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FDIC 2005 Economic Outlook
The U.S. Consumer: Hero or Has-Been?

The following is the transcript of the 2005 Economic Outlook Roundtable that addressed the outlook for the U.S. consumer sector. FDIC Chief Economist Richard Brown moderated a discussion that featured Carl Steidtmann, Chief Economist and Director of the Consumer Business Industry Group at Deloitte Research; Allen Grommet, Senior Economist at the Cambridge Consumer Credit Index; and Leonard Burman, Senior Fellow at the Urban Institute and Co-Director of the Urban-Brookings Tax Policy Center.

MR. BROWN: Good morning, and welcome to today's Third Annual Economic Outlook Roundtable sponsored by the Federal Deposit Insurance Corporation. The title of today's roundtable is "The U.S. Consumer: Hero or Has-Been?" We're very fortunate to have with us a panel of leading experts on the consumer sector to share their views with us and to answer your questions and mine. I'm going to introduce them to you shortly.

By way of background, today's event is the latest in what's becoming a fairly long series of roundtables that the FDIC has held to tap into expert opinion on the most important trends driving the economy and the banking business. We think that, in addition to the work that our analysts do on these topics, talking to the experts helps us do our job better. We think it might help bankers, private analysts, and other policymakers do their jobs better as well.

Now, a few words about today's topic. Our first Economic Outlook Roundtable, held in November 2002, focused on global demand and the threat of deflation. The weakness of the economic recovery to that point had raised some concerns about these issues. However, the strength of the expansion since that time has caused those concerns to dissipate somewhat.

Last year we brought in macroeconomic analysts to talk to us about their outlook for 2004 and the art of forecasting in general. Looking back this morning at their forecasts for 2005, as I did earlier today, I wanted to see how well they did.

I saw that John Silvia at Wachovia Securities had forecast real GDP growth for this year at 4.4 percent. I saw that Chris Varvares at Macroeconomic Advisors was forecasting growth this year of 4.5 percent. And now, almost a year later—with three quarters of the year in the books—the consensus of economists calls for growth to come in right at 4.4 percent. So anyone who claims that economic forecasters are just there to make the weathermen look good by comparison clearly has never met these gentlemen.


Anyway, leading up to this year's roundtable, we saw the economy gaining strength. We saw emerging signs of some balance in the economy, with the business sector really starting to pull its weight in terms of inventory-building and business investment. Those are very welcome signs of balance.

As you know, consumer spending in homebuilding made up a disproportionate share of U.S. economic activity during the recession and in the early stages of the recovery. This imbalance was such that The Economist magazine ran a memorable cover story in March 2002 entitled "The Houses that Saved the World."

Consumer spending has stayed strong through this period on the strength of a series of tax cuts, historically low interest rates, rising home values, the opportunity to refinance mortgages at historically low rates, the opportunity to tap into home equity by taking cash out at refinancing, or simply by drawing on a home equity line of credit. On the strength of these powerful sources of stimulus, consumer spending contributed more than 100 percent of net GDP growth in 2001 and 2002 and a sizable chunk of GDP growth last year and this year.

Besides serving as nearly the sole engine of U.S. economic growth during this period, U.S. households were also serving as nearly the sole engine of loan growth at FDIC-insured institutions. Commercial and industrial, or C&I, loans held by banks and savings institutions, which are usually the bread and butter of the banking business, shrank for an unprecedented 13 consecutive quarters from the end of 2000 until the first quarter of this year. Nonetheless, the industry managed to post record profits in 2001 and 2002—including five out of the last six quarters now—as growth in holdings of mortgage loans, mortgage-backed securities, and consumer loans helped take up most of the slack.

So, even though C&I loans began to grow again in the second quarter, the fastest-growing loan category at FDIC-insured institutions continues to be home equity lines of credit. They're growing at an annualized pace of about 40 percent.

All of this has been good news for the banking industry to this point. But being regulators, we're paid to worry, and we think there are some things to worry about with regard to the consumer sector. These are issues that have implications not just for the U.S. economy but also for the mortgage and consumer lending business.

I'm going to ask three broad questions:

First, as the marginal effects of the 2003 tax cut begin to subside, growth in disposable personal income will be much more heavily weighted toward growth in jobs and growth in wages. However, job growth has been pretty uneven to date during this expansion. So the first question is, will wages and salaries grow fast enough in 2005 to keep consumer spending strong?

Now, the second question. By our calculations, homeowners extracted some $312 billion in equity from their homes last year through cashout refinancing and home equity borrowing. That's about 4 percent of disposable incomes last year. So the question is, can this be sustained? Should this be sustained? And if not, what effect would that have on consumer spending in 2005?

Third, home prices are growing at better than a 9 percent clip nationwide and much faster than that in certain metro areas in the Northeast, California, and Florida. There's no question that we're in a housing boom, but there's disagreement as to whether a housing bust must necessarily follow the boom. So a third broad question is, what might home price trends mean for consumer spending in 2005?

Now, with such weighty questions hanging in the air, we feel fortunate, indeed, to have with us three leading household sector experts to share their views on these and other topics. I'm going to take the opportunity now to introduce all three of them to you.

Carl Steidtmann is Chief Economist for Deloitte Research and a nationally recognized expert on economic forecasting of retail sales activity, consumer technology, and general economic trends. Based in New York, Dr. Steidtmann works with individual clients in assessing the impact of economic, demographic, political, and technological changes on their business strategies. He was selected as one of the 25 most influential consultants for 2003 by Consulting magazine for his work in consumer spending forecasting. Carl, thanks for being with us here.

MR. STEIDTMANN: It's my pleasure. Thanks for asking me.

MR. BROWN: Allen C. Grommet is Senior Economist for the Cambridge Consumer Credit Index. Allen writes monthly in-depth economic analysis for the Index. His topics of expertise include financial management, financial analysis, risk management, forecasts and budgets, Federal Reserve policy, and macro- and micro-economic forecasting. Dr. Grommet has also developed a consumer confidence survey for ABC News and Money magazine that's widely used by traders and forecasters in the financial markets. Allen, it's a pleasure to have you here with us today.

MR. GROMMET: Thank you.

MR. BROWN: Leonard E. Burman has three roles: He's Co-Director of the Tax Policy Center here in Washington, a Senior Fellow at the Urban Institute, and a visiting professor at Georgetown University. Dr. Burman is the author of a book, A Labyrinth of Capital Gains Tax Policy: A Guide for the Perplexed, as well as numerous articles, studies, and reports. He's also a commentator for Marketplace Radio.

His recent research has examined the Individual Alternative Minimum Tax, something that's increasing in prominence for many people, as well as the changing role of taxation in social policy, tax incentives for savings, retirement, and health insurance, all timely topics for today's discussion. Welcome, Len.

With that, I'll turn it over to Carl Steidtmann.

MR. STEIDTMANN: Thank you very much. Good morning to you all. It's Friday and I get to go home, so that makes it a good morning.


In our analysis, when we look at the road ahead for consumers, we start by looking at the broad economy. We see the broad economy losing a little steam, probably losing steam from a pretty high level. We have had the fastest growth, at least in the first half of this year, in 20 years. Quite remarkably, that's coming off what was the weakest, mildest recession in the previous 30 years.

The mildness of that recession was due in large part to the fact that this was the first recession in the post-World War II period where consumer spending, at least on a year-over-year basis, didn't turn negative. This really was due, in large part, to policy: the very aggressive tax cuts, very low interest rates, the mortgage refinancing boom, all putting cash flow into the household sector. One of the great things about American consumers is, if you give them cash, by God, they go out and spend it.


One of the things that we've done at Deloitte is develop an index, which we'll talk about, that really tries to look at cash flow into the household sector, because we find that to be probably the best long-term indicator of where consumer spending is going.

In looking at that broader economy, though, we usually start by looking at the bond market. I often say, if you want to be a lazy economist—and I realize for some people that's a redundancy (laughter)—but if you only want to look at one thing as to where the economy is going, we find that the yield curve is probably the best single indicator. The stock market has forecasted nine of the last four recessions, but the bond market is a pretty good leading indicator.

A steep yield curve is good for the banking system. That means that their margins are pretty good. They have an incentive to go out and lend. When the yield curve is flattened or negative, the banks, of course, don't have nearly as much incentive and you don't get as much loan creation. As a result, the economy contracts.

Right now we've seen the yield curve come off its peaks. Our expectation is that we're going to continue to see the yield curve flatten, as is often the case when the business cycle lengthens. That's one of the first factors that we see in driving somewhat slower growth. By slower growth, I mean we're going from a 5 percent year-over-year growth rate probably down to a 3 to 3.5 percent growth rate.

One of the other factors we see contributing to that weaker growth rate is oil prices, which affects cash flow into the household sector, particularly for middle- and lower-income households. Gasoline prices and energy prices, obviously, have a big effect on that sector.

One of the things we find rather remarkable, though, about oil prices, and particularly the relationship to interest rates, is that there was a pretty good relationship between the two over the course of the last 30 years, up until about 1998, when we began to see oil prices lift off and interest rates continued to go down. In fact, one of the reasons underlying the mortgage refinancing boom during this past recession, and why the recession itself was so mild from the consumer's perspective, was that interest rates didn't follow oil prices up. In fact, we're all quite fortunate that they didn't. Otherwise, I think we would be in a recession today if we had interest rates that were up around 10, 12, 14 percent, which, again, would be the historical relationship between oil prices and interest rates.

