>> they've been talking about debt in the chinese context. most attention is focused on what happens first tuesday in november. vince, are any of your clients starting to ask about this? >> here's the bad news. we're going to mostly spend all summer looking at quotes of who's going to be the president, who's going to control the house, who's going to control the senate? multiply that in to what we hear on the weekend talk shows about what they'll do actually in they're in power and fiscal policy's going to be material. we have dug a five percentage point hole worth of gdp in 2013

associated with sunsetting the bush tax cuts, lapsing of payroll, unemployment benefits, alternative minimum tax relief. sequestration associated with the budget control act. some tax increases associated with the affordable care act. i probably left a few out. doc fix, medicare. and the problem is it takes a decision, it takes the lame duck congress and the president to agree to something to avoid that 5% cliff. about at the same time the secretary of the treasury will probably have to declare a debt ceiling emergency because they'll be bumping up against the debt ceiling and depending on what congress does in the next couple weeks we may very well have a problem with funding the government in terms of the continuing resolution. so if you think back in august, the last time we had a debt ceiling problem, well, it's a debt ceiling problem. it's a funding government

problem. and there's a fiscal cliff. that's a lot of uncertainty. >> wow. doesn't sound good to me. but i actually i feel like as an economist, i say if i were able to do what needed to be done or someone who's a better economist, a lot of these problems wouldn't be there. so i see these as political issues there are risks associated with oil prices. there are risks associated with china. but the risks that we're talking about here are made by ourselves and i think it's a real shame that the political system is not focused more on what's good for the country, but really what's good for the party. and you know, this is across the board statement. and i think that the economy is actually going to be hurt by this attitude. >> so by the way, and moregan stanley our forecast is we

muddle through, politicians don't. >> that's the american faith. >> don't drive into the chasm. that european leaders go from summit meeting to summit meeting and don't solve the problem, but they don't make the problem worse. i was encouraging to hear that baghdad's a neutral city, by the way. that really bad things happen. >> but the general principal when you're making a forecast it's the presence of details that say something about investors are willing to take on risk. an environment in which the tails are so stretched out you don't get the wealth creation that means your central tendency is the best type of growth. >> i think that also if we look at as you say it's a political problem. political problems are very dominating as a result of the last four years our politics have actually become more polarized, less communication, less ability to work across party lines than i was in 2007,

2008. >> actually, than it was in 1870. we do this count of the party line votes in the house and senate. and we are as polarized in our history as from i think 1870 onward in the house rather in the senate and just at the previous peak which was arguing about reconstruction. so we're fighting about, you know, about two extra months on unemployment benefits to the same extent as we were trying to bring a nation back together 104 years ago. >> we can see in the primary season there's a penalty now for people who work on a more bipartisan basis in primaries and so forth. that wasn't necessarily there before. this re-enforcing your point. >> are there any ways that washington is helping? silence.

>> give us a minute. >> could have been worse. >> next question. >> well the fed's down the block. and the fed has provided extraordinary policy oi come dags. here's the bad news. if you drew up 15 things that washington could do to help to sustain key economic expansion, quantitative easing and managing interest rate expectations are number 14 and 15. i think that everyone appreciates that one through 14 are just not possible given how polarized our system is. so we've put this pressure on our monetary policymakers to do something even if they don't have a particularly effective instrument. >> dan? >> i think that there is -- thinking about it a fundamental disagreement that's sharper than it's been in many ways about the role of government and what it should be in the economy. i think that probably the kind

of overhang of debt and everything that we have is kind of so awesome that that's just in itself a dominating political fact. >> thank you. my colleague peter is indicating there are some questions. >> we have a question that i'd like to put to the panel. not directed at anyone in particular. how does the fed ignore noncore inflation when it is the driver of the trend? and they want you to pick whoever you think -- we'll put that to you first. >> you should go to morgan stanley. >> this is an inner house dispute. apparently. and the answer is that the fed cares about core inflation and the fed cares about inflation expectations. that price stability is something that is in the eye of the beholder. when changeable prices are not material in the decision making of households and firms you're at the right place and they're

