there's an interagency group on privacy that's also working, and then the ftc who is the primary enforcement agency in the area of privacy has also been very active in this area. so there's a lot going on, and i think all of it's important. at the end of the day, it comes back to our desire to see the internet continue to thrive and grow as the innovative economic engine it's been. we think that happens only if people trust the internet and in one -- and people understanding that their privacy protected is fundamental to continuing that trust that people have in the process. so it's, i think it's quite important that the administration be as focused as it is on the issue. >> host: this is "the communicators," our guest has been lawrence strickling who is the administrator of the national telecommunications and information administration. lynn stand on the, senior editor, "telecommunications reports." thank you both. >> guest: thank you.

>> from barack obama to george washington, learn more about the nation's presidents online at the c-span video library. biographies, interviews, historical perspectives and more. searchable and all free. it's washington your way. >> major mortgage loan lenders admitted to improper

documentation practices during a recent house subcommittee hearing. representatives from bank of america, jpmorgan, wells fargo and citibank testified before a panel investigating the mishandling of mortgages and foreclosures. here's a portion of the hearing that runs about 45 minutes. >> next we will have ms. stephanie mudick, executive vice president, office of consumer practices jpmorgan chase. >> thank you, madam chair. congresswoman and members of the committee, thank you for inviting me to appear before you today. my name is stephanie mudick, and i'm head of the office of consumer practices at jpmorgan chase. jpmorgan chase is committed to insuring all borrowers are treated fairly and with respect, that all appropriate measures short of foreclosure are considered and that, if foreclosure's necessary, the process complies with applicable laws and can regulations.

as i discuss in detail in my written testimony, we regret the errors in our affidavit processes, and can we are actively correcting those issues. at the outset i'd like to emphasize that chase strongly prefers to work with borrowers to keep their homes. fore close yours cause significant hardships to borrowers and their communities, also resulting in severe losses to investors and lenders. therefore, we always consider whether there are viable alternatives to foreclosure. chase adopted its own modification program starting in 2007, and in 2009 was an early adopter of the government's program. since january 2009 chase has offered almost one million modifications to struggling borrowers and has completed over 25 o ,000 permanent modifications. sustainable modifications are not always possible. there are some borrowers who

simply cannot afford to stay in their homes notwithstanding alternatives. there are other borrowers who are not seeking modifications. while we make repeated earths to -- efforts to modify a delinquent loan, sometimes we must proceed to foreclosure. a property does not go to fore your if a modification is in process, but in one has begun, our investors -- including the gs es -- have instructed us to allow the two processes to run at the same time. however, we will not allow a foreclosure sale if a modification is in progress. i understand the focus of the committee today is our recent decision to temporarily suspend foreclosures in a number of states. it is important to note that this does not relate to whether those foreclosures were warranted. we have not found issues that would have led to foreclosures on borrowers who are current.

both a last resort and occur only in appropriate cases. to be clear, we service millions of loans, and sometimes we make mistakes, but when we find them, we fix them. our recent temporary suspension of some foreclosure operations arose out of concerns about affidavits prepared by local foreclosure counsel, signed by chase employees and filed in certain mortgage foreclosure proceedings. specifically, employees in our foreclosure operations area may have signed affidavits on the basis of file reviews and verifications performed by other chase personnel, not by the -- [inaudible] themselves. but the facts set forth in the affidavits and the amount of indebtedness, the core facts justifying foreclosure were verified prior to the execution of the affidavit. let me repeat, we take these issues very seriously. our process is not what it should have been, and it did not live up to our standards. while foreclosures have been

halted, we have thoroughly reviewed our procedures and undertaken a complete review of our execution policies. we've also enhanced training for all personnel involved. in addition to strengthening our procedures for future filings, we're also working to remedy any issues with affidavits on file in pending matters. we are working to strengthen our procedures, we're committed to addressing these issues as thoroughly and quickly as possible. i'd be happy to answer any questions you may have. >> thank you very much. mr. alan jones? this. >> thank you, chairwoman waters, congresswoman -- [inaudible] i appreciate the time to discuss our efforts -- >> i'm sorry, we can't hear you. is your mic on? >> yes, thank you. so chairwoman waters, congresswoman biggert, i

appreciate the time to discuss keeping americans in their home. wells fargo views foreclosure as a measure of last resort. in unfortunate cases where a customer simply cannot afford a property even with a modification, we actively look at other remedies such as short sales to prevent foreclosure. second, we hold ourselves accountable for the quality of our foreclosure data and work to insure our borrowers are protected from wrongful foreclosures. and third, we understand the necessity of having procedures that insure our documents comply with the laws and regulations that govern our industry. our goal has been to keep customers in their homes. since january 2009 we have provided nearly two and a half million customers with home payment relief through refinances and modifications including more than $3.5 billion of principle reductions. more than 92% of our servicing

portfolio has remained current on their home payments, and fewer than 2% has gone to foreclosure sale. statistics that remain the best among our peers over time. with the goal of exhausting all options before moving a property of foreclosure sale, we have invested heavily in hiring and training 10,600 home preservation staff for a current total of 16,000 people. and we expect all of them to follow our policies and procedures 100% of the time. here's some key aspectsover our approach -- of our approach. first, we create an electronic system of record for each mortgage customer including customer's name, address, number of payments and notes about home retention efforts. we attempt to contact our customers on average more than 125 times by phone and letter during the period of first delinquent si to foreclosure sale. investors often require we initiate proceedings at a

certain point, but we continue to work with these customers on foreclosure prevention options. when customers continue to work with us, we prevent foreclosures for seven of every ten customers who are 60 days or more past due. unfortunately, some customers are in homes they just cannot afford. even with substantially-reduced payments in the september customers who completed foreclose your were on average 16 months delinquent. we believe it is best for people to transition to affordable housing, and we repair and resell the 25% of properties already vacant to alleviate further burden on the community. wells fargo has a rigorous system designed to insure quality in the data use used to make foreclosure decisions. it includes controls to lessen the chance of error. as just one example, we pull a daily sample of the data we send

electronically to external foreclosure attorneys and do a manual check for accuracy. we continue work on improvements to reduce the likelihood of errors and address all errors when found. for example, we identified instances where we did not adhere to a final step including a final review of the affidavit as well as some aspects of the notization process. while we do not believe these resulted in foreclosures that should not have otherwise occurred, we executed supplemental foreclosure affidavits in the judicial states. we rely on guidance by outside attorneys licensed by each state to insure that we comply with state law and regulation. in conclusion, wells fargo will continue to help homeowners to stay in their home including better explaining the home retention process, for example, earlier this year we introduced a one to one model to enable at-risk customers to work with one person from beginning to end

on their options. additional ri, we have met face to face with 15,000 customers at 15 large-scale home preservation events and 25,000 customers at 27 home preservation centers across the country. thank you, and i'll look forward to your questions. >> thank you very much. mr. arnold lewis. harold lewis. >> thank you, chairwoman waters and congresswoman biggert and committee members. i'm heir old lewis, head of citi's homeowner assistance program. i'm pleased to speak with you today about citi's efforts to assist our distressed homeowners. we are working tirelessly to help families stay in the their homes. since 2007 we've helped more than one million distressed borrower's in their efforts to avoid potential foreclosure, but we know there's more to be done. we've redoubled our efforts toward helping customers who are facing financial challengings. we have a well-trained and

dedicated staff of approximately 5,000 employees who work with at-risk borrowers to help them find solutions to avoid foreclosure. in addition, we have partnered with a number of community groups across the country to further these efforts, including mecca and neighbor works. we believe we've been a leader in hamp. we actively eiffel jill borrowers, conduct extensive outreach to make contact and then guide them through the process of applying for modifications and obtaining permanent modifications. we make counselors available to borrowers, provide detailed instructions for completing required documents and follow up with ap applicants by phone, e-mail, text messages and in-home visits. by the end of september, 44% of our eligible borrowers had

obtained a permanent modification under hamp. further, citi's redefault rate is well below that of our peers. borrowers who do not quaff for hamp modification may be eligible for one of citi's proprietary programs to address their specific challenges. for example, we have an unemployment assist program that provides temporarily lower payments to borrowers who have lost their jobs. further, we offer a supplemental modification program for eligible borrowers who complete a three-month trial period. for those who simply can't sustain homeownership, we have replaced deed in lieu foreclosure programs and allow families to relocate with dignity. all of us at citi recognize the hardship that can be suffered by a family losing its home. indeed, foreclosures are a

terrible outcome for both families and commitments. communities. as such, foreclosure is always the last resort for us. in the event that a foreclosure cannot be avoided, we do everything possible to make sure that the process for our customers is as smooth as possible. now, regarding your specific concerns about the foreclosure process we undertook a thorough review of our process beginning in the fall of 2009. subsequently, we implemented a series of steps to strengthen existing practices and add additional resources to insure foreclosures were being processed correctly. we centralized our foreclosure operations into one unit, added staff and enhanced training for greater efficiency and control. we limited the volume of documents that staff is permitted to process at any given time and now require our

employees to be recertified on proper procedures every year. for their part managers were made accountable for regularly reviewing files to insure that employees comply with the procedures. as an additional quality control measure, we have been reviewing affidavits that were executed in pending judicial foreclosures initiated prior to the full implementation of our improved practices. we expect to refile a number of our affidavits. should errors be found, no foreclosure will be completed until a new affidavit is filed. this exercise will help us to insure that these affidavits are accurate and properly executed. the changes we have made this year give us confidence that there are no systemic issues in our existing foreclosure processes. while we have made important

progress in helping keep americans in their homes, there's more work to be done. as ceo of citi, vikram pandit has said we owe a debt of gratitude to the american taxpayer for providing citi with t.a.r.p. funds. we believe it is our respondent to help -- responsibility to help american families in financial distress, in particular citi remains committed to helping our customers with homeownership challenges they face. thank you. >> thank you very much, mr. arnold. >> chairwoman waters, congresswoman biggert and members of the subcommittee, my name is r.k. arnold, i'm president and ceo of -- [inaudible] thank you for this opportunity to appear today. mers is a member-based organization made up of 3,000 mortgage lenders. it maintains a nationwide

database that tracks changes in servicing rights and ownership interests and mortgage loans. today mers is keeping track of more than 31 million active loans, that's about 50% of all the loans in the u.s. the mers database is important to the mortgage industry because it's the only centralized registry in the industry that uniquely identifies each mortgage loan. the mers database is important to individual borrowers because it provides a free and accessible resource where borrowers can locate their servicers, and in many cases learn who their note owner is. the mers database is important to communities because housing code enforcement officers use it to identify who is responsible for maintaining vacant properties. the mers database aided law enforcement in the detection of fraud by tracking liens, taking out -- taken out utilizing the

same borrower name, social security number and property. mers also performs another key function, it serves as the mortgager of record where the holder of the mortgage liens on behalf of its members as a common agent. mers is designated as the mortgagee in the mortgage document, and this designation is approved by the borrower at the closing by signing the mortgage, and then the mortgage is recorded in the appropriate local land records. serving as the mortgagee enables mers to receive and maintain updated information as loan servicers and note holders change over time because we're the central clearinghouse for receipt of mail pertaining to the mortgage. one thing that is always clear in a mortgage document is that if borrower defaults on his or her obligation, the lender can foreclose. if mers holds the mortgage lien, foreclosures can occur in two

ways. either the mortgage lien is reassigned in the land records to the lender holding the note which is the vast majority of cases, and the lender initiates the action on his own, or mers initiates the action as the mortgagee of of record in the land records. either way, the note and mortgage come together at foreclosure. to do this, mers relies on specially-designated employees of its members called certifying officers to handle the foreclosure. to be a mers certifying officer, one must be an officer of the member institution who is familiar with the functions to be performed and who has passed an examination administered by mers. generally, these are the same individuals who would handle the foreclosure if lender was involved without mers. the loan file remains with the servicer as it did before mers.

mers not a repository for prom share notes. it makes no money from foreclosures. and mers does not decide when to foreclose. foreclosure must be authorized by the note owner, and it must be done in accordance with our strict rules and procedures which we regularly enforce and refine. for example, it is a key rule that the note must be presented in many foreclosure which some states do not require. and we prohibit the use of lost note affidavits in foreclosures done by mers once we saw they were being used as an excuse not to produce the note. earlier this year when we became aware of the acceleration in foreclosures, we asked for assurances. and when we did not receive assurances that our rules would be followed, we suspended relationships with some companies. when we discovered the so-called robo signers might be officers of mers, we suspended their

authority until they could be retrained and retested. madam chairman, all of us at mers keenly understand that while owning your own home is a dream, the american dream, losing that home is a nightmare. as professionals, we're dedicated and deeply dismayed by the current foreclosure crisis. we believe that mers can be a national tool to better access information about mortgages and provide transparency for consumers. most of all, it doesn't just benefit financial institutions, the broader economy and the government, mers benefits real people, real homeowners. thank you for holding these hearings and inviting mers to participate. >> thank you all very much.

i'd like to ask a few questions. and i'll yield to myself five minutes to do that. i have here a stack of depositions. in these depositions your employees, i think except for mers -- i don't think we have mers -- admit to things including robo signing, false note aroundizations, not being trained in how to prepare affidavits, not having manuals to follow on how to complete foreclosure paperwork. the list goes on and on. each of these depositions are dated well before or you initiated your mother moratoriu, tarted your comprehensive reviews or issued press releases about the changes you've made to your systems.

my question is, these depositions were taken months ago. what's taken so long to institute changes? can i just start with bank of america? what, why did it take so only long? >> sure. thank you, madam chairwoman. for the last two years, our focus has clearly been on dealing with the extreme volume and capacity requirements and staffing requirements. as we have worked through these issues, our primary focus has been around data and controls as well as serving the customers and in the modification as well as foreclosure prevention space. we were as a management team not aware of the inconsistencies around the affidavit process until very recently. and unfortunately, we did have associates that were relying on upstream processes and data controls and ended up signing high volumes of affidavits

inappropriately. they did not adhere to the procedures, policies and we're changing that process significantly as a result and taking this very seriously. we've also at the same time made the decision to halt and pause foreclosures across the nation in order to insure that we could do a fairly dramatic review in all state cases both judicial and nonjudicial to insure that we were in compliance. >> thank you very much. i'm not going to be able to get to each of you to ask you why it's taken so long, but let the record show that it's a real concern that it has taken so long, and we have so many of these problems that exist. i want to put something up on the screen if i could get some help from the staff. i want to put a price sheet from lender processing services subsidiary. i guess that would be dock-ex?

this price sheet advertises services like creating entire collateral files among other document creation services. now, we do not know when this price sheet was drafted or for how long it was used for, but the very fact that it exists is very alarming. i did want everyone to address this in their testimony, but i didn't really get that feedback that i thought was necessary to address it. would you consider document creation in a foreclosure case to be fraud? let me just go down real quick and ask each one of you starting with bank of america, just yes or no. do you consider document creation in a foreclosure case to be fraud? >> new document creation defined files, i don't believe that that would be fraud. >> yes. right down the line. >> you raise a good point -- >> i can't hear you. >> you raise a good point. again, we, we do not use doc-ex.

