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tv   Politics Public Policy Today  CSPAN  December 15, 2014 9:00am-11:01am EST

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what is our society going to look like in 20 years? what is the technology, what is the metadata being collected about us and what are those protections that, say, if congress doesn't act with the usa patriot act, where does the judiciary step in? >> it is a great question. it is probably going to be a wild ride. we saw in the riley versus california case the supreme court, quite surprisingly, ruling not only -- a bit of a surprise based on prior law that the court ruled that a warrant was required to search a cell phone but that dhe id so unanimously. now lower courts are trying to figure out whether smith versus maryland is still viable or whether it should be narrowed in
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some way going forward. that may or may not be clear. it may get up to the supreme court in the next few years. i think yesterday the 4th circuit heard a case -- heard oral argument on a case whether south side data is protected. 5th circuit says it is not protected. these are issues working their way up to the supreme court. i think in general justices tepid to be relatively sensitive to how technology changes privacy and this is a theme if you look back, the thermal imaging case from 2000. jones versus united states, the gps case from 2012. then riley versus california in just this past year -- this year. those are all cases where if you just look at the case law, the precedents, you assume the government won -- would win. those are all three cases where in fact the government lost. in jones and in riley they lost unanimously. justices i think republican
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generally attuned to these concerns and lower courts as well. we're seeing fourth amendment law evolve. if we had a functioning congress, i think you would see congress really active. unfortunately the statutory picture here has been sort of caught up in the broader dysfunction of congress. you see more action in state legislatures. one is the license plate readers. i think i read recently 12 or 13 states have in the last few years enacted some sort of regulation of data collected by license plate readers. that strikes me as a natural topic for legislation. i mean if our governments are collecting all of this data, what are they doing with it? how long are they keeping it? when are they evenly liesinging it? all of these are sort of important questions that should be asked. some states have started to ask these questions. i think the legal system is responding in its slow and cumbersome way. it's happening, obviously it is just delayed. >> slow, cumbersome and very mysterious sort of way. it is fragmented also.
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the jones opinion was a win but it is also very murky. it does not offer a clear direction in terms of where they are going with this. i think they'll avoid the third party doctrine and reasonable expectation of privacy only for so long. they're going to have to deal with it because it makes absolutely no sense in an age of technology. our fourth amendment is supposed to protect from unreasonable searches and seizures and the third party doctrine now just fiz very justifies very unlawful searches and seizures. one of the big problems with courts unfortunately is a lot of their rulings are very narrow. jones is a great example. had that ruling on the nay rowest grounrow e -- narrowest grounds possible. put the a tracking device on the car and that was it. so it is very hard to tell. these issues are going to come more and more to the fore and i think they'll have to grapple with them and they're going to be begging congress to do something about it. let's hope that congress does a great job.
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>> i was reading all the briefs in that case as they were being filed. at the very, very last stage, at the point in which no one else could respond the government then raised the issue of encryptions, oh, encryption is this huge threat. we don't have time to get a warrant if someone's phone is encrypted at the moment they tap in the p.i.n. number is when we need to get the phone. it's sort of odd that the court didn't really pay too much attention to that. i'll get back to that in a second. but a year later apple does this big change. i can't help but think that had apple and google announced their changes before the riley decision came out, it might have looked a little bit different. but even with the decision that we got, the supreme court really did leave a door open to exigent searches, searches without a warrant, when technology played
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it necessary. technological threats like encryption. the court didn't spend a lot of time there saying there are these existing fourth amendment rules on exigency. we'll decide on a case by case basis. i'm curious to hear your thoughts on this. my fear is where we're going to get, because of both the availability of technology, because of the fact that the devices are being built to be more secure, that we're going to find ourselves in a world where we're going to have law enforcement agents sitting in unmarked vans waiting to pounce. the moment they see the target pull out his or her phone to make a call or read an e-mail, that's when they'll jump on them and grab them and push them to the floor to get the device while it is unlocked. i think riley pushes us in that direction and i think technology pushes us in that direction. because that kind of see sewizu when the device is unlocked
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means they can ignore the other things we talked about before. whether getting back-ups from the cloud. if they can get that phone at the briefest moment when it is unlocked then they get everything that they need. >> as they did with dread pirate roberts. >> in the silver case. he was sitting at a public library in san francisco. they waited until he had logged in to his computer. then they -- >> disguised as bookshelves. >> then they used a lot of force. i think what we're going to see is an increase in force in cases of computer or other device seizure. is my paranoia crazy? >> i don't know about the added use of force. i don't see how that fits in but i agree with you though that from a law enforcement standpoint, if you have probable cause to arrest someone and you think there is evidence on their phone, you know you're going to need a warrant to search the phone but you think you're not going to get access to it if the phone is not in use but if the person happens to be using it you'll get past the pass code. i agree, law enforcement will -- a smart fbi agent will wait
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until the person's using the phone in order to do that. i think that's right. part of this though i think depends on a question that -- i'll put it back to you. we'll go back and forth. empirically there is going to be a question of how often is the government really stymied by encryption say in the ios 8 context. how often are they going to be able to bypass it either through encouraging someone, hey, give me your pass code. the person might give it up in that context. it may be that most of the time that happens. sometimes maybe they will be able to guess it and get through that way. there is this question of how often is ios 8 really going to stymie investigations. it might be that it is not that much of a barrier to law enforcement in which case the claim of exigent circumstances becomes weaker and it may be that it actually is a barrier on which claim the case of exigent circumstances becomes stronger. to some extent that question you asked sort -- the legal question depends on the technological
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question of how much is actually going to stop the government. >> i was surprised when the attorney general, and then director comey, both criticized apple and google. i was surprised not because these two top law enforcement officials were questioning the question, but i was surprised that in the last five years that i've been watching the going dark stuff unfold -- this is not the first time that the government has complained that companies are rolling out technologies that make life more difficult. i've never once seen the government call out a particular company by name. not because they don't want top offend the companies but they don't want to tell the bad guys just use this one technology, then we won't be able to monitor you. it it's been consistent that they will talk about classes of technology, peer to peer technology, or ip addresses for phone networks, things that are causing problems. they've never once said, "this particular carrier or particular app is a huge problem for us." it makes sense. they would be idiots to broadcast to the world the area in their armor that is the
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weakest. so i was thinking why are they calling out apple and google by name? the best theory i have -- really, i'm speculating here but the best theory i have is that what the attorney general and the fbi and the broader national security community are worried about is not the disk encryption on the device. because as noted, that's probably not a huge problem. there are cloud back-ups. people choose bad passwords. i actually don't think that this encryption is going to be a major problem for law enforcement. not the kind of problem that would warrant the fbi director an attorney general going on national tv to criticize companies. what i think they're really worried about is end to end encryption of voice, video and text communications in apple's i message and face time services, the new encryption of what's app now built into their product and now used by 300 million users. i think that the enkrepcryption real time terrifies law
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enforcement because it means that wiretaps no longer work very well. i think they are looking for a way to apply pressure to these companies. they are looking for a way to direct the attention of congress and other folks at this sector and at this problem without actually telling the public it is this particular technology. we are concerned about encryption but it is this -- i don't think they want to say if this part of the apple product that's really causing problems for us. on the issue of real time, voice, video and text communications, yeah, i think it is going to make life more difficult for law enforcement. it is sort of the point. it is also going to make life more difficult for criminals to spy and foreign governments to spy. but i think that technology will be impactful in a way that i don't think any of us have really sort of imagined. i do think either wiretap numbers are going to start to drop or we're going to start to see a usage of hacking by law enforcement that we've never seen before. because if we can get malware on
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to your phone then it doesn't matter what's encrypted because they get the microphone, they get webcam, they get everything that's going on through that device. we've been involved in an effort recently where doj has asked the courts for expanded authority to hack into computers around the world. and i think the response to encryption from law enforcement isn't an increased use of orders compelling people to the encrypted data. the natural response to enkrepgs inkrepgs is ha krip encryption. it is going to start with the fbi, marshals, then state and loc loc local. >> so we have about 10, 15
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minutes left. we've covered a lot of ground leer. there is a microphone over here. if we have -- if somebody can pass the microphone around -- then we can ask questions. >> why is congress not taking steps to permit this? you look at things like the military equipment and you can look at this intelligence -- the stingray material. people know about it now. why isn't congress acting? >> they've taken some steps with the introduction of legislation. in some cases it's past committees. the problem is that it's just never gone over the finish line. there is actually a lot of legislation in congress right now that touches on one surveillance topic or another, or one computer crime topic or another. some good, some very good, some bad, some very bad. the problem is actually getting it through congress and congressional leadership has proven to be an incredible
