policies? in any event, here's hoping for a great exchange of ideas. and now it is my distinct privilege to introduce james bennett. since 2006, james, who is a graduate of yale, has been editor in chief of "the atlantic." prior to that he was the jerusalem bureau chief of "the new york times" where his coverage was widely acclaimed for its balance and sensitivity. before jerusalem he was the times white house correspondent and he was preparing to go to the beijing bureau when he was snatched away by "the atlantic" to be its editor. please join me in welcoming to the podium a true leader and visionary, james bennett. [ applause ] thank you very much, richard. i'd like to tell you all a quick story about "the atlantic" to

explain why the conversation we're going to all have together today means so much to us. "the atlantic" as you may know was founded a very long time ago in the 1850s to advance big ideas in the culture and the society and particularly to try to promote the abolition of slavery. when the magazine actually launched in november of 1857 the country was very preoccupied with a different issue, which was the economic crash of that year. the big public policy offering in the first issue of "the atlantic" that november was not about slavery, it was about the state of the economy. and our writer surveyed the landscape and he identified four different diagnoses of what had gone wrong. and if you'll bear with me, the prose is very much of that era, but the critique itself, i think, will sound somewhat familiar. he identified four different

viewpoints. perfect son any fied them. one, he said, one critic cries that we americans are an unconscionably greedy people, ever hastening to get rich, never satisfied with our gains and in the frantic eagerness of accumulation disregarding justice, truth, probe at this and moderation. a second qualifies this view and shouts that our vice is not so much greed, which is the vice of the miezer, as extravagance, which is the vice of the spendthrift and that as soon as we get $1 we run in debt for ten. we must have fine houses, fine horses, fine mill lynn ri. our dwellings must be more royally arrayed than the dwellings of the might iest monarchs. when the time comes, as come it will, for paying for all this glorious frip perry, we collapse, we wither, we fleet, we sink into the sand. a third voice, he says, complains that the problem is actually the absence of a protectionist trade policy.

there's no high tariff. and a fourth says that the problem is the very existence of a credit system which is by its very nature inflationary. our writer went on to say that actually all of these views have some merit but that the real problem was the ease with which our currency was inflated then by the american banking system which he said varies from state to state and which outside of new england and new york where it is by no means perfect is as bungaling a contrivance as was ever inflicted on the patience of man kind. it would actually be another 50 years, more than 50 years, i think 1913 before the federal reserve was created to deal with at least some of the problems that he identified in that first story, which actually brings us to the issue of the -- the new issue of "the atlantic" which appears today. our cover piece is on ben bernanke's effort to use the

federal reserve to address the economic crisis we find ourselves in. it is a wonderful piece by roger loenstein. on the cover he's the hero. inside he's the villain because as he explains, he's managed to enrage both the right and left with which roger argues is a series of daring and ultimately fairly effective efforts to get things moving again. i'm hoping that there will be some disagreement as well as some agreement with our conclusions over the course of today. this issue is out today. there's some other wonderful stuff in it if i may say including a nice piece on how our spending habits have changed over the last few years. a terrific piece by the political philosopher michael sandel about how market logic has seeped into our consciousness, and for those looking for something more fun, a terrific profile by mark bouden of the man who broke atlantic city, a gambler who

successfully took three different ka seen knows for $15 million and how he did it. our panel from earlier in this domestic and global economic summit. we'll go to live remarks now from former fed chair paul volcker. with 50,000 applicants a year, those two firms are among the largest employers of young talent in washington -- in the washington region. david was a full bright scholar in the philippines. he serves on the board of the new american foundation, kip d.c., bridges of understanding and the manila based child protection unit. he's also a member of the council on foreign relations. i think david has one of those worthless degrees from swarthmore college. he also has an mba from the harvard business school and a j.d. from the law school. join me in welcoming david bradley. [ applause ] good afternoon. my assignment, my privilege is

