suggesting and here is getting into student loans is that while i agree that those who want to go to college should go to college, need to go to college, there -- we shouldn't by creating certain incentives through a student loan program that makes it -- creates that debt on you out there, we shouldn't be incentivizing the creation of additional debt, which means that we shouldn't have -- should have other opportunities besides a four-year graduate degree and i'm not taking anything away from what you do and what you're being good students that you are, but just recognize they're out there, there are other people that do not need to go to college and what we should be focusing on from a long-term perspective is developing those skills, skilled development is critical. i want to come back to one issue, though, broader, back to

the tax issue. shai mentioned at the outset that another component of the federal budget that is fast growing, and will continue to -- will grow fast, depending upon something that is right now being controlled and almost by global economics and that is interest rates, that the fastest growing component of the federal budget will be if interest rates normalize back at 5% will be just paying the interest on the public debt. our public debt right now is close to about $17 trillion -- total gross debt, $17 trillion. and one thing that that debt means to me, it is a tax, it is a tax on future generations. it is not a -- it is, again, here, you're getting screwed doubly. your social security benefits are not going to be there, and

more importantly, you're going to have to pay for that debt that we're accumulating today. either pay the taxes today, and now in fairness, i would say you can't get yourself out of this without increasing taxes today as well as -- or else the taxes -- you get the taxes in the future on paying that debt. and more importantly, and the one that really concerns me about the debt is that we're at something like about 74% of gdp on debt held by the public. and that historically has rounded up closer to 40% of gdp. current projections, even though the deficit, the annual deficit is coming down, debt held by the public continues to grow in the near future. and that's with some optimistic assumptions about economic growth. and the real problem, the real problem, joe heard me say this, shai heard me say this before, we have an old senator that

tends to get himself in hot water a lot, particularly with aarp, senator simpson from wyoming likes to say that we have a treaty with taiwan and that treaty with taiwan says that should china attack taiwan, we would have to go to war with china to protect our treaty with taiwan. and today we have to borrow from china to go to war with china. little bit embellished, but the truth of the matter is, of that debt, held by the public, not inner governmental debt, of that debt held by the public today, about 56% of it is not owned by americans. thank you very much. we're still a good place to invest. but we lost some of our sovereignty. we had debt held by the public

after world war ii, our generation, but we owed it to ourselves. war bonds. that's not the case today. it is a global economy. and so not only is your social security at risk, not only is your taxes at risk, your sovereignty -- control of your sovereignty of the country we love is somewhat at risk because of the -- level of debt. >> i want to add one thing to what bill said, which i agree completely, including the point that not everybody needs to go to college. we need to do a better job of having those people prepared to go from high school out into the world, not doing a good job of that. >> i agree. >> i wanted to add one thing that bill remembers, congressman john pratt from south carolina, for whom i worked for four years, wonderful gentleman, no longer in the congress, wish he were, he used to say if you want

to erode public respect for government, the easiest way to do it is to build up a substantial public debt. because one of the complaints you hear from people is i pay all this money in taxes and i don't get anything back for it. and you get the national defense, you get your highways, you get food inspection, you get lots of things that people don't think about. but to the extent that people are paying taxes, for the purpose of paying interest on the debt, they're exactly right. they aren't getting anything back for that. i always used to say that the one thing you get for the taxes you pay to pay interest on the debt is you prevent the acme collection company from backing the truck up to the white house and repossessing the furniture. that's all you get. you don't get any highways. you don't any food inspection. you don't get any national -- >> mm-hmm. >> you also lose, i mean, we could go on for a long time. you lose a lot of flexibility

with respect to making policy in the future. it would be nice if we didn't have to go to china to borrow money to go to war with china. one little point embellishing on that a little bit, the -- the share of our debt right now, which is held by foreigners by your number, 56%, go back 15 years and it was sufficiently lower than that. over the last 15 years of the money that we borrowed, $2 out of $3 was from foreigners. >> that's a good point. that's a good point. >> so we touched on a lot of different budgetary issues. i want to ask about one or two that are moving forward potentially in this congress today. trying to tie this back into the political reality and one of the issues that has been on the table over the last couple of years, might be again in this congress, is tax reform, specifically corporate tax reform. and just in the last couple of days, an issue that has gotten a decent amount of attention in the washington bubble is

something called dynamic scoring. and it's something that is -- it is a complicated concept, but joe and bill being the budget experts they are, i thought it would be interesting if you could give a quick explanation, maybe joe of what that means and the issues there and bill if you want to weigh in on what you think about that issue. >> i went to a luncheon in 2004