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bottlene bottleneck, an incredible bottleneck there. as i tried to say before, the best thing that could happen for moving it along is for people to stay mad about it and to contact congress. it sounds almost simple but that is a very powerful tool if enough people do it. >> i would just add to that, that this year you saw a perfect example of what harley was describing. one of the most promising reform measures actually got passed by the house and congressman massey referred to that this morning. but you have a circumstance where the house leadership on both sides of the aisle are very pro-surveillance. they've bought into this meme that i discussed is earlier today about collecting more being the answer when it really isn't. i can't emphasize strongly enough what harley said. members of congress need to hear from everybody about there, that ss in fact a priority for americans, and that's the only way this is going to change. it is going to take a lot of public pressure because folks in the national security community
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love having these authorities. it's just that simple. they're not going to give them up without a fight. >> we have at least seen three letters go out in the last month from senators to the attorney general and to the secretary of dhs demanding answers about stingrays. one letter from senator tester that went out this week had ten additional senators signing on to it. that's a pretty good sign. we've not yet had a hearing on stingrays. i really do hope we will get a hearing at some point on stingrays. i've testified at state hearings in texas and michigan on the stingray technology. in those states the state representatives were furious to learn about the technology particularly when law enforcement either refused to come and or wouldn't answer any questions at the hearings. we would love also to get letters out the door by congressional offices about hacking tools and hacking techniques and we'd love to see a hearing focused on hacking because i think when members of congress learn that the fbi can control someone's weapon cam
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without the light turning on, think that would make for a great c-span moment. i hope someone will decide to make that happen. >> if you can wait for the microphone. speaking of c-span, we have viewers joining us there. if you wouldn't mind, just state your name and affiliation, too. just speak into the microphone if you have a question. >> sure, my name is paul wagner, with beyond systems. you all discussed the increase in use of encryption or likely increasing use of encryption. it seems clear, surveillance agencies are going to want to target the devices themselves. so i wonder what -- how can end users trust -- seems like they'd want to go after for example the operating system or even the hardware outside the encryption stack. how can end users possibly trust the companies of microsoft, apple or intel, motorola, you know, in the face of secret orders or are they themselves
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might voluntarily interact with the government. do you see any way we can trust them, whether it is through open source, hardware, software or some other model. >> i know this is a law enforcement panel and not a national security panel. i mean i think in the national security context, there is good reason to be concerned about the financial relationships between large u.s. chip and other equipment companies and the intelligence community. i think it's troubling when you have a government services division of a company that makes the chips that power the encryption that we all use. i think that creates serious cause for concern. but even if there were some capability that these companies were either building in or revealing information that wouldn't make it easier for the government to intercept, i don't think those capabilities are going to be used in the law enforcement context. if there is a secret back door in intel's random number generator feature in their
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microprocessor, it is not going to be given to the fbi to use in a drug case. i think the average person doesn't really have any reason to fear hardware back doors or that kind of thing. i think where it comes to trust, what worries me the most is that for good security reasons we now have automatic security updates in our web browsers, in our operating systems, in the app stores that we all have on our smartphones. that means that the googles and apples and microsofts of the world have the ability to push sort of wear updates down to their customers. again, that's normally used for good reasons. there have been a few sort of incidents in the past where these companies use that ability to like remove books from people's devices, amazon famously removed copies of "1984" from people's kindles a few years ago. i'm very, very concerned that at some point one of these tech companies will receive an order compelling them to deliver malware to a target under the guys of an automatic security update. i'm very, very worried about
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that. we don't have a copy of that kind of order. we've not had any information to suggest that that's coming but these companies do have the ability to update software on our devices. and i think as the devices get more and more secure and they get locked down by the companies and the users, law enforcement agencies and their allies are going to look to any leverage they have. and that ability is one that is so powerful, i cannot imagine that they're going to not use it at some point. >> john petty from maclean, virginia. i disagree with the panel's earlier discussion where they talk about a back door being sort of a way out to find a compromise between the issues being raised.
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permitting inting enkrepgs kre keysors a back. providing that is just open sesame to the hacker and community.providing that is jus sesame to the hacker and community. there is one endorsed by industry. technologists anyway. it is a key recovery system. it is a dynamic key and not static. it is not server based. the network owner can regenerate a key at any time. that can be responded to by warrant or the court of judgments. so you have a control system and a balance between a broad encryption system that's available for national security
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reasons under approved laws and it'sed its administerable. >> this is key escrow. >> not quite. key escrow is a static key. i'm talking dynamic key. >> so the distinction here is that your employer or the government has a mechanism -- has some kind of key mechanism built in to your device such that they can then on a case by case basis -- >> no, sir. no, sir. only the administrator of the network has control over that key. it's a dynamic key creation. >> regardless of who has the additional key, whether it's the administrator of the network or your employer or apple computer or the fbi, if there is an additional key, there is an additional target that people will go after and i think the computer security community is in widespread agreement that we don't want any mo kere keys. the only person who should hang on to your key is you.
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i think those tools have been available in the market and they haven't really been adopted outside of enterprise settings where there's probably a legit plat use for them, which is if an employee quits, you want to be able to get the data if they won't give you their password. >> i'm, not correct. for a dynamic key situation. >> well, most security experts that i've spoken to don't want to have anything other than a key held by the use r. >> there is a gentleman right here. >> i'm sure it's not just judges who haven't heard of stingray technology. could you give a 30 to 60-second description of what it is, what it does, why we should be afraid of it? >> sure. and then there is a woman behind who would like to ask a question. >> it is a little dark up here
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on stage. >> so the quick version of a stingray is that it exploits a fundamental security flaw in the older generation of cell phones which is that your phone has no way of proving that it is talking to an at&t tower. any tower, any cell phone tower or any device that is effectively a tower can decide what it wants32nz to call itse. it can call itself an at&t tower. it can tall itself a t-mobile tower or verizon tower. you don't have to be verizon to call your device at verizon tower. the stingray impersonates the cell phone infrastructure of the cell phone network. the fbi drives into a neighborhood, they turn it on, it has a higher signal strength than any legitimate tower nearby. suddenly all the phones in that neighborhood say, oh, look, there's this new tower that i helicopter seen before. it's got great signal strength. let me use that for my calls. and in the process of that happening, it causes every cell phone in neighborhood to identify itself to that stingray and reveal a unique serial
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number. it then allows the stingray to locate those phones. and in some cases these devices can be used to intercept incoming and outgoing calls, incoming and outgoing text messages and even internet connections. for all intents and purposes the government it your phone network when they are using this device. of course whether that happens they also disrupt the normal functionality of a phone network you may not even be able to make telephone calls whether it device is in use. it is very evasive. it requires a degree of mass kr massac i think that's a step too fa
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>> thank you so much. i'm with the community to protect journalists. if you can talk about the law enforcement threats to journalists and to lawyers who really depend on the ability to discuss in confidentiality with their sources or their clients. i think that the issue you raised about pushing out malware is a real one. if you remember in dubai, the government-owned telecom pushed out malware to our blackberries. i was working as a journalist there. we only knew about it because foreign reporters who weren't working in a repressive country were able to report on it. a really important dine application. but the aclu and human rights watch did a very important report and i think it is important to raise specific threats to lawyers and journalists and hear about those threats. >> i'll let jack answer in a second because i think you probably have your own thoughts.
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one of the great things that's happened post-snowden is that journalists are now starting to take visual security seriously. the use of e-mail encryption is now widespread among national security reporters. that definitely wasn't the case two years ago. in some cases i had to help people and my friends and colleagues had to help people but i think journalism community has really come a long way. the legal community has not yet come in that direction. still the number of encrypted e-mails i get from lawyers who don't work for the aclu is very, very small. the number of legal organizations who encrypt their websites, who offer encrypted telephone services to their clients is very, very small. sadly, lawyers don't seem to do anything until failure to do so is deemed to be unethical action. so what we really need is for the aba, the american bar association or national association of criminal defense lawyers to put out statements
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saying that lawyers need to encrypt, lawyers need to use e-mail encryption, use telephone encryption. but the journalism community, it is moving in the right direction. i think the main problem right now is that still many of the tools that we have are not very easy to use. and so text message and voice encryption are basically i had not-proof at this point. i'm really happy with where things are going there but e-mail encryption is still a nightmare and sharing encrypted documents between reporters is still very, very difficult. >> just very briefly on this because i wanted to ask a question. the snowden disclosures on national security is but one very small area in sensitive reporting that journalists do all over the country and all over the world. at minimum, i have talked to sources in state governments, companies, private firms outside of the intelligence community where they may not go to jail, they may not face 20 to life or something for disclosing this, but they have a mortgage to pay, they have bills to pay and a family to feed.