at the right place now. so they're going to see through the blips associated with energy prices. >> i think i would add one thing not so directly answering the question. it seems to me we as global society may need to rethink our hatred of inflation. that the a limit bit of inflation would do a little bit of good for the u.s. economy. a whole lot of good for the housing market. a little bit of inflation would do good for europe which would allow the adjustments of weaker economies to be more rapid and more seamless. i think our notion of what these inflation targets are should be revised. we haven't had serious inflation

in decades. we can, i think we've overdone it. >> do you want to weigh in at all? >> one thing as you were standing there reflecting on europe, you can see that the politics of austerity are buckling under the popular pressure. how does -- can you imagine if we had 25% unemployment in the united states what would happen to our political system? hard to imagine. >> a quick question before i hand it back over to dan. let me put this question again to all of our panelists. if i'm ben bernanke right now and it's the question that i was lucky enough to put the to him at the top of -- at the end of his last news conference, what is keeping ben bernanke upmost at night. what should be worrying him most? and what should he do about it? >> 2% trend and an economy in

which wealth creation is impaired. i think you look down the end of the, you know, the street to congress there to say there's a heck of a lot of uncertainties. and if the major risk to economic progress is politicians, it's really hard for ab independent central bank to weigh in on that. >> anyone else want to weigh in on that? >> that's kind of the way i feel, too. doesn't seem to me the fed has a lot of effective tools still ready to go. if i were ben bernanke i think i'd be boworried that the rest the government wasn't doing what's needed. >> certainly worry about the rest of the world. particularly europe. >> on that, we're going to --

sorry, we're going to go over, but i want to come back to something. we talked about rethinking our hatred of inflation. >> right. >> how do we do that? >> well, i think we might talk about the housing market for one thing. i mean, we have all these houses that are underwater. how do we deal with foreclosures? how do we do with all this misery? well, if we had just a little bit of inflation and house prices went up, all of a sudden they'd be above the mortgages. this may be an expensive way to do it. all the alternatives that have been discussed are so quickly dismissed by one party or another. there seems to me inflation might be one of the easiest ways to do it. if you saw this as a -- as a benefit to the way that the housing market worked, i think everybody might feel like they were more comfortable with it. >> what do you think? >> there was a siren song in

that. the easy way to do it. inflation is an opaque tax. i think part of the answer is when there's nothing but hard choices you have to think about all taxes. the risk associated with it is its opaqueness means you tend to overdo it. historically how did governments work down large debt loads? they had some controls on finance and they had a little bit of inflation. the trick it worked in the' 50s and '60s because it was a little bit. it didn't work in the '70s because if it's too much you wind up eroding the controls and wind up making everything worse. here's the problem, we haven't had the conversation. central bankers asserted for reasons that was mostly framing inflation was around 2%. they say 2% looks good. therefore it's the goal. we never had the conversation in the united states about what the right inflation goal is.

and in fact, the central bank shouldn't assert it for itself. it should be part of the national dialogue. we're having an election. the election should be about fiscal policy. the election should be about central banking. the election should be important this time. >> good luck with that one. >> last point? >> i think it's a profound question that they leave us with. >> thank you, gentlemen. >> thank you, all, very much. i appreciate your participation in the panel. dan, thanks as well. we leave with a profound question. that's always what you want. we ask you all to make way for our next panelists who are going to make way and talk about another profound issue, the fiscal cliff that was talked about. we're moving on to the toic of government spend, revenues, deficits and debt. this discussion is going to be lead by jodi schneider the team immediate leader for congress and policy am list at bloomberg news. our first panel cyst the comptroller general of the united states. heads the u.s. government accountability office.

we appreciate him being here. we have alice ridland a senior fellow of economic studies at the brooksings constitution. he was a member of the -- a former vice chair of the federal reserve. she ran omb and cbo as well. many hats of course involved in the budget debate. and we have chris van hollen the ranking democrat on the house budget committee. he was also a member of the super committee and someone intimately involved in the spending issues on capitol hill. jodi, take it away. >> we have a big topic. i'll get started. on december 31st, the 2001 and 2003 income tax cuts expire as does the payroll tax cut for workers. the estate tax will rise from 35% to 55%. automatic reductions and defense and domestic spending will begin in january and the alternative minimum tax wants millions more tax payers and as we just heard,

