the possibility of a global system increasingly dominated by chinese-style values. i don't know about you but that is not a system that would be comfortable with. had we need to think in terms of the mix and not necessarily in light of the cold war. i agree with what you are saying. [laughter] >> before we go to the audience for questions, mauricio cárdenas, tell us about western hemisphere reactions to all of this. >> i lost the argument. brazil is not going to replace the u.s.. [laughter] >> obviously, i think if we

think of the debt as the issue, and the debt is going from 70% of gdp, to 80% of gdp in the next four years by. inertia, if we think that the u.s. has supremacy, there is now a contender, the next one in the marathon as miles behind, we can enjoy the summer, white for the bipartisan commission proposal and if nothing comes out of that, we wait until after the elections. i think that sense of complacency is misplaced. is this place for one reason. the damage it is -- it is misplaced by one reason. the damage is not empowered and competitors. the damage is the u.s. economy. to do too many things at the same time making the welfare state,

in infrastructure reject its priority is becoming the -- it is priority is becoming a global supplier of last resort, and in many cases of all may resort. with all of those burdens, and the current levels of taxation, i think that is not sustainable. at the end of the day, that hurts consumers, the investor, and the economy as a whole. i think the motivation of doing something is not necessarily because of losing supremacy, it is because of weakening the economy turned by the way, back to -- economy. by the way, back to brazil, countries are thinking let's ways of mitigating the costs associated with a weakened u.s. economy, where a weakened u.s. dollar. let's find other u.s. --

currencies. let's promote dialogue between emerging countries. let's figure out a way of stimulus. this is taking place. it is not about overcoming the u.s. and becoming the world leader. it is about figuring out ways to handle the change in circumstances, which basically means a change in the role of the u.s. in the global economy. >> a tape. let's go to your questions. i would ask you to act -- ok. let's go to your questions. i would ask you to white for the microphone, and secondly identifiers -- wait for the microphone and secondly identify yourself. who wants to go first? over here? >> thank you, m. nixon.

i wanted to follow on your original comments and offer eight but diagnosis of either political hypochondria -- offer a diagnosis of political hypochondria. you talk about the discussion on tax rights and entitlements, but what about foreign policy spending? we spent trillions of dollars on the war on terror, fund about 70% of naval operations, troops in asia, and now libya, and we're about to spend the next month looking backwards to that 10 years of foreign policy expenses. why do you see happening in the next 10 years? will they necessarily have to be cut, where is the status quo maintained because most of the money will come from entitlements and tax rates? authority than me. my own view is that some

expenses will inevitably be cut back. the chances of us in gauging militarily again -- engaging militarily again, of the scope of iraq and afghanistan, which out the clear notion of how we come out of it and finance it, is pretty far-fetched. i think out of this could come some very healthy adjustments in our whole sort of defense strategy, and expenditures. that would be a good thing. what i do see is that the easiest cuts are on the non- defense foreign policy side of the budget, and i see those being cut back, areas initiated by president bush, where we

really have some leverage to do some very constructive things will be cut back harshly. there are a whole host of kind of irrational cuts that are being made right now. it is because those are the easiest places to achieve it. i think there are some real adjustments to the head. the entire budget will be scrutinized and scrubbed, but all i was saying is the bottom line is if you are concerned about deficits and debt, the answer is taxes, health care costs, and growth. everything else ends up as a rounding error, as far as concerned about our financial well-being, but the other

pieces that get cut could do real damage. >> bob, do you want to comment on this in terms of hollowing out foreign assistance at a time where in the arab world it could be critically important in terms of democratic transitions there? is there not a danger in all of this where our level of influence will be seriously effected? >> it is hard to measure how much it will be effected, but it is foolish. these are trivial amounts of money. they are the easiest low-hanging fruit for congress to go after because they have no consistency. unfortunately, i actually believe the president has not helped the case. when the president said that we need to focus on nation-building at home, that kind of gives people more licenses than they might otherwise have to say

"let's, by all means." unfortunately, it always rests on the administration in power to make a big case for why these expenditures are necessary. if congress will never make that argument, and the opposition party rarely will make that argument. if the administration really cares, they will have to fight for them. >> thank you, pete schelling, from brookings. i like bob's optimism, but let me throw out a few other thoughts that might weaken the u.s. role overseas, and have them shoot you down. >> it is my job. i am up here all along on this. [laughter] >> first is a decline in public confidence in the ability of the federal government to do the right thing. in the 1950's, the 1960's, the

public believed to give it to the federal government, they will solve it. that confidence is no longer there. therefore the likelihood of the u.s. public urging them to be active overseas is not likely to happen. we solved a lot of problems in the past by just throwing resources at them. massive amounts of money, massive delegations, overwhelming other countries with just our manpower and people. i do not see us having the kind of resources we have in the past to throw at international problems. the last one, and i am not sure about this -- declining public interest in international affairs. the focus now is domestic, it is jobs. it could be transit -- rick perry, kicked the government

small, making a texas model. i do not see growing american public interesting adventures overseas, especially in the wake of afghanistan and iraq. my question is, do these points lead further arguments for a less influential american presence abroad? >> the one that is most constricted persuasive is constrained resources. -- the most -- the one that is most persuasive is constrained resources. again, having spent a lot of time looking back on the cold war we can't tremendously overstayed the degree -- we can tremendously over state the degree we are able to snap our figures with money. with a lot of money at the vietnam and did a lot of damage to our economy and the global economy as a result. you could overstate this.

as far as the public, i have been hearing every five years or less that the public has had it with foreign policy for the last 25 years. the american people are a very interesting, not to sit with you later, people, as they always say they do not care about foreign policy, and they never urge administration's to go off on foreign ventures. it is usually political leadership, whether it is in congress, where more likely in the white house. it is event sent american people do not think they will care about and then end up thinking about. i would be happy to wager with anyone in this room, including thomas mann, that if averages hold, sometime in the next five years, the united states will engage in another moderately sized military action. >> moderately? >> it is not world war ii, and

it is not 500,000 troops, and i've repeated this ad nauseam. we have, on average, since 1989, engage in a significant military action oversees roughly once every two years. i think we will be in a post- afghanistan, post-iraq the way which will probably extend that, but if you would have said to me at the beginning of the obama term that they told me if i voted for john mccain we would invade another arab country, and i did vote for john mccain, and that is exactly what happened. [laughter] if you had told me that we would be yet again engaged in a military engagement, however limited in a place like libya, i would have said that was odd, but do not matter -- underestimate the american people's ability to pay no attention to some place in the

world and then suddenly support intervention they had never given any thought to. >> i am from american university. i have a question to kenneth lieberthal and bob. i think china has aggressive foreign policy aiming to increase their army power, so why does the world not worry about china using their economic power to strengthen their army power? >> go ahead. >> i may agree with you. as you can tell, bob and i enjoy agree with each other. as i understand your question, why is the world worried that china pulled the military power is being strengthened on the

basis of their economy given they do not have aggressive intent, is that right? >> as opposed to their acceptance of america having a lot of military power. i think that was the other part of that act >> let me speak to the chinese side, and he will speak to the acceptance. on the chinese side, there are several concerns. one is that china certainly asserts constantly that it has no aggressive intent, but its plans for development of its own military are very non- transparent. it has become more transparent over the years, but it is by far the least transparent military throughout asia, or frankly the rest of the developed world. things chinese military is investing in, in some cases are really

worrisome. when you look at anti-satellite weapons that they tested, and it missile, carrier-killing missiles, and that kind of thing, that goes beyond taiwan and the area right around china. china, on the one hand says they have no global military ambitions, but on the other hand we keep seeing china develop capabilities at a fairly rapid pace that in fact could lay the groundwork for power projection way beyond its own periphery. i think that this connect work -- that disconnect worries because they need to understand more about how your mosby's military development delays to specific goals.

-- your military development at relates to specific goals. you can find that information about the u.s. military, but you cannot do that with china. if you look if the military white paper, which they issued periodically, and each year has gotten more detail, but it does not bring down the world by region and indicate its interests by region. you know the military thinks in those terms, but there is nothing that addresses that level of specificity. that worries folks. finally, frankly, the fact that china is not a democratic system worries folks. there is a sense in the united states, and frankly i think around the world, that if you have a non-democratic system, it does not have the kinds of constraints that democratic systems are kind of self-imposed

by the nature of their decision making. historians might not agree fully with that, but in terms of popular perception, there is a worry about systems that are authoritarian systems that are getting much more powerful developing their military is very rapidly and do not get into detail explaining why they are doing what they are doing pad. this, they would say the united states is not very constrained according to those statistics. are you. answering the questions about why don't people worry about what china is doing. >> i would ask you to respond perception that nato is not capable of sustaining the kind of military role it has played in the past. >> could you also respond to the

other half of the acceptance? >> talk a little bit about nato, first of all. on nato, we made a mistake, i think, in believing they could be something other than it was during the cold war, which was a . was to stay there, and not get beaten to quickly by the soviets. when the cold war was over, and i say this in all difficulty and talk to my wife was a nato ambassador and believed in this, and we decided that nato had to start becoming a global player, we stretched european capabilities and desires beyond where they reasonably could go. so, when we compare data to the past, it is not that it is worse

than it was in the past, but we are asking nato to do more than or desirous of doing so. that is creating tensions that are unnecessary. the goal of a nato and that you should be to continue the goal creating -- and that you should be to continue the goal of creating things yet europe, the middle east, and abroad. to talk about nato as a global power is a mistake. >> shocking, i agree with bob now. i think bob is right in asking too much of the european allies. of course, nato is not just a european allies. the canadians are also partners do step up to the plate in a lot of these operations.

what we have seen it is beyond afghanistan, especially, it does by non-european allies will have aspirations for nato, the glenn beck choice stepped up when the u.s. has requested. perhaps the biggest -- who have had actually stepped up when the u.s. has requested it. there was this very point about european security. what came out of that debate and subsequent commentary was that we forget how compromise europe has been from its not-too- distant past of world war ii. if there are still a lot of issues to be worked through about the use of military force, and the fact that to the united states the military is this point of pride, part of their national patriotic and narrative, that is not the case

across europe. there was a great tarnishing of a role of the military because of all of the atrocities of world war two. we are still dealing with the consequences of this. germany, in many respects, we are asking why they do not step it is not just china. where is germany with their great economic development? in many respects, they are so traumatized country, still dealing with the effects of what the german military did during world war two, and is a major element that has not been resolved. if you translate that to a european-wide stage, you have no concept of where they should prevent conflict. it is something we have to have a better conception of one we

start thinking about our own security, and where we are going to go in these next two or five years of something pops up again. >> nothing succeeds like effect on the throne, or leaves tripoli, it will be seen as a victory for nato. one question for the latest. >> i'm from the university of maryland public policy school. it has been interesting to listen to this, but what i sense is lacking is a discussion of the arab spring and the u.s. israeli policies. they have been such a big driver of foreign policy in the past. i do not have a particular agenda or arguments in may, but i would like to hear arguments about our dysfunctional political system and where that leaves us with respect to

influence on israel and the developments of the middle east? >> i guess that is for me. [laughter] >> you try to escape the middle east. >> it always comes back. >> i actually do think that the dysfunction we have been talking about here effect our ability to be effective in the context of the dramatic changes that are sweeping across the region. just dysfunction and bad debt and we have been over extended, and we cannot afford involved in another war or military intervention, it is in iraq and afghanistan, and that means we are reluctant, in particular, to take a position

that might imply obligations on our part to do something. when it comes not to libya, but to syria, because libya is a sideshow, like las vegas, what libya, basically stays in libya, but what happens in syria, will have profound world, and four arab- israeli relations, and in particular, for iran's bid for dominance in the region, which could suffer a decisive blow if the regime is overthrown. it might happen anyway, but the fact that we are hesitating to come out clearly and forcefully in support of the syrian opposition, when we did not

hesitate to do it in the case of egypt, our staunch ally for 30 years, hosni mubarak, or in the case of libya, where we did not have much interest in the outcome, is, i think, a reflection of preoccupation, or lack of ability to get engaged. it is ironic that did discuss -- that it is the turks that are not going to threaten the syrians with steps, whatever that means. we do not have the credibility at the moment because we are not prepared to move effectively, and the russians who are not willing to allow un security council action against this, i think would take a different

posture if we were much more assertive than we are. we are getting there, but we are slowly, and a lot of people are dying in the process, and i think that as a of the situation we facing. you also left about the arab- israeli front. -- asked about the arab-israeli front. there, i think we suffer far more from a sales theory. we went about it tried to resume negotiations in the wrong way. the degree of difficulty was great, given the dysfunctional as some on the israeli side, and on the palestinian side. nonetheless, we did not help, and you can cut debt down to political -- cold that down to political constraints, but i think it has a lot more to do about the way we went about it. we do not have time to go into

the details, but i think the failure to achieve just a limited goal of getting the did not care about solving the palestinian problem had final status on the negotiations, but president obama who swore from was going to make this a priority in two 0.5 years was not able to get direct negotiations -- 2 1/2 years was not able to get direct negotiations. that the facts are credibility. if we can not be effected our credibility. if we do not seem to be -- effects our credibility. if we do not seem to be effected in the arab world, we are badly positioned to play an influential role in these developments.

i am afraid that we are out of time, but i want to say thank you to the panelists and to the audience for a great discussion ter [applause] . [applause] [captions copyright national cable satellite corp. 2011] [captioning performed by national captioning institute]

>> some live coverage to tell you about it, the airline pilots association is meeting in washington, and coming up charlotte they will hear from -- , and surely, they will hear from john pistole on c-span to. coming up a 6:00, a look at emerging non-violent political

movements around the world. they will discuss why the moments are popping up in some countries and not others. also, on booktv we will be live with the author of "pinched." he will be at the politics and prose bookstore in washington, and talking about the long-term impact of the economic recession. that is live this evening at 7:00 p.m. eastern. will take you live next to the brookings institution. the 12 members of the congressional joint deficit reduction committee will begin meeting in the fall to find almost $1 trillion in spending cuts over the next 10 years, and this afternoon broken scholars will look at the prospect. the panelists will include a former member of congress and a political science professor. it should get underway shortly. on the issue of politics, texas

governor rick perry, who spoke earlier today in new hampshire, we will have that for you this evening, in its entirety starting at 8:00 p.m. eastern. bill frenzel

>> this is the brookings as a kid in washington. the group will discuss the upcoming meetings of the joint committee on deficit reduction. they will begin meeting when congress returns, the first week of september.

