Good afternoon. I'm Susan Collins. I'm the Joan and Sanford Wildean of the Gerald R. Ford School of Public Policy and On behalf of the faculty the students and the staff the entire community of our Ford School I'm delighted to welcome all of you here this afternoon We have a full program of activities to celebrate the life and legacy of the man Whose name that we adopted just seven years ago And so I'm delighted to be here as the school's new dean and I'm delighted to have all of you here as well Given the very many kinds of issues that Were important and are part of the legacy of President Ford It was actually a challenge for those who planned this whole program we have today to choose two topics for us to focus on for the panel The two that we decided to focus on are first of all a macroeconomic topic And that that's the one that I'll turn to in a moment focused on inflation And the second is a topic related to athletics and equity title nine and as I think Not so many people know I didn't know this Actually, the final version of title nine was signed into law in 1975 Which was shortly after President Ford came into office and you'll be hearing a lot more about that topic during the second panel this afternoon When President Ford took office in 1974 inflation was in double digits for the first time in 25 years And the dollar was depreciating sharply and it was one of the top Priorities and issues that there was a lot of concern and analysis about and so it seems a particularly fitting topic for us to start out with This afternoon we're really fortunate to be joined by two people who are really well qualified to talk with us on this topic And to perhaps launch a little bit of a discussion some questions and answers at the end of this session first of all we'll hear from Paul O'Neill and He was the deputy director of the office of management and budget in the Ford administration He has an extremely long and impressive record both in the public sector and in the business world He served as the secretary of treasury for the first two years of the current Bush administration And he was the president of the international paper company and the chairman and CEO of Alcoa After Paul speaks I will be able to welcome Alan Sinai Alan is the president of decision Economics incorporated a firm he founded in 1996 after many years as the chief economist and managing director with layman brothers He consults widely not only in the United States, but for International governments and corporations. He's published numerous articles and papers and had a number of teaching posts as well He received his undergraduate degree from our very own economics department here, and it's always nice to have our own come back It's terrific to have both of you here today. And so let me turn the floor over first to Paul O'Neill Thank You Dean Collins Great pleasure to be here You know I found when I received the program and saw whipping inflation then and now What rushed into my mind was The win program of the early time of the Ford administration and since it's a school of public policy I thought it would be useful to tell you kind of an out-of-school story It's true as Susan has said that inflation was high and a great concern of federal spending was a Problem the deficit was a problem in those days and so the president wanted to do something to focus the nation's attention on our need to solve these problems and One really important part of it. I thought was to call together the preeminent economists from around the country and get them to sit in the east room of the White House around the huge table that had been covered with Green felt like a pool table And to opine for the president and to the media who are over there with their television cameras What ought to be done and as I recall Marina Webman was there into a person they told the president inflation was public enemy number one and None of them said anything about the prospect of us going into a recession But in a very short period of time we actually went into a recession So it tells you something about the necessary humility that economists should have about their prescience and Advising presidents about what to do. They were all there. They all had an opportunity Famous people with famous names like John Kenneth Galbraith. They were all wrong But Inflation was a real problem and the president wanted to do things about it and the most famous part of it resulted in the so-called red white and blue wind buttons whip inflation now and I have to tell you this is the out-of-school story This is a lesson in presidential transitions when When we have a new president and I would say this is always true this I don't think there are exceptions this when we have a new president at the first 45 days the polity is at huge risk because the mechanisms and Systems for making sure things are vetted carefully or often not fully in place and you might Imagine that that wouldn't be the case in a transition from Of the one that we had with from Nixon to Ford But it was nevertheless true and and this issue of the wind the whip inflation now Idea getting it off the ground out of the speechwriters mind without betting from the economic staff Is an example of the dangers that we face that's kind of an innocent Thing it didn't do great damage, but it wasn't the only one.  