with audio now. c-span radio is available any time. it does call 202-266-2828 -- 626-8888. >> on c-span tonight, at the senate budget committee holds a hearing on the stated the u.s. economy. newt gingrich speaks of the young american foundation confngrich speaks of the young american foundation conference. later, a and washington journal interview with jesse jackson. . .

>> all this note that we have just gone through the worst recession since the great depression. economic growth in the fourth quarter of 2008 was actually i -

6.8%. in other words, the contract -- the economy was contracting at that. bank by more than 6%. -- at that point by more than 6%. in the first month of 2009, we actually lost 800,000 jobs and unemployment was surging. a housing market crisis rippled through the economy. we had record foreclosures. we had a financial crisis that threatened a global economic collapse. lending locked down and we saw very severe effects throughout the financial sector. let me just say, i will never be -- i would never forget being called to a meeting, i believe senator gregg was there as well, and the secretary of the treasury and the chairman of the federal reserve told us that they were going to be taking

over aig the next morning, and they told us if they did not, they believed we would face a financial collapse in a matter of days. so this was an extraordinary crisis. we'll just received a report from the economists alan blinder and mark zandi entitled, "how we ended the great recession." they say in part, "we find that its effects on real gdp, jobs, and inflation are huge, and probably averted what could have been called great depression 2. zero. we estimate that without the government response, gdp in 2010 would be about 6.5% lower, payroll employment would be less by some 8.5 million jobs, and the nation would now be experiencing deflation. when all is said and done, the financial and fiscal policies will of cost taxpayers a substantial sum, but not nearly as much as most had feared, and

not nearly as much as if policymakers had not acted at all. the comprehensive wrought -- if the comprehensive policy responses saved the economy from another depression, as we estimate, they were well worth their cost." . we can now look back at their economic report -- performance. the fourth quarter of 2008 was a negative 6.8%. in the most recent quarter, the second quarter of 2010, 2.4%. but you can see in the fourth quarter of 2009, it is 5%. so we are seeing a recovery decelerate. that has to be a concern to all of us. the private sector jobs as i indicated, in january 2009 we lost over 800,000 jobs. in the most recent month for which we have figures, we

gained 83,000, a remarkable turnaround but well below where we need to be. let's go to the next slide if we can. unemployment remains stubbornly high at 9.5%, down from its peak, but nonetheless too high. if we go to the next slide, the housing slump continues. you can see the peak there in january 2006, we had 2.3 million housing starts on an annual basis. that was the peak. we are down dramatically off that peak at 549,000 in june 2010. the next slide is a "usa today" story headlined, "expect lots of layoffs at state, local levels -- tight budgets, a lack of

medicaid help put governments in a bind." all of us know that the states, most of them have a balanced budget requirement so that when there is an economic slowdown, revenue decreases. if they are compelled to cut spending and in some cases cut it dramatically. cuts in europe stoke global fears -- britain and germany plan drastic austerity measures that may hamper recovery in the united states. i also want to indicate in my contacts with business leaders across the country, they tell me that the financial crisis in europe has had a notable effect on the economy here. that is, they have told me almost without exception that the recovery was going quite well until the european debt crisis hit, and that has slowed economic growth here and has certainly effected those countries as well.

if we look at the deficit, we see that under the president's proposal, the deficit will come down quite sharply over the next five years, but not sharply enough in the judgement of many of us. most concerning to me is the years beyond the next five, where we see the deficit again rising. that cannot be the course for this country. that is why the fiscal commission has been put into place to come up with a long- term plan to deal with deficits and debt. but what has been allied in the president's budget for the long- term cannot be the course that we take. that would simply add too much to the debt, and we are going to have to face up to that as shown in the next slide.

this is the longer-term look by the profession -- the congressional budget office, looking at 2010 and beyond going out to 2054. if we stay on the current course, we will have a debt that approaches 400% of gross thematic product of the country. let me state that again. if we stay on the current course, the congressional budget office tells us that by 2054, we will have a debt that will be 400% of gross domestic product of the country. nobody believes that that is sustainable. no one believes that we would not face of financial crisis well before 2054. let me go to the final slide, which is the chairman of the federal reserve board saying that we need a credible plan to achieve long-term fiscal

sustainability. ben bernanke, the federal reserve chairman on april 7 said to the dallas regional chamber, "a sharp near-term reduction in our fiscal deficit is probably neither practical nor advisable. however, nothing prevents us from beginning now to develop a credible plan for meeting our long run fiscal challenges. indeed, a credible plan that demonstrated a commitment to achieving long run fiscal sustainability could lead to lower interest rates and more rapid growth in the near term." that is the challenge before us. it is imperative that we develop a plan and implement a plan to face up to our long-term debt. with that, i want to go to our witnesses. all start with dr. bernard, if we go to left to right. we're going to hear from senator gregg first.

just shut me off. >> i would never try to shut you off. >> honestly, i am so eager to hear from the witnesses. and then i was going to turn to you after the hearing concluded. >> it would have been perfect timing. >> senator gregg. >> i appreciate the chairman holding this hearing and i appreciate this exceptional panel that has been put together and i look for to hearing from them, also. i also want to commend the chairman for putting forth some stark numbers that are accurate, as he always does, and once again pointing out that the path we are on is simply not sustainable as a nation. i asked my staff because i did not know the answer what the greek debt to gdp ratio was, of course greek having basically defaulted and then saved, and

they said the zero was about 100%. i am not sure there is their public debt or their gross debt. but the chairman's number of 40% for a debt to gdp ratio is a staggering number. we know that our public debt is already approaching one under%. let me take a global view of the issue. i know our witnesses will take a micro view. let me take more of a macro view. if we look at what is happening here, we're seeing a new normal, the term used by mohamed el- erian, in the way we work as a nation and the way we function as a nation. i am not sure it is a good new normal, because basically we are taking -- we're moving away from american exceptionalism, on which i believe has always been uniquely founded on the basis of fiscal response ability, individual ought to print your

ship, and the capacity of the country to grow as a result of people taking risks and creating jobs, if which required access to capital and access to credit which was reasonably available at a fair price. and we have contracted all of this. the government has gone from 20% of gdp just 2.5 years ago to now 24% of gdp, and it is projected to go to 26%. historically it has always managed to be in the range of 20% of gdp since the end of world war ii. even if our revenues recover to their historic levels, and it appears that they will, in fact under the president's budget is less like they will exceed our normal levels, normal levels of revenue being about 18.2%. we cannot fill this gap because the government is growing too much. how do we bring the government back down, and do it in a way that does not stifle this recovery, to the extent that we

are having a recovery? and that really becomes a very complicated, two-step event for us, as people who are keepers of the fiscal policy, and for the keepers of monetary policy, because if we act precipitously to try to control the deficit, do we end up stifling the recovery? but if we do not act soon enough or put in place a reasonably acceptable plan that is perceived by the markets, both internationally and domestically, as legitimate to bring down the long-term debt, then do we aggravate the capacity to get a short-term recovery also? i happen to believe that a short-term recovery depends on the markets believing that we're going to get our fiscal house in order. but how do we get it in order in a way that is also dampen this slow, slow recovery? these of the complicated issues and policies that we face, and i will be interested to hear from our witnesses as to what we can

do in the short-term on the deficit or what should we do? and what must we do it in the long-term on the deficit in order to give ourselves viability as a nation that we're going to be serious about the fiscal insolvency of our future and therefore our recovery? so i look forward to hearing from our witnesses on whatever you wish to speak on, but hopefully these topics. >> i think the senator for his very good opening statement. i agree with the way that he has framed it, he has framed it very well. before we start with the witnesses, i want to welcome the newest member to this committee, senator goodwin of west virginia who is here. we very much regret the passing of senator byrd, a giant on the senate and in this committee. we're delighted -- >> he broke the bill that

created this committee. g&a and many of the rules under which we operated. we're happy that senator goodwin has agreed to join this committee. we look forward very much to working with you. this committee has a heavy responsibility, and based on what i have seen of your past and your conduct as a new senator, you will be up to the responsibility that this committee faces. wellcome and we're glad to have you here. next, we will turn to our witnesses. richard berner, the managing director of global economics, chief u.s. a cop -- analyst for morgan stanley. prof. simon johnson from mit sloan school of management, and joel naroff, the founder of naroff advisers.

dr. bernard, welcome. please proceed. >> chairman conrad, ranking member gregg, and other members of the committee, i thank you for inviting me here to discuss the state of the u.s. economy, and with your permission, we will talk about what policymakers can do to improve it. first, a status report on the economy. as you noted, mr. chairman, we have emerged very slowly from the worst financial crisis since the decree -- since the great depression. this is scattered across the economic landscape and you know that some of the things that are important. i would add that one in four homeowners with a mortgage owes more than their house is worth. lenders are still hesitant to lend to or refinance many borrowers. and while the process of cleaning up balance sheets is well advanced, it is incomplete. steady progress is required to archer a sustainable recovery.

gdp is still below its peak of three years ago. federal, state, and local budgets are strained, as you noted. jobs and hours gains have been encouraging but a faster pace is required to generate the household income and confidence needed to sustain recovery. there is the tail risk that inflation could sink too low and turn into deflation. while i see signs of a bottoming in inflation at low rates, not deflation, we cannot take the outlook for granted. what about the outlook for our economy? despite those problems, moderate but sustainable growth of 3.5% through 2011 is likely. that would still be tested for the first couple of years of the recovery. four factors underpin that view. the shock of the european debt

crisis has begun to fade. financial positions have improved, and that is essential for growth. global growth, especially in the big emerging market countries where domestic demand is strong, is still hearty. we expect global growth to be 4.7% this year, off 4.2% next year. for example, the chinese example is slow to respond to restraints on lending and tighter monetary policy, but we estimate it is to 9.5% next year. the ongoing revival of job and income gains, although modest, will provide income growth sufficient to sustain 2.5% consumer spending. that is a big step down from the past but it is sustainable. we expect the price the data to show that nonfarm payrolls and hours rebounded in july. infrastructure spending, the

last part of the fiscal stimulus in 29, is starting to gain steam. five aspects of the recent data we saw from our national data shows this camp. demand accelerated in the second quarter to over 4%. that pace is not sustainable, but 3% probably is and it is likely. we see a personal saving rate -- personal saving rate ramp up significantly, suggesting that they are rebuilding savings and balance sheets by paying down and writing down debt more than previously thought. the data shows the stronger. consumers will spend more in the second half of the year. all wider trade gap was a drag on growth in the first half. we see signs that it is likely to narrow as global growth persists and domestic producers satisfy more global and domestic

demand. the profit margins still lie ahead. companies have the where the ball to spend and clearly have begun to invest to do it. finally, inflation measured by the fed's preferred gauge has run at 1.5% over the last year, still low, but a couple of tenths higher than previously thought. with rents now firming, those revisions reinforce our conviction that inflation is now bottoming and that the deflation scare will just be that, a scare. but there are obvious risks to any scenario. i mention tw of that important. in addition to the payback following expiration of the first time homebuyer tax credit, the downside risk on price, mortgage credit availability, and housing demand are still present.

