(00:00:00) Minnesota public radio's coverage of regional public policy issues is supported by a grant from the Northwest area foundation our live broadcast of Minnesota meeting is next here on NPR the time 12 o'clock. ladies and gentlemen Good afternoon. I'm Ed Spencer a member of the Minnesota meeting board of directors. It's a pleasure to welcome all of you to Minnesota meeting today. And we also extend a warm welcome to our radio audience throughout the upper middle west who are hearing this program on Minnesota public radio broadcast of Minnesota meeting are made possible by the law firm of Oppenheimer wolf and Donnelly with offices in Minneapolis, st. Paul and major cities in the US and in Europe. Minnesota meeting is a public affairs Forum which brings National and international speakers to Minnesota members of Minnesota meeting represent. This community is leaders from corporations government Academia and the professions Minnesota meeting is very pleased to present. Today's speaker Gail fossil. ER Chief Economist for the conference board. The conference board is a business-oriented research institute Miss Foster got her MBA at New York University. She is a former economic adviser to Senator Pete domenici and was the chief Economist for the Senate budget committee from 1981 to 1986. When the Republicans had a majority she then served two years as the minority economic adviser to that committee. She's going to discuss the budget deficit and defense spending and she's also she doesn't know this yet, but she's also going to give us the Inside Story what is really going on in the negotiations on deficit reduction between the administration and the Congress? Following her presentation questions will be addressed from the audience. There are cards at your table. And we ask that you dot jot down your questions on those cards Gary Gilson and Jane mrazek will move around among you to collect the questions and to manage the question and answer session. It's now my pleasure to present to you Gail vossler. (00:02:37) It's a pleasure to be here with you particularly on the heels of your famous visitor of last weekend to talk about the budget deficit and defense spending the peace dividend. I was I came in on Sunday afternoon. And as I landed at Minneapolis Airport, I noticed that a number of the airplanes were Russian and as I drove in from the airport, I noticed that a number of the Billboards were in Russian. And I thought that maybe the notion of Peace dividend had really come to Minnesota to stay but I observe that Minnesota is still part of the United States and not the Soviet Union. So I guess mr. Gorbachev got on his way with world events. So moving so so rapidly and the US budget deficit seemingly so such a remarkably intractable problem. It is it is possible that the events of the past weekend in terms of our meeting with between the President Bush and mr. Gorbachev will yield more in the way of long-term results than the other budget which ad alluded to that is the budget Summit that is currently going on in Washington DC. It seems that it may be easier for Russians. And so It's and the at Americans to agree on strategic arms reductions than it is for Democrats and Republicans to agree on spending reductions and tax increases. But today what I want to do is to describe a little bit of what is actually going on with these budget numbers because I think the impression is that there is a budget crisis and while we certainly have a serious budget problem. I think what is on the horizon is a borrowing crisis. I'd like to describe to you a few reasons why I am somewhat skeptical about the so-called peace dividend that is that we will realize far less in terms of real programmatic reductions in defense. Then we claim we will claim to have realized on paper and then make a few comments about how this peace dividend is or in fact has already been And and maybe I should scoop Myself by saying to you all that. I think it may come as a surprise. But in my opinion we have already largely spent the peace dividend here in the United States. So let me begin a little bit on the budget front as we know the administration true to form and carrying on a tradition that has been passed down by the Reagan Administration proposed budget in January, which was not only dead or Dead on Arrival when it arrived at Congress, but it was also based on economic assumptions that that concluded that that supported a deficit which in fact nobody really believed the administration's budget had a hundred billion dollar deficit for 1991. And if we look at the Congressional budget office estimates, which are often the more reliable estimates even And in January the Congressional budget office was looking at a budget deficit of somewhere around a hundred and forty now that we have begun the budget negotiations. We've spent the past month simply agreeing on the facts and with 11 years in Congress. I will have to I do not want to under underestimate the difficulty in getting the political system to agree on what the facts are of a given problem. However, it looks as if now the both CBO and OMB are looking at a budget deficit of somewhere around a hundred and forty-two a hundred and sixty billion dollars. The important aspect of this is that this is without the Savings and Loan the borrowing that is associated with the resolution of the Savings and Loan crisis. And this is what I mean. This is what I mean by the fact that we do not have necessarily a budget crisis, but we have Borrowing crisis that is the budget deficit if you look at just long-run tax and spending levels is roughly in the hundred and fifty billion dollar range where it has been. However, we have the underlying cost of the Savings and Loan bailout that has virtually doubled according to secretary Brady's estimates in the last announced Testaments in the last month and we have this concept which no one seemed to plan on which is extraordinary working capital demands that are required to Simply warehouse this Warehouse the real estate that is associated with the Savings and Loan bailout. So on top of