good question, mike. going to this conference, honestly, 350 people, 300 of which were entrepreneurs. only a handful of funds -- a lot of people were ready to go but having a hard time attracting capital. so i think this kind of sbic support to get those funds, those venture funds formed so those 300-plus entrepreneurs were waiting and these companies are not asking for a lot of capital. it would fit funds of this size. the first few steps out of the twhoom need financed, really the access to capital, that's the issue in a state like michigan. >> so, karen what are you going to do when you have funded certain number of these early merging growth companies and some of them fail and you're hit with front page stories of the failure of the program? how do you respond to that as policymaker? >> we've been doing this a long time, and we know our failure rate. and it's pretty good. and part of it is because we have a public-private

partnership. we're not making the decisions. we have experienced investors making the decisions. there's so much opportunity out there with these entrepreneurs that we have, and we are getting more and more of the best investors, partnering with us. so we anticipate, you no e, we have a record now of zero subsidy. we do a lot of work to make sure we're not going to lose a lot of money, and we anticipate that now with the competition that we will be oversubscribe. so we will have terrific both investors and companies out there. our first fund that we did under our impact funds, under start-up america, was in michigan. and the partners are credit suisse, one of their investment arms and dow chemical put in a bunch of limited partner money, because they are residents there, and they want to see entrepreneurs flourish in that area, and innovation flourish. and the state of michigan

pension fund. and that combination, the next fund we did was an alternative energy, with experienced groups. so we have great confidence in america's entrepreneurs and we think that they are lacking some of the pieces of the puzzle. some of the tools, to get bigger. one is early stage capital. it's pretty clear, well documented that it is, and we've been doing these funds for, we have more than a 20-year history in a lot of these funds and know with this kind of partnership we can put a lot of capital into places that generally the venture capitalists in the private sector are not touching, like michigan. >> kate. kate mention add hot button issue, and we can't avoid that. it's immigration. and immigration reform. i'm curious to get a sense, sort of how through which prism you view the importance of

immigration reform of some sort? how it effects your business and then to hear from the other two panelists. >> yeah. i think that most policy affects all competitors equally. so what we as businesspeople need is more than anything clarity on a policy and consistency of policy. because then we optimize and we make the right decisions within the context of that. what's difficult is the instability of policy. and the lack of clarity, and some points, the lack of -- the instability in enforcement, but -- >> so consistency and center -- >> absolutely. >> kate, i'm curious. >> when you look at our portfolio and it's a microcosm of any portfolio of any private small company investor, i'd say over half of our entrepreneurs are foreign born. and you mentioned earlier what's the difference between manufacturing and today's technology manufactures, the

reason u.s. competitiveness is such a big issue. hard goods. hard to have those things move. digital goods can be moved in a second overseas. see can those jobs. we have educated folks. look at a university like m.i.t. where over half the grad wid engineer, foreign born. those folks are going to go and create those jobs externally. there are a couple of things that have been concrete proposals for legal immigration reform that are interestingone called start-up visa. google that. in short, if i'm creating jobs and getting funding, i can stay here, because i'm creating more jobs than the one, say i'm taking if that's the concern. secondly, if i graduated from the university, stamp a visa to my degree. speaking at, again a group of entrepreneurs in san diego. almost like a revival meeting. a woman came up to the front. mainly entrepreneur, i'm going to be deported next week. i went to ucsd, found add start-up and i have to go back to india in two weeks. that's not what we intended

with -- i think when you speak to anybody in any part of the country including inside the beltway i don't think that was the intention of what we wanted to see. >> right. peter, do we have a question from the audience? can we sneak in one? >> maybe we'll get at least one of nor panelists to weigh in. from the entrepreneurial risktaking ow hornet are marginal tax rates and taxes in capital gains? would you support the buffett rule for a 30% minimum tax rate on high-income earners. >> i'd be happy to do a quick comment on tax rates for venture capital. you know, what matters most is that there's a differential for long-term investing. i think it's rational to say, how do you define long-term investi investing? is it a year? the capital gains differential is. should it be two or three? that's a ration's conversation. keeping that differential to