policy and political uncertainty -- we think increased uncertainty around taxes and implementation of healthcare and regulatory reform is a key reason that consumer confidence has slipped in the last couple of months. not the only reason, but it is an ingredient. in the rest of my time, i like to discuss some policies that congress might consider to improve the outlook for housing and employment, the two key areas that need attention and affect the overall economy. housing. as i testified before this committee in 2009, mitigating foreclosures was important. neglect in the past 18 months has created is no risk. the first is accelerating strategic defaults which read 18% of total defaults. these are borrowers who are critics who can pay but are so far under water that they choose to mail the keys back.

unemployment and low credit scores deny refinancing opportunities. unfortunately, the home affordable modification program has fallen short. two policy changes announced in march had been -- they could help. earned principal for forgiveness support repayment, and principal forgiveness. this program should be strengthened. cannot working because the language in the forgiveness modification rules is weak, and the fha short sale program continues to be advertised as being de minimis, with lenders been pushing back on both.

another proposal comes from my colleague david greenlaw. he hails from the great state of new hampshire. the government has guaranteed the principal value of the 37 million mortgages backing by tse's. there would be no credit risk for a mortgage originator who agreed to refinance these mortgages if the government guarantee were extended to the refinanced loans. that work -- he estimates that households could save $46 billion annually the mortgage rate could be reduced -- if the mortgages were refinanced. what about employment? perils' had been flat of the last year, including much of that cyclical weakness due to the tepid state of the recovery. the problem is that the high

fixed cost of health and other benefits, when adjusted for living standards, benefit costs and not gary with hours worked. they are paid on a per-worker basis. as employers seek to cut the cost of compensation, if these benefit costs drive a growing -- the growing wedge between total compensation and take-home pay. it continues to escalate the cost. the recession made this a bigger. long-term solutions include implementation to healthcare reform to save costs and innovation to boost productivity and labor skills. the affordable care act will possibly realize cost savings to medicare, but more work is needed to reduce the soaring cost of healthcare for employers and employees alike. short-term remedies -- perhaps a refundable payroll tax credit, but more aggressive implementation.

for years employers have complained that they do not find the skills they need in today's workforce. long-term solutions include keeping kids in schools and improving access to education. reorientation of our higher educational system towards specialized and vocational training and immigration reform. beyond unemployment service, one short term remedy would pair training in basic skills that are needed with income support. two other groups seeking employment, newly minted college students and unemployed teachers, could be an ideal nucleus for a job training corps that would empower job seekers with these bills. the third obstacle is related to housing, labor immobility. there is lower mobility rates because of homeownership rates. the long-term solutions include some of the ones i outlined before. short-term remedies beyond the

ones i have talked about would include an effort to establish a protocol for short sales and/or principal reduction which should be a useful tool. and the last obstacle is the uncertainty factor that i mentioned. we need to solve all long-term challenges, but the uncertainty around the implementation of the legislation and the solutions we have adopted, i think to some extent, it weighs and consumer decisions to hire, span, buy homes. the market participants aren't used to thinking that political gridlock is good. it keeps politicians from interfering with the marketplace. today gridlock is more likely to be bad for markets as a long- term problems require solutions with political action. long-term solutions require bipartisan leadership. mr. chairman and ranking member gregg, your work as commissioners on that deficit reduction commission is

critical. i know you agree that crafting a long-term credible plan as you just mentioned to restore fiscal sustainability will ease concerns and uncertainty about future tax hikes and the potential loss of our safety net. in addition, reducing policy uncertainty now could be a tonic for growth. it offers investors a chance to assess the fundamentals again. we assume that congress will agree to a 1-year extension of all expiring tax cuts. doing so should reduce uncertainty as well as sustain fiscal stimulus. obviously, the center such action is implemented, the center the reduction in uncertainty can be achieved. -- the sooner the reduction in uncertainty can be achieved. the challenge is to enhance the odds for more vigorous recovery and our long-term challenges to promote a sustainable fiscal policy and reform our entitlement and other programs that represent long-term claims on our future resources. khaki for your attention and the

opportunity to offer it buys. i would be happy to answer any questions you have. >> thank you very much, dr. berner. and now we go to professor johnson, someone who has testified before this committee before. >> thank you very much, senator. i think i am more pessimistic about our future prospects and more worried about policies and effective countermeasures. i would suggest that we fail in the discussion on the broad terms. if you look at the latest numbers from the dea, and compare real numbers with the latest quarter, the second quarter 2010, real gdp has hardly changed. we are on track to experience of

past half decade of growth. that should remind us all of the lessons from japan. i did not think that we will enter into a japanese-type inflation. but the damage done to balance sheet of homeowners, the latest data is around 20% of homeowners still have negative equity, and this percentage has not declined of the last four quarters. that's related to the consumption data to date, unlikely to rebound quickly. my experience in talking to the c.e.o.'s and c.f.o.'s is that they want to be careful now. the massive uncertainty that everyone experienced of the last two years was a very much in the credit system. most do not want to rely on borrowing or extend themselves and higher as much as they would

have done in the past. this undermines and slows growth. and we have the sovereign debt crisis and pressure toward austerity which is most manifest in western europe but in other countries also. the pressure to withdraw stimulus is apparent around the world. i was recently in china and was talking to some of the leading economists there. they were very much about the need for cutting back on the financial programs and worried about the waste of government funds in infrastructure. and i can share more details. but bottom line is that i think that global growth on a fourth quarter over fourth quarter basis is sustainable, but the global economy will struggle to

break 40% this year. next year should be better, i am not calling for stagnation, both globally and in the united states. the second. i'm going to make is that while i completely agree with you both about our long-term fiscal issues, and the very careful and analysis on these issues. a major fiscal issue is missing from this discussion. this a the liabilities created by our financial sector that are caused by the repeated instances of undercapitalized banks that take very big risks and are considered too big to fail. it is not unique to a united states. it is a very big fiscal issue.

he conceded from the cbo numbers. compare the baseline from january of this year to the january 2008 numbers. look at the projected debt levels as a percentage of gdp for 2013. 40 percentage points higher now than it was in 2008. you can decompose this coming occupancy were the deficit comes from. it is mostly from the lack -- lost tax revenue due to this recession. whether without that discretionary stimulus, he would still have on massive steam to the budget and to the deficit because of the recession. this is assuming a low rate of interest. if the more difficult fiscal scenario you outlined that the beginning start to play out,

long-term interest rates could decrease the deficit even further. we cannot obviously have a discussion about the dog-franc legislation, which i think was a step in the right direction but did not go far enough. but the discussion of these risks have not gone to zero. there is essentially a line of credit, and we ashley's been money out of the budget only with low probability i think that two of you were leaders in insisting that the cbo score that a properly. as discussed by congress, it was not scored in any way to contingent liability, the damage to the government budget that would arise from the future financial crisis.

we can argue about how frequently those crises occur, but there many who say that these crisis occur on a 3-7 your time line. the thesed that sensible ideas taken individually, if you take them together and looked along side the problem to the budget long- term, and i do agree with all you that over the longer term we must act, and the good news there compared to other countries, and was the former chief economist for the imf, so i look at a comparative framework, including the greek numbers there is some good news. car tax system is antiquated and could be modernized very easily.

many of the best ideas come from the council of economic advisers crumb george w. bush. that would generate somewhat more revenue than senator gregg was anticipating. medicare remains a huge problem. that is much more about ethics than arithmetic. it is a question of how much you are willing to pay for relatively late in life. it is a difficult and emotional question. the conversation is not move forward very much of the last couple years. we do not face -- if we do not face an imminent crisis, we would have time to face those issues. we should deal with them now and also deal with the issue of the contingent liabilities posed by a still dangerous financial sector in this country. >> now we will go to dr. naroff.

please proceed with your testimony. >> thank you, chairman conrad, senator gregg, members of the senate budget committee. thank you for the opportunity discuss my views on the status of the u.s. economy and to provide some idea of the direction of fiscal policy taking. the good news is that we have had one full year of economic growth and the economy expanded at 3.2%, off impressive given the problems that we faced over this period of time. consumers have started spending again, although they are not shopping till they drop. perhaps they shop until they are tired. business investment has made a strong comeback. exports solid. workers are being rehired. all of these factors indicate that the recession is over. but i am in the camp that is extremely concerned about growth

over the next year. i believe that the economy will face a significant number of headwind and that the damage done from the bursting of the housing bubble and the collapse of the national financial system cannot be cured in a relativity short period of time. while the banking industry is better, it is hardly in good condition. bank failures are running twice last year's pace. larger institutions are concentrating on rebuilding capital, not adding to their loan books. credit becoming slowly more available but is still limited. they're not turning down good loans. but there is never a definition of a good long. many firms have had to deal with that type of economy, and not had stellar results.

unless the expansion is stronger than i expect, credit standards may not be restored for another 18 months. given that the economy runs on credit, it is hard to see how growth concerts. the housing sector will also continue to restrain activity, possibly until 2011. they're too many challenges to overcome. first, it is back to the future when it comes to mortgage credit standards. the days of no documents and little or nothing down are over, thankfully. that means fewer people will qualify for mortgages. maybe more important is the loss of equity that many homeowners of suffered, and that has been discussed a lot here. the. in terms of housing demand is that without rebuilding debt to equity, a lot -- a smaller numbers of households will have the ability to make down payments on additional homes. without being able to do that, they're not going to be able to move. demand is just one factor in the dismal forecast in residential

construction. there's also the foreclosure crisis. foreclosures are greatest in those parts of the country where construction has typically been the strongest, california, arizona, nevada, and florida. as long as builders face the competition of a large number of low priced foreclosed units, new construction activity will be limited. in previous upturns, housing either led the recovery or was sent growing robustly in double- digit rates. i don't expect that to happen now. working growth come from? normally we led to the consumer. -- we look to the consumers. before, consumers returned to the mall after the downturn in did. now that is being delayed. their reasons for this to be depressed.

