Transcript
Sec. Summers: Mike, thank you very much for that kind introduction. And it is good to have a chance to be back at Brookings again. I've spent a lot of hours in this room. Most of the hours were spent when the room was arranged rather differently, with the table around the edge by the walls, in connection with George Perry's Brookings panel on economic activity.
We have just completed several days of global meetings here in Washington, where our focus has been on strengthening the global economy and where a particular focus has been on strengthening the global development effort. And I think we had very useful and valuable discussions, out of which measures to promote debt relief for the poorest countries, measures to strengthen the international institutions made very good progress.
But my topic here today is the strength of the American economy and maintaining the kind of budget policies that are essential for keeping the American economy strong.
But I have to say that I was struck over the weekend by the extent to which, in an increasingly interconnected global economy, our success in keeping our own economy strong very much relates to our capacity to achieve our global objectives, because a strong American economy is an impetus for growth around the world, and because a strong American economy is an example around the world of what market-oriented institutions can do, and because a strong American economy is an American economy that is more likely to be prepared to take the necessary choices to engage with the rest of the world.
And of course, as Mike mentioned, yesterday we completed an annual ritual as a nation that none of us enjoy but all of us recognize as central to our society, the filing of our personal tax returns. And it is in the context of the completion of that ritual that I want to talk today about the fiscal progress that we have made as a nation since 1992 and the fiscal choices that lie ahead and how we can best make them.
I think the place to begin with is with a recognition of where we stand right now. Because of our strong economy; because of the successes we have had in recent years in making government more efficient and, in some cases, reducing the size of government, with more work being done by several hundred thousand fewer people; because of the tax choices we have made through the Earned Income Tax Credit, the child credit, targeted educational benefits, incentives for savings and so forth, the tax burden on American families is now at its lowest in a generation.
For a family of four with half the median income, about $29,000, federal income and payroll taxes are a smaller share of income than at any time since 1977. For a family with the median income, federal income and payroll taxes taken together, are now a smaller share of income than at any time since 1978. And federal income taxes alone are the smallest share since 1966.
For a family with double the median income, $117,000, a family in the 90th percentile of our income distribution, federal income taxes as a share of income are lower than at any since 1974. So for the vast majority of families, tax burdens are lower than they have been in a very long time.
Now, some seek to present a different picture by emphasizing a different kind of statistic, the ratio of tax collections to measured gross national product. This is indeed at a high level by historical standards but does not reflect, for the most part, increases in tax burdens on particular categories of taxpayers. Rather, it reflects the fact that taxable income has increased relative to the gross national product, as the stock market has risen, increasing capital-gains income and increasing the quantity of withdrawals from retirement plans. And it reflects a tendency for the share of income to have migrated increasingly towards corporations and individuals in relatively high tax rates. All these factors have boosted tax revenues without raising the tax bills of the vast majority of American families, which--I emphasized--are lower than they have been in a long time.
Now, this way of looking at it is perhaps the standard way of measuring tax burdens and evaluating where tax burdens are right now. But there is a real sense in which it substantially understates the progress that we have made as a country in reducing tax burdens on American families because we have also reduced the tax burden on American families by shrinking our national debt.
In the same way that a purchase makes one poorer, whether you pay cash or whether you buy on a credit card, the contemporaneous tax burden understates the full tax burden during periods when the nation runs budget deficits and overstates the burden during periods when the nation runs surpluses. The former is what happened during the 1980s and early 1990s, and the latter, a decreasing national debt and tax burden reduction that goes beyond the progress in reducing stated tax rates, is what is happening today.
Let me make this more concrete. In 1983, when the federal government incurred a budget deficit of $208 billion, the average American family was effectively saddled with future burdens to service the interest or the principal on that debt that were equal to 35 percent more than the taxes they actually paid. In 1993, some progress had been made, but the deferred taxes associated with the budget deficit represented 22 percent of the income and payroll taxes that were actually incurred. In the year 2000, the estimated $167 billion budget surplus effectively reduces the future tax burden on American families by 9 percent of income and payroll taxes that will be paid this year.