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worst case scenario, journalists in hostile countries, as you point out -- here i'm lucky to live in a country where maybe the worse that happens to me -- not saying it is a walk in the park -- i get held in contempt. we're talking about people dying and disappearing if this information is let out, sources of us who disappear in the middle of the night because a government intercepts it. in terms of lawyers, i'm curious from a legal perspective what this surveillance means for attorney-client privilege and when the government does this sort of mass surveillance, how that's protected and how that works. >> totally depends on which mass surveillance you have in mind and so it is a hard question to answer. on the journalism question, to my mind there's been a little too much emphasis by the press on how victimized the press is by investigations that involve leaks to the press. the press is very good and defending its interests in such cases where -- i mean we have
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the basic problem seems to me is that leaking national security secrets to the press is a crime. so naturally the government is going to investigate the leak. then the reporters on the other end of that leak. so it creates -- the reporter's getting awfully close to the crime. right? so it is a question, how does the government investigate those cases. some would say the government should not investigate those cases. that should not be a crime. but if we accept that that is a crime, and should be a crime, which i think is the only way to have a classified system where we have some secrets that are classified which should be the case, then naturally reporters are going to get close to that. i think there's been some miscoverage of investigations in which it was -- i guess it was the affidavit in which an ap reporter was described as somebody who had committed an offense. and that got totally blown out of proportion. it was really a phrase that was required under a statutory authority, the privacy and protection act. justice department approval process. that did not mean that the reporter was targeted. it just meant that there was a part of a checklist that had to
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be covered and a language that ended up in an affidavit. so i'm not totally convinced that these are as severe problems as the question suggested, but at least in the attorney-client privilege question, it just totally depends on the nature of the surveillance. >> i definitely have a slightly different view. yes, i will be brief. we absolutely need to have an ironclad shield law for journalists. certainly at the federal level. i would argue at every level. if you want a poster cl eer chi why, look at the jim risen case. it is hardly the only example but it is an excellent one. my problem with essentially making an argument that we need to have wide latitude essentially for prosecutors to be able to go after folks in cases like this, the only reason we know that unconstitutional surveillance has been conducted against each and everyone of us is because of edward snoweden is being willing to go to folks in the business that jack and others are in. we need to be able to find ways, ironclad ways, i think, to make
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su that those journalists are essentially untouchable when they are doing their job on this. that's to me the great vulnerability we have in the law right now. >> it pains me to curtail this interesting conversation. i know it will continue at lunch upstairs in our cafeteria. i hope that you will join us back here at 1:00 sharp where we'll be joined by google chairman eric schmidt. nsa's best frenemy. we have a really fantastic afternoon lineup. we have a secrecy panel. we have a panel on reform and limits to surveillance. and then a very special closing session that you will kick yourself if you miss, i promise. after all that, we'll have basically booze and instruction in privacy tools with a really great series of tech experts who
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will walk you through how to use technologies to protect your privacy. so thank our panel again, please, and join us for lunch. we are live this morning at the brookings institution here in washington, d.c. for a discussion on federal budget projections. it begins shortly with panel of economists who will talk about whether those predictions are accurate and whether long-term budget outlooks create uncertainty and worry about fiscal policy. among speakers you'll hear from this morning, congressman jim cooper of tennessee, and cbo director doug elmendorf to talk
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about how to deal with fiscal uncertainty. this is live on c-span3 and should start momentarily. good morning and welcome. my name is luieouise shaner.
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our goals at hutchins are to both improve public understanding of fiscal and monetary policies, and to be a place that gathers people from academia, government and bu business to try and improve those policies. the hutchins center was made possible by the generosity of glen hutchins who will be here with us a bit later today. we are also pleased to welcome several members of our advisory council. our topic this morning is fiscal uncertainty. we all know that projections for federal government deficits over the long run show that we are on an unsustainable path. but it is also true that those projections have very wide confidence bans around them. the question of how that uncertainty should influence policy is quite controversial. some argue that because we have little ability to predict future deficits we should instead focus
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on the here and now. and while others argue that the fact that the future could turn out worse than we expect means that we should pay even greater attention to issues of long-run uncertainty. it's also possible to take steps now that can reduce the uncertainty of the fiscal outlook, but these steps may have drawbacks as well as benefits. the question of fiscal uncertainty is a hugely important but woefully underemphasized topic and we are lucky to have some of the world's leading experts on these issues here today to discuss and debate it. our morning will proceed as follows. our first paper is on the big question of whether uncertainty means we should pay more or less attention to projected fiscal imbalances. it is by allen auerback from the university of california at berkeley. the paper will be discussed first by professor charles manski of northwestern university, and then peter
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diamond. we then feature a paper on policies that can insulate the federal budget from uncertainty by a nyu law professor, david cayman. that paper will be discussed by panel of experts with much practical experience formulating policy, consistenting of senior vice president of the bipartisan policy center. jean sperling, and tennessee congressman jim cooper. finally, we will hear from two people who actually have the responsibility of explaining uncertainty in the policy. both papers presented today, as well as the slide shows you will see will be available on our website. let's get started with the first paper. i'm particularly pleased to have allen auerbach here to kick off our first purely fiscal event at hutchins. allen taught me most of what i know about public finance, first as my professor in graduate
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school, then at the joint committee on taxation where we again overlapped. i still tote around my notebook from allen's public finance class at harvard and have referred to it many times over the years. so i know what he has to say is worth paying careful attention to and remembering. so without further ado, please welcome allen auerbach. >> thank you very much,the titl. it is a very certain title. there's more uncertainty in the paper as well as in the subject. to start, as louise said, long-term projections for the path of federal revenues and spending show a significant imbalance under current policy. now of course, that in itself is a question that one has to deal with, what is current policy.
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there are disagreements about the best way to think about that. nevertheless, i think under reasonable analysis of assumptions about what current policy is, there is a significant imbalance between expenditures and revenues that leads to a very large fiscal gap, something that cbo measures periodically. much larger than the kinds of fiscal adjustments we are accustomed to making or review as large policy changes. but on the other hand, projections are also very uncertain. and about that, there is little disagreement. the uncertainty goes up with the horizon over which one is forecasting. and just as a very modest illustration of this, here's one figure from the paper taken from a cbo document in 2008 showing
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confidence intervals, that is statistical predictions of likely outcomes, as of mid-fiscal year 2008, looking through the end of fiscal year 2013. of course starting in fiscal year 2007 when the deficit is a share of gdp was known. and the wider -- you see what's sometimes called a confidence cone or band. as you get up to the highest and lowest series are the 5% and 95% confidence interval. there's also 25% and 75%. the solid line is what the forecast was. that is the listed forecast was for those fiscal years. and then the dotted red line is what actually happened. now i have to adjust what actually happened because the predictions were made under current policy. and since policy changed, i took
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out the estimates of the effects of policy. so the red line isn't what the deficits actually were but what, by cbo's estimates, after the fact the deficits would have been without changes in policy. you can see that even in the first -- second year being predicted, fiscal year 2009, the prediction was actually -- the actual value was outside the 90% confidence band. now of course, 2009 wasn't just your typical year. and that's an illustration. so it is reasonable, it may very well be that these confidence bands were accurate and we just had a really unusual draw in 2009, as we know we did. but the fact that the confidence band widens over time is customary from predictions like this. and it comes from the fact that there are some things that we are predicting that are important. of course testing revenues and expenditures, the error is compound over time. for example -- the level of productivity of growth each year is uncertain.
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if you look at the levels of productive several years in advance, that will be a result of a combination of annual errors that compound. so the revenues from that level of gdp will more and more uncertain. similar things apply on the expenditure side. so that even five years out you've got a deficit of 5% of gdp and a surplus of 5.5% of gdp. that's about half the size of the federal budget in terms of the range of uncertainty. that's just five years out. so presumably for a long-term forecast, the program is even worse. what should we do about this uncertainty. well, just to emphasize, my paper is not about what to do about the predicted fiscal gaps themselves. of course there is dispute about. that. it's rather about how our responses should differ as a result of their being a lot off uncertainty about these projections. you may find it hard to separate these two conceptually but i
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think it is important to do that because the arguments about one tend to spill over into the arguments about the other. now there are a couple of common responses i want to discard as not useful in thinking about this issue. one of them is stein's law which is, as many people know, is -- from herb stein, that anything that can't go on won't. many people say, well, if you look at these projections of medicare and social security occupying such a huge fraction of the budget, we know that's not going to happen. and some people take comfort in that. i don't understand why. because knowing that something is going to change doesn't really give you any information about how it is going to change, when it is going to change and what the consequences of these changes are going to be or the delays in making changes. and what one would really like to know is, if we just sort of don't pay any attention and wait
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for things to fall apart, how will the outcome when things fall apart compare to what we could do if we were actually designing policy. a second common response is projections behind -- you can fill in your favorite number here -- years are so uncertain, we should just ignore them. 20 years, 10 years, 5 years, 1 year. you can choose it. one hears arguments for different numbers depending on who is making them and about what particular set of projections. i don't actually understand what that means. does it mean that if we have projections showing that things are getting worse and worse over time, say 20 years out, with increasing uncertainty about the fact that koiestimate that it's getting worse, do we just ignore
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it and say, the problem went away after 25 years? that this thing that looks bad, but uncertain, suddenly 25 years out, no problem. if not that, then what? i don't understand what this point represents. so what my paper does discuss is -- and suggest is supported by the economics, is that if the future is uncertain, there is a case for saving. as a form of self-insurance. if you will. and that's an argument that really comes from the way individuals should behave with their own uncertain prospects. and although it is more complicated, it is an argument that one can make for the government as well. we'd like to -- uncertainty is bad. if we could, we would avoid it but there is not really any way to ensure against aggregate uncertainty. there is no insurance company that can provide insurance for