workers believed that if they did well, their positions for safe. they defined job security as the ability to work for one firm for their entire career. but productivity and cost containment are critical to long term survival and workers are largely overhead. the compact between businesses and workers was broken. what is replaced this? several years ago i argued that we should define sobs -- job security as having the ability to walk across the street and get another job. people feel better when they can sell their labor easily and not feel they are stuck in their current position or with their current employer. this has critical implications. labor is the largest expense for businesses, so there must be tight controls over payrolls. you do that by limiting both hiring and wage increases. that allows profits to rise.

betweene's a disconnect main street and wall street. firms or remain hesitant to hire until they believe the economy will expand strongly for extended period of time. if that creates a troubling cycle, if companies limit hiring, then workers who define job security is the ability to get a new job will be worried in consumer confidence will remain low. depressed workers do not usually spend lavishly. perrault's continue rising as they have the entire year, but the increases are not likely to be large to rapidly reduce the unemployment rate. it should not be as surprised that we're having a jobless recovery. the reality is that the last couple of recoveries and most future recoveries will be defined by slow job growth. the perception is an

anachronism popularized in manufacturing economy. the massive industrial sector that creates a lot of jobs early in a recovery by rapidly ramping up production and hiring is history. when our economy expands, we see the real economic need for products not only for u.s. companies but being produced around the world. we should stop using the phrase jobless recovery because it is normal that recoveries begin with anemic job growth. with consumers uncertain, it is not wrong to expect moderate growth of the they share. it should be enough to keep the economy going, but that is all. can business investment remain robust? investment in software and equipment soared but that could change. firms dramatically reduce capital spending. more recently, businesses have started making up for the failure to invest in capital

required to make competitive and on depreciation. that activity is just infilling delayed investments. what the process is completing, firms will invest only when they believe returns warrant the costs. it is hard to rationalized major purchases of software, equipment, or structures if the economy is not expected to grow strongly. uncertainty about tax policy is not helping either. investment could be limited to replacement and competitive factors. all this argues for decent but not spectacular gains in capital spending. similarly, the inventory rebuilding that added greatly to gdp growth is likely over. in 2009, firms reduced inventories in a breathtaking but excessive pace. they've been refilling those empty warehouses. firms need only to replace depleted stocks rather than refill emptied shelves. can export save the day? a slot -- a small gain should

continue, but imports will also grow faster and i expect the trade deficit to widen further, and that would further restrain growth. let me summarize. we're facing a lack of credit, on certain, cautious consumers, a committee already restocking warehouses, and replaced depreciated software as well as a widening trade gap and i have not even talked about the state and local governments cutting back dramatically. without changes in fiscal and monetary policy, my forecast is in the 2% to 2.5% range. over the past 20 years, the economy was hyped by the 1990's tech bubble and the housing bubble. excessive amount of resources flowed to those sectors, creating outsized group rates.

-- growth rates. do not they await this on two artificial bubble expansions. look at what is possible, as low and steady recovery. it is in this context of a slowly recovering economy that the structure for fiscal policy must be determined. while monetary policy is always evaluated on where we are in the business cycle, fiscal policy seems to be viewed in a vacuum. i believe that policies instead for the growth of the economy should always be a valley it did on basis of where they makes sense in the context of the current economic circumstances. and where we are in the business cycle. tax cuts should not be implemented only to the extent that they produce new growth and set the stage for further economic activity.

spending increases should be implemented only if they can quickly and efficiently increase domestic demand. we're moving from an economy that like the man before -- to one where demand is growing slowly. we need to take that to the next level where expense -- or businesses expand sharply. thank you for your time. >> obviously there is a debate going on here about what is the correct fiscal policy to pursue now. i think that three of you have outlined insignificant detail the economic conditions we confront now. the question for us is what do we do about it? to boil it down simply, on the one hand there is a camp that says you should provide more stimulus to the economy. very distinguished economist like paul krugman says that you have to provide more stimulus.

he recommends that we provide more aid directly to the states through f maps and other provisions, and maybe two more in terms of infrastructure. on the other half they say that we have record deficits and debts now. you have to take immediate steps to reduce deficits and debt now. so no further stimulus. dr. berner, what would your recommendation question mark janitor -- what would be your recommendation? >> khaki for the question. i think we ought to address our policies were specifically to address those problems. i think the problem that we've all talked about here involves housing finance and the state of balance sheets and the negative

equity position in which many mortgage owners find themselves. cleaning those problems up, mitigating those problems really involves fiscal policy. and we're using fiscal policy to do that. the losses incurred on the agency mortgages, from fannie and freddie, you and i are paying for that as those losses occur. the problem with that strategy, simply letting foreclosures occur, letting the defaults occur, including the strategic defaults i mentioned earlier, is that slow motion process really inhibits growth and creates uncertainty. it prolongs the adjustment in housing and by extension in consumer balance sheets, and therefore has a big impact on consumer spending and prince further downside risk to home buyers. >> so if they can -- if i can

say from your testimony, you would be for more aggressive intervention to prevent foreclosures and to try to close this gap between the 20% of the people upside down in their mortgage? >> som foreclosures are not preventable. in the point here is that we want to mitigate the ones that are preventable and we want to get a an opportunity and some ideas to allow homeowners to refinance or the only barrier is the refinancing process, where we are ready have the liability on the federal balance sheets for those mortgages that might default, said they are back with the full faith and credit of the federal government. in addition, to celebrate the process of bringing borrowers and lenders together proposals

like the earned principal reduction or forgiveness program, so that lenders have about four minutes -- a performing loan that is not now performing in the borrowers can stay in their home with the reduced payment, with some expectation that they were share -- not completely -- share in any stability are upside from future home price depreciation. that is why we have strategic defaults, because people do not have that expectation and they will not share in that future price appreciation if in fact it materializes. the policies we are pursuing today practically guaranteed that that appreciation is off in the future. the policies i am recommending would mitigate that, speed up the process, and reduce the imbalances in housing. the other thing that i talked about also involve fiscal policies. if we were to start at the job

training corps that i recommended to bring together people who had skills with those who like them, that it's going to cost more money. but instead of giving people transfers to and ensure project unemployment insurance, which is needed, it puts money into people's hands and gives them an activity which are productive and increase training and offer a lot more dignity to those activities. those are some of my suggestion. >> dr. johnson, what would your advice be on what we do now? >> the risks that we face in terms of the financial markets see our government debt is how did debut on how our decker short --. and i think that this is going to continue indefinitely, the europeans are getting their act

together. i do not expect high-growth but they may be getting it together. it could be read sought -- regarded as relatively appealing. if we see that sort of opportunity out there, i think you'll see a shift in international portfolios. some of the foreign holders of our debt, about half the board debt is now held by foreigners one way or the other, they could shift away from the u.s. and have an increased interest rate. the best way to get ahead of this, and answering your question, is to undertake now measures that credibly reduce the deficit 10 or 15 years down the road, which would be tight for former self, medicare reform. that should lower interest rates because you wrote reducing the interest on the dead, and that would create a fiscal you can choose either to pay down debt or put that in the short-term stimulus programs. but where we all today, while i am sympathetic to the

constructive ideas that we've heard today, trying to stimulate the economy, i would caution against doing it without an fiscal consolidation framework. the imf does not provide advice in this context, but i think that is the sound principle that the u.s. uses and that we should use for ourself. >> bad debt commission that senator gregg and i serve on, the success of that commission in your mind takes on even more importance given our current economic conditions? >> absolutely, but that debt commission and any other initiatives along those lines is the key to being able to provide short-term stimulus for whatever kind stimulus you think would be suitable for the economy. all of these additional measures are substantial risks, in my

mind. >> dr. naroff. >> i look at this in terms of a continuum rather than a specific set of policies. if we go back to early 2009, it probably could have cut taxes to households and businesses all your long, but the return with been minimal because businesses and households or looking to survive ravin spend in any form or manner. that is the ideal for the fiscal stimulus made sense at that particular point. we're no longer at the point where people are not spending our businesses are not spending. that has to be withdrawn. that was drawn the to continue, which is already under way. therefore we need to be transitioning from a statue was and where we're strictly looking

at the demand side to the phase at this point bang where we're looking to sustain some of the demand that is out there but not nearly as heavily that we have. the key lesson that we learn from the great depression from the 1930's is that you cannot have a failed recovery. that is why -- that is what extended those downturns. the concept behind a lot of the arguments, we need significant amounts of stimulus at this point, i did not think we need significant amounts of spending at this point. but we have to move toward the combination of sustaining a elements of those spending that only does that translate into demand immediately. and then move toward the tax side of the policy, the supply side of the fiscal policy, which looks to generate some initial demand but starts the process of laying the foundation for stronger growth. i do not believe that we're going to be seeing a whole lot of activity due to the

sensitivity of businesses if we lower interest rates. i do not think -- i look at the level of interest rates right now, and i find it hard to believe that we're going to go a whole lot lower than we are at this particular point. businesses will be looking at what the conditions are to make those investments and their return on them, not just the cost. but simon is really saying and i agreed that what you need to set up is of medium-term and long- term stability so that businesses can begin the process of making those investments. but the rest of this year, those investments are going to be very cautious regardless of what the fiscal stimulus will be, whether it is tax cuts or lower interest rates, and it is only as we move through the next half of next year and maybe the second half that we will get to the economic

portion of the cycle for tax cuts can become most effective on the business side. i will look at the continuum in that respect. >> senator gregg. >> picking up on those comments, essentially what you're saying is that the uncertainty issue to a significant extent the short- term stimulus issue will be addressed significantly if we put into place policies that address the long-term debt issue so that people have confidence in the out years as to where the country is going on the issue of debt. is that true? >> yes, senator, that is exactly what i am saying. >> cannot have a question again, falling opponent? you all talked about this issue of consumption as being a big driver, and our nation has always been a consumer concerns

-- consumer society. but i see this substantively different from others for a lot of different reasons. primarily because the baby boom generation has been the defining the economic engines of the 1960's through the 19 nineties. it was so productive driving so much of the wealth of this country. it was right on the cost of retiring when this recession hit. a large percentage of the baby boom that retirement savings was in contributory savings versus defined benefits plan. that shift has occurred throughout the 1980's and 1990's. what happened is that you had this huge generation of 70 million people which suddenly found that all of the money that they had saved for the purpose of retirement was significantly decreased in value, all their assets, by this recession.