insent people, it takes a company from genesis to ipo is important. i put that out there as a number one issue. >> karen? ron? >> i would disagree. tax policy shouldn't be used for public policy, and incents. but look, you know -- if we're going to put money into venture capital, let's put it into the budget and let's show it as an expense. let's not use it as a, for tax. in the end, it's not what we'll be able to do with the money. >> well, from the point of view of small businesses there's nothing they like better than a tax break, because it's more money in the business, and what we have done over the last several years is put out 18 different tax breaks that affect small business. the best -- and the most effective i think really have been those like accelerated

descripti depreciation, buy back that piece of equipment creating that next set of jobs. that is very, very well appreciated and like aid mong the small business community. >> i'd say my only comment to ron, this is a difference of opinion here. >> we should have started with this one i. know. so when you look at the -- as an example, one of the things i learned in sharing test score, 65%, peaks of the volume on today's exchanges, stock ex-changes, are high frequency trading. and it's interesting, we heard on the prior panel the concerns about an entrepreneur having to focus on quarterly earnings. that is really become the locust of economic activity what have you done for me lately? and lately being yesterday or tomorrow. and we do want people to take longer term risks, and i think, you know, we're rational animal, and i think encouraging somebody, again to have a

differential, to have an incentive, concerned about the absolute rate of differential to put capital away for a longer period of time i think make as really big difference to those at heart of it. >> i just would ask this question. i just cannot understand how capital deserve as lower tax rate than our workers that are making $12 an hour. >> and with that, i think we'll end it. thank you very much. >> thanks to our panelists. mike riley, thank you as well. a rather interesting discussion. we're going to keep the trains rolling. we've got our next panel coming up. take more of a market folks here. restoring invempters confidence and momentum is the name of our next discussion led by ken, managing editor for economic and government news at bloomberg news. works at the washington bure pope joining him, richard, former chairman of the u.s. securities and exchange. chief investment officer of the university of pennsylvania.

also bruce richards, ceo and founding partner of marathon asset management. thanks to all of you for being here and papti inparticipating the summit. it's all yours, ken. >> you introduced our guests. we're delighted you could all join us. let me begin by asking our panelists to try to sketch out the economic situation that we find ourselves in today as they see it. the data has been mixed, and even contradictory. today's ism report showed manufacturing is strong, consumer spending has been holding up well, on the other hand, first quarter gdp was a good deal less than most economists were predicting, and last month's job report was, of course, quite disappointing. we'll see what friday's report brings. richard, why don't you start us out. is there a durable self-sustaining recovery in your view or is it about to stall out as has happened in the past two year jsz. >> number one i think the one thing that's clear that this is the weakest recovery, weakest

exit from a recession, since the 1930s. so we have had growth, but it has been far below historic norms in terms of what we would normally expect coming out of a recession. number two, we have a growth that has defied the fears of double dip recession so far and last summer we had enormous turmoil in the markets. so fear of a double dip that didn't happen. i think it's clear the u.s. economy is growing, but not growing as robustly as anybody would like. somewhere in the 2% to 3% of gdp range and, of course, there now is a steadily rising concern over what happens at year-end when we hit the so-called fiscal cliff as well as the threats from overseas, but all told, compared to europe, we're doing awfully well. compared to our own history,

we're not doing as well as we could. >> kristen from your vantage point, running investments for a major university, how do you see the economy at this point? as richard does, or do you see hidden strengths, hidden weaknesses? >> i agree with everything richard said and add we're kaernd unemployment, consumer spending is a very important part of our economy and very important part of the earnings picture, and to the degree that unemployment continues and we've seen some positive signs that is an overhang. from our perspective we're most concerned about valuations since it's not so much -- it's what you pay for what you're getting, and in equity lend, earnings are coming in relatively strong. valuations are relatively attractive. there is some concern that in the medium term, if we don't face some of the structural challenges facing our economy and tackle entitlement reform and other things that would decrease our competitiveness that we could see the consumer

