I'm just delighted to be at the Minnesota meeting. I tried to get here. I was invited about to two and a half years ago and ended up in the hospital with an eye operation. And I remember being disappointed and I am glad to have made it back. I feel a little more at home in Minneapolis. Then I ought to an in the sense that I haven't spent much time here, but my grandmother grew up in Minneapolis. She was born here over a hundred years ago. And by the time I knew her she was an elderly lady living in Southern California, but she used to wax nostalgic about Minnesota and what it was like in the 1880s and 1890s and even Nostalgia for the cold weather. So hit her name was Alice I was named for her. So I feel at home in in the Twin Cities. The Talk today about the federal deficit it's a timely topic it's on the front page of every newspaper in the country this week, but unfortunately that's been true for a long time. In a timely topic for about 5 years and personally, I'm a little tired of talking about the deficit. I wish we could get it behind us and get on to other things. Not that it isn't important. But when you think about it, it really shouldn't be one of our most difficult National problems. A really difficult National problem is one where we don't know how we got into the situation. We don't know what to do about it, and we may not control all of the action. Like the Middle East for instance or Central America or our relations with the Russians the deficit is not of that nature. We know how we got it we cut taxes more than we cut spending not very sophisticated. We know what to do to get out of it. Somehow we've either got to spend less or tax more where some of each So we ought to be able as a sensible group of people to get this one behind us. Why is it been giving us so much agony? Whelmed analogies between National budgets and family budgets are always a little hazardous and I won't press one too far, but I think at the moment it's worth thinking a little bit about why this is giving us so much Agony in sort of Common Sense family terms. It's always hard to make a budget those kinds of decisions are the essence of agonizing because they involve choices and they're never enough resources to go around so both making with him a budget and living with it are difficult. No matter who's making it whether it's a family or a city or a government at the some other level or a business Enterprise. But it's particularly difficult. I think under four circumstances one is when there were a lot of choices both on the spending side and on the income side. I'm not saying it's better to be poor than to be rich, but it is easier to make a budget. There aren't as many things to decide about a poor family has to eat had to pay the rent and there weren't a lot of decisions to make about where to go to for vacation and a poor government is sort of in the same situation really poor government has to defend the borders and deliver the mail and there are not as many choices as a rich government has either on the spending side or on the taxing sign. Budgeting is particularly difficult for anybody who has to do it when there's access to credit. Again, I'm not saying credit is bad thing. It's a brought us much good for families for businesses. You wouldn't want to be out of any kind of a business without credit. You wouldn't have the kind of housing that Americans have if we didn't have credit at the family level and it wouldn't be sensible to try to operate governments without credit but it sure makes it more complicated. If you don't have to live within your income, you can always borrow and the US government can borrow as much as it wants at least so far as We Know, It's more difficult when there was a lot of uncertainty at the family level when you don't know whether you're going to have a job or not or how much things are going to cost and that kind of uncertainty. He carries through into any kind of budgeting and we have certainly been as a nation and a period of uncertainty about our economy of for the last few years a decade at least in which the statistics were not behaving as predictably as they have in the past and they made that makes budgeting much more difficult. And finally, it is much more difficult to make a budget no matter who you are. If there are multiple decision makers who have to play a part in this decision. And if they have different views about what the organization ought to be doing what the problems are and how you want to go about it that's hard in a family. It's heard in the government and that's what we've been seeing in the United States government for the last several years, especially with respect to the budget. No, it is this multiple decision-maker problem of that means that if you're making a budget you need a process for doing that and of course the first thing when you're having trouble is that is to say we don't have a good budget process and we better do something about it. And we've done a lot of blaming of the budget process at the national level in the last few years for the state that our budget is in. But what in a democratic situation whether a family or a government, can you really expect a budget process to do? Well, if you things I think you can expect it to reduce the uncertainty, although certainly not eliminated. If you got a process which means that everybody is using the same information in the same estimates about what the future is going to be and recruits the as good forecasters as can be had to say, what will the revenues be what will it cost to do these things? Then Everybody's Talkin from the same basis and you do reduce the uncertainty about what to do. A good process can get the decisions in the right order. So you don't find yourself making some small decisions and foreclosing some more important ones or making decisions in an order that doesn't make any sense and it a can economize on the time of the decision-makers by getting all of the information a raid at the right moment and getting them focused on the right decision and getting some schedules and some deadlines May. In the us, we really have to budget processes because we have to go through the process of the Cubs a president making his proposal and then the process of the Congress making up its mind what to do