The thing to keep in mind, though, is that the impact of oil prices on the consumer and on the broader economy is much less today than what it was even 10 years ago or 20 years ago. One of the ways that we look at this is that we try to adjust it to a real economic oil price, by adjusting the current nominal price of oil for both inflation and productivity [see Slide 1]. In a sense, we look backwards to see what the relative price of oil would be, given today's productivity and CPI levels.

Slide 1

Slide 1 - Real Economic Oil Price. Oil Prices Adjusted for Inflation and Productivity D
Source: Deloitte Research
Slide 1 - PowerPoint 82 k (PPT Help)

One of the things that we find by making that adjustment is that the actual price of oil is relatively low by historical comparison. It would take a substantially higher oil price to get the kind of shock we had in the late 1970s and even the kind of shock we had in the early 1990s with the first Iraqi War.

The conclusion that we come to is that while oil prices will have a bit of a dampening effect on consumer spending, particularly in non-oil-related areas and on business spending as well, the impact is being way overstated, and it is not really something that should seriously worry us.

One thing that we should be worrying about is real hourly wages [see Slide 2]. We find real hourly wages to be a pretty good leading indicator of real spending. Again, it's one of the factors that we look at when we're trying to measure cash flow into the household sector. What's happened over the course of the last recession—and one of the reasons why consumer spending held up so well—was that real wages actually rose during the recession; again, quite an anomaly compared to past recessions.

Slide 2

Slide 2 - Foundations: Real Wages. Real Wages and Spending. D
Source: Deloitte Research
Slide 2 - PowerPoint 82 k (PPT Help)

Real wages are going down now for a couple of reasons. One reason is we've had a bit of an acceleration in inflation. That, obviously, undercuts purchasing power. We've also had a real sharp increase in benefits. So in a sense, you're getting a little bit of a mix shift from the employer's perspective, away from wages and toward benefit costs. I think that's also depressing real wages.

The impact falls more on middle- and lower-income households, those households that are more dependent on real hourly wages. But it is one of the factors that is going to make life a little more difficult for the Wal-Marts of the world, and might not affect the Tiffanys or the Coaches.

We have seen a sharp rise in home prices. We look at real home prices, and we feel that the wealth effect created by home prices is much more significant than the wealth effect created by the stock market. The reason is that, for most households, the value created when home prices rise is much more accessible than an increase in stock prices. Most households' stock portfolios are in 401(k)s or in pension plans or IRAs. For tax reasons, those are not easily accessible.

Home equity, though, because of the revolution that's taken place in home mortgage refinancing, is very easy to tap into. As a result, the rise and fall in home prices is really quite critical. There's a lot of speculation that we're in a home price bubble. At Deloitte we don't see that as being the case at all. That's not to say that there might not be some local markets where that's the case. I've got a sister-in-law who lives here who keeps telling me how much her home has gone up in price. But notwithstanding a couple of local markets, I think for the nation as a whole that's not the case, for a couple of reasons.

First, the demographics behind the home market are very strong. You've got the children of the Baby Boomers coming into the housing market for the first time, in a sense providing liquidity for everybody who wants to buy up in the market. So buying in at the lower end allows everybody to move up in the market who wants to.

Second, we've got very strong increases in ethnic homeownership, particularly among Hispanics, which we see as being very positive. There's still a lot of room for that to continue to increase, to get to the level of the national average.

Third, we see the Baby Boom generation themselves very aggressively buying second homes. I think the second-home market, particularly over the next couple of years, should be very strong.

At the same time, one of the signs of a bubble in any market is an increase in supply, and it's usually that supply increase that ultimately crushes price. We are seeing a very high homebuilding market, but we're still just getting back to the peak of homebuilding back in 1973, and the population today is about 30 percent higher than what it was in 1973. So it's hard for me to see where you make the argument that somehow we've got this huge supply of housing coming onto the market that is somehow going to crush the demographics behind what is a pretty strong demand.

So we see the home market as being a good market. We see housing being very strong next year, housing prices continuing to rise, and that being a real supporter of consumer spending.

There's a lot of controversy around the job market and the whole issue of jobs. We look at both the household as well as the payroll survey. One of the things that we have found is that the household numbers tend to be a bit of a leading indicator of the overall job market. Household data captures smaller businesses and it captures individuals. Payroll tends to capture middle and larger businesses. If you go back over the last 30 years, you'll find that the household survey turns, both on the upside and downside, a little ahead of the payroll numbers.

I think one of the things that's interesting about this recovery is the dramatic differences between the two surveys. The lag time this time was much greater than any of the previous business cycles.

Some of the research we've done was due to the industry that I work in, the consulting industry. Back during the Y2K phenomena, a lot of businesses went out and hired people who were independent contractors simply because they needed them. Then, post-Y2K, a lot of those people who were on the payroll survey then got flushed back into the household sector—or being counted in the household sector—and went back to being individual contractors. So, in a sense, that shift back and forth somewhat masked the payroll survey and made it appear that it was actually in decline. At least that's the explanation that we've come to, and so far we're sticking to it.

We do see the payroll survey eventually catching up with the household survey. I guess the net of it is, once you get employment growth, there seems to be a certain amount of momentum behind it. I think the biggest challenge that I hear from businesses that we work with is not so much that they don't want to hire. Finding the right people and the right mix of people to hire is a much bigger challenge to them today than it's been before.

This recovery started with unemployment at just about its lowest level of any post-war recovery. I think it's going to be much more challenging to businesses going forward to find people. That, I think, probably more so than demand, is what's going to keep payroll numbers down.

We also look at claims, one of the better short-term snapshots of the labor market and of job growth. The steady decline in initial unemployment claims suggests to us that the labor market is gaining momentum, and that it will be a factor contributing to what will be a pretty good consumer spending environment next year.

[Slide 3] is an interesting slide. If you look at the initial unemployment claims of the last two recoveries, they almost fall right into track with each other. You almost end up with two business cycles that were very similar.

Slide 3

Slide 3 - Tale of Two Business Cycles. Initial Unemployment Claims.D
Source: Deloitte Research
Slide 3 - PowerPoint 82 k (PPT Help)

If you remember back in the early nineties, there was all the talk of the jobless recovery that we had then, and we ended up with pretty good job growth during the 1990s. I think we're really looking at a very similar kind of situation going forward today.

Look a little bit at tax burden. One of the things that we've not been able to find is much of a relationship between tax burden and consumer spending. We did get a real strong reduction in that tax burden on a year-over-year basis through the first couple of years of this decade. There is a little bit of a correlation, a negative correlation, between that and consumer spending, but again, we don't find a very strong one. In some cases, the reason for that is that a lot of the tax benefit went to higher-income households, and their spending isn't income-constrained. As a result, reductions in taxes didn't have that much of a direct impact on consumer spending.

At Deloitte, we put all these different factors, these consumer cash flow factors together, and we've come up with an index. We've been putting this out for a couple of years now. This was largely in response to a question I got from a reporter. I had done a report on consumer confidence that was called, "Why You Should Have No Confidence in Consumer Confidence." My basic argument was that consumer confidence was a lagging indicator for consumer spending, that consumers, when they got depressed, actually went out and shopped. (Laughter.) That was one of the factors that contributed to the recovery. So his question was, well, if it's not consumer confidence, what is it? That led us to try to look at the issue of cash flow.

What you can see is our index that tracks real consumer spending. Cash flow is weakening right now, again largely driven by the decline in real hourly wages and, to a lesser degree, the weakness in home prices that we've had the last couple of months. But still, this points to what should be a pretty strong environment continuing for consumer spending.

In terms of the polarization of income, that continues pretty much unabated. You can see it by looking just into the basic sort of division of personal income, of real personal income growth. We've had relatively modest real wage growth, again driven largely by the improvement in employment over the last 12 months.

But if you're in the business of collecting profits, rents, or dividends, life is pretty good right now. We've had a particularly sharp recovery in dividend income. Some of that reflects the change in tax policy, I think, but profitability also is growing quite strongly, and that also represents pretty good growth—again, one of the reasons why we should be more optimistic about spending at the high end, the Neiman Marcuses and the Tiffanys of the world, and less so for the Wal-Marts.

If you look at the retail business—general merchandise, apparel, and furniture, kind of the core of what people think of as typical retail sales—you have had a pretty sharp falloff since the spring of this year. The last two months, August and September, to a large degree reflected the impact of the hurricanes in Florida and throughout the southeastern part of the United States.

Our expectation is that we are going to see a rebound here into the holiday season. It will be an okay holiday, not a great one. We're forecasting 5.5 percent year-over-year GAFO sales [GAFO represents sales at stores that sell merchandise normally sold in department stores] and actually a little better year next year, somewhere between 6 and 6.5 percent, as employment continues to accelerate and we get a little better performance on real wages.

I think there are a couple of other reasons for optimism, these being the dismal signs. Bankruptcy is one of those. One of the interesting things about bankruptcy is that it's a countercyclical phenomenon. A lot of people think bankruptcy picks up during recessions, but actually it picks up after recessions. The reason for this, from the research that we've done, is that two major precipitating events of bankruptcy, the two largest precipitating events, are divorce and health. Basically, the health problems occur during the recession, but the bills don't come until after the recession, and that causes the bankruptcy.

In many cases, people can't get divorced during recessions, because one of the spouses is unemployed and there's no cash flow to support it. So, once employment picks up, and both spouses now have jobs, they can split. But that split still has all the debts associated with it, and you still end up with bankruptcy.