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that. so as a measure that's not as good as makining the uncertaint go away, putting resources aside so that if really bad outcomes occur, you're somewhat more protected than you otherwise would be. of course there are many complications when you think about the government doing this right rather than individuals. i go through several of these in the paper. i won't have time to discuss all of them but let me just deal with a few of them here. one is, well, it's not that we are uncertain about the future, it is really that we have no idea. we just don't know. well, this is really unfortunate that we don't know. obviously we wish otherwise. but that's life. we are very uncertain about the future. it's something that we might feel bad about and something we may not be sure how to deal
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with, but it's not something we should ignore. it is hard to come up with an argument -- co-heesht argherent about why we should ignore things of which we're very uncertain. another common argument one hears is that people would be better off in the future so they can absorb greater fiscal burdens than those being imposed on people today. well, the first thing to say about this is, this is really an argument about how to deal with projected fiscal imbalances. again, noting this distinction. that is, if we knew for sure that taxes would have to go up or benefits would have to go down for people in the future, that would be an argument one might support based on the greater well being of people in the future. it is not really an argument about lou to deal separately with, or in addition, to the uncertainty. and indeed, there are arguments suggesting that the uncertainty exacerbates the problem of leaving fiscal burdens for the future. in particular which if , if we
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series of negative events that mean taxes don't just go up as we expect them to go up but have to go up a lot baltimore, we could have very serious economic damage as a result or some sort of fiscal crisis if we find ourselves unable to collect the tax revenue we need to. so i think that actually pushes us more toward dealing with the problem now than simply projecting imbalances would. second, we should wait until we have a better idea about the future. well, this may be consistent with a view of the world in which there's sort of a certain amount of uncertainty out there and we'll resolve it as time goes by. first thing to say about this, there is always more uncertainty coming. that is, we may resolve some issues but other new ones about which we're uncertain will rise. and we wait. we're not really going to make uncertainty go away but we will restrict our options for dealing with it. second, there may be cases in which we do expect a resolution
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of information of uncertainty about certain things. we may discover about whether the provisions of the affordable care act meant to control costs will actually do so. we may learn other things about life expectancy or costs of other governmentexpenditures and it may make it easier to deal with things. but i argue this is more about the type of response that we should undertake today rather than whether we should respond today. for example, it might cause us to delay making any further major changes in our health care delivery system because we want to learn more about the most efficient way of delivering health care. but it doesn't mean that we shouldn't put resources aside to make it easier to deal with the fiscal uncertainty that we face. another argument is, well, look. there's uncertainty. we're getting new information all the time as we resolve the
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temporal uncertainty. we can't be jumping around, changing policy every time new information becomes available. i think that's right. i think there are a couple of implications. first, that whether we do act, we should act more forcefully. that is, if information is coming, we're learning that the future is worse than we thought a couple of years ago, or better, and that leads us to want to act. there are certainly costs to changing policy every year, leaving aside the political costs of trying to make it happen. there are costs to the economy. so we might want to act more gradually or wait to act until we really feel we need to. but on the other hand when we do act, we should act more forcefully knowing that we're not going to get -- not going to have an opportunity to do it again in the near future. and finally -- and this is something that david cayman talks about in his paper -- we could put in place some
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automatic responses if we can be fairly confident about what those responses should be as events unfold. an example of this might be -- i'm not advocating this but just as an illustration. indexing social security, age of normal retirement under social security, to life expectancy. that's been proposed by many people. it is not something we have. it would certainly make it easier to keep the social security system solvent. on the other hand, that might not be a good response if there is increasing life expectancy. because then some people would be much more adversely affected by that continue crease in retirement age than others and maybe we'd have a different response. the key is that the automatic policy responses that we built in ought to be things where we can say, if an adverse effect event occurs, we have an idea of what that event is going to look like, and this is the kind of
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response we're going to want. with greater uncertainty projections are more susceptible to political influence. i guess the story is, if the person or agency doing the forecasting doesn't have a stro what might happen, then the political influences might be more able to change what the forecast is. it's hard to defense against this influence. that may well be true. i'm not an expert on this. but to me, it provides an argument for institutional protections and transparency. i think ignoring information is a very bad second choice. unfortunately, maybe the one we're forced to make. but it certainly is one that we should make only as a last resort. so to summarize my comments, and my paper, which, as i say, goes into more detail on many of these points that i've made,
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uncertainty means that our policy choices will always turn out to be wrong in some sense. that is, it's going to make life more difficult for us, because we're going to have to make adjustments, and we're not going to get it right. we know we're not going to get it right, except by coincidence. but that doesn't mean that ignoring uncertainty is the right thing to do. we can't make it go away by ignoring it. it's still there. and it's better to have a more active response which could lessen the negative consequences of uncertainty than simply to ignore it and let things happen. thank you. [ applause ]
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>> so well done. no uncertainty. thank you. very happy that the hutchins center has organized this event. my remarks are going to follow on alan's, in the most broad principles that we should be facing up to uncertainty, rather than ignoring it. i've been trying to get that message across for quite awhile in my own work. i didn't write a paper specifically for this event. but here's a couple of sources at the bottom, if you're interested, of book, public policy and an uncertain world published a year ago, and then a article that i'll talk about a little bit today on communicating uncertainty and official economic statistics that will be out in the journal of economic literature, i think, next september. and that's on my web page if anyone wants to take a look at that. let me take a moment on the general themes of my work.
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they are foremost that society should face up to the uncertainty that attend policy formation. and i've been quite critical of various practices and policy analysis that hide uncertainty rather than facing up to it. my background is an economic rather than public economics. i'm very careful about how we make empirical inferences, and often the way we make empirical inferences is taking whatever data is available and adding whatever assumptions are needed to draw strong conclusions. and that may not seem a red button for most people, but for me that's what really gets me riled up. and so what i've been arguing is that a credible policy analysis would explicitly express the limits to knowledge. i try to show how that might be done in my technical work, and on the broad notion, is to study
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how policymakers can reasonably, i won't say optimally, because that's going to far. i think that's pushing things. but reasonably is as far as i would go, make decisions in an uncertain world. and i think that's what alan's paper was focused on. now, if we're going to face up to uncertainty. alan was focusing on projections to the future. but we have to face up to uncertainty, even of other things that we think we know about the economy today. so, i want to talk a bit about communicating uncertainty in official statistics. so, we have all kinds of statistics that summarize the state of the economy that are reported as point estimates. these could be unemployment rates, you know, growth in employment, gdp growth, household income statistics, and so on. that the federal statistical agencies report. and if you look at the news releases that come out monthly or quarterly, you find out that there's very little mention of error in any of these statistics.
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if you dig down into the technical publications, and i've done this, from the census bureau, the bls, and other agencies, you'll find verbal acknowledgment regularly that estimates are subject to sampling and nonsampling error. you'll find a little bit of trying to measure actual sampling error by confidence integrals and standard errors. but most of the error is really nonsampling error and you won't find any quantification of the nonsampling error. so reporting official statistics as point estimates manifests a tendency of what i call policy analysis to project incredible servitude. you make as if things are certain but there's really not much credibility behind it. and agencies do not justify the way that they produce point estimates. let me give just three examples that i think are important. one, if you look at gdp estimates that come out quarterly, those of you who know, the bureau of economic analysis reported advanced estimate, and the second estimate, a third estimate and then at the end of the year, and
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after five years there's a continuous process of revision of the estimates. and the revisions matter a lot. you can think from the first estimate that gdp's gone up 1%. next month you go oops it went down 1.5%. the estimates that come out are not accompanied by any error measures. the way the bea does it is by doing trend extrapolations when the data is incomplete and replacing them with real data when it comes in. it's a process that takes a lot of time. the bank of england actually, in the british context, actually puts in its -- does a fan chart that puts error bounds around covering gdp estimates. and i think that's something that we could do here. a second source is in sample surveys for anyone who uses sample surveys you know there's missing data. people don't -- are interviewed or they refuse to answer questions in the current population survey the basis for our household income statistics is a huge amount of missing data
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on household incomes. upwards of 40%. and you'd never see that from looking at the press releases that are put out, because the census bureau imputes everything. and you got to dig down and teach ee conmetrics to know that these impew tagss may not have much value. there's big potential problems there. a third, i could go on at great length about any of these issues, but a third that drives not just me crazy but macro economists regularly crazy is the use of seasonal adjustment. if you find out that the unemployment rate went down last month relative to two months ago, did it really go down or is that because of the seasonal adjustment formula, the x-12 or x-13 from the census bureau through its auto regressive moving average process made it look like it went down. now in this building i don't have to say much more about this. jonathan wright, from hopkins, wrote a very nice paper on this, came out as a brookings paper just a year ago.
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so we have all of these issues. agencies could use established principles to report sampling error in statistics. it's more challenging to measure nonsampling error. but i think that good faith efforts would be more informative than reporting official statistics. even if it's hard it's better to do it than not to do it. why is it important to communicate uncertainty. governments and private entities use official statistics when making decisions. the quality of decision making may suffer if decision makers incorrectly believe the statistics to be accurate. or if they think they're sophisticated and they have to guess at what the error margins should be but they don't really know what the magnitude of the errors are. i think it would be better if the agencieagencies, the statis agencies would communicate the uncertainty then we would have a better understanding of what information is actually available about the economy. now let me end the rest of my time, let me move forward, and talk about projections. i've written about this before.
