you state. .

>> they couldn't reinsure the risk. i'm not sure the hospitals will do better. they're a little deeper pockets so they'll go until bankruptcy but as far as being able 0 insure the risks they're taking, i don't know about that. i don't know if the plans can wrap around the hospitals to are insure the risks they're taking either with medicare exchanges -- i think they'll find themselves at war battling for the businesses in the exchanges. i'm not quite certain this is going to play out any better. you know, the one thing i think we should be doing right now, from the standpoint of trying to envision the future is look at what is happening in the markets with the a.c.o.'s are dom fant.

the fact remains i'm not close enough to say you -- the practices have not better coordinated care or vested in systems. >> we have time for one final question. there's a woman in the back row, before we make -- play way.

with the budget problem, everything is onhe table. ey went to a spokesperson for the defense department and said we need to control our budget. our number one problem is health care for the vets. so it permeates the budget dispute. over the next two years, what is different now than around before with we debated this was the impending bankruptcy of the united states. i am -- just curious as go forward if you could think maybe if the republicans got the white house in 2012, at least stayed the same or better in the congress, is -- would it be too hate to make significant changes sth is it all going to be so tightly put into the firm that -- that will effectively be impossible? >> well, i don't think it is too hate in 2012.

it is -- it is -- the hour is hate. -- you know, the truth is that we probably are a last chance to do entitlement rosme and -- reform and health care reform that won't be ruinuous. but if we wait longer, the only thing the mill class will clob on to is a sudden and damaging tax increase that to head off a fiscal calamity. when i look at the landscape and the missed opportunities and you know, where we are. we drade entitlement reform for 15 years and now the baby boomers are signing up for benefits.

we're going to add you know about double -- basically double the number of people age 65 and older for the next two decades. we're on the cuff of the last chance to do something different before that wave hits. the i think the presidential contest in 2012 is shaping uping to a -- to be a debate about that exact question. really the future of the american economy and how do we -- how do we structure our social contract with the citizens? it is for the the quite too late. we're about at our last chance. thank you. i want to thank all of the panelists who who have so ablely done this. what are the challenges and opposites. i know you helped me better understand what we could look forward to. many things. we're going to make way for the next panel on the economy and spending. thank you. [applause]

>> one of the new house members is chip crave vick who will represent northeast minnesota. in running for office for the first time, the airline pilot defeated james overstar. the new congressman representing mississippi's first district will be alan numbly. he's been in the senate since 1965. he's vice president of a life insurance company. [captions copyright national cable satellite corp. 2010]

[captions performed by the national captioning institute] >>

thank you for coming. it is an honor to have steve hadley. we had sandy berger but she's a little under the weather and on the theory that all national security advisers are fundible and look alike, we have jim jones. i don't think anybody accused you for sandy berger. we always have a backup national security advisor. so general scofe kroft who is cochairman of the aspen strategy group and george w. bush's national security advisor. not since henry kiss singer dined alone has that been such a constellation of security advisors. >> i want to talk to you gem

jones, do you think in the middle east, that prime minister netanyahu can get to peace or should we take more aggressive action? >> i think the administration has worked diligently with both of the gentlemen for quite a while. it is not quite two years. we certainly spent a lot of time with both trying to bring them to the -- to the table and try to get them to -- to understand just how important it is -- strategically, globally, that we find a -- a solution to the middle east problem,. i don't know when the time comes when -- when you go to another solution, but it is clear that we're having a difficult time figuring out exactly what it is

that gets them to the -- to the substantive part of the discussion because we're -- we're, we're the lines have been drawn at the -- at a pretty tactical level. the strategic -- the strategic discussion and the global ramifications of failure to find a solution to this long standing problem which -- around which, i might add, seems to me there's a convergence of views between the europeans and the arab world and the united states that -- that this is a moment that even though we have to the reached success yet respect but this is a moment that has enormous potential, if only we could figure out the right vectors for the two parties. >> the convernalance of views in the arab and european world is it is time for a peace man. i no e you can't speak to the

administration on this but would you be in favor of that? >> that's boon advocated by leaders of the arab world and the europeans. it is certainly something that -- that the administration at some point might have to consider. whatever it is, we have to find the solution to this. the failure is not -- failure is not an option here. one of the reasons you have this synergy that i think represents hope for the future is that the shadow of iran really lurks ominously on the more son as -- as a potentially bigger problem for the arab world. one they seem to want to -- they want to address but before they could do that, they want to get this -- they want to get this middle east situation figured out. i think there's enormous opportunity internationally to -- to -- figure out the -- the way to -- to -- to bring the two

parties together. the question is what is the best way to do it and if -- at what time do you -- do you shift to another strategy? >> what would be the outhines of a -- do we know what the outlines of plan is? >> it has been said that most everybody know what is it is going to look look -- look like. 93, 94, 95%. the question is how do you get there? do you get this at once or sequentially or gradually. and on that issue, of gradualism, i find -- i found that the palestinians are actually you know, reasonably receptive to a certain time frame by which things will happen rather than to say nothing is agreed to you believe everything is agreed to. that part of t i don't think is a major stumbling block but i whang it looks like is at the end is fairly well known right now. >> do you think prime minister netian hue is willing to give up

land? >> i don't know, i think -- obviously he's got a -- a difficult coalition to deal with. it is -- it is -- it is -- as a result of the nature of t it is difficult to -- to get a -- sometimes to get a clear picture of exactly what it is that -- that it takes to move forward, because -- you know, many times we thought we were going to make progress only to find that we couldn't get there. so it is a little bit -- to use annal ji like peanuts, like lucy and the football. that's -- somebody got to hold the football so we could kick it. >> isn't it frustrating to be the guy that comes up to the football and gets pulled away? >> it has its moments. drfment r-dr. hadley. do you have -- dr. hadley do you have cause to optimism? >> i think there's cause for optimism. everybody knows what the

solution is. it is two democratic states living side by side in piece pace and security. palestine is a homeland for the palestinian people and israel is a homeland for the jewish citizens. and because of negotiations under clinton and bush a lot of the contours of what the deal is going to look like are out there. second, there's incentives to do this. president abs made history fine years ago when he campaigned you need to get to a state with nonviolence. that's five years ago. at some point he needs to show this bold decision he made is going to work. natian hue has the ability to end the delegitimate says campaign of israel and establish it as a homeland for the jewish

people in the middle east forever. the arab leaders clearly want peace. and they're building the institutions of the palestinian state now under occupation which is very important, because it shows the mips that a state is real. and it shows the israelis that -- that state will not be a safe haven for terrorists. i think there are a lot of incentives. how do you get there? we need to get the date off the issue of settlements and construction freezes on to the issue of the terms of peace. the settlements issue politically is a winner for netian hue and a loser for us. if we we get on peace, that's a debate that public opinion polls show 60% is palestinians and israelis want the peace. let's get the debate. >> how do we do that, table the plan? >> i think that's something we

ought to do. but timeliness is everything. we're running out of arrows. the plan is the biggest and best arrow. it has to be done at a time when it will categorize progress. i think it is an element of an end game. the question is when. i think now with this settlement issue still in front of us is premature. i think -- what i would hope we would get and secretary clin do not has been signaling this, we need to get a negotiation going and start on the issue of borders and security. we need to try to get a preliminary agreement on borders and securities because that moots the issue of settlement. >> that could be done in 90 days? >> i think it could be done in fairly short order. it moots the issue of settles. then the question becomes, it is an interesting debate, do you stand up that state? a state with provisional borders while you continue to work the issues of -- >> that gets to the issue of

whether the united states should agree to veto any u.n. resolution that recognizes that palestinian state has -- as -- has a agreement with israel that will exercise its veto. should the u.s. give that to israel? that guarantee? >> it depends. i think the administration has to be careful that it doesn't end -- trying to convince the parties to get beyond this elingtsment issue, make some commitments that in fact get in the way of what may be a path to resolution. i think you got to be careful. >> how do you see that, jim? >> well, i think steve lays it out pretty well. i believe that -- personally believe that statehood whatever -- however that is defined is a benefit. immediate benefit for the palestinians to give them international legitimacy and gives them all kinds of things. >> u.n. recognition of a palestinian state.