If you look at the current business cycle, the interesting thing about it is that spike in bankruptcy filings is in the summer of 2001. So at this time we had a pickup in bankruptcy during the recession. The hypothesis that we have about that actually comes from talking to some bankruptcy attorneys. If you will recall, back in 2001 one of the initial initiatives of the Bush Administration was to change the bankruptcy laws to make them somewhat less debtor-friendly. That really created almost a frenzy of preemptive bankruptcy filings.

As a result, a lot of the bankruptcy that we would have had is, right now, kind of out of the way. So, in a sense, our expectation is that we're going to continue to see bankruptcy perform fairly well, again relative to past recoveries, and that won't be the kind of drag on the consumer spending that it has been in the past.

We also see wealth creation continuing. Household wealth is at about $46.8 trillion right now. Consumers actually have the largest cash position than they've ever had, with about $3 trillion in cash. So we see a very liquid household sector on aggregate. Obviously, there was a little bit of asset loss during the recession because of the decline in stock prices but a really strong recovery since about the middle of 2002. Household leverage is also going down. You can see the effects of the stock market decline increasing that leverage, but again, we see the issue of debt relative to households as a whole as not being that much of an issue.

Short term, we see a very strong economy in the southeastern part of the United States from now until the end of the year and really into early next year, as all the rebuilding process takes place. A lot of that is funded by government agencies and insurance companies and state government. We see that as being, again, another positive, another reason for us to be optimistic about consumer spending, particularly if you're in the homebuilding or furniture or consumer electronics business.

One of the other factors that makes us optimistic is really based on a question: Who's going to be around? We have sort of two areas related to age—one is young people. We have this impression of young people as being radical and kind of off the deep end in some ways, but the interesting thing is that young people today are actually quite conservative. A series of surveys were done by The Weekly Reader and by Channel One of kids from the ages of 8 to 18—obviously, not voters. But they voted overwhelmingly for Republicans in this election in straw polls that were taken in secondary schools.

At the same time, we have this view of the elderly, of this 50- to 70-year-old group, as being relatively slow-moving and kind of conservative and not very aggressive in terms of anything that they do. A couple of years ago when I turned 50, a friend of mine, as a joke, signed me up for AARP, and I got my first AARP magazine, which had this cover [with actress Susan Sarandon on it]. And I thought, you know, being 50 is not as bad as it seemed like.


Fifty is sort of like 30 was 50 years ago. If you've seen Sophia Loren, she just turned 70 two months ago, and she looks pretty good for 70. I hope I look that good when I'm 70.


The point of this is that I think the age demographics right now are really strong for consumer spending, particularly for spending on services. It takes a lot of money to look like Sophia Loren does and a lot of effort, both in terms of goods as well as services. So this is a group that is at the peak of their earning cycle. They're also, I think, going to be at the peak of their spending cycle.

Last thoughts: I think the economy is actually doing quite well. It always kind of scares me to be optimistic as a practitioner of the dismal science, and it doesn't happen very often, but I do find myself at this point in time being pretty optimistic. I think the consumer, the household sector, has got a lot of cash flow going into [the coming year]. Our research shows that cash flow is what ultimately drives spending. I think that cash flow will continue to be quite strong.

The housing market remains quite good. We see the labor market continuing to get better. If we can get a little bit of a break on the cost of benefits, that will help real hourly wages, and that should produce what we see as being a pretty good consumer spending environment next year. Again, we're looking for real spending, probably on the order of 3 to 3.5 percent.

One thing I do ask audiences, since we do deal in consumer spending, is that when you get done here, please go out and buy something, because I've got a lot of clients who could use your business, and my forecast always can use some help.


Thank you.

MR. BROWN: Please join me in thanking Carl.


MR. BROWN: I would like to see if we just have a couple of questions to direct toward Dr. Steidtmann specifically, before we move on to the next panelist. Does anyone have one they want to direct to Dr. Steidtmann? Rob?

MR. STRAND: Carl, I was looking at your index along with the consumer spending, and it seemed to be coincident. It moves directly.

MR. STEIDTMANN: Yes, in the last six months it's become much more coincidental. When we go back and look at it, particularly during the eighties and nineties, it led by three to six months. So it will be interesting to see how it continues to operate, but you're right, particularly in the last year, it's been much more coincidental.

I think a reason for that is that one of the variables that goes into it is tax reduction. I think part of it is that we didn't get the kind of stimulus that you normally would from what appears to be a large aggregate tax reduction to the household sector, largely because it went to higher-income households.


UNIDENTIFIED SPEAKER: Dr. Steidtmann, I was wondering if you have any comments on what you think the stock market might look like in the next year. I was thinking in terms of the household demographics.

MR. STEIDTMANN: Right. Well, one group I work with at Deloitte is high-net-worth individuals and I get that question all the time from them. The thing I follow is the Fed model, which is the relationship between 10-year Treasury bond rates and the S&P 500 PE ratio, and kind of the inverse of that.

Looking at that ratio, we're at about a 25-year low right now, meaning that stocks are undervalued. You know, the last time we were at this level was the summer of 1980. So, to me, I don't know whether the stock market is going to go up next week or next month, but, relative to Treasury bonds and relative to the last 25 years, stocks seem to be relatively undervalued.

Now, three things can happen to bring that valuation back up. One is that interest rates could rise. That's always a possibility, and actually something that I think probably will happen; long-term rates will go up.

The other one is that earnings could fall. I guess I have a harder time with that taking place, given the momentum that we have in the economy, and particularly the focus of Fortune 500 companies on productivity growth.

Or the third thing that can happen is that prices can go up.


UNIDENTIFIED SPEAKER: You said that one thing slowing the rise in wages is rising benefits. But fewer employers have defined benefit pension plans, and everybody I've talked to has said their health plan is getting stingier.

MR. STEIDTMANN: Well, I think they don't have defined benefit plans, but they still have defined contribution plans, which may be putting more of the burden of the health care cost onto the worker—but those costs are still going up very rapidly. I think benefit costs are up something like 8 percent from a year ago. So we've got a real sharp rise in benefit cost. Again, our hypothesis is that that's cutting into wage growth.

MR. BROWN: We'll get another opportunity in a few moments to ask Carl some more questions with the panel, but for the time being, let's move on to the next presentation with Allen Grommet.

MR. GROMMET: Thank you. Richard, your opening description of me before reminded me of how much in this last week I was humbled. I have a girlfriend that I was trying to impress, so I mentioned to her this week that I had gone to this meeting in New York with 25 of the top economists from the area to hash over the forecast. Her comment back to me was, "Hmmmm. Well, what number are you?"


With that deflation, I will talk about American consumers. I would like to focus a bit about the consumer economy, just as Carl talked about. Actually, I find myself very much in agreement with most of the things that Carl has mentioned in regard to the consumer economy and where we are going. But I also want to talk more on consumer attitudes, a little bit on how it's affecting the trends in consumer credit, and then some future policy changes, such as the bankruptcy legislation and a few things like that that are pending.

Talking first about the consumer economy, a cartoon taken from Business Week a couple of years ago is very descriptive of the situation that we have had for the last several years, where consumers have really been carrying the load [of the economy]. It was only in the last year that businesses came along and contributed to the growth. We are seeing that consumers are not on their knees at all; they're actually up. They're still trying. They're still helping the economy. So, to that extent, even though it has been a long road for consumers, I would see them as, on average, continuing to contribute to the recovery.

Another look at GDP: You can see that the recession ended or the recovery actually started in November of 2001. It was a little bit of a rocky road, and then, finally, almost a year-and-a-half later, it really started taking off.

We had 3.3 percent GDP growth in the second quarter of 2004. It went to a 3.7 percent rate of growth in the third quarter. So we're seeing that the recovery is moving along finally, but much of this growth has come from productivity rather than from employment, which is the point that Carl just made.

The unemployment rate came down to below 4 percent, and then, when the recession hit, it moved up and hit a peak of 6.3 percent about a year to a year-and-a-half after the recession ended, and is slow to work its way down.

One of the statistics that was quoted a lot [in 2004] during the Presidential campaign was about the loss of jobs. Typically, you would see that you would recover all of those jobs within two years after the start of a recovery. Now we're three years into it, and we still haven't recovered all of those jobs—yet another way of looking at this point about how slow employment growth has been in this recovery and that, obviously, affects consumers a lot. Incomes are even more important for low-income consumers, which is another point that Carl made.

We have seen productivity continue to grow, although it has moved up and down a little bit. More recently, in the second quarter, it was measured as 3.9 percent and in the third quarter at 1.9 percent. Most economists, including some from the Fed, believe that on average we're seeing productivity at about 2.5 percent. This is clearly a whole percentage point greater than it used to be prior to the acceleration that we saw in the nineties.

Looking at the Consumer Price Index, particularly the core inflation rate, which is staying very low, below 2 percent, the prospects are that it is probably going to continue to stay low, although it may work its way up just slightly. One of the things that we're seeing, of course, is the dollar losing some value, which gives an opportunity for domestic companies to raise prices with a little bit less international competition.

We've seen energy prices recently going up. Certainly they're not falling back to the levels economists forecast six months ago; they would have been expecting less than what we're expecting now. So energy is the big threat, but, in general, consumer prices are still staying well under control and are probably not going to be driving policy in a major way.

As for personal consumption expenditures, more recently it's become more erratic. I think that's a bit troubling. I don't know what that means. In August it was zero, but subsequently redefined to a minus 0.2 percent, and in September it was reported at a plus 0.6 percent. Again, this up-and-down movement makes it difficult to judge.

I suspect that a lot of this is due to reporting problems that I believe we're having now. Some of it is due to automotive sales, which have had stimuli that were on one month, off [the next], on and off again. Particularly, the September sales number was almost end-of-year sales in the automotive industry. We can say that the strong spending months are related to special incentives of some kind that are keeping the consumer going.