these numbers, which roughly let's say are a hundred and fifty billion dollars for the budget deficit itself we could imagine this year and next adding somewhere between 30 to 60 billion this year and fifty to ninety billion dollars in Federal. Our wing requirements next year. So after years the past three years when we have succeeded in bringing down Federal borrowing requirements in a not dramatic, but fairly steady way, we are going to witness a major uptrend in the federal drain on credit markets and an uptrend at a time when in fact the economy is fragile and the Federal Reserve has very little room to maneuver in terms of reducing interest rates. I think that it is this reality that has caused the administration to at least if not move their lips indicate a willingness to compromise on the tax issue in the interest of trying to get some kind of budget agreement because even if you get a budget agreement of the size that is being discussed in this is 60 billion 50 to D billion dollars, you need a budget agreement of that magnitude to Simply bring the budget deficit back to this hundred and fifty billion dollar range indeed. You need a budget agreement of that size just to keep federal borrowing requirements from going up rather than to be able to contribute that kind of budget package to assist to alleviating the drain of the federal government on credit markets. So how does while we just had President Gorbachev here much discussion about arms negotiations conventional Force withdrawals in Europe may be in fact the solution to the budget problem is going to be the peace dividend. Well in the spirit of the Dismal science, which I practice with a great deal of enjoyment. Actually you can you can imagine my conclusion, which is that the peace Of it end is going to play a relatively inconsequential role in changing the long-term view of the federal budget for several reasons. First. The first important point to understand is that much of what you read about the peace dividend represents not savings from what you're spending but savings from what you plan to spend the our arithmetic an artifice of the federal budget process projects into future years what is required in terms of cost to maintain an existing level of program and they do the same thing with the with with defense. So for example, if you were to take a proposal along the lines of Charmin rostenkowski that chairman rostenkowski put forward last March and adopt his defense spending line, which would cut defense spending by something like forty billion dollars. In 1994, you would end up back to about where we are at the currently 290 billion dollars in 1994 given the artifice of the lines that is just simply to say that the Baseline for defense spending in 1994 is about three hundred and thirty billion dollars. So we are not saving the peace dividend from what we are spending right now. We are spent we are saving the peace dividend and the numbers that you see with respect to defense cuts from what we might plan to spend in the future. However, the larger question is what kinds of changes are we likely to see in terms of the basic program of the military here. Once again, I think that the likely outcome in terms of Defense Cuts will be found mostly in personnel and operate what we call operations and maintenance the basic support. That personnel and very little in terms of procurement. Let's but even then even if we look at what is likely to be saved in the Personnel area. It is simply not easy to affect large budget savings quickly. There's probably many of you in this room that have gone through corporate restructurings. And even though you may go in with rather ambitious goals with respect to what could be saved from staff cut staff reductions in the like you find that when the Chief Financial Officer comes forward at the end of the year for a presentation of what actually has transpired with the staff cuts the severance pay the additional benefits the the addition to having to hire supplementary people to fill in for the people who've left Etc that your savings are substantially less and that is that is the case with Personnel still Personnel is a very high cost 42 percent of the defense budget is personnel. And it is a very high cost and high Target area for defense savings. The rule of thumb is that for every hundred thousand that you cut out of the Personnel area you save about three billion dollars, even though there is much talk about potentially cutting Personnel 300 400 500 thousand five hundred thousand cut and Personnel would be roughly one-third of the uniformed Force. These cuts are in part conditioned on what has the the evolution and resolution of the conventional forces treaty in Europe and and although the the Administration has proposed to cut 40,000. The Congress is likely to increase that number president Gorbachev's reluctant to pursue the conventional Force reduction. In Europe is in doubtedly going to slow up that process and in fact, mr. Gorbachev may have a rather intractable problem, which means that the United States May effectively be eliminating eliminating Personnel from Europe on a somewhat unilateral basis. And that is to say that while NATO forces in terms of personnel and Soviet forces are roughly On a par there's roughly 2 million military on each side of the NATO packed in the Warsaw Pact about 71% of those forces in the Warsaw. Pact side are Soviet troops. I think it was a famous statement after the second world war. How do you keep them down on the farm after they've seen Perry and the similar theme for Moscow must be how do you get them back to the Soviet Union after they've seen East Berlin? In fact, there is Major negotiations underway right now between the Soviet Union and Germany to pay and compensate for the presence of Soviet troops. But what happens with the Soviet troops who are really lodged all throughout Eastern Europe is as much a political question for the Soviet Union as it is a political question for the west and I think it's going to retard the rate at which we're going to be able to cut Personnel. Well, what