>> yeah. >> got you. >> if they're willing to as i think they are -- if they're will to agree to -- to reasonable gradualism in terms of how you get to the final status and -- and that is somehow guaranteed that it is not something that is going to take 30 years or 20 years or even maybe even 10 years, whatever that number is. i have a feeling it is -- no more than 10 but somewhere good zero and 10. i just think their cause would be dramatically enhanced by being a state to start with. >> can you imagine them being recognized as a state without there being a israeli palestinian agreement? >> you know, i think that would -- that would mean a -- a a major shift in how we been approaching this in terms of trying to stimulate the -- the -- both parties to see that this is in their interests. ultimately. but you know, frankly, i think

both parties generally want to achieve this solution but they're inhibit bid their -- their local politician if you will, for them taking that dramatic -- that dramatic step. >> you were close to zippy -- >> i'm sorry, dr. hadley. >> i don't think you could do it over the israeli oke objection but if you could get it on borders and security and get the israelis and palestinians agree on what that is, then the proposition you put to both of them is, wouldn't it advance the process and be both in palestinian and israeli interests if we went ahead and stood up that state, with provisional borders -- security and borders having been resolved and then go to the i haves. that would be the -- to the issues. the question is if you could persuade the israelis that's in their interest. >> this is always something that iran doesn't want to see happen.

that immediately changes the equation with regard to hamas and other organizations. dramatically i think enhances abbas as a heard. so to me, strategically in a geopolitical sense, this would be a good thing. >> i'm going take a quick break for what we call sponsors. i want to thank sammy and hudia farouky for sponsoring this. leading to a question. i see gene case here, and buerle bernhardt and bill maher. and general jones before you went into the administration, you worked with a lot of us. the u.s. palestinian partnership and the investment initiative. to try to build up the chi in the palestinian territories and in particular the with westbank. we worked with fayed, the middle east investment initiative that

they're involved with, has how much money in loan guarantees? >> 70 million in loan guarantees out. our u.s. palestinian partnership, i think gene case you just stood up a vent churpund now to go with it. do you want to say what that is? >> we're excited and coming to our first $50 million venture fund all ta -- all targeted in the westbank. we're excite about the traction that is being made. >> look for the peace process or is it in some ways as some people fear a way of helping netanyahu not get to th netanyahu not get to the peace process? >> maybe it hasn't changed from when i was working with steve and secretary rice and i -- i should publicly also thank them for that opportunity. because i -- it was clearly one of the one of the most interesting things i've done in

a short period of time and beenable to be a part of. tony blair by the way was also -- been very helpful in all of this. and the idea was basically to -- to -- to help the palestinian authority assert its -- its government -- governance over westbank. in so doing to show that it would -- it would succeed, not just in janine but if the janine model worked to expand it. to expand it. it was a bottom up economic approach that would -- would stimulate the whole -- the whole -- the whole of the everyday life of palestinians on the westbank. it wouldless a have a dramatic effect on hopefully on gas a to show that there's a better way. there is a way in which you could live in peace and security and i -- i was pleased to see the israeli reaction to this as well. the idea, under the general

changed its strategy from -- from counter terrorism to counter insurgency. that wasn't an easy thing for them to do. but under the -- the rube brick of they do more and we'll do less, they built up i think over time a pretty healthy relationship with the security forces of the palestinians. they have been generally pleased -- with what they have seen. and i still think it is -- it is -- it still is a very good model. i think it -- it is not a way for the israelis to play cate them, to to keep the status quo. i think it is -- it is what has to happen if we're going to be successful in the future. the top down issue is important because that is at the international level, this bottom up approach also has its own energy and force that -- that brings it toward the -- i think -- i think the sluge that even wants to see. >> completely agree with that. i think it is one of the most

hopeful things going on now. what is being done this. because there's a lot of cynicism about whether there's ever going to be a palestinian state and if so, what kind of state it is going to be. by building the state, it assures them they could see the state emerge and it is real. it reassures the israelis it is going to be the right kind of state. a state that is already cooperating with the israeli security forces to teal with terror. i think there are a lot of people that will say, let's kind of shelf the negotiations for a while and let's focus on this bottom up. i think it is a close question, but i think the better argument is that fay yad and institution building can only go so far without the political cover of a credible negotiations. that's why i think the administration would -- colluded both top down and bottom up. >> how much time does dr. fay

yad had? >> he said he's got a two year program and it is to be completed in the fall of 2011. it'll be interesting what happens at that point what decisions the palestinians make and what the israelis make and what decision the united states make. i think it depends a lot on where we are, whether there's an act of peace negotiation -- active peace negotiation or progress. >> the prime minister of the palestinian authority thounsed his plan in an interview with tom friedman and he gave this two-year horizon. his argument was, you know with the help of the u.s. palestinian partnership and some of the things nafta was doing, we will billion build a state in two years. we're going to build it from the ground up and the economic and civil society and security institutions. once we built it, they can't deny it to us. the world community can't say

you can't have your state if we have shown we built the state. does that mean at the end of 2011 no matter what the status is of the peace talks, that the world should think about wreck fliesing this palestinian state? >> i wouldn't say no matter what. >> okay. >> then modify my question. >> i think the issue, the issue at that point will be on the table. all right. >> i guess i think that the -- that the parties by themselves have demonstrated. they're unlikely ever to be able to come to agreement by themselves. the circumstances are so different, one is strong, one is

weak. they both have opposition groups and it seems to me that -- for them to -- to have a chance to get together they have to do something like, well, to their own public. we didn't want to do this, the united states made us. something like that. they got to have a scapegoat for doing what they both have to do but are unwilling to do. i think there has to be anem pet tuss. >> it has to come from the president or the secretary of state got more influence in the region? >> it has to come the president. this is a big thing. the united states never done anything like this this. here's something, the tava accords in 2000, the timing wasn't good. but they laid out what the -- >> -- >> it was right after the election. >> it was the end -- it was -- >> it wa the end of the

administration. >> just -- >> for a variety of things. but 67 borders ith directs and if automatic right of return for the palestinians, a cap for both countries and nonmilitary palestinian state. if you deal with borders, you can't deal with with borders without taking up the other issues. >> why? >> because if you draw the borders, what happens to -- to the people, the opposite side on the wrong side of the border? you got to do the population thing and part of the border is -- is jerusalem. so i don't think it is -- it helps. it moves it ahead. i agree that settlements is -- is -- is going after one part of it, which can't be solved.

but to me, a comprehensive offer because this are the issues now that are interrelate pd. >> comprehensive offer by the united states pushed by the president. do you think the president ought to take an offer, proposal and fly to jerusalem and go to bethlehem and ram malhas? >> something dramatic. >> it seems to me that a u.s. proposal. i would say u.s., i think the europeans would love it. they're -- they would obviously love it. to me the worst outcome for the israelis is the palestinians give up the on two-state solution. that presents israelis with three fundamentally disastrous options. i think we need to get them to realize they need this as much i think we need to get them to realize they need this as much as the palestinians do. >> and i saw you nodding.

>> well -- i -- i -- i agree with general scowkroft that we're at a point where something has to happen. i just don't think that -- it is likely that we'll have this -- this convergence between -- between external entities and the arab world and the yourns and us that are just -- that have this -- this historic sense that we -- this is the moment,s this is the time. we got to figure out how -- whatever that solution is to -- to force this to its logical conclusion. unfortunately, lonl i think doesn't play a big role in this because -- if you -- if you talked -- talked to both side, they both logically say, we want to do this. they won't let us. we have to find a way -- >> they won't let us meaning the population? >> no. no.

>> the other side. i mean it is always about the other guy. >> we just -- we simply have to find the right formula to -- to take that step. once you take it then i think -- you might be into a whole new world that might be some what irreversible and very good. >> i think the administration set that up. i agree with what brent said. i think wait around it, though, is that -- i'm worried that if you wait until he -- you have negotiated to close all of the final status issues, it is -- you'll never get there. it is just too hard. what i think the administration set up. you have a framework that sets out the bake principles on all of these issues. you don't stop there. in addition then you say with that framework agreement that gives reassurance about how those other issues are going to come out, let's start and focus on border and securities. it is the area that has been most worked on where i think there's the most convergence.

let's see if we could nail that down. then you may have an option as general jones said to see if you could convince the parties to stand up to the palestinian state and that ill with be transformative and i think it will buy you some time to then turn to the issues of the -- of the final terms of the -- the right of return and refugee issues and the jerusalem issues and then you can put it all together in a final status agreement. i think you have to eat this at a couple of bites. i think waiting for the grand agreement, nothing agreed until it is all agreed. that's just too hard. the administration is setting up the potential for a different approach. >> this is what we've been trying to do for a long time. >> do it in 90 days. >> do it -- >> the framework --

>> i don't know if he'll let me do this, but -- next question is whether there's a syrian track. do you have a question on this or do you have thoughts? i know senator mitchell and brent hauf and others have got it going. did you want to ask if there's time for a sir yap track? >> i'm not going to say anything. if you want me to ask a question, i like to hear com pepts. well the obama administration has been telling us as of day one that they believe and this is -- this is -- this is major difference than previous administrations that peace in our region cannot be achieved than commencive and on all tracks. they don't believe it can happen on one track.

they don't believe in the game played previously of pitting one track against the other. i would love to hear some comments on this if this is possible. >> thank you. talk about whether you ming it would be good or in parallel to syria? >> president bush had a conversation with prime minister oemerate and urged him in the context of annapolis to go after peace including sir -- syria and then lebanon, that was the goal. as everybody knows there were negotiations, quiet negotiations between israel and syria brokered by the thank you,. we were practically supportive of that. and actually authorized to -- the thank you, and the israelis to tell the syrians that actually improved relationships

with the united states went through a syrian israeli agreement. so we tried to be as supportive as we could of that track. it made some progress and then at the end in the 2008 it got overwhelmed by a whole series of things that even knows about. i think general jones will speak that -- my sense is that the administration has really tried in good faith to troy to get a serial track going. gem jones can talk about that. >> i think that's correct. i think obviously it would be to everyone's advantage if the -- if the peace that we have extended to a broader area and included syria and lebanon. i think the administration -- i know the administration has been working quietly to see what the potential is to do that. several fronts.