to introduce paul volcker, but i can hear you silently, i can hear you calling out to me, don't be in such a rush, david, slow down. tell us about yourself. how are you doing? well, you're good to ask. thank you very much. i'm fine. i have the oddest thing i want to tell you about. i want to tell you about the occasion when i -- my wife and i moved from my bachelor's apartment to our starter home. it's 1986 and we were at the closing of the selling of my apartment and i was introduced to the real estate agent for the buyer of the apartment and was told that her name was jean dickson. at a break i turned to my real estate agent and said, is there any chance this is the jean dickson, the astrologer? she said, yes, she is. who knew that jean dickson was a capitol hill real estate agent. we did the transaction. there was nothing interesting about it, but when we finished we were saying good-bye to miss

dickson and she took my 22-year-old wife's hand, kathryn's hand, and put it in hers and she turned it palm upwards and she looked at it and she clasped it back in both her hands and said, my darling girl, you are going to have the longest and loveliest life full of friendship and full of prosperity. and then she shook hands with me and she turned my palm face up and then she turned it back to just shaking hands and she said, i do so hope you enjoy your new house. so the connection between paul volcker and my starter house in the '80s, directionally i don't know that i would have been buying a house in the 1980s. i don't know if many of us would be buying a house in the '80s. i don't know how much of a housing market there would have been in the 1980s without paul volcker. 1979, summer of 1979 jimmy carter appoints him chairman of the fed. what i'd like to do is read to

you a bloomberg profile of that moment. so in october 1979, two months after his appointment was confirmed by the senate, volcker convened a secret saturday meeting of fed governors. some told their offices they were going fishing for the weekend. where he convinced them to switch the agency's focus to tighten the money supply instead of setting short term rates. when the fed restricted the money available to banks, interest rates surged throwing the economy into a recession. volcker knew the medicine had to be painful to work. there were demonstrations every day in front of the fed building in washington by groups raping from home builders to car dealers. volcker received car keys in the mail symbolizing vehicles not sold as the company sputtered -- country sputtered. gross domestic product fell almost 8% in one quarter yet the remedy worked. by 1986 inflation fell to the lowest level in two decades. so in october of 1979 the citing of this story, inflation was

12.1%. when i was married in 1eseptemb of 1986 it was 1.6%. as a canadian theologian who thinks of the finest character quality as being a long devotion in one correction. we a direction. remember 1962? some of you remember 1962. gary powers is released by the soviet union. johnny car son takes over "the tonight show." the pope ex-communicates fidel ca castro. that's 1962. in '63 he's deputy undersecretary in the nixon administration. he's undersecretary of treasury for international monetary affairs. 1975 the president of the new york -- the chair of the new york fed in 1979. chairman of the u.s. fed until

1987. five presidents in a row, reagan, kennedy, l.b.j., nixon, carter, reagan. a 20-year hiatus of largely some teaching and finance work and then the return to the national spotlight in 2008 with his endorsement of barack obama and subsequently his role in the economic recovery across the last four years. there's a volcker rule but there's also for this moment in time a bradley rule, which is it is always a really good thing when you get to introduce paul volcker at a podium. here's paul volcker and steve clemons who is my colleague at atlantic media. [ applause ] thank you, david. ladies and gentlemen, that was a rather fullsome introduction. there were parts of the introduction that made it quite evident that i'm not the youngest guy around.

i'll say one thing about the introduction, david, i've heard a lot of fond and extended introductions over those long years, and that introduction stands out as the most recent. we have quite a challenge here today. i have, you all have. by my account when i looked on my calendar and looked at the program, there are 20 strong-minded economists on the program. they come from across the international spectrum. they come from a range of occupations and that, of course, is only a sampling of all the professional talent that is in this room right now. we have collective many, many years of academic learning and practical experience to draw

upon. and you would think that ought to count for something. it keeps coming to my mind with all this collection of wisdom available, i have to ask, how did we ever get into this economic mess? what is even more in doubt is how we get out of it. maybe i'm wrong because i'm told that at the end of this program larry somers will be here and he has the responsibility to clarify all the analysis and all the priorities, what we should do and what we should not do and then go out and do it. my assignment is a little different. i'm here to be a little provocative, and i do want to emphasize a longer term perspective. and i do have some idea about how we should approach that