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i warned doug elmendorf i would raise this question again about cbo scoring practices. the congressional budget act that established the cbo has been sbempted as man dating the cbo to provide point predictions or scores of the budgetary impact of legislation. the scores are conveyed to leaders of congress, and they're not accompanied by measures of unternty. there are various things the cbo does that does express uncertainty but not the scores. i -- one notable example that i've used on a case study in my book was the scoring of the affordable care act, and it's a quote from the letter that doug sent to speaker pelosi back in 2010, the cbo and jct estimating that both pieces of legislation -- people will remember there were two pieces of legislation. would produce a net reduction of $138 billion in the debt. so the question is what does that $138 billion reduction really mean? plus or minus $5 billion?
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plus or minus $50 billion or whatever? doug will remember, douglas holtz-eakin wrote in the new york times that the real number was going to add to the deficit by $562 billion. his estimate and the cbo estimate were off by $700 billion. so what i'd argue is that the cbo should express uncertainty in scoring. and i have to say -- and this is controversial. okay. i give a talk at the cbo a couple years ago about this. cbo has established an admirable reputation for impartiality. maybe it's best to leave it alone and just continue things as they are. i worry, though, and maybe this is just my being an academic from the outside who doesn't understand washington, but i argued that there's been a social contract to accept cbo estimates. i worry that social contract is going to break down at some point, someone will dig in, in congress or the media or dig in and find some estimate from the cbo they don't like, ask how the sausage was put together, and
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then say, well, you know, who knows. and then this cbo's reputation will go. i would rather the cbo face up to this, and provide uncertainty in its scoring measures. very simple way to do this might be to provide integral forecast and upper and lower bound. it could be a probability. we don't have to get into those details. now the question is this. the right question to end this room, can congress cope with uncertainty? because when i've talked about this to academic audiences everyone says to me of course the cbo should, you know, should be transparent about the uncertainty in the scores. when i talk to people around washington they tend to be skeptical. there are two reactions that i've received. some people assert that members of congress are psychologically or cog knitively unable to deal with uncertainty. i've heard that many times. i won't ascribe it to any particular individual but i've heard it many times. some give a game theory argument that congressional decision
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making is a noncooperative game and expressing uncertainty will make things worse. there was one brookings economist with whom i had a fairly uncomfortable e-mail exchange about that a few years ago. i'll end up with three questions. because i can't answer whether congress can cope with uncertainty. so i want to just end up with these three questions. first, how do users of official statistics and cbo scores actually interpret them right now? second, how would transparent communication of uncertainty affect policymaking? and then third, and this is what this latter half of alan's paper was about, is what would constitute normatively reasonable fiscal policy in an uncertain world? thank you.
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>> alan has given us, first of all, a clear picture of uncertainty out there, and it is large. i want to do a few things around it. first i want to, no coordination here, quote chuck manski. that there is a important political question of how different ways of conveying uncertainty would impact and that matters. before i knew what chuck -- before i even paid attention who else was on the panel. i thought this really belongs. and what's important to keep in mind here is what we really want around policies is full blown benefit cost so we can think about why we like it. why we don't like it. first of all, there's no way that can be done by a neutral agency. because if nothing else it's
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going to involve way to put on different concerns, way to put on different parts of the income distribution. so the issue is, what can be done by an agency like cbo, which will help with the process? and i think we need to answer the questions that chuck just posed for getting on with that. and conveying uncertainty should always be there. but the question is how, and how that fits in. so i want to focus on social security for the odd reason i know a little bit more about it than the overall budget. so, the office of the actuary does three projections. and that's conveying uncertainty. it's often criticized because there's no easy way to hang probabilities on those two outsiders that are meant to be unlikely but no ease he is way of doing it. and there's also a sarcastic
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projection which i think has the unfortunate effect, again, chuck mentioned it, this is leaving out uncertainty about the model you're using. it's leaving out uncertainty about the nonstationarity of the time series you're using to set up the monte carlo. i think it's really important to have both. just because they're going to communicate, and what we can hope to do is communicate. so, let me go to the three issues that are -- everybody is talking about. i didn't invent these, around the uncertain projections. automatic adjustments. legislation for future implementation, and additional savings of what i'll call alan's theorem, in response to increased uncertainty. i want to say i love automatic adjustments.
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i think it's important to have legislation for future implementation. and i think we need a lot more theory work done before we accept allen's theorem. this is not to say i think it's wrong. but to say we need some serious studies. and let me just run through some of this. automatic adjustments, our security has some of them, adjustment built prices, adjustments in wages. that's it. you look abroad, sweden has adjustments for mortality rates for life expectancy, both for initial benefits, and the increase in benefits to delay claiming. germany has a benefit adjustment for the old age dependency rate. and sweden has an adjustment which they made an absolute mess of. if the projection of solvency gets out of line. jumping ahead, having read the abstract of kamin's
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presentation, i think trying to deal with solvency projections automatically would be hard, and not a good idea. doing something for mortality, as peter orszag and i proposed in our book i think would be a good idea. but again alan's example indicated the importance of being careful for that. and let me just throw out the point that cbo, in its projections, assumes all the benefits will be paid, and there will be no increase in revenues for covering that. perfectly sensible, central projection. it's also the projection in the alternative fiscal scenario. i think the probability i would hang on that outcome is very close to zero. it's hard to imagine its debt, finance, all payment of benefits with no change in revenues since two real histories of it in '77 and '83 show benefit cuts to be
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part of the story and revenue increases to be part of the story. so just to move on then to current legislation, future things. some of them have no credibility and don't affect private behavior. and turn out often not to happen. in social security the history is rather different. from the beginning of social security, up to 1990, there was always a future tax rate increase that had been legislated. none of them were ever repealed. some of them were delayed. some of them were accelerated. it clearly had an impact on the ability of congress to deal with that. and the increase in the age for full benefits, which was voted in '83, has had no serious points. so trying to figure out when you can do this in a way that leads
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to better policy seems to me to be an extremely important point. and now let me move on to allen's theorem. that's the theorem from him. but he draws on a model of individual behavior for it. which makes the point that there are conditions unique to that. and secondly, he makes the point that with uncertain rates of return, it becomes more complicated. and here's i hope i'm not being unfair, 100% of the logic behind, you go from the individual to government. i'm sure there's more in alan's head than was in the paper, particularly what was in the draft i went to. so let me talk about what missing theory there is. and first i draw on a paper by, of all people, alan and kevin
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which made the assumption that when you had legislation that triggered a delay till the next legislation, i presume, i didn't actually read the whole paper, that congress was acting in a optimal, consistent way, around that one political constraint. but i think the point to recognize here, unlike the models of individual behavior, is we don't expect continuous adjustment, but periodic adjustment. the second element is what kind of adjustment do we get? i don't think we want to be modelling, congress is always been consistently optimizing over all in a way we approve of. and i look around whether anything's on individual behavior, one might draw on, and this paper has behavioral misbehavior when you're making the decision, and uncertainty about what will happen if you try to do ahead of time and
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analyzes how to set the budget constraint for yourself to trade these off. i think that's an interesting mind-set for going forward. and now i want to turn to dead weight burdens of taxation which are part of alan's presentation. and my hobby force is, if you ever say the word dead weight burden, you need to say something about the income distribution changes that are accompanying the particular level of dead weight burden from the particular tax policy you are looking at. obviously, if we had lump sum taxes, we could have no dead weight burdens. but we can't for asymmetric information. if we had a small enough budget, and a good enough population so we could have a uniform head tax, to cover all of the budget, then we could have no dead
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weight burdens. but we might not like that. we might choose to have dead weight burdens in order to have a different tax structure for better income distribution. in that case, the presence of dead weight burdens is a sign that the policy is better, not worse. and emmanuel saez in his thesis asked the question, if you can't finance the government with a bold tax and you don't want to pay attention to income distribution, what do you do? and it turns out you get a particular optimal tax model, and he goes ahead and solves it, and my thinking is we need, on the policy adjustment, rather than the whole budget argument, an analysis of the minimum dead weight burden. that counts as dead weight burden. and if the actual policy is anything different from that, that's making the policy better, not worse, and i just want to
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remind you of two standard welfare theorems in the context of public finance. the absence of distorting taxes when you have income distribution concerns, and some other conditions is a sign that you're not optimizing, and even if it's just individual uncertainty that you're dealing with, with asymmetric information. again the absence of distorting taxes is evidence that you don't have the social welfare outlook. thank you. [ applause ] >> thank you very much for that. score you high on two counts. one is clarity, and the second is brevity.
