and that varies from state-to-state. understand what i'm saying? so a combination of those things saved $89 million that we were spending in our regular budget already before any of this stuff came up. now we don't have to spend that. so that savings was automatically created because those obligations were releaved by the private option. it's not a question of how are we going to track the data, how many are signing up. we already know that data. it was in the budget. you follow what i'm saying? now, if we don't do the private option, then we have -- that $89 million theoretically would be paid somewhere. right? but we already gave it week in taxpayers because we cut taxes -- we cut our overall income and our overall tax policy by an amount of money equal to what we were saving in

not having to spend that money in the uncompensated care or the traditional medicate that folks could legally and legitimately move over to medicaid expansion. that's the problem. i've not done a very good job explaining that because of your -- that's a great question. you asked a great question, and others have asked that question. i have to do a better job of explaining how the $89 million savings exists. it's not a savings based like on saving penalties from employers. it's an actual savings that's already been realized and quantities identified in a budget. >> i've been curious about what happens to prices in the exchange plan if you didn't get initial money for the private option because the overwhelming majority of the people in the exchange are the private option.

if that money is not continued, what happens to your risk pool and what happens to the premiums next year? >> it will have a devastating effect, it seems to me. everybody knows, perhaps because of the rollout, who knows, problems with the federal roll you et cetera -- the subsidized portion of the population is, as you mentioned, significantly less at this point than the medicaid expansion portion of the population. and you pull that whole pool out, then the insurance companies and the pool is paying for this theoretically has an upward cost spiral on it, and you may lose some of the insurance companies that are otherwise there, and certainly the ones that are left, undoubtedly you may have increased insurance premiums as a result of that. all of it -- it all needs to

work together. that's a gravity point. it will have a negative effect on the subsidized pool. >> sure. all right, folks. anymore questions? go ahead -- one second, let's get you a mic so everybody can hear you. >> you're leaving here good and going down to the street to to white house. what are you going to talk to the president about? >> probably not a lot of this. again, you're going to sit there with a bunch of republican governors and democratic governments and be talking -- to the extent we talk to president about healthcare issues, one of the things, a question you talk about early on, i think will be talking about the ease in the streamlining, of the waiver process. there's unanimous aagreement.

something all 50 governors irfired up about is the national guard cuts. those are the kinds of issues where you're going to see so much unanimity on the part of the governors that will be the bulk of what is talked about. [inaudible] questions. >> i don't think you're going to change anybody's mind in the course of a three-hour meeting with the president on where they stand with health care right now. >> all right. so, i think we'll leave it there. thank you so much, governor beebe for being here. i want to thank everyone for coming to participate this morning and we hope to see you back here for future events. thank you so much. >> bye-bye. [applause] [inaudible conversations]

>> coming up next, events from the national association for business economics, 2014 policy conference. first alan greenspan and then a discussion with cbo director doug elmendorf. >> on tuesday, attorney general eric holder will speak to attorneys general from around the country at their annual winter meeting in washington, dc. our live coverage starts at 10:00 a.m. eastern on c-span. >> the house and senate veterans affairs committee hold a joint hearing on disabled military veterans tuesday. the committees will hear testimony from officials of the

disabled american veterans organization, who will outline their 2014 legislative goals. that's live at 2:00 p.m. eastern on c-span3. >> i think there are some myths out there. i think that people think the marry -- cherry is somemakously preserved profit and it's no different than a pickled cherry and the brine process is no different than the types of sulfates you use in making wine. so it's a -- i wouldn't call it a healthy product but i would call it something that is a tasty treat. >> what you see here is cherries in various stages of process. the cherries come in, they still have jeanne they go through an extensive washing to get the brine, the sulfur and the

calcium salt back out. the practice of making marascly no, you're taking the brine and soaking it and progressively stronger and stronger sugar and color solution, and over the course of that syruping schedule you'll see the color intensative pick up as the sugar con tenant picks up. this is year in the process, and lightly colored. and that one is darker, much farther along. gives you an idea, you'll see yellow, pink, to deep red, and it's just that cycle of the infusion and where it's at in the process. >> next weekend, booktv and american history tv look behind the history and literary life of salem, oregon, saturday at noon on c-span 2 and sunday at 2:00 on c-span 3. one of the former chairs of the

federal reserve, alan greenspan, talk about issues with the current immigration system, the dodd-frank financial regulations law and income inequality. his comments came down a one-on-one interview during the national association for business economics conference in the washington, dc area. this is 45 minutes. [inaudible conversations] >> good morning everybody. i'm here with a map that needs to ointroduction, going to share with us about what he thinks the current economic conditions are, the challenges we're facing with the recovery and then get into some of the policy recommendations that dr. greenspan thinks are necessary to solve this stagnant recovery we're in right now. so, dr. greenspan, let's starts with a very generic type

question. what is your current view on the u.s. economic outlook. >> i would say essentially more of the same. that if it weren't for the fact that asset prices were probably still undervalued in part, i think we'd be in a much more difficult series of problems, many of which larry went over. but we're still in position where the equity premium on stocks, for example, reached 50-year high just several years ago, and have come down only partway, and remember that stock prices over the years have risen by six to seven% actually, fairly consistently, with half being real, half being inflation. and we have had no change for a

number of years, which means that granted the market was high in 2007, but we have five years of fundamentally no change, and so that there is a slight set of pressures that is probably the only thing i can say about the economy. >> what about -- there's been a debate whether or not the -- over the past couple months we have seen economic data turn slower, and a lot of it is being attributed to weather. do you believe that? >> i think certainly part of it is. but we're going to see a very significant downward revision of the fourth quarter gdp, and we're seeing definite slowing down -- one of the problems being, very large accumulation of gdp, and the rate of increase

is now slowing, which, of course, brings the level of gdp down. and we are definitely seeing some slippage in industrial production. we keep a weekly industrial production index, and that in recent weeks has come down a bit, partly because of the weather. we're also seeing that the adjusted to the weighs of the industrial production index have also started to go lower. i don't think that's anything really fundamental. i think it is essentially a reaction to the excess inventory accumulation but it's basically as far as i can see this first quarter looks like two percent. it may go up a little bit the rest of the year. that still remains to be seen.