the u.s. debt limit will probably run out in january. so given all of that and the fact that congress had enough trouble finding $200 million billion to extend it to payroll tax cut this past year, what are the chances of congress addressing the so-called fiscal cliff before the end of this year and what are the potential economic and fiscal implications and implications from the budget deficit of congress waiting? >> you want me to lead off on that? >> yes. >> all right. i heard the previous panel said the whole problem was gridlock on capitol hill. let me see if i can help at all on that. as to the first part of your question as to whether there's a reasonable prospect of us resolving some of these major issues before the election, i would say, regretfully no. having served on the supercommittee where we tried to resolve these issues and call for a balanced approach of cuts and revenue, we were not

successful. i believe these major issues will have to be dealt with after the election. i say that out of regret. i do think that the cocktail of issues, a very combustible cocktail of issues that you mention could have a positive action forcing consequence. especially because you have the expiration of the 2001 and 2003 tax cuts. now there are very few people that believe that we should keep, allow all those tax cuts to expire. what's about $5 trillion over ten years. but it does create an opportunity to take what has been described as a balanced approach. meaning a combination of revenue plus cuts. now, i'm not suggesting you can resolve all these issues in a six-week lame duck session. i don't think that's realistic especially if tax reform is a piece of it, which it probably will be. but i do think that it provides

an opportunity to move forward and if we don't seize that opportunity, i think we are in a world of hurt going forward. >> i totally agree with that. i don't think anything will happen before the election. i wish i could. and there are people talking across the aisle and trying to say if we get the chance what would we do? but i don't think that's realistic. but this confluence of bad things many of which were deliberately put in place to be bad things. things that you didn't want to happen that would force some action that's more reasonable. i think that will help. now they certainly can't put together a grand bargain in six weeks that everybody would sign on to in a lame duck session. but, they could put together a framework that would kick the

problem into the next session of congress, but not too far. a deadline of six months or something like that that would say we will avoid this catastrophe and give ourselves the time to put together a grand bargain. now, the staff work is all done. and the congressman knows this, he's used a lot of what came out of the two commissions. the supercommittee got close, but didn't quite get there. the pieces are all known. we're not inventing new things. this could be the chance to do it. if congress doesn't act, then we will have i think an economic catastrophe which will force the next congress to do something. if everybody's taxes go up, if you start cutting spending mindlessly across the board that will be a super wake up call, but, we ought to have the good

sense to avoid it. >> i think the action forcing events that you talk about are going to require action sometime before the end of the year. we need a medium and long-term plan to set the country on a more fiscally sustainable path. i'm optimistic the congress will rise to the challenge whenever it might be to be able to do that.

>> a very bad way to run a government. absolutely terrible. i don't think we have a choice right now. if the grand bargain could come together in a lame duck session that would be better. i just don't think it's feasible. and it is feasible to do a framework which says we're going to do these kinds of things to entitlement programs. we're going to do this. i hope comprehensive across the board tax reform that will give us a simpler broader based tax system with lower rates and more revenue. that's what we need.

>> that's just in terms of what the numbers are. there are different numbers coming out of different organizations, different anl cease. but that is the goal. and as dr. rivlin said an important part of that is to generate some revenue for the purpose of deficit reduction at the same time. if you were to keep a short fuse on the process, that could be a

recipe for suggest. the danger in your question is that you get to tend of the three month or six month period and try to kick the ball down the road. again, i do believe that outside pressures will be great enough to require, forcing the action and as dr. rivlin said we tried -- these efforts are designed to try and force action because the alternatives are worse. >> and they are the law of the land. >> they are. they happen if you don't do anything. >> it is no doubt an action forcing event. >> doesn't a lot of this then rest on actually who wins in the election in november. and is there an ideal election outcome from the standpoint of the budget deficit. isn't it true that when major deficit reduction packages have tended to pass they have been in divided government? >> well, i do think that it depends on the election and i do believe that the outcome -- one

outcome will favor a solution more than the other now, obviously i'm a democratic, ranking member on the budget committee. i would propose to everybody on a nonpartisan or bipartisan basis, what constellation of outcomes in this election would best lead to a solution. every bipartisan group that's up to this has said we need a balanced approach. what does that mean? it means that revenue has to be part of the solution and cuts and other reforms need to be part of the solution. i would suggest that if one major party candidate is running on a platform of absolutely no revenue increase, in fact, running on a platform of additional tax cuts, which will lose revenue, that that makes it very difficult for that candidate to then turn around and enter into a balanced bipartisan deficit reduction agreement. you know, i've seen people turn

