The Long-Run Budget Squeeze and the Short-Run Race to November

The Urban Institute

Published: June 01, 2004     ||   Availability:  Printer-Friendly Version

ROBERT REISCHAUER, Urban Institute: Good afternoon. I'm Bob Reischauer, the president of the Urban Institute, and I'd like to welcome both those of you here in the Katherine Graham Conference Center and those of you watching on television to the Urban Institute in Washington, D.C.

Today we're presenting the sixth in our special First Tuesdays forum series, a series which is examining key domestic social and economic issues and the roles they're likely to play in the presidential and congressional elections of 2004. So far this year we've brought together institute scholars and top political strategists and public opinion experts to discuss health care, immigration, jobs, taxes, and marriage promotion. This afternoon the subject is the long-run budget squeeze and how it will be addressed in the short-run race to the White House.

Four years ago this nation was looking at a future of growing budget surpluses. The chairman of the Federal Reserve and others were wondering what the nation was going to do after it paid off the national debt. There seemed to be the resources available to address the nation's major problems, even the problems posed by the retiring baby boom generation.

Today we're facing the largest nominal deficits in the nation's history. While they're not record breaking when measured against the size of our economy, they are among the largest. This is particularly the case if one abstracts from the surpluses that are being generated by the Social Security program and the hospital insurance portion of the Medicare program.

Homeland security and war-related spending is soaring. A new prescription drug benefit has been added to the Medicare program, which will cause its spending to grow very rapidly in the future. And at the same time taxes are begin cut to levels that Americans haven't experienced since the 1950s. The retirement of the baby boom generation is not over the horizon; it's just a few years into our future and Social Security, Medicare, Medicaid, and other types of spending will begin to grow very rapidly as the baby boomers move into retirement.

Obviously, something is going to have to give on the budget front and maybe we'll hear about that during the campaign and maybe we won't. But today we're going to look at such questions as just how far out of balance the federal budget is, why the financial community isn't more spooked by the dismal budget projections, the question of whether budget rules matter anymore, and what programs are likely to be the most vulnerable if and when our elected officials get around to scaling back the deficit.

To answer these questions and others, we're going to turn first to the expertise of two Urban Institute scholars. Leading off will be Gene Steuerle who is a senior fellow at the Urban Institute and the co-director of the Urban-Brookings Tax Policy Center. Gene served in the Treasury Department under four different presidents, and held a number of positions there, among them deputy assistant secretary for tax analysis. Gene's most recent book, Contemporary U.S. Tax Policy, is a wonderful summary and analysis of recent tax policy in the United States and it came out in May. It's available for those of you in the room over at the corner table, and for those of you who are watching on television, it can be ordered from our website, www.urban.org. And the right-hand column of that page provides access to our bookstore.

Following Gene we'll hear from Rudy Penner who is an expert here on Social Security and government budgeting. He is the Arjay and Francis Miller Chair in Public Policy at the Urban Institute and directs the institute's retirement project. Rudy has served as a resident scholar at the American Enterprise Institute, has been the director of the Congressional Budget Office, and chief economist at the Office of Management and Budget.

To provide some insights on the political dimension of these questions, we have two of the best analysts and practitioners of public polling and public opinion. First, Karlyn Bowman, who is a resident fellow at the American Enterprise Institute, and editor of "Opinion Pulse" in the American Enterprise Magazine; she also writes a weekly column for Roll Call dealing with public opinion, and was the former managing editor of Public Opinion magazine. She's the author or coauthor of a number of books on polling and public opinion.

Finally, we have Nancy Belden who is the founding partner of Belden Russonello and Stewart, a public opinion research firm. And she previously was a research director for surveys at Hill and Knowlton and an analyst for Hart Research. Last month she became the president of the American Association for Public Opinion Research, which is the professional organization for public opinion scholars.

To moderate this panel we turn to Howard Gleckman who is a senior correspondent in the Washington bureau of BusinessWeek. Howard covers fiscal policy with a special emphasis on taxes, Social Security entitlements, health care, and such. He has been long one of the most astute analysts of public policy and the economy in the Washington press corps.

Howard?

HOWARD GLECKMAN, BusinessWeek: Bob, thanks very much and let's get started.

Gene, do you want to take a first crack at it?

EUGENE STEUERLE, Urban Institute: Well, thanks, Howard. Thanks, Bob. Over this past Memorial Day weekend, I had the privilege of attending several events commemorating World War II. An important but often forgotten part of the sacrificial war effort made at that time was the budget effort to scale back on other social programs and to raise taxes in order to meet the needs of the time. Contrast that budget debate, if you will, with the one taking place between President Bush and Senator Kerry who between them hint that the only people who might be called upon to bear any sacrifice are young soldiers and, perhaps, the 1 percent of the population making over $200,000 a year. These presidential candidates do hint that they might cut the deficit in half, but then they really don't tell us how.

But think about it. Government does not exist to reduce its own deficit. An unsustainable deficit is symptomatic of a larger problem: the inability to direct budget resources toward our greatest needs. The blinders put on budget policy today threaten the very basic functions of government as they apply to many programs, particularly those affecting children and working families.

Ominous budget predictions are driven basically by two factors. First, taxes have been reduced by about 3 percentage points of national income if we retain the recent tax cuts. And, second, benefits for the elderly are scheduled to grow by about 6 to 12 percentage points of national income over the coming decades. In this world programs such as education, community development, job subsidies, transportation, justice, the environment, and foreign affairs are squeezed between the growing commitments for middle aged and elderly retirees and available revenues.

Now, of course, policymakers could make adjustments. Government resources are substantial and we are not a poor society. But here's the rub: programs for the politically disadvantaged wear stone slippers in the dance of budget legislation. Put another way, programs such as those for children, working families, and foreign affairs do not receive the large, automatic, built-in growth of many elderly programs or the automatically growing cost of many tax breaks.

For instance, current law promises that typical couples will get a continually more generous government-paid insurance package. Essentially in today's dollars rising from over $600,000 for a couple retiring today to over $1 million for a couple now in their early 40s. Federal spending on children and families simply pales by comparison while the budget process discriminates yet further against them.

A type of legislative supermajority is required for education programs simply to grow at all. A similar supermajority is required for elderly programs to grow at, say, 5 percent rather than 8 percent per year. I challenge any adult in this audience: do you really think that additional tax collections should go to giving you 20 rather than 15 years of retirement subsidies? Or would it be preferable to spend those revenues toward giving your children and grandchildren greater access to education, work, and the extracurricular activities after school and during the summer that would keep them busy, off the streets, and out of trouble? For couples in your 40s or younger, is your soon-to-be million-dollar-plus package of elderly benefits really more important than other basic functions of government?

As it turns out, to continue a rapid rise in elderly support was financed largely, in the second half of the 20th century, by declines in the defense budget. Defense fell from about 14 percent of GDP right after the Korean conflict to about 4 percent today. That's about a trillion dollars a year annually. While I know that economists predict the last recession right only about half the time, I'm nonetheless going to stick my neck out and forecast that defense spending will not fall by another 10 percentage points to minus 6 percent of GDP.

Of course, confusion was added to the budget debate in the late '90s when a budget surplus accompanied the bubble stock market and a temporary slow-down in Medicare cost growth. It took only a modest economic downturn to provide a reality check, as revenues fell and health costs exploded once again. Meanwhile, the terrorists attacked.

Now, how did Congress react to those economic and international pressures? In terms of long-term policy, that is policies enacted for the out years, it largely ignored them. Its most costly changes were to spend trillions of dollars in tax cuts and on drug benefits for the elderly. As a result of Congress's recent actions, the pressures on the most basic government functions are worse. Adding to them is the baby boom retirement, which, starting in 2008—that's three years from now—leads to projections of a decline in the rate of labor force, economic, and revenue growth.