the standard models are those extraordinarily complex and very sophisticated structures which so terribly well september 15, 2008. i was shocked myself. i was a great fan of the federal reserve's system, and we missed it. jp morgan mitted it. the imf missed it. oecd missed it, and in fact i'm hard-pressed to find anybody with a hard structure model that got it right. and i just finished writing a book saying what in the world went wrong -- that was not the title of the book. >> you know, looking now, looking more simpler, equity markets have done fairly well over the past year, a bit more. are they getting ahead of. thes? there is any possibility of a bubble there?

>> well, the answer to the issue of bubble is, no. but that's note the same thing assaying that it can continue higher. bubble requires a degree of euphoria, which is not quite in the marketplace. so that, yes, the market could go lower because of what i would differ with larry, think, that long-term rates start to move higher, and that's going to be very difficult to deal with. but overall, that's not where our problem lies the problem lies in -- more deeper problem that is essentially a consequence of our response to the crisis that emerged. >> let's dig a little deeper into this. why do you think over the past six years the recovery has been so muted or -- what's your view?

>> well, i agree with some of the things larry mentioned. but basically we're dealing with a situation in which you can see what is going on if you try to construct the gdp in terms of the average maturity, of what goes into the gdp. for example, software is three to five years. residential building is 75. haircuts are one month. and what you end up with is a weighted duration average, which basically -- i should have brought my charts -- going down gradually and then goes sharply lower. the major component in average

durability is the fact that there's been a very dramatic decline in structures as a percent of gdp. in fact, they went to some residential and nonresidential. they went from over ten percent of gdp down to slightly below six percent. that's four percentage potentials. a very big number, and it's translatable in one form or another to where the sluggish is in in the unemployment rate has come from and the overall slack that the cbo is imploring. so that to me is where the problem lies. it's not evident that the remainder of the economy -- it's not doing great but at it not doing all that -- not behaving particularly unusual manner, and so as far as i can see, the issue here is why is it that we

have had such a dramatic decline in long-lived assets and not particularly in shorter-lived assets. here we have to split the structures into residential and business. and then examine each separately. i've got a fairly long regression -- long meaning long in time -- which measures the extent to which nonfinancial corporate business moves its liquid cash flow into illiquid long-term fixed assets. >> so buying these assets with the cash on hand. so putting your money wherure mouth d -- where your mouth is. >> yeah. well, haven't been speaking much later. what the data show is very

interesting. at the bottom, which is not that far from where we are now, the actual ratio of capital investment to fixed -- i should say -- fixed illiquid capital investment is at the lowest point in peacetime since 1938. and we're up only slightly improved from that particular level. >> you sat on numerous boards. why is that? >> well, it's not so much the boards you see it. but you do see it, but also when i was an active member of this organization, i was a consulted through a lot of corporations and salt through the issue of how investment is actually made, and what will happen is a product manager will be asked to present a particular exhibit as

to why a certain facility, petrochemical, food stock are or something like that, ought to be constructed. and they will pump out usual data which a lot of the membership here will be quite familiar with, and they get after-tax rate of return of to%, which is terrific. -- of to 20%, which is terrific. and what is the variance? and there's where the big decisions are made. my experience over the years is that it's much more important to get a narrow variance, which i usually the case in basically cost saving equipment -- than it is to have a market expansive, very high rate of return, but with a significant potential for loss. my experience is, more often than not, that stuff is pushed

aside, and so what we're looking at is what is it that causes the variance of capital expectations to spread? and here it is really the issue of -- use a wonderful useless term -- uncertainty. uncertainty is a vague notion where you have to put numbers on it to get anything useful. and i i've used this relationship of the share of cash flow going to capital investment in nonfinancial corporations, and i tried to explain it in the usual regression manner. and using the dependent variable being capital investment and -- nonfinancial corporate capital investment as a share of cash flow is a dependent variable,

and then cyclely adjusting all of the independent variables to removal the multiple -- what you can do which gaves you the useful characteristic of multiple regression of the individual regressions, each by itself, sums up to exactly what the multiple regression is. so you can essentially see where the particular elements within the regression are affecting the -- >> the results? >> yeah, and i had this regression which goes back to 1970. a little over .75. but it's a trendless series so you don't have the biases, where you always have these wonderful

high -- when you have two populations and the a number of warts on a tree good up, but what the data show fascinatingly is that in a sense, you do get an impact from -- the biggest impact, i should say, when the slack in the economy increases. that is probably half the decline or half of the measure as to why corporate investment to cash flow rules. but the rest of this is not. and the rest of it is a big part is the civilly adjusted net close government ratio, or net. very close to the same. the net savings figure is

good-shows that large investment crowd out private investment, as cbo offer states but i see it doing ill contemporaneously, and the reason essentially is that ex-post savings in a domestic economy, sayings minus investment must equal your account balance, and what we're seeing here is that if you basically cause an increase in government deficit, it is of necessity subextracting savings from -- subtracting savings from the rest of the economy. i was about to say, that to me is what is causing the gross domestic savings rate to be declining very significantly to the point where now the net