glass decided i raised my hand to ask a question. he called on me. and this is 2004. the question i asked him was if the congressional budget office had used dynamic scoring for the tax cuts in 2001, how much lower would the deficit be today? which is the best economist joke. people were rolling on the floor. >> we should back up and tell the audience more about the subject, which is probably why they're not -- >> all right. the notion behind dynamic scoring is there are things that government can do that would be beneficial to economic growth and therefore would increase revenue. these policies, even though they would cost money up front, would therefore have the effect of increasing revenues later and

possibly paying for themselves or more. there have been allegations, hopes, claims, dating back to 1981, really, in a formal sense, that changes in policies, particularly tax cuts, would so increase economic activity that you would make more money back than the tax cut costs you first instance. there are certain folks in washington who historically tend to be skeptical of these claims. i've been one of those people. we could get very fancy about it, but let me give you the physics. back in 1981, we enacted tax cuts that cumulative came to

23%, reducing tax rates. so right off the top you take the amount of money that you earned, you reduced the rate on that, that income by 23% across the board. and the allegation was at the time that we would get so much of an increase in income because people would be incented to work more, to invest more. taxable income would go up enough to get the money back. here is the simple math is, you want to think of this in two pieces, tax rates have gone down by 23%. you need incomes to increase by 23% just to break even. if you think this thing is going to pay for itself, you need even more of an increase. basic fundamental point, how many people in this economy are paid for 40 hours a week and cannot work longer than that unless their employer asks them to. >> good point. >> there are so many institutional constraints.

there are so many people who are not particularly interested in working more than they do. they have children to take care of. they have other things. there are many people who have control over their hours, who, if you offered them a much lower tax rate might very well decide, hey, i'm going to work less and still make as much money. i once testified before a congressional committee, worked out the math, and said, okay, you have a doctor who plays golf three days a week and operates four days a week. you cut his taxes by 25%. his tax rate is by 25%. worked it out so it worked -- i'm not doing math on the fly here. he's got two choices. one of them is he could operate on three days a week, play golf four days a week and still make as much money as he is already making. is he going to choose to work more? or is he going to choose play golf more?

and there are a lot of -- there is a lot of evidence that suggests that looking at the population as a whole, more people choose to work less rather than more, on average it balances out. cut tax rates by 23%, you lose 23% of your revenue. >> so even, i guess, sort of -- the question that is on the table today is as joe explained, i think there is a pretty good consensus in the economic community that the tax cuts don't pay for themselves. you won't make back as much as you are by cutting the tax rates. there is a question as to whether there is some marginal effect on economic growth and on people working more in the labor force and so what dave camp, the chairman of the ways and means committee put together a tax reform proposal last year, he had it scored by the joint committee on taxation and found a margin, but somewhere between $50 and $700 billion, which is not an insubstantial amount of money, that the -- would accrue

because of that tax cut and lowering the tax rates due to a growth in the economy and people earning higher incomes. and so on that issue of whether cbo and the joint committee on taxation should be accounting for the macro economic impacts in their scores is what has become contentious, because if those are allowed to be counted and they find there is a benefit to the economy, that means you could potentially cut taxes more than you would otherwise be able to. and so, bill, do you want to -- with your experience talk a little bit -- >> this is -- this is rather sensitive because i've been apparently misquoted on the floor of the house yesterday about a comment i made. and, remember, i'm a republican. some people might question that. but -- and i -- i'm with joe on this a little bit. let's back up for just a second. what are we talking about here?

when congress passes, reports legislation, the -- they need to know what the impact is going to be on the things we talked about here earlier. level of spending, level of revenues, how that fits into a projection going forward on the level of debt and deficits going forward. so historically, the congressional budget office where i began my career in this town, was charged with under the law, you make cost estimates of the legislation. what does cbo do? they make an estimate that is thought of as conventional score -- scoring you change a tax rate that lowers the tax rate, you're taxing less than the revenues come down. you cut the reimbursement rate and the costs of medicare go down.