Putting these figures together, as a result of the deficit reductions we have achieved and the surplus that we have created, the total tax burden, inclusive of these deferred taxes, on the typical American family has fallen by a third since l983, from 31 percent to 21 percent of income, or the lowest since 1974. And surely that reduction in tax burdens and, particularly, reduction in the deferred tax burdens, which have such an impact on investment, has had a great deal to do with our economic success. Indeed, the progress we have made in reducing our national debt maintains downward pressure on interest rates and thereby helps reduce payments on home mortgages, car loans, and other forms of credit. It is difficult to quantify the precise extent of the contribution, but it bears emphasis that today, seven and a half years into policies of deficit reduction, more than eight years into economic expansion, long-term interest rates are nearly two points lower than they were then.
Every one percentage point decline in long-term mortgage interest rates over time reduces the cost of mortgages for American families by $250 billion over a decade, and a typical American family with a mortgage of $100,000 saves about $2,000 a year on mortgage payments, from a arry on that tradition by planning for the long term, by using realistic discretionary spending plans, and by taking special advantage of this moment of opportunity that is provided by the strength of our economy.
The recent congressional budget resolution must give pause on all three counts. I am concerned that it carries many of the risks that arose in connection with last year's congressional tax-cut bill that the president was forced to veto. Specifically, a five-year horizon obscures the size and risks associated with the total tax cuts.
By setting policy on a five-year basis, instead of the 10-year basis that has become common in recent discussions, the budget resolution obscures the long-term fiscal consequences of its proposed tax measures. Over the first five years, the resolution requires tax cuts of $150 billion. It permits additional tax cuts of $25 billion and, depending on forecast revisions, would allow up to $40 billion further in tax cuts, for a total of $215 billion. Reasonable projections and estimates--and no exact figure is possible, since specific policies are not laid out in that document--suggest that these policies could, over a 10-year period, including interest, have costs that could escalate as high as $1 trillion, substantially in excess of the $792 billion tax cut that the president vetoed last year.
Why do I say this is a reasonable prospect? One way to look at the question is to look at the measures that were considered last year in the House, the Senate, and ultimately, the conference committee. In each case, the 10-year cost exceeded five times a five-year cost. For example, the conference bill last year cost only $156 billion over five years--less than is possible under this year's budget resolution--but escalated sharply to $792 billion over 10 years.
Equally, the House has already passed tax cuts this year in the $100-billion range over five years, but which would cost in the region of $375 billion over 10. Similar legislation is moving along in the Senate. While the ratios are somewhat smaller than last year's tax bills so far, these also point to realistic tax cuts that, before interest, would have costs in excess of three-quarters of a trillion dollars.
It has become standard practice for the Joint Committee on Taxation and the Congressional Budget Office to project the effect of tax and spending proposals 10 years in advance, to take account of changes that are to be phased in over time. Taking a longer and longer view of budgeting, as we have steadily over the years--and I can't help but note that that is an innovation, like many of the important innovations in our national budgeting process, that has has had a substantial impetus from within this building--must be particularly important today, at a time when our budget discussions focus so crucially on long-term issues, such as the solvency of Social Security and Medicare, that require long-term solutions.
Moreover, we have observed again and again the danger that shorter-term estimates can pose. Without long-term estimates, proponents of legislation have often understated the true cost of their proposals by phasing them in slowly or not even starting them until after the forecast period. Without the discipline of 10-year horizons in budgeting, it will be all too easy to adopt policies that may tempt in the short run but could raise serious risks over the longer term.
A related aspect of sound budgeting is providing realistic baseline paths, and here I fear that the congressional budget resolution incorporates unrealistic proposals to reduce non-defense discretionary spending. It would cut critical funding for core government, such as law enforcement, and vital investments, like Head Start and job training. The resolution's allocation for non-defense discretionary spending in fiscal year 2001 is $7 billion below equivalent spending in the year 2000, and 20--20--billion dollars below the level needed to maintain current program levels.
