving, but an investment problem. one can get out of that trap if they wanted to focusing again as amity focused with growth and broad-based prosperity saying why don't we have a system with low marginal tax rates, but doesn't have big average tax rate cuts for hi income people. i'll give you an example of that. social security has fallen into this trap by saying no. what we really care is something about size. we're worried about social security deficits and we'll
change benefits and taxes to meet some deficit target, and as opposed to stepping back saying what the heck do we want this thing to do? i'll give an example following growth and broad-based prosperity of what we could do to achieve principle but -- principal but give us a ple way about it. the trap we fell into and both parties said housing was a way to paper over the way people feel, and so by broadening access to housing finance further and further down the income scale, we could have a big effect. to do this, we need, of course, to loosen lending standards, use government sponsored enterprises to carry out a mandate that few in the private sector do own their own, and that, of course, is what we did. the trap leads you to try to close the door with a focus on
safety rather than on health, and again, there is a way out. let's talk about tax policy for a moment. the objective for tax policy is really about saving investment in greet. we don't have to use the tax code alone to hit distributional objectives. we have something else in the federal budget called spending that is very capable of doing that, and tax policy can be used in part for fairness, but fairness shouldn't be the centerpiece of setting tax policy. now, the problem with the trap of falling into the marginal con consumerrer argument is what we have done is center the debate not over the objective that peater and i mentioned that i think any economist would mention, but rather on the fate of the bush tax cuts as if the entire code is described by the 2001 and 2003 tax cuts that led to three rat holes of policy
discussion. rat hole number one is repeal the 2001 and 2003 tax cuts. now, this is a rat hole because in and of itself repealing the tax cuts would be close to the largest tax increase at least in recent history without any discussion of offsetting policies for growth. it would certainly not be the way economists tell you to go about deficit reduction in and of itself that centers more on spending cuts. a second rat hole is why don't we extend all but the high-end tax cuts? . geithner said this was the way that the u.s. could convince the rest of the world it's serious. urn fortunately, that's wrong. ..
>> the third is largely a republican one. extend the 2001 and 2003 tax cut permanently. now, that is a rat hole because this set of taxes enshrined in the current internal revenue code would not be where, i think, most economists would start if you were trying to think about big reform of taxes. some elements added yes, menino. a better answer would be to extend for a while then and have a real discussion.
low marginal tax rates because distortions are higher the higher the marginal tax rate. emphasis on investment incentives and narrowing tax preferences, that is it does not have to be the case. low marginal rates are associated with low average rates for a given taxpayer. one could achieve that kind of revenue without distorting marginal tax rates. a good long-term objective is something like a broadbased progressive consumption tax. there are many, many good ways to start. they all share this focus on lower marginal tax rates. social security begins with the problem of principle versus principal. problem comes about because we tend to use the word deficit a lot of economists still like words like deficit. they come from accounting. i teach in discipline. captains get paid more than
economists. they may know a lot more than we do. lax economic concept. there are two components that do have economic concept. one is called taxes and the other is spending. if we look at a proposal the question is not what it does to the deficit in social security with the overall but what it does to spending and taxes. if we ask ourselves what we want some security to do we can avoid unfortunate rattles. the rat holes here apparel tax increases which we know suffer from the high marginal tax rate problem and other spending cuts. i mentioned at the beginning of the talk. if we don't get this right and we don't counter with taxes we will simply not be able to defend the country or pay for education. in the in the present value terms. we can try to reduce benefit
cuts. there are many, many ways to do this. no single proposal. all of these proposals would get it right by saying, yes, we need to bring the system and line, but we need to do it in a way that doesn't damage broadbased prosperity. now, what about financial regulation? back to the objective. here we want to talk about plumbing to enhance and enable balanced growth. as a plumbing because the financial system is not supposed to be the sexiest thing in the economy. sometimes distress at the number of students who are focused solely on finance. finance should be pulling, but very good quality plumbing, like you would want in your own house. what can work is the over emphasis on housing that we have pursued in public policy, not just because we give too much housing, because the wind up distorting the entire financial system.