about weapon systems West weapon systems is the famous Battle Ground of Congress because every weapon system is built in somebody's district and these cuts are very difficult to come by. All we have to do is to look at last year. When of course the appetite for defense Cuts was not nearly as large as it is is this year and we see that the administration proposed eliminating our old friend the M1. Hank, but the Congress is going to continue to produce it and they proposed to cutting the Bradley Fighting Vehicle and Congress decided to keep it and hear from my local area in New York. They the administration wanted to terminate the F-14 program. We are still making a 14s on Long Island and the B2 which the house hates the Senate likes again reflects the kinds of diversity in views about. Oh, I don't know if it's fair to say whether a weapon system should be continued but certainly how much of it is likely to be purchased. And so what you're likely to see with this interplay of procurement battles is a reduction across the frontier of procurement rather than strategic choices among weapon systems, so that the B2 will likely continue. But at a much reduced rate the the sea C-17 is likely to continue but at a much reduced rate and there's very it may be that a few of the weapon systems that have not really gotten into production will find their way into the weapon scrap Heap but the principal vehicle for reductions, as I said before is going to be personnel and the operations and maintenance that is associated with that personnel and I was one final point. I would simply point out that defense spending has been declining in real terms since 1985 and that only in the past year have we seen defense purchases actually decline in the national income accounts. So defense spending is still growing even though we have been cutting budget Authority because it takes a very long time for these kinds of cuts to make its way make their way into the system. I do not. Want to leave you with the impression that there will be no peace dividend because I think it's very likely that five years from now. We could have a level of defense spending which is well below the current level in nominal dollars, maybe 260 280 billion dollars depending on what kinds of decisions are in fact made, but even if we were to achieve this kind of level of Defense which in 1995 or 1996 might be three percent of GNP, really no greater than the NATO commitment right now. The unhappy news is that in my judgment. We've already spent the peace dividend as I look around the room. There aren't too many people who will remember this but defense spending was over 14 percent of GNP in the early 1950s when we look at the at the Baseline. This is not the level of cuts, but just next year's Projected level if we were to hold all things constant the base line for defense spending in 1991 is 5.1 percent of GNP. even if we look back to the decade of the 80s with the Reagan buildup defends the peaked at 6.5 percent of GNP. If it goes to three percent of GNP, we're already halfway there the long and short of it is that the resources that we have allocated in the past to the highway program to elderly programs particularly to healthcare have created a rather. This is how we have spent the peace dividend. And in fact those expenditures are going to continue to grow in a way that we find ourselves now at a budget Summit looking at where those expenditures can be cut back but even in the context of this budget Summit anyone looking at a 60 billion dollar budget package is going to 30 billion of that even if only on paper is going to come from spending and let's say half of that comes from defense. Effectively those defense savings are not going to pay for new programs. They are only partially contributing to the reduction of the budget deficit but they are going to underwrite basically existing programs which will grow at the rate of inflation or in some cases, especially in the health care area at a rate of the rate that is greater than the rate of inflation. So to go back to my initial title, which was defense budget more peace than dividend. I think we have achieved remarkable degree of Peace, but the notion that the that the benefit of this piece represents a new source of funding for many of America's intractable problems, I think is unfounded. The fact is that we the the problem that we Of is an allocation of resources, which we basically find in the political system to be intractable and a level of Taxation which we also find in the political system to be virtually on able to be raised much of on a much Beyond its current level indeed the level of Taxation this year and next is about the same level as a percent of GNP as it was in 1980 when supply-side economics began its it's short but highly effective Road and cutting taxes and here again, we see that one of the more prominent proposals in Congress is a tax cut proposal. It's not an individual tax cut proposal. It's a social security tax cut proposal. So my Fearless prediction is that rather than a peace dividend that will finance the government and public interests of the Sure, what we're going to find is if to the extent there is a peace dividend. It will be accompanied by a tax cut that will continue to leave us in a rather intractable position in terms of the ability of the federal system to finance many of the public interest to solve many of the public interest problems that we face in this country today. Thank you for the opportunity to come here today and address Minnesota meeting. It's a pleasure. Thank you. (00:23:03) On the station's of Minnesota Public Radio. We're listening to dr. Gail Foster who is the head of the conference board's economic advisory Research Institute and a formerly was the economics advisor to the Senate budget committee Senator Pete domenici 1981 to 1986 when he chaired that committee. We're ready to take questions. Let me begin. Dr. Foster by asking you in the late 1970s before the labor movement apparently totally disintegrated the International Association of machinists. Then headed by William