This is Maybe two or three weeks after he became president And So he went to Ohio State and gave a speech and my phone started ringing I think before the wheels were up on Air Force one coming back to Washington with the media calling to say What is this new thing that president Ford announced about? Creating a program to help people make the transition from school to work and I said They called me because at that point I was kind of the switching center You know I was supposed to know everything that was going on and have seen every Presidential speech before it was made and have the substantive background so when people called I could say you know It involves this many people in this time as it will cost and this I was going to work and these are the agents that will run the program and So I started getting these calls and I thought I have to call you back and so I started it ramming around And probably was certain amount of anger trying to figure out. Where did this thing come from? Well, it had Actually come from the speech writing staff. So I finally found this fellow whose name just coincidentally was a speech writer His name was Milton Friedman And and I said to Milton Milton where did this thing come from and he said Well, we just seem it seemed like good idea He was going to give a speech to these graduating students and you know some of us have thought about the problems we've seen with our own children and the transition from school to work and we just thought it was a pretty nifty idea and And then he said to me hey Paul. It's only a speech You know which was really an important tell tale about even a great Student of government like President Ford had gotten out on the leading edge without any support troops Because there wasn't a recognition being present a lot different from being anything else including vice president so Out of story school out of school stories But then to our topic about the managing the macro economy I I guess I'd rather look forward than look back But just quickly to dwell on the past and what we went through in the in the 70s And into the early 80s 80s. We had an awful period of time where we had You know unbelievably high levels of inflation and unbelievably high levels of unemployment and Again, I think it does speak volumes That we've learned a lot now. I think we're clear in our own minds Alan may have something say say about this that inflation is substantially a monetary phenomenon and And so I think we've gotten clear in our own thought processes about how to think about the macro economy And I hope that that's true although I have to tell you I think there are still a lot of things that we think we know that probably aren't true We just haven't Got ourselves into a position where they come together and and give us a new lesson The world I think is true as ever more complicated Because there is more and varied kinds of growth going on around the world and we don't it some of it doesn't fit very neatly into The models that most of us carry around in our head that we learned in undergraduate and graduate schools of Economics, but I'd like to talk to you a little bit about the things that I am worried about going forward from a macroeconomic point of view And I see this as both a Danger and opportunity at the same time it has been remarked now for I don't know 35 years That we've been putting ourselves in a ever more in a position of danger Because we've been accumulating unfunded obligations for things like social security and Medicare that I guess I would say by by most Estimators calculation we now have maybe 50 trillion dollars worth of unfunded obligations And and kind of a disconnect I think in people's mind that they they don't really understand That those obligations are actually going to come do In a way that we're not going to be able to serve us out of Current revenue levels, which means we're in danger of running into the wall when we have People presenting bills for Medicare and in spite of a rising amount of current income from Medicare taxes and general revenues and we're not going to have enough money to pay the claims It's not it's not a long way away And I think actually there there are ways to fix it And and this is I believe Necessarily the federal government's business and let me start with a building block We now have a federal tax code that is well over 10,000 pages long And I think it's a it's a huge block of a testimony to the fact that we are not an intelligent species Because intelligent people would not have created or tolerate a way to raise revenue that is so Awful in how it works so that for example It fails the efficiency test for sure because by the best estimates It is so complicated that we are currently under collecting taxes that are theoretically due to the tune of $400 billion a year if you can imagine that it's an enormous Shortfall between what we say people owe and what we actually are able to collect And a lot of that is because it is not designed to be Efficient and because it's not only efficient. I think it's also not rationally equitable that is to say if we sat down and decided how we wanted to distribute the responsibility for Those of us in the society to pay for the things we as citizens agree should be the object of The society's joint effort. I don't think we would design the system We have now and in fact we would even I think appropriately challenge Some ideas that are I think actually wrong But you know the idea that corporations pay taxes is not true There's no doubt they collect taxes, but they don't actually pay taxes they get the money that Goes into the the amount that they send to the government in the price of their products Which means we pay for the taxes that are collected by corporations and and yet, you know That complication is part of the reason we're under collecting because we have this fiction That somehow if we put it on corporations then we the people don't have to pay for it I you know, I believe we are Sufficiently advanced