now they are seeing some recovery of that, depending on how they were invested, but i think there is a fundamental mine shift in our nation in this generation. he does from consumption to try to deal with their retirement which they are about to start, and you're not going to say that consumerism had dominated our country when we were so productive. you're going to see it much less driving the economy from the consumer side is this generation tries to adjust to the reality of retiring with less savings that they thought that they had. if that is true, what is the implications of it? >> if i could answer that, i totally agree with you. i think we are in a period which i call the new age of thrift, responding to the wealth lost.

also in their houses and pension plans. i think there is enormous uncertainty about the promises that had been made to consumers by government, but that the state and federal level and at the local we should not expect to see consumer that is spending as before. the new normal will be the 2% to 2.5% that i described. we should look to other parts of our economy to provide growth. for the first time since the mid-1980's, we should seek global growth as a source for u.s. growth.

we should rely on that. that means we want to keep our markets open. we do not want to adopt protectionist issues. at the same time, we want to encourage the growth of other economies who will provide markets for our companies to export to. they will provide income for people to save and to rebuild their balance sheets. that is not an unsustainable environment. that is a more sustainable environment than the one we had left where saving rates were declining, both nationally and personally, and we can rebuild the foundation for a stronger and more sustainable recovery. nonetheless, there are things we need to do in the short run and

they're things that we need to do in the long run. i just want to express my complete agreement with the idea that we need to have a credible plan to address our long term fiscal challenges. that will reduce uncertainty. the way we do that is also important, whether through higher taxes or spending growth. it is extremely important. the promises that we made for the future that we will have difficulty in keeping by cutting the growth in those programs. >> i have heard this argument before, that, basically, our society is going to have to look to trade and the trade will be the the rising nation's, bric countries, for example. i understand the logic, but i do not except necessarily that it will be the driver of our economy. maybe it will become a but maybe

it will not. i think that and -- plays a bigger role -- i think energy plays a bigger role. is it -- is almost a catch-22. we're telling the banks and the financial system that they need to increase their capital. then we hear from the markets that there is no credit available because the banks are significantly increasing their capital. if we went to an even more aggressive process of saying that we must score the liability of there and see higher capital levels, i presume you're selling that -- i presume you say we would have to increase capital. do we not have a catch-22 in our fiscal policy? >> i don't think so.

a paper on raising capital requirements from chicago -- i do not think the effects are all as portrayed by the banking community and widely feared by the u.s. treasury. what will come out of the agreement, the unfortunate, is very little by way of the needed capital raising standards. the capital will be relatively low. low, so the financial system will have to absorber losses. given the political on come, i do not expect much additional capital to be in this. i think we should score the liability that this creates, relative to the risks that it

poses. that is standard procedure. this is 40% of gdp, so it is a big one. not scoring not one would be a mistake. >> just quickly, you do not ascribe to the view if you put more pressure on the need to increase capital -- which i accept it is necessary to keep the system sound for you will end up with contraction in credit. >> it depends on how to raise capital requirements. the way that we did things after the stress tests -- you can have your reservations about those tests, in general -- but raising capital is the right way to do this. you do not want to tell people you must change your ratio of capital to assets tomorrow because certainly you will get a contraction. there are ways to make the

banking sector. banking becomes less sexy, less of a high-risk, high return activity. that is okay, some like it, some do not. but it changes the nature of what a bank is. it does not necessarily cause a big credit contraction. >> senator goodman. >> thank you for the warm welcome. certainly, an immense honor to follow in your footsteps, senator. although no one can replace senator byrd, what i hope to do is to emulate his work ethic and commitment to this body into the state of west virginia. i have a tangential question for you. you alluded to faith in our local governments in your testimony.

i wanted to talk about the impact of the unfunded liability is that so many of our state are facing. in my limited experience in west virginia, we were looking at billions of unfunded liabilities in various pensions, other post- employment benefits. the end result being aggressive encourages efforts being made to amortize those liabilities over a period of years, but as you might expect, there were other political ideas that were needed in their own right, so my question for you is, what is the impact of these unfunded liabilities on future economic growth, what sort of pressure does it place on the federal government's efforts to tackle the issue? >> that is really the thing that

every state and local community is trying to get their arms around, at this point. there is no simple and quick resolution to the problem. that is the first thing to keep in mind. the unfunded liabilities and pensions, which states are simply not paying their share to in order to have the temporary balancing of the budgets, and that will likely continue, it is going to mean -- whether they were politically necessary programs or not -- they will have to be reviewed. crises, if they are handled correctly, will create fairly significant short-term pain, and i believe that will continue to be the case in state and local

governments, but that is a pain that should have been felt over the last five, 10 years. but the unwillingness to recognize them continued. my view is, in terms of federal fiscal policy, states and the to come to -- need to come to grips with their spending patterns, and to a large extent, make the cuts necessary. at this point, they need to get their fiscal houses in order. to the extent there are temporary fiscal issues that they may be eased through, and there may be able for federal policy, but more so it is time for the state and local governments to start recognizing the costs that they have the imposed on themselves

are not sustainable anymore. while i do not argue with some of the fiscal stimulus fund having gone to the state, because there was certain truck that you could not plan for, now that they have had a couple of years to deal with that, and one you cannot address 10 years of fiscal irresponsibility overnight, there is a need to address that. >> i just want to emphasize the importance of education in this process. what we see at the state and local level are big cuts in education. what we have seen over the past 20 years, the difficulties that people have if they do not have a college education, how hard it is to participate in the modern economy, have wage growth. senator gregg, your idea of

other motivators for growth, we support them, but increasing wages in the economy, not being able to participate in getting a job in the global economy, for example, the situation just gets worse with long-term unemployment. this is going to really come through as a huge weakness for our growth potential, but what can you do about it when you do not have space at the federal level because of longer-term fiscal issues? unless you do with that, you cannot create the space to do with these pressing issues. >> thank you. senator bunning. >> thank you, mr. chairman. thank you for showing up, a panel, lots of brains sitting at one table.

i would like to give you one quote from a formal federal reserve chairman, who in my opinion, cost three major recessions in the united states with his monetary policy. on "meet the press" he said the u.s. is experiencing "a pause in a modest recovery that feels like a quasi-recession." do you agree with that characterization, what policies would you recommend to change that situation, what is the worst thing the federal government could do in this situation? realizing that we have 15.5

million part-time or full-time of unemployed people, 8 million of which were unemployed in 2009. will we have any jobs to put them back to work? will we be able to raise our economic level so we can create those jobs? opinion.ike anyone's >> let me start the discussion. i do not think it is necessarily a pause. given the damage done from the blowup of the housing market, near collapse of the financial sector, the idea that we could get anything more than a modest, slow-growth recovery was hopeful. the 5% growth that we got at the end of 2009 was largely just

making up for excessive inventory cuts and investment cuts that were done at the peak of what we could call the panic of the first half of 2009. except for that, this 2.5% growth forecast, which i have and others are not far off of, is likely to be sustained. i do not see the deceleration, a pause in growth, as much as that is the reality of what we are facing, given the damage done to the economy. >> on this statement from dr. greenspan, i agree, it is slow growth, a disappointing recovery, one of the slowest since world war ii. >> doctor johnson, you are a

member of the cbo panel of economic advisers. i am sure you have predicted that economic growth will fall by 1.4%, if the 201 and 203 tax relief is allowed to expire. why does cdo expect that it will slow down our economy? cbo expect that it will slow down our economy? i am looking to get it going faster. i want everyone to realize cbo is the independent scorekeeper here. you expect a 1.4% decrease. >> i am only on the panel, and not responsible for -- >>

>> i did not say that, but maybe you can explain. >> if you are worried about stimulus, you could look at other ways to stimulate the economy -- >> i have looked at them. >> i would expect and support continuing tax cuts. >> kentucky has a $2 billion shortfall, out of an $18 billion budget out of a two-year period, and they are coming to the government for $240 million. are you kidding me? so there budget can be balanced? what if all 50 states did the same thing? >> senator, we are obviously in

a difficult place from a fiscal point of view. my point is, if you had an agreement on the longer-term budget, you could create fiscal space in order to choose. the financial markets, as much as they like you now, allow you to borrow the two-year at record lows, that will not continue. >> you obviously know zero to 1% is the rate that the federal government is borrowing money on. what will happen if we get some economic recovery? won't our borrowing go up some? >> yes, and relative to other countries, we have a relatively short time frame.

i am not playing this down at all. you need a longer term fiscal consolidation framework. without that, we are asking for trouble. >> i also believe when you look at the tax cuts from 2000, 2003, the context in which they were issued, it was a totally different context, environment. some of those tax cuts made time under the current set of circumstances they simply may not create any new economic activity. that is my point about another winning those cut individually and see if they make sense, allowing them, in the context of where we are today -- >> i have one more question that i want to fit in before my time is up. we have heard time and again consumer spending is weak because they do not spend their

additional income. you have said the same thing. is this not a result of cheap money over the last decade or we have achieved a negative savings rate and the average american is already struggling? how can we expect consumer spending to increase when debt levels are so high? >> that is partly why some of the remedies we are talking about news with helping consumers reduce those debt levels in a responsible way. >> are you talking about forgiving their debt? >> in some cases, if you are in deep difficulty, there will be a forgiveness or default. >> those are the 18%? >> and in addition the ones that

are foreclosed on. the choice we face is whether to let that process continue at the pace it has gone and have the housing market continued to suffer, for a weekend truce policies -- or we can choose policies where the cost is shared between the lender and taxpayer, in a responsible way. obviously, if we were to choose to rewind the tape, and choose to do things differently, but given where we are -- >> i wish we could rewind the tape. >> we all do. we do not have a good set of choices to pick from. >> i agree with you, the federal

reserve policy led us here, and we are set to repeat this because we have the same structure. >> i understand. my complaint to chairman bernanke is the has attend nature in which the federal reserve has -- hesitant nature in which the federal reserve has approached this. his balance sheet is now $2.80 trillion. i have a hard time getting my head around that. what he does is he buys treasuries to sustain the treasury market. that is how he fills up his balance sheet. it is dangerous policy, thank you. >> thank you. i have been very liberal today with everybody -- senator bunning, i did not treat you any

different. we appreciate very much your discipline, senator goodman. so i am going to treat everyone the same way, too. you will be able to go over a couple of minutes. senator begich. >> i leaned over and told him you could extra point because you left time on the clock. first of all, welcome. i represent the state of alaska, have been in the small business world since 16. my wife owns and operates four small businesses. we build these businesses from scratch, so we understand what real life is about. it is great to hear this theory and discussion, but we have experienced it in good times and bad times. let me give you some context, so you understand where my question is driving to. we seem to have a short-term

memory on the date -- 1980 recession. if you were a small business person, you wanted money from the market, you would have to pay 19. on prime. you talk about seizing of capital. businesses were not anxious to get it because the rates were short term. -- inska, and the 1980's, saw about half a dozen banks close at hand thousands of people leave in a short amount of time. we have seen what can happen. anchorage's assessed value for the city has essentially been cut in half.