the entire edifice of securities that was built on top of what used to be simple home mortgages. we also can't do this by focusing simply on safety. safety is a kind of cheese with strategy in which all we do is wind up holding cash on treasury bills with little ability to generate appropriate levels of risk in lending. radical mortgage reform. i will just mention this. reform of housing finance and the removal of much of the major government role we have had in the gst. a rethinking of mortgage contracts. on capitol reform rather than just saying hold more, more, or, the desire is to think about what you want capital to do as a discussion of a familiar proposal to economists of how to develop and design practically capital requirements that moved
over the business cycle. finally on systemic risks really focus on the elephant in the room which is the credible and to too big to fail. featured in the discussion, largely silent in the actual law. that we just mentioned quickly, and leaking compacted in q&a if you like, one area we also talk about in the book is energy policy. this is an area, too, where the wonderful compromise and economic perspective between what republicans have argued in energy policy in democrats. here the goal is to reduce the damage from oil price shocks and recognize externalities' in oil consumption. many pit will focus on environmental externalities'. in the book we talked a lot about national security externalities'. what can work, to rat holes that
we have been going down. one is what i will call the independence myth or autarky. you will simply never import energy. the second is a kind of sciences manna idea that if we just wait long enough technology will happen. most business people respond to incentives. one thing we talked about in the book is an oil price for as opposed to the cap and trade are simple tax that makes sure that oil prices don't fall below a reference level which removes uncertainty in an invasion, obviously it taxes required. to tie all this together, to wrap up, all of these examples have something in common. a single key that unlocks change. that is pivotal to thinking about the long term. i have made economic arguments with you this morning. i'm not a politician. i will be bold enough to argue
with you that there is some political salience. start with the social security recommendation for a safety net and settlement system from a republican point of view. that addresses the need to reduce future outlays and try to get rid of required tax increases. from a democratic point of view it focuses on guarding against poverty in old age. tax reform from the republican point of view, the plan that i outlined would address the need to put it away from consumption toward investment and trade. from a democratic point of view it would address the need to raise wage growth in the long-term. the financial ventilation policy of the republican point of view would strengthen financial intermediation and innovation. from the democratic point of view it would minimize casino incentives. finally the oil price floor would have market-based innovations incentives, perhaps,
from the republican side and address green concerns more from the democratic side. to wrap up, there are two ways to think about policy. the have been using the top one of these. in the long run we are all dead. throw was also right. in the long run men or women hit only what they imagine. [inaudible conversations] >> i guess i would summarize your comments as saying we have been using h-p's with strategy to get out of a rattle. i guess it probably lower than that in in the first place. we have to discussants. the senior editor for review. he has written for the "wall street journal," the new york times to the financial times, washington times, and many other publications. he is the author of the aei
monograph, the mystery of japanese growth below it's at the will said when nicely and into the conversation that i expect to have with both discussants which is that there have been some experiences the being in radicals in the past around the world. some folks have tried to do different things. what we would like to do is begin a discussion that takes your description and compares it to things that have been tried in the past. so with that -- and also the political feasibility. why is the we keep doing the wrong thing? with that i will turn it over to ramesh ponnuru and then introduce carmen. >> thanks. let me just start by agreeing with professor robert, nothing says christmas like "seeds of destruction." i agreed it a lot more in this book in particular i would say
that i am a much more keen on amity and her ideas and nikita khrushchev. that is the choice before us. but as a journalist i am supposed to prized conflict. i'm going to spend more of my time talking about the things that i disagree with. let me start with the areas of agreement. at think one of the really interesting things about this book is the way that it starts with perception. in many areas. touch with perceptions and insights that are more frequently associated with folks making meat into a free-market more interventionist arguments about economic policy and then move from them to pretty conservative conclusions. a tank that is true of the discussion about china, the discussion about manufacturing,
and the one place where i think that this book makes a real, at least, rhetorical break from a lot of central right commentary and economics is that there is a really sound up understanding that our schools should not be to simply restore the economic status quo before the financial crisis. there is an understanding that the economy was not in good health during what most central rights economic commentators, at least judging from the public rhetoric still regarded as the boom. in some cases conservatives will talk about the bush boom and act as the that is what we want to get back to. at think for a lot of reasons including wage stagnation that is a mistake, and it is a mistake that this book i think very wisely avoids.