in our thinking that it's possible if we had political leadership to overcome some of that kind of defective thinking And if you think about it and and believe the 400 billion dollar uncollection Uncollected number it really represents at any particular time a 15 percent Surcharge on those of us who do pay taxes, you know, it is really lunacy that we have this thing now Let me talk briefly if I can about the dilemma of social security and and Medicare You know, we've been living in this on this Ponzi scheme since 1935 and by Ponzi scheme what I mean is we collected money and We acted as though it actually went into Individually funded accounts to provide your benefits We've never actually done that we spent the money and You know, there's a big fewer about this, you know and Presidential candidate spent a lot of time talking about the famous lockbox. I'm here to tell you there really is a lockbox It's in West Virginia. The reason it's in West Virginia is because that's where a senator bird is from Honest to God it's it's there because he's there and and it created a few jobs to set up this lockbox filing cabinet Where there are pieces of paper that basically say we the people owe this much money, which is trillions of dollars, right? It's not really money.  That's your social security trust fund and your Medicare trust fund It's just Boney paper in a lockbox in West Virginia Now we've been able to get away with this for a very long time because we had a growing population and we were taking money collected from all the working population and Using it to pay benefits to the retired population the retired populations now beginning to overwhelm the size of the working population You know, so it's not too complicated to explain how we're going to cross over and run into the ditch But again, there there is a way to fix this problem going forward and let me torture you with a few numbers to make the point If we as a society decided that we wanted people when they get to be let's say For sake of argument when they get to be 65 That they will all have in today's dollars a million dollar annuity Which would mean for 20 years they could draw down $82,000 a year if you can imagine For every American when you get to be 65 $82,000 a year for 20 years, which is longer than life expectancy when you get to be 65 So it's so it's rarely workable in order to accomplish that if we put $23,000 into a named account from general revenues on the day Children were born into our society. They're about four million live births a year It would cost us 92 billion dollars a year for the four million live births and When people got to be 65 when those four million children got to be 65 There would be an annuity for each of them waiting in the amount of one million dollars You can do the arithmetic yourself. It's using an assumption of six percent annual growth Which is actually two percent these points lower than the real growth. We've experienced in equity equity Returns in the United States since 1929 so it's not some hokey number It is a believable number all it would take for us to is to decide that in effect We're going to become a saving society and we're going to assure With with our regard to what you do in your lifetime if you want to save more during your lifetime, that's fine but delivering on the idea that retired people in our society Should actually be financially secure is something that is doable Now of course there there is a little complication. We've got to get from here to there That is really a complicated problem because we've got this huge accumulation of Unfunded liabilities, but I believe if we could get political leadership To cause us to do the right thing for the longer term We could figure out how to solve the in-between problem now. There's one other piece of this I want to talk about quickly The again, this is to the issue of macroeconomic policy today. We're spending 16% of our GDP or 17% on health and medical care at over two trillion dollars a year If you go just something that I work on most of my waking hours if you go and look on the ground at The opportunity for improvement There's an opportunity to have a huge improvement in outcomes from medical care interventions and Therefore in the health condition of the population and I believe Simultaneously reduce the cost by a trillion dollars a year Now I'll give you a few Illustrations. I hope you don't think that's completely crazy. I'll give you a few illustrations One of every 14 of us who goes into an acute care hospital in the United States gets an infection We didn't bring with us and it adds enormously to the cost Both in economic terms and in terms of human suffering and almost all of it is unnecessary and we've known human beings had known now since semilars in Hungary in 1860 About the transmission of infections from the hands of a surgeon In that case to maternity wards where they were killing people until they figured out that they were transferring infection Since semilars we've known how not to infect people that are getting acute care and if we could Practice what we know we could make an enormous difference. It's just one illustration You know, they're the horror stories about wrong-sight surgery and stuff like that. That's also unnecessary and uncalled for But there's a huge opportunity for productivity improvement and if you can imagine What we could do in a 13 trillion dollar economy if we could free up a trillion dollars to work on What I consider to be necessary and important public policy Purposes both in the United States and around the world. It could truly be a different world So I'm one who's an optimist about the opportunity in