After taking into account those limited areas where the resolution seeks to maintain spending in real terms, all other non-defense discretionary spending programs would have to be cut to fulfill this resolution by about 10 percent. Such a move would, for example, force the reduction of Head Start services for 70,000 fewer children in fiscal year 2001.
The proposed spending path after 2001 does not even keep pace with inflation, pointing to even larger cuts down the road, with potentially grave consequences for government's capacity to fulfill core functions.
We have seen again and again, going back to the 1960s, the late 1970s and the nation's experience in the early 1980s, the damage that can be done when long-term fiscal commitments are entered into on the basis of unrealistic assessments of future economic prospects. At some points, the important errors have involved unrealistic forecasts of economic growth and tax collections. At other points, the errors have gone to forecasts of future spending levels or future tax collections. But the common element is this: The nation takes fixed commitments on the basis of unrealistic premises, and these fixed commitments take the form of serious budget problems, when the lack of realism in the assumptions on which they were based, become apparent.
The need to take the long view in budgeting properly, the need to rely on realistic assumptions if we are to maintain our fiscal discipline, and the need to take advantage lastly, of this moment of prosperity should frame our budget discussions. Even if one were to assume that the resolution's optimistic spending assumptions are met, it would set aside just $12 billion of the non-Social Security surpluses for debt reduction over the next five years, less than one-seventh as much as the president's budget would.
On the plausible assumption that spending cuts of 10 percent would not materialize, their resolution would channel none of the Social Security surpluses into debt reduction or, to put the point differently, would lead us away from on-budget balance, even before addressing issues of Medicare solvency, Medicare prescription drugs or contributions to the Social Security trust fund or changes for the worse, in the economic outlook. I would add that the resolution proposes no funds to extend the solvency of Medicare or Social Security by even a single day.
In contrast, the president's proposals would devote a substantial share of the projected on-budget surpluses to extending Medicare solvency beyond 2030 and Social Security solvency to at least 2054.
I have emphasized the progress that we have made in bringing about budget surpluses and, in particular, the progress that we have made in reducing the burdens on taxpayers, and emphasized the processes embodied in the budget choices that we are going to make, because I believe these considerations go to the heart of our national ability to maintain fiscal discipline. And I emphasize the importance of debt reduction and fiscal discipline as the best use of taxpayer resources, because fiscal discipline has rarely if every been more important to the future of our national economy than it is today.
Why? First, because the unprecedented nature of the investment opportunities that information technology is opening up means that the benefits of raising national savings, channeling those savings out of government paper and into productive investments is greater than it has ever been before, because of the opportunities.
Second, because the growing importance of our trade and current account deficits means that we must increase our national savings, which is best done by paying down government debt. If we are to reduce these deficits and reduce the associated borrowing from abroad without cramping investment in our economic future. After all, increasing savings is the only way to increase investment in such an economic environment.
And finally, I stress the importance of fiscal discipline at this point, because at a time o great strength of demand in our economy, surely the right focus for policy is on stimulus to savings and the economy's supply capacity, and that is what debt reduction and fiscal discipline represent. Thank you very much.
[Applause]
I'd be happy to respond to a few questions.
Barry?
Q: Recently there's been some highly optimistic assessments of the outlook for productivity growth. In light of those, do you think the 10-year revisions of the budget should incorporate a higher rate of economic growth than we now use?
Sec. Summers: I don't want to get ahead of the administration's mid-session review estimates.
I think we can all take satisfaction from the growing evidence that the productivity slowdown, which led people as recently as less than a decade ago to be talking about this as a period of diminished expectations--that that productivity slowdown appears to be giving way to a period of greater productivity growth.
But it seems to me that we will be best served in all of our budget analyses if we hope optimistically, but we plan on very conservative assumptions. And I think it would be a mistake for us, in setting long-term fiscal paths or making long-term judgments, to be overly influenced by even quite remarkable performance over a quite brief interval. The process of adjustment is one that has taken place over a number of years, and we may well not have seen the end of the process of adjustment. But I believe that it is very important that we be prudent and conservative, and that we be ever more prudent and conservative as the length of the forecast horizon increases.