the question has been raised particularly on the tax site, i'll get to it on the other side, that well, let's lower -- if we lower tax rates out there, marginal tax rates, that will stimulate economic growth. let's be clear, republicans and democrats, all of us, we want economic growth. part of this debate has been precipitated by a weak economy over the last many years in terms of our growth, potential growth in our economy. there has been an incentive. why can't we get more growth in the economy and for members coming in to congress, on the republican side, and yesterday and the rules they adopted, they had -- in the house, they adopted a rule that says for score keeping purposes of major

legislation, that being tax legislation, or spending legislation, cbo, you can't do it the way you've done it in the past. you got to take into consideration the things that joe mentioned, which are the dynamic effects upon incomes, and in terms of investment, and all of that will create additional growth. and as shai said, economists disagree on this. i don't know how many of you are studying economics or majoring in economics, but i'll tell you right now, there is a lot of disagreement, even in the economic profession, as to what does a change in marginal tax rate do? as joe outlined, a perfect example, of where may not be the case and you're restricted, mostly, controlled by it. long story short, this is extremely controversial. it is going to get more controversial as we go into this year. i believe that there are

incentives to be created for growth on the tax side. i do not believe just lowering marginal tax rates without dealing with a lot of other issues in the tax code, credits, deductions, exclusions, should have to be addressed also or else it is not the growth -- it is not going to offset the lost revenues from simply reducing. i'm not opposed to looking at alternative dynamic scoring and getting various estimates. my best example, two things and i'll shut up, shai, two things, this gives you -- because economics is the dismal science of uncertainty, there is no one single point estimate for accuracy. let's be fair. joe is a good economist. he would be the first one to admit there is uncertainty in

every economic forecast, even macro economic forecasts. the problem is that congress doesn't fund in ranges. when i was a very young, early out of graduate school economist at the congressional budget office, i had responsibility for the federal food nutrition service programs, which included at that time, called it the food stamp program. and i had developed this wonderful model i thought was great about projecting food stamp participation and i had my standard there with the estimates and my t squares and r squares and all that good stuff and statistics. i came up with an estimate for participation. and it was a range. and i got called over to a chairman's office, chairman

showing my age talmage to explain to my estimates. i said, here they are, it is a range. and in between here and here. he looked down at me and said, son, we don't appropriate in ranges. we appropriate a number. the difficulty with this whole process is congress has to have a number. and the adding dynamic scoring creates greater uncertainty. at the end of the day, we shouldn't be slaves to economic models. they are the elected officials. they should take in all of the information they can get and they should make a decision but they should not be bound by a particular estimate that has such uncertainty involved in it. >> i fear i led us astray on a technical point, but it is something that many in washington and congress feel is important issue and that will impact how policy is made over the next couple of years.

but one other policy question, and then we'll get to some from the audience, that we haven't spoken about yet, but was touched on, is tax expenditures. and those are all these provisions in the tax code that provisions in the tax code that some call spending through the tax code because they work basically the same as spending programs. but there is over a trillion dollars in those every year that on priorities that range from charitable contributions to retirement incentives to nascar provisions that -- for building racetracks or so what do you think is necessary to look at those with a finer toothed comb and decide which ones should be in there and how that can help us increase revenue to improve our deficit position moving forward? >> okay. real quick, joe. then i'll -- can i make one observation? >> sure. >> that is the things you've

identified are i'll call tax expenditures, home mortgage deduction is an example, or whether a deduction for contribution to your health insurance, or whether it is for charitable giving, or for energy electric cars, why are those expenditures in the tax code? they're in there because somebody thought if we put them in there that will help economic growth. the same argument, and one -- and one point that we shouldn't forget is this isn't just on the tax side. the area i get very concerned about is that, listen, we already talked about it, education, investment, instruction, infrastructure, science technology, don't those things contribute to economic growth also? why should we only be looking at dynamic scoring only on the tax side if we're not looking and that worries me because then that incentivizes my friends open the -- joe and his party so say, well, good, we'll spend more money on everything and it will pay for itself. >> right.

so everybody can have their cake and eat it too where everybody pays for itself and spend more and tax less and everybody is happy. >> and we have growth. >> right. >> we have supply side tax cutters and we have supply side spenders. and many of the supply side spenders think that if dynamic scoring could be put to their use, they would be very happy. shai asked the $64 trillion question that is over ten years. >> ten years. >> and that is program review. there is a problem with the review of tax expenditures. bill asked the rhetorical question and answered it, why are the provisions in the tax coat? the reason why the provisions exist is because the people put them forward and think they would advance economic growth. the reason why they're in the tax code very often, they think they're not going to be reviewed. and once you get them in there and they're part of permanent law, hey, we're home free and we can go and do that year after year.

