to about $800 billion a year. $800 billion a year in added interest costs. added interest costs. that's larger than the defense budget. that's roughly twice current corporate tax receipts. it's about 80% of personal income tax receipts. so, in other words, not to shrink the deficit, but just to pay the average at interest cost we basically have to abolish the defense department completely or we'd have to have an 80% rise in all personal tax rates. doesn't work. math doesn't work. the markets are going to call us on it long before then. because we are in a situation that economists call fiscal dominance. our monetary policy, unintentional unintentionally, has now become dominated by fiscal necessity. and we're not admitting it to ourselves yet and we didn't get

there because we chose to, we went there for the right reasons and i'm not criticizing chairman bernanke for the choices he's made. but those are the facts. we're not going to be able to back out of our current highly expansiona expansionary, highly accommodative monetary policy until we get our fiscal house in order. and if we continue to run greek deficits with, why don't we call it, old-style greek monetary policy, pre-euro monetary policy, we know where it ends. history's done this over and over again. and it ain't pretty. >> so -- so you're very concerned about the deficit. you think that the estimates for growth and spending are -- are not realistic in the administration, the public debate generally. how do you -- how do you tackle this? is it a combination of tax increases, cuts in spending? what is -- what's the responsible approach to dealing with this? >> yes.

we will need all the above. but if i can go back to the original theme, we need quality as well as quantity. because if you simply do the tax increases and the spending cuts needed to make it close, and you continue to spend and design policy as wastefully as we do now, you will doom the economy. so what we have to start thinking about is how do you improve the quality with which we collect taxes? and how do you improve the quality with which we deliver services? that's what i think has to be on the agenda right now. you know, we all talk comprehensive tax reform. i think if you look at what's actually being proposed, there isn't a lot being proposed from the administration, even on the republican side, i would give it

at best a "c" minus. you can do a lot better. my side can do a lot better on the taxes side. your side can do a heck of a lot better on the spending side. and that's where we have to focus. and, again, if we -- and i'm going to, again, put us collectively in the establishment. we are going to be held accountable. it is our job to get these people to do the right thing. and that's why we, especially you media guys who are out there, need to start holding these folks' feet to the fire. >> tax reform. can you -- can you go into a little more detail on the way you'd approach it? >> sure. on the personal side, let's start there. you know, i think that -- that bowles/simpson made a good stab in that direction. i can argue with the tweaks of it. but they collected more revenue

with lower rates across the board and a much more progressive tax system. now, that was because -- dominated it. corporate tax reform. here's a simple case where both sides are talking like they like corporate tax reform. and there's -- i know. corporate tax reform, your eyes have already glazed over. i know it. i'm going to give you two words that you should listen for. okay? because these are words we all understand the meaning of. and when you hear them from a politician, you know they're feeding you a line because they don't really understand it. my favorite is the word "territorial." everyone's for a territorial tax system. the president's for it.

romney's for it. what does territorial mean? it means you tax things within the territory. right? very simple. plain english. no jargon. let's think about this. we have, after japan, the highest corporate tax burden in the world. so if we apply a territorial standard, and don't cut revenue collections, we've just put on the highest corporate tax burden on things we do inside america. not exactly a job creator. okay? it's very simple. when you hear the word "territorial" think they don't know what they're talking about if they're for job creation. the right word you should hear from them, which you don't, is "border adjustable." border adjustable means that when the goods hit the border coming in, they're subject to an adjustment that levels the playing field. and when the goods go out,

they're subject to a border adjustment on tax and tax rebate that levels the playing field. example. when a bmw leaves the port of hamburg, the company gets a 17% of value rebate. it hits no tariff when it hits america. when we ship a cadillac to germany, it has a 17% tax imposed upon it. germany is doing border adjustability. we are not. we are getting to ourselves -- i don't know -- the word isn't coming to mind. but you know what i'm talking about. we're doing it to ourselves. let me put it that way. there we go. whew. got out of that one. you know, this is a self-inflicted wound. the chinese are doing it, too. the politicians talk about

territoriality. higher taxes on things being done in america. when we should be talking about border adjustability. and we're not. very simple. i hope i didn't go too jargony. just think what those words mean and listen to the politicians when they say it. >> we have a few minutes for questions. i'll give you a minute to stand out there. the microphone's over there and over there if you want to stand up if you have a question. while we're getting the questions ready, you -- you referred briefly to the activities of the fed and bernanke. do you place yourself in either of the villain or the hero camp on bernanke? in your assessment of him? >> well, you know, i've had forced -- in government. f four stints in government. for me to think anyone is anything but human after all that would be crazy on my part.