went Persinger issued an analysis of defense spending in which I think the central conclusion was that defense spending was counterproductive to the United States economy among other reasons because the products were not recyclable in the economy. Could you say something about that view and what we've learned since then? (00:24:01) Well that is that is not only a conventional view. But that's also somewhat of the underlying premise of the Paul Kennedy book on the decline of Empires, which is that defense spending because it extracts resources from productive purposes eventually undercuts the survivability of an economy and certainly defense spending does not have the kind of productivity benefits that that investment in Capital Equipment does but it does represent an important stimulus to the economy in terms of the initial purchases, which are fed and fed through in the economy in terms of wages wages and profits. And in fact, one of the problems were going to face now is that we're going to have defense Cuts without the offsetting interest rate reductions, which will allow that economic transfer from the Sector to the private sector my I will say one final word. As you know, I did work on the Republican side of the budget question in that I think when you talk to many of the Eastern Europeans one of the forces that has ultimately brought perestroika and the changes in the Soviet Union about is the fact that the Soviet Union was having to allocate an increasing share of their economic output to maintaining what they felt was required for their defense at a time when we were maintaining or even reducing our share the share of our resources. We were devoting to our defense. So the Soviet whereas the Soviet share of GNP going to defense was 15 to 20% The u.s. Share was somewhere between five and six percent and even below for the NATO countries. So it may be hard to evaluate this in terms of the Of economic dollars, but it certainly has I think contributed to the world that the new world that we see today. Thank you. Dr. Kossler have a question here from mr. Swezey. I'll read it from what credibility is given to the Peter Grace Commision and they're cut waste in government proposals. In some areas. The Peter Graves commission has really had a major impact on the way government does business and one of the most important areas has been in financial management having to do with the approach of the government to collecting its debts maintaining its cash balances operating its loan programs on a more businesslike way. I think some of the other areas where mr. Grace felt that there was waste fraud and fat are viewed with somewhat more skepticism because you you end up cutting real program. The the trade-off is not efficiency. The trade-off is usually program impact and that might be appropriate but many in Congress once having made some of these Cuts felt that to go beyond that would mean to limit the effectiveness of the program. He's been effective in some areas. And I think he has less credibility in some of the programmatic areas. (00:27:26) Here's a question from John Caitlin are TCF. You mentioned the financial implication of the banking crisis. I'd like you to comment on the notion that a regulatory induced credit crunches under way. (00:27:38) Well, this is a planted that question. I have looked at this issue of a regulatory induced credit crisis. And while I will not deny that there are some and maybe many businesses certainly some businesses in manufacturing transportation and construction who are finding that they are meeting tighter credit standards. I think that this this phenomenon does not have an economy-wide impact most of the credit crunch proponents have observed the Fallen loan demand as the equivalent of the tightening of credit by Banks. And in fact looking at the weakness of the economy, the Fallen loan demand is pretty easy to explain and recent survey by the National Institute Independent Business Federation of Independent Business suggests that even small business is not Seeing undue stress in terms of getting lending. And as a final point, I would say I think that the banks that the tightening of Standards by Banks is as much due to Banks evaluation of their own earnings situation as it is by regulatory prompting because I think banks have come to realize that they may be taking more of an equity interest in the organizations that they're lending to them they care to and they've experienced extraordinary write-offs as many of their as they equality of their loan portfolios has deteriorated. So I think it is as much something that is prompted by the bank's acting in their self-interest is it is by the regulatory authorities. Thank you. Yes a question here from David Andrea's (00:29:25) what effect would a line item veto have on the budget or borrowing crisis? None (00:29:33) next like to expand on the line-item veto line items are small things you go through an Appropriations Bill we talked about these huge amounts of money, but given that the administration is certainly not going to line item defense and the domestic spending is 15 percent of the total budget while I think it's got a lot of symbolic impact it just the the analogy between state government and federal government. Simply doesn't apply where you've got States haven't yet have more or less given up their arms. And so there is a isn't a defense component to State budgets and in fact States, In many instances don't have the entitlement obligations that the federal government does. We've got a big problem and we need a big or at least a long-term solution. And I don't think the line item veto is it did did George Bush hear me you suppose (00:30:37) is a question from Jim O'Rourke. Can we look for a capital gains cut in taxable 1990? No. (00:30:52) If we get a budget agreement out of the summit, I think there will be a capital gains piece to it, but I could virtually assure you that the starting period will not be until taxable 1991 and I am somewhat skeptical as I may have suggested as to what this budget what's actually going on at the top of