not come back in strength and that could weigh on earnings going into the future. that's more of a medium concern. right now we're cautiously optimistic, at least from evaluation standpoint, and looking forward to opportunities and whatever carnage may occur elsewhere in the world. >> you mentioned consumer spending, which has been a strength, at least recently, but comes with a price, which is increased debt, and there already was a great deal of consumer debt overhang coming out of the recession. how big a risk factor do you see that as being? >> well, from the way i look at it, leading up to the financial crisis, we ran a 4% or so current deficit, we had tremendous rise in household debt. all of that fueled consumer spending in the u.s. we were actually at the world's growth and someone earlier i think referred to being an atm

of the economy. and that is gone. we're not going to see that same kind of growth. in fact, that 40% or so contribution to growth is -- it has disappeared and we have to make that up and pay that back. so that will have a negative overhang. i think we're resilient economy, dynamic, we can change, and we have great enterprises, lots of panels on business. i think sort of points to the opportunity that we have, but it's something we have to be watchful of. a portfolio we're tilted more towards large cap quality growth kinds of companies that have some exposure to emerging markets and some prospect sustainable growth. >> bruce i know your firm has a very global perspective on your work, your investments. what kinds of global risk factors do you see that would impinge on the u.s. recovery? are there international risk factors? >> significant risk factors on,

start with the obvious. global growth slowing, and the risk factor that that brings. and the central banks around the globe have printed by blowing up their balance sheets. led by the u.s. fed, who started the cycle with the first quantitative easing in getting cycles going globally encouraging own central banks to do the same. that is a risk factor. today i think there are four main risk factors that are woirn worthy of front page news and two that i think are not significant but people spend a lot of time talking about and two that are rather significant. the two that are not rather significant to me, representing small tell risk. because i think the low probability events, is china. china growth of 6%, 7%. a slowdown. they have immense economy

sitting on a $3 trillion cash war cleft to be able to fix banks or the economy when they need to. given the type of surplus, you know, fiscal situation they've been running from for the last many years. so they may not be at 9% or 10% slowing down to 7%, people make that front page news. to me it's not a major risk factor. there are problems within its economy. potentially a housing market that's bubbling up. some company state controlled banks with large numbers of debt that need to probably work through at some point, but for the time being we're not too concerned with china. as it relates to the second risk factor we don't think it's significant, because although it's got a fat tail, it's only what we think a 10% probability event, which is the whole, you know, arab world. the spring rising that we talked about a year ago and potentially

some flare-up in the middle east that might raise oil prices to $150 a barrel, because of iran these days. a risk factor. something to keep an eye on and certainly might want to have some tail risk hedges against that, but not major events for us. so it comes down to, i think for the second half of this year as we enter the end of the year number one, the fiscal cliff we're running into and how much of a drag it will be for gdp. 1% or 2%, or 3% as certain economists are projecting if all measures go through and not able to kick the can down the road. we think they will be able to kick the can down the road and defer those days again. so we're a little less concerned about the fiscal drag but very focused on it, what it means for corporate earnings, for u.s. gdp and the consumer down the road. the biggest risk factor, globally, without a doubt in our mind, and in reality we believe is what's going on in europe. you have a sovereign debt crisis that's going on that is not yet

over. there's still more to be done in the sovereign side, and what they're doing right now is pretty serious austerity. austerity is in the form of higher taxes and high revenues of the government. and reductions in spending. it's roughly at 37 rule, at 30% comes from higher revenues and 70% reduction spending that's contractionary. that in itself, you look at quarter over quarter, you see all the fiscal deficits come down country across country throughout the eurozone. now something to recession. within the 17 e. u count emu countries, seven in recession. and european countries, ten in recession. that's one thing. second thing is the banking system. completely overleveraged and overcapitalized. $250 billion of capital led by spanish banks. $250 billion of capital raised