>> yeah. >> basically i think he did a heroic job under very difficult circumstances. in general, i'm a member of the central bankers union. it's the international brotherhood of central bankers. i have a union card. and we do not criticize our brothers. i -- i do think, though, that, you know, in going back to one of kane's favorite lines, he said that as a way of justifying short-term action. it was not a way of denying that in the long run we are all dead. and the more years that we drag on doing the same old thing, the closer we are to dying. and that's why we had better start paying attention to it. this is not a long run sustainable policy. monetary policy is a way of buying time. and if we don't use the time wisely, we're just running up a bill without having solved our problems. >> we're going to go to

questions. can you please state your name and affiliate. >> peter tanis from la perk links. mr. lindsey, the example you cited of border adjustability which i think was very clear and interesting, wouldn't we accomplish the same thing by doing what 150 other countries do and impose the value added tax? >> absolutely. in fact, my -- i didn't get this chance. i once testified before the senate. in fact, i was on a panel of four people. we were across the political spectrum. and we didn't compare notes before we went in. and what we told the senators, all four of us, was, you know, we should have a value added tax. and the senators then proceeded to tell us that you know that the senate voted 93-2 to never even consider a value added tax. and, well, there we are. now, so what i think we should do, right, if you're going to follow that logic, you want to pack everything into a value

added tax. right? not just the corporate tax. you want to have the entire tax system be border adjustable. that's how you make america competitive again. that's how you get rid of the self-inflicted wound. so, yes, if i actually could revise and extend my comments, my simple tax reform is scrap income-based taxation and go to value added base taxation. there are ways of making it progressive. i'm not going to go into the details of that. it's very simple. it makes us border adjustable, makes us a lot more competitive. and don't -- what we should not do, what we should not do, and i see laura taking notes, so i want to make it -- make it clear. but what we don't want to do is add another layer of taxation and another layer of accounting on top of what we already do. that will make things worse. substituting a value added tax for income based taxation will make things unambiguously

better. >> question? >> see how easy it was? right now if they would just, you know, step down and let us govern, right, we'd be fine. there we go. >> we're ready. i'm ed levy, a recovering government economist and now a freelance writer. you mentioned before, what you say is u.s. is one of the highest corporate rates, tax rates in the world. but aren't, in fact, our corporations paying effectively only about the average tax rate compared to the other industrialized countries? >> yeah. see, so, again, you know, i think the way to think about it is, you know, we economists agree that activity takes -- decisions take place at the margin. and so when you have a high marginal rate and a low average rate, you're really doing damage. because you're doing the maximum disincentive effects. while at the same time not collecting enough revenue to justify it. so, yes, i think that's -- that would be an example of why we --

you know, we cry out for tax reform. plus the complexity of it all is just ridiculous. >> time for one more question. get the microphone on. keep going. >> i'm casey dingus with the american society of civil engineers. a number of the speakers earlier have spoken about infrastructure investment as maybe a piece of the -- you know, the fiscal discipline going forward. any comments on the role of the private sector and infrastructure, public sector, state, federal? i just haven't heard you comment on that issue yet. >> great. i'm all for -- for it. i want it to be done in a cost-effective way. and what is interesting is that in general, our actual, say, road construction costs are much higher than elsewhere. and the reason has to do with federal contracting rules.

and here, again, i can just see the eyes glazing over. but what we have done is made getting a federal contract, simple federal contract, so complex that only largish firms with a dedicated person to filling out the forms actually can get the contracts. dedicated person or personnel. it's often a department. so, you know, a new construction company where the guy, you know, hires his cousins doesn't have a chance. we have rules that compel the paying essentially of union wages. we have set aside rules where companies basically set up dummy corporations with, you know, that have the right, quote, ceo, in order to qualify. we have all kinds of rules and regulations that are

environmental. that just aren't cost-effective. i'm not for no environmental regulations. i'm for making it, you know, a real cost benefit for us. i think if we were able to get those kinds of changes in place, you could do 25% to 30% more of what you want to accomplish for the same amount of money. that's the estimates that are out there of how much our ridiculous regulatory burden is driving up the cost of infrastructure spending. by all means, let's do it. but let's get maximum value for the buck. >> okay. our time is up. larry, thank you very much. that was great. >> thank you. >> thank you. [ applause ] >> larry, kevin, thank you so much. thank you very much for joining us. kevin, good luck with that. we call it publication of atlantic's next big thing. it is now a real pleasure -- when we talked about bringing voices from around the spectrum, i didn't -- didn't know we would be able to get such an iconic

economic essentially figure and theer tigs as allen meltze rerks. when i called allen he made the comment that, yes, i'll be there and i have a few things to say. so we're looking -- really looking forward to that. i also want to say because we realize that this is a real parade of folks, after dr. meltzer and my colleague here clyde crook, in this discussion of course we have sheila bair. we have laura tyson. larry summers. fred hockberg. i think i'm even missing someone there. gene spurling. yes. gene does not want to be forgotten, so gene will be here. and we will have this. but as a thank you to all of you as well, we've just decided to have a reception at the end with real drinks. and it's on us. i just felt like for those of you who are sticking this out with us, we want to make sure that you're welcome and join us up until that end. so i'll be back. without further adieu, please