>> welcome to the brookings. my name is ron haskins.

i am a senior fellow current i have been in washington for 25 years, serving at the legislative branch, and now the think tank, and all of this experience led me to think there is nothing knew i could see in washington, and in the last year i have been surprised on several occasions, not least in the past month or so, and that is what we are here to talk about, the biggest surprise, at least to me, this committee, and the way we dealt with our debt ceiling in this most recent iteration. here is how we will proceed. i will give a brief description of the agreement, but i will leave a lot out because it would take a long time to do the whole thing. i specialize in simplicity, and that is what you're going to get. then, we will turn to sarah binder, a senior fellow here at

brookings, an expert on congress and legislative politics, and she will talk about the history of super- committees, and it is said to think there have been previous committees like this one. whenever congress cannot make a decision, they appoint a committee or a commissioner, and sarah binder will describe that and talk about this particular committee. then, we will turn super william gale, who is a great return to -- turned to go william gale who was the author of several versions of the deficit and 10- year projections with all kinds of interesting base lines. he can produce baseline's festive and congress can pass legislation. he had this thing out about a minute and half after. shockingly, he will talk about baselines, and it turns out they

are a very, very big deal, and completely unresolved as far as i can tell. then, we will turn to henry aaron. he will say that we have the all wrong, the president has it wrong, congress has it wrong, and you'll tell us what we should do instead. finally, we will turn to my good friend, bill frenzel. for those under the age of 60 might not be as familiar with bill frenzel that he was in congress for 20 years, a ranking member of the budget committee for several terms, and knows as much about the budget as anyone i have encountered. is a guest scholar at brookings. he is quite to talk about the politics of the budget -- he is going to talk about the politics of the budget deal. let me say a few things about the agreement. it is helpful to think about it in three distinct parts. it raises the debt ceiling,

which was the point of the whole thing. in the history of the country, all of these agreements raise the debt ceiling. this time, which two other things -- if we reduce the deficit, crucial, and by far the most complicated, and an third we agreed to have a vote on a balanced budget amendment to the constitution, so that bull will take place in the fall. -- vote will take place in the fall. the second part of the deal -- the first part of the deal is raising the debt ceiling, and that is done with approximately $900 billion first, and then a subsequent step which will be between 1.2 and $1.5 billion. whenever it points out to be will get us through the 2012 election, which was one of the main goals, so the president got it least that goal. then the most complicated part is reducing the deficit, and

that also comes in two stages. the first is there as an immediate agreement to $900 billion over 10 years. there are a lot of numbers floating around. you conducted different baselines and budget authority, or outlays, but the budget authority is $935 billion, but as i say, there are other bass lines and so forth. that is the first one, and it includes interest. this is a great, important point about the budget. the more we cut, the more we save beyond just the cuts in programs because interest is getting to be such a huge part of our budget deficit. we are headed toward 10 but years from now, paying 1 trillion dollars -- from now, paying 1 trillion dollars in interest costs. that is an important part of the savings. this is achieved by putting caps on discretionary spending. the first step is out of discretionary spending caps both

defense and non-defense. there is a fire wall between security and on security, but that only lasts for two years, 2012, and 2013, so there could be a lot of interesting things that happen after 2013 and how these cuts are actually made. then, there is the part everyone is talking about, and the reason we are here, this new device that leaders came up with, and that is this super-committee, so-called carrot is the joint select committee. if it has the word joint, you know it must be really important. that will result, one way or another, if we live up to the agreement, between $1.50 trillion, or 1.2 trillion dollars in 10 years.

so there are six leaders appointed by each, and apparently can choose whatever baseline they want, that turns out to be an important issue. they could make any changes in spending or taxes. there was some dispute about that, but the text of the agreement makes it clear that they could raise taxes, cut whenever they want to, including medicare and medicaid, so they more or less have carte blanche to do whatever they want to do. it is a majority vote to decide in the committee, not like the president's deficit panel. seven out of 12 votes wins. if you get a majority, you can pass whenever you want to. they have to report decisions by november 23, and congress must vote by december 23, without amendment, and it cannot be filibuster in the senate, so these are about the best rules you could possibly have to pass something to the

congress of the united states, so in that respect, it looks at it could be a good deal. now, if they didn't reach an agreement or the congress votes it down, there is a fancy word sequestration, which is a holdover from the grammar days of the 1980's, and they're the additional cuts would be $1.20 trillion there are some complex rules about what can not be cut, like for example in medicare if it cannot be cut, only the payments for providers. we have such a strong record of delivering whenever we decided to cut provider payments that we would do it at the do it again. there are a bunch of low-income programs like food stamps and other programs that are protected from the sequestration completely. there is a brief overview of the deal, and now we will turn to the history of these kinds of special committees, and a few

words about the process of this committee, sarah binder. >> thank you. i thought i would make three points about congressional conditions in general, this particular committee, and then a little bit about the implications of the membership. first, congressional conditions typically sell, et -- commissions typically fail. second, the super-committee differs quite a bit from the previous incarnations of these congressional commissions or committees. it's important to understand why it differs, and why differences might be consequential. third, members of the committee has a number of implications for what is likely or not likely to happen this fall. i would like to spend a little bit of time thinking about how the leaders make their selection. first, why do committees typically sell? what is different this time

around, and what can we learn? why the prone to sell? -- fail. it is not unusual for congress to kicking the can down the road. there are plenty of examples. the medicare commission, the entitlements commission, the simpson bulls commission, -- the bowles-simpson commission, none succeeded in submitting a plan. even when we do see episodes of success, sometimes pointing to the greenspan social security commission, when you look under the hood, it turns out that agreement was reached by people outside of the committee, the work of a tip o'neill, the speaker, with president reagan. when conditions are successful, it turns out the mandate is very, very narrow. we will come back to the reasons why that might have succeeded. why do these not work?

i think of political and institutional reasons, and in the context in which these commissions are created a first, it is typically that deadlocked that encourages congress that it -- to kick the can down the road in the first place, mostly to avoid blame. not surprisingly, committees tend to inherent. when we think about the politics -- politics that lead to stalemates, we have in mind the increasing polarization, both increasing policy differences, as well as simple partisan team played that give the parties strategic reasons to disagree. parties see the death -- the problems differently, the submissions differently, and even when they can agree, they have an incentive to disagree just because it is the other party. so, political incentives are why

these are created in the first place, and then it is hard to overcome the pockets that created them in the first place. -- politics that created them in the first place. they are typically created by executive order, not like the joint committee that has a statutory basis. typically, when presidents set up these commissions through executive orders, they are given a supermajority requirement in order to will officially report. there provisions are rarely, if ever protected procedurally, there is subject to filibusters', party control of the agenda on the house floor, and the most successful commission is the one that proves the rule. so, the defense commission had a statutory basis, was protected procedurally from being amended on the floor, and the decisions when into affect unless congress and the president voted to disapprove or reject

recommendations. now, commissions created by executive order can not have these legislative authorities, so often that they are hampered by the way they are created. finally, in terms of contexture will reasons, these episodes -- contextual reasons, these episodes are created in. of crisis, and -- in times of crisis. it is inefficient to compel the parties to sit down. how was this different than what we have seen historically? it differs in terms of these institutional factors i have mentioned. it has a statutory basis. it only has a majority vote. there are no amendments on the floor, no filibusters from the right or left, and the rules committee cannot pull the bill off the floor. there are triggers written into the belt. granted, congress has kicked the can down the road, but they read bits of the explosive they fail to reach an agreement.

it effects the consequences of failing to agree. some parties welcome a stalemate because they might benefit elect laura lee from -- elect torelli from refusing to agree. this time, the cost of the stalemate is much higher. it might compel the committee not to deadlock. having said that, the political factors that lead to defeat and sell your are essentially still in place. so, -- and sell your are essentially still in place. -- failure are still in place. this committee and harris the polarization uc and the house and senate. -- inherits a polarization you see in the house and senate. the closest you get is max baucus to the center, but he is really alone to the extent he is

a centrist. that makes their charge. if it is to build a bipartisan coalition. second, the party leaders left little to chance in selecting contingence. all offer third-party leaders. they offer tax committee chairs. you might wonder where is paul ryan? for the democratic side, a key factions, latino, black, all women, and through john kerry, the defense constituency. they will cooperate with party leaders, and informal leaders from top party leaders. the deal is immensely important to party reputations and their brand name. this is not a rogue committee. this is not bowles-simpson,

which we of thrown off to the side. this is not a home-grown gang of six effort. the parties have deep stakes in the outcome of this committee and its suggestions, which means if there is going to be resolution, the key question is do the parties seek compromise in their election interests of 2012. keep in mind what paul ryan said yesterday, and this is apparently after he refused to be on the committee -- "we should not have a committee with all politicians, an agreement that redesigns the whole design of the federal government. this should be brought to the american people. in other words, these are issues for the campaign trail, not the joint committee to call if you add all of that up, where does it leave us? -- committee." hit you add all of that up, where does that leave us? i suggest that will be another last-minute deal. do not put the turkey in the oven to early for things given.

his there is a deal, it will be leadership-in door -- if there is a deal, it will be leaders in-endorsed. finally, the committee does not operate in a vacuum. there are many other deadlines and it is possible congress could rewrite the law and take the sting out of the triggers. so the committee here is not the last buy or the only bite at the apple. >> i would recommend the audience by their christian -- christmas presents early. william gale. >> talking about baselines' could be tedious, so let me justify it with two point. the committee needs to cut $1.50 trillion or the automatic sequesters kick in. in contrast, the debate about the baseline is a $4.50 trillion question.

it is actually much larger than the cuts the committee has to make. essentially they have a $4.50 trillion question, and then a $1.50 trillion question. i want to give a very simple example of what i am willing to talk about that is the tedious part. a baseline issue is basically if you need to cut $1.50 trillion, the question is compared to what? if you compare it to a baseline where the government has no revenue, and spends 50% of gdp, his easy to come up with $1.50 trillion, but you have to have a baseline to come. two. as ron mentioned, the budget deal has all sorts of as trips and semicolons, but it left this question undefined.

there is no guidance about what baseline people actually use. so, think about this the following way. suppose you have been eating badly the last 10 years, and you have been gaining a lot of white, and you want to lose 15 pounds. -- wake. you want to lose 15 pounds. the question is compared to what? the way we usually think about it is compared to where i am right now. there is another way to think about it, which is to say i've been eating badly for 10 years, if i continue to eat badly the next 10 years, so i will lose 15 pounds relative to debt increase in 45 pounds over the next decade. nobody that is serious about losing weight builds and a 45 pound weight increase, and then

says i will lose 15 pounds relative to that, but using one of the bass lines would be the equivalent of increasing the deficit by $4.50 trillion, and then say i am going to cut it by $1.50 trillion. that is essentially what is at stake. that ends the nine tedious portion of the top. the standard baseline is what is called current law. it is not literally current law, but it assumes that all tax cuts that are supposed to expire actually do expire, accept a deal. it assumes the alternative minimum tax will grow over time and take over the tax system. it assumes that congress will make the medicare cuts it is opposed by law, but never does. it assumes other things about military spending, as discretionary spending is held

constant after adjusting for inflation. the current law baseline is the answer to the question of what would happen if congress literally did nothing the next 10 years? the past and no legislation and just three appropriated the same amount of spending each year? that is not a realistic base line to use if you want to see where we are headed, but it is a good baseline to use if you want congress to have to recognize the costs to any changes of tax laws or spending items that it enacts. it is the equivalent of saying here's my weight now, i want to lose 15 pounds relative to my weight now. if congress wants to do anything, a needs to start where it is and cuts relative to the current law. that would be the equivalent of same when you find yourself in the whole -- of saying, when you find yourself in a whole, the

first thing you'd do is stop digging. there is an alternative baseline, and i feel responsible for this, having been doing this for over a decade, even back when the government was in surplus in 2001, the current policy baseline, which is the answer to the question what happens if congress acts in the next 10 years the way it has in the past, sort of a business as usual baseline, has shown large, increasing deficits over time. the current policy baseline assumes of the tax cuts get extended, that we cannot let the alternative minimum tax takeover the system, we do not spend as much in iraq and afghanistan over the next 10 years as we do now, that congress is incapable of making these medicare cuts that for the last 10 years they have shown they are incapable of

making. it is a business as usual baseline. is a really good measure if you want to see what path we are on if we do not change our ways. it is the 45 pounds and gaining over the next decade if we continue to eat badly. the point over the last decade is we are headed in this bad way, and here is the evidence, the current policy baseline. you do not want to use that as a baseline if you are trying to reduce the budget deficit. once you reduce the budget deficit, or once you want to reduce the budget deficit, that is the equivalent of saying i need to go on a diet, and i am not want to build in 45 pounds, or $4.50 trillion of the increased weight or budget deficit before i start cutting the deficit. so, the current policy base line has always been a good guide to where we are headed if we do not

stick stings, but it is not an excuse to not fix things, and all of the committees, some symbols -- bowles-simpson could, the obama administration, the congress, they want to use the current base line because it builds in the nice things, but it is not a serious approach to solving the budget deficit because it says basically we are going to cut taxes first by $4.50 trillion, then we will start balancing the budget. why don't you just not cut taxes by $4.5 billion -- by $4.50 trillion? just to make it more complicated, it turns out that the republicans this time around want to use the current

law baseline, even though that means the bush tax cuts have to be paid for as they are extended, and the democrats want to use the current policy baseline, even though that is sort of giving away the financing in the bush tax cuts. we can talk about the politics of that if you want, but let me sum up with three bottom lines to think about. one is the baseline is where the action is. if you can get to $4.50 trillion change there, you could care less about the $1.50 trillion in the supposed cuts. the second is they should use carson block as the current base line. third -- they should use current law as the baseline. when people talk about unclean tax increases in the deal, if they're talking about doing it from the current policy

baseline, that actually involves less revenue than sticking with the current law baseline and having no taxes in the deal. so, it gets very complicated and very orwellian, and very tedious, but keep the a weight loss example in the back of your mind. that is the most simple way to think about it. >> you can always shop now. henry, what did we do wrong? >> bilious a weight loss story. i will use in medical story to start my comments, not one i can claim originality, but it is at. you are a physician, you are encountering a person lying on the street, in the process of bleeding out, and merging all over the place when you bend over, you tell the person to stop smoking and eat better so they will have a better chance for a long and healthy life. the reason i use this example is