The budget squeeze is now so tight that if the budget simply were balanced and recent tax cuts and spending increases made permanent, then existing commitments would largely wipe out other domestic outlays altogether by 2011. Worse yet, no room is left under these calculations for any domestic or international emergency. No part of this calculus involves any new national initiative to meet the clear-cut needs of our children. And both parties run from recognition that maybe, just maybe confronting our worst international crisis since the beginning of the Cold War no longer means that international affairs and assistance can be run on the cheap—currently, by the way, less than one-tenth the level that what Tom Brokaw called the greatest generation paid to support the Marshall Plan.

Now, it's not too late to put a rudder back on our budgetary ship of state. No natural law requires us to retire for nearly a third of our adult lives. We don't have to receive close to a million dollars in aging benefits per couple. We don't need to have estate taxes forgiven even on income that was never taxed. And we don't need to maintain federal tax receipts at 17 percent of GDP. I guess I did get one thing wrong when I implied that children were left out of these budgetary equations. They will, after all, get left with the bills.

This crazy budget simply fails to serve us. Unlike the citizens we celebrated this past Memorial Day, we are not creating a budget that adapts to the needs of our time, and the reason is simple. Both political parties compete to tell us that we are entitled to get not give, to receive not contribute, and along the way to confuse appeals to greed with righteousness.

Thank you.

HOWARD GLECKMAN, BusinessWeek: Thanks a lot, Gene. Rudy, would you like to go next?

RUDOLPH PENNER, Urban Institute: Okay, thank you. Well, as Bob implied, today's deficits are really not that different from those of the early '80s in their magnitude after you adjust for the size of the economy and for inflation. The big difference is the political reaction. Earlier Congresses immediately reacted to what was, in fact, a surprising increase in the deficit in the early 1980s by taking away some of the Reagan tax cuts with the TEFRA [Tax Equity and Fiscal Responsibility Act] Bill of 1982. And then for the rest of the '80s and early '90s, Congress was really obsessed with the deficit, taking numerous actions to raise taxes and restrain spending.

As Gene said, today our politicians are only making the shallowest bow in the direction of fiscal responsibility. The presidential candidates, as he said, promised to halve the deficit but don't tell us what's going to happen after that, and the way revenues are coming in, that could happen by accident without any heavy lifting.

Well, why the difference in the political reaction? There are really two hypotheses, one I've heard from professional politicians and that is that the two parties are so balanced and competitive that no one wants to take anything away from anyone. The other hypothesis you hear a lot from economists, is that conditions are just too good. We have extraordinarily low rates of inflation and low interest rates and even unemployment is quite low by historical standards. And I'm sure Nancy and Karlyn will give us even more hypotheses as to why the politics is so different today.

I personally wouldn't be that worried about today's deficits if it were not for the fact that, as Gene pointed out, the short run is starting to merge into the long run, or as Yogi Berra put it, it's starting to get late earlier. (Laughter.) If all of the increases in the entitlement programs that Gene described were financed by increased taxes, it would imply that every tax in the system would have to go up one-third or one-half compared to the average of the previous 30 years.

Only a brave minority of politicians has been willing to confront this problem outside the privacy of their own homes. And I think the reluctance of politicians to confront the problem is very obviously related to the intense unpopularity of many of the solutions. I'm a bit more surprised by the reluctance of the financial community to get agitated about the problem because they're going to be on the front lines of any financial instability that results if we don't do anything, and that's what my essay is about in your packet.

Well, what are some of the options? Obviously, having people work longer, I think, has to be part of the solution. Then they'd be paying taxes for a longer proportion of their lives and taking out benefits for a shorter proportion. And it shouldn't be that hard to get people to work longer because they used to. In 1950 the average age at which a male applied for Social Security benefits was 68. The average age recently is 63, even though the elderly are much healthier and even though the number of physically demanding jobs has gone down in our economy. When you put the earlier retirement together with longer life expectancy, the average male today is spending twice as many years in retirement as the average male in 1950.

Well, longer work can be induced either with carrots or sticks. The stick of lowering benefit would, of course, induce people to work longer. Carrots can be provided by removing some of the disincentives to longer work, and removing some of the legal and institutional barriers to flexible arrangements, like part-time work and longer vacations.

A fundamental problem exists because early retirement used to be considered a good thing. It was a fairly painless way of downsizing firms. It was a way of making room for this horde of baby boomers as they were working their way up the career ladder. It won't be considered a good thing as the demographic conditions change, but numerous laws and customs have evolved that encourage early retirement and they're going to be very difficult to change.

Other components of the solution, I think, involve moving from our current pay-as-you-go system to some degree to a pre-funded system based on investments. The issues there are very complex, I'm not going to go into them here. I'll say the same thing about issues surrounding efforts to make the health system more efficient, both in general and, in particular, with regard to Medicare and Medicaid. The fact that I don't feel able to talk much about these issues in an eight-minute talk, I think is part of the more fundamental problem. If I find it difficult to talk about these issues, imagine a politician trying to squeeze them into a 30-second commercial.

Another possible but simpler solution is to means test some of these programs. That is the only option that I've heard mentioned by Senator Kerry. I find it a bit peculiar that my wife and I get more in Social Security benefits than the benefit going to a typical single welfare mother. Don't get me wrong, I like my benefits and I'm not giving them back, and I thank you taxpayers for them, but still it seems an odd way to use our national treasure.

The good news is that reform really shouldn't be as difficult as it seems. We would have no economic problem whatsoever maintaining the elderly in today's lifestyle. Indeed, if you look at the current payroll tax structure and the surplus in the system, that's sufficient to finance about a 4 percent increase in the average real Social Security benefit between 2004 and 2030. The problem is that benefits are linked to wages, and if economic growth turns out as expected we have promised about a 33 percent increase in the real benefits. Now, the demagogues will call the reduction from a 33 percent increase to a 4 percent increase a more than 20 percent cut in benefits, and the elderly will be scared to death because they'll think we'll talking about a cut from today's living standards.

The situation in health care is similar. Health costs are expected to rise so fast because it is assumed that technological progress will continue in health care and that will increase costs. There would be no problem, I think, providing the elderly with the same quality of health care that they have today. The problem is that we've promised them that they can utilize any technology that comes down the street no matter how expensive it is. That's what's so difficult to afford.

So, while the political debate makes it seem that those of us who advocate reform would condemn the elderly to eating dog food while they die in the streets, nothing could be further from the truth. The debate is really about how much to improve the well-being of the elderly as the living standards of the rest of the population improves. That should be a much easier debate than one that talks about how much to hurt people. Now, the need for urgency is great because I'll only be able to make that statement for three more years as Social Security benefits continue to increase. In a very few years it will be necessary to cut them in real terms if we maintain today's payroll tax.

Well, the improvements we've promised are extremely expensive. Society must ask whether we want working generations to continually face higher and higher tax bills to finance longer and longer retirements and even better health care for a population that is anyway becoming more affluent and healthier over time. I think there are better ways to use their precious resources.

Thank you.

HOWARD GLECKMAN, BusinessWeek: Thank you, Rudy. Now that we've heard from the politicians, let's get a sense of what real people think. (Laughter.) And let's start with Karlyn.

I'm sorry, let's start with Nancy.

NANCY BELDEN, Belden Russonello and Stewart: It's all right. Thank you. I'm delighted to be here, and I've been asked to take this conversation somewhat into the arena of public opinion, what the public's views are and politics around the relevance of the deficit to the electorate.

In preparation for this I went and looked at a lot of past survey data and some current, and I have to say that it leads me to believe that to the public the deficit really carries very little salience as a term or as a concept by itself, even though many in Washington may be very acutely concerned with it. Rather, the deficit is sort of a technical term. It's like tariff or trade balance or discount rate, and when used alone without the consequences that it might have attached to it, it lacks salience for most of the public.