we continue -- they continue, since i'm not part of the administration to work on the comprehensive nature of it. in an open and -- hopefully a reproductive way. it is -- it is -- there is reason for some optimism there i think. on the part of all players who have been talked about who we -- who we talked to on the issue. it is something that would be in everyone's interest. >> how would this help on iran? >> i beg your pardon? >> how would this help on iran? >> i think obviously if you are able to achieve consensus and results, results -- in obtaining a peace thatults -- in obtaining a peace that is foundational for the reembling and you build upon it, it -- it serves to isolate

iran more than it is right now. i think the combination of that -- those peaceful negotiations, plus the -- the sanctions that are -- we know are having a -- will have major effect. it'll send a strong message to iran that perhaps it is time to return to the table and start negotiating this seriously. >> how do you see syria and lebanon are actually more stable and are at peace with israel and not -- does that isolate iran? >> i think it does. it is a good thing in itself. it sends a message to iran about -- about what the direction of -- of the middle east peace -- the middle east sgoling to be. but you know this are more -- fundamental issues with iran. one is the nuke here program, one is the nature of the regime. the unhappiness many people within iran are showing with

that. >> do you think sanctions are helping a lot? >> you know, it is it is interesting and this may be comments from people here on sanctions. i have been surprised and pleased at how well the administration d-did -- did in materials of getting people around the table. they did better than i expected they would. it was through effort of a lot of folks. ones of the things that occurred to me the other day and i need to talk feem to get a better feel for it, you know, the -- the theory of sanctions is you're putting a lot of pressure particularly on business classes and middle classes to in turn put pressure on the regime. you know, it is interesting, ahmadinejad and the regime is also putting fresh yournt middle class because that of course is the center of the opposition to the regime and i wonder whether we don't have actually a perverse alliance between our sanctions activities and iran yap regime policy.

even is squeezing the middle class. so i worry about that. but i think -- sanctions are right. i worry that they are not going to be enough. i think you need to marry sanctions with -- with major support in a way that does not -- discredit them for the forces of change in iran because i think it is actually the domestic pressure for change that is more likely to convince the regime that they don't want both a domestic confronttation and an international confrontation at the same time. maybe more willing to deal. finally, i think we have to start thinking now seriously of what happens if this does not work. we have a lot of false debates on iran. this debate we had about can iran be detered. i think it is a false debate. can iran be deterred from using nuclear weapons against the united states, of course. can we deter the adverse effects that come once it is clear that iran has a clear path to a nuclear weapon?

yoons. what are those things? anem powered iran, we're willing to support terror, more willing to interfere with the neighbors. it is -- its neighbors both going for iran and their own motives for reprocessing so egypt jordan and turkey and saudi have the same options that iran does. i think we need to -- to think seriously about the problems of ampe with a clear path to nuke here weapons. secondly, i think we had another false argument about this issue of do you go to war against iran. it is easy to demonstrate that would be -- a very difficult thing. that's not the right question. the question is, is there some way we could visibly set aside and set back, for exampletheir activity on the to thinks, which is the way, the route for a nuclear weapon capability for iran.

can we visibly set that back in >> by a military strike. >> diplomatly, by some other beens -- means to set it pack. president obama has said not just that a nuclear iran is unacceptable. he says we will prevent iran from getting a nuke here weapon. >> how do you stop it other than striking it? >> one is departmently and focusing on it and hoping sanctions work? secondly, i think what the administration needs to do is think of our onyxes. >> like the -- >> you foe, what is -- what is -- ducks net and what is that all about. is that an option? i don't know. the other thing is -- is you know, and it is difficult because you know look at what the israelis did in taking out the syrian nuclear reactors that was done covertly and not acknowledged. syria decided to let it go. there was no retaliation. my only point is i think we had a big public debate of to go to

war on iran or not. i think we need a more sophisticated public debate about what we do if we get to the point that we are faced with the stark choice of either going to war which nobody wants to do or -- accepting iran with a clear path to nuclear weapon, which also i think is unacceptable. >> steve, inning that's a great summation. i would simi add a couple of things. one is that i think -- the -- the president's thinking on this has been consistent all along. the idea was to see if iran was will to -- to negotiate, reasonably. but to always leave the door open, even as we move toward sanctions. the sanctions result at least the process, the u.n., the e.u. and then individual countries was really i think a a frn

policy achievement. there is not somethg that happened automatically, it was something that the united states participated in rigorously. and i think we're still six it eight months away from -- from having the full depect of the sanctions. >> what happens if they don't work in eight months? >> i think as steve point out, we're not -- we're not just betting on a nothing else. there's an awful hot of -- an awful lot of dialogue with other countries, the israelis in

particular. i think -- i think this has had a calming effect in terms of the of the hype that you got to do something now. i think steve is right. this is really three reasons why a nuclear iran is a bad idea. first is the fact that you have another nuclear state. nuclear capable state. you could deter that. but secondly, the -- the fact that it -- would probably trigger a nuclear arms race in the middle east is something that is pretty well foregone conclusion. that would be very bad. thirdly, in the -- the one that i think is really the nightmare scenario, because i think it would -- without trying to -- to overstate things but it might change the world that we live in, is -- is a country like ave exporting that kind of technology to to terrorist organizations. >> would a joint israeli

u.s.-military action be far more likely or just more likely if we had a palestinian israeli peace? not likely. do-able. could is solve iran if we got a palestinian-israeli peace? >> i think a peace process that is ongoing and people could see is moving in the right direction is probably one of the best thing we could do to show iran that it is -- it is -- it is -- its path is the wrong path. i think it is extremely important to leave the door open as we have, both on official channels and unofficial channels. they have shown indications of -- of a certain willingness to come back at least to the -- to the conpresence teable, we'll wait and see exactly whether that happens or not. i wouldn't -- i wouldn't necessarily throw in the towel right now and say sanctions aren't going to work or they are. i wouldn't go too far the other way to start anticipating what

we might do on what we might do if the sanctions don't work because i think what has happened is we have arrived at a sents of -- sense of what that timing is. we know about their program and it is having difficulty. and we generally have a -- more common view as opposed to -- to 18 months ago where we had three different views. >> what is your knowledge of the thing that -- that -- i mean, we could know whether it is -- >> i'm not going to -- >> okay. >> four things about this. one, i'm not rushing -- i think we ought to let the sanctions go forward. i'm saying you need to look forward to where we might be a year from now and be doing some careful manning about it. second of all, i think one of the impacts of the election is that there will probably be more

support for president obama this whatever decisions he headaches, should we get to that point. i think -- i noted particularly the comments graham and john mccain made at the halifax security conference here a couple of weeks ago where they were tough about regime change. >> there would be support if he does something strong. >> i think he will -- there's support for him to do something strong. if we get to that point, if we get to that point and the sanctions don't work. lastly, i would say i think if there is some difficult work that needs to be done, i think it needs to be done by the united states not israel. i don't think we -- >> another military or covert action. >> i think there's something that needs to be done at the end of the day. i think it is not -- it is not something that you should -- >> we'll open it up. four or five times you mentioned how helpful russia has been on had iran situation. again all three of you and

general scowkroft if i play. how halfful -- how harmful to think it would be extremely harmful. i think it would be a blow to the prestige of the united states. it certainly would be a blow to the president, which is not a good thing in terms of his clout around the world as an influence. especially at a time when i think the united states has reasserted its leadership with regard to nuclear issues. the things that have been done working toward the start treaty, which i think was done in consultation with both sides of the hill, on a regular basis, there was a clear understanding

of what the red lines were from some of the would-be opponents. i think we work really hard to try to meet those red lines. there are all kinds of reasons for passage of this start treaty and i shudder to think well happen if we did not get it. >> i'm probably a little and the metal. i think russia has been quite cooperative for the bush administration and the obama administration. in terms of how they handle the negotiations, the bush administration got for security sanctions resolution and that russia supported them. i don't think russia will stop that, but it's an unnecessary argument. there are problems with the start agreement, they can and

should be addressed in the ratification and that is being done. we need to get agreement on the modernization program, so as long as we have a clear programs which will be for a considerable time, they are monitored. there is a way forward that early on in the new congress we can get. >> not in the lame-duck? >> early on in the new congress. we can get a good number of republicans joining democrats in ratifying. >> you think senator >> i think there is a modernization program that he and a lot of other people -- we both talked about the need for a modernization program. i think that it can be done.

i would like to see it done that way. i think it would be a good start for the new congress, working with the president to be bullish show the week ended the nation's business done on a bipartisan basis. after they have addressed these concerns. >> i agree with gm and with steve partly. i did not see the objections to the treaty. none of them are really the defense to -- really advanced. that is my problem. some of them need to be fixed, but they need to be fixed by fall lot negotiations with the russians. that can only happen if we ratified the treaty.

i think that psychologically, it will hurt -- they are not going to make decisions based on that, but the whole progress that we have with russia, not only iran, supply lines to afghanistan, there is a gradual -- we ought to encourage it. i think it would be [inaudible] >> >> thank you very much. thank you for sponsoring this meeting. i think it is a great idea.

the arab league has its peace initiative. it is a comprehensive framework. looking from my experience, when i was involved in that the egyptian-israeli peace negotiations, i think if president carter had not presented his own proposals and ideas to both sides, we would not have reached an agreement. i did not think that what israelis fear sometimes that there should be imposed on the process. it is just a proposal put on paper. but israel is trying to now to get from the united states, to

veto any attempt from the palestinians and octane endorsements. i think this is a very on helpful development if this happens. the united states should be perceived throughout as an honest broker who takes no sides. on the question of erotic and nuclear weapons, -- on the question of iran and nuclear weapons, it should apply to everyone, including the arabs, israel, and should have a zone that is free of proposed

threats. thank you. >> do you want to comment on that? >> add some bridging proposals will be how you get the peace. at some point, you may want to lay down a comprehensive propos. if we are talking about a framework agreement. timing is everything. we have seen a lot of things get played. second, you in resolution -- it is a complicated question, i think. the best thing to do is to try to get these negotiations back. we have a lot of discussion about nuclear free zone in the middle east. once you have a middle east peace, there are other threats other than nuclear weapons. when to get a comprehensive middle east peace, then we can talk about how to build on that.

