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we're meeting today with Mark Dugen who
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is a professor of business economics and
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uh public policy at Wharton and we're
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going to talk about the public policy
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implications of Obama's victory in the
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presidential election thanks for joining
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us today thanks for having me um the
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debt and budget considerations are the
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number one uh issue after the election
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uh all the talk is about the fiscal
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cliff could you explain what that Cliff
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is all about and what the options are
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for dealing with it sure uh so there are
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several things essentially uh on January
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1st 2013 that will happen uh both in
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terms of taxes increasing in a number
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number of different ways and spending uh
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being reduced in a number of different
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ways uh just at a at a high level the
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size of the US economy plus or minus is
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about 15.5 trillion dollars is our GDP
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and on a calendar year basis this fiscal
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cliff amounts to about 750 plus uh
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billion dollars so 5% about 5.1% of GDP
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uh in terms of increased taxes and lower
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spending on an annual basis when we move
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into 2013 so that is a huge change a
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huge jolt to the economy in the sense
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that immediately people are going to see
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more taxes being taken out of their
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paycheck and we're going to see less
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spending on things like defense Medicare
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and various discretionary programs and
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it that and and and that will be a huge
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change for the economy that's baked in
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unless we change something baked in
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unless we change if policy makers do
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nothing for the next two months then
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starting on January 1st 2013 we will go
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over the so called fiscal cliff and with
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uh tax increases and spending reductions
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that add up to more than $750 billion
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over the course of calendar year 2013 so
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that is a huge huge huge change uh in
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sort of tax and spending policy and as a
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result uh especially given the economic
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recovery is somewhat fragile uh I think
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policy makers are kind of scrambling to
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try to figure out what to do
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and uh and it's going to be an
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interesting negotiation between the two
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sides well there's not much time left
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and interestingly it's the same cast of
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characters that's been around even
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though many of them will be leaving when
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we get into January but between now and
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January 1st it's the same cast of
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characters what do you think is likely
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to happen so I think that there are
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certain parts so if you look at the
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fiscal cliff if you sort of aggregate up
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the different things the increases in
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income tax rates the increases in
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dividend taxes capital gains taxes the
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increase in payroll taxes reductions in
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defense spending and so forth um there
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are a couple of components that seem
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very unlikely to be renewed which is to
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say parts of the fiscal cliff that will
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happen so the first being uh a reduction
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in the payroll tax so right now over the
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course of the 2012 calendar year payroll
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tax rates have been two percentage
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points lower than they typically are so
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that if you're a worker let's say
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earning $50,000 a year you've paid ,000
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Less in Social Security payroll taxes in
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2012 then you would have absent this
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change so if your salary stays the same
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in 2013 when we go into 2013 your taxes
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your your basically take-home pay will
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fall mechanically by $1,000 they're
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going to let that expire I think all
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indications are they will let that
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expire it's very expensive I mean that's
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over hundred billion dollar and you know
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we would like uh so I think that is one
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that's uh uh very unlikely to be
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extended second one is uh emergency
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unemployment insurance benefits so
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basically in a typical economy
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unemployment insurance provides benefits
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for up to 26 weeks uh and if a person
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doesn't find a job within 26 weeks
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unemployment insurance benefits are
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exhausted during this recent economic
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downturn the federal government
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intervened in many ways to extend that
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maximum duration as high as 99 weeks and
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that's gradually been coming back and
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it's going to come back further still
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and so I and that cost a lot of money
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and that is not going to be extended I
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think all indications are so those are
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sort of two things that we think that I
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think are it's pretty plausible that
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those are parts of the cliff parts of