the book makes a strong case for a pervert -- progressive consumption tax. i guess i am predisposed to thinking that. indexing of social security benefits, initial benefit levels rise with prices and not without wages, i think, is an agreed policy. clearinghouse for derivatives, capitol reserve requirement policies that are anti cyclical and a rules based monetary policy. all of this is great stuff. it is adopted with the very large steps forward so the disagreements? let me start with health care. on health care of a lot of my fundamental policy conclusions are very much in keeping.
a very different way. rising health care costs as our principal problems in the health care sector. and not sure i would regard it that way. i think there are reforms, including many of the reforms that they talk about that we get a better value for the dawn from individual control, satisfaction . but if 30 years from now health care spending as a percentage of gdp is higher than it is now that is not something that i think is problematic. the country as it grows wealthier will spend more on health care. economic policy makers should think in the back of the mind that there is some correct figure for health care spending for health care spending over gdp that we ought to be in before.
health care spending will go down, but that should not be the principal goal of those policies. i also think that things such as the infant mortality rate and life expectancy of this country is strong evidence about the efficiency of health care spending in this country. there are a lot of reasons for thinking based on our lifestyle that those numbers would be likely to be worse than those for other countries for reasons that don't reflect on the efficiency of our health care spending. on medicaid the policy recommendation in the book is to have a capped block grant to the state. the state pays out and the federal government based on population plus inflation. it would be a step forward.
more rhetorical. the emphasis on the book would be that what you get from this policy is increased state flexibility. the problem with medicaid is that you have all of these rigid federal guidelines and micromanagement. that is an element of the problem. the bigger problem is the lack of accountability. the fact there are given a blank check to spend more money knowing that somebody else is going to pick up half the tab. am borrowing year from the terminology, it is not that it is an unfunded mandate. it is a funded and mandate. in the last on medical malpractice i simply disagree with the idea that we should have a federal reform of medical malpractice laws. this suggest that there should be a reasonable cap on
noneconomic damages. it seems to me that is not clear to be the best approach. even if it is committed is that clear what the reasonable cap should be. medical malpractice strikes me as a perfect area in toward law where the flaws of the state's policies are almost exclusively born by the residents of the state. why don't we have laboratories of democracy? why do we allow states to bear the cost or reap the benefits of their different medical malpractice policies? at think we should want to punish states for having a lousy political cultures that drive doctors away commander should want to reward states for improving the political cultures and getting better policies. i think that is essentially the system that we have. don't see any good reason to change it. turning to other areas, on
fannie and freddie, principal disagreement is that like a lot of reform proposals i don't think this one goes far enough. it may talk about -- in a lot of places they talk about their ideal policies and what the politically compromise step forward should be. think the political compromise step forward should be to really disentangle fannie and freddie from the taxpayer. for federal support. did my very well mean ending these institutions. my ideal policy, however, is to either burned or raise these buildings to the ground. i am not dogmatic about which method. put a sign saying, these are the wages of sin. you're never going to get to my right.
i think the bleated hostility in the book toward adjustable-rate mortgages and interest-rate -- interest-only loan is unjustified released not justified by the argument presented in the book. at think that in some circumstances for some people who know what they're getting into is these sorts of mortgages can make sense and pork out fine. and biased because of speaking in both cases from personal experience. on oil into policy, although the rhetoric of addiction is popular and a bipartisan spirit and not sure it is app of it. you know, we don't typically think of something that is cheap and useful and therefore used in great quantity as something that we are addicted to. in that think that there is a real political levity to the suggestions on energy policy.