>> [inaudible] was subject that has not, is the 1.5 palestinians live. a lot of the focus of the administration is on making some sort of peace agreement. what should be done with gauze that? how do you ultimately incorporates that part of the palestinian territory and is there a point at which you begin to reach out to hamas?

>> why am i entering the question? if we begin to make progress on palestinian peace, hamas can not afford to be left out. we take away some of the leverage they have now to say no by beginning to move. they will feel compelled to participate. >> i think the west bank is where we start. what this state will look like at some point. that does not mean that you cannot make progress.

trying to fix this now will only impede progress of getting the to stitch together in the future. >> if you get a peace deal that involves the establishment of a palestinian state of the west bank, you are in a position to go to hamas and said, are you in or are you out? if you are in, you have to give up terror. if you can get that piece, and show that a palestinian state is coming to the west bank, it will be -- a double shuffle the deck.

>> [inaudible] is a hopeful sign when president obama extends its $3 million inducement to israel in return for simply it 90 days of a settlement freeze? >> this is the matter of the table as to what is the -- what makes it worthwhile. in exchange for a 90 day settlement freeze. the israelis, to my knowledge, have now responded to that yet. the will to talk to wait and see what happens. the discussions between the u.s. and israel on israel's security have been ongoing with some

tremendous detail for the last year. the united states and the a ministration has spent extremely generous, even ride up to this point -- even right up to this point in providing assurances to israel that security is something that we pay a lot of attention to. i also want to come back to the point that is extremely important. the united states should be perceived as being an honest broker. we have to be careful that the skills tool tip to 41 way or the other. -- that the scales do not take one or the other. >> the worry i have is that i think the settlement freeze has not done with the destruction hoped it would do. at some point, if you are a

whole, you stop digging. i am not sure going another 90 days is maybe the best outcome. again, i am not party to these discussions. we need to get some other understandings. that address palestinian concerns, five -- we have to get on with it. >> thank you.

thank you, everybody, for being there. i have had the privilege to work closely at the aspen and institute has done a phenomenal work for many years in support of the palestinian people. it has made a tangible difference. furthermore, i would like to draw our attention what maritime -- a to state solution has jeopardized at this point and continues the result of pessimism on the grounds to continue to be jeopardized. and what state do you reach a point where it becomes an option anymore? are we close to that or not?

>> what is the alternative? >> i do not think we're close to that. because of the synergy that exists between the arab world and the europeans and the u.s. the outside watching is more to gather on the necessity to be successful than at any time in my memory. i think that the prize is still on the table and it is achievable. we have not figured out the right combination yet. i am impressed by the fact that everybody who has -- to place in this game really passionately believes that there has to be a solution. it is not just a regional problem. it has global dimensions. solving this will solve -- will help the world in many different ways. >> [inaudible]

most of my concerns addressed. i am very much concerned that this offer has been made by the united states in the terms of already been discussed. the question is -- you are dealing with the palestinian authority. it is an occupied area which has its own unique problems. what concerns me is that we talk about having to be an honest broker. and we talk about the timing problem as being crucial. if you are in the palestinian west bank right now how comfortable would you be i would

think that it would drive them away. that is what concerns me greatly. you look at the end of the 90- day period and while there is some optimism expressed in the long run as a matter of necessity, what is going to happen? let's assume that it does not work and for various reasons of politics, the palestinians do not feel comfortable coming back to the table. what happens then? >> i would simply say that

really want to make things conditional on progress. if, in fact, we did x, then why would be the result. and if y fails, x is off the table. you have to tie some of these things to good faith. and they demonstrated will to be courageous and to make some of these decisions so that we can move in the right direction. >> the $3 billion in security ordinance -- >> the president would expect that there would be some momentum that would lead to follow along progress. i do not know that for a fact. i left the administration before they made this proposal. i think you cannot simply keep

putting down payments on things that do not work out. >> i see many hands. i am trying to keep them in order. >> just to get back to the issue of sanctions, if i were the adviser to the iranian government, i would see something like, a steady as you go. it is working pretty good. the sanctions have not heard that much. -- kurt not much. the government -- the u.s. and redid the un sanctions are pressing the same group. i cannot allow imagine that sanctions are going to work. all right, in business you deal with a lot of probabilities and there must be a plan b and a plan seat. but i am always kind of surprised, we are talking about

sanctions. i know you have to try. but when it becomes accepted, not obvious, that they are not going to work, something is going to happen. it has to. did i say that robb? >> that was pretty clear. this is an open forum. i think that one has to have faith that responsive -- responsible people are thinking about these things as well. we hope the sanctions work. we hope the sanctions create a sense of logic and reason in the rodney and leadership to bring them back to the table. -- the karate and leadership -- the iranian the leadership. we will prevent iran from

acquiring nuclear weapons capability. >> were you raising your hand way back there? >> i was not. i just got back -- i saw president's next week and a lot of this people. i was more optimistic that even with this are rumored package that they will come to the table and the key is what happens when they get there. steve knows that i very much share his view of borders. the wild thing they did the convergences are possible. it was striking to me, all the jerusalem part of the trip, was the opposition that this idea was hitting because they feel that their cards are all

territorial. they have to move forward on all issues. in theory, that is what we all watch. we all want progress on all issues. i am skeptical that they have conditions of societal landscape on jerusalem refugees. all of a sudden, borders and security is almost a dirty word of it there. i think it is a mistake. that is my personal view. i do not think we can solve these issues in 90 days. i think you can make progress, but i think you are coming up with some of the more moderate elements against this approach. i think there is still some work to be done. >> thank you for your commitment to peace but they cannot the

government. i was in cairo in 1995 negotiating the final details of the creation of the palestinian authory. that was to be able in that year temporary status. that was 15 years ago. we are in the same legal limbo where the palestinians do not have sovereignty, they do not have borders, they do not have access. everybody thinks that we have about six months to negotiate, they grow progress on the two- state solution. because of our political process here. a conservative number of us have is that the conditions that are being sent by the israelis for the extension of the moratorium are going to be so great that the ultimate achievement of a two-state solution will be

potentially nullified. it will be certainly severely diminished. three months is not a very long time to negotiate something as important as borders. if you have a border agreement that does not encompass jerusalem, it is a nonstarter. the best mechanism other than a negotiation for an independent palestinian state is the u.n. part. the prime minister is working very diligently on it. that will be presented in to douse 11. if there is a u.s. veto threat and, that will severely undercut that option. you'll be led to a one-state solution, which i think the majority of the people in palestine today are leaning toward. particularly the yacht.

they do not have much faith in the honest broker as some of the united states or americans are the ability of the israelis to give up land that they have been colonizing and occupying since 1967. all this is a way of asking if we do not get it done in three months, what? >> you have the wrong witness is up here. i indicated my skepticism of this approach. but i do not really know the general -- the details. italy, the questions you raise are serious questions. -- in a way, the questions you raise are serious questions, but they have to go to the administration. it sounds like a dodge, but i think i share a lot of those concerns.

there are questions that have to be put to the administration. >> do you think it would be useful if the demonstration said, it this approach does not go very far, at some point, we will have to recognize a palestinian state. >> these are hypothetical. it is a hypothetical that may come our way. i think i will pass on that one. >> his formulation is i want to get to the point after two years with the only thing wrong with the palestinian state is occupation. he wants to cut -- >> maximum pressure to get these

issues resolved. >> is a good strategy. >> we will see what happens. >> but we will leave open that option? >> i do not know. >> david? >> thank you. i think that is the least attractive way out of this problem. the negotiating outcome would everybody agreeing -- there is much to be learned. sorry. >> [inaudible] i want to sell the cautionary notes a framework agreement and focus in on borders and security. first of all, i just do not see the palestinian -- the israelis be willing to endorse jerusalem as the capital. this government simply would not

do that. if you set that aside and simply start to negotiate on borders, you run into the question of jerusalem. even if you carted out as something to be worked on later, then you get it immediately the question of settlement. we are right back where we are today. >> what i would like to do -- i am going to let a few people make comments or ask questions and that 1:30, allow you to enter the ones you want and ignore the ones you want. >> what is president said to the united states, fine. i will come back to the table -- the palestinians want east jerusalem as their capital.

we are giving the nod to netanyahu to go ahead and build your settlement in east jerusalem. i will go back to the table if the u.s. agrees to pay for dismantling every single settlement and to pay for relocating all the individuals who were sitting in the settlement illegally right now. >> thank you. having three national security but this is with us, i would like to ask the question, since 1979, the u.s. has been very poor -- but we have not achieved very much. the big things were done by the parties themselves. the fact that everybody know what the final solution looks

like, why is it so hard for a president -- what is the impediment for a president who really wanted to get this done? every american who understands something about israel knows that the support for israel runs the the blood of the body politics. it is not a jewish issue in the u.s. the safety, security, the fulfillment of the zionist dream, will not be done until the israelis draw a line with the palestinians. it is only the palestinians that can legitimize the israeli state. why can we get this done? >> please see if there is anybody in our peanut gallery that did not get a seat at the table. >> final thoughts?