>> okay, next. >> chase does not use -- >> i can't hear you. >> can you hear me now? >> yes, i can hear you. >> chase does not use doc-ex. we have some companies we've acquired in the -- >> do they do document creation for you -- >> who did, but even for those companies we stopped using doc-ex a year ago. >> so do you do document creation now? are you doing that with the companies that you've alluded to? >> no, we do not. >> okay. would you consider it fraud? >> i think that the question about when documents are replaced is very specific to the case involved. >> okay. mr. jones. >> we also do not use doc-ex for those things that are listed on there, on the board. we use them for lien releases for mailing documents, and that was it, and that stopped in january.

>> do you use any services to do document creation? >> i think you have to ask, as the previous witness said, exactly what you mean by document creation. we don't fabricate documents for foreclosure. >> well, let me just put it this way, is creating an entire collateral file fraud? would you consider that fraud? i just spoke to mr. lewis. what about you? >> we do not use doc-ex. >> i can't hear you. >> we do not use doc-ex. >> do you use anybody to do document creation? >> as the other members are said, it depends on what you mean by doc creation. >> is creating an entire collateral file fraud? >> entire collateral fraud that doesn't exist or the reproduction from a database? >> let me go to mers. well, you see what the concern

is, and we are, basically, out of time. so let me just go to ms. biggert. >> falling apart here. thank you, madam chairman. i've got one quick question for mr. lewis. you mentioned in your testimony that you work with neighborhood assistance corporation of america, naca? >> yes, ma'am. >> we've had some strange things happening in dupage county and things that have been coming to my office where we receive papers faxed to me, and it would be, it's somebody's mortgage papers, their social security, a lot of personal information from them, and it has on it to call

naca. do you know -- has this happened? i mean, these are formal papers for mortgages or for foreclosures. >> i am not aware of what you're speaking of, ma'am, but i'd be happy to follow up and get some more information -- >> if you could since you work with them, but it's information and then these clients have signed up for privacy, but this is something that's going around, and it's as if we're supposed to be helping them with their mortgages.

can any of you describe the problems that you've had, and what i'm concerned about is the very limited number of fannie and freddie approved law firms that process for foreclosures? yes. >> i can take that. we have -- we've raised the

issues with these law firms with both fannie and freddie from the issues came to my attention. the issues are twofold. one issue is the lack of capacity. there are a limited number of firms on their list. one of the gsc's in particular has not added a substantial number of firms in more than two years. the other gsc has added firms and now they are both actively adding firms. the second issue appears to be surrounding the behavior of their firms, and i would say initially, while there was oversight present, i don't think that they were fully aware of all the activities and once we assisted them in understanding what our concerns were, they both reacted very quickly.

>> anyone else? nobody has any problems? mr. jones? >> we've experienced the same, same as the previous witness. >> okay. in a "wall street journal" article, it's about the issue and i'm going to quote here, that while fannie conducts regular audits of its approved attorneys, it says the mortgage servicers that select the firms are ultimately responsible for ensuring foreclosures are done properly. fannie has said it was preparing to add more attorneys in florida, but would you any that that's true, that it's the mortgage servicers who are really responsible for the approved attorneys? >> at bank of america, we are requested to use both fannie and freddie specific outside counsel. we do so at their direction.

we clearly are responsible ultimately for quality of foreclosure, but we are directed specifically to those firms. >> ms. bigert, we take responsibility for our actions, but we would also say that we are using counsel, they are referred to as directed counsel, and we are in a constant battle of managing the time line of our investors, including fannie mae, freddie mac an the needs of our consumers. we do everything we can to facilitate what we can do for the consumers, but it should not be lost on this committee, that our investors put efor must pressures on us to follow team lines and presbyterian pastor zests and we often push back very hard so we can meet the consumer's need. >> and it also talks about your

bank as having suspended thousands of foreclosures. was that due to the limited attorneys or was that a different problem? >> we've suspended about 102,000 or more foreclosures in judicial states, primarily due to the affidavit issues that cam up and process improvements, but at the same time, we are looking at end to end, including foreclosure counsel qualities and controls. >> thank you. yield back. >> thank you, madam chairman, thank you to the witnesses for appearing here this morning. i think one of the testimonies talked about the hard reality that homeowners can't afford the mortgages that they engaged in

and implicitly in that statement is that it really doesn't matter, whether the rule of law and due process were filed in moving foreclosed against these homeowners. i think there's also a hard reality that a lot of investors bought toxic paper. paper that may have been rated by a rating agency as aaa or a viable investment, sometimes not, depending on which -- the different tronchs that were bought, but that these investors are also playing a role in the decision of whether to foreclose or not foreclose and there's various people that may have conflicting interests. and i think there's also a hard reality here that the wall street banks, lehman, goldman sachs, others, that were encouraging this securitization of mortgages also played a role in getting us to the place where

we are today here. and that perhaps some interest here, facilitated all of this to happen, making it easy to get around state requirements for actually filing mortgages and other liens. and my concern really is where should the public interest lie in all of this, whether it should be the community, which is seeing mortgages and home values decline, people who maybe have bought a house in these communities and are making their payments, but nevertheless, because of what's going on with their neighbors, and their neighborhood, finding that their investments now are under water. should we protect the homeowners or should we be looking to be concerned about the investors who have invested in these

mortgages and now find those investments not paying off. one of my concerns is this process of talking to the homeowners about home modifications and gauging the homeowners and making those payments, but at the same time engaging in a dual track in which foreclosures proceedings are already begun against that very same homeowner and i'm curious about the response from chase, and city and bank of america, engaging this dual truck and what you see east the value or who -- see as the value and who gains or loses in this dual track process? mismaroine, do you want to start? >> sure, and hugh raised a mum of very valid concerns, that we

share as well. specifically two, the dual track piece, our concerns are very specific, and include the customer experience along the way. from a customer aspirer -- customer's perspective, as they move into the foreclosure process and are reviewed for -- we have put single contact in and putting extra communications into help the customers understand, but nonetheless, it continues to be a problem. at bank of america specifically, we're re-reviewing the process where we own those loans themselves, to reconsider how we're handling that dual track to make that potentially a significant better experience for the customers. outside of those loans that we own ourselves, which are nearly 80% of our portfolio, we are directed by investor requirements to do so, so we do do that dual track. >> so it's the -- your role as a

servicer with these mortgages, goes one direction, with the customer, but you have a different obligation to the investors that requires you to move faster on a foreclose you're, despite the modification process? >> that's correct. >> >> well, as you did raise several good points, what i'd like to make sure is clear is that my firm and i believe that foreclosure is a very poor choice in this entire equation. the problem we have as an industry is that the mortgage market is one where servicers who service for their own portfolio and also for others, you have a long legacy of rules

and securitization processes that were not designed for the current environment. we actually only own less than 5% of the loans that we service, so what we try to do is make sure that we serve the consumer and encourage the investors to do what's right for them, which is to prevent foreclosures. in particular, in the past year, he attempted to notify investors that the existing private label servicing contracts need to be changed. to give us even greater flexibility. we have received virtually no support from that. >> do you agree -- >> what i would hope is that through your efforts, and through the efforts of the chairwoman, that we can begin a process of previous writing these rules, and moving this industry forward.

it has been three years of this. we need to change the process. >> thank you. >> mr. miller? >> thank you. i'm afraid i missed your testimony earlier, i had to step out, but i understand that the witnesses for servicers are early this week and the senate banking committee testified that a major reason that they were not modifications that prereduced principal is the objection of investors. the holders of the residential mortgage backed securities, i've heard from investors that no such thing, they would like nothing more than to reduce principal on mortgages if that meant that you could avoid foreclosure, would be far better for them if that were the case and they believe the reason the servicers are not doing it, is servicers have interests that are different from theirs. their interest in liability, interest pertaining to the

second liens, there are different interests and the failure to foreclose -- failure rather to model of medicine fitzroy when it is in their interest to modify is a violation of the fiduciary duty of the servicers who the holders of the residential mortgage backed securities. if you contend that investor objections, that the objection of an investor is a reason for not modifying and reducing principal, can you identify for me and for the committee the investors who have objected and provide us with documents, with the letters that state their objections, with memoranda that state their objections, with e-mails, whatever documentation they have provided you, that they do object and what their objections are, can you do that for us? >> sure. on the modification side overall, what i would say is -- >> no. no. i just want you to -- will you give us of the names, identify

those investors who have objected. >> we can definitely get you the names of the investors who do not allow modifications and there's very, very few of those. he think from a principal reduction perspective, that's where it's gotten a little bit more difficult in those discussions. at bank of america overall, we do have any specific principal reductions but do not have it more broadly outside of the hamp program. >> if you could give us those investors and the reason for their objection, and as to the rest of you, can you provide that information? okay. i've got a lot of nodded heads there that you would get that to us. second, there were questions before the last panel, which i'm sure you heard, about whether it was a conflict of interest for servicers of firsts held by others, owned by others, beneficial owners for somebody else, also to own on thin own or to be an affiliate of a firm

that owned a second on the same property. we've also heard about conflict of interest for servicers or trustees, others involved in servicing securitized mortgages. to be affiliated with firms that secure first mortgages in the first place. they have information that's important for litigation that the investors want access to, there should be a duty of -- a fiduciary duty to those investors. they say that they're not getting that information because the servicers, or the trustees are protecting affiliates. what -- without addressing whether there's a conflict of interest or whether it really results in breach of fiduciary duties, what possible advantage is there for a servicer being affiliated with the securitizer? is there -- i mean, if there's any reason at all not to have them be affiliated.

if there's any possible conflict of interest, what is the counterveiling consideration that should allow it? does anyone have a reason? what's the advantage? mr. jones, the name of your firm is wells fargo home mortgage servicing. i assume you're an affiliate corporation of wells. >> that's correct. >> could you perform your functions if your not affiliated with wells? what's the advantage of being affiliated with wells. >> guest: thank you for your congress. wells fargo is a full financial services firm and our -- we offer our banking customers loans, right, we -- and to do that, and the securitization process is important for us to be able to make that happen. we don't own all the loans that we service, therefore, those customers who come to us, come to us in a bank branch who have

other relationships, want a home loan, we're able to take care of that home loan need and service that loan and work with the bank to make that occur. so it's customer convenience item for us. >> customer convenience? >> customer convenience, absolutely, because our customers who have mortgages with us, have many other products as well as banking, etc. >> my time has expired. >> thank you very much. the chair notes that some members may have additional questions for this panel. which they may wish to submit in writing. without objection, the hearing record -- >> we'll leave the last couple moments of this event to go life to the american enterprise institute. today, here hosting a discussion on the proposed agenda for the 112th congress. the incoming congress.

legal scholars and health policy analysts will look at possible changes to the new health care law and constitutional spending, as well as constitutional limits on the federal government. this is live coverage on c-span2. >> which is headed by kate o'bierne, she'll be the moderator of the first discussion and we're looking to a lively discussion in three different areas that we'll tell but in a minute. the election obviously has mandated sweeping change, the question is what exactly is that change supposed to be and how do we execute change, when americans clearly want it, and it's completely obvious that change is what people asked for. in the exit polls, after this election, according to the word done by edison research, that carla bowman, my colleague has analyzed at aei, we find that people who have voted on

november 2, 57% said that the number one issue for the next congress was either cutting spending or lowering taxes. asked their view on the federal government at the present time, 3% said that they were enthusiastic, 21% satisfied, but 74% of voters said that they were either dissatisfied or openly angry with what was going on with the federal government. that sounds like change is in order. well, what kind of change? this is the question that policymakers and policy analysts, people in the business community, academics and journalists are all asking about. what kind of change do we need, what do republicans and democrats, who have dedicated themselves to some sort of change or some sort of course correction, how do they respond to what voters wanted? one of the policies that will work best for america right now, and that might even satisfy

voters, that we heard, that policymakers heard, what voters said. well, we have work today to talk to you about in three different areas. we have panels in health care and the economy, and on the constitution. first up is a panel entitled health care reform, second opinion, that kate o'bierne will be chairing and it features three prominent policy analysts in this area. jim capretta from the ethics and public policy center, dr. scott gotlieb from right here at aei and ramesh ponnuru. after an hour, we'll take a break and kate o'bierne will be largely the master of ceremonies recall. the second panel is economy and spending, growing and cutting. the panelists will be andrew biggs from aei, kevin hassett from aei and robert stein from first trust advisers and

finally, to round out table is that probably the most difficult set of questions of all. a lot of politicians in the last election said that if they were elected, they would be guided in all of their legislative actions from the u.s. constitution. what does that mean day-to-day, when we're talking about budget, regulation, taxes. practically speaking is that an achievable goal? panel three today is the constitution, a repairman you'll. and our panelists thereby michael greve, from aei, and matthew spalding from the heritage foundation. matthew spoon will be the moderator, i should note that steven view he sp propublica -- that steven spruel will be the

moderator for our third panel. >> again, kate o'bierne, we're delighted to be joining aei this morning, to be addressing crucial issues. with the election over, candidates are policymakers and it's our term, it's time for the policy community to analyze options for change and the agenda that promises to deliver during the campaign. this morning, we address three central policy changes facing the new congress. we think it's fitting that the issue of health care reform is first, as many conservatives believe that addressing this costly new law that imposes unprecedented federal dictates on states and citizens is fundamental to tackling the bloated budget, entitlement reform, the need to begin

restoring proper constitutional limits on the federal government. so health care is central. health care reform is central. eight months ago tomorrow, president obama signed the patient protection and affordable care act. eight months ago, the following day, opponents pledged to repeal it. the new majority in the house is expected to attempt that appeal, but there's apparently no majority support for repeal in the senate, and a veto would be a certainty. last year, president obama noted that he wasn't the first president to take up the cause of such a sweeping health care reform, but he was determined to be the last. the law's opponents look forward to a president who will realize the cause of repeal in 2013. why has the law met with such opposition, and why options are available to its critics short

of a repeal that remains unlikely? this panel will address these questions and then entertain yours. jim capretta is going to go first. jim is a fellow at the ethics and public policy center here in washington. he was an associate director at the office of management and budget from 2001 to 2004 and he presides over an indispensable web site called obama care watch.org, which tracks. law's implementation. following jim's remarks, we're going to hear from dr. spot gotlieb, a practicing physician, he's a rest depth fellow here at aei, he served in policy positions at the f.d.a., including deputy commissioner for medical and scientific affairs and has been a senior policy adviser at the center for medicare and medicaid services at h.h.s. and finally, ramesh ponnuru, a senior editor for

national preview, he's been a contributor to "time" magazine and the "washington post" and one of his specialties as an extremely talented analyst and writer is the issue of health care reform. so i'll turn the program first over to you, jim. thanks. >> thank you, kate. pleasure to be here this morning. reelly important time to be talking about what do we do now and -- but before we get to what do we do now, it is important, i think, to spend a few minutes on this health care bill, once more, to lay the predicate for why, as i would say, there's no avoiding the need to repeal it. and replace it, with a genuine reform, but the "wall street journal" famously in the days -- in the runup to the final vote wrote an editorial that was called, the worst bill ever. and i think it's worth going back to that. i suspect that that's basically right, or certainly in the