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that $750 billion that I talked about
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that are going to take effect um a
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payroll
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tax return to its initial L it's not
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like an Inc it's basically it was
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temporarily lowered so it's going to go
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back to where it's basically always been
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for the last two 25 years um and
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unemployment insurance same deal it's
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going to get back uh closer to what it
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has historically been uh on the other
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things it's somewhat harder to predict
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so income tax rates are set to increase
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pretty much across the board uh the 10%
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marginal tax rate people for at these
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are would affect lower income folks
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that's set to increase to 15 percentage
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points that's a pretty big increase and
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that's you know that's going to affect
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many lower income workers middle- inome
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workers it affects essentially anyone
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because people pay that on their first
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uh let's say uh uh about $9,000 in
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taxable income even higher up up when
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we're talking about let's say $400,000 a
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year type folks uh those rates are set
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to increase from 35 to 39.6% and if
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there's one thing that is going to be
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sort of a defining uh issue here it's
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going to be do we uh allow do we extend
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tax cuts for let's say lower and middle-
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inome workers and let them expire for
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high income workers so these Cuts uh
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that uh George W bush put basically uh
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and and uh uh the their the so-called
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2001 Bush tax cuts uh basically lowered
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the tax rate from 39.6 to 35 on high on
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the highest income group um and that is
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set to return back to 39.6 so will that
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uh the I think is that going to go back
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to 39.6 will they extend that to 35
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that's going to be a huge issue I think
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both sides would be very very happy to
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keep those rates at lower levels uh for
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lower income and middle inome folks I
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think the big point of debate is at for
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people let's say 250,000 a year and
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above should we rate allow those rates
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to go back up to start to make more of a
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dent in the deficit so uh you know I've
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sort of highlighted some other things I
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mean on the estate tax that's going to
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be a huge issue right now if you pass
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away and your estate is worth less than
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$5 million no taxes will be paid on it
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whereas effective 2013 if it's it that
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that threshold Falls from 5 million to a
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million and on top of that the tax rate
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increase increases so dividends and
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capital gains tax is also set to
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increase it is going to be a very
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interesting negotiation if policy makers
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do nothing so you know we've heard all
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this talk about sort of what is the
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right mix of tax cuts and or tax
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increases and spending cuts if we're
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going to do something about the
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deficit and the changes that are set to
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go effect have more than $3 in tax
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increases for every dollar in spending
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reductions because the spending
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reductions are you know non-trivial but
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they're the vast majority of the $750
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billion dollar is coming through higher
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tax taxes so it is uh it'll be
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interesting I think that it's very hard
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to predict right now I think you know if
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you wanted to play it safe and predict
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that of the 750 billion they'll avert
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approximately half somewhere between a
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third and twoth thirds of that that
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seems like a plausible number how they
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will do that the devil will certainly be
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in the details yeah in Europe we've seen
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that uh Cuts in government spending
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appear to have made the public debt
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worse uh there's been a lot of austerity
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um that's resulted in uh slowing down
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the economy and at the same time it
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increases spending for safety net issues
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so it seems to be having exactly the
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opposite effect U of what was intended
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and this has been going on for a couple
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years now do you agree that's the case
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and and how would the US avoid getting
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caught in such a trap it's an extremely
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delicate trade-off that policy makers
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now have to face and I wish that I could
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have great confidence that they're
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optimally making this trade-off given
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the best available evidence but that's
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not always how policymaking works
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unfortunately um uh the uh so I think
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the figuring out so right now the
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federal government for every $3 it
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spends it borrows one and that is a big
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deficit and I think most agree that in