this budget Summit? Thank you. We have a question here from Inga Thompson. I'd like to know what studies if any studies are requirements are might be made about the military or economic conversion to civilian usage of materials mean. It's just ridiculous to make more tanks and airplanes now to me, this is insane. I do think one of the consequences of the reduction in Personnel is going to be a reduction in the order levels of many of the Conventional Weapons. So these are not huge items. But if we have 1/3 Less in terms of military personnel, we will have maybe one third or more than that Less in terms of some of the basic fighter planes and we're going to have fewer aircraft carriers if there's fewer places for air carrier planes to land there will be fewer carrier planes in the like But as a maybe a little bit of an advertisement for the conference Board of the conference board is in the process of initiating a Defense Forum where we are going to look at the economic base questions that are associated with a lot of these conversion issues so that we make reasonable decisions about one cutting back on defense on the levels of defense spending and at the same time do so in a way that preserves the industrial base to the best to our best ability in the industrial sector in the defense industrial sector and that's a future program of the conference board. (00:33:01) Our speaker today is dr. Gail Foster who is Chief Economist for the conference board Consortium of large businesses, which commissions her and her staff of 17 with a 1.2 million dollar budget to do economic research and Analysis. Here's a question from Gary 0 Mirza. What is your opinion on whether or not all are part of the S&L bailout spending should be on or off budget. (00:33:29) I am I am of the opinion that and this applies not only to the S&L bailout. But also Social Security is that whether you put it on or off budget is really an artifice of accounting. You can anybody can display any kinds of lines to show that things are quote on and off budget we're concerned about the budget for two reasons one is we're concerned about the budget because of its borrowing requirements. And in that regard, I think that the SNL borrowing both the underlying losses and the working capital should be on budget. We are also concerned about the budget deficit because of its impact on the economy. And in that regard, I think it's fair to take the SNL borrowing off budget because one could even make the argument that the S&L bailout is procyclical rather than stimulative that it's restrictive because it's holding credit Market. Demands up at a time when the economy is very weak. So there's almost a perverse effect. We have come a long way in obscuring the traditional economists ability to understand what the budget deficit is and your question really illustrates how the problems that we have. Thank you Doctor father have a question here from Paul (00:34:50) Taylor. To what extent is the defense department budget uniquely intractable as opposed to the larger process being difficult to work with relative to the needs that our country might have today. (00:35:08) I think I would say both the defense department is probably the largest bureaucracy in the country. Anyone who's had any experience working with a small bureaucracy knows exactly what that means in terms of order of magnitude of intractability. The administration is there are several areas in which the administration is going to resist defense Cuts. They're going to reduce the resist cots in the some of the Strategic areas. They're going to resist True Cuts of the magnitude particularly in Europe, at least initially that the Congress is going to want and they're going to support a program like the be to program which they think has long term technical significance, but that said all the problems that the defense department has the Congress. And the administration the executive relationship between the executive and the legislative branch have equal problems. My concern is that we do not have the institutional structure in public policy making to be able to resolve in a public policy way problems that we face in this country and the old style of the executive proposes in the Congress disposes simply does not work because always seem to do is to be able to modify in so small ways existing programs, but we're not able to restructure in a fundamental ways and very troubled parts of the economy. For example, Healthcare some major major problem major issue and the only thing that the legislative structure permits is minor tinkering with capital grants and doctors fees and a lot of other things so I have proposed a couple of ideas one is more conventional which is that we extend the commission approach that we used in the base closings to broader questions broader public policy questions and require the Congress act upon them in an expedited fashion. And the third I'm not sure this is a I'm not sure that it helped but I'll throw it out just because I think it illustrates the problem. The the second solution is to establish a third house of Congress. And that is a somehow a house that cuts across state lines. It is not somehow elected based on either States or local jurisdictions to try and help us identify our public interest in a way which which countries that have a parliamentary structure seem to be able to do and with our with the with our constitutional structure. We seem to be incapable of doing (00:38:08) Dr. Foster, do you have any support for that last (00:38:10) idea? Not many people know about it. But if you'd like to write your congressman and in fact Rudy boschwitz is on the budget committee, and I worked with him very closely. And if you write to him, he'll say Gail came up with a lot of cockeyed ideas when she was on the budget committee and clearly she hasn't stopped now. So question here from Selma (00:38:31) Schwartz. Hi, I have read that Social Security pays for itself to the extent that the Administration has been trying to use it to bail out the SNL's. Why are so many people opposed to Social Security? (00:38:50) Oh, I