running. and it's worth going back to why it's so important for the new congress to keep focused on this issue, why they can't let what passed stand, why they have to muster all the effort they can to, despite some obvious obstacles, to move forward operational plan building the coalition to move health care in a different direction. now, why is the bill so in need of repeal? it's going to have a devastating impact on the american economy, on fiscal policy, on the quality of american health care, and on health think political -- healthy political discourse in the united states. we'll start with the the economy. so much has been said about the bill on the insurance coverage aspects, on the new rules regarding what's covered by insurance, and preexisting conditions, etc., it's often

lost in the shuffle over the debate that it's a gigantic tax and spending bill. over the next decade, according to cbo's own numbers, numbers that the administration cites, it's going to raise taxes by about $700 billion. this was not just an insurance regulation bill. it's a massive, massive tax hike on the american economy. it's going to impose huge taxes on capital income, on wages, on all manner of health sector industries, the effect will be slower growth, lower employment, and higher health costs. so right from the start, it's bad for the american economy. moreover, employers will have a strong incentive to avoid hiring, particularly low wage workers, because if they hire a low wage worker and they end up in the new sub died system of health insurance, they'll pay a fine. not so if they hire a higher wage worker. someone from a higher income household. this creates huge disincentives

to hire the kind of people that are actually most in need of jobs. the second issue of course is the federal budget, fiscal policy over the long run. the primary problem in the federal budget is entitlement spending, and this bill would dump an ocean of gas on that raging fire. it expands medicaid by 16 million people. medicaid is already stretched to the limit. it really is actually not serving the current 50 or so million that are on the program very well. the network of if i have significancesnd -- physicians and hospitals that actually take medicare patients is very con strained and this new law is going to put a huge new number of people into the program without really any panel to take care of them. -- ability to take care of them. the second entitlement is everybody between the income of 133% and 400% of the poverty line is now entitled to premium discounts if they get their insurance through what it called the exchanges. this is a huge number of people. the number of census bureau says

that the number of people between 133 and 400% of the federal poverty line is about 111 million people below the age of 65. so potentially, this is hamas i have, massive -- massive, massive new entitlement option. cbo's new estimate determined 20% will end up in the entitlement, but that could be off on a magnitude of two or three. that all depends on whether or not the employer-based system essentially stays intact and employers aren't creative and find a way to get their lower wage workers into the entitlement. this would create huge inequities. you'll have a massive new entitlement in the exchanges and then lots of similar workers with the same income still in the job-based system getting on the order of $3,000, $4,000, $6,000 less in federal support for their health care. you have a huge disequal equilibrium and many people

assume that will not stand. eventually, all of the lower wage workers will take advantage through their employers helping them in there of this new massive entitlement program. if that's the case, just in the first 10 years, not even counting the long run, we'd be adding probably about a trillion dollars more to the cost estimate of the bill. so you know, watch out for headline a year or two or three from now, cost estimates explode. okay. i don't think most americans would be very surprised. and of course, in the state of massachusetts, which gets us to the third point, what it's going to do to american health care, in the state of massachusetts, they're already going down this road, lots of costs above projections, and the state is grappling with huge deficits, and so what do they do in response? well, they impose caps and price controls. and that's really the next step in this process. the bill was supposedly going to reform american health care and find painless ways to improve

efficiency in the delivery system. that's really not the case. what's happening in the bill and what's happening in massachusetts is across the board price cutting. okay. so they just cut every doctor, every hospital, every clinic exactly the same. there's no distinguishing based on quality or how well or badly they treat their patients. they have just cut everybody the same. that's how they save money to try to hit budget targets and the effect of that is quite predictable. it drives willing suppliers out of the marketplace. that's what happens in most other countries when they use these kind of price controls to control cost. it will happen here too. it's already happening, and that leads of course to keying those problems and the damage it will have on american health care will be quite significant. finally, the last point i would make here is that the bill is going to have a huge impact on the nature of american political discourse. the real point of the bill, when you really strip it all away, is to bring the american middle

class into full dependence on the federal government for their health care. they're going to have many, many millions more people looking to the federal government even fuelly over time for the financing and delivery of their health care services. this will change, if that succeeds, it will change very dramatically how people view their government. in effect, it will change the balance of power between the government and the citizenry, where people feel incredibly dependent on the federal government's power to deliver health care for them. so you've got a real shift that could occur and it could occur in other countries, that could occur here in the united states and i think that would be very, very damaging over the long run for our healthy functioning of our democracy. kate's observations at the top were what are we going to do about all of this. i wanted to make sure we laid the predicate for why we need to do something, and i'll leave most of this the others to comment on, but beyond a straight repeal vote, which of course should be done as soon as

possible, there's lots of things that can be done to advance and continue to build coalition to move in the -- basically 180-degree different direction on health care, one that's based on consumers and market and competition. just a couple of ideas to throw out right at the beginning. why isn't it the case that people can't keep the health plan they have today if they like it. that was the president's promise. i could see approval rating amendment being offered early and often to allow people to do just that in reality, not in -- not just through waivers issue you'd by h.h.s. i could see provisions to delay some of the really damaging cuts in medicare advantage and a commensurate delay in the startup of the new program based on the fact these cuts weren't really the way to do the bills. there's a lot of things the new congress can do along those lines that can continue to build momentum toward moving health care in a very different direction. thank you.

>> thank you, jim. dr. gotlieb. >> i feel a lot better, i don't know about the rest of the folks here. i wanted to touch on two things. first, talk a little bit about setting the table for repeal and what's going to happen i think between now and the time that we can do anything in terms of new legislation that could encumber this bill and what i think can be done over the next couple of years, because it's unlikely that this legislation is going to be repealed, so long as the obama administration remains in power. the president is going toughie to the any attempt to repeal the coryell else of this bill and i start out bichetteing on a remarkable article that was in the the "new york times" by robert pear. it dealt with efforts of the administration to try to consolidate local providers in local communities around hospitals and so-called accountable care organizations, and what this would create is effectively local control of all the provision of health care within communities by the hospital. under the auspices of it's new construct in the accountable

care organization, which no one has ever seen yet. they've just heard about it. kind of like unicorns, you don't know what it is until hugh seen it. what's remarkable about the article is the liberal left were aghast to find out that the administration, -- they had been listening to the administration for the last year and were surprised to find out that they were going to hand local monopolies to the health care administrations within the communities. the left can take sew lays in knowing this is a true single payer system. once you have the account cure organizations controlling its provisions of health care within local communities, contracting directly with the federal government for the provision of care and medicare and also the exchanges, you're really very close towards a single payer structure and we're evolving towards that very rapidly. this is very important to watch. because these things are happening very quickly in this country. by next year, more than 60% of all physicians in the united states will be working for hospitals.

these mergers are happening very fast. the health plans are trying to get in on the action and do their own acquisition, vertical integration by buying out provider accomplices and they -- practices and they can't get them, because most of the big ones are hooked up with hospitals already and the implication of this, not withstanding the impact it's going to have on the provision of health compare and the ability of consumers to exercise choice in the health compare is that the market structures will have evolved so quickly, that any attempt to repeal this in 2013 will be met by prestands in the provider community and others who have invested heavily to try to take advantage of the bill, so that's a long way of saying, 2013 is too late to try to do anything about the legislation. you'll have a very large constituency that will have laid out tens of millions if not billions of dollars of new arrangements in anticipation of this legislation, these exchanges, going into effect. these problems with the accountable care organizations and i want to dwell on that a little bit are man fold. i talked about the fact that

these are really handing local monopolies for cares to local hospitals within communities. it didn't have to be this way. the concept of allowing doctors, providers to band together to assume capitated arrangements for providing care to patients on the premise that they'll better coordinate care and maybe rationalize use of expensive technology, that's a fine premise. there's nothing inherently wrong with that. what's wrong with it in the obama health care plan is that the legislation itself heavily tilts these arrangements in to the hands of hospitals, precisely the wrong vehicle for inspiring innovation and delivery of care. hospitals have never innovated delivery of care. all that real innovations in how care gets developed, outpatient dialysis, home health care, rehab, all the great innovations in delivery of care were designed to take patients out of the hospital, and move them into less costly settings. none of them came out of hospitals. but it's going to be impossible

for anyone other than hospitals to try to form these accountable care organizations because everyone is capital con straining. when doctors have tried to enter the market to float plans, raise capital to form their own aco's, they haven't been able to get the capital. the business plans are out there, floating around to venture capital businesses, they're not getting the capital. so anyone able to form the aco's to take advantage of the new legislation are in fact the hospitals and that's the wave it's playing out in the market. this is going to have, i think, a couple of implications for patients. first of all, it decreases choice. if you're tied to your local communities, if you're a medicare patient t decreases your choice and flexibility to go outside of that local community, but the more important implication, the administration doesn't just envision the aco's providing care to med compare, they envision the aco's going on to the exchanges in 2014 and being an option for consumers in of the exchanges, and they're writing rules that would favor

the aco's in these exchanges, to exempt them from certain anti-trust regulations and certain stark provisions, certain anti-kickback provisions, to give them a leg up in of the exchanges. these rules are being written right now by the administration. and cms in fact presently had a meeting with the ftc to discuss this very fact. i think the advantages that the aco's will get through regulation sincere going to give them a real leg up. with the goal of trying to cut out the insurance companies altogether and once you have cut out the insurance companies, which create a competitive environment for the steering of patients to higher quality hospitals and physicians, once you cut out that mechanism in the marketplace, if you believe that they are just middle men that aren't adding value and you turn all the pro significance of care over to the aco's, you're pretty close to a single payer system where people are getting care from captive provider networks and not networks are contracting detectively with the federal government.

to sousa the real problem here -- so the real problem here are the laws that will favor the aco's in the marketplace. there's nothing inherently wrong with them. the fact that the legislations that are going to ensue will so heavily tilt of the -- the creation of the monopolies at people aghast if he "new york times" article which is worth going back and reading. it's as if suddenly someone discovered that this is a bill folks have been talking about for more than a couple of years. turning to the second point just briefly, what to do over the next couple of years, i do believe that these market structures, as they continue to take hold and you've seen medicare advantage plans consolidate, you've seen health plans trying to vertically coordinate and doctors trying to consolidate in local markets, quickly around hospitals, selling out their practices and becoming effectively salaried employees, as these things solidify and gel, the bill itself becomes in a way self-sustaining, so first and foremost, i would try to stall

and head off some of these regulations that are going to hand favoritism to certain preferred market actors, like the hospitals, to form these aco's and other entities like that. finally, i think that a lot of the action is going to play out in the states and we wrote about this here at the american enterprise institute, tom miller and i in a recent piece and we're going to continue to work on this idea. i think the states have a real opportunity to try to put in place structures that challenge the coryell else of the obama health care plan and that's the creation of these exchanges in 2014. by creating rules and framework within a state that might be noncompliant with the federal regulations but nonetheless often consumers a more attractive alternative and set up a fundamental choice in 2012, around whether people want to continue down the path of this legislation or look for something fundamentally different. thanks a lot. >> scott, just to build on your last point, could you just briefly explain what's already happening in the states, maybe contrast utah and california?

>> well, jim's probably more an expert on this than me, but the states have to probably this year, pass legislation to set up the framework for how they're going to set up state based exchanges. they have a choice. they can either pass legislation to try to set up the framework for how they're going to create these exchanges, or they can default and not do it, refuse to do it and let it fall back on the hands of the federal government. i think a lot of the republican governors initially were talking about refusing to implement the obama health care plan, letting it fall back on h.h.s., on the premise that if enough states did that, it would encumber the federal government so much. i think the more courageous choice is for the governors to put forth things that are trulily transformative and challenge the the administration to withhold the subsidies to the state exchanges. so what utah is doing is creating what i would call more market based type of exchange. what california is doing is creating a government run

exchange where an unelected board is going to dictate what plans can and cannot go into the exchange. we advocated in the "wall street journal," tom and i and this is just one idea to create a structure where any willing plan within a state that is currently offering a plan can offer a plan on the exchanges, so not confine it to the plans that meet the tight federal rules that are decreed in the obama health care plan, which is a one size fits all plan for everyone. it's not choice, it's one plan. the openly thing that varies different plans are the amount of co-pays, but the benefit structures are the same and allow the subsidyies to flow into it. the -- at least create a market-based framework. some governors have talked about creating exchanges that would only be confined to consume are oriented health plans. that's a con settlement. i think probably the preferred idea would be to create approval rating exchange in the true marketplace and create the proehl choice with a lot of different variety of health plans. >> thank you, scott.

so much of the discussion has focused exclusively on what congress, options might be available to congress. i think it's really important to broaden the discussion to options available to the states. and i think it's really helpful that you and jim have done that, and hopefully we'll be able to talk about it even in some more detail. the courts, of course, too, promised to possibly play a role here, maybe ramesh in his remarks, he's up next, will cover the courts' potential role. well, i guess i'm actually the moderate on this panel, unaccustomed role for me, because i don't think that obama care is the worst bill ever. i think, you know, the fugitive slave law and prohibition were worse fl but it's right up there. on its list. in addition to all of the

defects that jim and scott have mentioned, one area that i think has not received enough attention is the very high implicit marginal tax rates that the subsidy design creates for millions of americans of low and middle incomes. where they are going to effectively, for every dollar of a raise they get, they're going to only keep 30 cents of it, when the subsidy withdrawal is factored in. i think that at a time when, for many years now, we have been increasingly worried about the declining social mobility in this country, this is not a step in the right direction and i also agree of course with all of the other things they mentioned, it is striking the difference between the spending cuts and the spending increases in the bill, the main difference being that the spending cuts are fake, and the spending increases are real. so in short, i would say that

this bill is an expensive way to die. it's also, i also completely agree with what i take to be jim's point, that there cannot be, i think not withstanding the present elections, a -- recent elections, a revival of constitutional governments or free market or individual responsibility if this law becomes an accepted part of the public policy landscape. i mean, i just think that it is -- it is implausible in the extreme that we are going to have a system in which americans look to washington, d.c. for the maintenance of their very health care and yet retain the kind of jealous regard for individual liberty that the constitutional design envisions. and finally, i don't believe that this legislation for a variety of reasons can really be tinkered with or improved, you

know, i'm sure there are improvements that can be made at the margin with this legislation, but i think the more fundamental choice is are we going to have this legislation or not, and so long as there is a nontrivial chance of repeal, i think that is what conservatives should be focused on and i think there is a nontrivial chance for appeal, you know, and i think that's being underestimated in washington, d.c. and long the political class in general. in fact, i would go so far as to say, if there is a republican senate and a republican president in 2013, repeal is more likely than not, and i would say that, you know, one inning we haven't talked about, there's a very strong case that this individual mandate in the bill, which is required to make the thing work, is too weak to actually do the job it's

intended to do, this will cause massive amount of back firing. could potential my cause a number of people with insurance in this country to drop rather than rise and i don't see any plausible congressional majority over the next 10 years that is going to want to stiffen those penalties. we just had i think the most lopsided liberal congress that we are likely to have for some time and there are good reasons why it was unable to make those penalties particular my high, so i'm actually not wise as much as of a pessimist as my friends on the right in that i don't believe that this plan will go into effect as it was designed or, if so, that it will stay in effect for very long. now, when you start talking about this issue with conservatives, particularly those who are active in electoral politics, probably the most important thing that you run up against is this concern,