our society and the possibilities in our society And frankly, I'd like to be more optimistic than I am About finding a political leader who will tell us the truth so that we can get on with acting on it And I think with that I'll leave it to my friend Alan I'm not that political leader I'm just an economist Thanks very much Dean Collins and I'm I'm honored to make a contribution To the memory of a great man and a great president and in a dimension That supposedly I have some expertise in which is economic policy And the look at the Ford the Ford administration economic policy That the the crises that were faced at the time The challenges the policy policy choices and the is the mic going in and out Is there anything we can do about that is a the distance? I am at from the mic or is it the mic? Can you hear me in the back if I don't use the mic? Okay That will be easier and just raise your hand if I mumble Economists tend to do that sometimes Let alone Not be as clear as we would hope that we should be The state of the economy and economic policy were a big part of the Ford presidency There were essentially two crises One was stagflation That's a deadly combination of both recession and inflation The degree of the of that crisis can be summarized by something called a discomfort or misery index it was invented by a Dedicated Democrat Arthur Oaken Yale professor and advisor But used by presidents Republicans and Democrats after he coined the word The chart which some of you may have in a handout that is available chart one the discomfort index Was At a record high of 17.7% to some of the inflation and unemployment rates Not too long after president Ford came into office now unfortunately the Xerox copy of these charts Happened to white out The lines so you're going to have to imagine Where these points are where the bars are where the dashes are it's not your eyes playing tricks on you It's not age telling you that you better go see your ophthalmologist It is simply Unfortunately the Xerox machine Covered over and the reproduction the the points chart one the discomfort index in 1974 1975 ranged from 16 and a half to 17.7 and That was the highest that was the highest combination of unemployment and inflation ever in US economic history Indeed it was only surpassed thereafter at one time and that was in the early 1980s So you need to draw the dots in the chart one the Ford administration Period of time very short August 1974 to January 1977 is the barred section the kind of dark ray shading that you see and You would see if it came through At about the 17 and a half or so mark on the vertical axis a Bar that showed the sum of the unemployment and inflation rates That's a very uncomfortable for consumers situation This and really summarizes easily the combination of severe recession and sky-high inflation That president Ford confronted When he to his surprise became president of the United States The second crisis was energy And the quadrupling of crude oil prices Near doubling of gasoline prices and huge increases in energy costs that stem from the Arab oil embargo of October 1973 to March 1974 They shut down supplying oil to the world This had a lot to do with the first crisis the stagflation crisis Because oil which which had been priced at three and a half to four dollars a barrel and below for years and years Suddenly skyrocketed in the matter of months to ten eleven twelve and ultimately by the end of 1976 Jerry Ford president Ford's end of his term had multiplied more than four times and We of course were an economy That used that low oil and low gasoline quite freely It was cheap. It was almost free and so our production and consumption habits were Really fed by the low price of energy and suddenly that changed now It was to a large extent outside of anything that went on in the US economy It's what we call a supply side Shock to the economy in this case a huge increase in a basic price that goes into everything that we buy and produce and Therefore it was a huge Cost-push shock to inflation of a kind that nobody had ever seen before Not only in the United States, but in the world And of course the crisis was lines at the gas pump skyrocketing inflation Companies facing high costs and cutting back on people rising unemployment and poor American consumers faced with Losing jobs and having to pay more for everything not just energy as those costs reverberated through the economy This was the setting under which president of Ford took office on August 9th, 1974 and He came into office in the middle of a deep and intensifying downturn in the economy With a sharply rising unemployment rate growing jobs losses high in rising inflation Near record high nominal interest rates falling business profits and an equity bear market I Would submit that if we look back at the pictures and the films and the press conferences and as you remember the time With your father he probably entered that as he entered the football stadium in those early years of his life Leading Michigan on to I don't know what the win-loss record was but quite coolly calmly and Resolutely just simply determined to make it better in his particular own personal way If we were to describe the current situation of the US economy in this manner All of you would be out on the street protesting extremely upset They're calling for change in Washington You know, we haven't had anything like that Except for the early 80s in our business cycle history That's the setting and I wanted to set the stage for the policy challenges and Attempts and policy initiatives that came out of the Ford administration The setting was I would say a bad case of the worst possible