would say quite to the contrary. There is an extraordinary amount of support for Social Security such such that I think chairman rostenkowski his proposal for example to cut to to freeze the colas payments and Social Security is a total non-starter. I think there's absolutely no chance. The Congress is going to address the cola issue and Social Security. It is true. It is true. Not only that Social Security is a pay-as-you-go program it is however accumulating very large surpluses and that Surplus has to be invested somewhere whether or not we had a deficit I think we would probably invest it in government securities rather than in SNL's or something like this. So Social Security is I think the single most sacrosanct program in Washington. and it is likely to remain so thank you. Dr. Pastor have a question here from David Levy (00:39:57) with the latest run up in equity prices stability of dollar and decline in bond rates as an urgency of reaching a budget compromise (00:40:05) evaporated. I'm not sure that the urgency of reaching a budget compromise was ever there in the first place what Mister Darman has achieved which I think is no small task is that he has been able to interject the administration into the budget debate in a way that was foreclosed to him before he initiated these discussions and the only reason that these discussions were initiated was because there was some interest in what could be achieved at the administration were really willing to approve some kind of tax increase so given the fact that the budget Summit had the budget tears have been at the summit for a month. I think that they may take an entire summer sabbatical and I'd be very surprised if we have a budget agreement even before the end of the Congressional session. question here doctor father from it Spencer (00:41:04) you indicated that the peace dividend is not going to produce anything and that the likelihood of a tax increase is not very strong and that therefore the budget deficit Reduction Program is probably not going to produce anything this year. How can the country keep living out of these huge deficits in the piling out of interest rates if there's no political will the corrected until suddenly we have a great collapse. (00:41:33) I well I think the country can continue to live sacrificing some of the investment it would otherwise have and some of the productivity that it would otherwise have one of the problems is that even in a crisis situation and having watched the debate and discussion of the summit that occurred after the 1987 stock market crash that really after about 1980. I've the sense of the urgency of the federal deficit had more or less disappeared from Washington in part because it has disappeared from the town meetings and constituent discussions by and large that these people encounter as they travel around the country. So this is maybe what I said about fanciful notion of third house of Congress, but we don't have very good procedures are our constitutional structure is really based on preventing the government from doing anything to us that we otherwise don't want it to do and other countries seem to have a better ability to administer pain witness the value added tax in Japan or I guess Maggie Thatcher and Afflicted a little pain on herself with a poll tax in the United Kingdom, but these parliamentary systems do operate in a more Long-range goal. I'm not an advocate of a parliamentary system. I rather like this Motley construct that we have but if efficient it is not and that's why we need to have some kind of re-examination of the Congressional the Constitutional legislative process as a whole (00:43:25) on the station's of Minnesota Public Radio From The Marriott City Center in downtown Minneapolis were listening to dr. Gail fossil Chief Economist of the conference board speaking to the Minnesota meeting (00:43:34) and we have a question here from Ron (00:43:36) speed. What kind of effect do you think the single European market will have on World Trade? (00:43:47) World trade in my opinion is is dependent upon the overall level of economic growth in the world as a whole certainly the Advent of the European market is going to increase the share of World Trade that occurs within Europe. And in fact European trade intra European trade had declined for on steadily for almost 15 years preceding about 1987. And since that time the proportion of European of intra European trade has turned up. So it's now about two-thirds of the trade that Europe of the total trade flow in Europe, but although we focus on the European market there is in my opinion something more exciting that is going on which seems to be that we are getting a second generation of newly Lines countries south Asia countries Malaysia Indonesia countries that you never would have looked at in terms of their growth potential are turning around Mexico and the potential for free trade agreements. There is a Free Trade Agreement already of sorts between Canada and Mexico. There is some Rumblings of stability in Latin America. And so it may be that Europe will trade less with the rest of the world but the opportunities for trade particularly if the growth rates in the developing countries stay at their very high levels. I think we can look forward to a 1990s with maybe even higher rates of World Trade than we've had in the last half of the 1980s. Thank you. Dr. Foster question here from Cathy Taylor if we will not reach a budget agreement before the end of this year's session. What do you think? The future is for gramm-rudman? Well, if you listen, Senator Hollings has already gotten a divorce from Graham and Redman. In fact, Senator Rudman is probably in a state of legal separation from Senator Graham. We will see a major Revision in gramm-rudman. I don't think we'll see a repeal of the goals and what you'll see before the end of the year. And in fact, you may see much more in terms of the redefinition of gramm-rudman then real action on the budget deficit but you will see elimination of the Social Security surpluses from the gramm-rudman ceilings