well, the law bans insurers from discriminating on the basis of preexisting conditions, that is an extremely popular provision, and what are we going to do about it? and maybe we should therefore not take on this legislation. and the paradox of the politics of this issue is that yes, banning insurers from looking at preexisting conditions is very pop harks but none of the things that you have to do in order to do that are popular, so, for example, if you're going to prohibit insurers from making those sorts of decisions, it then becomes totally irrational for people to buy health insurance, which is why you have to force them to do it. you know, if i were to say for paul the complications of this legislation, it can really be boiled down to two steps. what the legislation does is transform insurance into a

product that could never survive orrin the free market, and then force everybody to buy it. and i think that then the question becomes the political question, which of these effects predominates. does it outweigh or is it outweighed by the popularity of everything attached to it and i think so far, any reasonable reading of the political landscape over the last year and a half suggests that the unpopular provisions are more politically important. and particularly since the ban on looking at preexisting conditions isn't in fact implemented for a couple years, i don't see why that doesn't remain the case. it's important for those of us who oppose the legislation to explain that there are other ways of dealing with a problem of previous existing conditions that we're not simply going to ignore this problem and this is something i think the opponents haven't calls done a good job

of. in fact, i think you could make a very strong case that the existence of this problem in the first place, the preexisting conditions problem, is an artifact of our dysfunctional public policies. that you know, we have a more integrated an less fragmented insurance market with the possibility of renewable individual policies, with the possibility of buying health status insurance. if we didn't have this tax code preference for employer-placed health insurance, which has the consequence that sometimes with people lose their jobs, and there's a gap in their insurance, they have this problem, that they're already sick, and people don't want to to -- insurance companies to become -- it becomes sort of irrational for them to offer insurance, certainly as irrational for them to offer it at the same rate as they offer to everybody else, but i think that if republicans and conservative democrats, who oppose this legislation will say, look, we've got a discrete

problem here, there are market oriented solutions, we can move gradually toward a more robust individual market, and as a transitional matter, have better funded risk pools for people in this situation, we can address this discrete problem without threatening that everything that everybody likes about their current health care arrangements and overturning the existing system from washington, d.c. for everybody else. i think that's a winning message, it's going to continue to be a winning message, at least i think through 2012, likely beyond it, and let's not forget by the way that we have not had repeated predictions from the part of the proponents of this legislation that popularity was just around the corner for this legislation. right. after the town halls of 2009, well, when the president weighs in in september, which look at the trend line of the polls, the president hardly gave that speech from anything you can see on the graph, as this gets debated in congress, people will

see all the good elements. doesn't seem to have happened. once it's enacted, people are really going to love it, they're going to create congressional democrats with candy and flowers, as liberators from this horrible health insurance system. well, we saw what they were actually greeted with earlier this month, so all those folks who say things are going to change, i wouldn't be so sure of that. you know. to sum up, you know, on the politics of this, the folks who were expecting something to change, in the long run, we are all dead, and i just hope that this legislation doesn't speed that up in reality. thanks. >> ramesh, i might just ask you to address potential court action given the challenges to the individual mandate and other features pending. >> sure. well, i would caution opponents

put not your faith in the courts. it seems to me thatful the political campaign against this health care law fizzles, if, for example, the republicans essentially acquiesce to the continuation of obama care and conservatives allow that to happen, then the challenges to obama care will not succeed in the courts. if, on the other hand, that political campaign continues, and gathers force, then there is a shot at succeeding in the courts, but i just think, perhaps i'm too cynical about the way contemporary american courts work. i don't think so. but i think that the choices that justices make are going to be significantly affect by what they see mainstream political opinions, and to the extent that obama care is an accepted part

of the landscape, they are not going to want to act against it. >> i have a few followup questions for the panelists before we go to the audience's questions. ramesh, on the politics of health care reform, conventional wisdom holds that it was a problem for the white house and the majority party to spend two years talking about held care reform so prominently, when voters were so concerned about the economy and jobs, and it seems they were engaged in health care reform that the courts should be addressing the economy and jobs. does a new majority, republicans on capitol hill, who have pledged to repeal the health care reform and to be doing things short of repeal, do they run the same risk of appearing to be ignoring the economy and jobs? >> well, i think that there is a

chance to integrate these messages, that, you know, what you -- what you'd argue, i think correctly, is that at a time when we are projected to have weak labor markets for as far as the pie can see, maybe that is -- the eye can see, maybe that is not the effect testify time for a $5.90 increase in the minimum wage. at the same time when we are worried about the fiscal condition of this country, maybe we should not be loading on new entitlement. so -- i mean, i think that there is a possibility that this thing gets misplayed, but there's no reason for opponents of the legislation not to put the economic implications of this legislation front and center in everything that they talk about. >> thank you, ramesh. and dr. gotlieb, the concerns you raised about the quality of patient care, the effects of this law on innovation, are

shared by so many practicing physicians that i've spoken to, yet the a.m.a. endorsed the bill, giving the impression that they've enjoyed that kind of support from doctors. do you have any explanation? >> now they're saying they supported the bill, but they endorse it, seems like a distinction without difference. that's what i was told by an a.m.a. official about four days ago. look, i think this is an example of what happens when an entire industry becomes captive to legislation, in this case, the a.m.a. has become captive to the sustainable growth wait raitt and the way in which they're reimbursed upped medicare and that's the single thing they'll lobby for with the -- to the exclusion of all else and i think that the risks here in this legislation is that the business community starts to evolve so quickly, that they've become a constituency and ramesh talked about various people underestimating the potential for repeal. well, talk to the c.e.o.'s of health care plans. none of them think this can go away and they're all making

pretty significant investments in the legislation. i have just want to comment on one other thing ramesh said which i think is very true. he talked about the popularity of the legislation, and is there any potential for this legislation to become more popular over time. i think everything that's going to happen between now and 2012 isn't good news for the president when it comes to the health care market. consumers are going to find themselves, consumers who are in employer based man's are going to find themselves in increasingly tight networks and less hospitalble types of plans. they're already in those types of plans because of the rising costs, the way the employer is dealing with it is to not raise premiums but to tighten the networks that the patients are in, so they get less coverage within their plans. there's fewer plans in the marketplace, we've seen plans pull out, especially in the individual market and small group market, not yet in the large group market, but you might start to see that as well, so there's less choice. costs have very clearly gone up and a number of insurers have gone up dramatically and will continue to go up, in part because of this legislation. on the margins, a a lot of small businesses are making the

calculation that in a slack labor market, they don't have to offer health insurance, they can wait to 2014 and offload the responsibility ton to the exchanges and first of all, the starting assumptions from a budget standpoint of the health compare legislation are off because the costs will be higher and the number of uninsured will be in excess of what was anticipated, but moreover, over the next two years, what is going to happen is not going to be very attractive. >> good, thank you, scott. and scott made the point, jim, that it will be terribly important, given what's already happening in the health care market, for congress to attempt to stall regulations, that favor the creation of those kinds of monopolies. how does congress begin to do that? how is that possible? >> well, you know, there's really two ways to do it. one would be to stop it through some kind of legislative action. you can pass provisions in appropriations measures and say, you can't spend money to

implement x, y or z. now of course, that faces of the same hurdles as repeal does. you have to get through the senate, you have to get past the president or override the president, so the odds are still low on that. but the -- it's not out of the question. there are some aspects of this where there are enough i would say, democratic senators who are watching what happened three weeks ago, and also, you know, up again in 2012, who were already worried that the bill was too ambitious, too costly, too regulatory, that there's possibilities for coalitions to form, bipartisan coalitions to do some of the things scott mentioned, to try to slow down, particularly bad ideas, and put them off until the voters can have another chance if 2012 to decide which direction they want to go. now, i would also say that the way to slow down regulations is probably through a lot of oversight.

you know, i think the first thing to do is bring before the oversight committee, h.h.s. and map out for the public what exactly they're planning to do and have already done over the last six months and what they're planning to do over the next six months panned make it absolutely clear that a lot of the restrictions will restrict their choice, impose a lot of burdens on the employment sector, so doing that i think is possibly the most important step, highlighting that in an oversight function. :

>> i think the voters actually connect health care to the economy. what they saw was in a commonsense way, wasn't that the economy, what's needed most now is private sector employment growth, more dynamism and the private economy, more investment, more entrepreneurialism to try to create new companies that will hire more people. that's what they see as most in need of happening over the next couple of years. and they rightly viewed at the health care bill as imposing a massive redistribution, and burden on the ability to get that going.

and so, very much in the public's mind, they said we want our politicians to focus on the economy and job growth, and we don't like health care. but economic and health care as being a negative in that very important equation. i think that's one reason why health care is going to remain an important issue in the next couple of years. >> you know, one i think fruitful topic we're hearing, you remember a few weeks ago secretaries sebelius sent out a letter that i think fairly be characterized as threatening predatory reprisals against insurers who told the customers that their premiums were rising in large part because of this legislation. i think that is something where the secretary and some of these industry officials could usefully be asked to shed some light on really the corrupting

potential of this legislation, and what it says about the actual relationship between the insurance industry and washington, d.c., as it is deepening in this legislation. >> one quick point. you as but what congress can do right now in terms of oversight to try to get a hand on the regulations, the most central to the implementation. clearly the creation of these exchanges and the flowing of subsidies is a core element. there's not a lot you can do about that, short of just going down the creation of the regulation. as someone comes in 2012, nothing is done and becomes easier to stall limitation and tell you can repeal the. i think the -- the rules that they could address are the ones where cms has unilaterally made decisions to make business environment for health care the provision of health care less competitive. one example. they unilaterally made a decision that health care plans more than wanted to part d.

plans within a state, or i think the country, needs to whittle it down, they can only offer two plants. if you're at and you can only offer to part d. plans. they did this under the premise they get multiple plans it would create confusion in the market, there were too many choices. gages unilaterally do that. health plans suddenly having to basically shut down a lot of their lines of business. these are the kinds of things that are happening all over. if you talk to health plans and people in the health care community. making the health care market, if you will, much less competitive and is going to a much harder to try to superimpose in 2012 and 2013, 2014, a market-based reform if you don't have much of a market-based industry left. >> just on that point. scott as what's most important moving part. the most important element of the bill is a subsidized people only through a heavily regulated federally run essentially exchange process where the

government is going to have control over everything basically. so they take control three exchange process, then they buy people into through a massive new entitlement program, and then they serve captured everybody through that process. the key issue probably over the next couple of years, they have 29 republican governors. it's an idle threat that hhs is going to go into all 29 of the states and run health care, in spite of what the government does. they need to states. they need those governors to actually implement this bill. if those plain and governors can get together around a pro-market, less regulated, more consumer direct system and say, regardless of what the law says, here's how we think we need to move in our states and around the country, it puts hhs and the obama administration in a very difficult decision. >> speaking of those governors, jim, and state officials, a

fairly number of them are howling over the mandated, the mandated expansion to medicaid coverage. that's going to be extremely costly to the states. what would you recommend that these reformed my governors do with respect to the dictates medicaid is placing on them? >> i think they need to go right back to hhs and say, human, these systems are a on the brink of collapse, and putting a bunch of more americans into system that is already not a living room for the people who are currently in it is no solution. the irony here is the bill was trying to take the private market and put it under federal control and capture it. and what should be happening is they should be listening medicaid and making that more consumer directed, more of a fixed in time, more beneficiary control. you can almost put them into the exchange as opposed to the rest of the private marketplace.

i mean, and so i would sort of start from that end of the spectrum and say what we need to do state medicaid and moved into system would they can choose private insurance and have consumer choice. have been pushed back and say why we starting from people in employer sector? why don't we start with people and medicaid that's already not working? >> i'm going to come if you don't want to usurp the role. is a case for states to opt out of medicaid altogether? >> i haven't examined it carefully at myself, i read the stories about it, or heard about the stories about some states looking at it. i think you have to think long and hard about doing that, because the consequences politically i think are pretty severe. so i don't have a strong view yet, but my inclination is that more something to route the cage with than actually to do. >> jim, you talked about the opportunity for a new majority. at least announced.

to have some votes on some of the, some popular aspects, up and down votes on aspects of the bill. one of those they could be looking at are the medicare cuts that the bill has. now, since conservatives may have been taken aback to see allegedly fellow fiscal conservatives arguing against medicare cuts, and yet they were and are, what are fiscal conservatives to make a be cut opponents of? >> i hope i'm not an alleged fiscal conservative, but maybe a them, i don't know. i will let others be the judge of that. [laughter] from my perspective, there's a right way and wrong way to cut medicare. the right way is to do it the way congressman paul ryan wants to do it, which is to reform it over the medium and long-term by moving toward a premium support system where the government isn't trying to price regulate the health sector. medicare is a dominant pair in most markets. it's really the source of

tremendous dysfunction in the health care marketplace. and the reason why it is because it's a crisis that could just and poses crisis on a marketplace that it does negotiate on anybody. is a take it or leave it, it's such a big player. that is with all kinds of things in the marketplace and the defragmentation, lack of coordination of care. it's really a huge problem. the bill simply double down on that model. they just go with more price cuts, more across the board payment rate reductions. that doesn't really get at the problem. in fact, they make it much, much worse. so, you know, it's true that on paper you could say well, it looks like you'll save money in medicare. i don't think it actually will. we have done these many, many times in the past, and look where we are. we have been priced in medicare for basically 40 years. it really doesn't work. so the alternative model is to put more consumer control in the

hands of consumers, give them more of a fixed in time in over the long run, and c. here are the choices available, they become much more conscious interim of the inflection tonight. that's how to get control of the medicaid program. that's how you sold over the long run. but that's not what he did in the bill. they went in the exact opposite direction. >> at a mac lover, the kind of price controls jim talk about the work of the utilization. even if you control the prices, utilization can go a. there's nothing the government can do about that. >> folks who try to make the case that this is really fiscal responsible legislation, they make a big deal out of this independent advisory board, medicare. what people don't pay attention to is that this board is statutory supposed to not suggest changes to the structure of the entitlement that actually mattered. it's not supposed to suggest

increased cost sharing. it's only basically a loud to suggest tighter price controls. so the idea that this board is really opens the door to entitlement reform, what it does is slam it shut. >> i have one last question for the panel before we turn to your audience, to the audience. it's a political question. you have all addressed the vision for health care reform. there are such fundamental different approaches. we've now unfortunately abducted and are living with the dramatic increase and government control and less choices. the prior administration really missed opportunity to have had this debate, with the advantage of a white house committed to consumer choice and health care? >> i'd say yes and no. i think you're exactly right

that conservatives spent more time on health care and have been more knowledgeable about it. it would have prepared the ground for the debate over the last two years better, both in terms of public opinion and the republican congressmen prepared for this debate. but they don't think we should overestimate how much conservatives could have accomplished under previous conferences. let's not forget that republican attempts to reform medical malpractice laws, and to make it possible to create association health plans, were successfully filibustered. i mean, the fact of the matter is republicans never had a degree of power in washington, d.c., that democrats have over the last two years. and so i find it's extremely implausible that anymore ambitious conservative free market health care reform, such as a real sort of big bang change in the tax treatment of