very quickly on their positions. but i just think that that is a set of gymnastics on the budget that is very politically unlikely and therefore if you believe in -- in you believe we need an agreement and you believe that the only real likely outcome is a balanced approach, i would just challenge people to say how that candidate would do it. how would a republican prth who's run on a platform of no new revenue, not one penny for deficit reduction turn around and enter a balanced agreement. >> dr. rivlin. >> oh, i brie with that. i think it's going to be very interesting if mr. romney wins to see how he gets out of this box that he has built for himself. one way out for republicans in general is to say well, we really meant lower rates. we didn't mean that we wouldn't

raise more revenue and we believe that the lower rates will raise more revenue and therefore we are willing to broaden the base drastically. now what republicans have not done yet, is to say how they would broaden the base of the tax. and to get where for example congressman ryan wants to get on taxes or indeed where mitt romney wants to get in terms of lowering the rates, you would have to get rid of almost all deductions, exemptions, exclusions and that means the tough stuff that nobody wants to talk about. the home mortgage deduction, the exclusion of employer paid health benefits, charitable deductions, state and local taxes. you name it. these are very controversial issues. there are ways of putting together a plan that will still protect homeowners, but be less generous to those at the top, for example. but nobody's been willing to

talk about that on the republican side of the campaign. there's this vague thing if we're going to lower rates that it's all going to work out. >> some of those things need to be on the table for both sides to get serious. >> if you're talking about dropping the rate from 35% to 25% or 39% where it would otherwise go, you're going to have to do exactly what dr. rivlin said. and i think that that is my point when i say if tax reform is part of this process, it's very hard to get done in a six-week period because i think that there's going to be great reluctance to make radical changes. i think there's significant things we can do. i also think that there's ways to do it where you're not picking on any one deduction or another. you are taking the marty fell steen approach. i'm not endorsing the specifics of that proposal. the idea is you're not picking on any one kind of deduction.

you're redusing the value of the deduction overall. let me give you one fact, nerd to get from 25% to 35% according to the tax policy center that's $4.6 trillion in revenue. that's on top of the $5 trillion of revenue from the end of the 2001 -- making up $4.6 trillion of revenue by reducing the -- eliminating some of the tax expenditures i would suggest is a huge challenge. i have not seen we challenge our republican are colleagues to show us how you do that without reducing the progressivity of the tax code. that's a challenge we made to them and they have not put anything on the table that shows it that it wouldn't increase the relative burden on middle income tax payers. >> as an independent and nonpartisan head of the gao i don't prognosticate on election

issues. so i defer to mr. van hollen and miss rivlin. i think everything needs to be on the table in order to solve this at some point in time. revenue spending, discretion, mandatory, it all needs to be addressed in order to come up with a proper solution that's going to put us on a sustainable path. >> the gao has been very good for a long time. this isn't new news in pointing out the cost of a much larger older population and their health care. >> yes. definitely. that's really the two main drivers. that affects state and local governments as well as the federal government. we really got fiscal challenges at all levels of government which compounds the problem and really needs to be taken into account as the federal government deals with these issues. there will be important consequences for the state and local sector that need to be

factored in. as well as tax reform and spending decisions. >> i wanted to ask you about that in an april report from the gao from the state and local governments continue to face short-term and long-term fiscal stress. the total tax receipts have only recently begun to return to prerecession levels. with the effects of the 2009 stimulus waning what can lawmakers and policymakers do about the states and their fiscal concerns? what makes sense and what's discussion about that? >> i'll take a stab at that. i'm sure my colleagues will as well. let me go back to the stimulus bill. much maligned by our republican colleagues. but according to the congress office budget helped to save or create up to four million jobs. you saw a direct correlation between the end of

elements including the major infrastructure investment which we still haven't done, which we should do. we have very high unemployment in the construction industry. close to -- over 15%. we have big needs. that seems like a no brainer. yet we can't get that through. another component was to provide some additional relief to state andt the layoffs of our teachers and firefighters and police. i just want to emphasize what i think, i know dr. rivlin has said in the past and supports, we need to do two things tramt. they're not contradictory