an extension of the which will raise to somewhere around 200 billion dollars two hundred twenty billion dollars the current budget deficit you'll see an extension of the goals for achieving budget balance probably extend through the end of the decade that is without Social Security. However, and I think one of the major criteria for reaching a budget Summit agreement, is that the Credit Congress will require the administration to either repeal the sequester process overall or to adjust the sequester process in a way that it fits more in the political reality of the of of the current peace Devon and perestroika spirit because now we have a sequester process which Cuts domestic programs which hurt and but it cuts defense programs about to the level that Congress would normally cut defense programs if they were acting through the normal Appropriations process and the Democratic Congress will require an adjustment in that kind of (00:47:36) imbalance. There's a question from John Kai Langer. This is not a plant. I'm intrigued with your ideas and the you have some interesting ones. I'd like to have you pretend you have 30 minutes of free TV time. To try to impress upon the American public the urgencies of the problems that you're projecting her today. What would you tell them? Could try to get them to understand the urgencies. (00:48:01) I think I've got what 8 minutes of free radio time or something like this the the United States provides an enormous gift of Liberty Which to the individual which doesn't exist in any other Society? That Liberty has a cost to it and I don't even mean the more the Romantic Notions of Liberty, but the ability to own your own home and put that home wherever you want it to be and to drive to wherever you want to work to send your children to the to University. We educate sixty percent of the eligible population in American universities compared to something like 15% in Europe. We have an extraordinary system of healthcare that permits a kind of personal choice patient-driven choice that doesn't exist any place else in the world and all of these benefits have an extraordinary cost. Some of that cost is already borne by individuals. My concern is that if we leave the resources that we have having felt rather flush and previous years in Pinched especially in the health care area at the federal level that our ability to finance this kind of Liberty through economic growth will ultimately be undermined. We can only have the kind of system that we have because we have the kind of economic system that generates the revenues in an economy-wide sense for being able to support this Liberty. If we don't pull ourselves together in order to make some hard decisions about the budget deficit about reducing interest rates and dealing with the economic infrastructure, not the physical infrastructure of this economic system. We may seriously undermine our ability. I think this is particularly true in the education area as well to finance this Extraordinary system that that is the Envy of the rest of the world was I convincing (00:50:38) would that shake people up if they were that they would they believe you when you say this is just another problem. There's a shake you up John is it does especially the education side really shakes me (00:50:48) up. I think one of the problems we have is it's hard to shake people up, you know we have with the budget issue. I don't we've cried wolf so many times if I stood up here and said if we don't get a budget agreement this year, we're going to have a recession next year how many people in this room? Believe me? (00:51:10) No Hands went (00:51:11) up no hands went up. So I think what we have to do is to find a way to appeal to people on a basis that makes some kind of sense. I wish we had Minnesota Minnesota has a marvelous tradition of being able to get people of diverse interests together to make compromises for public interest purposes. I wish we could find a way of extracting the magic that you have here in the state of Minnesota for the federal government in Washington, but that maybe even too large that was certainly too large a hope. I think to have (00:51:52) dr. Foster you keep talking about the cost of Health Care and I think everybody senses a great dread about what that's going to cost as the years go on. I've spent a lot of time in hospitals lately visiting relatives and friends and I as a reporter have observed what I would say Are widespread abuses by the medical establishment in Billing the government for services that are hardly rendered if at all, is there a Grace commission to look at the way the medical care system is being administered. (00:52:24) Well, there is not a Grace Commision but there is the legislative system has something called a quadrennial commission that quadrant that quadrennial commission is chaired by a woman named Deborah Steelman who ran who was in has been in charge in the Office of Management and budget of the healthcare and Human Services area the focus of this quadrennial commission is the revision and reform of the Health Care system to what extent it's getting into the kind of detail that you address. I don't know but it's this it's that this kind of commission and that kind of result. My concern is I have no idea what they will come out with and I have no idea how advisable it would be. But my concern is that when a commission comes out with a result like that that the lack of any kind of implement ability of it whatever those proposals are the fact that it that it can be discarded and set aside. Not incorporated into legislation at least to a force to force the political system to be accountable and stand up and say these are bad ideas. And this is why is really a problem in the political system. Thank you. We have a question here from Tom maskin. (00:53:41) Gail what are the challenges to the Federal Reserve and what what course do you expect it to take in the short and long (00:53:47) term? The chair I think the Federal Reserve is going to face to challenge faces. Maybe three challenges. The first challenge is is very straightforward. We're