that i think it is symptomatic of a kind of policy derangement represented by the debate now going on in this city over budget policy i would like to start with half -- i believets they are facts. number one, the nation is in the midst of the deepest and most protracted recession we have experienced in the last 70 years. fact two, increasingly, economic forecasters agree there is no realistic prospect for a significant economic expansion at any time in the near future. that leads me to fact three, which is this bad news is occurring in the face of not

quite, but almost all-out effort by the monetary authorities to be supportive of economic expansion. fact four is that over the past couple of years, fiscal policy nationally, and that includes not just federal fiscal policy but also state and local fiscal policy, has become significantly more contraction. -- significantly more contractionary. that is, working against economic expansion during that period of time. the center on budget and policy priorities has produced a nice chart, reproduced by ezra klein, available in a hand out outside the room, showing that states, including all the large states but one, have seen reductions in spending compared

to levels that prevailed in 2008 before the onset of the recession. the one exception? texas. but texas will join this group shortly because they have budget cuts coming that will make them a contractionary fiscal force as well. fact five is that nearly half of the unemployed, and a slightly growing faction, have been out of work for six months or more. that proportion also is at 70- year highs. fact 6 is that standard and poor's notwithstanding, there is little to no indication in financial markets that investors are seriously concerned that the united states will default on its debt. with a current yield on tax indexed bonds, a maturity of

seven years, the yield on those bonds is negative. people are actually paying to invest in them rather than requiring a positive rate of return. now, i say all of this along with the fact that we do in fact face an extremely serious long-term fiscal problem. bill and many others have been pointing it out for many, many years. but right now, we face an immediate problem of great seriousness, and that is dangerously flat economy. for us to be focusing now on dealing with the longer-term problem through measures that promise to aggravate the near term problem is, in my opinion, truly weird. i think it is important, even as we consider how this committee

is going to function, how the budget process is going to play out, that we not forget the weirdness of the priorities that are expressed in that policy. i think in this circumstance, it would be truly perverse for congress not to agree to what i anticipate will be president obama's recommendation to extend unemployment insurance benefits yet again and to extend the payroll tax holiday that was enacted it earlier this year yet again as well. in my view, the current policy -- the correct policy right now would be a combination of the short-term stimulus, including investments in public works that we can finance at historically low interest rates, together with longer-term deficit reductions enacted now, but to

take effect only when the the recovery is well established and unemployment has fallen to certain target levels. that happens to be exactly the policy that most of us here at brookings have been urging for a long period of time. it is a policy that christine lagarde yesterday embraced in "the financial times." she said, "what is needed is a dual focus on medium-term consolidation and short-term support for growth and jobs." that view is identical to the positions taken by reputable economists with such widely varying political positions as paul krugman and martin feldstein. for purely fiscal reasons, i think one should you with the concern the task that is laid before the super committee, to

cut up to $1.50 trillion from federal deficit over the next decade in addition to the $935 billion agreed to in august. but there is an equally -- additional an equally important reason for concern. if the committee does not agree to cut at least $1.20 trillion at through explicit measures, then some or all of $1.20 trillion will be cut through an automatic sequester, and those implied cuts would reduce both discretionary spending and a national defense spending to levels that would threaten basic economic interests in the nation. i have a couple of handouts attached to the one that i mentioned earlier that are available outside that graphically show the magnitude of the cuts that would occur.

i am going to conclude with one assertion about tax policy, which i am sure bill will come back to, and i think he would agree to. i think the best possible outcome for the debate over whether to extend the bush tax cuts would be deadlock, so that they all expire. at that point, we could begin to talk about how to occurred tax expenditures, loopholes, call them what you will, and use the revenue generated from them to lower rates by some amount. finally, i just have one brief comment on possible outcomes based on what sarah just described. a very likely outcome is that the super committee will agree to some modest, specific cuts,

but not to as much as the $1.20 trillion necessary to avoid sequestration. if that occurs, there would be automatic cuts evenly divided between defense and non-defense. they might be so large and so unacceptable that in the end, the agreement just reached in august might be one to which congress returns and reconsiders. >> bill frenzel. >> thank you very much, ron. as advertised, i have sinned. i am a recovering congressmen. -- congressman. [laughter] i have been going straight for two decades. in that before the court in hopes for mercy -- li lay that

before the court in hopes for mercy. this budget area is one our arena in which the political parties have always tried -- not always in the senate, but mostly always have tried to establish differences between each other. it is not unusual to find parties at loggerheads over a budget question. there have been glorious times in the past in various summits, under reagan and bush, a wonderful time under president clinton when we actually had a surplus is, times of compromise between the parties. but in recent history, both parties have been pretty vigorous spenders, and now we have the parties locked in this a vigorous struggle over who -- over what is going to be cut, if

anything. the republicans have been scrapping with obama and democrats on the continuing resolution for '11. we will have another scrap on '12 after labor day. we are talking about that debt ceiling deal at a budget and a special committee that has been put together. in the meantime, the democrats are fighting back. they have not passed any budgets. obama has put forth a framework without any need on it -- any meat on it. the economy is down, it deficits persist, debt ratio is climbing, and the parties have been arguing over discretionary domestic spending essentially. the super committee is not going to change that situation very much. the republicans have painted themselves into their little corner -- no tax increases.

the democrats have painted themselves into their little corner of defending the social security and medicare as written, although they seem to be the main drivers of our long- term debt problem. the polarization of the parties and of the voters accelerates. the resulting stalemate causes the can to be kicked down the road, in that over used metaphor. parties obviously prefer to wait until after the election so that they have another year to pender to their core constituencies -- to pander to their core constituencies. they are not interested in immediate solutions, and that is politicians of both parties. so they have created this budget control act of august 1, which ron described it to you as being

a byzantine in nature, whereas sarah describe to the predecessor committee's workings as well. as far as the constitution of that committee politically, i don't think it makes any difference. one of the panelists suggested they are going to represent the leadership, and that is my judgment, to. nobody on that committee is going to write a profile in courage by stepping out and voting with of the wrong game. they -- voting with the wrong team. they are going to stick together. that means they will stick to domestic discretionary, adding to some defense spending. but those players may as well be john and nancy and harry and mitch, because that is the way they are going to vote. the target will not stabilize the debt, depending on which

bill will tell huge base line to use. but it will continue to increase. they will wait for the election and the election is likely to bring us the continuation of divided government and further political stalemate while they and jockey until the next election. in the meantime, our economic condition continues to worsen. in my judgment, the right time of solution is the super committee or the congress itself has to negotiate something like the bowles- simpson or rivlin-domenici plan, stabilizing the debt in a dozen years and reducing it thereafter. i think our economy needs the certainty. if, as henry suggests, you need to that a bit, that is all right with me. >> ne -- need to backload that

a bit, that is all right with me. the democrats have to sacrifice in diamonds, stand for a stabilization in social security and cuts in medicare that they don't want to happen. in the meantime, republicans are going to have to sacrifice tax reform and for some additional revenue in as well. at the moment, neither party seems willing to make such a concession, and as a result, i believe that the super committee will achieve its $1.50 trillion goal. as somebody said, the trigger mechanism is a little frightening to both parties. with a few entitlements that are the least harmful to the rest of the world. my political prediction is business as usual. we will have spent at the end of

the year almost the whole year arguing about 15% of the united states budget, and we will be prepared to spend another year next year doing the same thing. thank you. >> all right, now i am going to take questions, and i would give people in the audience the opportunity to ask questions. here is the first obvious question. can anybody on the panel imagine any circumstances under which republicans would relent on a taxes and democrats on changes in medicare? henry aaron is going to tell us how. [laughter] >> financial catastrophe. >> i agree, i think it takes a crisis. american government has usually been pretty good in a crisis and pretty lousy at all other times. perhaps that would do it.

>> our colleague at alice rivlin, who is by nature extremely optimistic, said that her scenario, roughly speaking, is that the new ingredient is the public revulsion about what happened to the last few weeks or what didn't happen at the last few weeks it. public concern about downgrading, the crisis in financial markets, the weakening economy, that could then be the spark that causes a bigger agreement to take place. just to add to that, the most optimistic scenario -- i don't know -- don't ask me the likelihood of this, because it is not large -- but it is that a, there is a grand bargain, and

b, the stimulus measures that henry mentioned, if they are aiming for $3.50 trillion on the grand bargain, they have a lot of room to provide stimulus now and still get in the 1.5 ceiling. i don't know how likely it is to happen. i am not the right person to assess the political likelihood of it. but conceptually, one could see how that would work. >> fortunately, sarah is. you mentioned at the line that almost everybody does, which is that partisanship really predominates in washington now it from your perspective as an expert on congress, is this unusual historically? has there been a time when partisanship has been set so high? is there a chance it could be produced enough -- reduced enough to reach a reasonable agreement? >> no, no, yes, now.

-- no. [laughter] very high partisanship out of the civil war, low in the 1940's and 1950's -- we have conservative democrats, liberal and moderate or what agains -- liberal and moderate republicans. historically, we look at w lot like the late 19th century. polarization is not new. it takes awhile to dissipate, it takes awhile to reproduce the political center. that is not likely to happen in the short term. what else are you left with? the type of an external shock that henry and bill pointed to, financial crisis like we saw in the tarp episode. the drop in the dow focuses the

mind, even of members of congress. it is hard to see why the parties would want to give up the key issue that defines their differences before the election. the scary part to me is, when this all fell in early 2011, we are far away from an election. it may be that coming into an odd year, these electoral incentives keep the parties -- they want to burnish their brand names. >> i want to add one thing. we keep talking about how the crisis might trigger them to get serious about fiscal policy. but imagine we went back to 2007 and said, suppose the housing market totally collapsed, and the stock market totally collapsed, and the fed led out all the stops and interest rates 120 and still the economy collapsed and we had the worst

downturn since the 1930's, and europe was going to hell at the same time, and there was a worldwide fiscal crisis kind of emerging, wouldn't that be enough to get congress to be serious about this? [laughter] if you had said that in 2007, i think we all would have said, "oh, yes, of course, that is a ridiculous question of." and yet here we are, and they are still bickering about stuff of the way they are. it points to what sarah was saying, these are strong issues that are embedded in politics, and it is going to be hard to get movement. >> i want to combat --, backed -- come back -- i think these ads is confirmed the general derangement of the debate. what you have is general agreement, crossing party lines

just among the panel, that what is needed is a long-ter -- is a short-term stimulus and long- term deficit reduction. and yet the political process is unable, in the face of things not quite as bad as they work two or three years ago, but still pretty lousy, is still unable to strike that deal. >> by the way, if you have not figured this out, the politics on the panel is represented by the order of seating. [laughter] okay, so let's say they get a deal -- they have to get a deal, right? let's say they get 1.2 -- i think that is somewhat plausible. 2.1, maybe a half way, 1/3 of the way of where most people think we need to go, and would still not stabilize the debt as a percentage of gdp.

then what happens? what is next? >> next comes an election. >> yeah, but after the election, we still have the problem i just laid out. what does congress do then? all of a sudden de our bodies and will cut a deal? >> -- they are buddies and will cut a deal? >> if you go back to a year ago, people were saying they don't want cuts, they know what tax increases. what has changed, the big thing that has now changed, as people are talking about your deficit plan versus my deficit plan. in 2008, the candidates ran on who had the bigger tax cuts. that was a ridiculous debate to be having at the time, and some of us said so.

but the political system was not ready to have that conversation. in 2012, the election is due in large extent going to be about how to fix this. whoever gets elected will not be able to claim a mandate on how to fix this. maybe it will be the right government and we will compromise. but the thing that is different is that it seems likely to me, at least, as a non-expert political scientist, that the upcoming election is going to be about these issues, so whoever wins could actually do something about them after the election. >> the american people, in poll after poll after poll, who say don't tax you, don't tax me, tax that guy behind the tree, suddenly the book at gumption and say here is what you d -- suddenly the book that comes in and say here's what you do for the deficit?

it is not plausible. >> ok. [laughter] >> campaigns are not the place where people promise pain and suffering and sacrifice. [laughter] i suspect the '12 election will be similar to the other ones, and attended its will try to talk about with it -- the candidates will try to talk about other things brought the electorate will want to hear about the deficit reduction plans the. -- reduction plan. i hope and pray that that takes place, but i would not bet on it. >> if you are right that it is about tax cuts and spending, ron, you are right that nothing will happen. >> i hate to be right about that. in the past, there have been games here and there, but nothing like we just saw. what is the effect of this

episode on future debt ceiling of votes? we will probably have the debt ceiling vote after the bids until election within a few months -- after the presidential election within a few months. are we going to go through this every single time, that there will be an attempt to do something important substantively on the deficit on the debt ceiling of votes? >> there is a widespread perception -- right or wrong, i don't now -- that president obama was convinced that if the debt ceiling were not increased, the situation would be utterly catastrophic. and as president, he could not countenance allowing that to happen during his watch, and that he would do whatever was necessary in order to avoid it. if that interpretation is correct -- if the next person who faces the stor -- who faces this choice has the same

view that is attributed to president obama, the party that is willing to allow the debt ceiling to expire has essentially complete power over the agenda. that is one interpretation of how this whole process play out -- played out, and it is for that reason, i think, very important that whoever sits in the white house should this one orgain takes on a two line positions -- hardline positions. there should be no debt ceiling grid congress votes the debt when it votes -- there should be no debt ceiling. congress votes the debt when it votes expenditures. it is vitally important that the next time this happens, the president is willing to stand up

to those who ask for concessions that he or she regards as an acceptable. >> -- as un acceptable. >> they have to be willing to go off a cliff hand in hand with those dastardly republicans. >> you said it, not me. >> it was not a separate vote -- those were peaceful, wonderful years. i think, however -- because people who have a very strong feeling have seen what a powerful vehicle the debt ceiling is, we are going to see it subjected to too many more of these kinds of things -- i remember we got gramm-rudman on the debt ceiling, and we're

probably going to see more and more of this in the future before it slows down. maybe when sarah takes us into another cycle of a kinder and gentler times in the congress, we will get over it. in the meantime, i subscribe to pann. 's theory, the one that he describe -- to henry's theory, the one that he described, that the fault is not a great thing for the public and should be avoided at all costs. >> i don't want to equate the preaching of the debt ceiling with the shutdown of the faa, but i will, but we did see what happens when you take something hostage and congress goes on vacation. putting a fix on that for another month was in part to public scorn that congress it could throw these people out of work. >> some of the people in the audience might have missed that.