>> general, do you mind giving us your final comments.

.

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[captioning performed by national captioning institute] consulted significantly with countries in the aftermath. >> what are the possibilities of sanctions, then? >> we will take appropriate measure of what's happened here. understand the implications of it, depending on how we assess the revelation by north korea. then we will take appropriate action. >> what did you mean by -- react, what sort of reaction are you trying to avoid then? >> well, look, who knows why they did it? north korea had an agenda when it invited these scientists to visit pyongyang. they were very clear in discussing and they are very

open to showing these scientists a view of a supposed uranium enrichment capability. they have an agenda which we presume would be required to react and potentially to reward this new development. we're not going to do that. >> any plans to speak directly to north korea? >> it is going to take some time for us to work through this information and the medium term and long-term policy and implications. >> a sense of urgency? are you responding with surge si? -- urgency? >> is this concerting to us?

of course. any association or potential expansion of north korea's nuclear programs is a major concern. and why is that? because north korea is a serial proliferator. as it develops potentially new capabilities, their past track record suggests they would make this capability available to other countries. our principle concern about north korea is the proliferation risk that it represents. that's why we have developed a number of tools over the years including additional sanctions that protect the united states and others against this proliferation risk. >> one of the scientists who recently returned from north korea and reported on the nuclear facilities will be speaking today. you will hear his report on north korea's nuclear

capabilities later today on the c-span network. in a few moments, a discussion of how the new congress next year will approach economic problems. and in about an hour, a look at constitutional ways to limit the size of government. on "washington journal" this morning, we'll talk with david malpass, a posed to the federal reserve's plan to buy $600 billion in u.s. treasury bonds. our guests include an u.s. ambassador to nato and a look at the cost of higher education, richard vedder. "washington journal's" live on c-span every day at 7:00 a.m. eastern.

several live events to tell you about today. the american association for budget and program analysis will look at how to balance the federal budget and the future of the budget process at 6:42. here on c-span the national academy of social insurance hosts a program on the future of social security. that's at 2:00 p.m. eastern. >> this weekend on book tv's afterwards with polling data from eight arab countries, james zogby questions muslims. part of our extended holiday weekend of nonfiction books and authors starting thursday on c-span 2. >> more now from an american

enterprise institute forum on the key issues of the next session of congress. this panel focuses on the economy and how the congress can reduce spending. this is an hour. >> i'll be moderating this panel and whether or not those two things are compatible is probably going to doctrineate debate. just before we get to the panelists, i'll try to provide a little context for this debate. we have two debates going on in this country over the budget. there is a short-term debate focused on what tax and

spending levels are going to be next year. whether or not we extend all of the bush tax cuts or some of the bush tax cuts or none of the bush tax cuts, and there is also a question of appropriations for the next fiscal year. will the democrats in the lame duck session pass a new omnibus bill? will they pass a continuing resolution that simply fronts the government at the current levels until the end of september of next year or will they pass a short-term continuing resolution to just punts the issue to republicans early next year in january or february. that is going to be an important question that i think we're going to see some developments on in the next couple of weeks, even and i'm sure our panelists will have some things on say about that. longer term, after the election concluded, we saw the relief of

a number of deficit reduction plans on the long-term sustainability of our entitlement program. we've seen release of several other reports, each representing a different method of grappling with these long-term debt and deficit problems. with that in mind, that short-term focus, then zooming out to look at the bigger picture, i will turn it over to our wonderful panelists. we have at the end of the table speaking first, kevin hasset,

prolific writer on tax and policy for bloomberg national review. we have next, andrew biggs. a resident scholar here at a.d.i. as well. he oversaw the social security administration's research effort and has been working on this stuffer for a long time and one of the most knowledgeable people about entitlements in this town and then to my right, we have robert stein. he will be talking a little bit about you know, economic growth, the policies that are compatible with that and looking ahead, how can we get this budget deficit under control without doing a great deal of damage to the economy. so with that, i'll turn it over to kevin. >> so, peter was right, that this is little different from some of the panels that we have here at aei, that we are we're >> dations that there's

go be many follow-on conversation -- conferences in the next few months. but i think thinking of putting on your republican had and thinking what should they do is a useful exercise to kick off the debate. this is about the end of the story. i can also say it's not necessarily the republican party is not necessarily relevant in the sense that i am about to spend my time praising president obama's commission. and i think it' the best commission i've ever seen, what they've done so far. i'm not saying that it's going to succeed politically, butas a matter of intellectual content, the mbers of the commission are certainly to be committed. andrew biggs and i have been rking for about a year,

frankly. we've almost been locked in a room with a whole pile of data trying to figure out what the data tells us that in the area of fiscal consolidation, the idea that we have a big mess like bonnie a limited to, then how do we fix it? well, he sad history of human foibles is there are many, many countries over the years that it had significant prblems like our own. they've had debt to gdp hier than we have, and they've tried numerous things to fix that problem. and what andrew and i have been doing is looking at the literature and the data onto succeed, who didn't succeed, and what was the sort of basic characteristic of the thing that succeeded as a guide for u.s. policy. the objective of the work that we are doing, and will have a big congress on this in january, is to say that if we copy the successful fiscal consolidation of the past, then what would we do? and that's a data-driven exercise that's not a political one.

and i think you'll see something that's what interesting because the answer is we would take the sketch of the balls and some plan that was released by the two chairmen and enacted into law, or something like it. and so my presentation is going to get the most of the others i think that the other constraint which for me is more severe usually for the fact that we are doing this conference, we weren't even any economists supposed to have slides. and the only way i was able to get this slight up there was i reminded everyone that an h.r. guy at natural view. there's a chart that ut there. so as long as i promised to put one of these to slide in "national review" an upcoming issue than i'm allowed to put it here. spent a special exemption spirit a special exemption. and so, this is actually a chart that characterizes, there's big literatu that sort of, a lot

of literature about exactly what are the characteristics that are successful or unsuccessful. this is drawn from work that matt jensen and and and i are doing that is about to come out at the aei working paper the basic idea is that if you look at the leisure, there's quite a bit of dispute about the characteristic of successful or unsuccessful consolidations, depend on what paper that you're looking at. and so in this chart the axes are fiscal consolidations that were unsuccessful. and i unsuccessful they asked we just failed to reduce the debt to gdp. that's a reasonable measure of whether it's successful. okay, we're going to fix our deficit situation, we will try to get ejected gdp down over he next five or 10 years, then we can look and see, did they accomplish what they set out to do. that's the measure of success. is a pretty hard-nosed accounting type measure of success as opposed to the current economists often use, where it's in the eye of the

beholder. but the question then is there's a lot of variation over time and what samples authors are looking at, and in what people call a fiscal consolidation. so some people use data-driven methods with a sort of say if there's a big change in revenues and must've come from some underlying quality change and other people use x. and the definition of consolidion te country was a day, let's have a big frankie and annette. let's have a big fiscal consolidation and then they do. and then they look to see if they work. so the axes in this chart are the ones that failed. and the those in this chart are the ones that succeeded the differen colors tell us, for those of you who are aficionados of the literature, which paper we're talking about, and the basic idea is that the people that try on the y. axis, it goes up, this is right on a 45-degree line because the x and

y, it's a proportion that is either tax revenue or spending reduction. so the ones that rely on tax revenue, if you relied when a person on tax revenue you'd be awfully high up on the train accident if you relied when i was in on expenditure reductions, then you be all the way down on the train oneaxis. as you can see, e. x's tend to be up there trying to do it with expenditure to and the transixteen to be down here, they're doing, trying to do it with tax revenue. the o's are down here. there are somethings that say the proportion that has to be expenditure reduction is even bigger than 100-cent or 100%, and then there's some papers that say no, it's between 50 and 100%. but there are no successful ones that tried to get more than half of the reduction by tax revenue. and if you want to be really safety in the zone of having

successful fiscal consolidation, then this chart suggests you want to be down kind of on this side of the chart. the next one is the one that probably will be the one that will put in "national revi" because it's interesting. what we did here is, using the actualata now, and relying on a few different methods in the liratu. that's why there's multiple chart. this is the range of a you could possibly get. then using a few different definitions of successful, so a modest success would be one that reduce jet that mac -- jet to gdp. is based on own calculation. once again, the x's our failures and the o's our succeses. so again this israwn not from what we said that what we get out of the day. the interesting thinabout this chart, this is the point for the

republican agenda, is that there are two sketches, the fiscal commission had a sketch, but there are two extra slots on his chart. the blue triangl is what boes-simpson sketched. and the orange diamonds isn't the bipartisan policy center's plan. and so you can see right here that even bowles andsimpson i guess i woulwant to be a little safer to the other side of the boundary, and maybe i would be willing to slide down this way a little bit. but the bowles and simpson plan is drang on a pretty strong history of success. it safely into the region where we can expect the consolidation to work. now, it doesn'tmean, just because it works by the way, it does mean you want to do. that's what we have to have a whole other conference.