it is all well and good to suggest a policy that reduces volatility of oil prices, but price shots are unpopular. you're going to reduce the likelihood that we have a downward shock in oil prices. let me put it this way. if i were a professor at harvard running for political office on this platform against the candid who had a particularly lurid sex scandal of would bet on the sex scandal guy. finally on the china question and not really sure what the upshot is the what we should really do.
there is some gesture in the direction of let's really get tough with them on currency manipulation. what form that takes, the possible negative consequences? one last spot, reading that china section of strikes me as reminiscent of nothing so much as the books about japan that i was reading two decades ago about how the japanese were eating our lunch. we really had to be terrified into changing our economic model. that, i think, it turned out pretty clearly to be mistaken. it does not of course mean it is mistaken this time around. but it is a similarity that i found quite striking. with that i will yield the floor. except to say i think professor hubbard and his co-author again for writing a very stimulating
and interesting book. >> thanks very much. of. >> carmen reinhart is the co-author. i think it is safe to say that book, turn on the screen, i think that it is safe to say that book is really the most influential, serious, academic book that i can remember in my lifetime in the economic sphere. it has been a huge success because it has so much wisdom. some wisdom might be an interesting thing to bring to this session. looking at past history as being a crisis of capitalism that motivated. the start of this book, a very common experience.
recently appointed as the senior fellow at the peterson institute for international economic association turning as in the thinktank community after being a professor in maryland for many years. >> thank you for that wonderful introduction. that me begin by saying that i share much of the diagnosis and much of the proposed cures that i laid out in this book. i will delineate where my thoughts : and also where my thoughts depart. i think we have greatest departure on monetary policy and more broadly defined financial sector. at the beginning the elephant and a living room that i will be addressing this importantly
addressed in the book through a lot of the talks about need to deal with entitlements, need to deal with savings incentives, the elephant in the living room that i am going to be addressing this debt. government debt, which keeps rising as far as the accuracy and contingent liabilities of the government. this is, as i said, a great deal said in the book. i will refer to that. the federal reserve began to publish in statistics on government debt. the flow of funds. the historical statistics of the united states co back to 1916. i can say that since 1916 the level of public and private debt
in the united states at present is unsurpassed in public and private. when you look at public along only one, 1946, right after world war ii, public debt. and it is now. that is a running theme that i will come back to. the elephant in the alarum is, well, what do you do? a decade in the aftermath when you inherit this large stock of debt. any policy decision has to be informed by the fact that we have this debt overhang. that is calling to color, not just talking about typical policy, structural policy which i will go through. and this is not a baby elephant,
or an adolescent, this is an elephant with large heads. so what the starting point of the authors pretty much convincingly tell the story, we have and tax system where there is a lot of favoritism toward borrowing, consumerism. this is no more clear than housing. it we have had already three years after the crisis. plenty of evidence that we have an efficient fiscal stimulus. please tell me if i mischaracterized. multiple layers of run-up to the crisis. we really have not dealt with satisfactorily check.