it is an interesting point. i had not thought of it. >> the general question of what you -- what happens when you take the federal agencies hostage to leverage the policy outcome. the faa deal, which had many, many temporary reauthorizations -- the last one expired in the middle of july, and congress went out of town after the deficit deal and there were regional and partisan issues that got wound up in it and they said they would not pass a temporary authorization for all the faa workers -- >> there is another lesson here -- this is essentially a fight between mica and somebody on the finance committee -- rockefeller, yes, thank you. they could not reach an agreement, and as congress often does -- it is 100-some thousand who will lose their jobs,

construction workers working on airports stuff. who cares about that? it turned out that with a recession, a lot of people did care, and there was a lot of pressure, letters and stuff on congress, and they reversed themselves when they were out of session, and reached an agreement because of public pressure. that is what we don't have in this situation, the public saying to a certain thing, except "don't cut my benefit." >> fair enough. it will not tamper parties -- temper parties taking things hostage, but it might temper them jumping off a bridge. >> scholars never agree on stuff. we have nice political diversity, and you may be of recovering politician, but you still have as political -- a

nice political instincts. this is like having a huge bazooka. our politicians just going to leave it lying on the table next time around? this is going to be a permanent feature of our political system writ does anybody disagree with that? >> not a bazooka, a nuclear bomb. >> it is true for both sides. the discussion of whether the president could simply raise the fiat becauseuy of, what was it, the 14th amendment -- that will play out in the notion that the treasury can do things to extend that limit -- the debt limit. you can be certain that they will be more aggressive in planning operations. i agree, it has totally changed. it is not definitive about what

will actually happen. >> you pointed out that both democrats and republicans could use this weapon. >> think of the delicious irony of the republicans finally a electing a president and then having the democrats put on thejohnson's bill debt ceiling. >> audience, it is your turn. raise your hand, i will call on you, someone will give you a microphone, and a whole thing should require less than a minute. [laughter] right behind you. >> jonathan nicholson. two really quick questions, technical and procedural, probably for ms. binder for the most part. one, don't they have to fight a staff director for the super committee? how old the ease of that signify how well they will get along?

two, there is an aspect of this bill or the debt ceiling could be conditioned on the archivist of the united states sending forth the balanced budget amendment. by their constitutional concerns -- are their constitutional concerns with that the way there was with the line-item veto in the 1990's, with executive and legislative powers being intertwined? >> way to specific -- too specific. [laughter] >> the democratic and republican co-chair have to come up with an agreement here. i suspect there are too many eyes on the committee to that this become a stumbling block. i suspect it is well underway. it will be interesting to see what they can come up with. we will see. and not quite sure i follow on the balanced budget question. >> just that one of the ways the

debt ceiling can be increased is if the archivist sen it for -- sends for ratification of balanced budget amendment, which would be the executive and legislative branches intertwining along the lines of what was at issue with the line- item veto. >> i think we need a constitutional procedural expert -- i suspect they follow the president on how constitutional amendments actually get to the states -- follow the precedent on how constitutional amendments act to get to the state's. >> yes, up front? >> my name is." hopkins. can someone aluminum -- for memy n -- my name is douglas hopkins. can someone eliminate from the white caps and truckers will have any impact on -- illuminate

for me why caps and triggers will have any impact on the negotiations? >> the most cynical among us should answer this question. [laughter] >> i will defer to bill. [laughter] >> i don't know any caps and triggers that have been applied to medicare. it is true that once congress votes any financial provision, it cannot bind future congresses -- someone might make up some morning and say, "that was a stupid idea," and they will pass another law, and, standing any other provision of law, x, y and z. they can be got around. i suppose the doc fix is a good

example. but in this case, the promises are getting a little harder to get around, and particularly with respect to this super committee, i believe that it will not be possible for it to avoid at least finding $1.20 trillion from one of bill gale's baselines or another and submitting it to the congress. i do not think that congress will dare renege on its promise to itself. but i may be underestimating congress'. >> let me add one thing and see what the panel thinks. in addition to that, there are people in that house and some in the senate who are extremely serious about the deal that was cut and don't want to see a change, and they would object, they would fight -- i can

imagine the republican caucus going through the same kind of stuff that just happen because they are driven by tea party republicans and people serious about the deficit. i think that is a new element. do you agree? >> i was going to answer the question from the floor. >> it is -- >> if one is realistically to good for the various problems we have -- confront the various problems we have -- you can vote for caps, and whether or not they are allowed it to take effect in the future, you can go to the next election telling the electorate that you did something hard and fast. i find myself more cynical, to my surprise, even then bill frenzel. [laughter] i think the prospects of getting $1.20 trillion agreed to by the super committee are not good. there is, i believe, going to be

smaller list of cuts of some kind that will be agreed to, and one gets to doing the full menu, the committee will split along partisan lines. we might end up with $3 billion or $4 billion of cuts, which voted on, with that precipitate -- would then precipitate a sequester of $1.20 trillion-the agreed cuts, and from that point, it plays out over a period of years. in my opening remarks, i made the comment which i am returning now, that it is quite likely that congress cannot bind future congresses, might well, as suggested by the limit on fees for physicians under medicare, find that, come 2015,

whenever the year might be, the prospect of these cuts was just too unattractive, and if they decide to then reversed the decision. there could be -- there would be no procedural limit. we don't know how all that would play out, but it seems to me that the complete failure of the committee may not probable, but i think a complete success in reaching its target is equally improbable. >> bill, you want to add something to this? >> really interesting question about why discretionary spending cuts might work. i'm not arguing that we should think they will work perfectly. in the gears,and some of being more awkward and uncomfortable to change than others. the medicare spending -- the

medicare cuts that never happened -- let me give you a political economy, a sort of campaign contributions story about why the medicare cuts might not happen but the caps might work. the medicare cuts -- every year, sustainable growth rates are supposed to be implemented and every year they get overridden by congress. there is a very direct lobbying effort enacted every year by the doctors who get paid under medicare to make sure that the sgr think it's overwritten. with the discretionary spending cap, there is no group that has to suffer, so there is a much more diffuse lobbying effort to get those caps race. -- caps raised. the document might be that we, need moregroup b, mad

of the existing cap, but not to raise the cap. what would be most likely to happen is an aggregate spending cap, coupled with the notion that if the spending went higher, it had to be financed by tax increases. that would be what i think of as the strongest cap, the most sand in the gears. it would make it more difficult to change. i would give you a little bit more likelihood that the discretionary spending caps would work than the medicare tax would work. but i agree that all of them are kind of iffy. >> before you go, just two factual things. first of all, there was one lobbying group, and that is called the defense department. they are going to be out there, and they will be formidable --

>> well, they better proof effectiveness quickly, because they are taking it in the chin right now. >> they certainly are. the doc fix rules have been in effect for a decade. they were allowed to work early on monday adjustments were very small. it is when they got really, really big -- >> i have a better example in the budget enforcement act of 1990. caps were enacted for both domestic discretionary and defense. those caps were followed for about five years, and they laid a lot of the groundwork for some of the good years that we enjoyed under the -- they were not the whole show, of course -- under the clinton administration. in previous years, under the discretionary spending, caps

worked just fine. medicare would be harder, and we would just have to see what comes out. i don't think the super committee is going to fuss much with medicare. >> they have lots of research saying he cannot do much -- you cannot do much. >> wilson center. on the one hand, congress has been decried for tying debt reduction to the debt limit. on the other hand, what i am hearing from the panel is that it is probably a good thing that we are having this conversation for the first time, that if there were not this language, we would not have it brought president obama said to send me a clean debt limit bill. let's say he prevailed. where would snb have come down on that? -- would s&p come down on that?

a-? >> s&p was upset as much about the political process. >> that has got to be right. they went so far as to mention in their written version of the things the ugliness of the politics involved, and if you had a clean debt ceiling, he would not have had all that i cleanest -- you would not have had all that ugliness. this side, right there in the middle. >> dartmouth college. i was just wondering, do you ever think we would ever go to the pay-as-you-go approach of the 1990's, or is that not even possible? >> i didn't hear that. >> say it again. >> pay-go, from the 1990's. is that ever possible? >> when we get the grand bargain -- >> pay-go would be part of the grand bargain just as discretionary caps are.

>> one of the few budget gimmicks that have worked for ross. -- for us. they will try to work in some way. >> i will differ on that one. republicans brought their version this year, cut-go. hunch in the short term is that pay-go is quaint. fun while it lasted. it was in force by supermajority roles in the senate, but also, the cold war was winding down, so less pressure on defense spending, and they were raising revenues in 1993. it is important to keep in mind that we want to evaluate these procedure forces and budget forces congress makes, their success in part depend on the political context as well as the economic context going on around 8.

whether or not we ever see those economic conditions replicated for these sets of caps seems -- >> everybody on the panel would agree on this -- pay-go worked for a while, it had a good reputation, it is easy to think congress would use it again, but if congress wants to do it, they will do it anyway, they will overcome anything. just a couple more questions. let's go to the back, down lady right there -- young lady right there. >> delegation of the european union. there were a couple of balls bouncing are around the court. i have in mind, for instance, the upcoming decision about the fy2012 budget. the fiscal year begins on october 21. we have a looming decision about the expiration of the bush tax cuts at the end of 2012, as well

as the expiration, i think you mentioned in passing, the extension of the unemployment benefits and the cutting of the payroll tax for employees. could you comment on how you think all of those things will play into the debate of the committee how those issues might -- >> let's do two of them. someone talk about the budget process for 2012. >> i think you are going to see about what you saw for 2011. we passed, what, one operation in the house, -- one appropriation in the house, none in the senate. we will have a bid to doing resolution. that will be, coming out of the house, certainly at a low level. it is going to be a pretty well

stripped-down cr, probably handled again just before the vote on the super committee's bill. we will be voting on that cr for '12 into next year as well. but no different than we handled '11. >> bush tax cuts -- bill gale. >> what they handle inside the debt deal or outside the debt deal. not to beat a dead horse, but that depends on the baseline. [laughter] >> the dead horse is dead. you killed it. >> the joint select committee can propose $1.50 trillion in cuts from whatever baseline data side -- they decide.

congress can vote those things up or down. nothing is stopping congress from coming back the next day and reinstating a $1.50 trillion in deficit-increasing measures. there is no universal -- there is no cap on universal behavior. on tuesday, you have to cut the deficit by $1.50 trillion. wednesday, thursday and friday, you can do whatever you want. i would guess that if there was a grand bargain that the committee comes up with, it will include something about what to do with the bush tax cuts. if there is not, then the committee won't do anything with them, and we will just leave it to be decided after the debt deal. >> one more question, all the way in the back. >> thank you. gannett. speaking of binding future congresses, looming in the

background is the budget -- i am going to have trouble saying this -- the balanced budget amendment. my question is three parts. do you think this will pass? this is for anybody on the panel. what iteration is most likely to pass? one requires a supermajority to raise taxes. thirdly, will the debate over painful spending cuts that the super committee is going to have to go through to have an effect on whether the balanced budget amendment will pass? >> i believe i have figured out that if you answered the third question with no, the other two are irrelevant. [laughter] >> i will say no. >> i don't think we are anywhere near the supermajorities needed, particularly and the house, let alone the senate, to get the balanced budget amendment passed. democrats have decided it is off the table, just as republicans have staked their party brand

name on it. i don't see that bridge being -- >> it doesn't look like it is going to work. >> even if it did, there would be hurdles beyond that. thank you very much, audience. before you leave, i want to tell you we will have other events on budget issues. events on health issues and medicare. keep tuning in. we hope to see you again. thank you for coming. [applause]

>> more live coverage to tell you about on c-span. the johns hopkins school of advanced international studies discussing why the movements are popping up in some countries and not others. we will have live coverage of that. booktv is live at 7:00 eastern with don peck, author of "pinched." he will be speaking at politics & prose in washington. that is on c-span2 at 7:00. >> the july 20 declaration of famine in the region, somalia was not made lightly and reflects the conditions of people in somalia. based on a nutrition and

mortality is surveys, data certified by the cdc, we estimate that in the last 90 days, 29,000 somali children have died. this is nearly 4% of the children in southern somalia. our fear, and if you're of the international community and the governments in the one of africa, is that the famine conditions in those regions of somalia will spread to encompass the entire eight regions of southern somalia. the next rians our september and october, and even if they are good, we could bear witness to another wave of mortality in the south to do to waterborne diseases. >> what this hearing on line at the c-span video library. >> media reports to date say that president obama will announce his report to create jobs in a major speech on labor day. it is likely to contain a mix of tax cuts, job-boosting construction projects, and steps

to help the long-term unemployed. senior administration official told the ap that president obama's proposals would be new ones. republican presidential contender mitt romney, campaigning in new hampshire, says that president obama's plant will likely be too little, too late on the economy, telling reporters, "we appreciate that he is going to devote some time to it, not just vacationing in martha's vineyard, but giving thought to the american people." by the way, on president obama, he is finishing up his bus tour and we will have coverage at c- span.org, a town hall at 4:30 eastern. watch more video of the candidates, see what political reporters are saying, and track the latest campaign contributions, with c-span's web site for campaign in 2012. twitter feeds, campaign bios,

the latest from c-span's media partners. al at c-span.org/campaign2012. earlier today, texas gov. rick perry says he does not belief in global warming and he would not sign the debt ceiling compromise brokered by republicans and democrats. he spoke in bedford, new hampshire. >> very cheery good morning. as we were walking in, what a fabulous day. i don't think it is this way in texas. the heat may be a little bit higher in texas. right now you are blessed to have this beautiful weather, and it is certainly good to be with you. politics & eggs is an intriguing

idea, to say the least. governor, i want to say thank you for coming. doctor, i want to say to you, thank you for -- write down here -- i know i will need a little this before we are all done -- thank you for your son's service. the doctor has the united states marine serving in afghanistan. one of the reasons we archer today with -- we are here today with the freedoms we have our young men like yours. [applause] as has already been said, i am blessed to be traveling with my wife, and griffin's wife and our daughter, but they are a little bit of sleepyheads this

morning. [laughter] the day to rest a little bit. , andoing to be here a lot i'm going to be campaigning -- i think the right word is with "fervor." you will see me a lot, to see me in beijing often in new hampshire, particularly just coming -- engaging often in new hampshire, particularly just coming in and sitting and listening, but answering questions about what we see as the big issues that face this country. i love any state that doesn't have a personal income tax. [laughter] i am kind of jealous of you that you don't have a sales tax, either. that really makes a huge difference. i will talk a little bit about your economy as a whole.