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as we know they don't always coincide at brookings so appreciate that. alan, i want to ask you about something that peter raised. and it basically goes, as i understand your argument, you're saying that we should do enough today to put the federal government on a sustainable fiscal course that involves changes to taxes and benefits. so whatever you think we ought to be aiming for we should do that. and then we should tighten our belts more to account for the fact that there's a lot of uncertainty about whether -- >> yes, that's basically it. >> and, that sounds like we have to go through a lot of pain that may not prove to be necessary. and you -- and the reason we should do that is? >> the reason we should do that is that -- first of all, say life is more complicated than that. but, starting from that, you
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know, basically what i'm saying, if things -- there's a lot of uncertainty. and we have a series of adverse events which cause things to be within the predicted change but a lot worse than the baseline estimate. then if we haven't taken forceful action, we're going to have a disaster. economic disaster. not just a, you know, some people paying higher taxes, but a real economic disaster. >> and it's not enough to build in indexing or triggers. it's we have to save more now? >> well, you could build in -- you could build in indexes or triggers. the problem is that that overcomes the policy problem. you're enacted it. you won't have to enact it. but for example suppose the trigger is marginal income tax rates go up when there's a bigger revenue shortfall. well, it only happens after the
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shortfall, or when the short -- there's an incipient shortfall that's still going to give you the same path of taxes that you would have done if you were simply responding, and that could still give you, you know, very, very high marginal tax rates in the future. or very, very low socioinsurance benefits. so it overcomes the political problem, and perhaps avoids a fiscal crisis from the -- in an inability to act, but it doesn't change the economic costs or the adverse distributional effects. >> you think he's right or wrong? >> both. how's that? >> good. >> the point here is he was describing a particular way of responding to triggers that are there. and first of all, there are other ways to construct triggers that are forward looking. and secondly, one of the problems we have with some of
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these things is congress will have powerful incentives to undo them rather than do more of them. but we also have the ability to. so i think until we get usable, useful picture of the interaction of position and political action, it's hard to jump in spite of that. i don't think they're saving more now is necessarily part of the optimum. it may be. but, inallin''s sense of saving in terms of the cap, i find the argument more likely to have the conditions. >> you want to weigh in on that? >> i think -- let me add to what peter was saying. i think actually, it's
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uncertain. which goes with this morning. alan began with a -- alan's presentation was, people like peter and myself, allen never feel comfortable unless we see a well worked out model. of course that wasn't in this paper but as peter alluded to, i don't think it's there in the literature, even in alan's earlier work in 2007. when i was in graduate school and i learned that savings arguments, the effect of uncertainty on them depend on the third derivative of the utility function then my view was oh, this is really subtle and we shouldn't be drawing strong conclusions. now whether even -- whether that argument even applies to government savings, i don't know. but even if it did, this is subtle, and even if we want to leave aside the political economy questions of how congress reacts, that peter was raising, and just view this as a
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traditional economic social planning problem, i'm not sure what would be sensible government policy. so i take what alan's done today as doing us a service by sticking his neck out and making a strong proposal, which i hope would lead to research that would really get underneath us. >> you haven't spent all your life in academia. you spent some time on the joint tax committee. do you really think that members of congress, even if we say the median and above, members of congress can actually distinguish between what's a projection, and what's the uncertainty around that projection? are we being a little bit naive here if we think that that's even possible? >> no, i don't think we're being naive. i -- i think that obviously that some members are more expert in this than others. there are members of the budget committee who are likely to understand it better than people who aren't. and i also think that while they
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may not understand it in terms of understanding statistics the way we do, you know characterization of what the problem is, posed by uncertainty, i think, can be done in a way that should be comprehensible to educate people, and experience people who are economics of congress. people mentioned the issue of a political problem. i do see a political problem in, for example, trying to put aside resources for the future. this isn't a problem that comes up with us. it comes up when countries have temporary inflows from natural resources that are not going to disappear in the future, and understand that they really need to put these resources aside and have difficulty doing so. i understand there's a political problem whenever our theory says you should be putting resources aside. and, you know, but yet the
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resources are there. and it's temtding to spend them. >> let's turn to the audience. we have some time for that. there's a microphone going around. if you have a question it would be helpful if you, "a," tell us who you are. and "b," follow the panel's example of brevity. >> i'm a reporter with tax notes on the hill. this is for alan, and i hope this isn't missing the point, because i just read through one page here. but, you said the three main sources of the uncertainty over the next 25 years over a longer time horizon past business cycles, i guess, is productivity growth, interest rates on the debt, and health care costs growth. so, again, not to miss the point, but did you give any thought to just suggesting, well, if those are the sources of uncertainty maybe we just try to push them in a positive direction? so reforming education system for example? >> i don't understand what you mean by push them in a positive direction.
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well, first of all it's kind of hard to come up with anything that has a substantial effect on any of these factors in terms of policy. and second i'm really talking here about uncertainty, not about the trends and these factors. so again i want to separate what we should do about projected imbalances about what we should do about uncertainty about those projected imbalances. even if we were to improve excess -- projected trajectory of excess health cost growth that would mean we have a smaller job ahead of us, but it still doesn't tell us how we should be responding to uncertainty. in the back? right there. >> james, question for alan also. when you use the word savings. there's always an interesting relationship between savings and investments in models. if the savings were all people
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just sitting on the money would it reduce the uncertainty or is there assumptions that the savings would turn into investments, in which case then the question is why can't the government make the investments? >> well when i talk about the saving in the paper i'm thinking about government retiring debt. the simplest thing i think. so i'm not sure this issue comes up. >> arty? >> thanks. i agreed with alan's basic conclusion that we should be doing things in advance. the question of why, say? one reason why we should be thinking about saving is that we've seen the size of theation nal debt double relative to gdp in the last decade or so. from that point of view alone, given the risks associated with a large debt, paying some of it down, reducing the future interest costs, and the dead
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weight losses associated with raising taxes to service that debt all seems to be a good thing. another thing that particularly thinking about social security and medicare, yes, there's uncertainty about the future, and we could adjust when the time came, but you can't adjust the benefits of future retirees, both as a political matter, and as a matter of fairness to the individuals, you have to give them time to adjust. so i think maybe we gave too much time in social security reforms of 1983, which were still phasing in 30-plus years later. but you can't do it overnight. so that's another reason to respond to uncertainty by looking ahead, and making those adjustments. i like alan's suggestion about indexing to life expectancy.
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and he both made the case for it, and also raised the concern that not everybody is going to enjoy the same increases in life expectancy. and i think we know the statistical evidence is that lower income people have not enjoyed the same increase in life expectancy over the last several decades that higher income people do. but that's remediable. not individual by individual but income group by income group, because with social security we have the records of lifetime earnings. so we can make the age of full benefit depend upon the average income during the individual's working life. >> two questions, really. you talk about uncertainty, but there is often a useful
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distinction between uncertainty, which is stuff you can't price, and risk, this might be everything, that has probabilities on it. so i wondered whether it would be useful to make that kind of distinction in thinking about the sorts of things you're thinking about. my second question is from monetary policy, there's greater unstirn and that said you should move slowly, and then see what the effects are when you're uncertain about the effects. is there an analogy here? or the political i understand it, the political stuff would be very hard but i wonder whether there's any analogy. >> on the first one, i do talk briefly in the paper about the distinction between risk and uncertainty. suggesting that perhaps that is what underlies people's arguments about not just ignoring uncertainty. that is if it's the uncertainty where people don't have probability distributions it's hard to know how to react to it. while i sympathize about that
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perspective, i looked in the literature to see whether there is -- and there actually is a very small literature on precautionary saving and response to ambiguity aversions. and there really isn't an argument -- there's nowhere in that literature is there an argument for ignoring uncertainty. in fact, it tends to be kind of analogous. again it's fairly thin literature. the second point, i hadn't been thinking about the brainerd paper but i think my comments about health care reform have that flavor. if we're really not sure what measures we should be taking, we ought to be take precaution there, but that doesn't mean that -- maybe our responses should be more of a budgetary variety, and less of the structural variety if we really don't know what the right way to do things is. >> budgetary meaning turn the screw a little bit? >> for example if you said well, we don't know -- we have a
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medicare projected deficit. we don't know how big it's going to be. and we don't know how various health reform measures will change it, and so we have to be careful, in undertaking those measures. that doesn't mean we can't say, raise medicare premiums. or, do something else to improve the funding of the system. >> peter? >> let me just criticize the citation for the brainerd paper. i've written adam, it was turned down and i never followed up on it. what he assumes is something you know perfectly. and there's a parameter of changes from that where you have uncertainty. and so you go toward what you know perfectly. the problem that alan has posed for us is there's nothing that we know certainly. and so i don't think the brainerd analysis calls for monetary policy and fiscal policy. >> i could add on both of those, on brainerd, just take that as another example that as peter
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was saying precisely what is uncertain matters a lot. and you can get very different results. you really need to have them monitored. on the bigger issue about uncertainty or ambiguity one of the things we haven't talked about at all is what the view of the nation should be regarding uncertainty. once you move away from the standard expected utility framework, or even within that we have to ask should the government be risk averse or risk neutral? even within the standard framework. once you move into areas where there is ambiguity and this shows up in climate change policy quite a lot and other areas, as well, then you have to take a stance. because the government -- my technical work is on kind of maximum regret of social policy you have to take a stance on what the right answer to alan's question would be might depend on decision criteria in the government. so as well, just several pieces. >> try to understand that point. so there may be circumstances
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where the government thinks it's in the national interest to respond to uncertainty by taking action now. but there may be other circumstances where there's a different conclusion? >> well i have a paper that came out just this past year in the economic journal on the effect of infrastructure spending. the big uncertainty was what's the effect of government spending? the productivity of government spending. and what implications should that have for tax policy? and then i crank out, you know, because i'm a technical economist, i crank out solutions to that problem to 9 government and find out i could support higher infrastructure, or lower infrastructure spending, just based on what decision criteria the government's going to use. >> that would be helpful in washington, definitely. bill? >> thank you. bill gale the brookings. we're talking about all this in the context of cbo forecasts and how they use uncertainty and all. and that's all well and good. i want to make the observation,
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and observation may be wrong but it seems to me that the private sector, the goldman sachs of the world, when they put out their economic forecasts they don't treat -- they treat uncertainty much more likely cbo does, and much less like i think the ideal economic viewpoint would be. and so i think there's a question for all of you, given that the private sector is not asking for producing these estimates of uncertainty that we would like in our economic models with all the bells and whistles does that mean there's actually no demand for it? or does that mean that people just don't know enough to be demanding this, even in the private sector, and rather than just looking at the government forecast? >> this would be the private sector for the long run >> yes, yes, where uncertainty matters a lot. >> yes, i would say if uncertainty was being ignored on wall street it's hard to see why there would be a market for options.