you know, if our lord return objective is the desired 1950's outcome chest, an era of greater growth, we have in misalignment of incentives away from capital formation and moral hazard is everything. moral hazard, right off the board and the authors are talking about, you know, the too big to fail problem. if we think we have dealt with it, think again. too big to fail is alive and well. here just drawing on a little bit of the aftermath of financial crises, let me just state that this is not about the immediate aftermath, but the decade after a major financial crisis. these are the economic environment in which any changes
in policy unlikely to take place if history is any guide. is the decade. this is based on work with the vincent in my earlier worked. the paper we presented after the fall at the jackson hole federal reserve symposium. basically said if you compared the decade before the crisis to the ticket after the crisis a decade after the crisis is, if you think the title seas of their own destruction sounds gloomy, it is not an understatement to say that the decade after a financial crisis is a pretty gloomy decade. is characterized by lower growth, higher unemployment, and
lower housing prices. this is important also when it comes to that sacred cow of dealing with the removal of tax incentives and interest adaptability and such. that is an environment in which policy tauruses are going to be made. one criticism that i have of the book is that i was less wanting to hear more about the issue of timing and sequencing of some of these policies. i would like to, you know, because -- look, it would have been an ideal time to remove the interest deductibility of mortgages during the height of the real-estate market. that is not the situation we are facing. we have to ask ourselves, with the timing of the right even
though it is certainly the right idea in terms of reducing long-term miss -- potential misallocation of resources. it is the timing right given though long shadow that financial crises cast? the next slide basically shows the elephant, just part of the elephant. it is a small part of the elephant. it basically shows public textbook in the three years after a severe financial crisis. so it is a% of gdp. if you were to take care of the year of the crisis, 2007 and ask yourself what happens in the first three years after a financial crisis, the average increase in public to is about
86%. in the the words public debt nearly doubles. when you take into account implicit. frankie: this does not take into account implicit guarantees in this doing things like fannie and freddie which even the first quarter of this year alone was explicitly included in the government's account and amounted to about 27 percentage points. so if you take the following -- call me for a moment. flow of fund, net central government debt plus state and local debt plus debt of government enterprises which as of the first quarter of this year includes fannie and freddie, we are at 117%. only surpassed in one year, 1946. and so the whole issue of indebtedness : forward means that -- and by the way, it is
very much central to a point that is at the heart of the book. what can you do? what can policy do to foster growth? in recent work or more recent work insured paper called growth in the time of that, we highlight that countries with the high stock of debt, debt levels, public debt levels above 90% of gdp to mcgriff rates are lower. so the point i am making, all of these commentaries about dead in the aftermath of crises, we are starting out. and so, we are starting call from a whole that involved a high indebtedness which also brings me to the issue of
monetary policy. now, the 50's look great in retrospect many dimensions, but let me say that in the aftermath of world war ii the united states and most of the advanced economies that have inherited a very large stocks of debt had far from independent monetary policy. there was an era of financial repression which -- was test financial repression in? i am sending this. what may be the golden rule from a long-term desirable stability on the price level and what you would want for a central bank is not with the central bank's data when they faced high levels of debt. it wasn't because it was desirable. it was because it was expedient.
what is financial repression? financial repression actually combined caps on interest rate or keeping interest rates low, having a high share of marketable debt. in 1961 in the united states we had a conversion of debt that took marketable debt and made it unmarketable. in the name, pretty much a team we're seeing all over the world today. have a higher check of debt in which you don't worry about rollover. interest costs alone. a little bit of inflation. that little bit of inflation combined with low interest rates and large captive audiences was a major factor in liquidating our debt after world war ii here in the u.s. in the u.k. and australia and most of the address to economies which at the time inherited a lot of debt.
so that taylor rule is nice, but the tail a rule really came around at that time in which we were facing very different, very different economic environment, that which we have inherited today. so a practically agree with everything that is said the meeting to change tax incentives, the fiscal for off, about regulation, but in monetary policy a really have my doubts realistically we can expect in the decades to come. if we look at this last episode of high world indebtedness because this is not just the u.s., but also the u.k., most of the advanced economies what to expect from the monetary policy.