health insurance, could possibly have been successful. doesn't mean they shouldn't have tried again to highlight the issues, educated public, educate republicans, and shifted this debate a little bit, but let's be realistic. you know, the people say republicans never reform health insurance. well, they try to make little reforms and they weren't even allowed to do that. >> thank you. and with that, we're going to turn to our patient audience here. we have an initial question in the second row. and a microphone headed your way. i think it is practiced identify yourself, and it is a particular panelist you would like to dress your question, just let us know. >> thank you. my name is peter, and i feel i'm sort of daniel in the lion's den, because i think that contrary to many of the panels that had been presented by aei, which i enjoy doing, as a trade

learned, was that when they had issues of trade law, they have a few variations of points of view. here you have a monolithic point of view without any opposing kind of consideration. and i think that's not a way that a public policy forum such as aei on to run its business. to issues with regard to health care that i think have not been discussed here. first of all, the notion that there is a requirement for insurance and a government pool for covering the uninsured is not so novel in this country. we have that for automobile insurance, requires everybody who drives a car to have insurance. if they don't get insurance, there are uninsured motorists pools to cover the consequences of the lack of insurance. so i don't find that there's a big outrage about that kind of a program. and by extension, it could be

applied here, too. but more directly with regard to health care, i was just three days in hospital two weeks ago for a slight heart attack, which is very quickly rehabilitated from. but my three nights in hospital, the bill was $83,000, without a doctor's bill. that's a gw hospital for going to the emergency room, and for intensive care treatment for three days. now, that is just beyond the range of most people's capability of being paid, and it's a fictitious number because it's not going to be paid by anybody. the fact of the matter is that with medicare, for which i am eligible, and for military service benefits, which i'm eligible, i'm not going to be hardly anything. and i think that the real problem is, most democracies have recognized that health care

is such a universal need, that a single-payer system in some way that is a reasonable way of addressing that issue is the only way that a democracy can deal with that issue. and having a fictitious kind of program that we now have is not working either, and to suggest that that is a desirable remedy i think isn't it response. >> thank you. we're delighted you are well enough to be with us. and you have a building made the case for the other side of the issue. we, of course, didn't bill ourselves as having a debate over the merits of these changes. what we asked our panelists to discuss is, given the promises made on the campaign trail, what are the options available to the new majority, at least in the house is anybody else have a general comment in respect -- excuse me, in response? >> just a capsule observation. number one, that you think you're right that the fundamentally, the debate in this country is about how to

allocate resources in health sector. but this is this is is a question of what process is going to be put in place to more efficiently out of get resources in the health sector. and the key objective is the improve productivity and health sector. if you're going to try to slow the pace of rising costs and make the system more affordable over time, not rise much faster than income, maybe a little faster but not astronomically faster than income, you have to improve productivity and get more help for the dollar spent. okay? what process is going to lead to higher productivity and health sector? that's really the fundamental question. and the bill answers definitively, just as you did, that the government can do that. i think that is just not true. i think that is false. i think actually that a market mechanism will work much, much better. the government should be providing oversight of health sector in a way it doesn't in other industry. i think deserves more oversight

and other industries because of the equity questions, but fundamentally resource allocation divisions will be best left to patients and consumers driving the marketplace. if the government tries to do it for everybody in the united states of america, it will be less efficient and worse quality. we will be all equal. they'll be a lot more equity but it will be a worse system. >> on the car insurance point, i think, of course you're right that states do have that requirement. i think there are a couple of reasons why the health insurance mandate has attracted more opposition. one, i think it's simply federal rather than state level. you haven't had the federal government requirement, everybody purchase a particular product. and second, car insurance mandate is a condition of driving, which is of course very important, socially. but the health insurance mandate

is a condition of being a citizen of the country, or you know a condition of breeding. and so i do think it's qualitatively different. and i guess one last point is interesting about the car insurance parallel is, you know, car insurance mandate doesn't get you to 100% compliance, or anywhere close to. if you project that out, something is likely to be a lot more expensive, some of the consequences of the unlikelihood of this mandate to work are a lot more significantly negative. and i guess my last point would be, i think it's a mistake to suggest that because health care is a universal need, therefore, single-payer is reasonable, if we did that, if that was found logical, we would have to agree to a single-payer provision for food, which is also a universal need. i think actually the more important something is, the less likely we are in general, with some exceptions, for there to

want to be a quasi-monopoly on this provision. >> another question? we have one in the back. >> my name is howard smith. i'm a physician. i want to congratulate the panel. this is the first time that i've heard any discussion about the systemic review versus the budgetary concerns, and so the systemic reviews -- that could contribute the most. the issue of a cannibal care organization is very destructive concept. in terms of it and never been tried before, in actuality it has. that in the mid 1990s, organizations called physician sponsored organizations were formed your they were all paid

by capitation at the organization. as the capitation was conceived of, the risks could never be repaired by the amount of money that was allocated. these caused tremendous parochial interests to form in the organizations, primary care versus specialists. the specials, particularly cardiologist and pulmonary doctors, which took care of the most high risk of the group, were forced into situations where either they would leave the group, or they would be instituting a type of care that was cheaper, less effective, and more risky so that everybody else could make money.

and this is the future of what an accountable care organization would be brought onto us all. it is a formula for a much more deadlier. and, unfortunately, these accountable care organizations and medical homes also, although they will inherently become institutions not a fire quality, but deadlier and medicine, should they become bankrupt as did the tso's. in the bill they are bailed out built-in so that these organizations have been deemed too big to fail. >> dr. tommy thomas an alarming point. do you have a question for probably scott gottlieb? >> i guess my real point is that most people don't understand these things, that they've been

bombarded with the costs of the system and how expensive this will be and how damaging it will be to the economy. but the real issue is that it will be damaging to the health of every american, and i think that people who are in a position where they can get the word out, need to get that word out more than anything else. thank you. >> thank you speculated good point that a lot of the arrangements have been tried before, accountable care organizations, pss, as you say, the concept of medical care is really capitated primary-care which is been tried before. they didn't succeed for certain reasons that i'm not sure that we have really any rate the reasons why these didn't succeed. and one of the problems is i think this bill envisions these models being sort of nationalized, if you will, and they're not appropriate for every market that they may succeed in certain markets. there is markets we have -- it's

not going to succeed in every local market. as far as the psos are concerned, they care for a lot of reasons that the reason the ama another physician to try to lead that revolution say they fail is because they weren't exempted from certain start provisions and kickback provisions and antitrust officials so they could have an unfettered monopoly over local markets. that's what a district is worth using that criticism in the psos as part of the impetus for working on regulations to try to free the current aso's from some of those provisions. and i would expect to see some of those rules fairly soon. i think the larger reason why the psos. is because they were well run from a business standpoint. they didn't have deep pockets. they couldn't reinjure the risk. from that standpoint on the show hospital do any better. perhaps they are a bit of a deeper pocket, but for the standpoint of being well run business organizations and being able to reassure some of the risk that they're taking, i'm

not sure they will be able to do that. i'm not sure that the commercial health plans will be willing to wrap around the hospital to reinjure some of the risk that they are taking it in exchange is or what medicare population. i think the commercial insurers will find itself very quickly at work with the acos, battling for business in the exchanges. so i'm not quite certain this is going to play out any better, and, you know, one thing i think we should begin right now from the standpoint of trying to division the future is to look at what's happening in some of the markets where these aso's are becoming dr. donna. even though they have declared themselves acos, the fact remains that within local committee's hospitals have become the common providers because they have bought out enough physician practices. i can name a plethora of community's where that is the case with the hospital has effectively a monopoly on the provision of care. and care has changed. i'm not close enough to what to tell you all the different ways its change of them to cite anecdotes which i don't want to

do here. but the practices of physician from how to organize them selves have change. hospitals have not driven innovation, have not invested in better systems. >> we have time for one final question to the panel. the woman in the back row who has been waiting to ask one. before we make way for the next panel devoted to budget and spending. >> thank you so much. my name is bonnie. i was like, so give cover this, please give someone else a chance for a last question. first a quick fact that i found amazing listening to television over the last few days in the discussion of the budget problem, and everything has to be on the table, including defense. they then went to a spokesman for the defense department he said yeah, we need to get control of our budget. our number one problem is health care for our veterans. so it permeates the budget dispute. over the next two years, what's

different now that was around before when we debated this is the impending bankruptcy of the united states. and i am just curious as we go forward if you could think maybe if the republicans got the white house in 2012, at least stayed the same or better in the congress, would it be too late to make significant changes? is it all going to be so tightly put into the firmament that that will effectively be impossible? >> well, i don't think it is too late and wake, but the hour is late, you know, the truth is that we probably have one last chance to do a series reform, and health care reform, that allows a level of taxation in this country that is not ruinous.

but if we wait too much longer, the only solution that the political class will be able to grab onto is a sudden damaging tax increase, that to head off a disco calamity. so i think, when i look ahead to the sort of landscape year, thinking back on missed opportunities and, you know, where we are, we are delayed in powder form basically for 15 years. another baby boom is already starting to sign up for benefits, and we're going to add, you know, about double, basically double the name -- the last chance do something different before that wave hits. and i think the presidential contest in 2012 is shaping up to be at debate about that exact question, really the future of the american economy and how do

we structure our social contract with citizens. so it's not quite chilly, but maybe one that we are about at last chance. >> thank you, jim. and i want to thank all the panelists who have so ably done that which we asked to do, and the end of health care, what is the challenge and what are the options, and i know you have helped me better understand what we can be looking forward to. so many things, and we will make way for our next panel on the economy and spending. thank you. up on the. >> -- and thank you. [applause] [inaudible conversations] [inaudible conversations]

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>> all right. less people coming back in from the break we will go ahead and get started. my name is stephen spruiell, i'm a staff writer for "national review." i will be moderating this panel on growing and cutting. and the question of whether or not those two things are compatible is going to be, is going to probably dominate the debate over the next year, and over some of the years to come. just quickly before we get our panelists, i'll try to provide a little context for this debate. i think we have two debates going on right now in this country over the budget. there's a short-term debate focused on what tax and spending levels are going to be next year, whether or not we extend all of the bush tax cuts, or some of the bush tax cuts, or none of the bush tax cuts. and is also a question of appropriations for the next fiscal year.

will the democrats in a lame-duck session passing it on the bus bill trying to lock in a very high spending level for the next fiscal year? while it has a continued resolution that simply funds the government at the current levels until the end of september of next year over the past a short-term continued resolution that just punted the issue to the republicans in early next year, in january february. so they'll be an important question that i think we are going to see some development on in the next couple of weeks, even. and i'm sure our panelists will have something to say about that. and and then longer-term, after the election concluded, we saw a number of deficit reduction plans focused on the long-term sustainability of our income that program and our spending trajectory. so obama's fiscal commission,

the co-chairman of the commission released a report that generated a live debate in terms of how they address some of those questionequestions that they can come unsure palos will have a lot of thoughts on that, and since the release of that report we've seen the release of some of the reports, each representing kind of a different method of grappling with these long-term debt and deficit problems. so with that in mind, kind of that short-term focus then zooming out to look at the bigger picture i will turn it over to our wonderful panelists we have. at in the table speaking first is kevin hassett, director of economic policy studies, senior fellow at aei, prolific writer on tax and budget policy for bloomberg him for "national review." we have next andrew biggs, resident scholar at aei as well, principal deputy commissioner for the social security

administration when he oversaw the agency's policy research efforts. he's been working on this stuff for a long time, it was the most knowledge of google about entitlements in this town. and then to my right we have robert stein, senior economist at first trust advisors. and he will be talking a little bit about economic growth, the policies that are compatible with that, and looking ahead, how can we get this budget deficit under control without doing a great deal of damage to the economy. so without i will turn it over to kevin. >> so, peter was right, that this is a little different from some of the panels that we have here at aei, that we are we're trying to do today is think about republicans will have an agenda, what might it be. i can assure you that to the extent we arrive at recommendations that there's going to be many follow-on conversation -- conferences in the next few months.

but i think thinking of putting on your republican had and thinking what should they do is a useful exercise to kick off the debate. this is about the end of the story. i can also say it's not necessarily the republican party is not necessarily relevant in the sense that i am about to spend my time praising president obama's commission. and i think it's the best commission i've ever seen, what they've done so far. i'm not saying that it's going to succeed politically, but as a matter of intellectual content, the members of the commission are certainly to be committed. andrew biggs and i have been working for about a year, frankly. we've almost been locked in a room with a whole pile of data trying to figure out what the data tells us that in the area of fiscal consolidation, the idea that we have a big mess like bonnie a limited to, then how do we fix it?

well, the sad history of human foibles is there are many, many countries over the years that it had significant problems like our own. they've had debt to gdp higher than we have, and they've tried numerous things to fix that problem. and what andrew and i have been doing is looking at the literature and the data onto succeed, who didn't succeed, and what was the sort of basic characteristic of the thing that succeeded as a guide for u.s. policy. the objective of the work that we are doing, and will have a big congress on this in january, is to say that if we copy the successful fiscal consolidation of the past, then what would we do? and that's a data-driven exercise that's not a political one. and i think you'll see something that's what interesting because the answer is we would take the sketch of the balls and some plan that was released by the two chairmen and enacted into law, or something like it. and so my presentation is going

to get the most of the others i think that the other constraint which for me is more severe usually for the fact that we are doing this conference, we weren't even any economists supposed to have slides. and the only way i was able to get this slight up there was i reminded everyone that an h.r. guy at natural view. there's a chart that put there. so as long as i promised to put one of these to slide in "national review" an upcoming issue than i'm allowed to put it here. spent a special exemption spirit a special exemption. and so, this is actually a chart that characterizes, there's big literature that sort of, a lot of literature about exactly what are the characteristics that are successful or unsuccessful. this is drawn from work that matt jensen and and and i are doing that is about to come out

at the aei working paper. the basic idea is that if you look at the leisure, there's quite a bit of dispute about the characteristic of successful or unsuccessful consolidations, depend on what paper that you're looking at. and so in this chart the axes are fiscal consolidations that were unsuccessful. and i unsuccessful they asked we just failed to reduce the debt to gdp. that's a reasonable measure of whether it's successful. okay, we're going to fix our deficit situation, we will try to get ejected gdp down over the next five or 10 years, then we can look and see, did they accomplish what they set out to do. that's the measure of success. is a pretty hard-nosed accounting type measure of success as opposed to the current economists often use, where it's in the eye of the beholder. but the question then is there's a lot of variation over time and what samples authors are looking at, and in what people call a fiscal consolidation. so some people use data-driven methods with a sort of say if

there's a big change in revenues and must've come from some underlying quality change and other people use x. and the definition of consolidation rate country was a day, let's have a big frankie and annette. let's have a big fiscal consolidation and then they do. and then they look to see if they work. so the axes in this chart are the ones that failed. and the those in this chart are the ones that succeeded. the different colors tell us, for those of you who are aficionados of the literature, which paper we're talking about, and the basic idea is that the people that try on the y. axis, it goes up, this is right on a 45-degree line because the x and y, it's a proportion that is either tax revenue or spending reduction. so the ones that rely on tax revenue, if you relied when a person on tax revenue you'd be awfully high up on the train