and I submit though. You may be surprised at this it actually our budget process is due are reasonably good on these criteria at least two out of three. They had they have a pretty good information base as good as can be had people are mostly all now talkin about the same number and They do get the decisions of pretty much in the right order and focus on the important ones that didn't used to be true in the Congress 10 or 12 or 15 years ago before we had the reforms of 1974. The president had a pretty good process for getting his budget proposal together. But the Congress didn't they operated on the budget only in fragments. They debated spending bills one at a time and tax bills wanted a time. They never brought it all together in a package and look at the thing is a hole and said do we really want to do this? There wasn't a mechanism for looking at priorities and there wasn't a mechanism for looking at fiscal policy for looking at the difference between the spending and the taxing or the size of the deficit or once in a while. There was a surplus and deciding is that really what we want to do? But there is now and you can no longer say that the Congress isn't debating the right issues. They have done nothing but they have spent the last couple of years of round-the-clock doing debating and what they what we pay them to debate priorities as between defense and domestic spending and the size of the deficit. They certainly don't ignore it. They have a process for looking at it and the process for deciding on it. The problem has not been that it has been that they simply don't agree on the third Criterion by the way of economizing time. Everybody does very badly. We have the process which is too complicated both in the presidency. And in the Congress, it takes too much time. There were too many stages that could be cut down in simplified, but it wouldn't solve the basic problem that no process in the Democratic situation can solve the problem that if you have multiple decision-makers of multiple people with power and they don't agree that you're going to have a very difficult situation and that is really what we've had for the net last several years. They don't agree or they haven't agreed either on what the problem was are on what to do about it. No, I think the first phase is behind us. We spent the years 1982 through 1984 really with the president and the Congress arguing about what the problem was was the deficit really a problem. Maybe it would go away. Maybe we grow out of it. The president was always hopeful that we would the Congress I think to its credit or realized sooner than the president did that this deficit was as The Economist say structural it was not going to go away even if our economy held up pretty well and it has been it was a deficit which rose from the fact that even with good growth in the economy. We were simply spending more than we were taking in. There was argument about whether that mattered but I think again in the last couple of years with the argument about that has gone away. You do not hear many in Washington and almost none on Capitol Hill Jose. It may be a problem. It's not going to go away but it doesn't matter. I think the evidence that it does matter is is very strong and overwhelms. Those people The Economist were saying or most of them that we would have a problem in the long run. If we didn't bring our the two sides of the budget together. We were borrowing to pay the cost of government. So that was a use of national saving for a non productive purposes, and I'm not very high saving the economy and we would Be in trouble in the long run if we did that but the shorter run has also proved a problem. The reason we have been able to go on this saving at the government level this way and not close down. Our economy is that the rest of the world has been willing to lend to us in large measure but that has created other problem. So many of them very visible in the middle west we have that is put upward pressure on the dollar. It has devastated our export Industries, especially farming. It has devastated our import competing Industries and a we have seen this in the short run as well as a being conscious of the longer run Danger. So the argument about whether it's a problem and whether it's important has gone away, but the argument about what to do has not been solved. We have seen in this year that is passed a going back to what you were Goin the president presented his last budget very clear evidence of How Deep The Rift runs and it isn't really a republican-democrat thing though. There's some differences there, but it has been largely a difference in tactics of between the president and the Congress on what to do if you've got a deficit The president's point of you being if you got a deficit you look at what you think is the most important thing to have for the government to be doing you make sure that's funded and then you look at the things that you think the government ought not to be doing like subsidizing passenger trains or mass transit that the city problem not a federal problem or and he has a list of other things so that he feels the government should not be doing and you cut those out the problem with that tactic is that it works only if everybody has the same priorities in at the moment the Congress I think reflecting much of the nation does not share the same priorities about what the government elected be doing. The tactic of the Congress has been spread the pain of cutting back the deficit much more widely overall programs, including defense and some would say including Social Security and spread. Some of it over the federal taxpayer as well. Now what is a family do in that situation where they simply don't have agreement on what should be done and what the basic organization ought to be doing. Well, it has a few choices one is to abandon democracy and the elect a dictator and say will do what daddy wants it. We just as got to solve this problem and we'll do it that way. The only alternative to that I think is to adopt some rules some very simple rules about how to get the situation under control. One thing you can say is no more borrowing that we're just going to cut out of borrowing until we get things under control, but it quickly becomes evident that that