To the extent that it means anything to the average person, it probably means the opposite of financial discipline, and Karlyn has written about this—Karlyn Bowman, who is going to speak next. And she said although people say the deficit is important, it has little intensity as a political issue. People always say it's a serious matter but rarely the most serious.

There's a chart that I think we passed out earlier in which we tried to track several different pieces of data on it. You don't really need to look at it. I'll talk around it. But it shows that as the deficit changes, people saying it's very important does move, but the percentage calling it the most important never really rises much at all and is now very much—it's very low currently and very much in the single digits. The Pew Center's questions that ask people to volunteer what's the most important issue always leaves it in those single deficits. And, as I'll discuss in a minute, when it comes to picking a presidential candidate, the deficit is a minor player at best as an issue.

So, as Karlyn said, definitely people call it important but certainly not the top issue that they want government to address when they think of things as individual issues. This point was reinforced recently in a poll that was released in February that Hart and Teeter did where they asked people—where they offered people a list of issues and they find that strength in the economy, healthcare costs, fighting terrorism all come out ahead of the deficit. So our reading of these and similar data suggests that the deficit gains salience only with the modifiers that Democrats, Republicans, or others might attach to it, rather than conjuring up a concept alone. When you just use the word deficit it doesn't really conjure up anything to people.

President Reagan knew the importance of using modifiers and how to describe things. He drummed home a message about deficit spending. He attached spending to it and that that was a problem. So then the public agreed because it reinforced their view that the government spends too much of our money. When Reagan, on the other hand, nearly doubled the size of the deficit by spending on tax cuts and defense, protests by Democrats about deficits were less effective because the public wanted the tax cuts and believed the president when he said we needed the money for defense.

When President Clinton succeeded in convincing Congress to pass a disciplined budget to reduce the deficit in the early '90s, he paid the price with the electorate. The Republicans turned it into a vote on tax increases and swept into power for the first time in three decades. Tax increases at that point proved more powerful than deficits and they were termed tax increases.

Currently, President Bush has sent the deficits up again by dusting off the old Reagan playbook of tax cuts and military spending, but it really does remain to be seen how a rising deficit will be viewed in the current, less rosy economy than Reagan had. We should probably anticipate that the next installment of the deficit debate will be about cutting spending as they try to put those words back around it.

At their essence then, I think, the public attitudes about deficits are defined by three currents of opinion that coexist in the public's mind and that sometimes collide with each other. Number one, the public wants government to spend money on things the government wants where people are happy with their Social Security payments. We want Medicare, we want education, we want to be kept safe and so forth. So, people do want to spend money on things that they want.

Two, number two, this enthusiasm for specific spending coexists with the belief that the government generally spends too much of our money and much of it unwisely. And number three, the public has what I think of as sort of a Calvinist, conservative, moral value in terms of budgets, of a belief that the country should live within its own means, not go into debt. Much the same way people talk about how people themselves ought to behave, that you shouldn't spend more than you can afford, more than you can—than you take in.

So, I have some other data that I found that demonstrates how these ideals sort of all come together and come into play. When Gallup last fall asked people whether they supported President Bush's tax cuts, about half said good idea, about half said bad idea when they just asked is it a good idea, a bad idea to have the tax cuts. But an AP poll two months ago showed that when you matched tax cuts up against a balanced budget a large majority prefer a balanced budget. The survey asked if you had to choose would you prefer balancing the budget, that gets 61 percent, or tax cuts, and that gets 36 percent.

However, the value of a balanced budget can be outweighed by spending on those popular programs that I talked about as point number one. In another survey, people were asked if you had to choose would you prefer balancing the budget—now it only gets 26 percent—or spending more on education, health care, and economic development—gets 62 percent? So it really is—you're weighing those different concepts and values against each other. This is also a lesson in why you always need a lot more questions than one question in a survey to really get at an issue.

These three core beliefs then, will they be played out this year? How much salience will the deficit have in the presidential election? Past exit polls offer some guidance for how we should be thinking about this and how important the deficit might be when everything else shakes out on election day. So, if we go back and look at the exit polls, they always ask what the most important issue was to the voter for the vote that they just cast, okay, as they come out of the polls.

And in 1992 the VNS exit—the exit poll in the presidential election listed a lot of things and found that the deficit came fifth out of 11, after jobs and the economy, after moral values, after education, after health care. In 1996, in the presidential in the L.A. Times exit poll, the federal budget deficit tied for fifth out of 11 issues with health—it tied then with health care, with moral values, education, jobs, economy and taxes all coming ahead of it and tied with a bunch of other lesser issues in sort of fifth place. In the year 2000, the L.A. Times changed the question to say the budget surplus and now it was ninth out of eleventh as far as how important that was to people in making up their minds about who to vote for.

Moving to the 2004 pre-election polling, as far as it has shaped up—so far it's shaped up once again only as sort of a middling to low issue. Hart and Teeter recently asked people what they thought would be the most important to them personally in voting for Congress and the president this year. And they found deficit—of the issues that they offered, it came in six out of seven—the sixth issue out of seven with all the other likely items that you can imagine came ahead of it. In another example, Princeton Survey Research recently found the deficit is ahead only of the environment and foreign policy and behind everything else from the economy to health care, to education, again all those other issues.

From these numbers you might well conclude that the deficit is not likely to become a major issue this fall. However, let me end with a slightly contrary word of caution or warning of how the deficit could matter more in this presidential election. It's that third current of opinion that I talked about, that sort of Calvinist view, that moralistic view—that Calvinist streak that runs through our values and our attitudes in our culture.

So a president who finds himself on the wrong side of those values of overspending, if it's cast correctly could really find himself paying a price on election day. That's especially probably true if a high deficit moves the government to cut or to talk about cutting those programs that are so popular that I talked about that people do want to spend on.

HOWARD GLECKMAN, BusinessWeek: Karlyn?

KARLYN BOWMAN, American Enterprise Institute: Thank you and thank you very much for inviting me here today. It's always a pleasure to share the platform with my two former colleagues at AEI, Gene and Rudy, who began my education on some of these important issues about 25 years ago. And also to share the stage with Nancy Belden, who I think is going to make an outstanding president of the American Association of Public Opinion Researchers. And I think this is a very critical moment for the public opinion polls and I'm going to allude to some thoughts about that in my remarks.

I'm going to divide my remarks between trying to answer two questions. First, what are the prospects for addressing the kind of challenges that Gene and Rudy outlined? And second what, if anything, can the polls tell us about them? And Nancy, I think, has started this discussion in an excellent way.

As for the short-term, I think the prospects for addressing these kinds of issues, as both Rudy and Gene suggested—at least thus far in this election there are only two issues: the war and the economy. And the economy doesn't mean these long-term deficit entitlement issues; it means the guy next door getting his job back. So, in the short-term, I think the prospects are quite grim, and I think it would be unrealistic if, as Rudy suggested, the financial community lacks concern about these issues, to expect the public to be concerned about them overall.

The second question: what if anything can the polls tell us about these issues? I reiterate something that I frequently say at these sessions and that is that I believe that polls should not be used to make policy. They are too crude, too blunt an instrument for that purpose. I think there's an additional problem with the polling business these days, and that is we now have 14 major national media public polling partnerships in the field on a regular day-to-day basis spewing out all sorts of data. And as the business has become more competitive, the polling and the media business, I think the pollsters are following the media's ever-changing agenda and we have less sustained and systematic exploration of some of these issues—budget and deficit issues than I think we've ever had before.

There are many things I think that polls, no matter how well designed they are, cannot tell us. Virtually every poll I've ever seen shows strong opposition to raising the retirement age. Yet in 1983, albeit as a last minute legislative maneuver on the floor, raising the retirement age became part of the package of major Social Security reforms and there was no public opinion outcry.