if you put them in an appropriations bill, they would have to be reappropriated every year. why is a program an entitlement program rather than an appropriations program and that's the same thing. entitlement programs tend to go into permanent law and appropriations have to be reappropriated every year. why are we not doing program review and we're not reviewing tax expenditures? we're also not reviewing entitlement programs. i'll give you one interpretation of why this is true and bill may agree or disagree or may have another reason, why aren't we doing program review? members are too busy on the telephone trying to raise funds for their next election campaign, guys are elected to the house of representatives and the first thing you hear is you should be doing a minimum of x

hours on the telephone, not in your office, because that's illegal, you go across the street, where there is a building owned by the political party and we have the little booths where you can go and you can pick up a telephone and you can call people and raise money for your next campaign and you start that in january of the odd numbered year because if you collect enough money ahead of time, you might deter potential challengers and that's the best of all possible situations because then you can take that money and you can give it to your colleagues who are subject to challenges from the other party, and that makes them indebted to you so when you want to run for a leadership position, they're grateful to you, so they'll vote for you. >> there was a panel on monday with commissioner on political reform at the bipartisan policy center that probably touched on some of the campaign and

political issues. why don't we -- while we're finishing up this conversation, invite student who want to ask questions up to the microphones. one quick question for both of you while they're getting set up is i think when i was in college before i came to washington i thought that what went on here was sort of 80% based on substantive policy and about 20% based on the politics of the situation. and since i've been here five or six years i've come to realize i think it is about the reverse, that about 80% is made on the politics, and if we're lucky 20% actually gets made on the substance of the policy. and given that, what do you think are the odds that we see some action this year on some of these important issues that everyone agrees needs to be done, whether tax reform or controlling health care costs, but the political reality just is difficult. >> i'm going to be an optimist for a change.

congress will pass a budget. it will be a difficult budget. congress and they haven't done a budget for the last five years, and so that budget will start the process of at least starting to engage the discussion on a number of these critical issues. now, will that lead to agreement particularly with the president? on legislation? maybe not in some areas. but in some areas, minor areas, i think there is hope that something -- some things can be done. i think that the idea that a few years ago that there be a grand bargain that will do the big tax increases and the big entitlement reductions and i think the grand bargain idea is off the table, but i think marginal improvement in policy and legislation, at least until we get to about early -- later this year, later next year, get to presidential politics, so the opportunity for moving forward on a few of these issues i think

does exist for this year. >> joe? >> rather than prognosticating, let me just make one point and that is a lot of the big issues that we have been talking about and that bill just mentioned are of a nature where you are talking about the potential onset of a very big problem. in many of these instances, by the time you recognize that the problem is upon you, it's too late. and you are incurring an enormous amount of damage. i hear very often people saying in effect if we're going to avoid a crisis in this country, we need to have a crisis to provoke action. well, there is a circumstance later to that, which goes beyond the obvious.

and particularly with respect to the accumulation of debt, which bill talked about a few moments ago, somewhere out there you start getting into the quick sand and once you set foot there, the costs for the american people become very considerable, your options are much reduced. what i would urge all of you to do as you go out looking at your role as citizens is to talk to your elected officials to the extent you can, express your view that it is important in the spirit of the bipartisan policy center and with this reality of the consequences of inaction on some of these serious problems, it is really important that we put our heads down and get our work done on a bipartisan basis. you need 60 votes to get anything done under almost all meaningful circumstances. if we wait until some party has 60 votes in the senate and controls the house of representatives and controls the

white house we may very well already in the quick sand. >> great. we have a lot of eager students waiting to ask questions. we'll have you state your name and school and then ask your question and we'll try to get quick answers so we can get through as many as possible. let's start on the left. >> john graves, harvard university extension school. i really want to jump on the constant campaigning issue but i'll go a different way here. you mentioned the budget is not sustainable. you also mentioned that the entitlement program being the top of the list, as we move forward, that we cannot pull from that and we should look elsewhere at major impacts we can make. i'm a realist. i get that we probably need to audit defense spending. some of the major dents we could probably make are there.

but do you foresee that on an ongoing basis entitlements will always be here and we have to prioritize down the list to make sure that entitlements are always there? will that change in 2033 when the fund are exhausted? how do we move forward and will the entitlement always be on top of the list? >> sounds like that's for me. well, first of all, the controlling point that i tried to make earlier, we need to grab every dollar that isn't nailed down and many that are. we in the interest of being able to do the things that we need to do as a nation, we need to work on improving the delivery of health care in a fashion such that the cost per individual of delivering health care in our country, not just for the elderly through medicare, but really everybody is -- that the