we could be that works by killing the economy or something. we have to look more at other things like gdp and unemployment and what happens after you do it before we can say that's what we ought to do. but you can see that the fiscal commission plan is pretty ill advised, given the lessons of literature. and so, what i would conclude is that we're a pretty rough situation. the debt to gdp by the oecd measure them look like it will finish an era about 86%, that makes it higher than it was for the typical latin american country that defaulted on its debt. now, one reason that today's latin american countries have tended to default on their debt pretty readily. [laughter] >> they perhaps are willing to do it, you know, more than they should be. and so that doesn't mean we are necessarily doomed, but we are

any danger zone. where you could really expect markets to start punished if we don't do anything. my observation would be, if this most recent election was about anything, it seems to have been about smler government. there's this really wonderful, brilliant paper written by a graduate student at ucla where she went to the tea parties and took photographs of the signs, and then categorize what the signs sa. and almost all of them said smaller government. which is the lesson of the fiscal consolidation. and so if there's a wave that tes us that we should pursue a policy, and takes is a policy, then for me i would say the wave is telling us that bowles and simpson are onto something. bowles and simpson have their own plan, but that doesn't necessarily mean that it's the best plan th would most match the fiscal consolidation of the past. for example, there are subtleties like if we're going to reduce spending, then do we do it through endowments or the

military or what? andrew has been, the part of our team has been working on this was been working really hard on taking the compositional thing from this past successes and mapping it to policies. whate's going to do now is he's going to sketch whe e are in that, and what we think. andrew? >> thanks. >> that having been taken care of, and thanks, kevi for leading into these things. it's obvious we have a large task facing us in terms of getting on top of the budget g gap. the other day i checked the congressional budget office has? oceans what's called the fiscal gap, which is essentially th change in revenues or expenditures you need them the necessary to do exactly balance the budget but simply to keep

the level of debt from exploding. the cbo measures of the next 75 years the fiscal gap is rent a% of gross -- gross domestic product for the typical person that's not very meaningful so we'll try to put in terms that might be more eaningful. that's equivalent to an indian and permanent doubling of all income tax revenues, or likewise, it's equivalent to essentially elimate the social security and medicare program. that's the scale of the problem that we face. so i think it really makes sense to pay attention to this kind of literature, well works fixing these problems because we have a very, very large task ahead of us. as kevin mentioned, the existing literature that look at fiscal consolidation's overseas has really concluded that those succeeded in reducing the deficit and debt did so principally by reducing government expenditures rather than by trying to increase taxes. there's an additional finding out that pops up in the literature that talked a little

bit about the areas in which successful fiscal consolidation focused their reduction expenditure. in other words, to succeed you have to cut government spending, what is the type of spending that they tended to cut. in the two areas that successful countries tended to focus on work, first was called social transfers, which in u.s. context means welfare and entitlement spending. and the second is the government wage bill wch is really the number of government employees you have and the relative for each worker. so i think it's worth focusing on that, just avoid couple of quotes from literature from both the oecd and the imf, which are not known as particularly right-leaning institutions, ut the oecd says quote an emphasis on cutting carbon expect and associate with over a larger fiscal consolidation and a large weight on social spending cuts increase the chances of abilizing the debt to gdp ratio. likewise the imf said, fiscal

consolidation is that concentrate on the expenditure side and especially on transfers in government wages are more likely to succeed in reducing the public debt ratio than tax basic consolidation. i really like when they say something like that. so one question, why would this focus on transfer entitlement spending and public specter -- sector pay be so important? one and is sort of a dire economic effect. that lower governmt transferred encourages people to work more, to save more, and in doing that that stimulates the economy. you think, your debt-to-gdp ratio is a fraction. your debt on the bottom, you want to think not simply about shrinking the enumerated but also growing the economy. that's a direct impact there. likewise, if you ship the labor from the public sector to the private sector, the private sector is more productive that also helps the economy. so that also an indirect effect

in the literature points to which i think maybe it's just as important. there's a signaling effect when governments are willing to tackle issues of in thomas and public sector pay. because it is are considered to be third wrote to politics. things that are very, very difficult to get on top of. governments that take on these types of issues signaled their seriousness about fiscal reform. they signal both the public, you know, the general public and the financial sector that they are truly committed to getting on top of these problems. so when people see the government tackling the toughest fiscal issues, individuals become more confident about the future. they might invest more in themselves, investment and business. the financial sector may become more confident about the government's ability to service its debt in the fute. so you might get more favorable interest rates, things like that. so you these two effects which seem to work together which make us focus on entitlement spending

and government worker pay, one of the recipes of successful countries have looked at. given that backgrounbackground i want to talk a little bit insert abroad brushed drums and what a successful fiscal consolidation in the u.smight look like. i think, echoing kevin's comment. i really give credit to the chairs of president obama's fiscal commission. i think outlined an effort in balancing the budget, that is at least roughly consistent with the historical background of what a successful fiscal consolidation looks like. looking over the long-term, your biggest driver of deficits and debt is entitlement. social security, medicare and medicaid. y'all talk about medicaid and social security or medicare i'm hardly an expert on, and certainly we have heard from some already today, and obvisly there is more at aei. one idea, a simple illustrative approach that kevin and i have

looked at essentially introducing a deductible to medicare. sangha seniors above some given income level would pay the first x dollars of the health care teacher, and then medicare would kick in to cover the rest. something like that would reduce medicare costs directly in terms of simply introducing an extra source of revenue from individuals into the system. it might have a more important indirect effect by giving individuals some skin in the game, some incentive to care about the amount of health care they are consuming. if you believe the rand health experiment in the 70 and 1980s, individuals who have some cost shari came to visit the doctor less, they go to the hospitaless, they spend less overall on health care, but they don't have health conditions that are worse. there's a real key incentive effect their that i think could sort oaccelerate the effects are excellent the improvements. social security i believe the

key is to refocus the program back on its original intention, on itsmost important function, which is to provide insurance against poverty for the disabled, for survivors, and the old. today, much of social security expenditures are on people who are middle-aged and middle-class. if you go back to the 190s, the typical person caimed social good benefits at age 68 or 69, despite the fact that they had a life expectancy around 76. today the typical person with tires at 62 or 63 and can live into the early '80s. what that means is a typical person will spend around a third of their adult life in retirement, you know, financed by the government. it's great to retire whenever you want, e.g. saved up enough money to do it. but a lot of people haven't that i think we want to have a real push in terms of social security reform in terms of encouraging people to work longer. one of the reasons is is when you have an aging population with smaller numbers of workers, larger numbers of retirees, you

want to encourage people to work more, save more an retire later. on social security i tend to think that focusing on raising taxes will encourage people to work less, save less and retire sooner. the final point i will make is a public sector pay. in a sense, there's a split opinion on whether federal employees are overpaid. on one hand you have the office of personnel management, which ery year put that reports claiming that federal workers are underpaid. on this latest report, claims that the pay gap is 24%, that grew from 2008 to 2009. on the other hand, you have about three decades of ecnomic research which has consistent we found that federal employees ceive salaries 10 to 20% higher than those of otherwise similar private sector employees. recently, i have updated to work, working with jason at the heritage foundation, and where we his government salary data

and we controlled for differences in age, education, marital status, gender, every possible variable, even after that you find a rather 12% pay premium for federal employees. there's no reason federal workers should be underpaid, but there's also no reason they should b overpaid. this pay gap comes to around $14,000 per worker per year, or over $40 billion in total. i think as a way of controlling the federal expenditures, but also a way of demonstrating seriousness to the public that, while they are going to be expected to take some sacrifices on social security, medicare and other program that we are not exempt population that doesn't have to share the pain. i think that's a way of again, to show the commitment to moving forward on this and getting buy-in from people around the country. is just scratches the surface so i will pass it off now and we can go from there. >> thanks so much, andrew. i should mention also that

robert, in addition to working at first trust advisors as an analyst, before the assistant secretary of the treasury department, chief economist for the senate budget committee. he has been working on these issues for a long time. >> i was one of those overpaid government workers. [laughter] >> the first thing a want to say is i disagree slightly with something that andrew said that i think federal workers should be underpaid. and they should be underpaid because they can't be fired at will. when i was at the treasury department, frankly, if anybody is looking from the treasury department right now, not talking about you specifically, but i want to get rid of 20% of my staff but it would've taken almost all of my energy for six months to do that. so i didn't get rid of anybody in state. so they should be underpaid. >> the job security for public sector employees, it's like an insurance policy against passionate it's an insurance policy against unemployment.

if you to go buy something like that in the private sector it would be very, very expensive and very, very valuable. >> i'm going to take a look at of a different tact. .. and the slightly above 4% growth, we got very late last year, fourth quarter of 2009, first quarter of 2010, will eventually get around to saying that was about three too. i think the underlying trend of