this recession, we did not lose any money. no banks failed, the highest unemployment in two decades. now three months have gone by and we have come down 0.6%, going in the right direction. we have had housing prices moving up 14%, which is positive. still, new starts are low. we learned something from the 1980 crash. diversification, focus on job growth, and quick stimulation to get money into the economy, but look long term. here is my question. do any of you agree with the statement that the first thing we need to have is certain to inour debt, tax policy, spending? does anyone disagree with that?

ok, let's is approval. the second question -- silence his approval. the second question, do any of you agree that the combination of your idea, short-term and long-term, is what is necessary, does anyone disagree with that? ok, now for your response. i also heard, correct me if i am wrong, different levels of what those tax cuts should be or should not be. i did not hear anyone say all of them. i heard variations. instead of having a special interest debate over who will get which tax cuts, one not just reform the system?

tax reform is dramatic. it seems like that sends a message to the business world, we are protecting the middle class, and that would bring confidence back to the consumer. the biggest number i'm interested in is unemployment, but otherwise, consumer confidence. give me your first thought on the bill. there is another bill which caps credit unions on how much they can use for small business loans. this would raise it to 25% without putting any federal dollars into it. does anyone want to comment on that tax policy? >> it would widely enhance the

tax code. it would take away a lot of the special preferences that are built into the tax code. all those things, an economist with tell you, are good things. >> i think it is 24%, if i remember right. that gives a competitive edge -- one of the questions that you asked was, our ability to compete worldwide. >> that would more or less level the playing field with other countries. it would broaden the tax base, which is important when you think about how we want to do with our fiscal problems, going forward. by taking away some of those preferences, it will hurt some people, but would broaden the tax base, give us a more stable system. moreover, if you think about how we got to where we are, in

housing, for example, it was not just easy credit that was a contributor, but tax policy had a role to play in it as well. we have endorsed that in the past as a society. maybe it is time to rethink that so that we can we balance our economy and have more resources or things like education, product enhancement. clearly, we do not need more housing. >> this is true, inventories are high. >> as we think about the role that tax policy can play in that, i commend you in advancing that argument in the congress, your leadership for doing so. >> i must admit, i have not studied this bill but i will be doing so this afternoon. as i said before, now is a

moment of protection -- now is not a moment of protectionism. i would hope that we have versions on the table -- have on the table versions of the value added tax. we need to look at all things including the mortgage tax. carbon pricing has to be on the agenda. looking of 20 years, if that is your budget thinking, you can decide what to do with that revenue to reduce other parts of your taxation, but this is an important part of energy. we should be including all of these proposals into a 20-year thaksin plan --taxing plan

horizon. >> i agree with a lot that he said. we are a small business down. this is not a tax system that anyone would want to create from day one. the problem we face, and the issue of what you do about taxes, the simple fact is we start with the current system. if you start with the current system, you have to move from that system in evaluating any changes that you make. in any system, there are always winners and losers. that is what creates the havoc in any tax policy making progress -- process.

i do not think it is a good thing to simply say, we can keep all of 2001, 2003 so that we do not get into a discussion. there will be lots of taxes that will have little or no impact on the economy. in the context of the budget deficit, it would simply be a loss of revenue. so by restructuring in, you get a way from these crazy debates that are going on. >> thank you. i appreciate the comments. i am growing into this camp, we are spending all of our time thinking about which tax cut are right, who is in, who is out, and that is not going to change the confidence of the consumer.

it seems to me, it is time to rejigger it and allow the community to think that we have done something long-term hearing that will affect them, as well to the business community, so that we can monitor their spending habits. >> i just want to thank the senator from alaska for his insightful and substantive questions. >> thank you, chairman. >> senator nelson? >> you all testified that you do not think the tax cut in the stimulus bill did not have much of an effect. tell us what you think the spending did?

>> i am not sure i completely agree with the blinder-zandi total there. i look at it in the context of, the strategy they took, if we did not have it, what with the economy look like? clearly, the other alternative is if you took the same amount of money and spend in in different ways. you would also have a different outcome. since we had that set of policies, it is hard to disagree there was not a significant impact. nothing close to what we hoped, the kinds of money that would be spent, and a lot of that money is still being spent -- and

that need to be kept in mind. some of the concepts in terms of infrastructure spending makes sense. most of us would agree, if government is going to spend money, you want to provide long- term returns to the economy. nothing does that better than infrastructure, but there are other things that would simply transition the economy from 2018 to where we are now, but i think you have to say that it had a moderate affect and kept us out of a segment of the longer and deeper recession. -- significantly longer and deeper recession. >> you get a different bank for the block from different type of spending. unfortunately, all lot of the spending was done in haste, in an effort to help the economy, help state and local governments who were hit with the shock of the downturn.

pummelling not as productive as it could have been. i agree with the infrastructure spending peace. we need a program of infrastructure repair that goes beyond short-term stimulus. providing aid to stale local governments -- state and local governments was a good thing and possibly avoided some job cuts, but there are other things need to think about in determining fiscal stimulus. >> senator, i testified to the committee in the run-up to the stimulus, and i said at the time i am not a proponent of discretionary stimulus. the discussion was, something was needed to bolster confidence in the economy. as i look at what was discussed, the money was spread around in

different ways. the amount of money was actually pretty small, but i think it was a pretty good mix. it was a very unusual problem. delay, we never see it again. i worry that we will, that we will have to fix the financial sector and will have to throw money at the problem to keep it from getting worse. it gets worse in the long term. >> mr. chairman, do you remember when we tried to get more infrastructure? >> yes, sir. we tried to get $200 billion. >> these two esteemed and gentlemen, chairman, ranking

member on the deficit reduction commission, which i hope and pray will be successful. since they have a threshold that they need to get 14 votes 0f 18 on the commission, there is skepticism that they will be able to get that on whatever package they come up with. so if that skepticism bears out to be true, which i hope does not, i am prepared to gvote yes on their package, but i have not even seen it yet. and u.s. -- as you have testified, we need to do something about the deficit. but if it fails, what happens? what do we do? >> senator, i am not sure we

have room for failure. as we have talked about, ultimately, global investors who hold 55% of debt held by public are going to register their vote in financial markets, and they will see a our inability to do with long-term fiscal problems, will look at our lack of credibility on our willingness to deal with those problems, and that will raise the cost of borrowing, not only for the federal government long-term, but also for governments and businesses here. moreover, that services will take resources increasingly on of our economy that we could use for other productive means. that is the long-term cost of not addressing our fiscal problems. >> and creates uncertainty and a lack of confidence in the u.s.

possibility to manage its financial affairs. >> toquote the imf, the greek general debt was 133% of gdp. the u.s. is closer to 90%. this is the answer to what if it does not work. you have some time, but not very much. obviously, on net debt terms, it is not that bad, but you know what can happen with trajectory. we do not want to be forced, like the greeks or spanish, to do things in a precipitous manner. that is bad for small business and everybody. dougan while we still have time. >> if you want to know what this

will look like, look at most of the states. they have hit that point. they are scrambling in exactly the way that you have commented, trying to deal with these expenses that they have been overwhelmed with. to some extent, i know that some of you have talked about this, it may mean more changes to long-term benefits, social security, and so on, things that we have put into the cut in programs. we should not have to wait to -- until a crisis to do with them. when we reach that point, there will have to be significant cuts that will need to be implemented. >> speaking of states, we are going to be voting on something today or tomorrow, states have

not been providing revenue in order to fund their share of medicaid, as well as education. of course, they come to us in times like this, and want us to bailout those accounts. of course, the more we do that at the federal level, the more we add to the national debt. it is a vicious cycle. >> this is worse, in that it is creating the incentive not to do with the problem. that is something you do not want to do. >> thank you. senator sanders? >> thank you. this has been a great discussion. i want to inject an aspect of the discussion that i have not heard yet.

we keep talking about the economy in general, but when we talk about this, the reality of life is somewhat different for example, during the bush years, median family income for the average american went down $100. 7 million people lost their health insurance. 8 million people dropped of the middle class and went into poverty. so while the middle class is shrinking in party is increasing, and in this general abstract world, not everyone has an equal chance. and during the bush top earningon , the families earned quite a bit more than the rest.

does anyone in their right mind think we can have an equitable tax reform in washington, when we are bombarded with lobbyists and all of these loopholes? it is not going to happen. big corporations have enormous influence over the sorts of things. they will get more of their friends here to represent. that is the real world. sorry to bring some reality here. we all that knowledge the economy is in terrible shape. we all the knowledge the national debt. but i hope we could hear some discussion that as we move forward, one should working- class people who have already experienced pain be asked to

experience more pain? should we really raise the social security age for those people? should we be cutting back on food stamps when you have millions of families struggling to provide for their kids? let me suggest to you as someone who believes the deficit is a serious problem, we have also got to create jobs the economy needs. the american society of civil engineers tells us we have the $2.20 trillion need for investment in infrastructure in the next five years alone. i am a former mayor. infrastructure does not get done unless you invest in it. why are we not doing more of this? on the other hand, i understand you cannot just spend. but let me give you some situations that i think we can

address. about $100 billion a year -- the chairman of this committee has made this point many times -- part avoided in taxes by large corporations and the wealthy by going to tax havens in the cayman islands. a little bit crowded, hard to do their work with 18 valves and corporations in one building. >> it was five stories. >> oh, then it is no problem. something like $100 billion in lost taxes, why we not talking about this seriously? in 2005, one in four companies paid no taxes at all. this year, exxon mobil had a bad year, only $19 billion in profits.