I think also that poll questions asked in isolation tell us very little. It's easy to say that we're spending too much or too little on a wide variety of government programs, but if you don't put these questions in a larger context—what if your taxes are going to go up, what if additional spending wouldn't solve the problem—the poll data, it seems to me, are virtually meaningless. Yet, in this competitive media polling environment we have even less of this serious exploration of the issues overall.

Just to give you one example of how the polls can be misleading, using a very rigorous methodology, a survey that he designed and conducted over a long period of time, the political scientist Robert Weisberg examined two superficially popular ideas: additional federal government assistance to reduce federal classroom size by hiring more teachers, and expanded federal support for child care. Upon careful examination he found that those two superficially popular ideas were not as popular as people thought—again, suggesting that the polls have very significant limitations overall.

But with these warnings and cautions in mind, I think the polls can still be a very useful tool to understand a complex and heterogeneous public. And I'd like to focus on two things where, I think, the polls may be pointing us to some possible ways of addressing these taxes and entitlement issues, and they give me some hope that some of these issues can be tackled.

First is what you can learn from the polls by looking at demographic changes, demographic differences within the electorate. Clearly, if you look at seniors today they feel pretty confident about their retirement prospects. They're a small group who don't feel very confident, and obviously given the level of benefits they're going to be receiving, that shouldn't be surprising. But they're pretty optimistic about their future prospects. Many of them are saying that they expect to perhaps work at another job at least part-time in their retirement, again suggesting that that long retirement period is beginning to suggest some changes that may be made by the population itself.

Looking at the baby boomers overall, I think it's interesting that all of the presidential candidates are themselves boomers. And I think that is going to change the dialogue on some of these issues because they're bound to see these issues in a different way from an older generation. Overall they're much more aware, I believe, of the seriousness of the challenge and the role that they're going to be playing in it. The last baby boomer will turn 40 at midnight on December 31st and, I think, that that will in some ways provide an interesting opportunity for politicians to seize a moment to talk about the issue in a different way.

But I'm particularly interested in what you can learn from the polls about the 18 to 39 years olds because they look so very different from their older brothers and sisters in many ways that will bear upon these important debates. This is, at least in the early glances, a remarkably self-reliant generation—at least they're exuding self-reliance in a way that their older brothers and sisters did not. They're not very confident about big government. Government's grown. They're not sure what they're getting from big government. They're certainly not confident about big business.

About a quarter of them are the product of divorce. They're recognizing that they're going to have to be on their own in a way that their older brothers and sisters perhaps did not. And I think that explains, again, their lack of confidence in government. The results from that very funny poll that we all talk about conducted by Frank Luntz where he asked them in separate questions whether or not they believed that they'd see a UFO. A certain percentage of them did. And then he asked a separate question: well, do you believe you'll see a Social Security check? And far more people believed they'd see a UFO than believed that they would see a Social Security check.

So they're thinking about these issues in a very different way from the older generation. And perhaps—again, it's probably too early to have good data on this —they may be preparing themselves differently in terms of thinking about saving for their retirement and in terms of thinking about different kinds of career tracks overall.

But I actually think that another hopeful sign comes from the overall political climate. Rudy alluded to a deeply polarized electorate. We hear a lot about that. And certainly, I think, the city is perhaps more polarized than I ever remember it, having been here for about 30 years. But I think that notion of polarization—again, looking more carefully at public opinion data—really is a serious misreading of the survey data, and acts as a damper on reform efforts.

I looked back just recently at some public opinion data on Brown v. Board of Education. There was a chasm in attitudes on Brown v. Board of Education. If you look at the public opinion polling data on Vietnam, a chasm in attitudes and differences in terms of approaches to that war overall. You can find the same thing during Watergate. So, I don't think that this idea of a nation that's deeply polarized is accurate looking at the data overall.

But I do think we are a closely divided nation, and I think that in that there may be actually some reasons for optimism. Three pollsters last fall issued releases with essentially the same message. They described a rare moment of partisan parity. Gallup came out with a release in January of 2004 affirming what the three other pollsters had shown. They pooled all the 40,000 interviews that they'd done in 2003 and they found that 45.5 percent of Americans identified themselves as Republicans and 45.2 percent of Americans identified themselves as Democrats. Absolute partisan parity.

Now, there are a lot of reasons that we've come to this point overall, and the Harris data actually give us, I think, an interesting indication of how dramatic the change has been. Harris took all of its data collected in the 1970s and found that the Democrats had a 21 percentage point lead over the Republicans in terms of identification in the 1970s. In the decade—in the 1980s that was 11 points. In the decade of the 1990s that was 9 points. And today in Harris's data the Democrats have a 3 percentage point lead, so a very unusual period in public opinion.

Certainly, some of the change is explained by generational change. The old olds are dying off; they're the most democratic leaning generation in the population. Certainly, some of it's explained by a generational transformation that the Republicans have made on their own. For all of Bob Dole's many strengths, he was seen as a candidate of the past, not someone looking to the future. And, as I said earlier, all of the candidates today are baby boomers overall, and perhaps there's some hope in that overall.

But, finally, I think the Bush presidency represents something new for the Republicans, and that is a new accommodation with the federal government. When you think about it, Ronald Reagan wanted to close the education department down. George W. Bush has expanded it and insisted on some small-scale voucher experiments. Bill Clinton ended the last major federal government entitlement to welfare. George W. Bush said get a Medicare entitlement done—so a very different approach to government issues.

So, rather than a deeply polarized or deeply divided country, I see us as very closely divided, closer together than we ever have been on the past of some of these issues. And that seems to me to create a moment where a bipartisan commission, a group of younger members of Congress, both Democrats and Republicans working together might advance reform in these particular areas.

I think it's unrealistic to expect the public to be involved, not just because you can prove virtually anything you want with a survey these days, but I just think it's unrealistic to expect the public to follow the complexity of a lot of the debates that engage so many of us in this city. So, I think if reform is going to come, it's going to have to come from either a bipartisan commission, from small groups of senators in Congress, of different parties working together with, let's hope, support from an administration that recognizes the importance of some of these changes, but not from public opinion overall.

I think these kinds of reforms, of the kind that we had in '83 and in other moments in our history, can be presented to a receptive public because they too are deeply concerned about the health and well-being of the democracy overall.

Thank you.

HOWARD GLECKMAN, BusinessWeek: Thank you, Karlyn. (Audio break, tape change.) And it leads me to wonder—you know, in '83, Washington was able to create a sense of crisis over Social Security, and I wonder if that's what it's going to take this time, some sort of real or artificial sense of crisis before these issues can move—before public opinion can get behind some changes.

Gene, you want to take a crack at it?

EUGENE STEUERLE, Urban Institute: There's certainly a political science argument that the nation comes together in times of crisis. There's also an argument that I've heard for many, many years now, actually decades—it's not new—that democracy is not really very good at dealing with small problems but it's proven to be very good with dealing with large ones. And there certainly was an ability in '83 to define the issue in a way that pretended there was a crisis. There was a so-called trust fund shortage, that the checks weren't going to be paid, but of course there were ways of paying the checks outside the trust funds if they'd wanted to.

I think what also happened in '83 however was an agreement among the leadership that something had to be done, and we had leadership from Senator Moynihan and Ben Rostenkowski on the Democratic side, and from Senators Domenici and Dole and the president on the Republican side, and so there was some willingness to come to agreement, and I think that's an important part of the debate as well. If there's a willingness—a bipartisan willingness to tackle problems, then it's often easier to define some of our problems as being, if you want to, a little more crisis-directed. We could talk about the need to adjust to the needs of the 21st century or the problems of a new defense and international order or the budget as a crisis, but what we don't have yet is the political consensus to really move forward.