for the europe peen banking system and about $2 trillion of assets need to be shut. a rather significant floob the banking system has when shedding assets not in a position to be able to lend, austerity spills through to the corporate side going through a recession. we think, for instance, high yield company, leverage loans and bonds will see default rates as high as 8% or 10% before the cyc cycle's done and the recession gets deeper towards the second hall of this year. europe, last year, grew and we grew about that same rate, and this year we're growing about 2.2% last quarter. 2.8% quarter prior. accelerated. and they've now fallen. the risk last year was the length that we would fall into a double dip. dragged about 25% trade with europeans. the link is broken, but that link if europe gets much worse, the banking system and their

economy will start to relink again and that's a major risk. >> are u.s. policymakers doing everything that they can do to insulate our economy from that kind of risk factor that you're talking about? >> obviously limited to some degree, they dent -- u.s. policymakers don't have control of things overseas but are they doing what can be done? >> as many policies, won't get into too many, spoken for debt. but the two main policies that any government has is mois mone policy and fisk's policy. last time i check, milton freedom sn dead, what i mean is, we all know that they pass aid way many years ago, but their policies are dead. fed funds are zero. the fed is in no position from a monetary standpoint to do much monetary stimulus. yes, print money and do qe 3, rates down further, lose credibility as time goes on

through printing money and inflating our way out of this. so the fed's hands are tied to a degree, especially with the restrictions you've put on the banks from a regulatory standpoint which we think is prudent, which congress and the president think is prudent. right? the fiscal standpoint, we're running a deficit which is salve about 8% fiscal deficit. our gdp is about 15.15 trillion and our debt now is 15.2 trillion. so we're slightly greater than 100% debt to gdp today. and that number will grow to 16.2 trillion with the 1 trillion-plus deficits we're now running. so it used to be the case that revenues, right which is taxes, accounted for 17%, 18% of gdp and debt counted for, excuse me, expenses counted for, you know, about the same thing. and we were balanced, expenditures a little more. we're spending 25% of gdp now. 8% fiscal deficit subpoena it's out of control and we have to catch up to that and that's why

our hands are tied. >> great theory. the government is the problem, not the solution. and you know, we spend way too much time awaring ob whether the fed is going to have qe 3, qe 4, qe 5 going back to the sum of the previous panels, that the economy will get going and will get out of the ditch if we have real businesses generating real profits sash profits, supporting shares for investors and critically supporting growth in employment. which will be a positive circle that helps build the economy. so the single thing that government can do to best insulate us from problems anywhere else in the world is to pursue pro-growth policies that allow the u.s. economy to not only continue to grow but to grow at a better pace than it has been doing. >> can you be specific about what kinds of policies you'd like to see? >> i'm very concerned when you look what's coming at the end of

the year, and i don't want to get into partisan thing, but we are set, if thing dos not change, when you look at current tax on dividends at 15%, slated, the president's budget has its way and if the health care tax stays in place, having tax on dividends go from 15% to 43.4% or 44%. that's a tripling of the tax on investment, and you know, at the same time we're proposing to raise capital gains rates, not so much. and i'm saying, ultimately we have a fiscal situation that everybody in the country will have to participate in solving but we need to be very, very careful not being to punitive how we treat capital investment. ultimately it's capital investment that can produce strong gdp growth per year helping europe get out of the ditch and will help about source of strength around the world and

certainly help us solve our own problems as well. >> uh-huh. kristen, we heard a discussion earlier today at an earlier event in this conference about the fed's policy of upholding interest rates to near zero for another two years, and the view of one fed regional president that the fed should move off that policy sooner. from your perspective, is it wise to, for the fed to be hold be interest rates to virtually zero for another two years and making that commitment to the market, to investors, to everyone else? >> long ago i learned i'm not a macroeconomist. i think it's important that we continue to have accommodative policies at least in the short term. i think we have to attack deeper issues in the median term. i think by having the slow policy of rates it should be stimulative. i think it's less stimulative than it could be, law the banking sector is not necessarily able for whatever reason to lend and support