is a very costly rule or it can be in an emergency if the refrigerator breaks down and you can't go out with your credit card and buy a new one you're in a very difficult situation indeed. So there is a tendency if that's the rule to say. Hey, wait a minute. We didn't mean emergency. Or and or you can adopt a rule which says we're going to cut everything by 5% until we get the situation back under control. And that sounds very sensible when you start but it also immediately brings you into situations in which one member of the family or another or perhaps all will say hey, wait a minute. We didn't we can't do that. We can't pay 5% less on the mortgage the bank won't let us we better put that aside. We got to pay the water but we'll put that aside and you put quite a few things aside because they don't fit in this rulemaking procedure and you end up with having to cut the rest to make your goal by a good deal more than the original 5% Now, that's exactly where we are with gramm-rudman. We have sat down to Aman ourselves as a nation and said we don't want to elect a dictator not even Ronald Reagan, but we will have Ourselves a set of very simple rules by which we simply cut the spending side of the budget by even percentages until we get this thing under control. And we went through the procedure of saying wait a minute. There's some things we don't want to touch and we set aside Social Security. We set aside programs for the very poor and we said we want these things these Final Cuts to fall even Steven on defense in domestic and then we took a deep breath and voted for this law and it goes into effect right now. There were those who thought it would be a nice thing to go in effect, really far and future but not right now, but I think fortunately if we're going to try this at all those who said if we're going to do it we better do it right away. I Prevail and we are in to even as I speak the first round of gramm-rudman consequences of which were announced this morning by my successor Rudolph Pandora and James Miller of OMB. That means I think that we will have a chance to see for the next few weeks in rat with rather small numbers fortunately for the first round exactly what we have gotten ourselves into And I predicted even with the relatively small numbers. We will be cutting a little less than 5% from that which we have decided is credible and not exempt or specially set aside. Even with the small numbers. We're going to be into the hey, wait a minute situation. Did we mean air traffic controllers really? Did we mean f b i agent did we really mean those who enforce our tax laws and I think we will see a series of questions in the exception, but we'll get through that one cuz I think the will to try it and to make a stab at getting the deficit down is strong enough and the time available for doing something else to the 1986 budget when we're already part way through that year is so sure that we will get through that one. But then there is 1987 where we have set ourselves. Is a much more stringent goal and it now looks like cutting 56d billion dollars may be out of the credible part of the budget. And then I think we will be able will be forced to do one of two things first. They will be the round of hey, wait a minute and we didn't mean to do this and we didn't mean to do that and surely we can't cut the numbers of the percentages will be large that we start with Shirley. We can't cut 15 or 20% out of everything. Let's start setting some things aside. And then the percentages go up. What happens then? Well, what the hope for gramm-rudman for this rather foolish of process that a grown-up nation has set itself upon is that we will simply realize how foolish it is that we will say look our goal was approximately right but we had better do it in a more sensible way. And what would a more sensible way be well, I think there is a consensus. So in the Congress building for something that would do some choosing of priorities but basically spend a spread these spending cuts quite broadly over programs possibly bringing back in even Social Security and saying if we have a much broader base from which to make these Cuts we won't have to cut so deeply into each one and we will be able to make some choices. It's about things we'd like to cut out and things we wouldn't but when all is said and done, I think almost everybody realizes probably including the president that there is not a consensus in the country for cutting on the spending side either in defense or and domestic programs as much as would be required in Gramm Rudman. There isn't that much waste. There aren't that many programs to which a large people or for which a large number of people do not believe we need that and at that point. I think the only way to get a a compromise that will bring the deficit down is to enact a tax increase and there are is I believe a consensus on Capitol Hill that with broad spending cuts in all areas of the budget donut in the mind. Sway of gramm-rudman and the tax increase of some sort of probably a consumer tax increase this problem is doable. So it comes back to the one person who has control the outcome for several years namely the president of the United States if the president is willing to buy on to this compromise and deed to shape it and be part of it and to make deals about it. I think he can have it and he can avoid what everybody really wants to avoid the gramm-rudman acts of falling in this mindless way. Now that was true last year of the president could have had that compromised or we could have had it the year before and he didn't want it because he felt at that moment that the defense increases and holding the taxes down. We're more important than getting the budget problem solved and there was no consequence. In a proximate sense of not solving it but now I think there is what Ann and I believe this is probably true whether it is constitutional or not that we have now set ourselves targets which everybody would like to reach and we can either reach them by a crazy. So processed by a more acceptable process and one would hope that the more sensible process would Prevail supposed doesn't suppose the President says no as commander-in-chief. I wanted to protect the fence and I don't want us to be a party to any tax