HOWARD GLECKMAN, BusinessWeek: Nancy, is—

NANCY BELDEN, Belden Russonello and Stewart: Well, I think that one thing that's important to keep in mind is that something becomes an issue when politicians make it an issue. I mean, something may be inherently a concern or an issue, but when it's articulated as—just in the example that you gave—it's made into a crisis or made into an issue. And Karlyn referenced the fact that there are so many published polls now that seem to be more and more superficial, but the other thing to remember is that behind the scenes there is a whole lot of survey research that goes on in all politicians' operations and in all corporate rooms everywhere else, every institution that's trying to do anything about policy, looking into public attitudes, looking into what would be salable and so forth, and where you could build a campaign around something like a crisis whether it's really a crisis or not.

But it takes political leadership to articulate something as an issue. So I think we won't see really movement on that, on the deficit, if you want to take the deficit or any other piece of the budget and economic picture. You don't see movement on it until one of the campaigns, for example, in this year takes it on and makes it whole for people. And it doesn't have to be this year; it could be at any point, but that's what it really takes.

HOWARD GLECKMAN, BusinessWeek: Karlyn, it seems to echo what you said, that this is going to take sort of a top-down initiative; this is not going to come from the bottom up.

KARLYN BOWMAN, American Enterprise Institute: I think I would agree with that. I think the public is becoming inured though to crisis rhetoric. There was a story in the New York Times yesterday about the crisis in the American novel. (Laughter.) I mean, we have a crisis of absolutely everything. There are crises in sports, and so I—

NANCY BELDEN, Belden Russonello and Stewart: That's a crisis that's very important to me. (Laughter.)

KARLYN BOWMAN, American Enterprise Institute: Yeah, it is. Well, and so I do think it probably is going to have to come from the top down, but it may not be the top of the top down; it may be a group of younger members of Congress who recognize the importance of these issues who might be willing to work together, who are not as deeply polarized as the leaders of Congress seem to be at this particular moment, and maybe there's hope at that level for advancing these kinds of ideas.

RUDOLPH PENNER, Urban Institute: I think the lessons of the European democracies as crises help a lot. I think Sweden wouldn't have fundamentally reformed their system without a very severe budget and economic crisis. The same sort of thing happened in Italy and in two steps in Britain.

It doesn't have to be a real crisis. An artificial crisis will do. (Laughter.) In Sweden, the social security reform is extremely complex, took a long time to implement. The financial crisis passed before they finished. Nevertheless, they persisted and they finished the social security reform. The Maastricht rules limiting deficits to an artificial amount have created artificial crises in Italy and now in Germany that is inducing reform.

So I think that politicians sometimes seize on a crisis to do things that they should be doing anyway, even if the things they do have very little direct relationship to the perceived crisis. I think that's kind of the best thing we can hope for here.

HOWARD GLECKMAN, BusinessWeek: Rudy, there's another source of crisis and that's the financial markets. In your paper you made, I thought, an interesting comparison to where we were in 1980 when we had a budget deficit—or President Carter proposed a budget deficit, which is by today's standards, in nominal dollars at least, laughably small, and the financial markets hiccoughed. Now we have relatively large budget deficits and the financial markets seem disinterested. Tell me what they're thinking, if you can. (Laughter.) And I'll take close, good notes and run to call my broker.

RUDOLPH PENNER, Urban Institute: Okay, well, I wrote the whole essay in the package, the point of which is I don't know what they're thinking. (Laughter.) It's very hard to explain—for me to explain why they're as calm as they are in the face of this looming problem.

I think what the Carter episode—compared to the huge Reagan deficits right after that—that did not cause much problem. What all that proves is that financial markets don't seem to mind Republican deficits as much as they mind Democratic deficits.

HOWARD GLECKMAN, BusinessWeek: Let's give the audience a chance to ask a few questions. A few ground rules: when I call on you, please wait for a microphone to appear. I'm told they're around somewhere. And I'd also ask you to give your name and affiliation, and please end your question with a question mark, not with a statement.

So, any questions at all?

PATRICK LESTER, United Way of America: I was a little concerned earlier when you were talking about long-term budget situations that you were conflating Social Security and Medicare. It's my understanding if you look at the two separately, Social Security's situation is far less dire than Medicare's is, and when you said, you know, there's a 30 percent real increase that you're looking at in some of these programs, I wasn't sure if you were mixing them up, but it's my understanding that the average, in today's dollars, Social Security benefit is something like $10,000. Medicare, you know, the costs, who knows what they're going to be? You have to look at health care, inflation, anything.

I guess on that side of the equation, I guess what I would say is when it comes to any sort of unsubstantiated or any kind of trend that can't be kept going, it's not going to happen. So my question is, to what extent can you tell us what the future is going to be for these two programs separately as opposed to together?

HOWARD GLECKMAN, BusinessWeek: Gene, you want to—

EUGENE STEUERLE, Urban Institute: In terms of the additional cost in the system, about two-thirds of the cost growth is in health care and about one third in the Social Security payments per se. Rudy's number is on a 30 percent-35 percent real increase for Social Security numbers. The health care numbers would be substantially larger. I don't know whether you have the exact figure, but in some cases almost, if you go out far enough, perhaps even a doubling of cost. Of course, that comes from the simple fact that health costs grow at, you know, 6, 7, 8 percent a year while the economy is growing at 3 percent, and that just keeps compounding over time.

I do think, however, that there is one reason to combine the issues back together, and that is to some extent if we're talking about a package of benefits for ourselves—let's not talk about the current other—let's talk about ourselves, what we want in terms of a package of benefits. If we demand and insist that we have greater portions of that package be in the form of health care, then it seems to me we have incumbent upon ourselves, some obligation to figure out how we're going to pay for them, and that might mean such things as increasing the retirement age, such things as is actually hidden a little bit in the current drug benefit, some requirement that we have to pay, at least for the middle class, for some greater portion of the Medicare benefits.

So I don't think the health and the cash benefit parts of the program can be entirely separated because they really need to be considered as a whole. And as I mentioned, for a couple today, they're already promised about $600,000 in Social Security and Medicare benefits. Maybe 60 percent of that is Social Security. You go out to a couple retiring in about 30 years and it goes up to a million in benefits with two-thirds of that growth coming in the form of Medicare. That's just a lot of benefits and it's not the annual numbers that are driving it, which is what you refereed to, it's the number of years of support.

A typical couple retiring on Social Security will retire on Social Security and on Medicare for close to a quarter of a century. That's how long the longer living of the two will live. It's that extraordinary period of time that they retire on the system and drop out of the taxpaying population that puts a lot of the pressure on the system.

RUDOLPH PENNER, Urban Institute: I'd just like to strongly agree with Gene on that. While you're absolutely right, the health cost problem is very, very much more severe than the Social Security cost problem, the two are co-related, and I personally think it's going to be a lot easier to squeeze say 1 percent of the GDP out of Social Security than it is out of the health programs. We know a lot more about the available Social Security options and what they'll do to costs. I think we're going blind as to what most of the health care options will do to the costs of those programs.

Indeed, we're pretty blind as to the baseline. The Medicare trustees assume that the rate of growth of health costs is going to slow down a great deal in the future, but there's really no argument underlying that proposition. Basically we don't know where we're going with health today.

HOWARD GLECKMAN, BusinessWeek: Karlyn, Rudy just referred to the difficulty of dealing with health care in a substantive sense, but I wonder, in a sort of a political public opinion sense, does the public see a difference? Are they more willing to accept reform in Social Security, say, than reform—they should pay more in Medicare?

KARLYN BOWMAN, American Enterprise Institute: That's a hard question to answer. I think we as a society have agreed this new accommodation with Washington (where I think the parties are in similar places) that we as a society are going to spend a great deal on health and Social Security and retirement issues, and I think the public thinks both are important. I think some of the possible tradeoffs have been outlined more clearly in Social Security. The public is beginning to think about—at least those beginning to retire—well, maybe I should work a little bit longer, or something like that. But I don't think—we're really flying blind I think, to use your words, in the health care area because it's not clear what kinds of accommodations people would make. They want the best possible care and they want all the advances that are being made. And so it seems to me that issue is a particularly thorny one.