Income and spending are being compared. We have seen some modest growth in real disposable income, but certainly nothing exciting. It's often less than the rate of spending. We all know that, without incomes growing very fast and spending on average staying pretty strong, it's driving the savings rate pretty low. I believe for the month of September the savings rate actually came out to 0.2 percent, well below the 1 percent trend that it looks like we're on now.

I can remember back when I was with the House Budget Committee in the late seventies, we were talking about savings rates between 6 and 10 percent on a regular basis. We haven't heard of those levels for quite a while. Certainly, if consumers would go back to those rates, then we would really, I think, see a move into a more recessionary period. Consumers wouldn't be holding up the economy like they have been doing. But the trend seems to be for the savings rates to stay low. It's probably driven by a lot of easy credit, not only by low interest rates, but we all know about credit card applications that have been pushed toward everyone. All of those measures, I think, are helping to push to keep the savings rate very low.

As for interest rates, the fed[eral] funds rate is now back up to 2 percent. Most of the forecasts that I know of among economists say that they are expecting the fed funds rate to be up to between 3 and 3.5 percent a year from now, by the end of next year. There are going to be eight meetings of the Fed in the next year. So that means that even at the minimal one-quarter rate, we wouldn't expect them to raise the rates at every meeting. I think that's key. The Fed will have to explain inaction at some of their meetings. They don't want the market to be surprised.

But, in any case, it's likely to move up at less than the pace of an increase at every meeting. I suspect that, even if the yield curve stays flat, it's going to mean that there's going to be a significant increase in longer-term rates, which are more likely to affect housing and some of these other areas than perhaps some of us have been expecting.

It's very difficult to forecast in this area. As Carl showed, there are a lot of times when long rates will stay flat. This yield curve has flattened a lot in the last year, but it's still at a point where it could flatten some more. But, with some rising inflation pressures and a few other things, it's still possible that we would see the spreads even turning around a little bit the other way by the end of next year. So I don't want to suggest that I know with any certainty where it is going, but we're concerned about the effect of interest rates going forward, and it's not likely to get better. The rising rates will ultimately affect the housing market.

I also looked at consumer attitudes. Consumer confidence—using the measure by the Michigan Survey—was at 105-110 in the latter 1990s. In this decade it's moved down to the mid-nineties, around 95. In the last two quarters, it had moved down a little. In the last month, just before the election, it moved down significantly, from about 96 in September to 91.7 in October. But all the preliminary indications are that the mid-month number moved back between 95 and 96 for November.

Using the weekly ABC Money Index, which is one I have more personal experience with and which measures on a weekly basis, that index has been showing a recovery since the election; I think that was just pretty much an election phenomena. But it's now moving back to the same roughly mid-ninety levels, which we can look at both ways. The good side is that at least consumers are hanging in there; their confidence levels are staying up. The bad side of it is that we do not have a really robust consumer confidence level. We're not above 100. The most recent changes in the ABC measure indicate that the increase occurred because fewer people were discouraged about the future. It's not that more people were expecting better for the future.

On consumer credit, we at Cambridge do a survey every month, by telephone, of 800 to 1,000 people nationally; it's a randomized sample of people, a new sample every month. We measure what people or consumers are expecting to do about changes in credit in their own household, if they plan to use more or less credit. We release these results the same day that the Federal Reserve announces the G19 report on consumer credit. But, in the beginning of December, the Fed will be reporting numbers for October because they're collecting it as they can. We'll be reporting the results for December.

Usually, we have found a better correlation on a not-seasonally-adjusted basis, which is a little troubling. But it's just now that we're going to have three years of data to do our own seasonal adjustments. If you look from last March through November, we see a consistent level of planned credit use. I think this is key, because we know income growth is going to be slow. We're not seeing that big an improvement in employment yet. We know that the savings rate is already low, so there's not much room for consumers to tap that source further. So credit is key, and it looks like they're going to continue to want to use credit.

If we look at this on a seasonally-adjusted basis, you'll see that one of the problems in comparing them is that the Fed's seasonal adjustments are not working very well for them in January of the last two years, and it sort of throws off the comparisons here. Often there are lags in the data. One of the interesting things is, if you were to go back even on a not-seasonally-adjusted basis, you'll notice how the numbers correlate three years ago a whole lot better than they do in recent years. That's partly because of the corrections that the Fed is constantly making in these numbers, as they get more of the data clarified. Fortunately, we have found that they have been getting closer to what our survey numbers are showing. There's always a lag until they get all the numbers together. When we are looking at the Fed's numbers as they come out each month, they are erratic and we can read too much in them; that's the main point I would want to make.

We break down our results demographically. It's very interesting to make comparisons on how people are using credit if they're in a lower-income group or a higher-income group. This is helpful in explaining the correlation between using credit and consumer confidence. Lower-income credit use has been steadily growing over the last three years in our survey, as you can see [in Slide 4]. If you look at higher income, or even middle and higher income, it has not been growing; it's been much flatter.

Slide 4

Slide 4 - CCCI Index for Under $25k Income.D
Source: Cambridge Consumer Credit Index
Slide 4 - PowerPoint 1,376 k (PPT Help)

In fact, when you look at individual time periods, one of the interesting things about our survey is that low-income people use credit because they have to. Higher-income people use credit out of convenience. Higher-income people will use more credit when things are going well and they feel more confident about the future. Therefore, it's more positively correlated with consumer confidence.

The lower-income people can be going in the completely opposite direction. Things can be going bad in the economy, when you go into more of a slowdown and recessionary period, but low-income people can be using more credit because they have to in order to get by. That's why it's key to separate out the income groups, because they don't always go in the same direction.

Every year in March we ask the same question of the people who say that they're going to use more credit. We've asked them, "Why are you [going to use more credit]?" And the two response choices are, "Are you using it because you're more confident of the future, or because you need it in order to get by?" Two years ago, in March 2003, 44 percent of the respondents who were planning to use more credit said they were using it because they had to, to get by. This year, this last March 2004, it went up to 49 percent, a 5 percent increase. So it's showing that there's pressure building in the lower-income strata.

As for trends of consumer credit—we all know the kind of pressures that consumers have been under to use more and more credit, seemingly on a treadmill. It's why we're seeing the savings rate so low.

Using some of the newer calculations by the Federal Reserve on federal obligations and comparing the monthly expenditures to personal disposable income, you see the upper line here is representative of the home renters, and the lower line of homeowners [see Slide 5]. Most of the increase in monthly expenditures has been among renters. That's where the pressure is. There has been far less of an increase among homeowners.

Slide 5

Slide 5 - Financial Obligations RatioD
Federal Reserve, Cambridge Consumer Credit Index
Slide 5 - PowerPoint 1,121 k (PPT Help)

This graph [in Slide 6] breaks that down a little further. The upper line is the same line as on the previous graph. Mortgages are on the middle line here, and you'll see that's what's been increasing in the last several years, whereas credit cards and non-mortgage credit to consumers [shown as consumer debt on the lowest line] has been trending downward a little bit.

Slide 6

Slide 6 - Homeowner Financial Obligations RatioD
Federal Reserve, Cambridge Consumer Credit Index
Slide 6 - PowerPoint 1,120 k (PPT Help)

So, that's sort of the positive news. Consumers are trying to hold back on nonmortgage credit, but they are using more and more mortgage credit. Some of it has been refinancing, as we've talked about before, which shows more in the mortgage debt category on this graph.

In a comparison between income and housing prices, income has grown about 6.8 percent since 2000, but housing prices have gone up 30 percent. This wouldn't have happened except for the lower interest rates which allowed homeowners to finance larger mortgages with lower or the same payments. There's certainly the question of whether this trend is going to continue at the same pace. Even if interest rates level off, it would tend to suggest some slowing in new mortgages and total consumer credit.

As for credit card delinquencies, we're back to about average levels, looking back over roughly a decade. Delinquencies are below the highs from 1997 to 2002, and that's the good news. We hear a lot of people talking about that, but it's still at an average level. It's not really at a low level.

Charge-offs are still at a pretty high level historically, but a lot of the news stories have only been reporting a comparison over the last several years. If you look at that peak in 2002, that was rather abnormal. To show a significant improvement from that time is really, I think, not describing the correct story here, but charge-offs still are at a pretty high level. It's roughly, as I'm remembering the numbers, about 6.2 percent in the prime market, and about 17 percent for the subprime level. Again, there's a huge difference in the charge-offs in which group we're really talking about.

Just looking at the number of credit offers that I've seen lately, it looks like the offers slowed up a little bit, that a lot of the subprime lenders are not offering at quite the pace that they were earlier, but it certainly hasn't been difficult for consumers to get additional credit.

As for future policy changes—one of the things we have pointed out in this discussion is the difference between upper- and lower-income people. On average, consumers are doing fine. I expect them to continue to do fine, to contribute to the recovery. The problem is going to be the lower-income people. If we compare incomes, for instance—the upper 10 percent of incomes represented 33 percent of all income in 1980. Now, as of 2000, it represents about 44 percent. It's hard to describe the lower end; I'm describing the upper end to show, obviously, the differential on how the lower level has fallen off compared to the upper level. If you look at it in terms of wealth, the upper 1 percent controls about 40 percent of the wealth or net worth. That, too, is growing.