domestic savings figure is zero. and if the net domestic -- if the gross domestic savings is close to zero, which it is, in order to get capital investment, domestic capital investment, you have to add to the domestic savings figure the figure on net borrowing from abroad. what is happening now is basically we have had a dramatic decline in gross domestic savings, and partially offset by a decline in the -- i should say a decline in the borrowing from abroad. and the result of this is that the capital investment going into the capital stock is declined very appreciably, and that is going through the usual

multifactor productity shows why productivity has slowed down and why the gdp is stagnant. my basic view that unless and until we get capital investment going up, somehow changing some of these components because the most important one right now is a very different one. it's the spread between the 30-year treasury and the five-year note, and that basically is at the highest level in american history, meaning that we are not only discounting the future but we're discounting the far distant future as a far more regresssive rate. >> i'm going to quote your book on this and then we can talk about remedies. this is interesting. struck me as -- our highest priority going forward its to fix our broken political system. authority of that there's no viable long-term solution to our

economy. what use your recommendations be? guess you have several elements of it. you have the regulation side -- >> you're asking me how we fix our political -- >> well, not how we fix it. how do we start. >> let me start off by saying that my basic view of the way that the things -- the way that the system is structured, is that you get a -- how to put this -- the regulatory sojourn, define as dodd-frank is not working and can't work because it doesn't address what the problem is. there isn't a single issue which

could -- remember, in 2008 this was not a breakdown in the nonfinancial system. the nonfinancial system in fact was in good shape, as i can basically recall it. and the result of that system is that all of the problems were financial, and all of the financial problems were of two sides, two forms. one, a failure to fully address the issue of the extent to which fraud is essentially restrained because fraud is a very dangerous thing for a market economy. trust is a fundamental issue in the way our system work. i don't think -- the remainder is largely the fact that we had

inadequate leveled of capital in the financial interimmediate area system and collateral requirements were different for different types of debt, which tells me that if we didn't have all of that type of problem, we wouldn't be running into serial defaulted -- defaults of the type that broke the whole system down virtually overtime night. and serial defaults cannot occur unless you have debt. and so my solution to this, which i think would probably ultimately be a major factor, i hope in any fundamental solution because why they have now isn't working -- is to have requirements of not only capital goes up but, more importantly, that there be mandatory requirements to hold so-called

cocoa bonds. those are contingent convert able bonds which are very much like deb ben tours but if you put it in certain precrisis triggers as to when and under what objectively measurable conditions that turns into equity, and it obviously the flow addition of those issues -- flow -- floatation of those issues cost two points but that is the ultimate this government is going to be bailing us out. so as far as i can see, if we were to do that, then you eliminate the major possibility of serial defaults in the financial system, which means you can have tremendous decline

in the market value of capital -- of equity, but, as occurred after the dot-com boom, nothing. the gdp is barely -- changes in gdp were barely visible in the peered immediately -- the period immediately following the crash of the dot-com boom, and the loss in households and pension funds and 401ks and which there is no basically heavy leverage but you can see -- absorb lots amounts of loss, and basically required to do as they're trying to do, avoid this from, quote, happening again. i've heard that phrase so many times it's tiring, because it always does happen again unless we do something. >> so, what -- as you said,

fixing basically this -- reducing the uncertainty, how do you see it progressing? do you -- a year from now, two years from now, are we still going to be talking about sub three percent growth or will this be resolve. >> i think until the political system is re-stack toured in a form in which we have do -- restructured in the form we have rational policies, fiscal policies generally, i don't see how we can solve this problem. the basic problem i think is the fact that we have no domestic savings going on. ...

and progressing towards zero and the structure of the budget is way out of kilter. i mean cbo is going to forecast for the deficit going down next year and i think that's probably like we do then it goes straight back up. they're using what i would consider fairly optimistic income reporting, and vested income so what we have got here is a very tricky problem because there is another i haven't mentioned which is relevant here the sum of finance and insurance

as% of gdp in the united states which was 2.4% in 1947 rows ritually every single year to at least 8% in 2007. now that is not i should say that is not something basically american. chinese data show exactly the same thing. most of the major international economists show that phenomenon which is shall we say no it is not the issue of bankers trading with each other because these are consolidated numbers. to be sure that 8% went down to 7.5 or sense during the height of the crisis is now right back where it was. the interesting question is the secular eyes on thing

fundamental to the system and i don't know the answer to that question but if it is then dodd-frank is actually going to be significantly if in squeezing down and creating despite the fact they are creating institutions which are too big to fail which means that those institutions which were they allowed to support out from under them by government you would end up going into chapter 11. now there is nothing wrong with going into chapter 11. it's an extraordinarily successful program which restructures debt but if it's too big to fail it becomes utility and everyone expects the government to step in which means that they get the state -- savings for low interest rates

and it's a terrible misuse of the domestic savings of the society because unless you have creative destruction and unless you have liquidation of the obsolescent equipment you are never going to make it. >> a further similarities with japan? >> i would think so because i recall in 1989 what became apparent to me is that the japanese banking system was not calling loans. they kept turning them over and as larry pointed out zero interest rate which they had back then, it's not terribly difficult to do. but the problem essentially is that japan does not, i remember