increases because I said I wouldn't be and therefore do it my way or not at all. Then what will happen. I suspect that it will not go into. Fact that the Congress and the president at that point rather than take the kinds of cuts which gramm-rudman would imply will find a way not to do it lawyers are very clever people. There will be a way to repeal this law without actually repealing it and we will go back to where we were but we'll wait. No, I don't think so. We would be if we did that we would be worse off than we were before we will have lost we have already lost some of the cuts that we're past the last year that were promised last year and never passed and now probably won't be because we're involved in this new process. We will be well through another year and further down into a recovery that might falter. And it would be a much more difficult situation in which to put together any kind of really sensible approach to the budget. So it is my hope though without a hundred percent sure assurance that what we have done to ourselves through this rather childish. Mechanism is at least shocked everybody. He was at a party to the process into the realization that we need to do something. We don't need to do it in this crazy way. There is a fairly sensible solution available, which would spread the pain quite widely and get this not too serious or not too difficult problem behind us, and then we can go on to the business of governing the nation. Thank you. my question is on your last point if them decides isn't what we need and the lawyers find a way to get it out of gramm-rudman. What is that due to the credibility of the system? Well, and I think in a sense that's the problem but it's it's the problem of this whole exercise. We look foolish. I was in the Brazil in November and in Brazil is a very interesting place to be at the moment because they have a new Democratic Leadership in their writing a new Constitution and they were asking questions. Like how what should be the role of the Congress in making budgets and how do you do it in the United States? And it's very hard to sound terribly enthusiastic about how we do this in the United States cuz we're doing it so badly at the moment and I think gramm-rudman just it first dramatizes how badly we were do it were solving the problem that we couldn't get ourselves together to do something more sensible. And if it doesn't even shocked us now into doing what we should have been doing for 4 years, then I am worried about credibility and Incidents in government that we will feel that we're somehow our system is failing us for 4, I think no good reason. You talk about a tax on consumption. Senator dirnberger came out for some kind of a bad tax this week. I sent her off as a bill in for not only reducing the income tax much more across-the-board than the rest of calcium build but making up for it with a 10% vat tax of which 6% would make up for the deficit in the taxes. The other 4% would go for cutting the deficit is this what you have in mind a vat tax and that type of thing. There's lots of ways of taxing consumption and in some ways the most attractive is a value-added tax. Lots of Nations do that and it's it's doable and I think it's doable probably even without being terribly regressive which is the usual problem with consumption taxes one could exempt food and medicine one could even give some credit you want to make the income tax more Progressive at the low end to to offset. It is one big problem with a value-added tax. We've never done it before. And we don't really know how to do it. I'm not saying we couldn't but I think it to put a major new tax like that in place would me and at least two years before we got any revenue for it from it. So that is not a very good solution to how do we get some more money quickly better Solutions are things. We already know how to do we know how to collect the gasoline tax. We know how to tax in the don't do that easily politically, but the range of consumption taxes that we already have as in gasoline. Beer wine and cigarettes are administrative Lee much easier to get some money out of quickly and have some other rationales going for them in each case like conservation and health, so I find those for near-term Attractive although I think if we could the other thing about a value-added taxes if you can do it at all and I wrecked the whole new tax structure you might as well do it fairly substantially and substantially enough so that you would be able to shift some of the burden off the income tax or and or the payroll tax. So and make it be a shift in the nature of federal consumption of federal taxation more toward consumption and less toward toward income in their arguments for that. Yes right down here. I'm Steve Johnson with some of the state's seem to be relatively affected with a line-item veto power of their Chief Executive Officer of the governor's would you discuss the feasibility and the possibility of a line item veto power for the president? Yes, I don't think it's such a terrible idea. Although some in the in the Congress do and as you say many Governors operate with a line item veto, but I think The the problem with the federal budget at the moment. Is that although the President says he like a line item veto and I'm sure he would if he had one. I don't think it would make very much difference. I think about what's in the federal budget. Very large part of it is is Social Security which he wouldn't use the line-item veto for even if he had an opportunity and he wouldn't cuz it wouldn't come to him in that form defense where the president doesn't he his view is he wants more defense spending than the Congress wants so you can imagine him line item veto in a few items in defense as in some basis and some congressman's district for instance, but not very many because he needs those votes to get the defense budget through and he wants it more than they want it and that you can go on down the list of federal programs, but we've already talked about about to Where do the budget and the interest doesn't count? So the number of things for which there could be a line item veto that would make any amount of monetary difference. It says to me is just a negligible the growth in the budget has not been in the last few