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hello I'm Jeff Brown for knowledge at
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Wharton today we're with Kent Smets
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professor of business economics and
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public policy at Wharton and we're going
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to talk about 2013 and how things stand
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at the beginning and how we think
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they're going to go through the year so
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thank you for joining us my pleasure so
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the first thing I think is just a
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general question you what is the state
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of the economy it certainly seems to be
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a little bit better but I no one's
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really bragging about it is it going to
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get better or sputter along get worse
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what do you think I think it's going to
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sputter along and I think we're in this
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for for a while I think a lot of the
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projections that people have about a
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turnaround 2013 2014 are probably
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optimistic so historically since 1980 um
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fixed private investment has hovered
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around 16 17 18% of GDP and that's gone
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way down it went down to about 10 11%
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during the Great Recession and it's
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slowly climbing its way up but it it
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really has not um come back to where
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where we need it and the job market is
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still really bad I mean the uh job cre
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is barely keeping up with uh the growth
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rate of population um it's uh the at
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this rate we won't be back to the
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Natural rate of unemployment for another
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five years at least and um in fact most
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of the changes that we've seen the
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unemployment rate recently has actually
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been just because people dropping out
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looking for jobs rather than kind of
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real jobs and being created and so you
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know fundamentally in this Pro in this
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country and this is the big issue a lot
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of people weren't talking about is we
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really have an education problem if you
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look at the unemployment rate for um uh
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college graduates it never got that high
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dur even during this Great Recession
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it's been a lot of people who do not
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have a college degree um that's still in
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the double digits uh blacks and
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minorities still in the double digits
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and so that's the big um the big problem
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is that the world's changing there's big
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returns to education
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a lot of people don't have it and that's
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what we really need to be uh uh focusing
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on for those who don't have it I hate to
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be pessimistic but is there any real
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hope other than going back to school but
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what what if you're in your 30s or 40s
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or 50s and you don't have much education
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yeah there the truth is that there
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really is not a lot of Hope unless they
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obtain new skills and so it's I think
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the approach for education is
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multifaceted we need to have much better
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Public Schools public schools are really
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should be focused on educating kids and
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not as employment opportunities it
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should be more more power to kids and
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less power to the teacher unions um of
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course there's more issues involved than
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just that um we're spending a lot per
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capita on on kids in this country in
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terms of Education we're one of the
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highest in the world but we're getting
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very little return for it and so we need
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to get Public Schools fixed but we also
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need to get training um better for
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people in the 30s so they can acquire
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new skills but bottom line is a college
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degree is still the the big
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differentiator uh in the in the labor
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market today and while we're on public
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schools for just a second the one of the
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obvious problems is kids dropping out
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they're clearly not getting an education
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but for those who remain do you think
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that the schools are are are focusing on
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the right skills the right subjects uh
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no I don't think so I think um there has
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to still be more reward for getting
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people to understand a lot of the basic
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fundamentals and of Reading Writing Ari
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arithmetic I mean there's still um we
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have a a shortage still of Engineers of
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even computer science uh people in this
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country and we still have kids who are
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graduating who really can't um
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comprehend um reading and can't write
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and these are huge advantages in in the
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the labor market when you look at at the
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economy aside from the things we've
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mentioned what do you say are sort of
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the key issues that are kind of
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overhanging right now that will either
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push it ahead or uh could could send us
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back into a bigger slowdown yeah and I
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think the education reform is kind of a
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long-term investment other long-term
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Investments that we got to be making
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right now is entitlement reform um and I
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think there's um uh kind this belief
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this myth out there that we don't have
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to take any kind of big hits right now
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until we get the economy back so it's
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let's just get the economy back to um
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Full Employment and then we'll take our
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medicine and and that's that's the big
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problem that we face right now because
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that that's just the myth in particular
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we'll never get people to make large
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investments in this in this economy when
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they face tremendous uncertainty if
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they're going to get taxed to death kind
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of later on um and it's uh we really
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have to resolve the long-term financing
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problem of the government to encourage
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people to make kind of the big bets
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we've already seen this in the area of
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biology uh right now uh investment in
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that area has gone way down um Lots less
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of investment in um Pharma large
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molecule small molecule therapies and so
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forth over time because they're
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long-term bets and no one knows what
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that world's going to look like 10 years
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from now and given the low probability
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of success people are starting to shift
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toward less risky things and that that
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that's a big problem the government
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needs to uh create much more clarity for
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investors and people making big
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sacrifices what that world's going to
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look like a decade from now and we're
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just we're just not doing that a lot of
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the discussion of entitlements of course
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looks at Medicare as as the the real big
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one that's the that's a major major
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problem and you hear remedies proposed
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like well raising the eligibility age a
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year or two uh or clamping down on the
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payments to doctors and hospitals are
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those really enough or is I mean is
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there have to be something much more
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sweeping than that to make this work it
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has to be fundamental reform those are
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not going to do do much um increase in
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entitlement age or retirement age is not
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going to do much uh reducing
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reimbursements to doctors just means
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fewer doctors are going to take uh
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Medicare and so um what really has to
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change is we need to go in a fundamental
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reform away from the feed for service
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model that we have now more to toward