longer term perspective. what we all know is that the world of political economists has lost a sense of self-confidence that it once had. i entered the united states treasury in the early '60s in the midst of the triumph of cangian thinking. the consensus then was, and i can give you quotes from some of the leaders then, we had conquered the business cycle. instead, of course, we ended up with a log period of stagflation. we had to invent a new word to suit the unhappy circumstances. then more recently in the 1990s we had those benign years of the washington consensus, of rational expectations, of market

efficiency. we even for a year or two managed to balance the budget. and then without much anticipation it all went bad. the big lesson is that in an inherently uncertain world we should be weary of any seemingly simple and all-embracing approaches toward economic policy. a period of success seems to perversely breed overconfidence and excesses. and those excesses produced the next crisis. it was howard menske, little known then, not so well known now, who rationalized that observation of repetitive cycles into a theory of the seemingly inevitably repetitive financial crises of the 1980s that nobody was listening.

the economy has perced up in the last few months, but in my mind we're still far from a satisfactory level of activity. my impression is there's still a long slog ahead of us before we can claim anything like success. rising consumption, partly based on lower savings, and a pick up in inventories do not a strong and lasting recovery make. housing and commercial construction look like remaining flat for at least a year or so ahead. business investment has come up from a low level, but it's still lagging well under previous peaks. export markets are slowing. there's heavy weather in europe in particular. i don't have any silver bullets

for a vigorous, short-term growth pattern. i do know that for the immediate future we do have to do what we can to sustain the recovery. that inevitably means maintaining for a while fiscal and monetary stimulus, but that's not a recipe for sustaining a healthy economy over time. indeed, we should know that watching the stimulus too long will be counter productive. i suspect it's hard for any of you to really quarrel with those generalities, but what's still harder is to make the more basic and necessary reforms that will sustain growth in the economy. we are in an environment of well-financed resistance to change and a deep rooted political polarization. now in that respect i could

speak at length about needed reform in the financial system. i've had a lot of opportunity to do that recently, so let me simply say that financial reform is a work half done. some important areas haven't really been touched. the mortgage market is one. what about accounting and auditing practices? what about credit rating agencies and money market funds to mention some important areas that to far have received very little attention. even in those areas where an international consensus seems to exist, it is difficult to actually implement new capital and liquidity standards. important parts of the dodd-frank legislation need to be nailed down. the important parts dealing with derif va tifs, even more important parts dealing with too big to fail and, yes, the

volcker rule as well. but i want to emphasize something different today. not the problems of the financial system but the imbalances in the real economy and what to do about them. the simple fact is the united states is a high consumption economy. that's been true for years and it's been true recently even when income has lagged. for a deck katd or more consumption has run through a willingness to save. consumers took on a heavy debt in the process, mainly in home mortgages. to some extent that process was propelled by the absence of real income growth for most households extending over a decade or more. you know, that's something that simply is not supposed to happen

in economy. productivity gains are supposed to be widely shared but instead we've had concentration of income growth at the very top of the population. 1% or less. with an income distribution that has not been seen so top heavy since 1929, which is a kind of interesting point of comparison. something similar went on with the federal budget. we reduced tax rates and increased both military and mandated spending. the financial manifestation of those private and public deficits was rising indebtedness. for the nation as a whole, it also inexorably led to large net borrowing from abroad ranging as high as 5 to 6% of our gdp.

now that didn't appear so threatening when the surplus countries, china, japan particularly, we were eager to sell manufactured goods to us, satisfy our consumption desire and to accept payment in dollars. interest rates were low. got lowered and even lower overtime and for the time being given the problems in europe and japan. in the absence of any strong alternatives to the dollar in the emerging world, our ability to borrow cheaply abroad fortunately remains. but i also think that it's true that borrowing is symptomatic of an underlying disequal librium that simply can't be sustained indefinitely. who could have imagined that