-- i mean, youie got to love that. it is remindful of a little place down in texas called the alamo, where people were willing to sacrifice for the freedom they hold so dear. people ask me, why are you running for president? i am straight up about it. i am running for president because i want to get america working again. that is what we need to be doing in this country, is working. our nation cannot endure another five years of rising unemployment, rising taxes, rising debt. now we are told we are in a recovery. sure doesn't feel like a recovery, and i know it is not feel like a recovery to the 9% of americans were unemployed,

those who have to work full time, or those who have just good looking. it does not look like a recovery for them. one in six work-eligible americans cannot find a full- time job. that is not a recovery. that is an economic disaster. monday, president obama said he had reversed the recession, gotten the economy moving back again. over the last six months, he had run into a little bad luck. at the same time, people job creation.as' there are some over on the left who said that the fact is that the 40% of jobs created in america since the ninth of june -- excuse me, since june 2009 -- was just luck. mr. president, america's crisis is not bad luck, it is bad policy, and it is from

washington, d.c. jobs come from keeping taxes low, reforming tort laws and making sure it is fair and predictable. president obama's policies, which he claimed reverse the recession, increased unemployment, exploded the debt, and led to the first downgrade of credit in our country's history. now his new plan is to create an agency for jobs. we need new jobs. we don't need new agencies. we need the private sector getting to work and getting the government out of their way. if you want to stimulate the economy, you let small businesses and employers across all economic sectors keep more what they make. that's the way you stimulate the economy. and here's another thing we do in texas and we do -- i should

say, here's another thing that they need to do to really send the message across this country that you can be free to risk your capital and have a good chance to get a good return on that investment. and yesterday i talked about freezing all of the federal regulations for a six-month period of time. it's just regulatory overkill. that is, it's a serious threat to investor confidence and growth. you know, there's been this tension between washington regulators and employers and i will tell you that the situation as governor is rapidly deteriorating. in 2010 the obama administration implemented some 43 new regulations that cost businesses more than $26 billion in this country. here's an example -- new efficiency standards for residential water heerts, and

that's getting down -- heaters and that's getting down in the weeds, but the fact is those type of regulations, those pool heaters, it's going to cost businesses. in particular, it's going to cost their customers $1.3 billion. the new standards to raise the price of the typical water heater by $120. it's the uncertainty that's out there. and particularly from obamacare . they see this coming down the tracks. this monstrous cost to them.

it's a takeover of 1/6 of the economy of the united states, and it must be repealed. the president's rhetoric doesn't match his record of change. you know, what they sold us in 2008, they haven't delivered. it's no wonder that businesses are holding money in reserve, not putting it in the economy. as governor of texas, we've led with a few simple principles. principle number one is -- don't spend all of the money. and number two is, have a tax structure in place as low as you can keep it and still be able to deliver the needed services. have a regulatory climate that is fair and predictable. it's so important to have that

predictability in the regulatory climate, and obviously the last is to have a legal system that doesn't allow for frivolous lawsuits. as a matter of fact, just this last spring we added to our substantial tort reform in the state of texas by passing a simple but powerful concept called loser pays. you know, over the years that's the -- [applause] you may. you know, over the years we've followed this recipe to produce the strongest economy in the country. since june of 2009, 40%, as i said earlier, of all the jobs in america were created in texas. you know, it's time to do the same thing in our federal government. and those simple principles will work as well in washington, d.c., as they do in the state of texas. it's time to put a limit and

simplify our taxes. we have to quit spending money that we don't have. you are we need to get our fiscal -- we need to get our fiscal house in order. we need to restore our good credit. in new hampshire, you know what works. it's what's called the new hampshire advantage, and it involved this republican legislature cutting spending instead of raising taxes. because of you and because of those courageous legislators you have the best economy in new england. to make it even better, i would suggest you override the veto of the governor so that you become a right-to-work state. [applause] you know, yesterday the president said i needed to watch what i say. [laughter]

i just want to respond back, if i may, mr. president, actions speak louder than words. inside actions as governor are -- my actions as governor are helping create jobs in this country. the president's actions are killing jobs in this country. it's time to get america working again. thank you, all, for coming and let's open it up for a few questions, if we can. [applause] >> the governor is going to take some questions. i just ask if you do have some questions identify yourself -- >> and i'll repeat the questions so everybody can hear back. even in the back. >> i'll offer the first question. governor, the congress and the president in the last several weeks in the summer have been debating lifting the cap of the debt ceiling.

>> yeah. >> if you were president would you sign that piece of legislation? >> if i were president it never would have come to that. the theoretical side of it, if i were, cut, cap and balance, governor haley and i from south carolina wrote an editorial together in the weeks while that was going on and we clearly laid out the case for cutting spending, capping that ceiling and then passing a balanced budget amendment. no, i wouldn't have signed it. i think the idea -- listen, we got to quit spending money. this is not -- this is not rocket science here. spending money we don't have continues to put more debt upon young women like alex sitting right here. the idea that we're going to spend more money that we don't have i think is counter to -- it sends the wrong message to every part of the economy.

yes, sir. >> my name is wayne. my question is about sort of what you started off with, honoring our veterans. i have two brothers that are serving. i have a dad who is 100% disabled veteran. we've been at war for 10 years and a lot of young men and women are coming home and need our help. there's been some discussion in congress about reorganizing retirement for military folks and the issue at the v.a. is a consequent. i wonder what your thoughts are on honoring the service of our men and women in uniform coming home. >> i don't want to get too deep in the weeds on this but the fact that i am a veteran. anita and i, we chose the wounded warrior project to be the recipient of our inaugural proceeds that we have. we work not only in is a public way but also in a private way to support those young men and women who are coming home. some who have been deployed four and five times. and i don't know how many times your son has been deployed, but

multiple time for these kids. i can't tell you how magnificent they are. i've traveled to iraq and afghanistan multiple times. they're selfless. they're sacrificial and for us to not take care of them -- and i suggest to you the way to get our economy working again, get america working again and give the -- you know, lower the taxes and the regulatory impact on these job creators -- and i know what americans do. they roll up their sleeves and they go to work. they risk their combal. you give people -- they risk their capital. you give people an opportunity to have a return on their investment, and they go out there and create jobs and in turn create the wealth. i mean, i know it works because that's what we've done in the state of texas. that job creation engine is so powerful, and for us to have

the resources coming in to the federal government so that we can appropriately fund the programs for our veterans, you've got to be able to do that. you can talk about all the programs that you want and how you support them and what have you, but if you don't have the money to be able to put into those programs, and i suggest, again, whether we're going to have an economy that is strong enough so that we have the offensive and the tactical platforms in place so that people around the world know that america is strong militarily, we've got to get this economy back. i mean, that is the issue in front of us as a country. and i know there's going to be a lot of diversionary talk and what have you, but at the end of the day we have to get america back working again. so making sure that the v.a. -- anita and i work with a young man who was discharged and he

wasn't medically discharged. 100% disabled, and he needed some substantial help. just working to get the military to understand, oh, we made a mistake here. took six months of the governor of texas calling up, you know, the governor of -- former governor of mississippi, secretary maybe is. -- maybis. those are the types of focus we've had on our veterans. and there's not a group of young men and women that deserve our focus, our thanks and our support than our active duty military who then become our veterans. thank you, sir. yes, ma'am. >> thank you for coming today, governor. >> yes. >> my question refers back to when you mentioned about business taxes. can you explain to me why g.e.

should be allowed to pay lower tax rates than -- >> i can't. i can't explain that. i mean, that is as easy as it gets. but the fact of the matter is that the idea that just because you have a good relationship with the political world in washington, d.c., and just because you get chosen to be on the governor's business council is not a good enough reason that you're not paying your fair share of faxes. when small business men and women are struggling to keep their doors open and you've got corporate entities like g.e. -- and listen, that's a great company. and they have some incredible projects, but the idea that they're not paying their fair share from the standpoint of corporate taxes -- and it's what we need to do is go back in and look at our tax code.

we need to simplify it. lower the impact on people. you know, i will suggest -- i was talking to representative scott of south carolina 10 days ago, i believe, and he has a piece of legislation that lowers, broadens it, heading towards a fair tax. that's one of the ideas that's out there. i'm not saying it's the right idea but it's heading in the right direction from my per sperktive that we have a -- perspective that we have a national conversation about our tax structure and how we simplify it and frankly how we lower it. and here's another issue from my perspective, corporate profits that are offshore that we tax at 35%, i mean, we know for a fact that money is not coming back. they are going to leave that offshore. so why not look at and talk about how you repatriate those dollars and have those dollars focused on job creation but

allow them to come back in at a substantially lower rate than 35%, say, something like if it's clearly going for job creation, like zero, to get this economy working again? yes, ma'am. >> debbie with philips health care and i chair the health care committee. there are not -- medical mal practice reform. there was something in health care that wasn't addressed and something that's driving up costs and keeping physicians -- not giving them the ability to maintain their own practices. i know you've addressed that in texas. and i know that's made a difference. i want you to address it -- >> medical malpractice obviously something that is really -- texas was a -- i use

the words of "the wall street journal" -- we were a judicial hellhole back in the early 1990's. we started addressing tort reform in 1995 with some good steps in the right direction but in 2003 is when we really made the big impact in texas and we put in place some serious protections against frivolous lawsuits. we capped noneconomic damages, for instance, where the doctor, hospital or the nursing homes would be protected from these monster ousley out-of-sight settlements. and there were a lot of people who stayed, you know, this is not going to work. it's going to limit people's access to health care. it's going to limit people access to the courthouse. and none of those things came true. none of them. i'll tell you what did come

true, what one of the results was. this last year 21,000 more physicians practicing medicine in texas because they know they can come here and do what they love and not be sued frivolously. what a powerful message. some 30 counties in texas that didn't have an emergency room doc have one today. counties along the rio graunda, which some of knows really -- grande, which some of those really bad counties where women are having to travel miles and miles outside the county to see an ob-gyn, to have prenatal care, and today they have the type. that's the result of medical malpractice reform, tort reform, that really matters and really makes a difference. and people still have their access to the courthouse. they still have the ability to go in front of a jury trial,

but we protect it against the frivolous suits, and it's very important. i think that has to be done state by state. federal courts and federal court -- federal law, tort reform, certainly. i support that and i hope there are members of the legislature that will come forward with those types of programs, but state tort reform does not need to come from washington, d.c. yes, sir. >> governor, thank you for coming. we follow texas as a role model . [inaudible] programs as be a alternative to various incarceration. one of the most inefficient and ineffective programs that government runs is capital

punishment. is there any -- can you foresee a point at which we will say, it's just not worth it? >> well, again, i think that's a state-by-state issue, and it's really interesting to have the conversations about all of these different issues that people think a constitutional amendment needs to be passed for. if there are enough people in america and enough states that believe capital punishment needs to be prohibited across the country, then that will happen. if not then state by state they will make that decision. in the state of texas our citizens have clearly said that they support by overwhelming majority capital punishment. so i just lay it out there as an issue for americans. and state by state, and if they want to pass a constitutional amendment, i will suggest to you i'm going to work a whole lot harder on a balanced budget

amendment to the united states constitution that i am a constitutional amendment to ban capital punishment. >> thank you, governor, for coming. >> yes, sir. >> you wrote in your recent book that global warming is a contrived phony method that is falling apart and that earth is experiencing a cooling trend. on the other hand, the national academy of sciences, an independent body of our most esteemed scientists, say that fossil fuel conbuggs is the primary cause of warming. and every month since 1985, every month we've seen the earth warmer than the 20th century average. the hockey stick. my question is, scientific data and the national academy of sciences is wrong on an issue involving thousands of scientists, doesn't this call into question the entire science discovery process that form at the foundation of 100

years of america's technological preeminence? >> you may have a point there because i do believe that the issue of global warming has been politicized. i think there are a substantial number of scientists who have manipulated data so that they will have dollars rolling in to their -- to their projects. i think we're seeing it almost weekly or even daily scientists who are coming forward and questioning the original idea that man-made global warming is what is causing the climate to change. yes, our climate's changed. they've been changing for -- ever since the earth was formed. but i do not buy into that a group of scientists who have in some cases found to be manipulating this information. and the cost to the country and to the world of implementing

these anti-carbon programs is in the billions if not trillions of dollars at the end of the -- of the day and i don't think from my per expectively that i want -- perspective that i want america to be engaged in spending that much money on still a scientific theory that has not been proven. and from my perspective, is more and more being put into question. yes, sir. >> governor, in light of the terrible debt the country has right now, just notwithstanding the unfunded liabilities for entitlements, most of the debt in this country can be traced to -- it wasn't a problem until there was a federal reserve

system. i'm just wondering if -- >> i got in trouble about talking about the federal reserve yesterday. [laughter] i got lectured about that yesterday. >> i'm just trying to wonder if you would be an advocate of at least auditing the federal reserve. >> i think there have been a number of candidates that have -- have stood up over the course of the months and really questioned the transparency of the federal reserve and absolutely. whether you're the governor of a state, whether you're the president of the united states, whether you're head of the agency or if, you know, an independent branch of government or not a branch of government but an agency of government like the federal reserve, they should open their books up. they should be transparent so the people of the united states

know what they're doing, how they're doing it. and frankly if -- the mistrust that is there today, if they would simply open up and be transparent with the american people i think it would go a long way towards finding out whether or not there is some activities that are improper or that they've been handling themselves quite well. but until they do that i think there will continue to be questions about their activity and what their true goal is for the united states. yes, sir. >> governor, thank you very much for coming to new hampshire. in federal fiscal year 2007, the annual deficit was $200 billion. the total g.d.p. was 14.2 trillion dollars.

today fiscal year 2011, the annual deficit is $1.6 trillion and the g.d.p. is $14.2 trillion. basically we've been in a holding pattern since the end of the last republican budget. as president, what will you do about fixing that problem? >> obviously -- excuse me -- working with the house of representatives and the senate, you know, i'm a little biased here but i hope we pick up 20 or 30 more seats in the u.s. house and run the table and have 60 republican senators to work with. i -- that would make it a lot easier from my perspective. and then working with that -- those two legislative bodies, to put a budget in place that is balanced and start freeing up the private sector to create the wealth that it's going to take to pay off that i think

close to $16 trillion national debt. but if the legislature for whatever reason does not agree that that's the way that we should go, a president has one other very powerful tool. and that's his pen to veto spending bills. and i love this country enough to wear out the inc. in a veto -- ink in the veto pen that we will not spend money that we don't have because i think our children's future is more important than that. yes, marm. >> good morning, govern -- >> yes, ma'am. >> good morning, governor, perry. i am a blue star mother of a united states marine. and i know in your opening remark you referenced our state motto, live free or die.