accident if you relied when i was in on expenditure reductions, then you be all the way down on the train one axis. as you can see, e. x's tend to be up there trying to do it with expenditure to and the transixteen to be down here, they're doing, trying to do it with tax revenue. the o's are down here. there are somethings that say the proportion that has to be expenditure reduction is even bigger than 100-cent or 100%, and then there's some papers that say no, it's between 50 and 100%. but there are no successful ones that tried to get more than half of the reduction by tax revenue. and if you want to be really safety in the zone of having successful fiscal consolidation, then this chart suggests you want to be down kind of on this side of the chart. the next one is the one that probably will be the one that will put in "national review"

because it's interesting. what we did here is, using the actual data now, and relying on a few different methods in the literature. that's why there's multiple chart. this is the range of a you could possibly get. then using a few different definitions of successful, so a modest success would be one that reduce jet that mac -- jet to gdp. is based on own calculation. once again, the x's our failures and the o's our successes. so again this is drawn not from what we said that what we get out of the day. the interesting thing about this chart, this is the point for the republican agenda, is that there are two sketches, the fiscal commission had a sketch, but there are two extra slots on his chart. the blue triangle is what

bowles-simpson sketched. and the orange diamonds isn't the bipartisan policy center's plan. and so you can see right here that even bowles and simpson i guess i would want to be a little safer to the other side of the boundary, and maybe i would be willing to slide down this way a little bit. but the bowles and simpson plan is drawing on a pretty strong history of success. it safely into the region where we can expect the consolidation to work. now, it doesn't mean, just because it works by the way, it does mean you want to do. that's what we have to have a whole other conference. we could be that works by killing the economy or something. we have to look more at other things like gdp and unemployment and what happens after you do it before we can say that's what we ought to do. but you can see that the fiscal

commission plan is pretty ill advised, given the lessons of literature. and so, what i would conclude is that we're a pretty rough situation. the debt to gdp by the oecd measure them look like it will finish an era about 86%, that makes it higher than it was for the typical latin american country that defaulted on its debt. now, one reason that today's latin american countries have tended to default on their debt pretty readily. [laughter] >> they perhaps are willing to do it, you know, more than they should be. and so that doesn't mean we are necessarily doomed, but we are any danger zone. where you could really expect markets to start punished if we don't do anything. my observation would be, if this most recent election was about anything, it seems to have been about smaller government. there's this really wonderful,

brilliant paper written by a graduate student at ucla where she went to the tea parties and took photographs of the signs, and then categorize what the signs said. and almost all of them said smaller government. which is the lesson of the fiscal consolidation. and so if there's a wave that tells us that we should pursue a policy, and takes is a policy, then for me i would say the wave is telling us that bowles and simpson are onto something. bowles and simpson have their own plan, but that doesn't necessarily mean that it's the best plan that would most match the fiscal consolidation of the past. for example, there are subtleties like if we're going to reduce spending, then do we do it through endowments or the military or what? andrew has been, the part of our team has been working on this was been working really hard on taking the compositional thing from this past successes and

mapping it to policies. what he's going to do now is he's going to sketch where we are in that, and what we think. andrew? >> thanks. >> that having been taken care of, and thanks, kevin, for leading into these things. it's obvious we have a large task facing us in terms of getting on top of the budget g gap. the other day i checked the congressional budget office has? oceans what's called the fiscal gap, which is essentially the change in revenues or expenditures you need them the necessary to do exactly balance the budget but simply to keep the level of debt from exploding. the cbo measures of the next 75 years the fiscal gap is rent a% of gross -- gross domestic product for the typical person that's not very meaningful so we'll try to put in terms that might be more meaningful.

that's equivalent to an indian and permanent doubling of all income tax revenues, or likewise, it's equivalent to essentially eliminate the social security and medicare program. that's the scale of the problem that we face. so i think it really makes sense to pay attention to this kind of literature, well works fixing these problems because we have a very, very large task ahead of us. as kevin mentioned, the existing literature that look at fiscal consolidation's overseas has really concluded that those succeeded in reducing the deficit and debt did so principally by reducing government expenditures rather than by trying to increase taxes. there's an additional finding out that pops up in the literature that talked a little bit about the areas in which successful fiscal consolidation focused their reduction of expenditure. in other words, to succeed you have to cut government spending, what is the type of spending that they tended to cut.

in the two areas that successful countries tended to focus on work, first was called social transfers, which in u.s. context means welfare and entitlement spending. and the second is the government wage bill which is really the number of government employees you have and the relative for each worker. so i think it's worth focusing on that, just avoid couple of quotes from literature from both the oecd and the imf, which are not known as particularly right-leaning institutions, but the oecd says quote an emphasis on cutting carbon expect and associate with over a larger fiscal consolidation and a large weight on social spending cuts increase the chances of stabilizing the debt to gdp ratio. likewise the imf said, fiscal consolidation is that concentrate on the expenditure side and especially on transfers in government wages are more likely to succeed in reducing the public debt ratio than tax basic consolidation. i really like when they say

something like that. so one question, why would this focus on transfer entitlement spending and public specter -- sector pay be so important? one and is sort of a direct economic effect. that lower government transferred encourages people to work more, to save more, and in doing that that stimulates the economy. you think, your debt-to-gdp ratio is a fraction. your debt on the bottom, you want to think not simply about shrinking the enumerated but also growing the economy. that's a direct impact there. likewise, if you ship the labor from the public sector to the private sector, the private sector is more productive that also helps the economy. so that also an indirect effect in the literature points to which i think maybe it's just as important. there's a signaling effect when governments are willing to tackle issues of in thomas and

public sector pay. because it is are considered to be third wrote to politics. things that are very, very difficult to get on top of. governments that take on these types of issues signaled their seriousness about fiscal reform. they signal both the public, you know, the general public and the financial sector that they are truly committed to getting on top of these problems. so when people see the government tackling the toughest fiscal issues, individuals become more confident about the future. they might invest more in themselves, investment and business. the financial sector may become more confident about the government's ability to service its debt in the future. so you might get more favorable interest rates, things like that. so you these two effects which seem to work together which make us focus on entitlement spending and government worker pay, one of the recipes of successful countries have looked at. given that backgrounbackground i want to talk a little bit insert abroad brushed drums and what a successful fiscal consolidation in the u.s. might look like. i think, echoing kevin's

comment. i really give credit to the chairs of president obama's fiscal commission. i think outlined an effort in balancing the budget, that is at least roughly consistent with the historical background of what a successful fiscal consolidation looks like. looking over the long-term, your biggest driver of deficits and debt is entitlement. social security, medicare and medicaid. y'all talk about medicaid and social security or medicare i'm hardly an expert on, and certainly we have heard from some already today, and obviously there is more at aei. one idea, a simple illustrative approach that kevin and i have looked at essentially introducing a deductible to medicare. sangha seniors above some given income level would pay the first x dollars of the health care teacher, and then medicare would kick in to cover the rest. something like that would reduce

medicare costs directly in terms of simply introducing an extra source of revenue from individuals into the system. it might have a more important indirect effect by giving individuals some skin in the game, some incentive to care about the amount of health care they are consuming. if you believe the rand health experiment in the 1970 and 1980s, individuals who have some cost sharing came to visit the doctor less, they go to the hospital less, they spend less overall on health care, but they don't have health conditions that are worse. there's a real key incentive effect their that i think could sort of accelerate the effects are excellent the improvements. social security i believe the key is to refocus the program back on its original intention, on its most important function, which is to provide insurance against poverty for the disabled, for survivors, and the old. today, much of social security

expenditures are on people who are middle-aged and middle-class. if you go back to the 1950s, the typical person claimed social good benefits at age 68 or 69, despite the fact that they had a life expectancy around 76. today the typical person with tires at 62 or 63 and can live into the early '80s. what that means is a typical person will spend around a third of their adult life in retirement, you know, financed by the government. it's great to retire whenever you want, e.g. saved up enough money to do it. but a lot of people haven't that i think we want to have a real push in terms of social security reform in terms of encouraging people to work longer. one of the reasons is is when you have an aging population with smaller numbers of workers, larger numbers of retirees, you want to encourage people to work more, save more and retire later. on social security i tend to think that focusing on raising taxes will encourage people to work less, save less and retire sooner. the final point i will make is a public sector pay.

in a sense, there's a split opinion on whether federal employees are overpaid. on one hand you have the office of personnel management, which every year put that reports claiming that federal workers are underpaid. on this latest report, claims that the pay gap is 24%, that grew from 2008 to 2009. on the other hand, you have about three decades of economic research which has consistent we found that federal employees receive salaries 10 to 20% higher than those of otherwise similar private sector employees. recently, i have updated to work, working with jason at the heritage foundation, and where we his government salary data and we controlled for differences in age, education, marital status, gender, every possible variable, even after that you find a rather 12% pay premium for federal employees. there's no reason federal

workers should be underpaid, but there's also no reason they should be overpaid. this pay gap comes to around $14,000 per worker per year, or over $40 billion in total. i think as a way of controlling the federal expenditures, but also a way of demonstrating seriousness to the public that, while they are going to be expected to take some sacrifices on social security, medicare and other programs, that we are not exempt population that doesn't have to share the pain. i think that's a way of again, to show the commitment to moving forward on this and getting buy-in from people around the country. this just scratches the surface so i will pass it off now and we can go from there. >> thanks so much, andrew. i should mention also that robert, in addition to working at first trust advisors as an analyst, before the assistant secretary of the treasury department, chief economist for the senate budget committee. he has been working on these issues for a long time. >> i was one of those overpaid

government workers. [laughter] >> the first thing a want to say is i disagree slightly with something that andrew said that i think federal workers should be underpaid. and they should be underpaid because they can't be fired at will. when i was at the treasury department, frankly, if anybody is looking from the treasury department right now, not talking about you specifically, but i want to get rid of 20% of my staff but it would've taken almost all of my energy for six months to do that. so i didn't get rid of anybody in state. so they should be underpaid. >> the job security for public sector employees, it's like an insurance policy against passionate it's an insurance policy against unemployment. if you to go buy something like that in the private sector it would be very, very expensive and very, very valuable. >> i'm going to take a look at of a different tact.

.. >> it was more like three. and the slightly above 4% growth we got very late last year, fourth quarter of 2009/first quarter of 2010, we'll eventually get around to saying, well, that was around three too. i think the underlying growth of 3% over the past year is is correct, we didn't really accelerate quite as rapidly as we originally thought we did late last year, early this year, and we didn't really go into a ditch again in the middle of the

year. what we can do in terms of public policy to accelerate short to medium-term growth the first thing i would recommend is resisting the sigh run call -- siren call which both parties have fallen to over the past decade of short-term demand management. this really goes back, originally in my view, to paul o'neill in 2001. there were several reasons he was a poor treasury secretary. one of them was his absolute insistence in negotiating with republicans on capitol hill in 2001 that we send out checks as rebates of, essentially, the previous year's taxes right away. he insisted on that, and it was an attempt to manage the economy through demand over the short term. and we have fallen into that again and again. president bush did it multiple times, president obama has engaged in it, also, trying to send out extra checks for inflation that didn't affect

social security recipients over the past couple of years. so we need to resist that. instead, i would focus first on extending the top tax rates that were enacted in 2001. in 2003 dividends, capital gains and regular income. notice what i did not say. i didn't talk about the other tax cuts that everybody on capitol hill agrees should be extended. i'm not talking about tax cuts for the middle class and below. now, those will probably be extended. they're certainly not going to be -- the extension of those tax cuts certainly won't hurt growth over the next couple of years, but they're really not very important. almost all those tax cuts, almost all of the expenditures related to those tax cuts, lumbar all of the deficit -- almost all of the deficit related to those tax cuts doesn't hit people at the margin. even if you're what would have been the 28% bracket but is now 25%, extending those tax cuts, most of the money earned in

those brackets is earned by the people above that bracket. they really don't matter that much. i would call them kind of cross-dressing tax cuts. they look like supply-side, but they're really mostly keynesian tax cuts. second thing i would do is accept the president's proposal on full expensing in 2011. now, to me this is kind of like a booby trap that larry summers left for the president. [laughter] he got, he got the president to agree to this and, frankly, i think the president knows what's going on. he can't full expensing on a permanent basis right away, so they're just asking for it in 2011. but can anyone in their right mind say that the president of the united states seeking re-election in 2012 wants to do expensing only in 2011 and then go back to regular depreciation in 2012? i think he knows full well once we go to full extension for one year, it's going to be extended and eventually made permanent, so i think the republicans

should accept that proposal as quickly as possible and move on to something else. in terms of cutting spending, i'm not quite as enthusiastic as kevin is. we achieve about 80% of the 35-year -- 75-year deficit reduction within that proposal, within that program is related to reductions in government spending. 20% related to an increase in taxes. frankly, i would take that. i'd prefer 100% to 0%, but 80 to 20 is good enough. in terms of the medicare changes, i'd prefer to see something that raises the retirement age or adds deductible as andrew just mentioned. most of the proposals are nickel and dime proposals. i'd take that too. it's better than nothing. in terms of discretionary spending cuts, i think the commission -- i think, i'm not the greatest budgeteer of all

time -- but i believe the commission is fudging the numbers. when i looked at the proposal, the numbers didn't line up between the early pages and page 16 early in. it appears -- it appears -- i'm not 100% certain about this, it appears that the bowles-simpson commission is using when it calculates how much money it's saving through discretionary spending cuts the president's budget, not the cbo baseline. and the president's budget is inflated with proposals over and above what cbo baseline would require. so that little triangle you showed earlier shouldn't really be at the 80-20 line, it should be a little further up where some of those xs appear. if it's calculated a little differently. so i'm a little more worried we're not getting the bang for the buck in terms of the discretionary side that the bowles-simpson commission is suggesting that they're achieving. in terms of the medium-term

budget outlook, trying to get to a sustainable budget position is extraordinarily daunting. cbo baseline for 2014 is a budget deficit of about $450 billion. let's say we extend all the tax cuts, and by all the tax cuts i'm including a patch for the alternative minimum tax for a few years as well as other expiring provisions like the r&d tax credit that always end up being extended. then we have a deficit of about a trillion dollars. that's about 6% of gdp in 2014. let's take out the interest outlays and try to get to a primary budget balance or a budget balance excluding the money that we have to spend on interest. that's about 3.5% of gdp. to put this in perspective, that's about 45% of all discretionary spending in 2014. i'm not talking about all social discretionary spending, i'm talking about everything.