china during this sentences century would accumulate $3 trillion worth of reserves and other foreign countries in effect financing a large chunk of our budget deficit as well as our payment deficit. the inescapable conclusion to me is that it's not too soon to think some hard -- think hard about the medium and longer term. even if we continue with the stimulus right now. now i know there's no political consensus today for a summit. strong forward looking action appears beyond reach at least in this election year. but if the electoral process doesn't produce some common ground for constructive policy decisions, then i feel that sooner rather than later unbearable pressures will come to bear on monetary policies and

some combination of a weak dollar and rising interest rates. financial institutions and markets, even if reforms were fully implemented, would then again be in jeopardy. the matter that i suspect is new to most of you, the budget deficits certainly grab our attention day by day and the political process and other worries. i think the result has been more political posturing than thoughtful reform. i wonder in all of my own naivetety that even in this so far contentious and demeaning election year we could not clarify the issue and at least lay the groundwork for needed

reforms. we have a start in the proposals. the national commission on fiscal responsibility and reform has been named, a long name for the simpson bowls commission. you've had the aborted budget agreement last summer, in the midst of the debt ceiling debacle. all of that suggests some ground. some common ground. my point is none of those approaches went far enough in terms of the economic prom we re really need. to set the stage let's start by setting out some points that seemed to me to command some support in general terms if not in detail right across the political spectrum. do we want a strong military and national security system? if so, and i think we do, we

have to assume that for the time being cuts in those areas will have to be reasonable be bli limited. do we need to pay more attention to our decaying infrastructure? if so, i think that's correct, that means more spending rather than less. much of it through state support and states are very heavily challenged at the moment. we do need to sustain our much admired systems of higher education in particular but education at all levels and high the higher education piece in particular is being threatened at the state level by extreme budgetary pressures. we do need to bring about a financial balance in the social security system in the decades

ahead. we need to do it without significantly adding to reliance on already high payroll taxes. of course there's the biggest challenge of all in the health care expenditure pattern. now i have nothing to add to that particular subject, the health care side, but i do want to point out that i have not seen any new proposals that have shown that fees will continue to rise faster than the gdp deflated. it's just a question of how much. today the federal government spends close to 25% of the gdp. that's well above any previous peace time level. some of the budget is stimulus spending which should diminish over time, but even taking literally the most extreme

proposals like the simpson bowels commission, the spending level would only go down to 21% of the gdp. that's well above past levels. and they under their own planning would take years to reach that goal. so even then we look at that spending level and look at the present tax system, we can't come close to balancing the budget. in fact, the revenue system is so shot through with exceptions, exemptions, and credits that it's leaking badly. the system is so complicated it's hardly comprehensible. as things stand, the tax take is unlikely to regain and maintain its historic average of 18.5% of the gdp. nor does political reality,

administrative capability, or economic analysis suggest marginal tax rates can be appreciably increased across the board and still generate enough revenue. the implication is arduous. very large changes are necessary. they need to be structural. they need debating, and this is the year to pursue that process. debating even beyond the simpson bowels approach. that commission and other informed discussions tend to take a page from the reagan era of reforms of 1986. people forget that ronald regan improved increases of taxes of some size i think three times during his administration after the initial big reductions in tax rates. in '86 exemptions and credits were in many instances reduced,

in some cases they were ended. the result in revenue increases said it would produce lower marginal income tax rates consistent with a net increase in revenues making a contribution toward reducing the budget deficit. so simplification and revenue enhancing may in concept both be possible in one fell swoop. the complimentary approach simpson bowels is taking with respect to the corporate income tax. now all that seems to me part of a constructive debate. it's perhaps politically possible in time but i don't want to stop there. my plea is for greater boldness. we do need tax reform. we need to think hard about how

to rely more on consumption-based taxes, avoid incentives to move business abroad and think about possible integration of corporate personal taxes. we need to consider the impact of federal spending policies on state finances which consequences for infrastructure support and medicare responsibilities. in that connection i might remind you that between 500 and 600 billion of federal expenditures each year go to the states. we need not so incidentally to those of us at an advanced age clarity and consistency in estate taxation and whatever one says about that debate, clarity and consistency do not apply. we need to consider how all tax and spending decisions bear upon the d