Let's look at the lower-income group and focus on the kind of pressures that we're likely to see. We're all aware that there's been some bankruptcy legislation that's been pending in Congress for a number of years. It's been held up for a number of reasons, but I think everyone is expecting more attention to be paid to that soon. This legislation earlier had been prompted primarily by large lending financial institutions wanting to make it more difficult for consumers to declare bankruptcy. One of the ways of doing that was to require consumer credit counseling before they could declare bankruptcy. But the problem is that the legislation specified that the counseling was to be provided at no charge. So people in our industry of consumer credit counseling are finding that a little interesting and want to understand who's going to pay for this.

We have set up kind of a "Perfect Storm" situation right now, when you're looking at the lower 20 percent by income of consumers. The IRS in the last year has been coming out against the counseling industry by reassessing the non-for-profit status of all companies in this business, and it affects all of them, not just our firm. Most of these companies were small companies that had some sponsorship from local counties, but two-thirds of the funding for these credit counseling companies comes from the lending agencies. There would have to be a fair payment back to the credit counseling companies to help them in setting up these payment plans, so that consumers could avoid going into bankruptcy.

Hopefully, you can see some of the obvious conflicts of interest that might arise from this business plan. As a result, the IRS is saying, wait a minute, if you're really representing the financial companies that are making the loans, we're questioning your not-for-profit status. That's one pressure. Another pressure is that the legislation itself would require credit counseling without providing for payment. Therefore, it's going to make it difficult for consumers to get that counseling in order to qualify for bankruptcy. Then the third factor is the fact that most states require any firm in this business to be a not-for-profit company. But it doesn't work.

Somehow this process is going to have to be reconciled over the course of the next year or so. I think this new legislation will probably help with that. As a consequence, though, consumers could be caught, and the danger is not being able to work out of a bankruptcy situation. It will be difficult for financial businesses to operate until the legislation is, I think, worked out a little bit clearer.

MR. BROWN: Allen, thank you. We may have time for just one or two questions before we pass to the next presenter. Do you have a question for Allen?

UNIDENTIFIED SPEAKER: Yes. In your discussion of spending by income groups, do you have an idea of what share of total consumer spending is done by lower income versus middle income versus upper income?

MR. GROMMET: Do I have numbers off the top of my head? No, I don't have good numbers. Obviously, it's low. That's why worrying about the lower 20 percent isn't going to give you a good picture about what's going to happen to the economy as a whole.

The pressures that I was talking about are what is going to happen in courts and legislatively that will make it difficult for low-income consumers. That won't throw the economy into a recession or a tailspin, but it will make it difficult for financial institutions, the FDIC, and others that have to work with trying to recover some of those losses.

I would be happy to get some of those numbers.

MR. BROWN: Any questions for Allen? Yes?

UNIDENTIFIED SPEAKER: I was wondering, in looking at the lower-income people, whether you made any attempt to distinguish between people who, in terms of their lifetime income, are mostly higher income, but they're young and just starting out. They may be using credit because they need to use it to get by, but they also know that they're making the kinds of investments that are going to raise their income later on. Have you made any attempt to separate out those people in terms of either their age or their education, and look at how they use credit differently?

MR. GROMMET: We break out the results of our monthly surveys not only for the three questions in our index, but for a special question that we ask every month that might deal with anything. I think two months ago it was about automotive purchases. But all of the questions are broken down by male/female, by broad income categories, by age categories, education, rural/urban. Those are some of the main ones.

When we asked the question on automotive sales, the cross-index showed that consumers who were young but making high incomes usually bought cars with monthly payments over $500. They weren't saving it by buying cheaper cars. Perhaps the best way to measure what you are asking is to look at education loans or student loans by income, but relating this to future income would require a different type of survey. I would suggest that auto loans will not increase their income later, but education and student loans would be the best kind of investment that would raise their income later on. Student loans are increasing at a significant rate, but so are low-income student credit card accounts. Savings usually start happening as people get into their thirties and forties, if they save at all.

MR. BROWN: I think savings rates is an issue that we would like to explore further when we get to the open panel, but I think for the time being let's move on to the next panelist. It's said that there are only two certain things in this world, and Dr. Leonard Burman is going to talk to us about one of them.


MR. BURMAN: I can actually talk about both.


I think I'm the outlier on this panel. First of all, I don't have any cartoons. I didn't realize they were expected.


Those cartoons were great. I did do one presentation once where I had sound effects, like explosions, but I don't have those either.


You'll have to imagine the cartoons and sound effects that go with these slides.

The other thing is that my work doesn't focus on the consumer or businesses directly, but it focuses on federal tax policy that, obviously, has a lot of implications for consumers both in the short run and in the long run. So, basically, I'm going to give you an overview of what's happened in tax policy over the last four years, and then some speculation about what's coming up and what the implications are.

President Bush promised to cut taxes, and he's been spectacularly successful from that perspective. There has been one major tax cut a year for the last four years, and, actually, there's even one left off of this chart, which was a business tax cut. It was, technically, revenue-neutral. It was passed just before Congress went home for the elections.

In 2001, there was a $1.3 trillion tax cut which basically did everything the president promised to do in his first campaign. In 2002, there was the Job Creation/Worker Assistance Act, which was supposed to be a fiscal stimulus. Interestingly, though, the thing that was supposed to spur the economy along was the smallest of the four tax cuts, $43 billion. In 2003, there was the Jobs and Growth Tax Relief Reconciliation Act, JGTRRA, another $350 billion in tax cuts. Then in 2004, they filled in all the gaps that were missing from the first three tax cuts with the Working Families Tax Relief Act. The grand total for those four tax cuts was about $1.9 trillion over 10 years, including interest. When these things have all played out by the end of the decade, it will add up to about $2.5 trillion of additional debt.

This is an overview of the 2001 tax cuts: The main element was tax rate reductions. The top rate was cut from 39.6 percent to 35 percent. The other rates were cut as well, and there was a new lowest tax bracket—10 percent.

There was so-called marriage penalty relief, a phenomenon that was discussed a lot during the campaign. When people get married, they can end up paying more taxes than they would as two single people. The marriage penalty relief was accomplished by increasing the standard deduction for couples, so it's twice what it is for singles. This increased the size of the 15 percent bracket so that it was twice as big as it was for singles. The consequence of these provisions is that, if marriage changes people's tax status at all, it actually lowers their taxes rather than increases it. That's called a marriage bonus.

The tax cuts phased in an increase in the child tax credit from $500 to $1,000. They also made a portion of the credit refundable, meaning that for some low-income families, they could get the credit even if they didn't have tax liability. Now, this is where death comes in as well as taxes—they phased out the estate tax. If you're lucky and die in 2010, your heirs don't pay any tax at all. In 2011, just like everything else in this tax bill, it all comes back, like Freddy Krueger. It also phased in higher limits for contributions to individual retirement accounts and pensions. The pension limit for 401(k)s before the legislation was enacted was $10,500. It phased in an increase up to $15,000, and then it will be indexed for inflation after that.

One of my favorite provisions of the law was this thing called "fairness for women" in the description of the legislation. This is a provision that allowed people who are 50 and over to contribute up to $5,000 more to their 401(k) accounts. The humorous element of this, of course, is that the vast majority of people who were at the limits for contributing to 401(k)s were men, because men are paid more than women, and women tend to spend time out of the labor force. So it's really fairest for men.

Then the IRA limits went up from $2,000 to $5,000. And in 1997 a new kind of IRA was created, a Roth IRA, which allowed after-tax contributions. But, instead of the traditional accounts where you got a deduction and then you pay tax when you take the money out, these Roth IRA accounts are tax-free forever.

There is also a Roth 401(k), which works similarly. If your employer sets it up, you can make contributions with after-tax dollars, and then the money in those accounts is tax-free forever. That actually has long-term implications for revenues we'll be getting 20, 30, 40 years from now as current workers are retiring and more and more of their retirement income is tax-free.

There's a new savers credit, which is a tax credit of up to 100 percent for contributions to IRAs and 401(k)s for low-income people.

There's a host of new education tax incentives. I joked when I went through all the complexities involved with these education incentives. One was called the HOPE credit. Another one was called the Lifetime Learning Credit, and there were various others. I said the only thing that was left out was the Hope to Learn How to Do Your Taxes Credit.


Everything was phased in very, very slowly, and then the whole thing sunsets at the end of 2010, which means in theory it all comes back in 2011. That was technically to save money. Well, that wasn't really the plan, and the legislation in 2000 and 2004 basically filled in all of that. Almost everything that was supposed to phase in slowly was accelerated, so virtually all of it is fully effective now. There are a few exceptions. The pension increases are still phasing in as well as some of the smaller provisions.

In 2003, as mentioned, there was a cut in the tax rates on capital gains and dividends. The top rate on ordinary income was 35 percent, and that applied to dividends as well as wages and salaries and interest. Congress said that dividends should be taxed the same as capital gains, which in 2001 were subject to a top rate of 20 percent; now the top rate is 15 percent. That provision actually is eliminated after 2008.

There are some temporary business tax incentives. The most notable of those was a thing called bonus depreciation that would let companies write off half of the cost of new investments over a temporary period. The idea was to encourage people to make investments now rather than later and to try to get us out of the recession. Interestingly, that provision was extended by the 2003 legislation. If your goal was actually to get people to speed up their investments, that probably wasn't a great idea. Currently, it's set to expire at the end of this year.

And then something I need to get back to is a provision called the Individual Alternative Minimum Tax [AMT], which is a nightmare of complexity and a bizarre story of tax policy. This is a serious problem and, as with all serious problems, Congress decided to push it down the road just a little bit and deal with it later. Currently, there's a temporary patch on the AMT that expires in theory at the end of 2005.