a prominent politician told me i went through my analysis on why you had to have creative destruction and you got productivity rising and you have to allow institutions to go bankrupt. and he says to me, you analyze the situation extraordinarily well. the only problem is that it is not the japanese way. forcing people to lose face is an extraordinarily unethical thing to do in business. and to have a loan on your books you think it's easy to get from the united states before this crisis. basically they wrote them off and people went into beit --

bankruptcy and came back out but they don't choose it that way in japan. one of the problems they have had in this dimension is they haven't allowed businesses to liquidate. >> should china? >> they are but not in the way we like it. [laughter] >> what are your thoughts on what is occurring in china right now? >> well i think if you just look at the basic data on the shadow banking system the lending is very significant and i thought it was very disturbing the other day i believe those the coal company which went bankrupt and everyone was waiting to see what would happen because the presumption was that with nearly $4 trillion in reserves, peoples banks with china were not about to allow any institution to go

bankrupt and consequently it was like gse's in the united states. it's a very inefficient system because the capital is not the productive cutting-edge technologies. the result basically is that they came in and they bailed them out and it's precisely the wrong signal that they sent at the time because it's going to make it very difficult to get cutting-edge technologies to have a significant advantage over less productive types of investments. which means that their tremendous growth rate in china which has been essentially a result of borrowing from the

developed world by bringing in capital investment with the technologies. the trouble is that a couple of years ago thomson reuters did a study from their criteria, who were the 100 most technologically innovative companies? 40 were american. zero were chinese which means effectively if thomson reuters is right, almost all of the 9% of the annual growth rates in china are from borrowed technologies. now as the chinese wage has moved significantly higher and closing the gap against the developed world that productivity rate is going to fall very sharply.

and it already is. we are looking at a double digit annual growth rate that is now approaching six by measure and remember that the chinese the years are not the same as we look at areas they can create whatever gdp they want by just acquiescing in the requirement of province to build three office buildings to put people to work. it wasn't that they didn't have the office, but they needed the jobs and that is financed by a state-owned bank under instructions coming essentially from the state council. the result is that you get the gdp that is created there by the sea through building or as is

more relevant to the problem excess steel capacity which is else to create jobs and not to create anything else. >> sounds like animal spirits is a phrase you used in your book and you said basically the impact of the bubble bursting a lot of that is due to leverage. is there a bubble in china in your opinion and do you think? >> there's a big difference in china. it's very comforting when you have three $.8 trillion to do as you want to solve your problems. so i'm not at the moment saying china is about to go bust unless the stuff they are holding which are u.s. treasuries go bust. and i hope that is not --. >> i see and let's bring it back to the u.s. for moment, income inequality.

it's been rising pretty substantially over the past couple of decades. what is your view on that? any policy recommendations etc.? >> as i point out in the book you can make a pretty high regression if you examine the issue of various measures of income inequality with two independent variables. one is the average hourly earnings or even average earnings for not only hourly but nonsupervisory employees as well and the issue of stock prices. that fairly well fits the rise that is going on, first the decline and then the rise in inequality and the issue is do we want to prevent, do we want

to knock sprite -- stock prices down to get a quality better because i consider it income inequality the most dangerous part of what's going on in the united states. mary had an interesting chart that shows it's going back to where it was in the 20s and 30s which is probably accurate a couple of oppressors but the data together and i thought quite effectively. so that you can see the deteriorating impact of that on our current political system and you cannot talk about politics without talking about its impact on the economy. it has an economic effect so my basic view is to recognize that what is causing the slow rate of

growth in average yearly earnings has basically slowed proclivities growth and slow productivity is occurring because the capital stock is not rising especially because capital investment is not going anywhere and therefore we cannot expect to keep borrowing savings from abroad to finance our gross domestic capital investment. we can do that. and i would just say that we have basically got to get to the position where we get our economy moving at a 4% annual rate and in so doing if we succeed in doing that, that solved the issue very quickly, but that does not look as though it's immediately on the horizon. i just want to say parents at a clay i want to mention the fact that household uncertainty is best measured by the price of

homes. for the years 2001 to 2004 there were a million additional single-family owner-occupied homes which essentially met the whole household formation was going to owner occupy single-family dwellings and that was because the price levels were rising and everybody felt. positive about the distant future. homes last a long time. as soon as the prices begin to turn the whole thing caved. the actual level of the stock of single-family owner occupy homes has been going down, not vary significantly but gradually and the share of ownership to total households which came down very

dramatically after the crash has not recovered despite the fact that home prices have come back. >> and certainty again. >> it's another way of saying that if you are a homeowner, if you're basically say a person about to form a household, do you want to take a long-term commitment or a short-term commitment and it's disproportionately going to rent where you have a very short-term commitment rather than buying a home which is a long-term commitment. so it looks exact like the business community's reaction in a different context. >> in terms of these indicators you are looking at as an employee of bloomberg what other indicators are you looking at or

what other imbalances do you see that you are monitoring around the world? on your terminal, yeah. [laughter] what does it look like? >> i collect certain types of -- and its exchange rates mainly. at the moment i am always looking at what's going on with the yields on long-term debt in the euro area has as i say in my look i don't look for ticket early hopeful at being able to essentially keep the euro in place unless it goes to full political consolidation and the issue here is that because of

extraordinary actions on the part of the ecb which is essentially said we will do whatever is required to do, and when you essentially are putting out a means of financing with very little restrictions, people will borrow if you are commercial bank when they can. my problem here is the fact that the system is not stable. and until we stabilize it, i'm nervous about that because we are growing now but it's a rope last 1% per am and greece is going into an election. the main problem is greece is

