Alice Rivlin: "Now Is An Excellent Time To Fix Social Security And Medicare"
At lunch today, former CBO Director, OMB Director, and Fed Vice Chair Alice Rivlin spoke to a packed house at the National Economists Club in Washington, D.C. A podcast of her remarks will be posted within the next few days.
Her most striking remarks were how forcefully she warned that we should undertake long-term deficit reduction measures now. Without them we will face rising interest rates before the economy has enough time to recover as foreign purchasers of U.S. Treasury debt balk at buying a lot more of it. She boldly asserted "Now is an excellent time to fix Social Security and Medicare." She referred to how we fixed Social Security in 1983 as a model: extend the retirement age and index lower benefit growth for those under age 50 and raise the tax rate. She added that we could save a lot of Medicare spending before we tackle health care reform by requiring competitive bidding on durable medical equipment and by allowing the Centers for Medicare & Medicaid Services to negotiate lower pharmaceutical prices.
Regarding the stimulus bill, she said stimulus of that size was necessary, but she had concerns about how well some of that money was going to be spent. When asked how stimulative it would be, she defended its stimulative effects, particularly those amounts going directly to individuals through Food Stamps and tax cuts and to the states through the increase in the federal Medicaid match.
Focusing on the causes of the housing bubble and the subsequent crash of our financial markets and of the economy, Rivlin detailed numerous causes: too easy monetary policy; regulators failing to maintain credit standards; living beyond our means; and speculative fever.
Alan Greenspan got some harsh criticism from Rivlin for failing to heed Fed Governor Ned Gramlich's urging to rally regulators against lax home lending standards of state regulated banks. However, in his defense, she explained it wasn't so obvious, except in retrospect, that interest rates were too low for too long following the 2001 recession. Even the Fed's economic models fail when the current period differs too much from that of the historical data used to estimate the model. It's hard to include factors like the breakdown of credit creation by non-banks.
One social commentary from Rivlin deserves note. She charged that America's top business leaders have lost touch with reality. "I know. I serve on corporate boards with some of them. They don't live in the same world we do." By the time they realize they've made serious errors, it's too late, and everyone bears the consequences.
Rivlin predicted we will need a new revenue source to cope with our long-run deficit problem, a value-added tax. I'm biased on this subject. I formulated House Ways and Means Chair Al Ullman's VAT proposal in 1979. There's no way to protect the poor and the elderly from such a tax, and it could become quite a money machine for a lot of government spending I would prefer to avoid. Rivlin has promoted a VAT for a long time because it is a more efficient tax and because it would harmonize our trade with the rest of the world, almost all of which has a VAT.
Finally, Rivlin urged that we adopt policies to protect against the next speculative boom. "It will come -- just in a different asset class."