and in new hampshire i think we very much do that. our freedom and our individual liberties. and a few values, as well, and i wonder how you reconcile that value with your executive order to mandate medical treatment specifically the gardisil vaccines for the little girls of texas, and how about your recent support of legislation where the state of texas now mandates medical treatment specifically the men jiteis vaccine for college -- menijitis vaccine for college stuents whether or not they reside on campus or not? >> my wife is a registered nurse. her father is a physician for 52-plus years. both my parents are cancer survivors. and i hate cancer. we passed a piece of legislation in texas in 2007, the same year that i signed

that executive order, to invest $3 billion over the next 10 years from -- to find the cures for cancer. the gardisil issue for me was one of cancer. and i made a mistake. clearly in how we put that forward without working with the legislature, but it did create not only a firestorm but it created a conversation between parties, mothers and their daughters that i think was really healthy so they could make that decision of whether or not they wanted to have access. the legislature clearly sent me the message that that was not the way that they wanted to go. i respected that. i still respect it today. but the idea that we've got diseases that are killing our

children and that we have proven vaccines like the one for meningitis i think is unconstitutional. i think it's our responsibility to take care of the citizens of our states and, again, it's a state issue. and the texas legislature agreed with that, and i signed that piece of legislation. so if you don't want to do in new hampshire i respect that. in texas we think it's important to protect our kids against a number of diseases and we mandate vaccines for those but it goes through the legislative process. i learned a good lesson about not getting out in the legislature too far. yes, ma'am. >> governor perry, karen.

you spoke of private sector as opposed to government of bringing our economy back in line. i'm wondering how and what your plan is to remove and transition the heavy government involvement in nonconstitutional matters into the private sector. >> it's not going happen. her question was, hew do you remove the regulatory impact that is very pervasive throughout our economy and then how do you move our country back towards a more federalist type of an approach, is that a fairway to -- >> right. [inaudible]

>> in my book that he mentioned was "fed up" -- thank you, sir. you can find that at barnes&noble and amazon.com. the proceeds go to a foundation in texas. not to me. i talk about that in the book, we have really gotten away from our roots and that the government and particularly the centralized government -- thank you -- centralized government and the -- look, it's human nature to acquire more power. whether it's in a state or whether it's at a county or a city level. people tend to accumulate power. and we just need to wean ourselves away from that. for instance, on the regulatory side, if i'm so blessed to be elected to president of the united states, there will be

men and women going into those agencies that are clearly pro-business advocates and that they will bring that philosophy with them. i think that's one of the things missing in washington, d.c. we almost have an anti-business climate there. whether it's the e.p.a. or the department of labor. the idea that the national labor relations board would stop a company like boeing from going into a right-to-work state like south carolina is beyond me. i mean, that is -- if you need just a bumper sticker snapshot of what's wrong with this administration, that is a great one. and so having -- i'm a pro-business governor. i don't make any apologies to anyone about that. i'm going to be a pro-business president. i'm not going to apologize for anybody about that. i think that's the future of america that we get this country working again.

yes, sir. in the back. you get the last question, sir. >> governor. >> yes, sir. >> first of all, i want to thank you for your service to our country. thank you for coming. i wanted to ask the question about the debt and deficit reduction ideas that are currently in washington. one of them, unfortunately, is to cut back on spending for retirement savings. needless to say, we see -- [inaudible] could you tell us a little bit about your views on retirement savings and whether they should be protected and not cut? >> simply put, i agree with your position. i think that should be -- there should be incentives out of government for specific things. whether it's energy and trying to get this country more energy

independent. i mean, i think you should have a conversation nationally is how we give incentives to those. i think we need to give incentives to our citizens for their savings so they -- they can become more thrifty, more personally responsible. so incentives work. i think we obviously will have a great and broad conversation about which ones are right and which ones are not. but the fact of the matter is people respond to incentives. we use them in the state of texas to help bring businesses there to compete with other states. and i think that is fine and we should be thoughtful. as i said earlier and as i wrap up, those offshore profits that are being taxed at 35%, we should give those companies an incentive to bring that money back onshore to the united states to create jobs. thank you, all, for letting me come and be part of this today. god bless you.

[applause] >> good job, governor. just want to present -- first off, i want to thank the governor for taking time out of his very, very busy schedule to stop by here and the politics and eggs. we wish him much success and good health as he journeys through the great state of new hampshire. as he said he's going to spend a great deal of time here. i'm sure he's going to be spending a lot of time drinking coffee. i couldn't think about a better gift than a texas-sized mug of politician and eggs. all right, governor. good luck. >> all right. thank you, sir. [applause] [captioning performed by natonal captioning institute] [captions copyright national cable satellite corp. 2011]

>> and rick perry continues his tour in new hampshire tomorrow. by the way, if you missed any of this, we'll show it again tonight at 8:00 eastern on c-span. also, president obama in alpha, illinois. that's coming in at 4:30. you can watch that online at c-span.org. >> would you mine signing these? >> i tell you what -- >> you got a better plan? oh, lovely.

>> will you walk with me? >> i will. >> go towards the door. >> i can. >> watch more video of the candidates. see what political reporters are saying and track the latest campaign contributions with c-span's website for campaign 2012.

yeezey to use. it has twitter feeds and fates book updates from the candidate campaigns. the polling data. plus links to c-span partners all at c-span.org/campaign2012. at 6:00 eastern here on c-span a look at emerging nonviolent political involvements, johns hopkins university school of advanced international studies. why it's popping up in some countries and not others? on c-span2, "book tv" live with author john beck who wrote the book "pinched:how the great recession has narrowed our futures and what we can do about it," talking about the long-term impact about the economic recession. in a city that averages 250 murders a year, former baltimore homicide detective, calvin sewell, and investigate wereive worper stephen janis,

features "why do we kill?" , including a book launch party for columnist and political commentator armstrong williams. and how they tried to change our nation's school system. court tv founder talks to diane ravich on "after words." get the complete book tv schedule on booktv.org where you can watch all of our 9,000 programs online. >> the united nations economic commission for latin america estimates that china will be the region's second largest trading partner behind the u.s. by the year 2015. today, some of those scholars to discuss the ties between china and latin america and what it means for u.s. foreign policy. from the brookings institution and the council of the americas, this is an hour and a half.

>> ladies and gentlemen, while we're waiting, now would be a good time to turn off your cell phones and electronic leashes that you might have come in with. or put them on silence, please, or buzz. >> well, good morning, everyone. >> good morning. >> kind of feel like i'm at church. good morning, everyone. >> good morning. >> there you go. much better. thank you. welcome to our program this morning on china and the americas. it's a particularly auspicious day to be hosting because of you following the news our own vice president biden just got off the plane in beijing for a five-day visit. so much of the world's attention is on china and the u.s. today. we want to focus a little bit

of that spotlight on china and the broader western hemisphere, specifically latin america, today. my name is eric farnsworth and i head the americas society and the council of the americas. and it's a real honor for me personally and also for my institution to be able to partner with brookings this morning on what promises to be a very important and relevant and timely discussion. i want to na the brookings institution for their willingness to host this program and particularly -- in particular i want to thank mauricio who leads the latin america initiative and of course is one of our presenters today. i want to take note of diana neglect are a opponenta -- negraponte. we have cutting edge work, some of which we're hearing this morning, attempting to

understand latin america's link with asia and the implications of these linkages. it's a multidisciplinary approach that's strongly encouraged by the brookings institute president whom i first met in 1995 when he was the deputy secretary of state and we traveled together as part of the u.s. delegation to the inauguration of argentina's newly re-elected president. as part of that trip we also traveled to brazil and chile and came back to washington describing to the president and secretary of state the quiet revolution that was then under way in the region. a revolution underpinned by a new commitment to democracy and economic liberalization. emerging from the cold war and beginning -- building on the vision agreed by ackplamation, i repeat, by ack i will mation, after concluding at the summit in miami, many believed the region had arrived. the type was ripe for washington to solidify partnership from a foreign and

trade policy perspective. the united states faced no meaningful competition, either commercially or in the promotion of its values. either from outside the region or from within the region itself. but at the same time another revolution was under way halfway around the world. a revolution that would become more pronounced as the years went on. that was, of course, china's race for growth. and by now the outlines of the story are well-known. china is 9.8% annual growth rate from 1979 to 2009 including an 8.7% growth rate in 2009, when much of the world faced economic collapsed. growth that has been fueled quite literally by inputs and raw materials for much of the developing world, including the commodities exporting nation of south america. trade and investments have grown exponentially. china is now brazil's top trading partner as if is chile's. in my view this in and of itself is no cause for concern.

trade with china has had positive short-term consequences for the commodities exporters of the region as their own macroeconomic growth has been bowlesered and nations such as brazil is -- bolsters and nations such as brazil is booming. and anyone that's been there can attest to that. there are a number of questions that call out for additional study and understanding. for example, whether the longer term implications for the region of china is engage what the patterns of trade and investment? who is winning and who is losing? is trade with china leading to development, innovation and value-added production? or primarily just short-term sand perhaps unsustainable profits for some sectors? what are the impacts on macrolevel indicators such as interest and exchange rates and the ability to manage effectively in a turbulent global economy? more broadly, and here is where even more interesting questions arise -- what are the values being promoted in latin america through chinese engagement with

the region? are they compatible with western-style democracy, including the media, free from government intrusion, open markets, including transparency and freedom from unfair compe figures, social inclusion, including playboy rights, and the rule of law, including anti-corruption? or to put it as succinctly as possible, does china's growth revolution support latin america's uneven but generally positive political and economic transformation toward healthy open market democracy? increasingly, the picture is mixed, i believe. it's time to move beyond the honeymoon period in china's relations with latin america and try to discern what is really going on. in so doing we have the best chance to develop our own policies toward the region consistent with new realities while working toward an agenda that promotes mutual interest with the democratic charter whose 10-year anniversary we celebrate barely one month from today. and to help us do that we have a stellar lineup of speakers

this morning. presenting new research that may well in time prove to be definitive. you have your biographic information in front of you. their backgrounds are very impressive. we're going to begin with mauricio and then turn to aircrafta for their initial presentations. and that's going to be followed by mauricio who will offer comments on their presentations. after a bit then we'll have the opportunity to bring in all of you for a discussion with the audience. this is an outstanding lineup, as i said, and i for one are looking forward to hear what they have to say. so let's get it going. ladies and gentlemen, would you please join me in welcoming the head of the latin america initiative here at the brookings institute, dr. mauricio.

>> the point i'll be making today are -- it's on the brookings weapon site on china and latin america which basically conveys the following message -- trade between latin america and chain has been booming since around the year 2000. and it has brought a significant exchange for latin america and especially in the commodity intensive sectors but it's also had some side effects. and i want to emphasize some of those side effects.

let me start with a few facts on the trade issues. in the year 2000, total exports from latin america to china were $5 billion. last year they were $91 billion. that is a 18-fold increase which is at an analyzed rate about 34% growth per year. which is more than three times the growth rate of china. before the year 2000, the growth rates were much smaller. you could say that growth and the trade figures with china and other regions of the world have also been quite high but not as high as the case of

latin america. which means that something happened around the year 2000 which triggered these growths and i will come back what the probable cause of that growth in trade. this means that in the year 2000 trade with china for most of the larger economies of latin america was less than 5% of total trade. it was a small share. today, as eric mentioned, trade with china represents 25% of exports for chile, 13% of exports for brazil and 15% of exports for peru. that means there has been a significant increase in the trade shares for the majority

of these countries. another remarkable factor is that it's not only exports to china that have increased. it's also imports from china that have increased. and in the case of imports from china, brazil now buys $25 billion per year from china. chile $8 billion. mexico, $18 billion. so this is a bilateral trade increase. another remarkable factor about this trade figure is that in the case of exports from latin american countries to china, they are heavily concentrated in one or two products per country. where imports from china are much more diversified across a wide range of goods.

so this pattern of concentration repeats from country to country. for example, in the case of argentina, the largest export is vegetable products. in the case of brazil, mineral products. by an order of mag that tude -- magnitude. in the case of chile we know it's copper. it's essentially one commodity per country and this is quite remarkable. so these are the facts on trade. fast growth since the year 2000. more than with any other region of the world. high concentration in the case of exports from latin america and also high growth of imports from china in a wide range of products. what have been the consequences of this for the region? the aspect that i want to

highlight today are the consequences on the economic structure in latin america. and essentially the main fact here is the rapid decline in the share of manufacturing in total output across countries in latin america. just to give you a few figures, since the year 2000 until last year the decline in the share of manufacturing output in total g.d.p. in brazil was 3 percentage points from 16% to 13%. in the case of colombia and in many other countries in the region it was around two percentage points. from 14% to 12%. so this is a significant change in terms of the structure of production. which sectors have expanded in

latin america? the most remarkable change is the rapid expansion in the services sectors. the share of output in the services sector have increased in every single country. but it's more remarkable the increase in the share of employment in the services sector which countries like argentina, brazil and chile has been on the double digits. to give you an example, the share of employment in argentina has increased by 13 percentage points between the year 1990 and the year 2005. well, the changes in the structure of the economy could mean anything, and they could

be positive changes as the incretion in production and employment in the services sector have greater productivity but it's just the opposite. output of workers in the services sector have declined and is much lower than in the manufacturing sector and in the mining sector. so the decline in just put per worker in the services sector has affected overall aggregate productivity in latin america, and this is an unintended side effect of the primaryization or col nicization of latin america. now, -- coliniization of latin america. now, what about the future between latin america and china? there is one key question to

answer here and, what's going to happen with the demand for commodities from china? and in answering that question we have to consider two elements. one is the income elastiesity for commodities. how much demand is generated by each additional unit of output in china? and the second question is, the overall growth rate of china in the future. in terms of the income elastiesity or the intensity in the use of commodities, history provides some lessons. countries that have gone through similar phases of development have experienced declines in terms of the intensity and the use of commodities. and these changes are from commodity to commodity. for example, one key element of the demand for commodities from china is associated with the rates of urbanization. and these, of course, is

related to the migration from the rural sector to the fast-growing cities of china. based on historical evidence, one can argue that once china reaches per capita income of around $13,000 per year in purchase in power terms, the demand for new housing will tend to stabilize. historical evidence -- and this could happen in china, by the way, in the year 2015. iron ore tends to stabilize at per capita income of levels of $15,000 per year which in china could happen in the year 2020. other examples -- for example,