Bob McNamara?
Q: Larry, I share your emphasis on fiscal discipline. As you know, the executive branch recommended a defense budget that is roughly the same as--in inflated dollars, roughly the same as during the Cold War--much, much larger in relation to our allies, much, much larger in relation to the rest of the world. But the Congress appears to be moving toward making the defense program a--it's not an employment insurance program. And they added substantially to what the president recommended, far more than the chiefs proposed for bases, far more than they proposed for weapons.
Would you recommend to the next president, whomever he may be, he take special care in examining the defense budget?
Sec. Summers: Let me think. Let me think.
Should one try to get into a discussion of defense policy with Bob McNamara? Should one, as an economic policy official, try to make judgments about the size of the military budget? I suspect I could give five or 10 good reasons for ducking Bob's very thoughtful question. Let me just say this.
I think the right approach for the country to take, over time, with respect to defense spending, is to always recognize that the paramount responsibility of any government is to assure the national security and to do what is necessary for that objective.
But at the same time, in a world where the security of our people depends on many things, many different kinds of foreign threats and many different kinds of domestic threats, it is also important that we spend no more than is necessary to achieve our national security. And it is that kind of approach that I know has shaped this administration's thinking about defense policy. And my hope would be that with the best-informed possible--best-informed judgments, that that will be the kind of approach that will shape any future administration's attitude towards defense policy.
Yes?
Q: Both the administration and the Republicans in Congress have proposed a variety of targeted tax cuts. If it looks like there will be no agreement on the overall size of a tax cut, where among these smaller pieces of the puzzle do you think there may be room for a compromise with the Republicans?
Sec. Summers: Well, I don't want to try to predict where--you know, what choices the Congress will make.
I think the president's budget provides us with a framework that provides for the maintenance of our fiscal discipline, provides for a substantial contribution of on-budget resources, both to paying down public debt and making room for investment, while at the same time increasing solvency of both the Medicare and Social Security program, in a sense using the surplus to prefund those liabilities; and shows how we can meet those two tests, while at the same time preserving core government and making room for what seem to us to be some particularly important areas for targeted tax incentives. And I'd highlight as being of particular importance within that, to me--although these are--all seem to me to be priority issues--an emphasis on promoting the economy's supply response, which seems to me very important at this point. And we do that by encouraging more people to be able to work and have incentives to work through the expansions of the Earned Income Tax Credit that are contained in the president's budget proposals and, I think, of particular importance over the long term, at a time when the nation's personal savings rate has fallen to its lowest level in many years, new steps to promote savings, not by encouraging more savings on the part of those who are already saving substantiality, but by providing incentives for the heavy marketing of savings to the more than 50 million Americans who have no pension, no IRA, no 401(k), no savings incentives of any kind, and who in a very large majority of cases are doing very little savings, and so that any savings that is generated represents an incremental contribution to the pool of national savings.
Yes?
Q: My question has two parts. First of all, I want to--in the New York Times you were quoted as saying, "When history books are written 200 years from now, the last two decades of the 20th century, I am convinced that the end of the Cold War will be the second story. The first story will be about the appearance of emerging markets and about the fact that developing countries, where more than 3 billion live, have moved to the market and seen rapid growth in income."
First, were you quoted correctly? And if so, what exactly did you mean by this?
According to the World Bank, Latin America grew between 1960 and '80--it grew 73 percent before the Washington Consensus. After 1980, during the period that you say it saw rapid growth, it was 5.6 percent.
Moreover, in Africa, per capita income grew at 34.3 percent from '60 to '80. Since '80, per capita income in Africa has fallen by 23 percent.
Some emerging markets, such as China and South Korea, have grown rapidly over the past 20 years, but then they did this in the previous 20 years as well and in the case have largely disregarded the Washington Consensus. Could you reconcile these statistics?
Sec. Summers: Thank you for your question. I was quoted correctly, and we'll only know 200 years from know whether I was exactly right in what I said about the history books 200 years from now.