they did not pay many taxes and they've received a tax refund of $156 million. shouldn't we be focusing on creating jobs in infrastructure, stopping the absurdity of importing $350 billion of imported oil, move to energy independence, and at the same time, go forward with deficit-reduction, in a fair way that does not unjustly affect middle-class families? dr. johnson? >> yes, of course, we can put more money into infrastructure. it is not that easy, given the way the spending is set up. it is an acceptable proposition. but in terms of tax reform, what is intriguing about the bell you add it tax, it is coming from people from the right and left.

depending on how progressive or regressive your system is, what exactly you are taxing, it is a relatively hard tax to avoid. it focuses on consumption, rather than income, which has a sensible affects. i am somewhat encouraged, if people at the technical level are thinking hard about those proposals -- obviously, the political decision is another story. i do think in all of the issues you raise, the one thing we must not avoid is medicare. if you look out 20, 30 years, that is an issue. do we based it on my time earnings? >> medicare is part of our health-care system, and we end up spending about twice as much

per capita compared to any other country, and outcomes are not as good. it is not just a question of medicare. it is during our healthcare system to providing quality care. >> i am sure you are right, the whole health care system needs to be addressed, but if you put all of the european union health spending projections together, their numbers are just as bad as powers in terms of containing future health care spending. all systems across the industrialized world have similar problems, demographics, and aging population, and increasing use of technology. to what extent you give people access to those technologies? >> this is the reality, people are getting older, health care

is getting more expensive. but in the midst of all of this, the point on the making, we have a lot of problems. some of my friends will conclude that the way you solve these problems is by punishing lower class, middle class people. i think when you have a society that is moving, in many ways, toward an oligarchy -- >> [inaudible] >> some of them are in the room. we talk about oligarchies with the top 1% owning 90% of the would referis what i w to as an older kid. -- oligarchy. we have a huge crisis, we have to do with it. i would to just, everything being equal, unless we can rally the american people, it will be

dealt with by making the poorest people poorer, see the middle- class decline further, and see the wealth gap grow even bigger. >> i think we can do better. it is clear, this has been happening for a long time. the source of the problem has to do with educational opportunities and other factors. it is clear that federal policy, policies on other levels of government can do things to do with that, but some of it involves allocating the court -- resources away from some areas, more broadly, to health care, so you can get better outcomes and lower cost, and you would have more resources left over for education and infrastructure investment, both of which will provide jobs and

human capital. that is the kind of economy we want in the future. what is required is your leadership. >> thank you. dr. naroff? >> i do not disagree with you, in the least. when people would say to me, x percent of the top income are percent of taxes, and isn't that a sign that things are unfair? you have to know how it is distributed, the reasons for the change. that is an important factor. but the reality of where we are now is we no longer have any wiggle room. 10 years ago, if the deficit went up a couple hundred billion dollars, it was not going to create major, long-term crises,

as far as the economy is concerned. we do not have that luxury right now. what that tells me is, getting help of this slow-growth environment, moving to pay low level budget deficit, it is going to require some groups to pay more. it is the politician that decide which groups pay more. in the current set of circumstances, who are the people that are not spending? part of the problem -- what i find most interesting -- i did lots of talk to business people, other groups. i asked them how many believe the recession is going on and most of them raise their hand. most of them are middle, upper

middle-class business people who feel that way. they do not see the benefits of this. consequently, they are not spending. so something that provides them with the impression, reality, that the economy is moving in their direction, to the extent it improved confidence, will improved spending. >> thank you. >> thank you for your excellent questioning. i would like to go to the panel with a separate question. that is how we got into this mess. i have my own view and i am going to try it out on each of you, and i would like your reaction. it strikes me, we had a series of bubbles formed.

we had an energy bauble, commodity bauble, we all know happen with housing. on commodities, wheat went to more than $20 a bushel. that is evidence of bubbles forming in lots of different places in the economy. how did we get so many forming simultaneously? it seems to me we had overly- loose fiscal policy, responsibility of the congress and president, massive budget deficits in the good times. on the monetary policy side you have an overly-loose monetary policy after 9/11. we had an unusually low interest rates for an extended period of time and expansion of the money supply. on top of it all, a policy of

deregulation, so nobody was watching, and forcing the -- enforcing the laws that did exist, and in some cases, they were insufficient, like in the case of a.i.g. so when you have these conditions at the same time -- pretty unusual in economic history. you usually have one or the other. provides the seed for bubbles to form. ultimately, they burst and there was enormous economic wreckage. i would like to hear your view of the economic history. >> you are pretty much on target, senator conrad, starting with the regulation piece of

tit. we had inappropriate regulation in the financial services market. we now recognize that. what we failed to understand was that the more we wanted our markets to be open and free and to allow for failures, since the failure in tinges on the financial system, leverage, that requires less leverage. into some capital, liquidity requirements, underwriting standards, the rest. as i was listening to utah, i thought to myself, the dimension of monetary policy was to lose in the regulatory front which allow the credit bubble to form excessive growth in credit. the legacy of the bubble is still with us. unless we write-off that debt

against the value of real estate and other things that have gone down, we will be stuck in a slow-growth economy. the misallocation of resources is part of that legacy. >> when you talk about the misallocation of resources, what my understand that to mean is too much money in housing. >> that is right. on the macro sense, and also, the incentives that were built into the tax code that encourage that. i would point to the 1987 tax which change the treatment of capital gains in housing. >> very generous treatment. >> now there are no capital

gains, so we may not have to worry about that. but the matter of fact is it was a stance in policy. that is why it is so appealing to think about using this moment not only to fix our long-term fiscal future to make its sustainable, but to address some of the things in the tax code, through tax reform, that would take away those incentives. senator gregg alluded to energy policy earlier. i think that is an important policy -- aspect of what we are talking about here. for years, the idea was we should have higher prices for energy, higher prices that reflected what they were in the rest of the world, so we subsidized relative to other economies with energy. as a result, we import a lot of our energy and that has added to our imbalance, dependence on

overseas sources of energy. we have the power to correct that report. policy, energy policy, the tax treatment of energy is something that we can deal with. if some people pay more, we have to deal with that, but that is an important ingredient in thinking about where we go to the productive uses of those resources. >> i also agree with the broad outlines, but i would to just put in in in a longer framework, talking about the repeated cycles that the bank of england now calls doom loops. prices, expansion in 1982. another emerging crisis in 1990. then a crisis based on u.s. housing. all the specific pieces have pushed us to a bubble in housing, and i would agree with that, but this is not a

housing-specific problem. monetary policy and fiscal policy is involved in this. this will probably -- policy should probably be pushing hard in the other way, but monetary policy gets pulled into the cycle. you have this crash and then you try to reflate the economy with low interest rates. unfortunately, regulation over a 30-year period as the cycles continue it, actually deteriorated and in some key countries, particularly in europe. the franc legislation pushes us back some distance, but not far enough. in my assessment, these others will not deliver much in the wake of substantial change. -- the franc regulation helps

some. it will not be housing, or banks in some way or other, that probably global. there will be big capital flows. the fiscal policy should be leaning the other way and preparing for the worst. it is very hard even to agree, and even if we imagine a smooth-sailing future, we cannot even figure out what to do for the 15-year horizon. >> and a sister, but not sufficient condition for the bulls out there -- it is a start. you had to have a lot to create them. it was not limited to just tax policy or legislation. look at the technology bubble. it was largely private-sector. it was massive amounts of private sector capital that got misallocated.

what concerns me is the structure and functioning of the financial system whereby almost anything can be securitized, and almost anyone can invest in anything. while capital flows to the greatest return, it tends to flow into the greatest short- term return in given period of time, rather than the greatest long-term return. the implication we have gotten from the bubble that has formed here is that capital is flowing not in the long term direction. we're looking for the shortest term gain. it is the idea that universities can invest in energy futures as part of their endowments as a way to make money. is this really a long-term investments that makes a lot of sense for a university? but they do it because there is

a rate of return they can take advantage of. while you can talk about all the things you have, i'm not sure that you get around it unless you deal with the way the financial sector itself allows capital flow. and i'm not sure how you do that without interfering with a lot of the good parts of the relatively free flow of capital out there. >> can i answer that? >> you may disagree. >> i do not disagree, because obviously there is a balance. creating more leverage creates activity, and feels great while it is happening, but there is a bounce. there is no handbook with the exact number for balance, but in financial institutions, and a corporate level of capital to mitigate risk and enable people

to earn returns -- that is where we can find a balance. in the financial system as a whole we can find a balance. does it make sense to choose housing again as an example, to lend money as we did? obviously not. if you look to the north, to the canadian financial system. you can see they have a requirement for no one gets a mortgage loan with less than 20% down. well that amount is arbitrary, it is sensible. common sense tells you where the regulations ought to be without being too precise about them. and to limit the amount of leverage. no leverage is not good because it stifles growth. too much leverage has left us with problems we have now. while i did not come from new hampshire, i did grow up in new england. >> i grew up in north dakota and

was raised by my grandparents. my grandfather said if you cannot put 20% down on the house, you have no business buying it. >> there you go. >> that was my amendment in committee and it lost. i wish you had been there, doctor. dr. johnson, on a couple of occasions you have mentioned medicare as being a key measure on our long-term issues. i think you have dealt with the issue of technology and the expense of the last six months of life, for lack of a better term. do you have any specific proposals in the medicare area that could be useful to the financial condition, that work, incorporated in the original bill, the healthcare bill? >> no, unfortunately. i have spent time talking to

leading health policy experts. i will share the names with your staff. there are obviously some indications, both within the va system and within the private sector of health organizations that have managed to get a grip on costs without severely compromising quality of care. these experiments have proved hard to replicate. we do not understand how some have been so successful in cost control, and not able to replicate that in other cities. it is a very tough problem. arenot saying that there easy solutions year. i wish that i had a magic bullet for you, but i do not. >> senator, there is a report from cms that outlined the

potential savings of medicare that might come from some changes already proposed. but it seems to me as important as medicare is, i would point to the bigger problem of medicaid. it is an example of how the federal system is really broken. the states always come for assistance to the federal government during a downturn. so that system does not have permanence, does not have stability over the longer term. if you think about medicaid as a program, that one needs desperate attention. more broadly, if you look -- simon and i are both on the advisory panel to the cbo. if you look in their options book you'll see one big option that stands out. i'm sure you know it. that is the tax treatment of health care benefits.