set of conditions that anybody Any president has faced Up to the time of President Reagan who actually entered at an even worse time in situation The challenges were many The crisis essentially I think on economics were to Stagflation and energy contributing to inflation and the need which we still have for energy independence the challenges for policy as Indicated in the first full economic report of president Ford the January 1975 economic report the president were first said he Recession and unemployment second inflation and third energy independence The three major priorities The challenge is the economy inflation energy Subsidiary to that was a belief in balanced budgets and restraint on government spending. I Wouldn't say President Ford was a green eye shade guy I am I think Paul you might be too Restraining the growth in federal government spending and being tough and videoing the attempts of Congress to spend more than they should And the attempts in one zone administration to spend more than they should is a challenge for every president and Most of us Republican or Democrat would agree that in the past six or seven years Have we seen one veto? Zero vetoes So that can help the economy but in the long run, it's really not the right thing to do President Ford's notion of restrained government spending really was the right one and he tried But it's very tough with Congress to get that done as for energy independence An attempt in some of the early seeds of trying to deregulate a highly deregulated Economy deregulated in the sense of transportation in the sense of oil prices natural gas prices Regulated airline and freight Something that changed immensely over the years after the Ford administration The seeds of that can be said to have been sown or at least an attempt to deregulate in the Ford administration and finally the final challenge Was certainly the public mood Think of the economic setting I described think of put yourself back to Watergate the Nixon Resignation state of the nation and Having to deal with not only that economic situation and how people felt But how they felt about Washington About the presidency and about the state of our country if you look at the Gallup poll approval disapproval ratings at the time of the presidency first Nixon and then Gerald R. Ford and You look at the University of Michigan the famous University of Michigan Consumer sentiment that we all follow and watch now started Here in Ann Arbor you will be alarmed at how low those numbers were and how the public mood Was so sour I think I'm bringing some of us back to the time and if we put ourselves back at that time We begin to feel I believe how bad it was and how bad we all felt Well, what were the policy choices? Attempted by the Ford administration what happened How did it affect the economy? Can we learn something from it for the future and Do I have some sort of a prescriptive judgment? Or great to give Here at a university on the policies of the Ford administration first. We should of course mentioned that Paul was there Very very hardworking and remembered very much by his friend and the friends of mine Alan Greenspan in terms of the role that he played There was an economic policy board appointed early by President Ford I think it was September 28th 1974 a little more than a month after he took the oath of office That was a very I think intelligent thing to do Showed us again the the the the character strength of the man and The quickness of how he would reach out to people who knew things. He knew he didn't know So that he could then do the best he could do in an honest and hard-working way as a surprised Person who came into the presidency? He didn't ask for it and those of you who have heard him tell the story of how his only main ambition was to be Speaker of the house and I was privileged to hear that story and to laugh with the late president at a dinner in I think beaver creek some years ago The eight times he tried to be speaker and fail He was about to retire and suddenly he found himself president of the United States and he had never asked for it He'd never asked for it which leads Alan Greenspan to say to have said at the time And I would agree with this that maybe it is those who don't want the job who we should put in the job in Terms of what the results might turn out to be and the example set for the country and other countries as well well There is a table in the handout table to which summarizes attempts to summarize the major policy thrusts of the Ford administration and So as an economist and a little bit hopefully as a teacher to those in the audience who might be students of economics Let me Briefly take you through it. We often talk about policy mix in certain situations in the economy And there are prescriptions of the dosage of monitoring fiscal policy to be calibrated when you have a patient That is the US economy that is having some illness pathology and needs some treatment in a recessionary and inflation situation One of the prescriptions and this comes out of some Macro global macroeconomic work made famous by Mundell Fleming And Bob Mundell Nobel Prize winner has to do with what kind of monetary policy What kind of fiscal policy do you use and one of the prescriptions is easy money and tight fiscal We got easy money. I Think that was easy for the chairman of the Federal Reserve Arthur Burns to be supportive economically and probably politically And Arthur Burns was one of the key core advisors Although not day by day in the inner circle of the policy advisory group to President Ford the others of course where Alan Greenspan. He was chairman of the Consul it with Treasury