HOWARD GLECKMAN, BusinessWeek: And they don't want to pay for it. They want the government to pay for it.

KARLYN BOWMAN, American Enterprise Institute: And they don't want to pay for it, exactly.

NANCY BELDEN, Belden Russonello and Stewart: I would second that and say that I don't—I couldn't cite polling data that puts one ahead of the other. My sense is, though, that since health care and the idea in the Clinton administration of a larger health care program for the country move so front and center that that drives more and more interest in old-age health care and in making sure that it's there and it's probably on the agenda and on people's minds in a way that maybe it wasn't 15 years ago, and that that's going to only intensify.

Furthermore, I can tell you, in focus groups across the country, over and over again the thing that drives people crazy is what's happened to the delivery of health care, so that—I mean, everybody is agitated about it and nobody is more agitated than old people about how difficult it is to see the physician, to get things done, to get what they need out of—to get anybody to honor their Medicare card. People don't want to—doctors don't want to deal with it. There's a lot of anger about that.

HOWARD GLECKMAN, BusinessWeek: And they're in fee-for-service. (Chuckles.)

NANCY BELDEN, Belden Russonello and Stewart: And they're fee-for-service.

HOWARD GLECKMAN, BusinessWeek: Gene?

EUGENE STEUERLE, Urban Institute: There are only three ways you can control cost in Medicare, as best as I can see, or in health care. One is we pay for it ourselves so we bear the cost; two, we decide we want the government to engage in greater price and cost controls; or three, we get some intermediary. It's just sort of a logical division. And we reject doing it ourselves because we're afraid that especially the poor among us won't get the care. We don't like government doing it because we don't trust government to do it very efficiently and we think they don't know how to decide what new goods and services we should have. And Hollywood tells us we shouldn't like intermediaries like HMOs and PPOs.

So I'm not so sure health care is necessarily harder to resolve—is that we've reached fundamental disagreement as to accepting any of the possible ways of getting and controlling the costs. We reject all of them as a public.

HOWARD GLECKMAN, BusinessWeek: Joe?

LEE PRICE, Economic Policy Institute: I would suggest there's a fourth possibility if we're talking about 25 to 30 years from now. My wife is a physician. Twenty years ago she finished her training. And virtually all of the diagnostic techniques and all the treatment techniques she's using today were not in existence when she finished her training. The same will be the case 20 years from now. But we are not doing anything to affect—as government surely could through the NIH, through the contracting, through general guidelines of things, to say, let's advance health care, let's improve health care but let's do it in a way that doesn't take more resources to do. If you read the NIH guidelines for what they're funding, there's not a word about costs. Surely we can advance the frontiers of medical care improvement without having to say we're going to ignore costs.

EUGENE STEUERLE, Urban Institute: I don't disagree with that but I think that's part of the solution that comes about by having someone care about those issues, and it either has to be us as individuals, our government, or some intermediary, and in fact, the numbers I ran show that the health industry is the only growth industry in the U.S. that has substantial growth in the quantity of what we received and substantial growth in the price of what we pay. Every other growth industry—telecommunications, computers, even recreation—has below-average price growth that accompanies that greater-than-average quantity growth, so I don't disagree.

RUDOLPH PENNER, Urban Institute: I was pleased to learn that fairly recently the NIH has hired some economists. No one else may be pleased to hear that but I was pleased to hear that. (Laughter.)

HOWARD GLECKMAN, BusinessWeek: Let's go over here and I'll switch—

MATT BENJAMIN, U.S. News and World Report: On that same topic, the Bush administration's answer, the only one they'll give right now, to the growing cost of health care is they say they want to make people better consumers of health care, tougher consumers, and there's something to it, I think, in the fact that because people pay through insurance, through their employers, they don't know exactly what things cost and aren't so concerned. Do you think that answer that the administration is giving is just a politically safe one before an election or is there something to it that could be a big part of the solution?

RUDOLPH PENNER, Urban Institute: I don't think it's politically safe at all if you're talking about higher deductibles and copayments and things of that nature. Indeed, the thing that worries me most is that I think the public is just very adverse to market-type solutions and economic solutions, and they do much prefer bureaucratic rationing, as horrible as that often looks to an economist. They much prefer that to economic market kind of rationing.

HOWARD GLECKMAN, BusinessWeek: Nancy, is that right? We see with Social Security there seems to be a lot of support for private accounts. Do you see that sort of support for controlling your own health care?

NANCY BELDEN, Belden Russonello and Stewart: Yeah, I think actually that's, to some degree, what I was speaking to before, that people feel that it's now out of their control and that's enormously frustrating to them, so that they have less choice, that things have gotten more difficult to actually accomplish what they want to. What should have been fairly easy, to go see the doctor and have your throat looked at, becomes an enormous undertaking. And I think that's true, that the farther we've gone along the sort of managed care path, as beneficial as it may be from some perspectives, the more frustration that's built into it, and that's going to build more and more demand for it to be delivered differently and for things to happen differently.

HOWARD GLECKMAN, BusinessWeek: Well, will people be willing to pay more to get the kind of care they want?

NANCY BELDEN, Belden Russonello and Stewart: You know, it's a great poll question always. I don't know that we—you could probably ask people that in a survey and they would tell you yes. If you describe a benefit that people really want they will tell you, yes, I'd be willing to pay for that. When push comes to shove in policymaking, whether or not there is the political will that underpins that, I don't know. I would say it's questionable.

HOWARD GLECKMAN, BusinessWeek: Karlyn, what do you say?

KARLYN BOWMAN, American Enterprise Institute: That is a hard question to answer. I agree with Nancy. I think it becomes questionable when you really push them. It's always something that's easy to say in a poll, but I'm not so sure how a broad swath of the public would react to it.

I think in thinking about health care it's important to make some distinctions. And again, Nancy listens to what people say in a lot of focus groups, and that, I think, is really important because you can really learn a lot that way, but looking at a lot of the trend questions over time, it's pretty clear that people are very satisfied with the quality of the medical care they get. They're satisfied with their own doctors, they're satisfied with the access they have, and they're even more satisfied with costs than they have been in the past. What they're completely dissatisfied with is the bureaucracy that gets them to the point where they now are.

So there are some things about the system that they think are working pretty well overall, but it's so hard to answer the hypothetical in public opinion. It's really very difficult and very dangerous to even try I think.

EUGENE STEUERLE, Urban Institute: Can I just add a footnote here?

HOWARD GLECKMAN, BusinessWeek: Sure.

EUGENE STEUERLE, Urban Institute: The average cost of health care per family is now $16,000 per family. And that is you take total health spending in this economy and divide it by a number of families and you get a number like $16,000. And my impression is—and perhaps, Nancy, you or Karlyn can respond to this—is that most people, when they talk about controlling costs or doing things, they're talking about spending an extra $100 or $200 or $1,000; that they have no concept of where this money comes from, partly because over half of it comes from government, counting the tax subsidies, and a quarter or more of it comes from employers, so they just don't simply see where the money is coming from.

HOWARD GLECKMAN, BusinessWeek: And the interesting question is, is there a politician out there who is willing to make that more transparent so they do see?

NANCY BELDEN, Belden Russonello and Stewart: Well, I think it is a very difficult issue when something is not—it's not money that you had to handle and then give back out again. But I would say that the answer to any of these questions about how the policy will evolve is not just dependent on where we are right now either in public opinion on these issues because those—if some entities, some individuals either in Congress or in the presidency or in interest groups, want to make policy different, they engage in a campaign to make it different, and they use polling and they use a lot of other research to figure out how to find those pieces of the picture that will matter to people that they will be willing to get behind, or that if illuminated will make people upset, and then the campaign begins and you start to see opinions actually change and some people glom on to an issue that previously wasn't an issue or to a solution that the public doesn't have the solutions; policymakers and thinkers and you guys have to come up with solutions.