years in the kinds of things that you might think of for line item veto specific projects rivers and harbors and and traditional pork barrel. That's not where the growth has come at. All. It is come into fence and it is coming entitlements and those aren't really subject to that. I'm Dean Wahlberg, I would you speak to the likelihood that Social Security might be removed entirely from the budget process as opposed to staying in and being tinkered with from time to time. Well being removed from the budget. Meaning that somehow in the budget documents. You don't show Social Security you show it on some other page and we aren't going to give away the power of a democratic government to change the terms of a pension system and North should wait. I mean, it's it's something that has to be legislated about so I think it hasn't been tinkered with a great deal and it probably won't be I think tinkered with a great lot of Deal or large because it's a pretty good system that works quite well and is now for the first day of our future well-funded so why bother with it and I think it makes relatively little difference whether it is formally part of the government budget or or not now, I'd rather have it in cuz I'm a budget here and I'm a purist and I think that the people who sit down to make decisions about What the federal government does should have everything in front of them. That's an activity of the federal government including all of the minor things that used to be off budget, but it mostly now been put back on and that it makes sense to have it there. But if it's on a separate page The Economist who worry about the total impact of the federal government on the economy. I will not be bothered very much. They'll just add it back in. Camel, you're most likely scenario that we was that we would realize the gramm-rudman was to create a process that we didn't really want to cut what is cuttable easily that much and so we have tax increase as I understand some of the philosophical background President Reagan. In fact would like to see the government to be a smaller part of economy. And therefore this tax increase would be anathema to him. You might want to address that aspect. The question in particular I had in mind is has the gramm-rudman process in any sense strengthened the hand of the president dealing with these issues. Good question, but I'm not sure and I'm not sure that we will know the answer for a while. I would say that it had not that it had the Innocence week in the hand of the president. It was always possible for the president to say I don't want to tax increase. I want you to cut these things and if the Congress didn't do it, it was their fault. But now what you have is a situation in which if they don't do it something else happen. And what happens is that major cuts across the board will occur in fiscal 87. I'm not talkin about eight 6 now where they're fairly small but they will occur both on the domestic side where the president might not mind seeing them and on the defense side where he doesn't want to see them and I think most of the nation doesn't either want major cutbacks in defense especially ones that are even percentages and absolutely Everything I mean, there isn't anybody in this room who given the responsibility of cutting a back the defense budget would do it. That way you might find ways to do it but you're sure wouldn't do it that way and the president would face then faces the situation. Does he go for a package including some tax increase in some more sensible cut or does he let this happen and that's a hard choice, but I think in a sense if he's going to stand firm against tax increases. He's got a weaker position much weaker position to do it from now. this gentleman and then Jim Gibson, what are the chances of ever getting the real thing namely a balanced budget amendment? I think they're less now than they were before but I don't share your view that it is the real thing. I still have the hope that we can get work our way out of this and get the budget down a budget deficit down toward zero in the next several years and I share your view that a balanced budget right now would be a very good thing. I don't mean that giving her we are we can balance it tomorrow but being on a path toward balance would be a good thing, but you're right it into the Constitution to say we had to do it every year I think would be a mistake and would be my hope I guess two that we work our way through this gramm-rudman crisis convinced ourselves that we can do sensible budgeting without writings rules arbitrary rules and that we don't write that one. I have a simple question. Would you care to give us the Alice rivlin Theory or expectation of what's going to happen to interest rates the stock market and the economy? At b e n a e before the election and after the election Beverly if I could do that, I wouldn't be here because I'd be so rich I could retire to some wonderful place and never do do a lick of work again. I think the economy now, I mean, I would go with the consensus forecasts and you have to realize that all we conomic forecasting is never very good. The thing it's worst at is predicting the turnaround in a business cycle at the beginning of a recovery. There are no ways but up but as you get into the third and fourth years historically it gets less probable that we can sustain it forever and Economist have never been predicting a very good at predicting when it will turn down. We don't have signs of down at the moment at least as we usually look for. An overheated economy or any of the the signs, that one was kicking. We're certainly not doing that. We're limping along. Is it with a so-so economy of much of which depends on whether we take sensible actions on the budget deficit and everybody knows that it depends on that. I would see either way sort of a medium economy for the next year or so. I don't think we're facing recession or are we going into a big boom? Three three, three and a half percent growth and moderate inflation and interest rates not moving an awful lot. That's if it is the consensus forecasts of but the longer run depends on our getting ourselves together and getting this deficit down getting interest rates down getting the dollar down and having balanced growth for long run