if we address that tax treatment in the broader context of our tax system and looking at health care, as difficult as i know that is, that will be something that both helps the deaths of problem and change as incentives for healthcare. >> you are talking to the choir on a point. i appreciate your time. >> thank you, doctors. we very much appreciate the time and effort you have extended, and the assistance you have provided this committee and this senate. we stand adjourned. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010]

>> tonight, newt gingrich speaks

at the young ameritech -- young america conference. that is followed by "washington journal." later, collection week coverage from primaries across the country. on "washington journal tomorrow morning, our guest include the founder and president of the national black farmers' association. he will discuss a class action lawsuit against the agriculture department. we will look at immigration. a weeklong discussion of the new health care law focuses on how it affects individuals. we will be joined by michael cannon. "washington journal" is live every day at 7:00. this week, the senate is expected to confirm elena kagan as the next supreme support --

supreme court justice. you can see how your senators are planning to votes and follow the entire process online at c- span.org. >> former house speaker yesterday's spoke at the annual conference of the young america's foundation. the group is college-age conservative activist. he talks about this year's election, the economy, and the obama administration. >> we accomplished our mission through conferences, seminars,

and internships. we provide speakers to students across the country. to learn more, of visits www.yaf.org. fall was on it twitter. the next speaker is one of conservatism's greatest champions. newt gingrich is a well-known author of contract for america. he is the first republican house majority in 10 years. he led the way for the passing of a comprehensive welfare reform, passing the first balanced budget in a generation. during a time when the white house lacked leadership, the speaker was the country's

indispensable leader. since retiring, he continues to serve various prestigious leadership positions. he is the co-chair of the national commission for long- term care to help promote a better health care system for all americans. he also served in various organizations to dance the principles of a strong national defense. he has also written numerous titles. he is also currently the chairman of the gingrich group.

he is a fellow of the hoover institution -- institute and is the contrary chairman of the business alliance, it is a regular fox news political analyst and contributor. [applause] >> thank you very much for allowing me to be here. i want to thank young america's foundation for giving us this opportunity to get together. i thought i would talk a little bit about what is at stake this

fall and have to go back to your campuses and tried to be effective in winning the argument. recognizing that there are basically it some people -- how many of you have some professors that you think are impervious to fact? i want to get a feel for how much has not changed. i want to -- i think all of you have been given a couple of things. i want to talk about movies that you might be able to use on your campus. i want to start with something that came out of our movies, which i think you have all gotten. it is the hallmark of my whole talk. it is 2 +2 =4. i note it is bold. it is out on the edge.

one of my principles is that when you go around the neighborhood politically, if you hold this sign up and you run into a professor that does not get this, i would not spend a lot of energy on them. they are hard core obama people and they will not understand it. we got to it because we were making a series of movies and had made "the ronald reagan rendezvous with destiny." there is a section where we show you jimmy carter. carter was a lot like obama. but things just said it -- just did that seem to work. we ended up with 13% inflation, rising unemployment. they decided that they were big

on redistribution. they wanted to redistribute -- when they had a gasoline shortage, but they decided they would protect all of us by rationing gasoline. you could only buy gasoline every other dp -- every other day. you all are too young to remember this. here are americans waiting in line having to fill up their cars every day because you could not fill it up the next. the head of citizens united you made this movie with us told us that he was 13 this year. every morning, his father would give him a screwdriver and send him out back to change the license of the two cars so that the car that needed gasoline have the right number.

it occurred to me after that that you could test the following theory. if you hear that there is a government rule so dumb that we are teaching a 13 year-old have to get around it and you are a conservative, you would say that we should drop the rule. if you heard exactly the same story and uri liberal, you would -- and you are a liberal, you would say that we need license plate police. when making the reagan fell, -- reagan fell, we went to the electrician at the london shipyards. he became the head of solidarity. we went to poland -- he spent three years in jail fighting the soviets. we ask the question. what was the decisive moment in the collapse of the soviet

empire? they both said, it was nine days in june of 1979 before ronald reagan was elected. he was not collected until november of 1980. -- not elected. what happened in june of 1979 was that pope john paul the second, the first polish pope in history, went back to poland and led a nine-day pilgrimage. during the nine-day pilgrimage, he aroused so much emotional belief, religious belief, that the peoples of poland began a 10-year struggle. five months later, the berlin wall fell.

we made a movie called "nine days that change the world." in making this movie, i was struck with how similar we are. the pope goes to the warsaw, it is an enormous crowd. they looked around and they sell all of these people and they suddenly realize that there are more of us than there are of the government. why are we afraid of them? if you look at the most recent poll, at the american people would like to repeal obama care. 63% of the company said -- of the country is on the side of arizona. if you look at the number of people who think the stimulus

was a waste of money, we begin to discover that there is more of us than there is of the left. the left has the commanding heights. the left has the tenured professors who can flaunt you if you are too openly conservative. the left as high as the news media editors who will not hire you if you are too openly conservative. the left dominates the courts, the bureaucracy, the trial lawyers, the entertainment news media, and a great deal of the elite establishment of this country. i got a neal today if -- i got a note today. he thinks that the democrats have gone far too to the left. the gap between the elites and everybody else is wider today than at any time in modern american history.

if you go down a series of questions, the elites are all over here. the american people are all over here. we got into this week ago when we were filming a new movie. it is called "america at risk." we were in new york and we were filming had ground zero. -- coming at ground zero. i thought it is wrong to build a mosque near the ground zero. [applause] you are now opposing what i just said. how many of you would agree that it is just psychologically wrong to put a mosque up near ground zero? raise your hands. almost unanimous. you'll find the elites are on the other side. overwhelmingly. if you read this morning's

paper, one of their more left- wing columnist wrote an entire column. i gave a speech last thursday at the american enterprise institute in which i basically outlined the we are not engaged in a war on terrorism. we are in a war with the radical islamist who want to impose on the united states. we are building an entire package of materials. you can go back to campus this fall and raise the following questions. see how the canvas handles this conversation. a man was brought into court in new jersey and his wife was trying to get a restraining

order. on the grounds that he had been torturing her for several hours of it -- at a time and then raping her. the judge found that the man was not guilty on the grounds that he believed it was his right to do anything to is wife that he wanted to and he was the judge to impose his views. i am not making this ought. he gets overruled by the appeals court. you can read the appeals court description of what he was doing to his wife that the local judge found acceptable. we had another case in minnesota, a class in which there was a student who was blind who was coming to class with a seeing eye dog. several students said that was

wrong and he should not be allowed in the room. the college caved. if you want to live in somalia, it is available. [applause] they gave this did in credit without coming to class in order not to have a confrontation. back cheats the stated. the purpose of college is not to acquire credit with no knowledge. i know for some of your radical friends, this is out on the edge. think about it. what that college did was wrong on every level. you'll find as you go through these cases that it is fascinating. what i want you to understand is a very simple conviction.

it would impose on everyone and a subordinate position, homosexuals are executed, adulteresses are being stoned to death. in iran, there has been sufficient outrage. none of this is made up. nobody in our league media wants to talk about it. i think the number one battleground on the war with radical islamist is not afghanistan. it is united states. [applause]

i think everyone in this country should look at the cover of "time" magazine. are you willing to allow it to be tolerated here? if you are not, you should demand that congress pass a law. no jurisdiction will tolerate having it imposed in the united states of america. [applause] sharia -- there are times when a 2n can be killed for stsaying +2 =4.

the big choice this fall is here is straightforward. it is between job creators and job killers. the obama administration, speaker nancy pelosi, majority leader -- majority leader read represent a philosophy that kills jobs. they believed in big government, but trial lawyers, unions, rules and regulations, centering our life in washington d.c., they believe that one bureaucrat in charge of the center for the medicaid and medicare services with a spending power greater than the pentagon can make health decisions for 305 million people in a confident country. think of the lack of intellectual arrogance.

-- fact of intellectual arrogance. that is so profoundly wrong. that is why we need to appeal obama-care and start over with common sense reforms at a practical level. [applause] notice the underlying cost of the obama-care. we have regular meetings and go around the country and hold a town hall meetings. we have meetings with small business owners. 24 in st. louis, 26 in stamford, connecticut. i ask all of these small business owners, how many people are you going to hire? the answer is zero. obama wants to raise their taxes. raising taxes on the rich turns out to mean small-business owners. he wants them to pick up health

costs they do not fully understand. he wants to pass an energy tax increase. he wants taxes to go up across the board. he wants to redistribute their wealth. i get to work 60 or 70 hours, go out and work every single day, and some politician is going to show up and say to me, you are making too much money. i am going to take half of your money and give it away to your cousin who has not done anything. maybe i will not hire anybody. maybe we will have a nice play by% unemployment for the next couple of years. the job killing nature of the obama team is the first big challenge we are faced with as a country. that is why i wrote my book.

if you set up buried in this 2700 page health care bill is a massive new federal government long-term care insurance program which every american is automatically enrolled and unless you want in role. -- unenroll. it sounds to me like socialism. every business transaction of over $600 will be reported to the government. that is a level of information and control more worthy of a totalitarian state that of a free country. it is buried in the bill. if you go through item after item after item, you can access for free a chart that shows you

the 159 new offices that they create. the chart is 3 feet by 6 feet. you can also access the chart that shows you all the deadlines out to 2020. it is 50 square feet. do you really believe that creating what hundred 59 new offices in washington to implement 50 square feet of dead plants is the way to run the health-care system? the choice we will face is that we get to decide, do we want to go in the direction of bigger government, higher taxes, more bureaucracy, more centralized decisions in washington, more red tape, or do we want to go to an america that relies on

individual freedom, created entrepreneur wars, local communities, solving their own problems, and using our resources, our energy, our ideas to get this done? it is that fundamental. i think there have been very few elections in american history that have as big a choice as you will see this fall. i would urge everyone of you to get actively involved. who wins this fall what makes a bigger difference than the in the election that i can remember. at american solutions, we have been developing several steps toward more jobs. i think all of you have a handout. we believe that lower taxes, so that people who are productive have more money so they can grow their business, so they can hire more people is a key part of how

you get back to economic growth. friday, the obama administration issued a report that said we will be at 95% unemployment this year, 9% unemployment next year and that we will not get back to full employment until 2016. that is their optimistic version. are we likely to be better off or worse off than the administration's report? that is why you need to change direction. i hope he will encourage your member of congress to co- sponsored, jordan of ohio's bill which is the economic freedom act which has five major tax cuts. because the social security tax by 50% for both the individual and to be employer. every small business in america will have more cash flow and less need to borrow money. second, it matches the chinese

capital gains. if we had zero capital gains tax in the united states, we would be building factories, creating jobs. we would be dramatically better off. third, it provides for 100% right of every year of every tool brought by a small business. if you want american workers to compete with china and india, you want them to have the best, most productive, newest equipment. you want to be able to constantly by the next new breakthrough so that you are at a cut in the -- cutting edge so that a farm workers are more creative and more productive. that is the only way to sustain a higher standard of living competing in the world market. fourth, because the corporate

tax rate to the same as ireland, which is 12th with 5%. american corporations pay the highest tax rate in the world. it means that american companies are like a runner in a race in which they get to carry a 60- pound back on their back on their trying to win the race. we would be be a most formidable economic competitor in the world. it provides for permanently abolishing the death tax on a very straightforward grounds. it is culturally wrong to say to somebody, if you work, save, and do everything right, some politician can come in when you die and take away your money.