in the eighth year of an economic cycle the inventory levels the excesses we've had in grains and oil and metals and lots of things that have provided a lot of price relief throughout the decade of the 80s are largely gone. So in my judgment the economic system is not dramatically but somewhat more inflation prone. The Second Challenge is that I think the Europeans are going to find that the one of the costs of German unification and Eastern European economic development is going to be more inflation. And therefore the FED is going to have to face under conditions of a weaker dollar more inflationary pressures from abroad and the third challenge is the structure of the economy. We have been able to affect price stability only by virtually hammering. The price flexibility of the goods sector of the economy. And of course to a greater extent in some cases even sending the basic Agriculture and metals areas in the economies into a virtual depression. When you have an economy where Services seem to Services prices seem to rise it's not only health care but education and all forms of personal service and entertainment and the like rise at a 5% annual rate. If your goal is some discuss a zero inflation rate. It means that Goods let's say goods are 25 percent of the economy or 30 percent of the economy Goods prices have to actually decline which I think is untenable for the industrial economy. So I don't think the FED is going to be able to achieve its price goals until it takes a real hard view as to some of the of the inflation (00:55:48) problem There's a question from Scott long. And all this day all this time. I don't think I've heard you mention the fact that one of our greatest problems is exploding population of the entire Earth. And this is something that we must face regardless of how we have to matter with these other questions were doing you had some way to do that. (00:56:18) You make me feel a little like Cinderella. The the problem of the exploding populations is something that really very few people reflect upon. I think it takes two forms one is that in the next 20 years the we are going to add 700 million workers in the developing World, which is the equivalent of the current labor force of Europe the United States and Japan and unless we find a way and I think we are moving in that direction. Although I'm afraid we're not moving fast enough unless we find a way to bring real economic prosperity to many of those areas with very rapidly growing populations. And Mexico of course is one of them and there's been a remarkable turnaround there. I think the United States is going to face a Flood of potential immigrants trying to share in this kind of prosperity. The second major issue with population is is the Environmental issue and that is to say that if we could buy dictum convince the developing world to restrict their per capita CO2 emissions to half of the level of the developed World in 20 years. We would have twice the level of CO2 emissions that we have today. I mean the the dynamic of population means that any measure of per capita environmental pollution is just is growing exponentially and while I think there is some hope in the economic area in terms of providing at least outside of the continent of Africa, which I don't really have any Salient observations on but outside of the continent. If I think we have a good shot at being able to improve the economic growth. It's the environmental problem that's associated with that economic growth that I think is even far more intractable (00:58:29) time for one quick last question one quick last (00:58:32) answer a question here from El Fletcher with regard to (00:58:35) foreign aid. What is the size of the budget? And how important is it in can be cut (00:58:41) the entire Foreign Affairs budget at 17 billion dollars it is it is relatively of course that's about one and a half percent of the entire budget. I think the foreign aid budget cannot be cut but frankly the pressures are to increase foreign aid both for Central America and for Eastern Europe (00:59:07) our guest tonight the Minnesota meeting from the Marriott City Center in downtown Minneapolis has been dr. Gail Foster Chief Economist at the conference board. Thank you so much live broadcasts of Meeting I made possible by Oppenheimer wolf and Donnelly providing commercial corporate litigation and international legal services to businesses in 40 countries around the world. There is a possibility of some scattered shower activity across much of the area this afternoon temperatures will be in the 60s and 70s today's broadcast of midday was made possible with financial assistance from the James are Thorpe Foundation. I'm Bob Potter. This is K. No W Minneapolis-Saint Paul in the Twin Cities now cloudy skies 62 degrees the wind from the south at 12. NPR Network station kzs EFM in the Rochester area is beginning its second year of quality news and information broadcasting. Thanks go out to all members who support the MPR news and information network stations. A quick reminder that today is programming is sponsored in part by Andrew and Allison Martin in celebration of their eighth and fifth birthdays. It would be nice to be eight years old again wouldn't have a (01:00:24) friend. Yeah, but in your heart you are aren't you? (01:00:27) Oh, I'm not sure about that. Not today Beth today. I feel more like 80 than eight. (01:00:31) It'll change Bob. It'll (01:00:33) change it. Will what do you got on take out this (01:00:34) afternoon? Well, we're going to find out about a nationwide photography project going on all this week all across the country. We're going to talk with education commentator Herbert: then we're going to escape (01:00:42) by talking to Travel (01:00:44) Experts with great tips on how to go to exotic places and by being read to say now no, no I listened to that and I might feel like (01:00:50) I made again. Are you gonna escape to great places sounds exciting coming up on take out with Beth friend right after the news from National Public Radio, which is next at a minute after one o'clock.