now, i do share -- but didn't know this, but like wins mom i am very victorian. by last commentary is going to be on monetary policy. more importantly the feast side, the victorian feast. the victorian feasted carmen reinhart this is important looking forward because one thing where we are not -- the 50's is actually not a very good guide it afoul integrated vr. so what monetary policy does and part of our confounded external imbalance continues to do, which is provide a continual source of financing from abroad. whether we liked to a middle not really undermined our monetary
policy on a tony in a big way. the reason i say this is not to a, you know, because the view which is, i think, espoused -- not embraces, but espouses, we deviated. i heard this from tenants of. we deviated. this important contributor to the crisis. i just don't buy that. we have massive capitol inflows, purchases of u.s. treasury from central bank that dwarf the magnitudes of qeii and qe1. england -- i'm sorry, the u.k. had massive capitol inflows. spain had massive capitol inflows to decrease. capitol inflow is to step right way of saying he barolo from a lot. in effect when you look at monetary policy the correlation
between the federal funds rate and long-term trade is a very weak one in this area of global capital. what i am asking the offers to of income more about it is, how did he shape monetary policy in an environment which is a global and we have a lot of that? a think the win raised the issue of we can't pass to few instruments and we have too many goals. will we had. a lot of credit was fuelled by be able to borrow from abroad. also have to look at more measures in which old-fashioned
tools like margin requirements and other things that encourage indebtedness. might not be pretty, but they may very well be expedient. to wrap up, let me say, a very much enjoyed reading this book. a lot of the issues, the articulation of things pertaining to -- just really how messed up our tax system is. when you go and talk about current account deficits and borrowing from abroad, a trace that and put me back to our tax system. that is a key determinant of saving and investment. so it me be very hard to think
about these issues. in terms of the proposed solutions, as i said, it is impossible for me to read my own work without a degree on everything. at think that, you know, we have to a number one, think about more the timing of these things and let of the fact that the aftermath of financial crisis is not particularly vulnerable. have you would sequence and bring these in. secondly, a tampa the debt overhang that we have weekend of may disappear. the way that you make did disappear is through partial restructuring to a partial default, which is called restructuring, growth, which seldom happens, and through some combination of inflation.
it could be that it does not have to be the big blowout variety that we have had in many emerging markets or in germany, but the way the we did it in the 50's, the way we did it in our recent paper on financial repression i calculate the liquidation effect, how much debt was liquidated through combination of very low interest-rate policy, segmented markets demand a little bit of inflation. it was the equivalent of raising 2-4% revenue is as a% of gdp in the u.s. the the late 40's and through the 50's. for the u.k. it was actually even higher. for a strong it is even higher in the early fifties. so i want to send them back to the borking board and monetary
policy. >> think you very much. i think it before we open up for questions just for a minute to ask. also i have just one question. and you could kick off your response. the seeds of destruction, you said that they were planted by both parties, which in some sense means that you yourself are kind of a farmer. you're there as chairman of the celts lived economic advisers for president bush. the you think that this book reflects a change of heart for you? is it more that you can't that you saw this coming but were completely unable to get the politicians to listen? hoping to be more successful now >> i can answer that question at the end. no, it is both parties that contributed. if you take the bush tax cuts,
something i have a lot about, there are wonderful elements. some particular ones i am very fond of. suffice it to say that the set of policies that we followed, not just in the tax area, but the whole area, of the policy did exacerbate the problems that, and mentioned of excessive leverage in the economy. i don't think any one person gets blamed for that, but it is surplus something that both parties acquiesce to, both parties acquiesce to the housing subsidy of return. both parties looked at tax policy through less than pro-growth. i don't think that is a change of heart. a recall making those points many times. the only person that opposed medicare expansion in the bush administration. there it is. >> he did that right before you departed. >> that's true. vesture. i would like to thank carmen for
your wonderful common spirit a few things on health care. the book that i wrote with john cogan, it is also small. if it's in a stocking. it is about value. talk about cost. really it is of value. every reason to believe we are not getting value right. costs are too high from a value perspective. ramesh ponnuru is also right on medicaid. the key issue is less the formula you choose and just ending co participation, in the states getting to spend other people's money. and pat, john and dan and i argued it almost doesn't matter what formula he said. stop the co participation in and go away ed. on adjustable-rate mortgages and interest only mortgages what we argue is that we ought to go
back. we ought to go back to the kind of regulation that limits contracts. i have no problem with affluent people having any kind of contract award, but it was ironic that a wealthy person buying an apartment on park avenue in my hometown had a simple contract and many low-income families with some prime mortgages. that is not the way we do anything else in regulation. probably not the way we want to do it here. the addiction really is harmful. the national security externality. it is not addiction to things coming out of the oil and ground in taxes. it is coming from places that are trying to harm us. on china there is a difference from japan. i am one of the ones who wrote quite critically that japan will eat our lunch in the late 80's and early 90's. this kind of global imbalances such that it is not i am afraid
china has a better economic model, but that the global imbalances are truly problematic i absolutely agree that that is the elephant and the ground, but there is more we can do about it. the big elephant in the room is entitlement that. not the scariest one spirit a real scary numbers are the entitlements that to read much larger. that we can change and making changes with the stroke a pen. we can change it by limiting benefits growth in a very large effect on the long term fiscal policy of the country. in terms of timing and sequence we are given the book that you basically want to tackle spending first, particularly social security, corporate tax changes, and limit a reduction. a thinks tax reform follows. monetary policy, we may disagree. the 50's were also a time of william r. new comes out to praise in the book.