But I think it's important for us all to recognize as we think about the global development effort, and as we think about the events of the past few days, that with all of the problems, with all of the disappointments, with all of the things that can be improved--and I'll say something about them in a moment, and I am choosing my words carefully now--the last two decades have seen more progress in improving the human condition globally than any two-decade period in human history. That that is there in the most concrete manifestations of the things that are most important to people: the fraction of their children who die before the age of five, the fraction of their children who learn to read, the fraction of children who lose their mother due to dread disease, the fraction of young girls around the world who are forced into child prostitution. The societies have been transformed in ways that people thought almost inconceivable two decades ago.
This room was, in the late 1970s, the site of more than one discussion of the--what was seen by many of those who participated--as the near-certainty of mass famine throughout Asia and the developing world during the 1990s. That did not happen. That progress is a reflection of many, many things; surely, the most important is the success of the countries themselves in pursuing economic policies that liberated the economic energy of their people and allowed growth to take place, but it is also a success of the movements towards greater global integration that have taken place during this period and it is a success of the global institutions that have been a part of all of that.
Does growth in developing countries need to be more equitable, more human-centered, more focused on health and education? Absolutely, it does. Do the institutions need to be much more transparent and accountable? Absolutely, they do. Do their programs need to be more sensitive to the people who live in villages and involve greater degrees of popular participation? Absolutely.
But let us all remember that there has been no substantial success in raising people's incomes and living standards without contact and resources from the rest of the world and that that is something that we requires revenues from exports or foreign investment, or international foreign assistance, and that, if we are going to have progress, we have to find a way to have those things and to make it work for people. I hope I have addressed the concerns that were reflected in your question.
Yes?
Q: Do you foresee any dilemma arising in the administration's working to decrease the tax burden on taxpayers and put more disposable income into their pockets, while the Federal Reserve is trying to increase interest rates to regulate or curb the demand of the wealth effect?
Sec. Summers: Well, let me say that we have--along with fiscal discipline, the other pillar of policies that I think have succeeded over the last seven years has been respect for the independence of the Federal Reserve and recognition of the credibility benefits that it brings. And, therefore, I am not going to comment on the Federal Reserve's policy.
I did very consciously say at the end of my remarks, that I thought this kind of period of strong demand was a moment when it was particularly important to address the issue of increasing savings and that maintaining fiscal discipline was a particularly good way of increasing savings and maintaining balance in the economy and increasing the economy's supply potential. And I think it's a moment when policies that moved in a different direction, away from promoting savings and away from fiscal discipline and away from paying down the national debt, would be particularly risky.
Let me take one more question, if there is one. Yes?
Q: Let's suppose that everything goes well, we pay down the government debt, we run surpluses year after year. In about 10 to 15 years, we have no government debt left except that held by people who won't give it up until they die. What does the world look like in that situation? Does some new financial instrument come in and become the standard? Does the Treasury Department accumulate surpluses and then loan against them? What takes the place of the current active Treasury market when Treasury debt is all paid up?
Sec. Summers: Let me first say that if and when some secretary of the Treasury faces that problem, it will be a high-class problem for the nation to face.
Let me say also that we already find ourselves in a situation where the people in our debt policy area who, for six decades, have had as their work the issuance of federal debt, now find that they have as their work, in part, some issuance of debt securities, but also they auction, they do some auctions, but they now also do reverse auctions when we buy back debt securities, and I think that is a sign that we're at a position where those issues are things that we're not just discussing, but acting on. It's a sign of the fiscal progress that we've made.
I hesitate to predict the precise ways in which financial markets would adapt to a period when federal debt was very substantially reduced, and certainly it would not be appropriate for the federal government to seek to choose or enshrine any particular alternative instrument as a benchmark. But I suspect that one would find that there would be a rich competition among private issuers to provide liquidity and to provide some of the attributes that government debt has today, and that the financial markets--as these adjustments were made, after all, over a substantial period of time, would take place smoothly, and that the overwhelming impact on the economy and the nation's financial markets would be the crowding in of private investment as a consequence of the reduction in the supply of federal debt.
Thank you very much.
[Applause]