welcome my guests clive crook to have a conversation with allen meltze rerks. allen, thank you for being here. >> sure. thank you. [ applause ] >> well, this is quite a parade of talent that you've got unfolding in front of you. but i do want to commend this interviewee, allen meltze rerks. he really is one of the most eminent economic scholars in the world, an authority on monetary history, monetary economics, monetary policy and an author of a wonderful two-volume history of the federal reserve. that's where i want to start, right at the beginning. allen, i know that you're not in the bernanke is a hero category. you've been quite critical in things you've written for the "wall street journal" and elsewhere. tell us -- tell us why. >> well, i do think -- and i commend him for responding to the questions which he helped to

create by letting lehman fail. at least he responded to it and didn't let it destroy the financial system. so i applaud him for that. now he's doing the administration's fiscal policy. and that's not a good thing for a central bank to do. so the proof of the pudding is going to be whether he's a hero or a goat is going to be whether he is able to get rid of the $2 trillion or $3 trillion that he's put on the balance sheet and shrink it back to $1 trillion. my guess is not without difficulty. and that difficulty has been compounded because now the european central bank is adding fuel to the inflationary fire and the bank of japan has finally decided that it wants to inflate, too. so, you know, when you see all the central banks in the world running -- the countries are running big deficits and the central banks are printing money as rapidly as they can, then you know that inflation is coming.

and people say to me, well, where do you see inflation? oh, i see it in a lot of places. but one of the places i see it in is unlike the federal reserve, i think the bubbles are caused by people getting out of money. that the exchange rate is declining because the fed is printing money. so just to give you a few little examples, when president nixon left the brenten wood system there were 360 yen to the dollar. there are now .8. there were 4.25 swiss francs to the dollar. they are now.8. those are signs of inflation. there are others. productivity has slowed. productivity growth has slowed now. wages, compensation is rising. that's surely a sign of things to come. which aren't going to be nice. >> okay.

so you see inflation in the works. i want to come back to that in a moment. but i want to unpack a little bit. the first part of what you said, when you said the fed is doing the government's fiscal policy. just -- i mean, help people to understand what you mean by that. in what sense is the fed doing government's fiscal policy? >> when it -- when it buys $1 trillion worth of mortgages, it's doing the government's business. it has no business buying long-term assets. central banks -- well-run central banks never do that. and the fed in its history, it's 100-year history, only did it during wartime. now it's doing it to a fare thee well. that's government policy. why? the treasury, the administration can't go to congress and say we want to spend more. so the fed is doing their work for them. it's also doing the work of -- which i much deplore of

recapitalizing the banks system by keeping interest rates low, letting the banks borrow as very low interest rates and lend at somewhat higher rates. and now, heaven forbid, they're saying to them, well, now you have all this capital. you can pay dividends. you can buy back shares. you know, this is our taxpayer money that we're going to pay for in inflation. i mean, it's a ridiculous policy. >> let me push back a little bit. put myself in the position of a -- you know, of a fed official. i'm sure that listening to you, they'd think, well, you know, we were forced to do a lot of unorthodox things. a lot of things that made us very uncomfortable. the fed is split right now on whether to persist with some of these policies or begin to reverse them. >> that's the fringe. >> but i think the fed official would say, but what's the alternative? i mean, you know, was the government capable of doing what

perhaps you think it should have done? the fed stepped in because nobody else would. >> i heard paul volcker speak at lunch. you know, i've known paul volcker since we both worked in the kennedy treasury way back in 1962. we didn't always agree. but he said something very important. we have a long-term problem. that's my view. we need a long-term solution. we're not going to solve our problems by printing a little more money today or having a bigger deficit tomorrow. what we're -- what we need to do and what i would want to do is to say, we have a long-term problem. in fact, a number of them. so let's find some long-term solutions. let's say h, how -- the central question is, how do we get back to a long-term growth path for the american people that has low inflation? that's what we want to do.