solving its government deficit problem but they are doing it in large part by a primary surplus. they are getting to the point where no longer is it going to be a net cash flow into greece. they are going to have to start paying out interest. that's the danger point politically in greece and i don't know how -- it's touch and go in this election year. it goes to the extreme and drops out of the euro which is not a small probability. i'm not sure what happens. whether it is a contagion or not >> it's or any other country that is a red flag for you right now in the eurozone? >> no, actually portugal is

doing better in spain is doing better. after being in really serious trouble. i don't know how italy is going to be with a nuke prime minister. i like where he comes from but i'm not sure what his policies are going to be like. >> we have time for one more question. i will bring it back to the u.s. and i read your book this weekend and he said immigratiimmigrati on was one of the most important but least talked about policies that the u.s. should be discussing right now. what do you mean by that? >> let me just go back to income inequality for just a second. we could carry significant part of that like taking our h. one beep programs and illuminating them which is not happening or basically opened up the issue of allowing people who for god sakes get to greece and the united states and then we force

them to go home. we have as all of the measures of education indicate, and unbelievably deteriorating k. to grade eight. we can't manage, we can't manage to staff our very complex, highly sophisticated capital structure with what is coming out of our high schools. we used to be able to do that and we have high-class -- actually. we have deteriorated rather significantly and it's getting worse all the time. if we are not going to educate our kids, bring in other people who want to become americans. let them in here and let them use their skills which is what

would happen with h. one beep were eliminated. and that also has a very significant impact on the psychology of income inequality. h-1b visas of said i is his the income of everyone in this room including you and me and if we were to open up, we would be finding ourselves completely with others at our skill level and our income levels would not necessarily go down very much but i'll bet you they would go down enough to really make an impact because income inequality is a relative concept. people who are absolutely at the top of the scale in say 1925

would be getting food stamps today. it's a relative issue so you don't have to necessarily bring up the bottom if you bring the top down. so immigration has got a many pronged, there are really two different types of immigration problems we have. the question is what we do we do with the 11 million illegals which is a very tricky problem than half of them are in the workforce. if we ever required them to leave the country our economy would fall apart because we have no idea how much structure is built into it create i think we are making a mistake in the immigration area which in many respects could be the easiest thing we could do to solve it.

>> was hoping to get a segment in on jazz but we are out of time so we will have to leave it at that. thank you all very much. i hope you enjoyed it. thank you dr. greenspan. [applause] [inaudible conversations] [inaudible conversations] [inaudible conversations]

[inaudible conversations]

the new c-span.org web site makes it easier than ever for you to keep tabs on washington d.c. and share your fines be as facebook twitter and other social networks. easy search functions like new access or daily coverage of events. new tools make it simple to create short video clips and share them with your friends via facebook twitter and other social networks or you can send links to your video clips via e-mail. just find the shared tools on our video player or look for the green icon links throughout our site. watch washington on the new c-span.org and if you see something of interest it and share it with your friends.

>> we more now from the conference with congressional budget office dreck or douglas elmendorf. he discussed the most recent budget and economic outlook. this is 35 minutes. >> good morning again. it feels like i'm drinking out of a fire hose after that talk for sure and actually after the last couple of talks so i'm pleased we have been having such excitement this morning. doug elmendorf became the eighth director the congressional budget office on january 22, 2009. he brings to us today an impressive background to his assignment. his undergraduate degree is from princeton phi beta kappa and received his master's and doctorate from harvard. one of this dissertation committee member spoke to us this morning larry summers. we also had marty feldstein and greg. our speaker was previously an assistant professor at harvard served on the staff of counsel of economic risers for the

federal reserve board federal reserve board and deputy assistant secretary for economic policy at the treasury. before he became cbo doug was a senior fellow at the economic studies program at the brookings institute. that kind of ends my biographical background. many people no doug and his work from an administrative standpoint. we will try to get some questions in. i know we have done a little tax for time so at this time i would like to invite his presentation and take you an day hopefully right after he presents. thank you. [applause] >> thank you. it's great to be back. i'm afraid i'm going to mostly stand here while i talk. rather than just focusing on the budget this morning i thought it would be useful to spend most of my time talking about cvs perspective on the u.s. economic

outlook and then i will wrap up by talking about the budget and i know your next session will go into budget details in greater detail. i want to try to address five questions. first most importantly how will the labor market evolve together with their budget economic outlook we released a separate report on the slow recovery of the labor market. i will start with that and then i will talk briefly about how rapidly we think actual output will grow with the paths will be for inflation and just rates in the labor share of income and that will wrap up by talking about the resulting projections for the budget. about the labor market in our view the slow recovery of the labor market largely reflects slow growth in the demand for goods and services with a smaller role for structural fact yours. we think there was considerable slack remaining in the labor market and specifically would think the economy is about 6 million jobs short of where it would be if the unemployment

rate was back down to its pre-recession level and labor force british arrayed -- participation rate was back up to where it would be without the current cyclical decrease. here is the unemployment rate graph through late last year. obviously went up sharply and has reversed a little more than half of its increased since before the recession. the net increase in the unemployment rate from me and a 2007 to the end of last year was about two percentage points and we think of that roughly two percentage point net increase about one percentage point can be attributed to a weakness in the demand for goods and services and thus businesses demand for workers. we think the other bench point can be attributed to structural factors which about half we attribute to stigma and erosion of skills arising from long-term unemployment and the other half to a decrease in the decrease in

matching workers job at least partly from the mismatch skills of locations. those are of course estimates and rely heavily on our judgment but we try to quantify these concepts and i will give you several sets of quantification's as we go along to be concrete about what we think is happening. with the structural factors we think the natural rate of unemployment the rate that would arise apart from the weakness in demand for goods and services has gone up from 5% before the recession to about 6% now. as we look ahead we see a natural rate declining to about five .25% by the end of the coming decade which is our normal horizon for budget economic projections and we expect the national rate to decline as the structural fact year's wayne. we think the actual rate of unemployment will fall down close to but not quite to the natural rate of unemployment and i looks plain that gap in just a moment.