this is a fundamental question of right and wrong. no one should be required to go to the undertaker and the irs the same week. [applause] after cutting taxes, the second phase is to have an energy policy that is very simple. we want to create american energy to keep the money at home, to create american jobs. the left is engaged in a war against american energy. they favor a new -- energy and your old and the world or they favor no energy. they are prepared to ride around in corporate jets and limousines to tell you when you should have

less. take, for example, the recent obama moratorium on deep sea drilling. i have a hunch that when the administration announced the six month moratorium, they literally did not know that those huge drilling gregg's could move -- rigs could move. i think they had so little knowledge of the real world, the governor of louisiana tried to say, a moratorium becomes a six- year loss of jobs. going back to jobs killing. it turns else that these huge, eggs are very expensive. -- rigs are very expensive. the very first thing that happened was that one of the

rigs left louisiana to go to egypt. president obama and guaranteed that the jobs would be in egypt and the money would be in egypt and the taxes would go to egypt. this one is unbelievable and you should make a note of this for your generation. this is a very sobering moment for america and it should tell everybody you know how dangerous the current situation is. company issued a report that said, "because of political instability in the united states, we are moving their drilling operation to the condo -- our drilling operation to the condgo." [laughter] i did not make this up.

they are saying, we cannot trust to the white house, the department of interior. i do not know any more about what they teach and always worries me. how many of you are familiar with the story of the goose that laid the golden eggs? how many of you have never heard it? it is -- if you have a goose that lays golden eggs and you get greedy and one morning you cook the goose, there are no more eggs. it is not -- you did not have to kill the goose. these can fly. if you scare the this, it leaves. i've never seen a more perfect example of its. they are huge producers of revenue. his -- he has estimated publicly that the moratorium will kill 80,000 jobs in louisiana.

these are high-value jobs. these are sophisticated people who work on very sophisticated equipment. most of them have pretty good technical education. they will not be paying taxes in brazil or the middle east. that is typical of the job killing performance of the obama administration. they do not know. they are socialist and they do not care. they would rather have a smaller economy with fewer people working and they get to redistribute the wealth that have a larger economy with more people working. we are doing for movies. -- four movies. are we at risk? we need this national

discussion. remember when we have the christmas day obama in detroit to? remember the sequence to this. it is important to understand how bad the administration is doing with nasa security. the young man who had the bomb had a father who went into the american embassy and briefed to cia agents that his son would probably be going to a terrorist training camp. you would think that a years after 9/11 in the fall of 2009, it would have been fairly obvious that if somebody comes into the embassy -- by the way, the father is a banker. he is relatively responsible. the answer was, we did not have

a smoking gun. the father says, my son is training to be a terrorist. you wonder, what was the secret phased he missed out on saying? -- a phrase he missed on saying? when did we first noticed that he had a bomb? they designed and under where bomb. in 2002, when we had a shoe bomb and we began taking her shoes off, how many of you took your shoes off to get here? almost all of you. our estimates -- we have now taken off a billion pairs of shoes in return for one issue

bomber. think about the exchange rate we are building here. if we take their shoes off, what will happen if they invent and underwear bomb? luckily, tsa has not follow up on the logical implications. when his parents began to smoke, the passengers broke into two groups. the liberals on the plane began to shout, smoking on an airplane is illegal. we will turn you end. the conservatives began to say, you are a terrorist and we will throw you out of the airplane. it is a fundamental difference in the approach. [applause] here is what i want you to think about.

after all the money, the creation of the national intelligence, the 9/11 commission report, the first time we knew there was a bomb on an airplane, was when it failed to go off. that is a total failure of our homeland security and intelligence. come forward a few months, you have a gentlemen who is a pakistan any citizen who becomes an american citizen. he probably takes his family back to pakistan. he comes back to the united states and build a car bomb and takes the tube times square. when do we learn there is a bomb in times square? when it fails to go off and a vendor walks up and says, the car is smoking. we did not know about the detroit bomber and we didn't know about the times square

bomber. we should be having a national debate about the total failure of our intelligence system. we should be asking, how can you spend all this effort and money how can we have all this phony public relations oriented security, and when it comes down to it, we cannot figure it out? what does that tell us about how dangerous it is if they ever get a nuclear weapon or a biological weapon? that is why, for your generation, at this question of america being at risk is a big deal. if our enemies give a nuclear or biological weapons and they use it and we lose several hundred people, the freedoms you have known are going to start disappearing overnight. people will not live in terror. people prefer dictatorship if that is what it takes. we have -- our freedom is based on our security. our security is based on

competence. we currently have an administration so incompetent that it cannot even name who are enemies are. it does not believe and national security. you take every single person, there were over 52 were arrested, -- over 54 arrested. none of them -- you know who they were. they were all radical islamist. this administration will not use the word jihad. it thinks it is going to win this war. this is far bigger and far more important than afghanistan. the first threat is the united states, not the middle east. one other thing i was going to mention, i think you need to go

back and start right now and talk about it. we should build a national movement that demand that candidates pledge that there will be note lame-duck session after the election. this congress should pass a resolution and when they go home in october, they should go home for good. under no circumstance should nancy pelosi be allowed to come back here. here is the reason why. they proved with the stimulus bill with an elected official having read it. they prove to -- they proved it would be capped in trade energy bill. they proved on the health bill, the country was so opposed to the bill, they gave up having town hall meetings because people were so hostile.

every single national polls said that the country was opposed to obama-care. they lost senator edward kennedy's seat. below is the seat in massachusetts on the issue of health care. their reaction is, we will ranid down your throat. we will run over you and there is nothing you can do about it. of course, there is something you can do about it. it is called an election. they may lose the house and senate. their new plan is, let's get back together after the election and has every bad piece of legislation we can before we go at a session this fall. we should demand of every candidate in both partner -- both parties that they will pledge that they will not come back for a lame duck session. so that the new congress can

start afresh in january. those people should be the ones making the law because they represent the will of the american people. the folks you will have been defeated do not represent the will of the american people. a lame-duck session would be totally illegitimate. you can help stop it. [applause] i mention the movie that we did with ronald reagan and the movie we did in poland. i want to talk about american exceptionally some. -- exceptionalism. it started when the ninth circuit court ruled that "one nation under god" was

unconstitutional. i went ticket actively engaged in talking about history. -- i wanted to get actively engaged. president obama had a press conference in a europe. a reporter said to him, how do you feel about america exceptionalism? he said, i am proud to be an american it showed that he had no clue. it starts with our very first founding document. the declaration of independence says, we are endowed by our creator with certain inalienable rights, and which are life, liberty, and the pursuit of

happiness. [applause] there are three things to remember. the first, which we should be teaching at every level of school, is that your right come from your creator. we are the only society in history that says, power comes from god to each one of you personally. you are personally sovereign. this -- there is a quote from john f. kennedy. teddy repeat this. he is the last democrat to explicitly explain this. your rights are inalienable.

what does that mean? that means that no judge, no bureaucrat, no politician can get between you and god. these are your rights. they are not big government rights. -- they are not government rights. your rights proceed the constitution. the declaration -- a proceed the declaration of independence. they are not making up rights. third, one of the key rights is the right to pursue happiness. the right to pursue happiness. it does not say it the right to be happy. it does not say that you are entitled to sue if you are unhappy. it is not a bad week -- suggest that we need a federal department of happiness. it does not suggest that

politicians should take from the too happy to take -- to give to be unhappy. [applause] the next time one of your friends tells you that our rights to not come from god, tell them to look at "we discovering -- rediscovering got in america." we had a remarkable future. if your generation will rise to the challenge, as every generation has done now since 1775, we will continue to extend and expand freedom across the planet. i think i have a few minutes to take questions.

[applause] >> [inaudible] do you have any future plans to run for president? >> i think it is a wonderful thing. we will probably make a decision in february or march. >> i work at a movie studio and i am very frustrated with the liberal bias that clearly exists in this industry. the last election proved that the media can shape the outcome of the presidential nominee. what can we do to promote conservatism in at an industry?

>> learn the industry very well. start making your own small movies on youtube. there are a whole range of new films coming out that illustrate that people -- you strike me as somebody who would be very good observer. take the carefully about the dahmer parts of liberalism. write a novel that would become a best seller. >> thank you. [applause] >> thank you so much for talking about the issue of sharia law. i think it's ignored a lot in common discourse. what do you think about some of the european responses?

do you think those have a place in the united states? >> the same all leads that appeased hitler would like to appease its longest period it is a long tradition of appeasement to avoid conflict. people were exhausted by a world war i. in the end if we have to, we will. but it would be nice if they did their share. this is gone to be a confrontation. -- this is going to be a confrontation with radical islamists who would impose a religious legal system which is absolutely intolerable if you believe in western civilization. we are not gone to let it happen. when we do not let it happen, they will be unhappy. [applause]

>> good afternoon, speaker. i am from california. i will be attending the university of southern california in the fall. i am a huge fan and i really love your politics. when you run your -- for president, will you introduce a second formal contract with america? [laughter] >> if we end up running for president, i am confident we would want to find a way to draw a remarkably sharp and clear distinction between -- would be job killing, debts creating, bureaucratically centralizing destructive policies of the administration. how we will do that, we will

discuss. you have to win the nomination. you finally get around to a contract. i cannot jump that far today. >> you already have my vote, though. [applause] >> i am from arkansas state university. i am not going to ask you if you are running for president, but i am praying that you do. everytime we have a rally, we always get in the paper and they always bring not racism. what can we do to combat that? >> when they raised the part question of tea party --