45% of social and pentagon spending combined, homeland security also. it's an amazing amount. now, it's about 17% of all spending, but that would include social security, medicare, medicaid, and obviously we're probably going to do something more long term rather than short term. so getting to a sustainable fiscal position over the medium term, it could only be done with drastic reforms to entitlements that not just bring those programs into line for the long term, but are used to generate savings for the rest of the budget. if we're going to avoid a tax hike over the next several years. that's it. >> thanks, robert. just a couple of quick questions for the panelists before i turn it over to the audience. i wanted to start with kevin, but any of you can feel free to chime in on this. we talked a lot about the broader big picture stuff

although, robert, you got into some of the current tax policy debate. but in terms of spending, on the spending side, republicans, i think, are going to come under some pretty intense pressure for spending cuts to this grassroots movement that provided so much of the fuel for their electoral triumph. and i was wondering, how aggressive do you think republicans should be on this year's appropriations particularly with this spending fight that we're looking at maybe having here in the lame duck or, you know, even if this gets punted to february, do you think it's possible for republicans to come in and right away deliver on drastic cuts in discretionary spending the 100 billion that they've talked about? and what are some, what are some ways that we can, we can advise them in terms of what, what should be cut, what should go first and that kind of thing? >> the fiscal consolidation literature looks at what happens

in the near term to countries that do this. some of the papers find that you set off a near-term boon, and andrew alluded to this. it could happen if, say, you thought companies were sitting on hordes of cash and weren't spending it and then suddenly they see it, you know, with clarity, future policy, and then they say, okay, i'm going to start buying machines and stuff. but there are other papers that i actually have subsequently, they're relatively new and found pretty convincing that it looks more like in the near term it's kind of a wash. and especially for a big country like the u.s. but the good news is that what that means is within the framework of a significant fiscal consolidation we were to cut government spending, then i don't think that you should expect a sort of keynesian-style contraction. the literature doesn't find those. my concern would be that you would just have some sort of

haphazard spending reduction for one year that wasn't within the context of the complete let's give you clarity on this future movement in which case it'd be very difficult to predict what might happen. you might then continue to have the uncertainty and then the effect you'd want to bet on would be the keynesian effect. i don't think it's as big as some people think, but it definitely goes in the direction of harming us a little bit in the short run if you do only that. but i would really like to see them, you know, take the big job on now. the scale of the problem is actually characterized well, last point. mr. boehner at one point said in a speech he thought we ought to go back to 2008 spending. this that's sort of, you know, depending on which point in time we're looking at, that's sort of like lopping 600 billion of where we are on the spending side, and that's the scale of the problem to have, like, a genuine consolidation. you've got to be doing -- you

have to get back there and grow really, really slowly. so my prediction what they'll do on spending is something that's politically sail bl, it has -- salable, it has a nice sound bite with it, and they'll freeze. i think they'll be able to get very strong political support for a freeze. >> great. thanks, kevin. andrew? >> just a quick thought. there's sort of a tension between focusing on, you know, short-term cuts to discretionary spending and then focusing on these long-term budget issues. and it's -- i think both of them are important. the short-term sum matters because we do have a large budget deficit now, and i think you also is as a signaling effect of seriousness, of showing that you're willing to make some tough choices. at the same time, you know, you want to keep your eyes on the prize which, long term, is simply the into entitlement endf things. so i think if they have enough

political capital and they think the public has enough of an attention span, you want to get some stuff done on the discretionary end in the short term, but also fully engage on these fiscal issues looking at what the debt commission's come up with. i believe there's some reason to believe the president would be interested in at least the latter part. i think he wants to produce something of substance on that, but it'll be interesting to see how that plays out. >> someone famous a couple of years ago said we shouldn't let a crisis go to waste. [laughter] well, there's a had doe hanging over the republicans -- shadow hanging over the republicans which is that they fail inside '95, early '96. looking back, though, the unemployment rate was 5.5%. it's very unlikely to be 5.5 anytime soon or even 7%, frankly. so if we're ever going to have enough public support for the republicans to cut spending, it's now.

and if they don't do it in some way -- and i agree that the discretionary side really is more signaling than anything else, then it will be a signal that they're going to fail on the entitlements as well. so they need just to keep the faith of their supporters. >> fantastic. with that, i think we've got about 20 minutes left, so i'll open it up to questions from the audience. we've got one back there. >> thank you, folks. rick from virginia. i think the voters, i mean, this last election republicans won by 7%, i think, in the house. a lot of the margins were really thin. i don't think that the voter really, as you guys well know i'm sure, are getting the information that they need to make intelligent decisions. i don't think they know who, for

the most part, who's fiscally conservative, who's fiscally liberal. they don't know even the makeup in the senate that there's about 44 fiscal conservatives now. you need, -- you need 60, obviously, to get anything done. last year $4.5 trillion. that's 36% of the 14 trillion economy for last year. we usually just use the 25% federal share. then atr comes along for the regulatory costs, and they're saying 2.5 trillion. so that's 7.5 trillion of government-created costs every year. people never get this information, that's 52% of gdp, excuse me. that's what creates the job loss, the budget deficit, and according to the national association of manufacturers, the trade deficit with china

because production-level labor in manufacturing is only, like, 11 or 12% of all manufacturing costs. they've cited census data on this in committee testimony. the landed cost for chinese product here is is about 20% less than a u.s. domestically-manufactured product. what do you guys think about a 15% tax credit just aimed at manufacturing? maybe that'll attract some, like, bipartisan support with the unions and, also, can you guys tell me what the savings would be on, like, a high medicare deductible, 5,000, 10,000 for, like, a single gross income of, like, 50,000? >> okay. thanks, rick. i'll let whoever wants to take the manufacturing tax credit issue, and then andrew might have some things to say about the medicare deductible

component of the question. >> can yeah. i gave some testimony on something like that and was the only person in the hearing in either party or on the panel who argued that we shouldn't favor manufacturing. [laughter] but it's bad economic policy to favor this over that. and the fact is that i think you can scaremonger with decline in manufacturing facts, that there's been a sectoral decline in manufacturing as a share of gdp for 50 years and it's, i think, analogous to the decline in the percentage that's agriculture, and we don't feel that we need emergency measures to revive the percentage of gdp in agriculture -- >> well, don't tell that to the house ag committee, right? [laughter] >> but i do think that manufacturing is particularly hit by our high corporate tax rate, and it's very easy to locate manufacturing facilities overseas. the thing i would add is that very often manufacturing, the

facilities overseas are extremely capital-intensive, and despite that firms are deciding that it's better to be abroad, and that can only really be a tax story because if it were a labor cost story, then i could understand how maybe like textiles or things where a person with a sewing machine. but for a lot of, you know, if you think about even just what's a chip foundry is kind of like one guy in a lab coat out front who hits the start button every morning, and the rest of it happens with machines. it's almost the model you should have. but we're locating those overseas. that's a sign we need to have a fundamental change in our tax policy, but i'd reduce the rate. right now if you add state taxes, it's a smidge below 40%. japanese are cutting their rate this year, so we'll be the highest on earth as of this summer. we need to reduce the corporate tax rate by 14, 15%.

that's why something like the bowles-simpson plan is crucial for getting the economy moving forward because they figure out a way to do that in a fiscally-responsible way. >> on the idea of a medicare deductible, i don't have numbers in front of me, though i have calculated. a guesstimate you go out to about 2030 or so where we looked at projected costs and say how high would a deduck f deductible -- deductible have to be, i think it would have to cover about 20% of the average cost per person which doesn't mean you cover 20% of whatever costs you have, it means if average medicare expenditure per person today is is around $9,000 and you cover 20% of that, so, i don't know, 1750 or something along those lines. but that assumes that the presence of the deduck table has no effect on outlays at all which i think is is probably not the case.

so, you know, to the degree that's a very large amount, and it is a large amount. it just shows you the extent of the underfunding and of the rate of cost increase with medicare. the sorts of things that we've looked at aren't to show, you know, this is an easy way to balance the budget. in a way they show here's how tough it would be. and i think looking at the fiscal commission tells you the same story. they're making changes in social security, to medicare, to defense spending, to taxes all across the board just to try to balance this thing. so we really do have a very difficult task facing uh-uh on this. facing us on this. >> yes, sir. >> larry bruiser from mitt suey usa. all of you have, very rightly, said the only real long-term solution to the deficit is reducing entitlement costs. but the house republicans who are now going to be in the

majority in their pledge to america took social security and medicare as well as defense off the table. polls continue to show that the public is not very excited about the prospect of cutting social security and medicare, so how do you think this is actually going to play out in congress over the next couple years? >> that's a good question, larry. i'll leave that to the panelists. i mean, it is, it is -- i would just note that in addition to being left out of the pledge to america, even the bowles-simpson plan which was fairly bold on social security did a little bit of magic wand waving with medicare, just said we're going to control the costs to 1%, the cost increases to 1% of of gdp and how we're going to do that, well, we're going to strengthen this panel that as our last panel pointed out, this medicare advisory panel has not really, is not really projected to be all that effective at controlling costs.

so i'll let, i'll let any of our panelists weigh in on that, if you want to start, andrew. >> i mean, i didn't look very closely at the pledge to america. for keptics out there -- skeptics out there, i don't have it in front of me. i'm not reading off somebody's talking points. but i don't believe they took social security off the table in that. i think they may not have addressed it, but i don't think they said, well, we can't cut social security benefits for anybody. i think it's interesting that both john boehner and the speaker and steny hoyer who was then the majority leader on the democratic side have both, essentially, endorsed the idea of raising the social security retirement age. so it, you know, there's nothing like sort of impending fiscal doom to focus the mind and bring people together because these are sorts of things which, you know, five years ago probably neither of them would have endorsed. so i think there is some possibility of progress. social security is the most likely case to do that because we, we understand the issues.

it's a mature policy issue. we know the pros and cons, and it's also a game where you can split the difference. we can do a little bit on the tax side and a little bit on the benefit side, a little on the retirement age side. we can compromise easily. medicare and medicaid, in general, is tougher. not enough individual and market control, not enough government control. so it's -- you have just a pulling in different directions. the left tends to want to so the health care end with more -- solve the health care end with more government control, more dictates, more rationing, that kind of thing. the right wants to focus on a more consumer-based approach with more sort of market discipline on things. it's tougher to compromise there because you're pulling in different directions. it's hard to split the difference on health care than, i think, it is on social security. >> go ahead, robert. >> i actually think there is room for bipartisan agreement, at least in the near term, late this year. probably more likely very early

next near. i'm not saying it's going to happen, but it's not in1257b8, the odds of this. ultimately, president obama knows his legacy critically depends on getting reelected because without that he really can't guarantee that the health bill enacted in march will ever be fully implemented as planned, and if it isn't, he goes down in his history as the greatest squanderer and he, obviously, doesn't want that to happen. i think he's going to draw very clear lines on health care and not so much on other issues. i don't think, frankly, that he takes seriously the idea of a challenge, a primary challenge from the left in 2012. and if there is, i don't think it would gain much traction. so i think he has room to not -- when i say triangulate, that kind of indicates he's going to pull a clinton. i don't think he's going to do that completely on many issues because he will be very strict

on health care to protect his health care bill, but i do think he's willing to compromise on things like social security and the top line level of discretionary spending. if he's in this a debate with the republicans on how much we should spend total discretionary, that's a debate that's on the republicans' turf. if he can free with the republicans on a -- agree with the republicans on a top-line number and then argue about what the priorities are, then he's on turf that is more favorable to the democrats. and is less likely to be a political problem for him. so i think he's willing to compromise on top line discretionary and, perhaps, social security. >> one other thing i wanted to say, like, returning to this deductible point, and this is the paper we're coming at. we're going to have lots of tables that show you the different deductibles and ask what you accomplish, but if we told people who are currently retired that they had to pay a deductible, it would be wrong

because they had no advance warning, they thought they had medicare when they retired, and what we want to do is we want to signal -- if we're doing policy well -- the time for people to adjust. so what we would want to do is tell people if you're, well, i don't know, pick a number, 55 or younger, then when you retire then the first x dollars are out of pocket, and people have a chance to safe in anticipation of that. save in anticipation of that. the thing is that i think if you were to say we've gotta have, you know, a thousand dollar deductible for medicare for all current retirees starting this year, then you'd have zero chance. again, i'm not a political scientist, but i don't think i need to be to make that statement. but i think if we were to say, okay, beginning in a decade there's going to be a deductible in medicare that starts out at $200 a year and then grows depending on government's ability to constrain costs. if government's bad at constraining cost, the deductible has to go up to keep

it in the balance. then you set up a game that's actually the right game. so government realizes, oh, we're going to have to defend a big deductible in the cost management side, but i believe you could get a deductible in as part of a big fundamental fiscal consolidation because it's something just like changing the retirement age, if you do it often in the future like was done before, then people kind of understand that that's something far off in the distant future that we'll have to start to do to address our long-term problems. and i think for me it's very hard, but amazing how much you can get with a deductible that starts kind of small and then grows over time and doesn't look so terrifying from today. >> well, one of our previous panelists wanted, i think, to possibly make a point or ask a question related to that quickly. >> sure. i was just wondering what you have to say about wages and take-home pay which, you know,

as you know a lot of people didn't even before the recession think they were living through a boon because that was stagnating. so what can we do? obviously, health care's part of the story, but beyond that what can we do to get wages and take-home pay going up for the median worker again? >> the first thing that comes to mind is that if you look in terms of private sector pay over the past year over and above inflation, it's up in the 3 3.5% range mostly because people who are already in the work force are working longer hours and average hourly earnings are up a little bit, too, and it's been outpacing inflation. ultimately, what we need to do to get the median worker to earn more is to have a combination of faster economic growth and a lower fringe benefit cost which gets back to health care. now, over time the fact is unless we make some

market-friendly reforms -- and even if that occurs, it would just be a one-time benefit over several years -- that health care is going to cost more relative to gdp over time, and that's just a function of higher wealth and living standards, and we just have to live with that. so as long as health care costs come as a business expense through fringe benefits rather than through the wage side, we're just going to have to live with the fact that wages are not going to grow on a real basis as quickly as the overall economy and overall compensation. and that's okay because, you know, big tvs are going down in price, so maybe we don't need as much. >> this is another thing that i've been working on with stuff i haven't come out with yet, but there's a web site that everybody can go to right now called payscale.com. and it's an internet site that if you go and, like, type in

everything about yourself, then it tells you how you're being paid relative to people like you. it's pretty detailed, but i think it's actually the sort of labor database out there because 23 million people have done this, so a big sample. not a random sample, but if you go there and look, they now have a national wage index that's better than the government ones because it tracks wages for people who change jobs accurately. and so, and so the wage data that we just heard about is really the people who have kept their job, so most of you in the room have a job, your wage didn't go down, right? but the people who lose their jobs and then get another one, they take a big pay cut. so it turns out that wages have actually been declining in the aggregate pretty sharply, and it's a trend that we miss. and so i would just finish with that means the sort of crisis go to waste point is is really

important here, that we need to understand that it's worse than you think in the labor market out there. sure, the unemployment rate is is really high, but the average wage has dropped a lot, too, and so o it's not clear that they're keeping up -- or they aren't keeping up with inflation. and so, and so that calls for changes in policy, frankly, and, again, you know, we have this paper that's subsequently been confirmed by a dozen other papers that shows the high corporate rate is squashing u.s. wages. it's not really rocket science, but it's clearly in the data. we have to do something about this. it it seems like -- this would be the final observation. the mood in washington has been we've got all these crazy problems like broken fiscal situation and corporate taxes that are too high, and instead of fixing those problems, let's just try to jack up the economy with a keynesian stimulus, and so we'll keep these bad things but hope that this positive

thing offsets those. if there's a hope for me about where we go from here, it's that that reasoning, those sort of larry summers' timely targeted and terrible is is probably the third t -- [laughter] that that's just off the table, and wages and unemployment are the fundamental reason why we can't play that game anymore. >> this okay. i think we have time for one more question. this gentleman's hand has been up for a while. >> thanks. one kind of expenditure that was not mentioned which i don't think how large the total is, but as agricultural subsidies would seem to me to be total waste now, unnecessary but significant and something to which the republicans seem very much wedded. do you think there's any chance that the agricultural subsidies will be reduced? >> go ahead, robert. >> no. [laughter] i think if you look at the co-chair's draft in the fiscal

commission, they had some small reductions -- >> 10% or something. >> yeah. i think the size of those reductions in a plan that is otherwise pretty ambitious shows that bob's right. >> and then here's, i guess, a fun fact that will help put it in perspective for you. the agricultural land is the only real estate item that's continued to increase in price over the last few years, so it's -- like, there's even talk of a farm price bubble and so on. but it actually doesn't necessarily have to be a bubble because government policy keeps bringing up higher subsidies. >> [inaudible] >> i don't remember the total. >> i think it's something in the area of 18-20 billion a year total on agricultural commodity support, so it's not the total farm bill which also includes food stamps and other programs like that. i mean, you know, i'm surprised there's so much pessimism. you know, one of the things that the last time there was a republican wave election they were able to do was the freedom

to farm bill that actually started to phase out subsidies, but then a couple years later a total reversal once crop prices went down -- >> that's why there's so much pessimism. [laughter] >> yep. okay, great. well, thank you so much to our panelists, i really appreciate it, guys. [applause] stick around. our next panel is going to be on restoring constitutional government. we've got some great possiblists -- panelists. matthew frank is going to moderate that one. we've got michael grave is going to speak on that as well as david mcintosh, former congress and federalist society co-founder, and matthew spaulding will also be on that panel. thank you very much. ..