the shortfalls of output relative to its potential had been more frequent and larger than the excesses of output over its potential during economic boost. that picture is even more striking if one adds the last set of years of this very long and sustained weakness in the economy. projection going forward is that the output capital narrowed but will not entirely dissipate and we are simply taking our cue from the historical average. on average over the past several decades and indeed overall since the second world war actual output has been a little below the potential output on balance so we are not predicting any petite or cyclical events in the second half of the coming projection but we are trying to allow for this average. the other crucial and at least

two s. surprising feature aspect of the labor market over the past few years has been the participation rate of the labor force which as you know has fallen quite distinctively, fallen more rapidly since the recession started in the years before that. there has now been a three percentage point decline in the unemployment rate from before the recession to the end of last year. of that roughly few percentage point net decline we treated about half or 1.5 or senator rates to long-term trends primarily the aging of the population in the movement of baby boomers into retirement. another percentage point we attribute to the cyclical weakness and that no man for goods and services and people choosing to stay out of the labor force to leave the labor force because they can't find jobs because the job prospects are so poor. and we attribute half a percentage point to discouraged workers who have dropped out of the labor force permanently.

some of these folks have gone into social security disability insurance programs and the number of people going and has moved up noticeably in the last few years and others at some weight left the labor force to do other things with their time. but we think that half a percentage point on the participation rate of its decline can be explained by those folks who we think will not come back into the labor force. in contrast the people who are out because the cyclical weakness are the people we expect will come back this job prospects improve. so our forecast for the labor force participaparticipa tion rate shows a gradual downward trend over the next several years and the net result with two factors. the cyclical recovery expected of men and goods and services and thus for workers will pull people back into the labor force and pull a participation rate but the demographic factors will continue to go down in the participation rates in the next four years we think it will win that battle slightly but the partisan ration --

participation rate will come down. beyond the point once the cyclical recovery will be complete in our view than the demographic factors are the crucial factors that push down the dissipation rate a bit more sharply. another piece the story we talked about in our report which is the effects of personal policy now will come to that in a moment. between 2007 and 2024 in our projection the participation rate in the labor wars will have fallen by five or senator point and of that decline we expect 3.5 or send to load tube democratic -- demographic factors and the retiring of the baby boomers. this is the other side of the story in terms of the pressures the federal budget with more hetero benefits are much more generous. we think about a little under half a percentage point of that total five verse image point decline in the producer's ration ration -- participation rate comes from

the labor force permanently and the last percentage point we think oz to federal fiscal policy. the larger share of that stems from the affordable care act and the reduced incentives to work that arise when people with lower income received a benefit which has been withdrawn as their income rises. the other part of this is the real racket in the income tax. as you know the individual income tax brackets are indexed for inflation but we expect real income growth will outpace higher brackets and hired effective tax rates. so if you put together the unemployment rate in the participation rate you can look at the share of the populatiopopulatio n is unemployed. as you know this fell very markedly during the recession and has essentially moved sideways. as we look forward for the next four years we expect there are to edge up a little bit.

this is again the cyclical recovery in the increased participation rate and the decline of the employment rate tending to pull up the share of the population that is employed but meanwhile the demographic factors are continuing to way on the share of the population. after his cyclical recovery is completely protect in four years the demographic factors will show through and the population ratio will tend to fall. so that was a quick review of the labor market. let me move on to the other questions that i raise raised. one is how rapidly will potential output grow and the main point i would like to make here is to compare the history of the last 60 or so years with our projection for the coming deck eight. the potential gdp grew we estimate by 3.25% of the last 60 years on an annual effort basis and we think will grow 2% over

the coming decade. nearly all of that slowdown can be explained directly by slower growth of the potential labor force. in the period of the historical average we did not have the end retirement of the baby boom generation and moreover we had a sharp run-up in women's participation in the labor force from the 50s into the late 90s but that has now crested and women between the ages of 25 and 54 now have a participation rate that is gradually falling much like with a male participation rate for people of for people that ages has been doing for a number of decades of the waning of the run-up in the participation rate for women and retirement of the baby boom generation we think the potential labor force will grow much more slowly and that has consequences to capital in our view and leads to much slower growth of potential output. the actual output we think will catch up almost to potential

over the next four years and the output gap will be down to just a quarter of a% by the end of 2017 but this will catch up entirely to potential in our projections which overlong historical period has averaged a little bit below potential output. so we are looking for as i said the output to close at 4% at the end of last year to half a% at the end of 2017 in subsequent years gdp growth averages 2% a year over the next decade a little above the rate of growth of potential gdp over that decade because of this period of ketchup. i should note that this line separating the actual and projected falls after 2012 and before 2015 because this figure was taken from an outlook and we completed our projections before the epa released its projections

for the fourth quarters of 2013 is a continuation of that flat segment and we look for gdp growth to be a little above 3% in each of those years. after the ketchup period the growth proceeds to be in line with the potential growth of gdp. now i don't want to skip these important variables to let me talk a bit about each of them. the inflation rate as you know this is pc prices, pce inflation has fallen since the recession and has remained below the federal reserve's objective. we think looking ahead it will rapidly come back up toward that objective and will stay there for the rest of the decade. interest rates as you know have been moving up on average since last year. we think it will continue to rise and we look for the federal