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>> but i think there are -- delivered in the same spirit that cbos are. it's understood that there's uncertainty about them. >> right. and i think that when the goldman sachs predicts what the fed's going to do, their clientele may be as interested in certainty as members of congress even though there's a great deal of uncertainty about what the long run delivery is. >> thank you very much. what impact on uncertainty would have -- if we focused on the inequality, the wealth inequality, if you used that gap considerably, what impact would that have on uncertainty for the future, especially as it relates to social security, medicare, medicaid? thank you. >> if we made inequality disappear, other things --
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>> it's not going to disappear. but it seems to be going in the wrong direction. >> well, getting back to peter's point about distortionary taxes when you have greater inequality you're likely to want to use more distortionary taxes. that is, the equity is marginal improvements in equity are going to be more valuable. so you're willing to spend more to get it. but that also means so if you have an economy with -- where you can have lower marginal tax rates because you don't need to affect policies of redistribution, that gives you a little bit more flexibility in terms of your long run planning. it does mean for example that if revenue needs go up unexpectedly you have more scope for increasing marginal tax rates than you would if you were already using a lot of high marginal tax rates to do redistribution. so it would make life, obviously
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it would make life simpler. and among the unlikely things to happen in the next several years, i think that's probably among the most unlikely. >> last question here. the guy in the blue shirt? >> bob shiller has a proposal that we have a tax increase on rich people that's triggered if uncertainty -- if inequality gets worse since we're not certain about how -- >> yeah, steve from the social security administration. i have a question for really sort of the imagine and it relates to what you were saying, david, about the prospect of elected officials inflicting pain that may not ultimately be necessary. and i think others on the panel have mentioned this. alan's contention is, yes, understanding insurance, and worrying about risk for the future, we would like to save more than may ultimately be necessary. we may expect to be necessary to have a cushion. but i would ask you all to sort of look back and observe on what you're seeing. and i think we have a lot of
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theoryticians, not so many elected officials. what is your observation, elected officials representing the people, actually have function, presented with a range of possibilities, do they tend to look at, i think you're suggesting alan, at the outlyer situation where things could be bad and we should save extra or do they tend to be perhaps more hopeful and say, given a range, well it could well turn out to be better than the best expectation? so we can defer action as a result, therefore giving a range of possibilities, because it really take us in the direction in our economy in our politics that you would like? well i'm not sure i'm an expert on politicians. there are others here who are much better able to comment on that. i think an interesting question is what, if any, institutional changes could be made to make it more likely to succeed in putting resources aside?
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it's an interesting question. there are various potential answers. but, i'm -- i don't really know. >> i'll go a step further than alan. i am not an expert on how politicians behave. but the inflicting future pain is politically much easier than inflicting current pain, and again social security is the obvious example. but secondly worldwide we're seeing serious attempts to build up -- >> norway is the -- >> i'm just back from peru, and they're studying how they can make it work, given commodity issues. chile wrestles with this. so i think this -- >> i'm even less than expert than peter is on this. >> we actually have some experts coming later.
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>> before we get too humble here. >> but the one point that i might put is that, politicians is not necessarily fixed. i hate to turn economist to use the world cultural norms but i think there is a cultural norm in this country to ignore uncertainty. and that is changeable. even if now and going back to bill gale. bill gale is the guy who i had a testy e-mail exchange several years ago about this. he's true to form today. except that wall street doesn't -- they make these earnings forecasts without uncertainty either and therefore that shows the market's always right so therefore we don't need to worry about uncertainty. it could be the private or earnings forecastors are wrong to ignore unstirn and the government is wrong to ignore uncertainty. and that these things are changeable. i don't know what robert shiller may have to say but i spent a lot of time in london and i find
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somewhat more respitivity to expression in the uk than i do in this country. so i think this is changeable. >> with that i'm going to dismiss the panel. and invite david kamin up. david kamin is assistant professor of law at -- oh, sorry. [ applause ] david kamin is assistant professor of law at nyu. veteran of the obama administration, both the office of management and budget and the national economic council. and we asked him to think about if you know that you're uncertain, how can you, instead of ignoring that, take chuck manski's advice and don't ignore it, how can you build in to government policy, in to legislation, ways to anticipate and adjust to it. after david speaks i'll be
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joined by bill hoagland, gene sperling, and representative cooper who will not say that they are experts on what washington does. >> first thanks to the hutchins center for organizing this conference. and i very much look forward to the discussion with representative cooper, bill, and gene, and want to thank them in advance. i also want to specifically thank gene. part of my interest in these topics and trying to build these kind of mechanisms actually came from the many hours, and frankly very late nights i spent trying to dream up various trigger mechanisms while working for gene. so i want to thank gene for some inspiration. even if it came sometimes at the expense of sleep. so, first, i want to distinguish this discussion from the discussion that came before. alan's paper, and the discussion we just had, addresses the very important issue of how much we should be saving for the future considering the uncertain future
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we face. the future i'm talking about is somewhat different. the perspective of whether we choose to save more or less because of uncertainty, we do make decisions today that will affect our future. we have little choice in that matter. so when major legislation is enacted today or on some future date, it will have effects going forward. the legislation will continue as time goes on and even as the world changes. and potentially in ways that were not expected at the time the legislation was designed. so unless the legislation adapts in some way to new circumstances, we will have a situation where what i call policy drift. as we drift off course, that was intended for where there is no correction, potentially from the legislation itself, or from policymakers. they can produce suboptimal policy in areas ranging from countercyclical policy to social security. so my discussion today focuses on the legislative mechanisms
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that can be used to address this problem. and build in flexibility into legislation so that it can update in ways to circumstances, even if we end up in a situation where we are -- where the world is different than what we had expected. i emphasize automatic adjustment mechanisms as a tool for doing this. something that was emphasized, obviously, by the previous panel. i think that is probably among the most attractive ways of doing it. but i don't think it will be appropriate to all circumstances and i will also discuss other tools that we have at our disposal for trying to address this. first let me lay out the basic problem. the process of legislation is often characterized by inertia. but, not always. so there will be moments where large legislation gets done and where grand bargains get struck. even as that is followed by periods where little legislation is actually done. so the figure i have up here
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displays this visually in terms of the type of process we may be looking at. and it really is quite a simple figure. the idea is that, policy gets set at an earlier point. circumstances change in some way so that we begin to drift off of the path that was intended. and policy may not be performing as it was intended to. but there may be thresholds below which congress simply will not correct the drift. it may only correct if you drift off sufficiently from the originally intended path. there are a number of ways to explain why this pattern may develop. it includes the fact that congress can only focus on so many issues at once. it also may include the difficulty of negotiating across two houses, and the president, as quite evident today. especially in increasingly partisan environment. irrespective of the exact perspective congress moves in fits and starts and doesn't always respond to new
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information. this has very real effects on policy and the country. and i want to illustrate that now using two different policy areas. one cominging from the recent recession. and the other from social security policy. which obviously has been discussed already. so first the great recession. the great recession may be remembered in fact for its very large legislation in response to economy tailspin. so it may seem an odd choice for illustrating what i am calling policy drift. because congress seemed, in fact, to respond. but it's major legislation adjusting fiscal policy the recovery act was designed at a time of great uncertainty about the state of the economy. and while the economy was expected to suffer severe recession, the severity had not become fully apparent. as of january 2009 for instance the congressional budget office expengted the unemployment rate to be about three percentage points above the full employment rate in 2010.