3% growth over the past year is correct except we didn't accelerate as rapidly as we originally thought we did. and we didn't really go into a ditch again in the middle of the year. what we can do in terms of public policy to accelerate short to medium term growth, the first thing i can do is resisting the call which both parties had fallen to over the first decade. a short-term demand management. this goes back originally in my view to paul o'neill back in 2010. there were several reasons he was a poor treasury secretary. one of them was his absolute insistance in negotiating with the republicans in capitol hill in 2001 that we send out checks as rebates of the previous year's taxes right away. he insisted on that. it was an attempt to hang in

economy through demand over the short-term. multiple times, president obama has engaged in it, also, trying to send out extra checks for inflation that didn't affect social security recipients over the past couple of years. so we need to resist that. instead, i would focus first on extending the top tax rates that were enacted in 2001. in 2003 dividends, capital gains and regular income. notice what i did not say. i didn't talk about the other tax cuts that everybody on capitol hill agrees should be extended. i'm not talking abouttax cuts for the mile class and below. now, those will probably be extended. they're certainly not going to be -- the extension of those tax cuts certainly won't hurt growth over the next couple of years, but they're really not very important. almost all those tax cuts, almost all of the expenditures related to those tax cuts, lumbar all of the deficit --

almost all of the deficit related to those tax cuts doesn't hit people at the margin. even if you're what would have been the 28% bracket but is now 25%, extending those tax cuts, most of the money earned in those brackets is earned by the people above that bracket. they really don't matter that much. i would call them kind of cross-dressing tax cuts. they look like supy-side, but they're really mostly keynesian tax cuts. second thing i would do is accept the president's proposal on full expensing in 2011. now, to me this is kind of like a booby trap that larry summers left for the president. [laughter] he got, he got the president to agree to this and, frankly, i think the president knows what's going on. he can't full expensing on a permanent basis right away, so they're just asking for it in 2011. but can anyone in their right mind say that the president of the united states seeking re-election in 2012 wants to do

expensing only in 2011 and then go bk to regular depreciation in 2012? i think he knows full well once we go to full extension for one year, it's going to be extended and eventually made permanent, so i tnk the republicans should accept that proposal as quickly as possible and move on to somhing else. in terms of cutting spending, i'm not quite as enthusiastic as kevin is. we achieve about 80% of the 35-year -- 75-year deficit reduction within that proposal, within that program is related to reductions in government spending. 20% related to anncrease in taxes. frankly, i would take that. i'd prefer 100% to 0%, but 80 to 20 is good enough. in terms of the medicare changes, i'd prefer to see someing that raises the retirement age or adds deductible as andrew just mentioned. most of the proposals are nickel

and dime proposals. i'd take that too. it's better than nothing. in terms of discretionary spending cuts, i think the commission -- i think, i'm not the greatest budgeteer of all time -- but i bieve the commission is fudging the numbers. when i look at the proposal, the numbers didn't line up between the early pages and page 16 early in. it appears -- it appears -- i'm not 100%ertain about this, it appears that the bowles-simpson commission is using when it calculates how much money it's saving through discretionary spending cuts the president's budget, not the cbo baseline. and the president's budget is inflated with proposals over and above what cbo baseline would require. so that little triangle you showed earlier shouldn't really be at the 80-20 line, it should be a little further up where some of those xs appear. if it's calculated a little differently. so i'm a little mre worried

we're not getting the bang for the buck in terms of the discretionary side that the bowles-simpson commission is suggesting that they're achieving. in terms of the medium-term budget outlook, trying to get to a sustainable budget position is extraordinarily daunting. cbo baseline for 2014 is a budget deficit of about $450 billion. let's say we extend all the tax cuts and by all the tax cuts i'm including a patch for the alternative minimum tax for a few years as well as other expiring provisions like the r&d tax credit that always end up being extended. then we have a deficit of about a trillion dollars. that's about 6% of gdp in 2014. let's take out the interest outlays and try to get to a primary budget balance or a budget balance excluding the money that we have to spend on interest. that's about 3.5% of gdp.

to put this in pspective, that's abt 45% of all discretionary spending in 2014. i'm not talking about all social discretionary spending, i'm talking about everything. 45% of social and pentagon spending combined, homeland security also. it's an amazing amount. now, it's about 17% of all spending, but that would include social security, medicare, medicaid, and obviously we're probably going to do something more long term rather than short term. so getting to a sustainable fiscal positn over the medium term, it could only be done with drastic reforms to entitlements that not just bring those programs into line for the long term, but are used to generate savings for the rest of the budget. if we're going to avoid a tax hike over the next several years. that's it. >> thanks, robert. just a couple of quick questions for the panelists before i turn

it over to the audience. i wanted to start with kevin, but any of you can feel free to chime in on this. we talked a lot about the broar big picture stuff although, robert, you got into some of the current tax policy debate. but in terms of spending, on the spendi side, republicans, i think, are going to come under some pretty intense presre for spending cuts to this grassroots movement that provided so much of the fuel for their electoral triumph. and i was wondering, how aggressive do you think republicans should be on this year's appropriations particularly with this spending fight that we're looking at maybe having here in the lame duck or, you know, even if this gets punted to february, do you think it's possible for republicans to come in and right away deliver on drastic cuts in discretionary spending the 100

billion that they've talked about? and what are some, what are some ways that we can, we can advise them i terms of what, what should be cut, what should go first and that kind of thing? >> the fiscal consolidation literature looks at what happens in the near term to countries that do this. some of the papers find that you set off a near-term boon, and andrew alluded to this. it could happen if, say, you thought companies were sitting on hordes of cash and weren't spending it and then suddenly they see it, you know, with clarity, future policy, and then they say, okay, i'm going to start buying machines and stuff. but there are other papers that i actually have subsequently, they're relatively new and found pretty convincing that it looks more like in the near term it's kind of a wash. and especially for a big country like the u.s. but the good news is that what that means is within the framework of a significant

fiscal consolidation we were to cut government spending, then i don't think that you should expect a sort of keynesian-style contraction. the literature doesn'find those. my concern would be that you would just have some sort of haphazard spending reduction for one year that wasn't within the context of the complete let's give you clarity on this future movement in which case it'd be very difficult to predict what might happen. you might then continue to have the uncertainty and then the effect you'd want tobet on would be the keynesian effect. i don't think it's as big as some people think, but it definitely goes in the direction of harming us a little bit in the short run if you do only that. but i would really like to see them, you know, take the big job on now. the scale of the problem is actually characterized well, last point. mr. boehner at one point said in a speech he thought we ought to go back to 2008 spending. this that's sort of, you know, depending on which point in time

we're looking at, that's sort of like lopping 600 billion of where we are on the spending side, and that's the scale of the problem to have, like, a genuine consolidation. you've got to be doing -- you have to get back there and grow really, really slowly. so my prediction what they'll do on spending is something that's politically sail bl, it has -- salable, it has a nice sound bite with it, and they'll freeze. i think they'll be able to get very strong political support for a freeze. >> great. thanks, kevin. andrew? >> just a quick thought. there's sort of a tension between focusing on, you know, short-term cuts to discretionary spending and then focusing on these long-term budget issues. and it's -- i think both of them aremportant. the short-term sum matters because we do have a large budget deficit now, and ihink you also is as a signaling

effect of seriousness, of showing that you're willing to make some tough choices. at the same time, you know, you want to keep your eyes on the prize which, long term, is simply the into entitlement endf things. so i think if they have enough political capital and they think the public has enough of an attention span, you want to get some stuff done on the discretionary end in the short term, but also fully engage on thes fiscal issues looking at what the debt commission's come up with. i believe there's some reason to believe the president would be interested in at least the latter part. i think he wants to produce something of substance on that, but it'lbe interesting to see how thatlays out. >> someone famous a couple of years ago said we shouldn't let a crisis go to waste. [laughter] well, there's a had doe hanging over the republicans -- shadow hanging over the republicans which is that they fail inside '95, early '96. looking back, though, the

employment rate was 5.5%. it's very unlikely to be 5.5 anytime soon or even 7%, frankly. so if we're ever going to have enough public support for the republicans to cut spending, it's now. and if they don't do it in some way -- and i agree that the discretionary side really is more signaling than anything else, en it will be a signal that they're going to fail on the entitlements as well. they need just to keep the faith of their supporters. >> fantastic. with that, i think we've got abt 20 minutes left, so i'll open it up to questions from the audience. we've got one back there. >> thank you, folks. rick from virginia. i think the voters, i mean, this last election republicans won by 7%, i think, in the house.