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kate o'brien and arthur brooks of nria kei for convening this day's session. i've learned a lot already this morning, and am looking for to learning more from my fellow panelists in a moment. i met frank, a director of the william a. and carol g. center on religion in the constitution at the with us spent institute in new jersey. i am recently retired from teaching constitutional law and political philosophy at bradford university after 21 years. and kate asked me to mention, i'm happy to mention that i have been blogging for the "national review online" since its inception, five and half years ago. i'm joined by three distinguished panelists today. we will go in the following order. i think we just agreed, first will be matthew spalding, director of the center for american studies at the heritage foundation. matt is a constitutional scholar co-author of political thought

and religious liberty. author of we still hold these truths, just out in paper recently, i think. came out a year ago. next we will hear from michael greve, the scholar here at aei, authors among other things, real federalism. he cofounded and from 1989-2000 was director of the center for individual rights of public interest law firm. and finally we will hear from mr. david mcintosh, former congressman of indiana's second district, served in congress for half a dozen years and was chairman of the subcommittee on regulatory relief. he also served in the reagan and first bush administrations, and when he was five years old or so, cofounded the federalist society, a very young organization. i will make a few quick remarks to set things up and then we

will go to doctor spalding. brock of him as a cover something in his first two years as president. that bill clinton couldn't manage in his first two years. i don't mean the national passionate passage of national health care. i mean obama has prepared -- propelled countless americans to read instead and organized a political thought and action around a felt need to return to its principles. we see this in the invocation of a revolutionary forebears in the name tea party. for what happened in 1773 in boston was a protest of constitutionalists. we see it in the habitual references to the constitution made that many tea party gatherings. politicians got the message. think back to 1994, the contract with america, i looked it up again last night, contract with america the 1984 republican party contain no references to the constitution. not one. but they should both the pledge to america and the contract from

america may be constitution thing one. the first pledged america saying we pledged to honor the constitution as constructed by its framers. and the second, the contract from america saying as its first concrete action item that each bill introduced in congress should quote, identify the specific provision of the constitution that gives congress the power to do what the bill does, end quote. such resort to basic principles cost additional as an is a welcome development, and a market change from the outgoing speaker nancy pelosi who said are you serious? when asked what constitutional provision undergirded the new health care law. the new house majority appears to be quite safe. the most important task before the new congress is whether it can recapture a fully rounded sense of its own responsibility for the integrity of the constitution. losses are going forward against the health care legislation in michigan, virginia and florida before federal judges of bearing degrees of openness to such

legal challenges. but i think it would be a mistake in principle and in practical politics for the new congress to rely upon the judges to vindicate the constitution. first, the judges reliability is seriously in question. does anyone really want to trust this to justice anthony kennedy? second, it is not the judge is constitution. it is not theirs, subject to periodic judicial amendment by five supreme court justices. it is our constitution, and it's the fence rests ultimately with us. the people of iowa remembered as three weeks ago when the unseeded three state supreme court justices who had abused their trust in 2009 by inventing a right of same-sex marriage under the iowa constitution. makes one long for a similar opportunity at the federal level, alas. and the whole of america people seem to remember it as well, as many of them were by concerns

about the size, cost and intrusiveness on our freedoms of a government that has slipped free of its anchor in the constitution. every branch of government seems to have exceeded its proper boundaries under the document. the congress itself, by acts of legislation, that cannot find a basis in the constitution. executive branch agencies that rest of asked powers on slender reeds of statutory authorization, think only of the environmental protection agency, for instance. and the judiciary, which claims supremacy over constitutional questions, never intended by the founding generation. a remedy must begin somewhere. the natural starting point being, i think, the congress as the most electorally responsible branch, especially the people's house. somehow the members of congress must discipline themselves while also paying heed to the damage done and threatened to the

constitution elsewhere as well. a tall order, i hope we'll have some sound advice for the new congress from our three panelists. begin with matthew spalding. >> thank you, matt. that set up the task very nicely. thank you, adi, especially for putting on this conversation. it's extremely important right now. i think we have entered what we call a moment, shall we say. what interests me about it goes over the course of the 20 century the general expansion of liberalism has always thought to be inevitable, unstoppable. and we finally got over love affair with the founders in a thing called the constitution, but it turns out that's not exactly right. something has been awakened. this debate between the founders, writ large aggressive have been fully engage in the public mind, not only were issues that were naturalized but the election was foundation

allies in a very important way. you see this of course in the election outcomes. you have to go back to see a midterm president lose as much in congress, you have to go back to 1938, fdr's second midterm. to see a large enough example at the state level you have to go back to 1928, when calvin coolidge was president. there seems to be something afoot here. a monumental opportunity. let me put it in broader terms. in 1938, that election stopped the core momentum of the new deal that after that the expansion of the new deal was over. but it was absorbed. in the 1940s you remember the 46 election, congress came in, they lost that in 48. in the 1960s, because a very savings, including kennedy's a fascination.

larger national discussion of these matters that the 66 midterms, didn't discuss it that much. and as a result of the various waves of liberalism absorb, or shows that almost constitutionalize. but i wanted something different is happening this time. this seems a get that -- deep public, but here it seems to me is the challenge. a popular rejection of a broad agenda. is it possible to turn that into an embrace of conservative constitutional? american seem to be ready to reembrace some sort of enforceable limits, but it's not at all clear how far they wish to go. they oppose to runway budgets, spending debt, living government takeover of health care paid by don't think it necessarily means that they want to scrap social security, or close down the department of education. what we have seen is that not accept that there are no limits, which is an extremely important

thing. we must assume the rate of getting rid of every department. they are just not there. that is the task. now, you take the sentiments, which are extremely good, good instincts proved a lot of common sense, in deep and expanded how do you expand from a political moment, or momentary, short-lived come into a constitutional moment, which is lasting. is a plausible not only to stop the latest wave in its tracks, but after change course? i think the answer is yes, but it's going to be very difficult and will take a lot of prudence. one thing it will take is a constitutional strategy, a pathway, if you will. something, somewhere like between what we might call a cold turkey strategy, which some people might prefer, hyper constitutional, if you will, and on the other end bruce his theory of constitutional moments

which is to say that everything becomes constitutionalize. i would call legislative jurisprudence that i did want to talk about five areas where this kind of approach could be used and point at some particulars, and leave it at that. first area is in the area of congress isn't that congress needs to get control of its lawmaking process. the legislative function, if you will, in the name of responsibility. they need to learn how to write bills again. they need to make those bills public and writing in clear english. there are all sorts of things having to do with getting control of programs and things that are automatically continued that they don't intend to continue, things that are not authorized but appropriated. the user legislative process function to make it more constitutionally responsible. in this area you have a question about the constitutional authority question, the pledge, the lynnwood in the pledge but noting legislative authority.

a great idea and we want to encourage debate the question, think that that is actually enforced. how strictly enforced. i think the question is whether we can leave room for constitutional improvement. what do you do when the department of education is up for reauthorization, or some massive program that has been whittled down and put in every possible good you are, but the underlying vehicles us dubious? you have to leave room for the question i think. we also need to be very creative in terms of how we identified. say, their marks and turn us into constitutional debates as well. and more generally go after the big stuff. the biggest russian right has to do with health care, obamacare, largest in the constitution adobe an early vote to repeal the. over innocent, let them mess around with. precedent should pass on

constitutional grounds. spending, all these large budgets have in the command it coming i think intimate into constitutional march that the secondary is the executive. i think this congress will do some series thinking about executive orders. and laying the ground, drawing lines about where they can be challenged, especially if there's underlying legislative behind them. but mainly this area touches on oversight. aggressive oversight, how things are actually operator a promise of a lot of oversight -- oversight, we need to turn that around the congress needs to learn oversight as a front end mechanism. which points my third area which is the administrative state it so that the real problem here is its core branch of government called the administrative state. i think congress could use its legislative authority, he are very aggressively, fed by oversight to challenge

regulations, the congressional review act. there's something called the reins act, regulations over 100 may, they have to come back to congress for approval for any regulation, so you don't go on and live forever. some of the congressional react as or they should you appropriations riders that is all legitimate tools congress has a hand to press these things in the right direction. keep in mind is much of the politics i think of the modern era is really a battle over who controls the administrative state. the executive branch of the legislative branch? which is a? it's kind of muddled. why presidents have started to pick czars and things like that. congresses position would be to say it's exactly passionate its executive and if they don't like that, they should take back the authority, they should start drawing some lines. i will touch on include passing, and train to hear is really thinking about this much more

than i have come is federalism. there's some wonderful new opportunities to aggressively pursue new avenues. new cooperative avenues with state governors and legislatures. and things that we might not think of on the face of the weather might be opt out, exemptions. thinking areas of transportation, education, homeland security, over criminalization. some areas where we might not think of normally which might allow some avenues for creative changes. and a fifth area is a structural area. i think it's important and it's time to be think about structural changes further down the road that one thing i would emphasize is was going on now should be seen as an opening of a great, not closing. we should be thinking it. the legislative area we might be thinking about things like a legislative line-item veto. it was declared unconstitutional last time because is at a time in which the veto occurred. after the president cited. you could actually change the and push that again.

may be questions about taxpayers a standings on some of these question. the questions about budget reform, or entitlements go. these are all constitutional question. the larger questions of course, things like constitutional amendments. here i just want to say something very brief, which is that constitution should be part of the strategy but we shouldn't overplay the hand that i think oftentimes there's a misunderstanding about that. look at past five this moment, they did give rise to constitutional amendment. usually at first, but they should be seen as technical legal, but more as a way to constitutionalize your successful political victories. that is political, the politics comes before the constitutional a minute, we should be setting the groundwork for those things now and developing into what they ought to be. that's the way president reagan

looked at in his second term. and we should be looking at it the same way. in general, i would just close in saying that i think we need to focus on also how to think constitutionally. i know dave mcintosh has been thinking about as well but we have to keep in mind the kinds of intellectual muscles we're talking about are extremely weak. we need to think strategically, step-by-step, baby steps in some cases. we need to avoid self-defeating votes in debates that get us focus on things that action might take our attention away from the larger things at 10. they really are no silver bullets or easy solutions. technical argument did not necessarily always solve substantive constitutional questions. those will be settled in politics. and politics we must a member that nothing trumps argument and persuasion. this is a historic moment come in my opinion, a rare opportunity where the american people step back.

that means what happens now should be seen as a setup for what comes next. the election 2012 in particular, which happens to be the anniversary of 1912. it would be a large-scale debate nationwide about where progressive liberals are taking the country. the possibility that in that debate, presidential level, possibly realigning election if you will is enormous. it puts a lot of burden on constitutional conservatives and a lot of responsibility that i think in and on other things, constitutional statesmanship, which we are to think long and hard about. thanks. >> thank you, matt. we will train next to michael greve. >> i think there are a lot of bad things that the obama administration has done. i think the worst thing is done for the country is to collapse in 60 seconds flat, the way democratic government is supposed to work is that if one party gets wiped out, as republicans did in 2008, they

will have time to regenerate themselves, rethink their program and the premises. we just haven't had time for that, and it shows, and it's nowhere more obvious than the federalism that i've been asked to talk about. the conventional view is something like well, conservatives ought to be in favor of federalism. limits of the federal government, government is closer to the people, devolution, decentralization. and that agenda is supposed to have government, a lot of push and release on life with the latest election that i want to point out two problems with that view of the matter. the first thing is to notice that that agenda, federalism devolution and decentralization, splits the conservative coalition down the middle. what conservatives think of, social conservatives in

particular, that means self-government. way businesses think of is trial lawyers. state attorneys general, hellhole jurisdiction, exploitation, 50 regulators, hounding you. and they are right to think about federalism that way. the second thing is as conservatives used to moan about, unfunded mandates, washington at patches all these strings to these limited funds, and that will ruin the state. so what's the response? well, we should have funded non-mandates on also known as block grants. these things are fun, so long as governor thompson experiments our welfare reform, but that was almost 20 years ago now. what these programs now mean is that california and new york experiment on our money with programs that are unsustainable, known to be unsustainable, and experiment with those programs

in hopes of a federal bailout. in they come as news to come we've already built out the state six times in a row now, with various programs under cover of them, they're always called bailouts but that is what they are. i will have a few more remarks on that. now, under the surface these two problems have been sort of bubbling for some time under the bush administration conservatives have a fund of dealing with it, which was where in favor of federalist except when we are against it. that will no longer do. what you now need is a federal formula that first unites conservative constituencies instead of dividing them. and second, a federalism formula that doesn't ruin the country and ideally offers a way out. we are nowhere near that. we have barely begun to grasp the problem. so now what do you do? there are a few constructive

steps. there was a review of while ago called rogue states that have sort of seven concrete steps, things you might want to think about. that's a very good start. if you're being asked that's what concrete steps that i will give you two rules of thumb, and one concluding thought on this front that the first thing is, i want to construct a neon sign that says decentralization does not mean smaller government. and i want to hang that sign over the office of every congressman in congress. look at the dodd-frank bill. what does it actually do? the answer is, before you even get to elizabeth warren and her fabulous commission, and this board and that board and the other 50 things they constructed at the federal level, this thing liberates state regulators to hound financial institutions

that was in 1864 have been indian from federal compared to state interferences. that means more state power. that means more state regulatory authority. if that's your federalism model, then by all means, go ahead. or is your model the federal aviation act, which liberated the airline on the regulated the airline industry by adequately preempting any and all state law relating to the services, routes, and so forth of air carriers. the lesson is this, if you manage to do anything at all for smaller government in washington, d.c., that doesn't mean the pro-regulatory constituents are get. they were just migrate to the state that if you want to make smaller government state, you must preempt the states and you must preempt that maneuver. to repeat, decentralization does not mean smaller government.

i want to construct a second sign, and it should say when it comes to federalism, this into the states and then do the opposite of what they say. ..