But if there's a renewed debate on health care—on how to improve the health care system in this country and get it to more people and get it improved for everybody, believe me, there will be an enormous campaign that will go on from many sides with a lot of different messages developed and a lot of different ideas, growing hopefully out of real policy suggestions, and that will change public opinion. Opinion will move as people become educated about it through the media, through campaigns.

So there's no real one answer to how people—would people accept this or that right now?

HOWARD GLECKMAN, BusinessWeek: It's interesting. I suspect a debate over health care won't be a debate over do we want to make it better or not; it will be an argument among the providers, the drug companies, the nonprofit hospitals, and the for-profit hospitals, and everyone else over who gets which piece of the pie, and the broader debate perhaps gets lost in that special interest argument.

JOE MINARIK, House Budget Committee: Just an observation on health care, and I promise I'll put a question mark at the end.

The vast bulk of heath care costs go to a very small number of people who have very serious problems, many of which are life-critical. When you're in a circumstance like that, you tend not to shop for price. That being the case, plus, as Rudy said earlier, the fact that—and Lee next to me said a moment ago—that technology is running so much of where the health care industry is going and has changed so radically over past years, and is going to change so radically in future years, isn't it most likely that as much as we would like to talk about a benefit package for the elderly that is comprised of health and income support, that at the end of the day we are going to muddle through on health care because there is no such thing as a cost controlling solution, given these facts, and we are going to find ourselves making incremental changes for a long period of time, and in the end deciding whether we are going to pay for the health care that the elderly need at the state of technology that we have, or whether we are going to decide, in crucial circumstances, to refuse care, which presumably is not something we're going to want to do.

So we can talk about—isn't it true that we can talk about global solutions and long-term solutions for Social Security but we really are not capable of coming up with a 75-year actuarially sound package for, for example, reforming Medicare?

HOWARD GLECKMAN, BusinessWeek: Gene, impossible?

EUGENE STEUERLE, Urban Institute: I don't think so. I mean, I mentioned the three ways I think we decide how we pay for things, and I think you can make movements on all fronts. You can make movements on having individuals, when they can afford it, to pay some of the costs. You can try to make more use of intermediaries. As much as people may object to it, they're not out of the ballpark altogether. And government cost controls have never been fully contained. It's sort of like we have a box and we push on one side of the box and we keep the other side open. So that we don't have a rule in the government Medicare like we have for some other parts that says if costs go up here, we're going to ratchet down prices over there. So we haven't really been willing in any of these fronts to really push hard.

And I disagree even the extent to which people being involved in choice doesn't have an affect on cost. If you and I bargain with our surgeons—to the extent that we have to pay for it—at least for minor surgeries and we get them down from $500 and hour to $400 an hour, that has an impact on Medicare's ability to say, well, now we're only going to pay $400 for surgery instead of $500, too.

So I think on all these fronts we have the potential to do something, and so far as a nation we just haven't been willing to really make these what I believe to be tough choices. I don't think cost control in health care is out of the framework of possibility.

And finally the question as to whether we operate incrementally there, of course we operate incrementally. It's a sixth of the economy. If it was 100 percent of the economy we'd think—you know, we make incremental decisions on what we're going to do every year and the next year we don't fully know what the possibilities are going to be the next year.

RUDOLPH PENNER, Urban Institute: I do think that countries with socialized systems have engaged in a considerable amount of rationing. I don't know the extent to which it's implicit or explicit, but I think it would be very hard for an 80-year-old to get kidney dialysis in Canada or in Britain. Indeed, the one health statistic where we lead the world is expected life at age 80, and that shows that we are lavishing a lot of care on very old people. Whether or not the United States has the political stomach to do the same kind of rationing that you see routinely done in a socialized system I'm not so sure. That's a very different issue, and maybe that's your basic point.

HOWARD GLECKMAN, BusinessWeek: Let me change gears for just a second and ask about taxes. And I'd like to ask the two pollsters here about whether or not Senator Kerry can make something out of his proposal to roll back part of Bush's tax cut as part of a deficit reduction argument, and on the other side of it, whether President Bush can make an argument that John Kerry is going to raise your taxes.

Karlyn, you want to—

KARLYN BOWMAN, American Enterprise Institute: The polls show right now that people think Kerry would be more likely to raise their taxes than Bush. The tax issue is extremely important to a very small slice of the electorate. Looking back at all the exit polls—and Nancy talked about them earlier—on the deficit issue, between 14 and 17 percent of those who vote on election day in elections since 1984 have said that taxes is the most important issue to them in casting their vote. That's a bigger single-issue vote by far than the environment, abortion, the deficit, and those people vote overwhelmingly Republican. And so that's the reason that the president continues with the line that he continues with.

I don't know how much of a disadvantage Kerry's being seen as someone who would raise taxes is right now. I don't think it is with the larger electorate because tax cuts for the larger electorate just aren't credible anymore. Nobody believes they're going to see a tax cut, whether it's from a Republican or a Democratic president. They're just not realistic. They see their total tax burden continuing to go up, or at least they think they do, and so therefore they don't think that they're getting a tax cut. I think a politician has a lot to lose by being seen as someone who would raise taxes but very little to gain by being seen as someone who would cut them because it's simply not credible anymore except for that extremely small—that slice of the electorate, 14 to 17 percent; a very big single-issue vote, a small part of the electorate overall.

EUGENE STEUERLE, Urban Institute: They see their tax burden going up at a time when the tax burden is the lowest in 50 years? Is that right?

KARLYN BOWMAN, American Enterprise Institute: But they don't think about it that way.

NANCY BELDEN, Belden Russonello and Stewart: They don't perceive it that way.

KARLYN BOWMAN, American Enterprise Institute: Yeah, they don't perceive it that way because they're thinking about their personal property taxes, which probably are going up in many places. They think about it as one big tax bill.

NANCY BELDEN, Belden Russonello and Stewart: Yeah, I would agree with Karlyn. I would just say again that in survey after survey, tax cuts are not particularly as important as other things. Raising taxes is a no-no, and that's where people get in trouble. And if you get labeled with that—and perhaps it is with just a small piece of the electorate that would actually make a difference. Although, as we know, a tiny few hundred votes might make all the difference in the world, so it could matter.

HOWARD GLECKMAN, BusinessWeek: Is Bush succeeding in convincing the public that what Kerry is proposing is raising taxes?

NANCY BELDEN, Belden Russonello and Stewart: I don't think that people's attention is there yet to know whether that'll stick.

HOWARD GLECKMAN, BusinessWeek: Okay. Yes?

TOM MILLER, Joint Economic Committee: Back to the fiscal issues. For about roughly 20 years there has been at least one line of thinking, which is to use the term, starve-the-beast theory, that if you reduce taxes enough, eventually you reduce the size of government. Recent scholarship suggests in fact that it's a perverse correlation; that as we reduce taxes we increase spending. We've got an automatic speed limit supposedly on taxes at about 20 percent of GDP. Deficits aren't quite a big as they were in the mid-'80s. Maybe deficits need to be a little larger. But what's going to give in terms of those kinds of different correlations? In fact, will lower taxes mean smaller government, bigger government, or is it a random walk?