in addition to the things in mission it was also an accord. the way to the treasury, something that we could wish for the problem with a little bit of inflation, it is like capital levies and some optimal tax models. if only it was a onetime wolf lefty it would not be distorting and you could finance things with the pier the problem is rich people suspect they will do it again. on the crisis, we don't argue that the violation. it probably is important in contracts breath from gaps between short and long term. >> and now i asked for questions. please raise your hand and as for the microphone. >> it is gainer marshall.
i think glenn and peter for this excellent book. what that was very interesting, and this was the question. elaborate on it. when trying goal of issues, a great innovation manufacturing. bipartisan, holistic, and it is real. there is a focus. it is very interesting to see that they did not get much into this. very characteristic of these kinds of discussions. the book breaks out of this. tickets into questions but the real economy, manufacturing, innovation and trade. the book speaks about the problems that china has imposed on the system in many ways. you give some suggestions about ways out. but if you might appeal to
elaborate? what we can do to rebuild our innovations systems that we not only innovate better, but that we manufacture what we innovate and not simply offshore that to increase a trade deficit which is unsustainable. >> are great questions. on china and the way out of macro and micro. macro in the sense that the u.s. needs to saved rather less. those are both in each country's self-interest to this whole notion of policy coordination, don't think you need anything that grand. this should happen. on the micro level we have to push the chinese are to be not so much on the exchange rate, but more on a financial system that actually encourages that rebalancing. a think as a push that is likely to succeed. in addition there are two things
we should do. one is obvious and the other less obvious. really continue our support for basic research. a lot of innovation in the real world has come from basic research in the sciences and engineering that involve federal support with universities. i think that is a great thing. but i think manufacturing is also very important. in the book we don't advocate and industrial policy. lycee stop handcuffing manufacturing. lower the corporate tax, litigation reform, things that keep manufacturing here. the reason to do that is of mercantilism. it is a sense in which you actually learned something about practical or critical innovation if the shop floors aren't here all of the basic research in the world will give you that innovation. we are a little more manufacturing friendly. at think many conservatives. >> thanks. izod question.
i guess the will start over here and work around. one, too, and three. >> appreciated. first of all, i am the tax code -- test to give you a reference, the compliance is only one of external cost of the code. gao did a report in august 2005. if you put the numbers in it is more like 700 billion annual external costs. could be up to a trillion to read and pat, i asked about that, and his response was just we stand by all of our reports that we may to gao. robert carroll, formerly of the tax analysis division said in community testimony, i think it was his finest committee, that the code could be decreasing the size of the economy by up to about a million -- a trillion
dollars. i wanted to ask you, mr. hubbard, what he thought about a 15% tax credit just aimed at manufacturing? at understand there is about a 20% cost difference between the limited chinese products here and what we can make it for. that is according to an outsourcing cost index. and a corporate tax reduction, although a favorite, will not affect the past used. so proprietorship. and finally, i asked you this. a t r estimate on all the indirect costs, tax code, legal system, regulatory, but two and a half trillion a newly added to the 5 trillion spending.