business. i don't think there's as much new loan growth as there could be and you're seeing this particularly in europe. i think it really is strangling europe, because bank, cutting off their smaller customers and that's paralyzing smaller enterprises. so i -- i don't have issues with the lower rates. it's forcing all of us to take on more risky assets, just to boost our returns but when i look at what it's forcing me to do, again, get out cash and fixed equities, i like equity valuations. dividend yields. worried on taxes and dividend yields. it doesn't affect us an a nonprofit, from my own personal port follfoli fofolio portfolio. >> it will affect you if it -- >> exactly. but -- but by having low rates it's forcing us into risk assets, all of us into risk assets out of treasuries into corporate debt, into high yield debt, into all manner of assets and that's good for the

inflation train. i think that's -- that has been important. it's been critical to putting a very large band-aid on the patient and keeping us in critical care. where it is impacting businesses is the discount rates on pension liabilities, and you're seeing companies having to contribute, you're seeing plans being shut down. this year we're all due to have another whack to the discount rate and i think that part of it is not being talk about it so much. a little play on the state and local pension funds but it's affecting corporates, too and affecting workers because it's going to ultimately impact the stability, the safety and the availability of benefit obligations. >> the simple thing that would most help our economy and it's something that where there's the highest level of agreement between republicans and immigrants, would be to get our corporate tax rates in the united states down in line with the rest of oecd. we're at the high end of the

spectrum. if we could bring the corporate level tax rate down 10%, whatever we do about taxing the wealthy. if we brought the corporate lower rates down we would inject cash and expansionary power into all across the business sector in the united states who could have a far greater stimulative effect than a fed interest rate of 2% for, versus 1% versus 0%. >> do you think that could be dmun ice xwlags politically in isolation or does it need to be part of a larger tax overhaul? realistically? >> gephardt over here, i won't hold myself out as an expert what can be done politically. i worked for president reagan and president bush first and i think you can't make the perfect, the enemy of the good. sit around saying we're not going to get anything done until we solve every problem in the world. that's never going to happen. you have it pick out the thing us think are the worst problems

and where you can move forward and do it. and i don't know that corporate tax rates can be done in isolation, because if nag reduces revenue has got to be offset. but it doesn't mean we have to solve every -- comprehensive tax reform of both corporate and individual, that's to me would be ideal, but if you're talking purely about let's get the, as much power as we can behind the broader economy, then i think cutting corporate level tax rates would be the way to do it. >> well, you anticipated my actually my next question, which is, if you cut corporate tax rates in isolation, and do nothing else, you make the revenue side worse. the deficit and debt side worse. how do you address that in isolation? >> again, both parties have in theory embraced the idea. what we did back in 1986, eliminate on a massive scale corporate tax expenditures. the loopholes that build up like, well, the things in caves,

the stalactites and stalagmites and 20, 30 years goes by and you have 3 million words of the tax code worth of loopholes that benefit some people but not everyone. and what was done in tax reform once before and i think would be hugely stimulative if we could do it again would be to throw out the 3 million words, simplify the tax code and relentlessly go on a policy that says we're going to get rid of deductions, that benefit only a few, and use that to drive rates down for everyone. politicians debating whether do you that in a revenue neutral way or a slightly revenue positive way, you could do it either way conceptually, but eliminating trillions of dollars of tax expenditures and focusing on lower rates and more simplicity for entrepreneurs would really add tremendous boost to the economy. >> we've been talking about what we think policymakers should do. i want to turn that around a

little bit with the knowledge of what happened last year with the debt ceiling and theiasco and damage most people think that it did. one is the one thing policymakers should axrovoid do to make things worse? bruce, a view of that? >> yeah. start there. sure. with the debt ceiling, and policymakers freed to come together. need to come together. and they need to be non-partisan and figure how to close this huge deficit that we have, and i think that closing a deficit is going to be good for our jun generation and our credit. there are problems around the world with solving credit. people come running to our credit, but at some point if we don't do something to fix this it's going to be rather significant. the problem wes have. first address it. what we saw last year was the exact