Secretary William Simon Alan recalls The tremendous amount of work that Paul was involved in his deputy director. I think it was Roy Ashe was the director of the budget Someone in large economic policy board established in September 28th 1974 by the president upon which he relied but also in reading about the episode understanding or trying to understand President Ford Not being there and reading what people wrote about him. My guess is his instincts on the economy We're really pretty good And he had a pretty good sense of the economy from his work in Congress and simply a Man with a lot of common sense President Reagan I thought had great instincts on the economy. I always thought he was one of the smartest presidents ever He wasn't mentioned Nixon and Clinton were mentioned as intellectually the smartest presidents by by Alan Greenspan in his book. I Reagan was so smart. You know why I thought one of the reasons I thought he was so smart He never listened to economists He was his own economists And he got it right again and again much to my chagrin is one of those economists who once in a while doesn't get it right so Monetary policy eased up and probably had a good deal to do with the recovery in the economy that began in the middle of 1975 was very vibrant the federal funds rate In short-term rates went down about five percentage points over the span of about two years and that was very helpful However on fiscal policy President made attempts to restrain the growth of federal government spending and in real terms in the table federal government spending in real terms really was restrained in 1974 1975 1976 in real terms federal government spending hardly grew Now it's numbers are low because inflation was high and Probably at the time it didn't feel like federal government spending was restrained But in the context of the sweep of history against other years and other business cycles I can tell you that is restrained growth in real federal government spending so Paul whether you knew it or not Your advice was getting through and it was it was restrained on taxes the prescription there was cutting taxes So what we had was easy money to deal with the recession cutting taxes to help spending Tax cuts were originally temporary they were tax rebates to people with a four billion dollar investment tax credit Which also was temporary and then the work I do that actually is very potent on the business side We've found empirically it to be very potent. This was a very good prescription It wasn't quite planned in a unified way at this time as oh, yes The policy mix will be this and this but ex post and retrospect They kind of fumbled their way to what I would look at and say was a good policy prescription for the situation at the time The tax acts tax reduction act of 1975 Proposed in January with 16 billion dollars Congress did what Congress will do it enlarged it to 23 billion dollars It took it from a year to a year and a half That's actually in my view a better thing to do permanent tax cuts are better than temporary tax cuts It was a reasonably reasonably good sized half percent of GDP It wasn't too big and I think in the accounts of the situation The administration had to beat down the attempts of Congress to make it bigger and to make the spending bigger That was the balanced budget restraint coming from executive leadership Absolutely the right thing to do and then we had some adjustments the revenue adjustment act of 1975 a couple of attempts at tax reductions Some got through some didn't and the tax reform act of 1976 it wasn't major tax reform was minor tax reform all of that really in retrospect looks to be very positive so the policy to stimulate the economy out of recession unemployment and The policy mix which tries to do that without revving up inflation more than is already there looks to be a minus in retrospect to me an Energy and its effect on inflation there was an energy energy policy conservation act which Started a phase deregulation of oil prices. There was a lot of jaw boning about deregulation Deregulation did not really come into the U.S. economy the full force until the 1980s and 1990s But I think it is fair to have said the Ford policy planted the seeds Started the motion going and the intellectual thought wave and leadership going to help that come about Jaw boning was also part of the policy approach. I think I view the win Buttons and whip inflation now as a jaw boning attempt to get us all to be inflation sensitive And the president did stand up against u.s. Steel on a 10% increase in prices very early on Basically demanded that they rescind it and they did cut it back. That's leadership on the issue of inflation It was more of a public relations thing. It was not out of the bowels of the economists Advising president for this win item but you know, they're not always right and as a non-economist if I had been a speechwriter, I might have thought of that one been very proud of it and Suggested to the president you ought to fly with it. You're the leader and it's perfectly okay If I had been an economist there, I don't think I would have been that critical of it Anything that would get the public consciousness up in terms of sensitizing the public to attempts to arbitrarily raise prices And particularly to a deregulate environment I would I would have been for at least I can say that now that was 25 years ago I probably would have said that as well On deregulation one example of president ford's leadership was in the bailout of new york city. Do you remember that? New york was going bankrupt and he held the line no bailout money from the federal government unless you You go you new