federal, state, and local police seven and a half trillion total. so if people want to know why the economy is slow the atr uses the 12 trillion a personal income as the denominator. the kid about 60%. so a typical business of a million dollars above cells per year, $600,000 on their portion of government created cost on average. >> your question raises all lot of interesting issues because the higher that we try to make marginal tax rates in the corporate sector or the non corporate sector we get all kinds of tax avoidance and regulatory schemes that become necessary. lower our marginal tax rates, not just the lower distortions that economists talk about, but the lower the regulatory apparatus and the tax avoidance apparatus. don't think the fda should be to
give a tax preference to manufacturing. really he tried to lower tax burdens for all activities. lowering marginal tax rates on individuals and lowering corporate tax rates the does not have to blow a whole in the budget. lower the marginal tax rates. there are ways to do that. in the case of the corporate sector you could probably lower the corporate rate into the high 20's with no of said just because of large income shifting potential. the and incorporated sector would probably require offsetting deductions. >> okay. we have another question right over here. >> my name is alex juergen. a very much enjoyed the panel. i have a question specifically on the oil price tag. how would you implement this tax if it's sold goal is to keep the price of oil high which would
mean the differential between the market price of oil and the target price will come out to you prevent government and politicians from viewing this as a revenue source that will always be there? presumably it would not be there if the price of oil was high enough. >> well, a stud at the back part of your question first. we argue that the tax should not be used to raise revenue. it out to be used and rebates. we're talking about a substitution effect and not the income of fact. the difference between an oil price and the state tax is, we are trying to focus on lower tail and not the whole distribution. it came about talking to executives and companies who were looking at a real saving innovation. the biggest fear was what we are about to celebrate, which is will prices coming back to being low. suvs are back.
nobody wants to think about alternatives. a tax does not take away the state of the world. a fax variants, but it does not eliminated at the bottom. so rather than having a simple tax, have one that operates only in low price states. we weren't trying to great revenue. it is up to politicians what they do. this is simply for the price effect, and we would rebate the money to the american people. >> in response to that, i'm not celebrating it. probably two-thirds of the way convinced by the argument. i was just making a political point about the feasibility. >> this is a follow up on the last question. >> could you identify yourself? >> you indicated earlier in your discussion that technology is a rat hole. you indicated earlier that it will price for what move some of
the uncertainty for innovation. where does innovation in an rathole began when it comes to at technology and energy? >> my point was that business people don't innovate for the heck of it. they invade because there is a return to that in addition. when you're talking about long life capitol have to be very worried about states in the world in which the price of oil stays low. said this wishing that people would innovativeness that uncertainty is not going to make it happen to read at think that if energy taxes would be one way to encourage, but i don't think they are the best way. it don't really get at the state of the world that people are worried about, which is that you could go through five or even ten years. so i am a huge fan of innovation. it is not innovation, but the idea that dreaming, hoping. hope is not a strategy. hoping that business people will and of a further and could is
probably not a good policy. >> we have run into hour time limit. like to thank everyone for coming. >> this event was hosted by the american enterprise institute in washington d.c. to be for more information visit ei got org. >> welcome to book tv live in prime time. time. tonight we have three topicpi areas of discussion. number one, we are going to loo back at some of the nonfiction books of 2010.mber two, we a clinch a refusal of the publishingindustryin the industry, and we are going to look ahead to some of the bookse coming out in early 2011.20 joining us live11 from seattle,e the co-founder of thisnder of is
publishing industry newsletter and what side. first off, what were some of the big selling nonfiction books of? 2010? schlecks well, certainly thece biggest book of 2010 was w decision points. we are seeing sales of almostio 2 million, and has only been oue since the beginning of novemberf in addition to that we have sen 200,000 copies in the book only. so that is toping list for sure. >> can you give a reason why? the president left with a very low approval rating. >> he did. and it is interesting that this book would do so incrediblywel. well. there are a number of people inf publishing that aren't thinking that his book is actually goingg to surpass the sales of clinton's book which is an intein