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the long run we want to get that deficit
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down at when do we start trying to make
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a dent in that that's sort of the
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critical question how do you start to
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make progress on reducing the deficit uh
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in such a way that you don't basically
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prevent the economy from getting sort of
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escape velocity from this current sort
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of not great situation that we're in so
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we've had some pretty good job growth
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over the last two or three months
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indications are that you know the
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economy may be starting to do better it
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would be highly unfortunate if let's say
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we went over this fiscal cliff and then
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went into a recession as a result which
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is totally plausible so I think is of
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that 750 billion I don't I wouldn't
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personally I wouldn't say the right
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number is zero which is to say I don't
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think that we should do nothing when we
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cross this fiscal cliff uh but I think
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the concern about doing the full 750 is
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that it will uh and remember that the
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number that you hear a lot in the Press
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is the 607 billion from the
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Congressional budget office that's a
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fiscal year number if you look at on a
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calendar year basis it's higher it's in
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this sort of$ 750 plus billion dollar
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range so it's bigger it's even bigger
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than it has has been being build in in
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in the Press uh and so uh is where
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between 0 and 750 is is the right number
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that is that's the critical question and
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I think 750 would pose a lot of problems
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for the economy but I do think there's
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value and starting to make a dent in
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this deficit and so those two things
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that I described the payroll tax letting
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it return to its previous level the
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unemployment insurance benefits letting
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those uh those uh emergency benefits uh
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expire uh that would now It's Tricky
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there's trade there's nothing's free
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here so whenever you raise taxes or you
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lower spending that there I me the
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people are affected by that so that's a
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real some you know something it's not
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just numbers it's something to think
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hard about it's 150 billion that's about
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a fifth of the uh fiscal cliff I think
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that is going to go
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ahead um how much further is you know at
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some level that what we're talking about
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right now is changing the the sort of
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parameters within the existing tax code
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I think what many economists and other
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experts hope is that sometime very soon
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policy makers will get together to try
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to make ra make design a tax system that
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makes somewhat more sense that is more
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progrowth okay and and do things to
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reform entitlement programs to get the
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country on a better longrun fiscal
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trajectory so I think in the short run
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we should be very careful that we don't
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sort of stop the you know sort of
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slowish recovery but it seems to be it
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seems like we're doing we're getting
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some recovery stop it in its tracks
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because as you say if the if we go into
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a recession that can have uh pretty
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negative effects on the budget uh
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thereafter so it's uh it it my hope is
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that instead of tweaking within the
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existing tax code and tweaking within
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existing entitlement programs they try
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to do something that puts the country on
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a better
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trajectory so um if nothing happens
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there would be uh a
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750 billion dollar combination of tax
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cuts or or I'm sorry of tax increases
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spending cuts or or tax increases um
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you're suggesting that who really knows
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but maybe the compromise may come down
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somewhere in the middle yeah how much of
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a dent does that make in the deficit or
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or or or the or in the budget for the
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year so if you think so in terms of our
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our deficit is uh uh for this past year
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for fiscal year 2012 was essentially 1.1
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trillion which is let's say 1,00
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billion okay that deficit would fall by
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from 2012 to 2014 I'm not going to use
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the 2013 number because the the numbers
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are fiscal year so 2014 would be the
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first full fiscal year that it would be
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post the fiscal cliff you would see
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deficit the deficit decline by about
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2/3 um uh over that period if we went
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over this fiscal cliff so it's a bit it
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makes a giant dent and it I think even
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if it kicked the economy into a
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recession it would still lower the
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deficit somewhat the question I mean it