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perc capitation or having people um
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understanding um the marginal cost of
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the medicine that they are getting and
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so various plans out there bipartisan
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plans like the Ryan rivlin plan and
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other plans that have tried to move the
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the conversation in that direction right
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now I've been kind of um demagogued by
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all sides um but that's the conversation
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that that we need to have if we fix
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everything else and don't touch Medicare
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we're doomed and so and if we screw up a
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lot of things but fix Medicare Medicaid
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and Social Security we're in pretty good
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shape and so it really comes down to
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those uh and Social Security uh that I
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my impression is that's a problem but
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not as big a problem as Medicare is that
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correct it is it's a much smaller
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problem both in size and in the nature
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of the problem in size it's probably
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one6 of the problem of
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Medicare um and in terms of the nature
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of the problem at least with social
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security benefits is it it's a dollar
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benefit so you can decide who to get
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fewer dollars to and lots of plans out
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there about keeping the poor out of
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poverty but maybe reducing some of the
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benefits that go to higher income
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classes and and so forth and uh with
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Medicare much higher harder problem
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because what do you do you say you know
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we're not going to pay for half of this
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open heart surgery and you PID for the
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other half much harder problem um to fix
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yeah and and I gather that that raising
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the eligibility age or the starting age
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for Medicare doesn't mean much because
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those are the healthier people in their
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60s it's the people in their 80s who are
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were really costing a fortune that's
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right almost all the Medicare uh
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spending I shouldn't say all but the
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vast majority of it has done in the last
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two three years of life and so increas
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in the eligibility age has very little
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impact now looming over all this of
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course is the question of the debt and
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deficit and the debt ceiling and all
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that how important is it that we get
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some sort of kind of long-term solution
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to these problems yeah it's it's
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critical I mean no one's going to make
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an investment um private entrepreneurs
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are not going to make it a sacrifice
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until they what the long run looks like
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and the signal so far from Washington
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has been entrepreneurs and people who've
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invested and succeeded they're going to
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get the ones they're going to be the
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ones who we go to for getting the money
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to to solve these problems and so until
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you create that type of certainty uh
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about what the future politics is going
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to look like by solving having us on a
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long run sustainable path today um we're
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not going to make any any real Headway I
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mean what I think the biggest myth that
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really just needs to be dealt with is
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this idea that we can just um balance
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all these problems and kind of the the
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backs of the Rich and it's it's that's
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been the group we've gone to in the past
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and that we can just pile it some more
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on right now we're carrying a national
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deficit of $99,000 per every us
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household um if the Bush tax cuts had
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expired so the taxes went up for
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everybody taxes would have only gone up
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about $2,000 per household and that's
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what everybody was calling the fiscal
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cliff and so and of course that couldn't
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possibly happen and so it's this big uh
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view in Washington really on both sides
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that the middle class should not be hit
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whether it's higher taxes or lower
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benefits um and uh that they should be
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participating in this whole debate um
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where it's just mathematically
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impossible to do something meaningful
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without them participating either in the
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form of higher taxes a broader base
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lower benefits and this that the most
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recent tax increase on the rich will
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close about six to 7% of the annual
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deficit this year trivial amounts and so
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we need to have a broad-based discussion
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I is there any way to deal with these
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problems without a lot of pain uh for
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the middle class and for others are
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there any technological breakthroughs or
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sort of dream solutions that we haven't
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thought of that may come along no no I
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mean we're just way over consuming right
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now we've gotten a a very rich appetite
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and it's going to be painful for people
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to think about I have to cut back but
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right now as as a nation we're spending
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much more um than what uh we can um and
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as a result we're not saving for the
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future and we're on a path that is just
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completely unsustainable the the middle
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class has to be part of the solution I
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think most people would uh you know if
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you ask them what they want out of the
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economy they want an improved standard
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of living uh better prospects for jobs
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and a comfortable retirement it sort of
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boils down to those what are the
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prospects for getting all of those in
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the next 10 15 20 years yeah it they're
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not good at least in our current path
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simply because we've already consumed a
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lot of that um we've saved very little
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um for the future
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average US household has save very
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little um our government has
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overspent um and we're we're simply not
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going to grow fast enough in order to
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allow us to kind of grow our way out of
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this out of this problem keep in mind
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certain benefits like Social Security
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and Medicare or to keep up with lots of
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the technology uh technological progress
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they keep up with the average wage rate
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and so it's not something that we can
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easily grow our way out of and and so
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real fundamental choices are going to
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have to be be made and this is why it's
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I think real important that we make real
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um uh hard decisions about saving more
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uh today and why what the tone of
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Washington has to completely change
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right now the president is essentially t
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uh you taking advantage I think of the
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weaken position that Congress has
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especially in the public Limelight
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whereas the president really needs to
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shift focus and say you know this is a
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national problem this is a bipartisan
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problem we're here because of both
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political parties and here we we need to
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have a fundamental um reform to our our
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tax code our entitlement problems um and
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but this is going to involve everybody's
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participation and this idea that we can
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just Finance this off the backs of a few
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is just it's just mathematically
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impossible well it's a it's Grim but I
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guess we knew we had to hear it so we'll
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hope things turn out better but uh thank
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thank you very much we'll talk about it
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again my pleasure
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