These next charts, I'm not going to go through them. I've gone through the main points. But in your handouts are a lot of details about how the different provisions work. If you get confused when you're reading through all these things, it gives you a good sense of the complexity that's been introduced over the last few years.

The purpose of these tax cuts, well, the initial purpose of the tax cuts was to … I can't remember, but … (laughter) … I think it was to get President Bush elected, and that worked. Then after he got elected, it was clear that we were in a recession. So the main focus became fiscal stimulus.

This chart [on Slide 7] shows the size of the tax cuts year by year over the next 10 years, according to estimates by the Congress Joint Committee on Taxation. What you can see is that, actually, in 2004, there's quite a lot of tax stimulus in the economy. It's $280 billion or so. The combined effects of the 2001, 2002, 2003, and 2004 tax cuts were actually even a little bit more than the [incentives] that were enacted in the business tax package a few weeks ago.

Slide 7

Slide 7 - Fiscal Stimulus from Tax Cuts Cost of 2001-2004 Tax Cuts, in $BillionsD
Source: Joint Committee on Taxation, 2001-2004
Slide 7 - PowerPoint 80 k (PPT Help)

The size of the tax cuts gets smaller over the next few years. Some of the cuts are temporary—the AMT provision, for example, is temporary and some of the others phase out—but it's a substantial amount of tax cuts.

MR. GROMMET: How do you measure fiscal stimulus related to the deficit on these numbers?

MR. BURMAN: Well, in total, these tax cuts amount to about 3 percent of GDP.

MR. GROMMET: It's part of the deficit now?

MR. BURMAN: Yes, right. A number of things have contributed to that, but the tax cuts have been a very significant factor. Of course, you could also talk about whether this is an effective way to create fiscal stimulus. Both of you mentioned that with these tax cuts, most of the benefits go to higher-income people who are the ones least likely to spend the money they've got.

This is the combined effect of the 2001 to 2004 tax cuts. In 2004, almost two-thirds of the benefits go to the top 20 percent of taxpayers, and almost half of the benefits go to the top 10 percent. Some people have argued that it makes sense that the largest tax cuts go to people at the top because they pay a disproportionate amount of the taxes. But even as a share of after-tax income, the tax cuts are regressive.

For the top quintile, the tax cuts amount to 3.2 percent of their income. In the middle three quintiles it's only 2.4 percent, and for people at the very, very top, the top one-tenth of 1 percent, tax cuts are 4.1 percent of their income.

You can also see what it does to the overall federal tax burden. It goes from 20.1 percent overall before the 2001 legislation to 17.9 percent right now. Again, the biggest cuts on average that affect the tax rates are at the very, very top.

Actually, I do have a cartoon that goes with this, but it's not in your packet. There's a wonderful paper called, "Homer Gets a Tax Cut." It tries to explain people's disparate views about tax policies. And the cartoon shows Homer Simpson and Mr. Smithers, his boss. Smithers has got these big, big bags, money bags, which represent his tax cut, and Homer's got a $10 bill in his hand, and Homer is jumping up and down and giving high fives.


Next time I'll have my cartoons in advance.


The big issue that's being swept under the table is this issue of the Individual Alternative Minimum Tax. This was put in place in the late 1960s and aimed to make sure that high-income people pay some tax.

The AMT has a broader measure of tax base. You add back in a bunch of things that are deductible under the current tax system. Certain kinds of tax-free income have to be added back in. Certain kinds of deductions are not allowed. There's a completely different tax schedule.

The AMT is very, very poorly designed. It wasn't indexed for inflation, which most of the regular tax system is. So every year people's average AMT liability goes up just because of inflation. You can't take your children's deductions against the AMT. State and local taxes are not deductible against the AMT. The corporate tax bill includes a temporary provision that allows people to take sales taxes as a deduction against the income tax. If you're on the AMT, you're not going to be able to take that either. There are a number of other bizarre special provisions that can really create very odd and undesirable tax consequences.

[There was a projection done as to] what was going to happen to AMT taxpayers even if the 2001 legislation hadn't been enacted. And it was actually kind of alarming, as 15 million people were going to be on the AMT by the end of the decade.

Well, then, all of these individual income tax cuts cut regular taxes, but they didn't do anything about the AMT, except temporarily. And since you pay the one that's higher, people who are in situations where their regular tax is above the AMT now find their regular taxes below the AMT. Once you're on the AMT, you don't get any additional tax benefit from this legislation.

In addition, the AMT is really complicated. You've got to figure out your taxes two different ways, and then you get stuck with the bill at the end.

You can see that the effect of this legislation over the near term, until 2005, was actually to cut the number of taxpayers on the AMT, because the Congress temporarily raised the exemption level for the AMT, but they didn't do anything in the long run. Projections show that, by the year 2010, when the tax cuts are fully phased in, about 30 million families will be subject to the AMT, including virtually all upper- and middle-income families with two or more children.
It's simply not going to happen. But that raises an issue, because we're counting on $600 billion or so of revenue from these people from a revenue source that's politically unviable. It doesn't really make any sense, either, as a matter of policy.

In short, these are the new proposals. The president has proposed, and the majorities of both houses of Congress would favor, making the 2001-2003 tax cuts permanent. The president has also proposed tax reform. I'm going to get back to that in just a few minutes. He's also proposed to reform Social Security, which would add some additional short-term challenges for the deficit, possibly for the long term as well.

This chart [on Slide 8] shows the costs of these different components. Making the 2001–2003 tax cuts permanent [as shown in the first column] would cost $2.6 billion. This [column] doesn't have the 2004 tax cuts.

Slide 8

The next [column] just shows permanent extension, including the things that were enacted in 2004, plus the cost of fixing the AMT. And that would add another $1.9 trillion to the deficit over the next decade, unless it's paid for by other tax increases, which is probably unlikely

So the bottom line, [the figure in the] lower right-hand corner, is that the combined effect of all these tax cuts is $4.5 trillion over the next decade, and permanent extension would cost trillions of dollars every decade going forward beyond that. You might think that this isn't a very big problem, but obviously deficits are not only caused by taxes, they're also caused by spending. A lot of the rhetoric has been that what we should do is get spending under control. Well, that's going to be exceedingly difficult.

This [bottom] line [figure of $4.5 trillion] shows how much you would have to cut spending to balance the budget in the year 2014, assuming the tax cuts are extended. Other discretionary spending would have to be cut by 75 percent. Basically, that includes all non-defense, non-homeland security, non-international spending, assuming it all had to be done on the discretionary side, would represent a 75 percent cut. If you were doing it all through, say, cuts in Medicare, you would have to cut Medicare by half; you would have to cut Social Security by 45 percent.

This chart [in Slide 9] was prepared by my colleague, Gene Steuerle. This is a chart that I love. It also makes adjustments to spending. The previous chart used the Administration's assumptions about what was going to happen to spending over time, which assumed basically that the Iraqi War is over pretty soon and we stop spending money on defense really quickly. Gene makes some other adjustments.

Slide 9

What this chart shows is that if you adjust tax receipts for extension of the 2001-2004 tax cuts, you fix the AMT, you adjust spending for growth in entitlements and defense, that by the year 2013 there's basically nothing left for anything else unless you finance it through deficits. Basically, the conclusion that a lot of us reach is that you can't deal with this through spending cuts alone.

This chart shows the effect of these tax cuts on tax receipts, and you can see that the effect of extending all the tax cuts, plus fixing the AMT, would add over 3 percent of GDP to the deficits. Obviously, this isn't a long-term projection. There are a lot of other things that are going to happen, but these things are significant.

Now, people argue that running deficits at the rate of 3 percent of GDP is maybe not a big deal, that we're a strong economy; we've run deficits bigger than that in the past. Well, it wouldn't be a problem if this were 1970 and the Baby Boomers were all starting their careers. The problem is that [Baby Boomers] are all getting near retirement age now, and that's going to put immense demands on the budget.

[There] is a chart showing government projections of what will happen to Medicaid, Medicare, and Social Security. Medicare and Social Security are entirely programs for senior citizens, and growing portions of Medicaid are paying for nursing home care for seniors. By the year 2050, these three programs together will take up something like 18 percent of GDP, according to these projections. That's what we've spent on the entire government on average over the last 50 years. This is a problem. [That] chart shows … Gene Steuerle's estimate of the cost of the new Medicare drug bill, which adds over a trillion dollars a decade to the cost of Medicare and the higher cost of defense. It's not clear what the implications are to this in the short run. Basically, it depends on when the bond market starts to get concerned about this.

Over the long run, unless we actually deal with these problems, this clearly will have a negative effect on the economy. And that is not saying how you should deal with the deficit problem, but the policies so far. Grover Norquist has said he wants to have a tax cut a year for the next four years, and he expects that to happen; he is the official "Svengali" of the Bush Administration, so I assume that his projections are right. It's a concern.

Can we talk about tax reform just briefly? Do I have time for that?

MR. BROWN: Yes, by all means.

MR. BURMAN: Okay. One thing the president has called for is tax reform, and I think he's right on the mark on this: that the tax system is way too complicated. People think it's unfair. It creates all sorts of opportunities for tax avoidance and tax evasion, which are economically inefficient. If people are spending money to take advantage of tax breaks rather than spending money because it's the best investment opportunity, that's a drag on the economy. So there are all these good reasons to reform the tax system.

Now, the president said that he wants tax reform to be revenue-neutral. He wants it to be progressive. He cares about the distribution of the tax burdens, and he said that at least one of the options for tax reform ought to be reform of the income tax rather than, say, moving to a flat tax or a consumption tax. He said he will empanel a commission, a panel of experts, to make recommendations by next spring.