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would but it wouldn't lower it clearly
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as much if it if it hampered economic
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growth a lot and and caused us to go
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into a recession so but it's it's real
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money I mean it's it's $1.1 trillion
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where's our current debt debt held by
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the public is about 11 trillion if you
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take gross debt which includes let's say
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what the government owes like basically
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social security has trust fund the
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Social Security program has a trust fund
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that has holds a lot of US federal debt
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so like two and a half three trillion
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dollar of the current debt of the 16
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trillion debt is held by the Social
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Security program so 16 trillion is Big
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what we're talking about is you know 750
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billion but that's not nothing I mean
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that's 20% I mean that's 5% of the uh of
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the overall gross debt so a move of that
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in that deficit on a Pere basis is a
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pretty big deal okay uh the other big
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issue big issue in the campaign of
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course was Unemployment uh you mentioned
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the numbers have been improving somewhat
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over the last couple of months job
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growth 170,000 or so this this latest
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number um which is a little bit better
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than just keeping up with population
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growth right um but even if that number
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were to continue if that froze at that
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number and we increase it by that amount
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every month for the next many months it
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would take many many years to get uh
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unemployment rates down to the level
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that they were at before the financial
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crisis oh absolutely so what what do you
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see happening with unemployment what are
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what are their programs uh what's most
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likely through these compromises to help
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um bring it down so I think you know to
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the extent that there are big policy
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changes on the tax side or on the
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spending side the hope that I have and I
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think most uh who who study this have is
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that they're going to do things in a
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program growth way that are going to
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enhance economic growth and enhance job
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creation I mean our tax code is a just a
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there are a lot of well-intentioned
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policies sort of packed into our tax
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code but in the aggregate it's a
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complete mess and so doing something to
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try to rationalize that thing so that we
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stimulate investment by companies so
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that we encourage people to work uh that
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I think can have desirable effects on
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employment growth and 170,000 a month is
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good it is better than certainly uh uh
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uh it's some it's a little better than
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keeping up with population growth but
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basically right now if you look at the
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employment to population ratio in the US
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we're about four to five percentage
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points below where we were before this
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this thing started and that's millions
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and millions of people so if you think
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about you know 170,000 a month just to
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do population you've got need about 125
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so you're talking about 45,000 extra a
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month half million a year that's going
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to take a long time for us to get to
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where we want to be so I think it's
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going to be very important for
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government for policy makers to um put
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in place policies and this isn't just on
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the tax and spending side this is on all
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kinds of levels trade policy energy
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policy Health Care policy housing policy
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and so forth do thing Financial
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regulatory reform do things in such a
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way that we're enhancing economic growth
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enhancing job creation because as a as
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the economy grows the deficit becomes
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less and less of a problem because
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mechanically you've got more people
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generating tax revenue fewer people
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going on to government programs because
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they need help and it just you know the
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problem can can to some extent take care
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of itself but 170,000 a month is just
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not going to it's not going to do it so
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the real answer is to grow our way out
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of it and that's that's the big
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conundrum how do actually do that that's
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right exactly and and and I think though
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that there are it is uh and it's hard I
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mean there it it is uh we're not we
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don't have the luxury of having a lot of
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sort of uh uh uh you know we we have now
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run these big deficits uh we don't have
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the luxury of being able to spend a few
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hundred billion more dollars to do this
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or that uh uh effort this or that tax
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cut if anything will be going in the
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opposite direction so figuring out I