and we want to develop systematic stabilizing policies over a long period of time. does the federal reserve do that? no. does the congress do it? no. does a t administration do it? no. do they even think about it? no. that's the worth part. just to finish this i read more federal reserve minutes than any human being ever ought to read. >> right. >> you never see a sentence which says if we do this today, where will we be a year from now? never. the exception was the volcker years. volcker knew he couldn't end inflation in a month so he had a longer-term policy. it disappeared after he left. it's all about what are we going to do this quarter and how will it affect next quarter? well, that's not the way to stability. in fact, it's a way to disaster. >> i mean, i've written so many

columns over the course of my career in favor of central bank independence. which i think is -- is -- goes to the heart of what you're talking about here. but i have to say that the -- you know, the crisis has rattled my confidence in the correctness of that view. the correctness of central bank independence. precisely because central banks have to accept the political constraints that confront them, don't they? they can't wish them away. so what i want to ask you is, let's suppose you've been running the fed which is not such an outlandish supposition. it's a job you might well -- >> what a terrible idea. >> let's suppose that you were doing that job. and you confronted the problems that confronted bernanke in '08. what would you have done? >> well, let's see what he did and what i would have done differently. i lauded his response to the failure of lehman. even though i disagree with the idea that in the midst of a

recession, without announcing it in advance, you change the policy that's been in effect for 30 years without telling people you're going to do that. i mean, that's enough to scare the be jeebers out of anybody. but he did that. then he cleaned up the mess. when he did it he said, look, these are short-term securities. so they're going to run off. but they didn't. when they started to run off, he bought long-term securities. that's when i would have gotten off the train. when the long-term securities began to run off he bought mortgages. i wouldn't have gotten to that step. i would have stopped before that. and i would have said, look, my policy is to get back to long-term growth with low inflation. and so i'm going to do what i can to prevent -- to clean up the mess. but i'm going to do it in a framework which says i know where i'm headed over the next three to five years, and i'm going to consistently go there. >> but if you'd stuck to that -- you know, that purist line. you might describe it that way. what do you think would have

happened to the economy given the fact that congress hasn't been in a position, hasn't chosen to do its job since the lehman collapse? or at least so one might argue. i mean, you know, what would you -- what would you have expected to see happen in the wider economy if you'd taken that hard line on monetary propriety? let's put it that way. >> i would have assured people that if there's a crisis, i will respond to it. but i will try to strengthen their expectations. just the way paul volcker did when he was reducing inflation, you know, that wasn't a popular action. >> no. >> there were demonstrations against him all over the place. but here's the lesson which i think is very interesting. in january 1982, with the home builders on their back, worse than anything in this current recession, he went to las vegas and talked to home builders.

he said to them, we either end inflation now. if we give in, we're going to start over again. and it's going to be even harder. they gave him a standing ovation. you know, why? because he was telling them this is where i'm going. get ready for it. bear up. because in the end, it's going to be better. and he was right. and that's what i would try to do. get them to believe that what you're going to do is really going to be in their long-term interest. because that's the only thing that policy can effectively do. >> now, i understand, of course, you know, the -- i think many people, most people, would agree that volcker was a hero and what he did was both brave and right. but one might also argue that the situation confronting the u.s. in '08 was even worse. i mean, one could argue far worse, in fact, than the situation that confronted

volcker. and if you'd -- if the fed had stuck to its guns and said, we do monetary policy and we do it with an eye on the long term, if congress isn't capable of mitigating the short term crisis, tough. i mean, how bad do you think things would have -- would have become? >> well, you know, volcker did this with the reagan deficits. you know, he just didn't buy government bonds. now the fed is buying the bulk of the government bond issue. is that a good idea? i don't think so. and i don't think they're going to think so when it comes time to sell. the important question is not whether what he's doing today, tomorrow or next week is a good idea. the question is, how is he going to unload a couple of trillion dollars. trillion, that is, with a "t." >> that's right. >> you know, is he going to sell a trillion dollars worth of mortgages into this mortgage market with this housing thing?

not on your life. you'll hear the screams from honolulu to portland, maine. >> i want to ask you about the -- you know, the reversing of the policy in a moment. at risk of being, you know, overly persistent, let me just press one last time on how bad you think things might have got. if i understand you correctly, you aren't saying that the fed failed to soften the recession. you aren't saying the fed's policies failed in the short term. you're saying that was the wrong goal. they shouldn't have concerned themselves with the short term. that leads me to ask, how bad might the short term have been if -- if you'd been running the fed? >> let me answer that sligtly differently. in a slightly different way. the fed is 100 years old. how many of those years have been years in which we've had stable growth or relatively stable growth and low inflation?

well, there was 1923 to 1928. on the gold standard. limping gold standard but a standard. then there was 1985 to 2002 when they followed something call called -- not identitically every meeting. but pretty much followed it. that's it. the rest of the time they produced the great inflation, the great depression, a whole variety of business cycles and they contributed, they didn't cause, but they contributed to the current crisis. so that should tell you that all this discretion and making policy judgments from quarter to quarter is a bad idea. and the economics profession is if it's solidly on the side of anything, it's solidly on the side of rules are going to work better than discretion. and, you know, would we have had bubbles if we had followed rules? no, we would not. the bubbles are people getting out of money and into real -- intol