reserve to match the funds rate in the second half of 2015. those rates level out at about 5% of the 10 year rate in 3.7% of the three-month bill rate. labor compensation growth has slowed very distinctly since the beginning of the recession. i think this is confirming evidence that a substantial slack remains in the labor market and as a result of that the share of income has fallen, continuing a downward trend that we have seen for a number of decades. as we look ahead as the labor market strength is the labor share of income will rise but in this projection a decade from now below its average over the past 30 years so we think part of what we have seen in the labor share is a cyclical

phenomenon that will be reversed but the downward trend over the past several decades is a resistant matter that will not go away when this downturn ends. these economic projections of course are the base on which we build our projections of the budget. this picture shows federal deficits and a few years of surpluses. the deficit has come down very markedly over the past several years from about 1.4 chilean dollars or nearly 10% of gdp in 2009 to an estimated roughly 500 billion dollars from about 3% of gdp in 2014 under the current law. we think deficit will fall by the end of next year. you can see the deficits over the next decade stay close to 3% of gdp which is essentially their average share of gdp over

the past 40 years. but that similarity to the past is worth noting but also in some ways masks to important aspects of the budget that will be very different than in the past. one of those aspects is the composition of federal spending. in this picture these bars show social security spending as a share of gdp. four years ago and are estimate under current law and our projection for 10 years from now. you can see growth in social security if seeding growth in the economy so a rising share of gdp devoted to social security benefits than that provides of course over the next decade or the aging population with projects there will be more than one third more than a fishier of old-age insurance insurance 10 more years than there are today. a major health care programs are rising more dramatically.

that stems from three sources. the first is the aging of the population which will push up the cost of medicare and of course medicaid. the second source is rising health care costs per person that has been underway for a number of decades. that has slowed recently and the projections take on board the slowdown but nevertheless you are talking more generally will continue to rise faster than gdp per person. the first factor of course is the significant expansion of federal subsidies for health insurance under the affordable care act. in sharp contrast with the growth of spending for those programs all other mandatory spending which basically refers to the benefit from grams we think will be a smaller share of gdp over the next decade than it is now or was 40 years ago. defense spending and shrinking

relative to the size of the economy given the caps on defense funding better in the current law and non-defense discretionary spending. everything else to government does except for making insures payments is also falling as a share of gdp under the caps on funding. if you take the three right sets of bars everything the government does a in major health care programs and interest that entire set of spending will a decade from now be a smaller share of the economy under our projections for current law then it has been at any point since at least 1940. the growth of government spending you can see in the last set of bars i put up stems not from the growth of the size of the government generally but it wrote for the handful of large programs while the rest of the government's funding is actually heading to be a smaller share of the economy than at any point in 70 years. the other way in which the

future is very different from the past is the level of debt as a share of gdp. as you know debt has surged upward over the past years because of the large deficits. we project that debt will be flat as a share of gdp for the next several years but then will begin to rise again and in our longer-term projections updated last fall that increase in debt as a share of the economy continues beyond the decade to future decades. so let me stop right there and see if you have any questions i can answer or you. [applause] >> whatever you are more comfortable with. as you know we have cards from the audience. the question that this morning

larry summers made a comment on casting a long shadow. it will be interesting to hear what your assumptions are about the potential and how it is being estimated in your forecast. >> so relative to the projections of output that we have made in 2007 and the royal we, i was the cbo at the time that the projections we had in 2007 we have mark danner rejection for potential output in 2017 by a little more than 7% this is a point that larry and others have noted. of that reduction of more than 7% we attribute a little less than 2% directly to the deep recession and slow recovery so we think there is a one and three-quarter percentage rate reduction in output coming from

the persistent effects on the labor market particularly the effects of the elevated levels of long-term unemployment and pushing people out of work and discouraging them from looking for work. we think it affects the recession and weak recovery in capital accumulation and productivity so that is the one and three-quarter percentage point of this downward revision. the remainder more than five percentage points of downward output comes from a reconsideration of various trends underway up to 2007 so it is not directly related to the recession and a weak recovery but is a reassessment from our perspective in what the underlying growth rates of key variables in the economy are and we actually have a report which i hope will be out by next week that explains and documents the sources of revision. we do think there is a long

shadow from the recession and the recovery but we also have a set of other changes not so directly related. they are still of course relevant to how much the economy will grow and what incomes will be and what the revenue base will be so i don't want to minimize it. >> we have a question. the ratio of hires to vacancy is back down compared to prior to cyclical peaks. does this indicate we are back at full employment? >> i do not think it indicates we are back in full employment. the number of people looking for jobs relative to the number of job openings is down to where it was a few years ago but still elevated to where it was in 2007 there are a lot of people who are measured as being unemployed and seeking work and we think many others who have left the

labor force out of discouragement but who can and we project will be drawn back into the labor force by an improvement in job prospects. i think part of how one can as i mentioned before confirmed the evidence for the labor market is the behavior of compensation which has increased very slowly over the past several years. adjusting for inflation hourly compensation is barely up now from what it was four years ago and that is in our judgment a strong sign of the labor market in which the business of demand is an important factor. >> we have a question on how much of the slowdown in health care cost growth is durable. >> so the slowdown in health care costs in the past several years has been very pervasive. it has been in medicare and