Will tax reform happen? I think probably not. Revenue-neutral tax reform is very difficult. Changing the rules in a meaningful way without cutting taxes means that you have to raise taxes on millions of people, and the losers are always more vocal than the winners.

It's possible that the President could combine tax reform by, say, extending the 2001 through 2004 tax cuts, take some of the money that was going to be used for those tax cuts and use that to come up with a tax cut that would provide overall reductions for most people, to sort of buy off the losers. But there's no indication that that's what he's talking about. Tax reform proposals are probably going to take a long time to come together, despite the call for them to be on the table by spring, and the president has said that extending the 2001 tax cuts is a high priority.

There was a revenue-neutral tax reform in 1986, and that's actually what brought me to Washington to work for the Treasury Department. But the way that worked was that the losers were corporations, and one of the great things for policy is that individuals don't understand what all the economists do [understand], which is that actually people pay taxes, not corporations.

So there was not a huge hue and cry against increasing taxes on corporations, especially given that all the corporate CEOs got big tax cuts from the legislation. But that's not on the table now. We don't have an investment tax credit to repeal, and it's unlikely that the president would propose big tax increases on businesses.

An interesting question is what the president has in mind when he talks about tax reform, and there have been a lot of signals that he's thinking about something like a consumption tax or a flat tax. He said that a national retail sales tax is an interesting idea that ought to be explored further.

The Economic Report of the President, produced by his counsel of economics advisors [CEA], has made different arguments for the last couple of years that would favor a consumption tax. Last year the CEA said that taxes on capital are ultimately borne by labor, which means that when we look at tax burdens by income, we're really missing a lot, because a lot of the taxes paid by high-income people on interest and dividends and capital gains are actually ultimately borne by workers who get lower wages. I don't read the literature the same way, but there is at least one article that is consistent with that. In 2003 [the CEA] argued that consumption may be a better measure of ability to pay than income. There are other things, too. There have been tax expenditure lists that have said maybe you ought to look at the normal tax system as a consumption tax rather than an income tax.

What's actually been happening over the last few years is what's been called the "five easy pieces" strategy for tax reform, which is to just exempt more and more capital income from tax. A consumption tax would basically just exempt all capital income. It also would not allow deductions for borrowing as well, which hasn't happened.

But we have made a number of steps in that direction: the big increases in the contribution limits for IRAs and 401(k)s, the cuts in tax rates on dividends and capital gains. The major new tax policy to try to rein in health cost inflation is a thing called Health Savings Accounts, which are basically turbo-charged IRAs for health care. There are education savings accounts and these so-called 529 plans that allow people to set aside large amounts of money tax-free if it's used for their children's or grandchildren's education.

The president has proposed Lifetime Savings Accounts, which would be another new tax-free account that people could use for virtually any purpose, and over time that would allow most Americans to exempt almost all of their capital income from tax.

If we move to a consumption tax, it would represent a significant shift in the tax burden. Consumption decreases as a share of income [as incomes go up]. The bottom 30 percent of households, according to the Consumer Expenditure Survey, actually spend more than 100 percent of their income. For households with incomes above $200,000, they only spend about 37 percent. So, if you went to a consumption tax, you would be exempting two-thirds of the tax base for the people at the top. The fiscal stimulus there probably wouldn't make much sense. A big tax on consumption for the people who are most constrained probably wouldn't be that great, either.

You could also look at this as a wage tax, as another variant of a consumption tax. Wages are virtually all of income for people at the bottom. For people at the top who are very, very wealthy, it's only about a quarter of their income. But for the same reasons, because of the substantial shift in burden, because high-income people pay almost all the tax burden now, if they're paying a lot less [in taxes], it means the middle- and lower-income people inevitably have to pay more, either now or later when the deficits come due. So, for those reasons and others, I think tax reform is unlikely. A consumption tax, especially, is unlikely to happen.

So the real question, as I mentioned before, is, when are financial markets going to notice that we're on this unsustainable path? Currently, interest rates are not that high. My view is that if there were a financial market response in the short term, that would be a good thing, because it would force policymakers to act before the situation got very, very bad.

The story is that John Snow, who is currently the Treasury Secretary, was instrumental behind the tax increases in the early 1980s after President Reagan's big tax cut, because he went to the president and said, "Your deficits are increasing interest rates, and it's making it hard for us to finance our investment."

I think it's worse if financial markets are quiescent for a long time and they don't react until we're actually in a crisis situation—for example, the Chinese and Japanese decide they no longer want to hold our debt—and that could be very bad news.

MR. BROWN: Thank you, Len.

I would like to talk about the savings rate. We see a savings rate of 1 percent. We also know that, to some extent, the American consumer has been labeled the "consumer of last resort" for the global economy. Our interest rates are lower than they otherwise would be because of the purchases of Treasury and agency securities by foreign central banks. To what extent do some of these international financial imbalances affect the savings rate, and is the savings rate something that we should be overly concerned about?

MR. BURMAN: One of the things I think is frustrating is that there doesn't seem to be a lot of response of savings to the rate of return. We spend an immense amount of money through tax subsidies aimed at raising the return on savings. My colleague Gene Steuerle calculated that we actually spend more on tax subsidies for savings than the amount of personal savings in the U.S. So it's not a very effective way to increase savings.

MR. BROWN: Does that mean our rate of return is just too low to induce savings?

MR. BURMAN: I don't think it's that. You're an economist; we're all economists. There are income effects and substitution effects, and my reading of the evidence is that, when rates of return increase, there are some people that say, "Well, that's great; I'm going to save more," and other people say, "Great. I can pay for my kids' college and I only have to set aside two-thirds as much as I was going to otherwise." Those things about balance out.

The thing that has been proven to be effective, and your luncheon speaker is going to talk about this, is actually changing the way you sell, say, pension products to individuals and investing in financial literacy. For example, there's empirical evidence that if employers set things up so that contributing to a 401(k) is a default option rather than something somebody has to check a box and say they want to do, the contribution rate goes up. Similarly, if the default option is to put some of your money into stocks, more people will invest in stocks than if the default option is to put the money in a low-yielding, interest-earning account.

There's other evidence that financial literacy education in high school and in college can both encourage people to save and also reduce the debt burden; of course reducing debt is the same thing as increasing savings.

MR. BROWN: Are you concerned about the savings rate, Carl?

MR. STEIDTMANN: It's interesting; one of the first economic papers that I wrote when I was in graduate school was about the savings rate, and it basically took a demographic approach. If you remember, back in the mid-seventies there was a lot of concern about the low savings rate. In fact, I think then-Secretary of Treasury Simon made a big point about how we needed to raise the savings rate. I don't remember the exact number, but it was a relatively bogus forecast as to what it needed to be, based on a lot of bad assumptions. At that time, the forecast that I made was bad: If you looked at demographics, given the Baby Boom generation starting to plan for retirement, you were definitely going to see a rise in the savings rate. Well, the savings rate fell.

I went back and looked at the issue again in the mid-eighties and, again, came up with the hypothesis that the Baby Boom generation had done everything late in their life. I mean, they had gone to school late, they had married late, they had gotten into the job market late. So they were late to get into savings, but now they were going to get into savings and that the savings rate had to go up. Of course, it went down.


So in the early nineties I went back and looked at the issue again and felt quite certain that, by God, now this generation is getting into their forties, they've absolutely, positively got to start saving. Again, the savings rate went down.

And then we started looking at all the incentives for savings that were out there. I again made a forecast that the savings rate had to go up, given these incentives and given the demographics, and again it's gone down.

So the conclusion I've come to is that I'm a really bad forecaster when it comes to trying to forecast the savings rate.


But the other conclusion I've come to is that the American consumer operates on the premise that instant gratification is not fast enough. If you're going to forecast based on demographics, you would forecast that the savings rate is going to go down, that as the Baby Boom generation moves into its late fifties and late sixties, and particularly the higher-income ones start retiring early, they are going to spend more. They are going to start spending out of their capital base.

So I wouldn't be surprised if we begin to see going forward an actual negative savings rate.

MR. BROWN: In international comparisons of net worth and disposable income, U.S. households fare pretty well.


MR. BROWN: So they have the wealth, but they've invested in capital markets and through homeownership without the need for savings, apparently. So I don't know if that indicates that they're doing pretty well or it's some sort of a statistical anomaly.

MR. STEIDTMANN: I think it's more of a statistical anomaly. The other thing that we find in some of the consumer research that we have is, when you ask people about "Do you have enough savings, and what do you need?" there's a certain amount of ignorance about how much savings you really do need to retire.

But I think there's also a belief that they're going to work to a much later age; that this idea of early retirement is going to be something that a small group of people might be able to do, but the vast majority of the Baby Boom generation really is going to have to work to a much later age than what previous generations have.

MR. BROWN: Allen, do your surveys show that as well?

MR. GROMMET: I don't know that our surveys show, but I think Carl's last point is key. What Social Security is ultimately going to have to rely upon in order to work out of the Social Security problem is that people are, in fact, going to have work longer. The legislation that is on the books now raises the retirement rate some, but probably not nearly as much as what's going to be needed.

I think it's interesting just to trace through the several factors that I think contribute to the lower savings rate. One of them has been Federal Reserve policy. Keeping interest rates low encourages people to borrow, and certainly that keeps the savings rate low. One of the reasons the Federal Reserve has kept interest rates low has been the productivity that we have experienced the last while. That's key. We don't know how long this will continue, but I think as long as we can expect the productivity rates to continue averaging at least 2.5 percent, if not higher, we're likely to see the savings rate staying low.