the case of soybean oil which tends to stabilize at a per capita rate of 45 kilograms per year which is something that china can achieve within the next decade. so that means at that time soybean oil will be replaced with other vegetable oils like vun flower or olive oil -- sunflower or olive oil. this happened in the case of korea. there are other considerations which are supply considerations. at the same time that the demand will tend to stabilize or the commodities will stabilize, it will increase. as we will hear from erica, the chinese have been investing in the production of these commodities and, of course, the high commodity prices have also triggered a greater investment in these sectors, especially in latin america and africa. so this means we will also have

to factor in the fact that supply will increase. and lastly, there is also the issue of overall economic growth in china. it's not just the elasticit, the overall -- elasticity, the overall growth rate in china. it is natural to expect as the level of income increases, also, the rate of growth will decelerate and there is essentially what the chinese authorities have also told us in their five-year plan when they now have a 7.5 growth rate projected for the next five years. and in the case of china, the overall deceleration in growth could be even faster, essentially because china as a society where as a result of

one-child policy will have very high dependency rates very soon. and it means lower savings. also, china is an economy that has a very large share of employment in manufacturing which is high productivity. as incomes grow, services will also expand and services as we know have lower productivity. so this could factor an -- to the deceleration growth in china. and one extra point that has been emphasized by one that predicted the global recession is that china's high investment rates in the past few years have resulted in idle capacity in many, many sectors of the economy and those high interest rates can't be sustained for too long. so the message is latin america cannot count on fast growth in

terms of demand for commodities from china forever. and this means there are some policy challenges that latin america has to face and i think it's about right to begin thinking about these questions now as these fast growths in commodity exports and the high commodity prices may not last forever and latin america has to begin thinking about ways to generate growth that are more -- that rely more on its own forces, essentially, with the and the demand for manufacturing and services. these are the questions we deal with in the policy section of the paper. how can latin america prepare for the new face and one way of

preparing is investing. the current boom in activities that will generate in human and physical capital to make sure there will be an expansion in sectors that can take the lead in terms of economic growth once the current boom in commodity received. these are activities related to more engagement in terms of research and development. and the expansion of the sectors that can rely on the demand will come from the larger middle class's, the larger size in the middle-class in latin america. how has latin america done in terms of investing in those recent activities? what we show in the paper is the record is mixed.

some countries have been able to use these resources to expand investment, which is positive, but still, too many countries in the region and thus too little in research and development and the generation of new sectors that can replace the expansion of commodities. i will just end by saying that although it has been a great decade in terms of opportunities, the tail wind from china has had a major impact in latin america in terms of economic expansion and these tail winds are not going to last forever. some people argue that india can take the lead in terms of demand for commodities, but we note that india's growth strategy depends much more heavily on sectors like technology and i.t., which relied much less on commodities and china's growth in the past few years.

china's reliance on heavy industry has been a critical element for the expansion in demand for commodities. these are some policy issues that are a challenge for latin america to prepare for these alternatives. commodities have to be found and where the recent decline in manufacturing output, the recent decline in exports of manufactured goods that do not rely on commodities or are not research based is not a good signal that latin america will have to reverse that trend. this means that contrary to many

views in the region, china would not provide all of the answers for the development of latin america. some of those answers rely on hemispheric trade and the possibility of greater economic engagement between the united states and latin america, but also on greater intra regional trade with them last america. those will be necessary elements in a more comprehensive strategy, putting on the best trade with china will not result in very favorable outcomes. this is essentially the message we want to convene. so i will and with this. [applause] >> good morning.

i'm going to focus on another aspect of the growing economic conveys -- growing economic gauge read between latin america and china and that's the development of china's development bank as an important source of capital for governments and companies in latin america. my remarks today are based on my recent study inside china inc., which is available on the brookings website. the studies examine most of the $79 billion worth of energy exports that china development bank extended to governments and companies in brazil, ecuador, turkistan and venezuela since 2008. this is the story about how chinese government and firms interact to execute cross border deals. it's also a story about china and latin america because more than half of those energy

backbones have gone to borrowers in the region. the government of venezuela has it -- has borrowed more than $32 billion since 2008 from china. what i would like to do is briefly address four questions. first, who is china development bank? second, how are the rest -- the loan is structured and implemented? third, how do these tellus how the chinese companies interact in class-border deals? what are the implications of china develop bank's activities in latin america for the united states? who is that china development bank? it is a wholly is state-owned bank that aims to support china's national interests,

including the expansion of chinese firms and securing energy and natural resources. it was one of three policy banks established in 1994 to free the big four state banks to lend on a commercial basis. although they began as a piggy bank for the government's pet projects like the three gorges dam is, it has evolved into a much more commercial and international group, has fallen to the man who has run the bank since 1998. today, have the lowest non- performing ratio and the dead have the largest portfolio of outstanding foreign currency loans. their outstanding foreign currency loans totaled $134.6 billion which exceeded the total amount of outstanding loans for the total bank. since the global financial crisis struck, they have

increased their business portfolio to its efforts to leverage its considerable financial resources to secure energy and minerals. this brings me to the second question i would like to answer which is our the loans structured and implemented? the loans are secured by revenues earned by the delivery of oil at market prices to chinese national companies with the exception of the loans to turkistan which are secured with revenue earned from deliveries of natural gas and undisclosed prices. i will illustrate how this works. in 2009, they agreed to lend the brazilian national oil company $10 billion. the loan is being secured with what they earn from chinese oil companies and when they take delivery of the oil, the money is deposited into an account they hold and every month, they

withhold deep principles from their accounts. in addition, other energy-backed loans to borrowers include two loans totaling $2 billion to the government of ecuador and loans totaling $32.6 billion to venezuela. what do these deals tell us about how the chinese government and chinese companies interact to execute cross-border deals? much of the media reporting on these loans portrays them as the work of china in to and the oil companies working closely together in a highly coordinated global pursuit of energy. this is only part of the story. he may arguments i made in my study is a that is the prospect of coordination between the banks, the oil companies and the government, but the conclusion

is subject to to caveat. each of the actors involved had their own interests to pursue, including profitability. that includes making money, expanding the global business portfolio, and maintaining the privileged position in the banking position for the chinese government is interested includes energy supply security, foreign-exchange diversification and export diversification. what i mean by that is, if you look at the loan the bank extended to venezuela last year, half of that is denominated in chinese currency which locks the government into spending $10 billion on goods and services from china, creating export opportunities for firms in china. if we look at the loan denominated in u.s. dollars, $3 billion was earmarked for the purchase of oil equipment from china.

export opportunities for chinese companies. for oil companies, the big prizes upstream assets. if you look at countries that have borrowed from them, they control some of the most important sources of natural gas supplies in the world and having the opportunity to develop these resources is attractive to the national oil companies. the second caveat to my conclusion that this is highly coordinated activity is that it is not synonymous with top-down decision making. the loan illustrates this point nicely, that alone was actually the product of efforts to get business in brazil starting in the mid 2000's and this started as a deal just involving the two companies but according to the man who had set, once the leaders learned about the deal

and decided it would make a good diplomatic deliverable in may of 2009, a government when support and it became what has been called a national project. in contrast, the loans appear to have originated in developed within a government to government from mark and i expect they are probably happy to have paging involved for risk management purposes given the large size of the loans made to venezuela. this brings me to the last question -- what are some of the implications of the activities in latin america for the united states? there are three i would like to discuss. first, the loans to venezuela indicates the bank is concerned about economic policy-making in recipient countries. for those of you who follow chinese lending practices, you

will know that sometimes they differ from multi donors in that chinese lenders have not emphasize things like combating corruption, foster and transparency, or raising environmental standards to the extent some other donors to. moreover, many loans are tied to a hiring from china or buying from china. however, the loans to venezuela indicates the bank does aim to promote good economic decision making in borrowing countries and one piece of information that supports that is after the framework agreement for the $20.6 billion loan was signed last spring, a 30-person delegation consisting of government and industry officials travel to venezuela and they spent 18 days there.

part of the purpose of that trip was to assess the venezuela's resource base and confirmed the country did in fact have sufficient resources to secure the loan. i suspect it was also about looking for projects chinese companies could do to help implement alone. but another thing that happened is the chinese delegation drafted 10 plans for venezuela aimed at helping to reform the economy covering things like price stability and improving the environment for foreign investment. when the delegation got back to china, there was an interview with a said if that is welland's implement these plans, they can grow at more than 8% a year. know if that's true, but i think it indicates they're taking steps to make sure the loans are repaid. the second implication to discuss is that these loans are supporting irredeemably let's america which is not very

friendly to the united states, particularly the loans are bolstering hugo chavez and venezuela and the immigration and ecuador. agassi powering these regimes as a objective, but the bank is serving as a lender of last resort to their government whose difficulty accessing the financial markets because of risk perception and the reluctance to deal with the international monetary fund have left them with few alternatives to chinese banks for external sources of capital. it is worth noting both administrations are using the money they have received to address key political vulnerability is. in venezuela, the money is being used to finance housing projects and power plants and so on and so forth. the third implementation -- a third day i would like to discuss is securing these loans is unlikely to undermine the security of american of supplies.

the oil market is global. the u.s. could simply import more from other countries like brazil and canada. it is also unlikely that venezuela will ramp up oil exports to china because of transportation and refining issues. the united states is closer to that as well up and china and we have greater capacity to handle venezuelan crude. in support of that college is interesting to see what chinese oil companies are doing with will they get from venezuela. there's a big gap between the oil that is delivered to secure these loans than the amount of venezuelan crude that actually flows into china. i suspect china oil is taking a substantial amount they are receiving and storing it in the americas. i will stop there. thank you. [applause]

>> good morning. thank you very much for the invitation. it's a pleasure to be here. i'm about to have an exile in the attack because i have about 10 minutes to comment and i will try to go quickly to that piece of work. let me begin with one issue. goingn economist, so i'm to weigh more heavily on this paper that on the americas, but i will try as best i can to balance the comments. i very much enjoy reading the papers and he touches on several trillion dollar questions which

policymakers in the region are facing these days. let me quickly summarize his arguments. first -- this idea that china's emergency is leading to a reversal on the structural transformation has shown by a decline by factoring in [unintelligible] the decline in manufacturing shares a leading to- productivity in the sense that money is flowing into low productivity and sectors -- the argument that china demand for natural resources is likely to fizzle out in 10 to 15 years has shown by the experience from other countries like japan and korea and finally last america

needs industrial policies to reverse this structural shift. let me comment on each of those arguments, hopefully briefly. following in the share of manufacturing gdp -- when we look at that, we have to take into account there is manufacturing overshooting in latin america. if you look at the end of the '80s and the early '90s, there is much more manufacturing in the region and there was supposed to be. brazil is a clear example. the imports in total domestic consumption in the early '90s was 5% which is close to soviet levels. it is as if people did not read -- there was this idea that you need to produce everything.

it was inevitable and desirable that we would see a decline in the share of manufacturing in most countries in the region, particularly the largest countries when brazil -- we had to take into account that as incomes grow, people demand more services and productivity is lower and they need more people to do the job, so you are bound to see an increase in the services sector. i do not dispute the fact that china has been playing a part. figure oute we can exactly the contribution of china but what i usually called the caesar effect, that china is raising commodity prices and lowering manufacturing prices at the same time as clearly hurting

the manufacturing division. productivity is an--- again, i'm not comfortable with this idea because the implicit assumption is we have this wonderful manufacturing sector in the early '90s and then when we open up, for some reason manufacturing shrunk and resources flowed to lower productivity sectors. if we measure productivity in late -- on the closed economy days, [unintelligible] people usually taken to a cow local prices which are jacked up by 100% tariffs. if you imagine productivity in those days had national prices, he would see those are not adding any value of all. the idea of that there was a

negative shock, it does not make much sense. after opening up, thanks to more competition, including chinese competition, there was a productivity gain. you got rid of all of those factors. the car sector is a good example. to produce a car that cost twice the international price -- you are not adding much value a in international terms which is the way you should be measuring opportunity costs. the idea of a negative shock really troubles me. third point, the china demands is going to fizzle out. i am one of those who believe china cannot continue to grow at current rates. even before nouriel roubini was saying -- it's always hard to understand how a country can for

more than two decades invest more than 50% of gdp. it's clearly not enough profitable projects to sustain it. it is going to slow down sooner than later, particularly in an environment like the world economy these days with the u.s. and europe's stagnating. i agree there will be a slowdown, but i do not agree this idea would lead to a decline in the relative price of commodities. i agree there will be in come and technological effects. china will reduce its intensity, but looking at the past, looking at japan and korea with less than 10% of the chinese population, you can learn much from that.

either china or india, we're talking about economies sitting on a small pool of land and water. there is no precedent. there is no leading the economy. neither the u.s. or the u.k. or whenever that can tell you when this demand for natural resources is going to come down. you can't say it is much more than an educated hunch, but it's going to take much longer to stabilize. we are bound to see a trend. i am one of those who believes in the super cycle. going to believe it's be a long time. you will be declining manufacturing prices and of course with a lot of volatility. but i believe this is going to be a trend.

it has been growing in part because of i.t. services, but it is 1% of their employment. if they want to reduce the rate of poverty, have to go into manufacturing. they have to go into manufacturing or else. they are in a worse way than china. we don't have land, they don't have water. even if they don't demand that, they will be demanding a lot of food. the industrial policy, same. let me try to be blunt. indiat think with china, and the rest of asia in the game that the region stands any chance of becoming a major exporter of manufacturing goods. i think this window is closed with very few exceptions.

mexico, south america -- for transporting goods, i think there is clearly an opportunity, but to think you can reentries what happened in asia, having manufacturing export as a driver of growth, i think this is not in the charts anymore. the competitive advantages of asia are overwhelming. in this context, it does not make sense to lean against and insists with industrial policy because we don't particularly have a good record. the asians do things well, but what has been done in the past does not mean much successful and we waste a lot of money on this kind of initiatives. so hopefully i'm not using too

much of my time. i found a big book fascinating and a little bit scary. he is more concerned about employment -- medications for the u.s. but to the risks the region faces with its relationship with china -- he suggests it is a mix of commercial and strategic interests and the risks are on both counts. the region has to balance fresh resources to expand supply of natural resources, but there are risks of selling assets to its main client. are you going to open up the possibility transfer pricing which can very quickly whisked away what those countries could

be enjoying? on the strategic side, if you keep accepting a lot of financial favors from china on the count that strategic interests of the chinese government, you are going to pay a price in terms of the freedom your going to have in terms of your own strategic interests. this clearly has to be on the table, at least on the balance. on a broader note, i would conclude that this is something that always comes to mind. this very aggressive stance of the chinese state in terms of pursuing commercial and strategic interests raises the question of how the region should respond, particularly in

terms of manufacturing. what are the options? to try to do the same thing, perhaps subsidizing -- emerging , that tit-for-tat kind of strategies -- my country seems to be pursuing that lately or perhaps it should be taking a more aggressive foreign policy against state intervention or international trade. i have no doubt that the region has a lot to lose in terms of pursuing the first strategy. our experience with big government industrial policy has been very problematic and even

if you could have a very efficient industrial policy, you cannot match the resources of the chinese government. there is a very old saying that the little guys like the police -- we have re trading environment where those factors and subsidies are not just from china. it's from a lot of places as well. it would be much more productive than to try to get a tit-for-tat strategy. thank you very much. [applause]