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think it's an extremely difficult
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problem figuring out how do you design a
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package of policies that simultaneously
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reduce the deficit which is either
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you're increasing taxes or you're
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lowering spending or some combination
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and you're enhancing job creation so
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that is an extremely difficult thing to
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do simultaneously and uh I think it is I
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My Hope Is that it's going to require a
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better sort of policymaking process than
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we've seen in recent years I mean it is
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uh it is the environment is
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unfortunately dominated by the sort of
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it it's just it's not been conducive to
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uh e economic policies that are in the
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country's long run interests and I just
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really hope that policy makers can sort
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of you know really work together in such
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a way that they uh put the country on a
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better fiscal trajectory because you
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know there are a lot of I mean it's it
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and I think all these people work in DC
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I've spent a little bit of time working
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in DC they all I think uh you know for
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the most part maybe not every single one
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but they uh the vast vast majority of
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them are are well-meaning very smart and
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everything else but the process as a
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whole and the aggregate you take the way
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this process works and it's a just a
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disaster for the country if it keeps
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doing going the way it has so I hope
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they can work together and it there's
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going to be compromises and there will
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be uh and and it is you know I think the
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country needs to come together because
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the challenges we Face are so so massive
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and uh uh uh and you know stimulating
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job creation I think trade policy uh has
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some potential for doing that because to
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the extent that we can do a better job
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of uh uh uh opening up markets abroad
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and increasing their demand for our
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products that will uh that will raise
00:18:15
exports and that can raise employment
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hard thing here is though the rest of
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the the rest of the world economically
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right now is struggling you see Europe
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even China slowing down and elsewhere so
00:18:24
it's going to be uh that it is that's a
00:18:26
challenge but on energy policy I think
00:18:28
there are a lot of opportunities for us
00:18:30
to do things that can stimulate job
00:18:32
creation there so you know we sort of
00:18:33
think about what is it going to be the
00:18:35
thing that gets us to to improve the
00:18:37
trajectory that's going to sort of be a
00:18:39
GameChanger to economic growth and you
00:18:41
know many people think that maybe the
00:18:42
energy sector is an area that can really
00:18:45
uh uh be a source of both good
00:18:47
employment growth and helping us to uh
00:18:49
reduce our dependence on foreign uh
00:18:51
petroleum and so forth could you just
00:18:53
give a little bit more detail about that
00:18:55
energy sector that there's hope for in
00:18:57
in your view so I mean I think you know
00:18:59
there's we have uh the
00:19:02
us we've uh seen in recent months years
00:19:06
that uh the US has a very large amount
00:19:09
of natural gas reserves and so there's
00:19:11
some question about whether we should be
00:19:13
doing more to try to harness to uh put
00:19:15
that to use it certainly I think natural
00:19:17
gas is now about a quarter of our uh
00:19:20
energy consumption but it could
00:19:22
potentially be more uh with government
00:19:24
policies you can't really easily use
00:19:26
natural gas right now in an automobile
00:19:27
for example
00:19:28
uh so natural gas but then there's also
00:19:30
just the fossil fuel versus renewable
00:19:32
kind of question and should we be doing
00:19:35
more to try to stimulate Renewables I
00:19:37
mean there's still a tiny fraction of
00:19:39
our energy consumption I mean if you
00:19:41
throw out hydroelectric and you only
00:19:43
look at let's say solar and wind type
00:19:44
stuff it's tiny tiny tiny I think two
00:19:46
percentage points perhaps of our energy
00:19:48
consumption is uh is is on Renewables
00:19:51
maybe it's three but it's not it's it's
00:19:53
not it's not very big and are there ways
00:19:56
to an efficient way stimulate more more
00:19:58
on that front um I think that's you know
00:20:00
something to think about and you know
00:20:01
for that matter I think nuclear power is
00:20:03
something that you know we don't hear
00:20:04
much talk about but it's a possible
00:20:06
source of increased energy uh uh uh of
00:20:10
you it's a potential source for more
00:20:12
energy uh down the road but I think
00:20:14
that's a it's just such everything's
00:20:15
connected government policies for
00:20:17
spending for taxes for energy for trade
00:20:21
for housing for healthare for all these
00:20:23
things to the extent that you move one
00:20:24
policy you often have Ripple effects in
00:20:26
other areas and you know sometimes you
00:20:28
can move a lever and it helps you on two
00:20:30
problems so you know you might think
00:20:32
suppose that you decide that climate
00:20:34
change is a big issue and and the uh uh
00:20:36
CO2 emissions and so forth suppose you
00:20:39
increase the gasoline tax that
00:20:41
potentially helps you on the budget
00:20:43
front and it helps you potentially on
00:20:44
the climate change front because maybe
00:20:45
it causes people to shift to cars with
00:20:48
better fuel uh efficiency and so forth
00:20:52
um but often unfortunately you move you
00:20:54
so that's an example of what case where
00:20:55
you can kill two birds with one stone
00:20:56
with a policy but but often
00:20:58
unfortunately when you move a policy
00:21:00
deliv that helps you on one front it can
00:21:02
harm you elsewhere and so I think the
00:21:04
you know a really important thing for
00:21:05
policy makers is part of the reason that
00:21:06
I think you know people like uh you know
00:21:09
e people who study uh government
00:21:11
policies and who have some expertise in
00:21:13
this area uh part one of the things that
00:21:15
we can contribute is to try to help
00:21:17
policy makers think through the effect
00:21:18
of their policies before they're enacted
00:21:20
because so so many government policies
00:21:24
that sound good and that have a really
00:21:27
uh laudable objective end up having
00:21:31
unintended consequences that uh actually
00:21:34
either you know have negative effects
00:21:36
that you weren't worrying about or may
00:21:38
even undermine the very goal that the
00:21:39
policy was intended to help and so I
00:21:41
think it is uh uh policy makers really
00:21:44
you know they're back in these rooms and
00:21:46
they're rolling up their sleeves and
00:21:47
people with you know lots of experience
00:21:49
with negotiation and and and political
00:21:52
experience and 30 years on the hill or
00:21:54
20 years and this or that branch of the
00:21:56
federal government I really hope that
00:21:58
they call on the expertise that is out
00:22:01
there because a lot of these policies
00:22:03
that they're moving are complicated and
00:22:06
they often as smart as they are and as
00:22:08
talented as they are on the things they
00:22:09
do they often don't understand the
00:22:11
trade-offs at
00:22:15
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all