RUDOLPH PENNER, Urban Institute: Well, Jim Buchanan and Bill Niskanen enunciate the theory that you cited that says—putting it a little differently—that when you have a deficit, that government looks artificially cheap. That is to say people aren't paying for it directly so they demand more of it. I guess I'm more of a starve-the-beast person. I do think that the nation has been largely governed for 200 years or so by the notion that budgets should be balanced, and that's a very powerful influence—less powerful today maybe than in the past, but I think you see it even in recent actions. Those few years we had the surplus everybody really did go wild spending money of all sorts, and now, although we're still spending at great rates for homeland security and defense, the other appropriations have been, very recently, fairly limited, and I think you will see them extremely limited when they finally finish fiscal year 2005—maybe after it's over at the rate they're going, but I think you will see discretionary appropriations really constrained.

HOWARD GLECKMAN, BusinessWeek: Gene, as you argue, that's chasing after pennies when $20 bills are flying out the window.

EUGENE STEUERLE, Urban Institute: Well, Tom makes a good point. I mean, what I think happens is that the correlation that people like Bill Niskanen are seeing is that when times are tough and it becomes time for the government really to demand something of us as a public, that's when we tend to get both tax increases and spending cuts. And when times appear loose and we have a surplus, or because there's something like terrorism and this basically takes off all the constraints, there's a lot of giveaways. I know Tax Analysts likes to quote some lobbyist here in town as saying if you didn't get something in one of the recent tax bills, or the expenditure bills, you were really a bad lobbyist, you know, because it was in a giveaway mood. And so I think the correlation is somewhat easy to explain.

I think there is a longer-term dynamic at play here, and it would be interesting to know, again, how our public opinion experts think this plays out, and that is in the '50s and '60s there was this notion that the Democrats essentially kept favoring spending increases and the Republicans had to come along and reluctantly accept some tax increases to pay for them, but they couldn't win any elections that way. And then some supply-siders started arguing for essentially what they called a "two Santa Claus" policy. The two Santa Claus policy was that, well, the Democrats got to be Santa Claus and then the Republicans had to be Scrooge, so the Republicans could now offer tax cuts and they wouldn't pay for them, and then the poor Democrats would have to solve the deficit problem. And in some ways I think that actually is what's occurred but what neither, I think, side thought about was what happens when both Santa Clauses show up at the same time—(laughter)—and we get what we have now, which is a lot of spending increases and a lot of tax cuts and neither side is willing to pay for them?

And I think maybe that breeds in the public—and I'm not quite sure—sort of a sense of skepticism and cynicism that both sides are finally not really leading them down the path of righteousness or towards anything that can achieve balance. But I'm curious whether the public is just aware of the extent to which the promises that each side has made are now coming through on both sides. I mean, Clinton was in favor of tax cuts and spending increases and Bush is in favor of spending increases and tax cuts. It's like—it is hard to distinguish between the two because they're in favor of everything.

HOWARD GLECKMAN, BusinessWeek: Nancy?

NANCY BELDEN, Belden Russonello and Stewart: Well, I'm not sure that I can cite specifically data on that particular point, but the related is that the classic view that the Democrats were less good at managing the economy has, I think, flipped around. Now that the economy has looked not so rosy and Bush's being called to question on it, you start to see the questions that say, is Kerry or Bush better on this issue, even out so that some of that begins—that difference that used to classically be there has begun to disappear.

I don't know if Karlyn has other data on that.

KARLYN BOWMAN, American Enterprise Institute: In answer, I think, to Gene's larger point, I think there's been an enormous amount of skepticism about politicians in Washington for a very, very long time, and I think it's sort of an equal opportunity employer. People have been skeptical of both Democrats' and Republicans' promises. But I do think, as Nancy points out, that on a lot of issues, a while ago the Republicans used to have a big lead on the tax issue. That's just not true anymore. The parties are pretty evenly matched. Unless you use the specific words "holding the line on taxes," then Republicans still have an advantage, but they don't have an advantage on the tax issue anymore and that is something—

NANCY BELDEN, Belden Russonello and Stewart: And on handling the economy.

KARLYN BOWMAN, American Enterprise Institute: Yeah, or on handling the economy right now. But that's been changing over the last 10 years and I think that speaks to your point that there has been a change on that overall, but part of that larger skepticism that's existed for so long about this city.

RUDOLPH PENNER, Urban Institute: It's not only the level of taxes; it's their structure as well. I mean, Jim Buchanan and Milton Friedman argue for the most inequitable tax system possible to limit the size of government. And there's a recent book that argues that the European systems have been able to tolerate very high levels of taxation because they have more efficient taxation, more consumption taxation, less progressive taxation, very heavy taxes on goods for which there is an elastic demand, like liquor and cigarettes, and essentially they're taxing the poor to support the poor very generously.

HOWARD GLECKMAN, BusinessWeek: In the back?

VIC MILLER, Federal Funds Information for States: I think you're wrong, Rudy. I think since 2000 discretionary grants to state and local governments have grown faster even than Medicaid. It's been a give-out-the-dollars period here.

My question is back to the 1981 period and the Reagan cutbacks and the resulting increase in funding of government through property taxes, and a couple of years later the passing of Proposition 13 and other propositions. We're going through the same process right now of government being funded by a larger percentage through property taxes at the local level, and in your opinion, will this result in either more tax or spending restrictions at the local level?

RUDOLPH PENNER, Urban Institute: Well, I find it hard to answer that. I mean, we have such an enormous number of constitutional provisions and legal provisions now restricting state and local government. Admittedly they get around them a lot. I think the trend is to go much more for fees and business type activities and so on.

I guess I find it hard to imagine many more restrictions than we have today, but it could happen, I suppose.

EUGENE STEUERLE, Urban Institute: The local area is somewhat like the federal level and somewhat not. A, when the feds start deciding that they're going to cut back on their deficit and do something about it, one of the first places they turn is to state and local governments because it's easier to push those decisions on to state and local officials than to make them at the federal level, and I think that will happen again.

The state and local governments have in common with the federal government the huge increase in health-cost growth. It's leading to significant pressures. And I think if you look at the numbers closely, I think once you add in the small tax increases that are now occurring today, state and local governments are now about near their all-time high in terms of taxes as percent of GDP, but their expenditures are also ratcheted up to a slightly higher level, partly because of the health-cost growth, partly because of the impact of putting people in jail longer is actually starting to really impact upon the numbers. It doesn't make a lot of difference when you say we're going to put people in jail 15 years or 10 years for the first 10 years, but you get to the 11th year and all of sudden it starts adding to cost. And of course I think there's some push to maintain educational spending.

So there are some issues they have in common with the federal government and some that I think are new and unique.

HOWARD GLECKMAN, BusinessWeek: Nancy, just quickly, do you have a sense about whether the public is more or less likely to support state and local taxes as opposed to federal taxes? Do you see more of a connection with the resources?

NANCY BELDEN, Belden Russonello and Stewart: I wouldn't say so. I don't think that there is probably a preference for one or the other. I do think people always judge what's closest to them more favorably, so that people are more likely to believe that their local government is performing well and delivering for them. So perhaps if we extrapolate out from that we could hypothesize that they would be more willing to accept state and local taxes, but since they come in such different form, it's not like an income tax always, it's property tax, it's sales tax, it's a lot of other forms, and they have many other issues mixed up in there.

But if you want to sell it on the basis of bang for you buck, you do have a better chance the closer you get to home, just as everyone always rates their public schools in their neighborhood higher than they rate the schools in the state or in the nation, they rate their own congressman or congresswoman more highly than they rate Congress. So they do with the delivery of services and with government that's close to them.

HOWARD GLECKMAN, BusinessWeek: Nancy, you got the last word.

We're going to have to wrap it up. Before we go I'm going to plug Gene's book one more time. Contemporary U.S. Tax Policy is available at the back of the room for $20, and those watching on C-SPAN can obtain the book through Urban's website, which is www.urban.org, or by calling the toll-free number, 1-877-UIPRESS. Okay, I did my job. (Laughter.)

Thank you all for coming.

(Applause.)

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