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however, as it turns out, the actual rate was something like four to six percentage points higher than the full employment rate in those years assuming policy remained the same as of the beginning of 2009. and i should be clear, the fact that the initial projections were incorrect, and were too optimistic became very quickly evident. the unemployment rate quickly shot up to higher levels than had been expected. so what was the congressional response to this new information? well, 2009 saw basically no additional fiscal support beyond what was earlier enacted. and 2010 saw some. but largely as a result of congress extending measures with cliff-like expirations in the earlier stimulus. and this becomes a lesson on which i later focus. one way, probably not the best way, but one way of getting congress to focus, and update areas for new information, is to build in dramatic expirations. the point here is that circumstances had changed and policy had drafted away from the
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inherently intended course to the extent there is such a thing without much response from congress. so, now taking the exempt am of social security which obviously has already gone in some significant discussion as our prior panel discussed, the problem of uncertainty is not just about the short-term economic trends, but also about the long-term. and we certainly face uncertainty there, as well. so when it comes to social security we seem at least to have a general commitment by policymakers for self-sustaining social security system. so they agree on that. generally. and in 1983, and in the face of an immediate solventy problem there was a deal to maintain solvency in the system for at least 75 years but the deal was made in the face of uncertainty. and as it has turned out and shown in this figure various factors have combined to actually produce a system that will not be as solvent as long
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as they had originally expected so instead of being solvent through around 2060, the current projection now puts solvency into the solvency or insolvency point around 2033 in the central estimate though as was shown with an optimistic scenario that the trust fund never becomes insolvent and a pessimistic scenario that it occurs as early as 2028. in sum we have drifted off the course that was set in 1983 but there has been no response certainly in the form of any significant social security legislation since that date. so, now the question comes, what does we do in the face of a combination of uncertainty and the sometimes inability of congress to actually response to new information? part of the answer should be to make legislation more robust to certain circumstances so legislation can adapt and without congress necessarily having to take action. i call this automatic adjustment triggers, a form of it is
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indexing. so this is a trigger that is set to go off under certain conditions and updates legislation appropriately for those conditions. so first let's turn to countercyclical policy. in the face of uncertainty our fiscal system could be made to automatically respond to changes in economic conditions in order to support demand when needed and withdraw that support when not. the idea of strengthening what are often called the automatic stable identifiers is a bold one. while the idea is old it is worth revisiting and expanding in at least two ways. first, when the government does do significant discretionary fiscal stimulus with congress stepping in during a period of economic weakness to actually adjust demand. it can potentially build additional automatic adjustments into that legislation. congress should recognize there may only be one bite at the apple and it is sensible to plan as if that were the case. in the recovery act many of the
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largest provisions could have been made contingent on economic circumstances. second, on a permanent basis, there are many opportunities for improving our automatic stabilizers. for instance, right now only unemployment insurance is triggered off by when the unemployment rate crosses certain thresholds. and yet the unemployment rate does a good job of indicating when we, in fact, are entering recession. as the slide shows. so the gray period here shows periods of recession and the line shows six-month changes in the unemployment rate. a spike in that consistently indicates the beginning of a recession soon after it has begun. so you can imagine then having either based on this unemployment rate or on other indices we could come up with, we could automatically adjust additional infrastructure spending, potentially on a state by state by sis. we could adjust tax credits and so on. and we could have better economic performance. now returning -- sorry.
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now returning to social security, in social security we could index both taxes and benefits either to the long-term social security projection, or to individual indices that we think are relevant when it comes to social security solvency. the idea here is that there's been a common agreed upon goal of a self-financing social security system and assuming that remains the goal the system could automatically update itself to be consistent with that. now, one point that peter diamond made was that you should do it based on indices other than long-term social security solvency. i would note here, i think that there's a potential that we could do it based on long-term solvency. i agree we might have to build in different protections, for instance, for the actuary doing those projections. but i would note that when it comes to looking at actual social security plans, when people actually do them, they do them based on the actuary's 75-year projection, including the diamond-orszag saving social
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security plan. this would suggest people do target the 75-year solvency. and if we're targeting it when we're actually legislating the question would be, why don't we target it when we're actually doing automatic adjustments? with that said i think that we are doing automatic adjustments. i think that steps in this direction would be an improvement however we did it. when it came to individual parameters that makes sense, as well. one thing is we index the benefit side and revenue side. now, to be clear the goal of such an automatic mechanism would not be solvency. our current system will probably be made solvent. congress will get around to it later and focus changes on later generations. the idea is to spread the adjustment appropriately. i don't mean to suggest that this is the way we get to solvency from where we are today. right now congress and the president do need to agree on a compromise. the point is we can build in
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these mechanisms into compromised legislation so as to preserve the deal made and spread risks across generations rather than waiting for adjustments and concentrating them on certain generations. medicare, of course, is also an area of major uncertainty. our health cost growth trajectory is uncertain. our question is how do we react to that? let me start by saying how automatic adjustment mechanisms can be used here, too, specifically used to adjust financing. one can set a baseline whatever is expected or desired for health care costs and adjust financing to at least partially offset changes relative to that trajectory. we do this when it comes to medicare premiums. irrespective of how fast they grow premiums offset about 10% of medicare spending. the same is not currently true
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of payroll taxes or general revenues including income taxes. as the graph shows if health care cost growth followed income growth payroll tax would finance one quarter of medicare. if they grow one percentage point faster they would fall to just over 10% of medicare costs. payroll taxes and income taxes could be indexed partially to automatically adjust depending on the trajectory. for the payment side of medicare it is much harder to figure out how to do these kinds of automatic adjustments that would be in any way constructive and shows the limits of them. that is because we have less information about appropriate policy responses to different cost trajectories. we don't have great information now about how to reduce costs and effective ways. whatever the policy responses are they can't be readily
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triggered via formula. but there are other tools for addressing policy drift beyond the automatic ones. for instance, an alternative to triggers like the ones discussing is delegation. it has been historically used in this way. congress could delegate authority to an agency with better ability to adapt policy. in medicare this is part of a logic around reforms in the affordable care act that includes medicare with powers to adjust payment policies under certain circumstances. now, it is unclear if it will get off the ground given congressional opposition and certain aspectses of its own structure. this kind of delegation makes sense for helping to address uncertainty on the spending side of the equation. in my paper i discuss other tools, as well, in addition to delegation that can be used to address policy drift whether in medicare or other areas.
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this includes alarm bell triggers and expirations. these are mechanisms that try to force congress to address an area even as circumstances change so instead of having policy adapt the idea is to force congress's hand to focus on an area and compromise if circumstances change to a certain degree. each of these mechanisms come with trade offs. in my talk i focus on adaptability to new economic circumstances and along these lines automatic adjustments seem superior. so that is the first place i turn but others may give greater weight to other factors identified as]vyw being releva before i conclude i want to offer a few words of caution to policymakers. first with regard to alarm bell triggers and expirations these are mechanisms meant to force congress's hand to adapt policy under certain circumstances often by creating a set of
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circumstances that are so distasteful that congress just has to act or at least that's the there a. a colleague of mine calls these shot in the foot mechanisms. they come with a severe risk namely they may actually go off and congress may fail to respond. in that case policy drift may become worst than it was. so they can end up being counter productive along these lines. the goal should not be confused. the country faces uncertainty along a number of dimensions. in the face of that may be tempting to make the budget unresponsive to changing circumstances and thus say reduce year to year changes in the fiscal balance. that can be done through block grants or targets like balanced budget amendment. in my view this goes in the
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wrong direction at least in terms of policy drift. we can end up with policy that is even less responsive to changing circumstances than we have today. still the benefits of using such mechanisms are real and significant. they can be used to reduce unemployment and recession and can diversify risk through social security and could help adjust health care policy if growth exceeds certain levels while adapting receipts. i should say i am somewhat optimistic as compared to the prior panel about the ability to consider these issues given the fact a number of the tools have been used historically. i think they can be expanded in the use but we have seen policymakers expanding to some degree. i think we can accomplish very important policy goals. [ applause ]
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>> thank you for talking about that. all of the papers that we are discussing here we only get a taste of them from the discussion all on the website. has written a paper. usefulness. i'm pleased to be joined here by three people who have practiced at this art and science. now at the bipartisan policy center spent 33 years in the federal government, 25 of them in the u.s. senate, most of that time on budget issues and a stint in the private sector at cigna. we don't hold that against him. gene spurling has been a fixture in washington since the original
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bill clinton campaign, director of the national economic council not once but twice. in one of his few periods out of government was director of the center of universal education which is a brookings council on foreign relations joint venture. most importantly, if you don't like triggers you can blame gene because he had something to do with almost everyone that i can remember in the time he has been in washington. finally we have jim cooper, democratic congressman from tennessee. something he has done for all but eight of the past 32 years made a name for himself as somebody focused on budget issues and not afraid to say what he thinks even if it is not popular through the leadership of his party. and i want you all to respond a little bit to david's paper but first i feel there is a question hanging from the first panel. somebody suggested that maybe members of congress were
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incapable of thinking of uncertainty. >> you will get me in trouble with my colleagues. it is the profession. that is on a good day. throw in the fact that economics is the dismal profession. we survive on happy talk. i am strongly in favor of allen's bias towards precautionary savings but that is very unpopular speech material. i think it is almost a hall mark of civilized people to be able to delay gratification. we seem incapable of doing that today. it is what have you done for me lately in politics. i am very appreciative of allen's paper and his work navigating uncertainty. >> i have an observation from a practitioner's point of view.
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i started my career at the congressional budget office and was in charge of making estimates for the federal food stamp program and i developed this wonderful model and was projecting it and had the estimates going forward. i was called over to one of the chairman's office to explain to me my estimate. i want to be pressing and i said i have the standard estimate and this is my point estimate and here is what it looks like. he said young man, we don't appropriate in ranges. and that always led me to the conclusion that as much as i like to talk about ranges at the end of the day it is a number that is most important for the congress. >> you have talked about uncertainty i'm sure. >> the one thing i wanted to raise because allen's paper a


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