>> as we are waiting for our colleagues to get their microphones on, have to tally after the presentations that i had about 15 questions and then i changed the questions to different questions and after the last speakers, there are so many things on the table here that we could pursue and i know you all want to pursue and we don't have unlimited time, unfortunately, but we want to jump right into this. he spoke eloquently about the changes going on internally in economics, particularly in the

exporting nations of south america and i should emphasize you are not talking about mexico or central american countries but the commodities exporters primarily. let me broaden this out a little bit and talk about global trade negotiations. let's america, specifically brazil and other countries have taken very strong positions in the wto context. comethey're not willing to to agreement on, based on your analysis of how these economies are changing from manufacturing to services, are there implications in terms of the global trade negotiations? would you anticipate more emphasis on services as a negotiation platform? you have been a trade negotiator

for columbia. prior trade negotiator have for us. >> i think the question of the manufacturing sector has been declining in terms of its shares is a major concern. it is something politicians talk about and it worries people because the main point here is there are not enough good paying employment opportunities in latin america. we talked a lot about how last america weathered the crisis so well and how it is growing relatively fast these days. but if you look at the employment figures, they show problems. there is high unemployment in countries like colombia. everything else in the economy looks good, but the unemployment

rate is 10%. the reason is these commodity- intensive sectors, especially in minerals and oil is not generating enough jobs. politicians need to respond to that. one possible response is policies that expands the manufacturing sector services sector to generate more jobs. of course, trade in those areas is so important. that is why countries like colombia and panama put so much emphasis on the need for a free trade agreement in the united states. but that is just one part of the agenda. there is the multilateral trade agenda in which these countries promote the idea of expanding markets and reducing subsidies. i would say that the one sector which is the target of these

negotiations is the agricultural sector, where it is important for countries in south america to be able to access the markets of europe, the guided states, with products like a football, for example, but not just in that particular case. this is why the trade agenda is so important. that is why the key concerns are more employment opportunities. also more diversified trade, not just in terms of the number of products, but in terms of the number of countries that these countries engage with in terms of trading opportunities. >> so bringing the spotlight now domestically to some of these countries, latin america has traditionally done a relatively decent job of creating jobs but many have been in the informal economy and not the formal economy. you see a lot of service jobs, but you don't see that with the

protection of the state, social security, or anything like that. do you see implications here based on your analysis for changes in labour codes which have been around for decades if not centuries or government policies domestically that this new external actor is encouraging changes domestically in south america? >> it is not a coincidence that with the expansion of the primary sectors, except -- essentially exports to china, there has been a rapid increase in the services sector. if you look at the services sector, some of it is modern. it is financial-services, for example. but the minority of expansion and services in areas where you see things like personal services or retail where

informality is a big issue. that is one element of a side effect of the expansion of the commodity-intensive sectors, which, a big share of the employment is an formal services so you essentially have economies and that this is the picture of want to portray -- have very modern things to produce. the water to agricultural exports, oil, those resources are recycled into the entire economy and end up generating employment in sectors with very low value-added. many of those jobs are informal. this is not a balanced economic structure and this is the issue that needs to be resolved. >> i would love to explore that in greater detail. perhaps we can do that with our audience. i would like to ask a very blue sky type question.

you presented at analysis of coordination. maybe not perfect coordination, but strategic thinking of the chinese approach into the hemisphere. obviously, the optic is that china is doing what china perceives to be in china's interest. but there are implications for the region itself. let me ask, does china take note of some of the things occurring as a result of this think agent in the region? more importantly, does it care? >> that's a loaded question, no doubt. what does china sea as happening based on its engagement and d.c. that changing based on the political question of the chinese saying there are implications that we need to take note of them? >> i feel a bit deceiving the case you promised me questions before we got onstage.

i'm going to take the case of venezuela. one thing that struck me there and that made the activities in venezuela among the most interesting i studied was that's the bank is the very concerned about getting paid back. even though the bank's loans total $32.6 billion, the biggest loan was extended last summer and it seems to me they're very careful in thinking about how that loan was going to be disbursed and what types of projects the loans would be spent on. this had to do with the fact that the bank was aware this loan has a 10-year term and hugo chavez, there's a possibility he may not be in office before -- he may not be in office when the

loan is repaid. there is a big effort to make sure the projects alone is supporting are ones that are perceived as helping the country as a whole and not just the administration of hugo chavez. things benefiting the country as a whole, to combat the blackouts plague in the country, to build housing. there has been a crisis of affordable housing. correct me if i'm wrong. there is a recognition that by virtue of making these big loans, some of which have relatively long terms, that they are in for the long haul. there is more attention being paid to how those loans are being perceived and what can they do to make sure they're being perceived that there is a change in government before the term is up that whoever

succeeds chavez will be as willing as he is to repay the loans. and sure there have not been any repayment problems on the loans that have been extended. >> based on that and based on the analysis in your presentation -- it was interesting. you said it was a coordinated approach, but each of the actors has thrown interests. to this point, those interests have largely coincided. do you feel over time that those interests may diverge? the bank with some of its private-sector clients internally and, if so, what might be -- this is another easy question. i know i'm asking you to speculate and that is not there. but this is tremendously interesting as a student of lats america and western hemisphere and u.s. policy, it is difficult sometimes to ascertain or view a strategic

approach to this region, but the chinese are changing the model little bit. do you see that as sustainable over time? >> in terms of will interests diverge, that's interesting. if you look in the background of these deals, even though there are interests that overlap, sometimes there are ones -- if in any of these deals, if there is a repayment problem, do you see interests diverging? i'm going to go outside the region to make this point -- one of the case studies i looked at in my volume or loans to russia that in 2009, are on the time loans were made to brazil and venezuela, it won $25 billion for russian energy companies. the big prize from the chinese government perspective is that they're finally going to get this pipeline they spent 15 years negotiating.

if we fast for today, the chinese accompany that is involved in the loans for oil deal with russia, china national petroleum corp., they have been involved in a squabble after the russian oil company over the transportation, efficient and the pricing formula that underpins the loans. the chinese are no longer happy with the transportation coefficient they agreed to in 2009, so they are unilaterally taking action to pay the russians less and this is making the russians up happy. the oil company is unhappy because they are in a battle over an oil pricing formula. the other thing that is interesting about the loans is that because they did not go to a national oil company and would to foreign governments, by suspicion is these are loans

where you had a senior chinese leaders involved in brokering the deal and these might have been loans for the government said you were going to do this and they were left to make the best of the cards they were dealt them so far, at least in the case of venezuela, the loans have been taken back but if there are payment problems, happens, so that's why they're happy to have these occur within a government to government from work because there is probably expectations that these administrations will think twice about stiffing beijing, but you never know. >> that was interesting. the whole idea that china was structuring loans almost the way a new york bank would structure them, they are worried about repayments, they're worried about access to natural resources. there is an agenda, but they want to get repaid and this is not charity. it is different from the model

one would have seen during the cold war, where was politics first and economics second. correct me if you disagree, but it's almost the reverse of that. politics is nice and we want to remain -- we want to read -- we want to retain that but -- is that accurate? >> one thing that is worth noting about these deals is that these were not deal's structure on the back of the envelope. china development bank hired top tier law firms to advise it on all of these transactions and the deal also included in the case of venezuela and ecuador that there are binding third- party arbitration so that something goes awry, the courts in the u.k. will settle the disputes.

it looks like a lot was done from my perspective, that they did as much as they could to mitigate the risks in a number of ways as far as to they hire and how the loans are structured and in the case of venezuela, it looks like they are doing it in ecuador. being very careful trying to make sure the loans are spent or the discussion of how the loans are spent indicates they are there for the benefit of the people as a whole and not to support the government. >> very good. you have comment on both presentations and i want to draw you out a little bit in terms of some of the comments you made. i can't remember who made the comment. you mentioned that the resources

coming into the countries are being spence on current needs like housing. perhaps supporting a political agenda and i guess my question would be that we talked a lot about sustainability and commodities prices. the question would be if you want to use these resources coming in from china, the ones that are not locked into purchases of chinese products for exports, how could they be used in the domestic latin- american context to get to the next stage of development? you have a pile of money for natural resources from china -- what could those governments easily be doing to ensure they are developing innovations and getting to the next stage of development. yet just said that perhaps

manufacturing is not the direction to go, so where should they be investing those resources use fully? >> that's a good question. i believe there are a lot of risks and this discussion about natural resources -- you have to walk around the region to see it's not a mess. there are a lot of challenges in assuring these types of resources don't corrupt the system and the institution. it is a precondition, if you have a working democratic society and the government that is accountable, you're going to have a lot of problems with this money coming in. but then, if you don't have that, you are not going to have any economic development anyway. my concern -- let me clarify.

my time was short. i would not say manufacturing is going to disappear. it will remain as an important factor in most of those economies because their regional market is big enough and there is a natural protection and things like proximity to the united states. so it is going to remain important. but it is not going to be asia two or three. their resources are not there and you cannot compete with wages that are one-tenth or 18 of your wages. it is fine to lean against the wind, but to lean against a hurricane -- it doesn't make any sense. to use those resources, this money coming in to try to subsidize the manufacturing

sector, export manufacturing goods and things like that, to me, it is a waste of money and this can lead to a lot of corruption as well. it's easy to do that, to the entire regime, but in a democracy you try to be selective. you start with two sectors and a week later you have five sectors, a month later, your subsidizing the whole economy. i think the best thing they could do is to try to channel those resources -- one of the biggest weaknesses of the region is education, science and technology. then you are going to be able to not just get basic commodity exports but add value to those

exports. that's the clear opportunity we have. not trying to challenge any u.s. interests, but with the wealth of resources the region has, why can't we have companies -- you look at national resources but add technology in education, i think that's the most sensible way of investing this money. although i think we are just going to be wasting one more time. >> that was very well said. thank you very much. we don't have a lot of time but i want to give to the audience. why don't we take a around of three questions. please keep statements to a minimum. let's go right to the questions. identify yourself by name and organization. if your question is directed to

a specific panelists, address it to them, otherwise we will as soon as for the entire panel. >> i'm from inside u.s. trade. this is a two-part question for the panel. it was alluded to -- it seems that in the past couple of weeks, brazil has come out with its own new industrial policy. it seems that this policy is mainly aimed at supporting these industries that have been impacted by cheap chinese imports. i want to get an assessment from the panel as to whether you thought this policy was going to be affected, was a good idea? the second part is whether you think we will see more policies like this in other countries in latin america, either aimed at supporting domestic industry or

using trade policy as a way to protect their markets from china? >> very good. there is a gentleman here on the aisle -- the gentleman behind you. >> i would ask any of the panelists if they could comments on the environmental impact of these chinese commodities and what they might cause in a latin america. >> and there was a gentleman in front. right here. >> i'm here from the department of energy. my question is for dr. downs. given that a lot of these heavy at latin-american streams are heavy acquisitions were chinese refiners, do you see that as a source of tension toward this

relationship? >> very good. let's see how many of these we can get done. to the panel, if you could keep your remarks substantive and answer the questions, but as short as possible to get another round of questions. some very interesting questions here. industrial policy, environmental implications and then a question of venezuelan crude. >> let me start with the industrial policy question. when we think about industrial policy, we think about import substitution from the 1960's. we created a very inefficient operations and white elephants. industrial policies have changed. industrial policies have learned from the vast experiences. brazil is a good example of some success with industrial policies. fink for example of the production of aircraft -- think

for example of the production of aircraft. the investment in science and technology, research and development, or the government put funds that can actually generate sectors where there is a competitive edge. the industrial policies you mentioned that was announced about two weeks ago, in response to the competition from china in manufacturers, and the employment consequences of that, that's related to a reduction in taxes for some sectors, especially the labor-intensive. this is a reaction. by lowering taxation in sectors that are facing stiff competition from abroad. where i would disagree with the

recent wave of industrial policies in brazil is the use of subsidized lending, which is a key element of industrialized policy in brazil. there is a bank that lends to the private sector at a rate which is half the rate of the commercial banks. in choosing which industries benefit from these subsidized loans, there can be mistakes in terms of choosing the wrong industries just because of political connections. so you have all kinds of industrial policies. they are not necessarily bad. there are some good, there are some bad. they are not selected at selected firms or industries because they benefit a broad range of industrial sectors and those are the more effective ones.

on the environment, i think countries in the region are aware of that. legislation in terms of environmental regulations are becoming much more strict. there are limitations. if i could mention one example, which is the decision by the brazilian government not to allow the purchase of land in the amazon from foreign investors, that's a message in that direction in the sense that there is a concern and the region is very aware of the importance of protecting its environment. >> any comments on either of those questions? >> i think brazil's industrial policies are very much in the way that concerns me -- there

are difference but there are a lot of things being done that is very much like the things we used to do in the '70s or even in the '80s. it is going to have the same kind of problems. even the tax reductions are a sort of unfounded. the treasury is going to have to pay for that. at the same time, i don't see much action on the foreign- policy side, so it is very much a decision to go tit-for-tat, a sort of assumption that we are on the world that now states compete and we need to have our big state and at the same time, very soft on criticizing state to intervention and international trade. you cannot do both. either you criticize or try to

rein in those practices or otherwise, if you try to intervene at the same time, it doesn't work. i don't think it's a step in the right direction. >> very good. >> on the question about venezuelan crude flows to china, as i mentioned earlier, china does not have a lot of refining capacities to handle venezuela pause very heavy crude. because of that, that's why there's such a gap between what chinese customs are importing from venezuela and wet is being delivered -- and what is being delivered to secure the loans. what explains the difference is this will being sold or toward in the america because it cannot be pro