medicaid and the private health insurance arena. we heard a long report last year documenting that medicare is very pervasive. you can see this in payments for hospital services and payments for physician services, payments for prescription drugs. you can see it in regions of the country that tend to have high health care costs and countries that have low health care costs. you can see it of patients who have low costs so as to arrow phenomenon. there has been some work outside the cbo and how much to us the slowdown can be a chair reduced to a weak economy and how much is left for other fact there's in the range of estimates and the only analysis of medicare we cannot find a role for the weakness in the economy although loss of assets and asset value in americans. we quantify a number of factors

that played some role but end up with a large amount of the slowdown that is not traceable in the ways to the weak economy are the factors that we can quantify. we think and we talked at some length in this rep board for in a qualitative sense about structural changes in health care in this country and we think we have seen significant structural changes in the ways i think driven partly by utilization on the part of health care providers and to some extent patients that some health care not necessarily very helpful in improving people's health. i think it also comes from an observation on the part of beneficiaries of the costs the amount of health care spending has put a pressure on goods and services that we would like to enjoy. as i said in the system with those pressures of spending they

need to look for ways to provide care more efficiently. we have done our projections to take them down considerably so relative to our projections for years ago spending, projected spending for medicare or medicaid or around 2020 is down between 10 and 15%. so we have taken a substantial signal from the slow growth we have seen and actually lowered the rate of health care a little bit beyond this decade. however we have not marked down the rate of growth indefinitely. it's a slower growth and we have seen over the past several years and if you look back with health care costs slowdowns they have in many cases been hollowed by a pickup in health care cost of growth. so and moreover i would say for all the changes that are underway in the health insurance

system of the federal system and private health insurance there are still an awful lot of parts of the system which payments are significantly on a fee-for-service basis so the incentive remains in many cases to do more services to build more facilities. in addition there is a substantial amount of ongoing work in developing new drugs, new medical procedures and treatments. we think some underlying drivers of the high health care spending will persist. we have taken a substantial signal and mark down our -- and then some return to somewhat higher growth rates again maintaining a lower level of protected health care spending but not expecting that the growth over the past several years will continue forward and in an rv that balances the risk trade we look our projections to be in the middle of the distribution of possible

outcomes. if the slowdown we have seen in the past years does last indefinitely there has been a larger structural change than we realize that our projections will have been too high. on the other hand if there is a faster rebound because of cyclical factors are or because of a step up in the medical innovation and dissemination of new health care treatments and procedures than our forecast may look all too low and we can roughly balance those differences. >> doug we have a couple of questions on unemployment. the first question relates to your measurement. can you explain how you are measuring structural employment among economists and we also question how do you think youth employment and unemployment will affect economic growth? >> so, those are good and hard questions. we have estimated roles for cyclical and structural employment looking at a friday of indicators and as i mentioned

earlier applying our judgment to that. one looks at the beveridge curve and the relationship between unemployment and job vacancies one can see a pronounced shift and that says to us there are important structural fact there's. at the same time as i mentioned we see very weak labor compensation and a lot of people working and cannot -- looking for work and cannot find jobs. by structural factors what we mean is people who are out of work for reasons that would not be directly resolved by having stronger demand, stronger aggregate demand for goods and services so that monetary and fiscal policy were more expansionary in some way that could in principle take away the cyclical unemployment and would not take away the structural unemployment. that is how we think about the

differences and the natural rate of unemployment is a term used for unemployment for structural reasons. last year the unemployment rate was 7% and 5% for saying the natural rate is six which is same way as saying half the structural and have to cyclical. i think the elevated rates of unemployment among young people are very serious concern and as i mentioned we think a number of people have been discouraged from working enough that they will not come back to the labor force even as the labor market improves. some of those people are older people people who decided to retire earlier than they might have otherwise been that some of those people are young people and their loss from the labor force is obviously an economic loss for the country as a whole and potentially a serious social was. we have some other work underway

it's not finished yet and i don't want to get ahead of the work but something we are looking at more closely. >> here's another one on unemployment, a big topic obviously. the lowering unemployment rate is down historical observation that is succeeding our neighbor but isn't that because of the historical emphasis, the historical emphasis on disinflation if that makes sense? >> so the pattern that i showed, the pattern of output tending to fall short of potential on average is a similar picture i could have shown of the actual employment rate relative to the natural rate. the natural unemployment rate has tended to be above the rate. you can see the pattern and slice into a number of different ways. you can see it over each of the past four or five is the cycles going back 40 or fit ears but

you can also see as i mentioned on average over the post-war period. the way we calibrated this drop was to look at the average gap between potential output in the actual natural rates of unemployment from the end of the second world war two today and on average over that period the actual gdp has been half a percentage point below potential gdp on average than the actual unemployment rate has been a quarter percentage rate above the average unemployment rate. i'm not sure that's the right way to calibrate that gap but if one looks over the past 40 or 50 years you can guess you find a larger gap partly because of the last half dozen -- half dozen years and also in the business cycles preceding that output tended to fall short of potential planet had in the first post-world war ii business cycle. the calibration is obviously

uncertain but we think the pattern is clear enough that we need to take it on board. we have now done that in our 10 year projections. >> i have a question on the probability does cbo attached probability to a u.s. recession in the next 10 years and what might be the impact on long-term assumptions? >> we do not estimate the probability of recession at any point in time. the shortfall that we showed a potential could be an economy that does not have a recession. it never quite gets itself to full employment or it could ease an outcome that reflects a home in the recession or various combinations. we are not trying beyond the next few years to project a particular cyclical pattern in the economy.