In the other comment, you related somewhat to the growing international debt and how that might influence savings. Right now I only find economists talking about the problem. I don't find anyone else who seems to be worried about paying off the U.S. debt held internationally. Talking to bond market people in New York, they seem to be oblivious unless they are economists. It's a fact that we have a wonderful international market buying up all our Treasuries, and that's what's allowing us to continue to run these trade deficits at the level that we are.

Now some of it is starting to turn around. We have seen the dollar depreciate relative to the Euro by quite a bit, and probably, if we were to do a careful analysis of it, we would say it has already gone far enough to achieve a balance. But the way these foreign exchange markets work, you overcompensate and come back to your neutral. That is just historically the way it has been.

But we still have some significant revaluation relative to the Asian currencies. Japan has been a little slow. It still has more to go. But China and India, China in particular, is where we have a huge imbalance. Right now they're buying a lot of our Treasuries. If it's in their interest to keep buying and if they want to export, it works out fine. But if at sometime in the future you reach a point where people don't have confidence in the American economy, then that's going to put the pressure on. It could raise interest rates very significantly and have an effect on our savings rate.

In the meantime, I think we can expect to see some slow further depreciation in the value of the dollar. It will put some pressure on savings, but that's about it.

MR. BROWN: Questions from the audience? Yes?

UNIDENTIFIED SPEAKER: A more general question on savings: What was the funding like when the savings rate was 6 or 10 percent? I mean, was [the difference] the White House? What else was going on that was so different?

MR. GROMMET: Well, when I was working with the House Budget Committee, at that point we had a deficit of $65 billion and thought that was horrible. Of course, relative to what we're facing today, that's very small. We had unemployment at 5.5–6 percent, in that range. We had the Black Caucus beating on us horribly, that this was way too high.

I'm trying to think of some other descriptors. We had more of a Phillips curve problem, a stagflation problem that we were trying to work out of. I don't know if the high unemployment rate with high inflation somehow caused higher savings. Perhaps it was the conservative attitudes that caused people to save more.

MR. BURMAN: Wasn't it a big factor that the Depression generation was still working and they remembered the Depression, and they were just saving so that they would have money for the next one? Now we have a generation that believes that prosperity will go on forever.

One interesting thing is that when you do surveys of young people, the overwhelming majority say they don't believe Social Security will be there when they retire, and they're not saving.


So you say, "Huh? You're planning on living on a heating grate?"


UNIDENTIFIED SPEAKER: And I will say, with the Depression generation, you had people who did not grow up with access to credit cards. Now you've got people who just get it in the mail in college.

MR. BROWN: A question I would like to throw out here is about the democratization of credit. We've seen big changes in credit practices. You mentioned the access to credit by lower-income households.

We've also seen, from a macro-economic perspective, perhaps more stability. We've only had two short recessions in the last 20 years. Does the democratization of consumer credit lead to a smoother macro-economic cycle? Does it allow households to weather the storm in better shape than in previous times?

MR. STEIDTMANN: I think the smoothing out of the business cycle has a lot more to do with better inventory control by businesses, which to me was always one of the big drivers of the business cycle, and the fact that the non-cyclical segments of the economy have grown so much greater. I mean, services are much larger. Government is a larger share of the economy. The things that tend to be cyclical are much better managed and don't go through a boom-and-bust cycle the way they used to.

I can remember the times when General Motors and Ford would end up with 180 days of inventory, and then they would stop production and the whole economy would go down. They just manage their inventories much tighter. They manage it on almost a just-in-time basis.

MR. BROWN: Now that we have zero percent financing, we go and buy those.

MR. STEIDTMANN: Well, they also have the ability, yes, to manage the demand side of it a lot better than they did before. In fact, you could almost argue that GM and Ford now are really finance companies that just happen to have the manufacturing lines to go with them—but, I mean, they don't make any money doing that. They're making all the money on the finance side.

MR. GROMMET: I think that's a good answer.

MR. BROWN: Other questions?

UNIDENTIFIED SPEAKER: So how do we solve the Social Security problem? There are always proposals out there, right?

MR. BURMAN: It would be easy for the people at this table to do it because we don't have to run for office. The problem is that we're paying out too much and we're not bringing in enough. So you can either cut benefits or you can raise taxes.

One thing, and actually the most sensible thing, to do would be to increase the normal retirement age and index it to longevity. You had mentioned that people are working longer. You mentioned that people are going to be 70 years old and they're still in great shape. When Social Security was started, I think life expectancy at retirement was 3 to 5 years or something, and now it's 20 to 25 years. It's kind of ridiculous.

One thing that I think is not a magic solution, although there's some appeal to it, is this idea of individual accounts. The theory is that, well, since individual accounts can be invested in the stock market, they'll earn a higher rate of return. In my view, that's sort of rearranging the deck chairs on the Titanic. The problem is that the financial market is in equilibrium. If Social Security is now effectively investing in the stock market, that just means that they're not buying bonds; somebody else is buying government bonds. But it doesn't necessarily increase the amount of national wealth.

What we really need is to have more resources available when we reach retirement. We need to have more savings or we need people to work more, or both, and policies ought to encourage that.

The worst policy of all, from my perspective, would be to borrow money to finance the transition to individual accounts, because you would have government dis-saving, thus reducing the overall resources available. Individuals might have more money then that they can use to spend in retirement, but there won't be any more resources available to actually satisfy the spending needs, which means that our children will be worse off. They're the ones who will be paying off the debt, and overall we won't have solved the problem at all.

MR. STEIDTMANN: To me, the solution of Social Security is pretty simple. It's just that you have to lengthen the retirement age. Actually, when Social Security went into effect in 1938, the life expectancy of males was 58 years. So not everybody made it to retirement, which was one of the benefits of the system, actually. So the obvious solution is to slowly increase the retirement age, and that will make the system solvent.

MR. GROMMET: Yes, the other way of saying it is to live longer; I'm agreeing with you.

MR. STEIDTMANN: They've actually got to live shorter.


I didn't mean that the way it sounds.

MR. BURMAN: So you want to subsidize cigarettes.

MR. STEIDTMANN: Cigarettes—that would be another way.


Cut the cigarette tax, yes.

MR. BROWN: I have another solution. I have four school-age kids right now. That's my part of the solution. I would like to get that in my personal account.


UNIDENTIFIED SPEAKER: Eliminate the child labor law, put them to work.


MR. BROWN: They'll eventually get to work.

MR. GROMMET: Ultimately, we've got to realize that we're going to have to save more, and I just don't know the ways in which that's going to be done. But you're caught. All the alternatives are laid out. We just need leaders with the bravery to work on the problem.

MR. BURMAN: One thing is, national savings is the sum of public savings and private savings. So at least getting the deficits under control would help, even if we can't do much about personal savings, because our children have to pay back the deficits.
MR. BROWN: We have time for one more question. Mitchell?

MR. GLASSMAN: Yes, just on the taxes on the federal basis. As you know, there's a lot of talk about state deficits and the local municipalities, that there's a huge infrastructure that needs to be rebuilt, like the water and the sewer systems. It's got to be paid for somewhere. It seems like there's a hidden tax at the local level that consumers are constantly facing from their local municipalities, especially as they have to build more schools and things like that.

So, what can we expect here in the next five to ten years that's going to be an add-on, besides what you just pointed out to us?

MR. BURMAN: Well, one issue is that, if we really do start cutting spending, and in the last four years spending has been pretty constrained, that is likely to put more pressure on the states. So if you reduce spending at the federal level, but it is just offset by increased spending at the state level, you haven't really done anything in terms of how the resources are being taken out.

States have to balance their budgets, so at least they can't be running long-term structural deficits like the federal government does. In terms of the demands being put on state systems, it sounds like you know more about that than I do, but it is obviously a concern.

UNIDENTIFIED SPEAKER: One question I had concerns the international environment. If the Chinese are successful in revamping their financial system, is that likely to result in less savings flow into the United States? What are some of the implications of this for Chinese growth and our ability to attract it?

MR. BROWN: To repeat the question, it has to do with the reform of the Chinese financial system and, I guess, an abandonment of the currency peg. What effect would that have on savings channeled to the U.S.? Any opinions?

MR. STEIDTMANN: Well, I'm by no means an expert on it, although I do work with somebody who does know a little bit about it. In talking to him about the issues involved, one of the concerns the Chinese have about taking the peg away is that there is an enormous amount of pent-up demand within China to diversify at the private level.

So while you may end up with less Chinese government money coming here, you may, in fact, end up with a lot more private sector money, which is growing at a very rapid rate. There's a very high rate of savings within China. So you could actually accelerate the flow of capital.

UNIDENTIFIED SPEAKER: But that's a short-term measure. I'm thinking more of a longer-term measure.

MR. STEIDTMANN: There's a huge amount, in a sense. One of the reasons they don't want to fight the peg is that they're worried that until the trend of the currency appreciated, it would actually depreciate against the dollar, because you would have such an outflow of privately held capital.

MR. BURMAN: I just want to add one thing to my previous answer. The one big pressure facing the states that I'm aware of, and it obviously comes from the retirement of the Baby Boomers, is that they pay a substantial portion of the cost of Medicaid and their health costs, both for retirement and also for children's health programs and things like that, which are a serious problem at the state level.

There's a chart like that one I had for the federal study that, unfortunately, also relates to state spending. It's more bad news, I'm afraid.

MR. BROWN: On that note, I am afraid that we are out of time for today's roundtable. I really appreciate the presentations that you made and your ability to field the questions. Please join me in thanking the panelists.


Last Updated 12/7/2011

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