a lot of the margins were really thin. i don't think that the voter really, as you guys well know i'm sure, are getting the information that they need to make intelligent decisions. i don't think they know who, for the most part, who's fiscally conservative, who's fiscally liberal. they don't know even the makeup in the senate that there's about 44 fiscal conservatives now. you need, -- you need 60, obviously, to get anything done. last year $4.5 trillion. that's 36% of the 14 trilln economy for last year. we usually just use the 25% federal share. then atr comes along for the regulatory costs, and they're saying 2.5 trillion. so that's 7.5 trillion of government-created costs every year. people never get this

information, that's 52% of gdp, excuse me. that's what creates the job loss, the budget deficit, and according to the national association of manufacturers, the trade deficit with china because production-level labor in manufacturing is only, like, 11 or 12% of all manufacturing costs. they've cited census data on this in committee testimony. the landed cost for chinese product here is is about 20% less than a u.s. domestically-manufactured product. what do you guys think about 15% tax credit just aimed at manufacturing? maybe that'll attract some, like, bipartisan support with the unions and, also, can you guys tell me what the savings woulde on, like, a high medicare deductible, 5,000, 10,000 for, like, a single gross

income of, like, 50,000? >> okay. thanks, rick. i'll let whoever wants to take the manufacturing tax credit issue, and then andrew might have some things to say about the medicare deductible component of the question. can yh. i gave some testimony on something like that and was the only person in the hearing in either party or on the panel who argued that we shouldn't favor manufacturing. [laughter] but it's bad economic policy to favor this over that. and the fact is that i think you can scaremonger with decline in manufacturing facts, that there's been a sectoral decline in manufacturing as a share of gdp for 50 yrs and it's, i think, analogous to the decline in the percentage that's agculture, and we don't feel that we need emergency measures to revive the percentage of gdp in agriculture -- >> well, don't tell that to the

house ag committee, right? [laughter] >> but i do think that manufacturing is particularly hit by our high corporate tax rate, and it's very easy to locate manufacturing facilities overseas. the thing i would add is that very often manufacturing, the facilities overseas are extremely capital-intensive, and despite that firms are deciding that it's better to be abroad, and that can only really be a tax story because if it were a labor cost story, then i could understand how maybe like textiles or things where a person with a sewing machine. but for a lot of, you know, if you think about even just what's achip foundrys kind of like one guy in a lab coat out front who hits the start button every morning, and the rest of it happens with machines. it's almost the model you should have. but we're locating those overseas. that's a sign we need to have a fundamental change in our tax policy, but i'd reduce the rate. right now if you add state

taxes, it's a smidge below 40%. japanese are cutting their rate this year, so we'll be the highest on earth as of this summer. we need to reduce the corporate tax rate by 14, 15%. that's why something like the bowles-simpson plan is crucial for getting the economy moving forward because they figure out a way to do that in a fiscally-responsible way. >> on the idea of a medicare deductible, i don't have numbers in front of me, though i have calculated. a guesstimate you go out to about 2030 or so where we looked at projected costs and say how high would a deduck f deductible -- deductible have to be, i think it would have to cover about 20% of the average cost per person which doesn't mean you cover 20% of whatever costs you have, it means if average dicare expenditure per person today is is around $9,000 and you cover 20% of that, so, i

don't know, 150 or something along those lines. but that assumes that the presence of the deduck table has no effect on outlays at all which i think is is probably not the case. so, you know, to the degree that's a very large amount, and it is a large amount. it just shows you the extent of the underfunding and of the rate of cost increase withmedicare. the sorts of things that we've looked at aren't to show, you know, this is an easyay to balance the budget. in a way they show here's how tougit would be. and i think looking at the fiscal commission tells you the same story. they're making changes in social security, to medicare, to defense spending, to taxes all across the board just to try to balance this thing. so we really do have a very difficult task facing uh-uh on this. facing us on this. >> yes, sir. >> larry bruiser from mitt suey

usa. all of you have, very rightly, said the only real long-term solution to the deficit is reducing entitlement costs. but the house republicans who are now gointo be in the majority in their pledge to america took social security and mecare as well as defense off the table. polls continue to show that the public is not very excited about the prospect of cutting social security and medicare, so how do you think this is actually going to play out in congress over the next couple years? >> that's a good question, larry. i'll leave that to the panelists. i mean, it is, it is -- i would just note that in addition to being left out of thepledge to america, even the bowles-simpson plan which was fairly bold on social security did a little bit of magic wand waving with medicare, just said we're going to control the costs to 1%, the

cost increases to 1% of of gdp and how we're going to do that, well, we're going to strengthen this panel that as our last panel pointed out, this medicare advisory panel has not really, is not really projected to be all that effective at controlling costs. so i'll let, i'll let any of our panelists weigh in on that, if you want to start, andrew. >> i mean, i didn't look very closely at the pledge to america. for keptics out there -- skeptics out there, i don't have it in front of me. i'm not reading off somebody's talking points. but i don't believe they took social security off the table in that. i think they may n have addressed it, but i don't think they said, well, we can't cut social security benefits for anybody. i think it's interesting that both john boehner and the speaker and steny hoyer who was then the majority leader on the democratic side have both, essentially, endorsed the idea of raising the social security retirement age. so it, you know, there's nothing like sort of impending fiscal doom to focus the mind and bring

people together because these are sorts of things which, you know, five years ago probably neither of them would have endorsed. so i think there is some possibility of progress. social security is the most likely case to do that because we, we understandhe issues. it's a mature policy issue. we know the pros and cons, and it's also a game where you can split the dference. we can do a little bit on the tax side and a little bit on the benefit side, a little on the retirement age side. we can compromise easily. medicare and medicaid, in general, is tougher. not enough individual and market control, not enough government control. so it's -- you have just a pulling in different directions. the left tends to want to so the health care end with more -- solve the alth care end with more government control, more dictates, more rationing, that kind of thing. the right wants to focus on a more consumer-based approach with more sort of market discipline on things. it's tougher to compromise there because you're pulling in

different directions. it's hard to split the difference on health care than, i think, it is on social security. >> go ahead, robert. >> i actually think there is room for bipartisan agreement, at least in the near term, late this year. probably more likely very early next near. i'm not saying it's going to happen, but it's not in1257b8, the odds of this. ultimately, president obama knows his legacy critically depends on getting reelected because without that he really can't guarantee that the health bill enacted in march will ever be fully implemented as planned, and if it isn't, he goes down in his history as the greatest squanderer and he, obviously, doesn't want that to happen. i think he's going to draw very clear lines on health care and not so much on other issues. i don't think, frankly, that he takes seriously the idea of a challenge, a primary challenge from the left in 2012. and if there is, i don't think it would gain much traction.

so think he has room to not -- when i say triangulate, that kind of indicates he's going to pull a clinton. i don't think he's going to do that completely on many issue because he will be very strict on health care to protect his health care bill, but i do think he's willing to compromise on things like social security and the top line level of discretionary spending. if he's in this a debate with the republicans on how much we should spend total discretionary, that's a debate that's on the republicans' turf. if he can free with the republicans on a -- agree with the republicans on a top-line number and then argue about what the priorities are, then he's on turf that is more favorable to the democrats. and is less likely to be a political problem for him. so i think he's willing to compromise on top line discretionary and, perhaps, social security. >> one other thing i wanted to say, like, returning to this

deductible point, and this is the paper we're coming at. we're going have lots of tables that show you the different deductibles and ask what you accomplish, but if we told people who are currently retired that they had to pay a deductible, it would be wrong because they had no advance warning, they thought they had medicare when they retired, and what we want do is we want to signal -- if we're doing policy well -- the time for people to adjust. so what we would want to do is tell people if you're, well, i don't know, pick a number, 55 or younger, then when you retire then the first x dollars are out of pocket, and people have a chance to safe in anticipation of that. save in anticipation of that. the thing is that i think if you were to say we've gotta have, you know, a thousand dollar deductible for medicare for all current retirees starting this year, then you'd have zero chance. again, i'm not a political scientist, but i don't think i need to be to make that statement. but i think if we were to say,

okay, beginning in a decade there's going to be a deductible in medicare that starts out at $200 a year and then grows depending on government's ability to constrain costs. if government's bad at constraining cost, the deductible has to go up to keep it in the balance. then you set up a game that's actually the right game. so government realizes, oh, we're going to have to defend a big deductible in the cost management side, but i believe you could get a deductible in as part of a big fundamental fiscal consolidation because it's something just like changing the retirement age, if you do it often in the future like was done before, then people kind of understand that that's something far off in the distant future that we'll have to start to do to address our long-term problems. and i think for me it's very hard, but amazing how much you can get with a deductible that starts kind of small and then grows over time and doesn't look so terrifying from today. >> well, one of our previous

panelists wanted, i think, to possibly make a point or ask a question related to that quickly. >> sure. i was just wondering what you have to say about wages and take-home pay which, you know, as you know a lot of people didn't even before the recession think they were living through a boon because that was stagnating. so what n we do? obviously, health care's part of the story, but beyond that what can we do to get wages and take-home pay going up for the median worker again? >> the firsthing that comes to mind is that if you look in terms of private sector y over the past year over and above inflation, it's up in the 3 3.5% range mostly because people who are already in the work force are working longer hours and average hourly earnings are up a little bit, too, and it's been outpacing inflation. ultimately, what we need to do to get the median worker to earn

more is to have a combination of faster economic growth and a lower fringe benefit cost which gets back to health care. now, over time the fact is unless we make some market-friendly reforms -- and even if that occurs, it would just be a one-time benefit over several years -- that health care is going to cost more relative to gdp over time, and that's just a function of higher wealth and living standards, and we just have to live with that. so as long as health care costs come as a business expense through fringe benefits rather than through the wage side, we're just going to have to live with the fact that wages are not going to grow on a real basis as quickly as the overall economy and overall compensation. anthat's okay because, you know, big tvs are going down in price, so maybe we don't need as much. >> this is another thing that i've been working on with stuff i haven't come out with yet, but

there's a web site that everybody can goo right now called payscale.com. and it's an internet site that if you go and, like, type in everything about yourself, then it tells you how you' being paid relative to people like you. it's pretty detailed, but i think it's actually the sort of labor database out there because 23 million people have done this, so a big sample. not a random sample, but if you go there and look, they now have a national wage index that's better than the government ones because it tracks wages for people who change jobs accurately. and so, and so the wage data at we just heard about is really the people who have kept their job, so most of you in the om have a job, your wage didn't go down, right? but the people who lose their jobs and then g another one, they take a big payt.