york go and put some money on the line We call it skin in the game yourself to deal with it And then he did recommend and the federal government did put a couple billion dollars into new york And look at new york today New york new york. It's in great shape Not much internationally not much in the dollar The aftermath I take you to the table three And the results on the economy from all of this and from the wonderful workings of the Mixed capitalistic private enterprise system that we have and by that I mean It really is motored and motivated by individuals and by business More good work gets done in the private sector to give us good results In our economy, I think Then typically gets done in washington despite all the good advice and invitations that We sometimes get to help out We all know those of us who provide any advice that there's a heavy-duty political element in the advice So what goes in in terms of what economists think will be pure good advice? Does not come out that way There's always political compromise and the timing can never be quite right because of the timing of the political process Nevertheless, the economy did get out of this severe recession Up to that point. It was the longest in our history. It was a 21 month recession It's extremely bad recession Unemployment rate peaked at 9.2 percent were at 4.6 percent today And on the quarterly numbers, you can see the revival in real GDP growth starting In the second quarter of 1975. That's the first line 3 percent from minus 4.7 to 7 to 5 3 9 3 3.0 then there was the famous pause the second half of 1976 Which unfortunately all that was was a pause in growth. It always happens It probably hurt president ford a lot in the reelection campaign And then we bounced up and had a wonderful year in 1977 for 0.6 growth The unemployment rate went from a high of 9.2 to Around seven and a half Lower than that when president ford left office and the jobs losses of 1.3 million 1975 turned to gains in 1976 of 2.4 million This is really a very good recovery Against a context of still rising oil and energy costs and a country Which still hadn't recovered in terms of the public mood and that you can see in the Numbers that go with the public mood earlier on the stock market came roaring back Interest rates came down Inflation moved from over 9 percent at an annual rate of 1975 down to 5.8 percent in 1976 Yes, energy and food price inflation came down. That was part of it But it's fair to say that in terms of The crises faced by the ford administration president ford when he entered office The challenge is posed by policy The policies chosen the ex the exercise of those policies the leadership exhibited Gave some very good results that an objective Board member director member of the board looking at that ceo Would have given should have given that ceo very very good marks I'm not going to give a grade. I don't do that anymore But the marks would be very good. I think uh What do we learn for today? We still have some of these problems hanging around. We're not energy independent What we learn is we should darn well Take measures to be energy independent even if that involves an excise tax on gas These days the more popular form is a carbon tax We've shifted our production and consumption immensely. We're not as subject As we used to be oil is 83 dollars. I think a barrel today and we're still getting along But you know that is going to hurt the economy a lot over the next year And our economy is slowing down and does have a lot of excesses We are probably in a very late stage of our business expansion. So energy independence uh incentives to increase supply of oil and refining capacity Uh attempts at this were made in the before administration that still rings true today As for tax cuts, it's probably not the time for additional tax cuts Maintaining the tax cuts in place as incentives and stimulus Makes a lot of sense to me. I'm one of the few economists who in analyzing objectively the bush administration tax cuts Uh have found that it made a major difference in our recovery uh and Permanent tax cuts are better than temporary tax cuts. What has been missing is uh yet another Dimension of ford administration policy and The late president's view Restraint in government spending More than anything that is important to achieve Monetary policy will do its job. It will do a good job. We have a very fine Solid federal reserve in place the challenges to our federal reserve Are probably more than can be handled by any federal reserve, but they're doing an excellent job uh, and so uh What we see when we look back 25 years From a president and an administration Uh that i'm sure in the wildest dreams of Jerry ford never occurred to him that he'd be in that position president looking at stagflation uh looking at OPEC oil embargoes quadrupling of oil prices Lines that pumps unhappy people Having to decide whether to pardon What we all know to be a flawed president in retrospect Uh That uh the man was up to the challenge his administration was up to the challenge the results on his watch. We're very very good Thank you very much to both of our speakers, uh, alan sinai and paul o'neill There are a lot of topics and issues on the table Um, we have heard about the context and the macroeconomy challenges and problems That the ford administration faced at the beginning Some of the types of leadership and and uh decisions that were made policies chosen Some of the outcomes going forward. We've also heard Starting from the perspective where we are today some of the kinds of policy challenges that we now face And I think that there are Considerable at least potential Parallels um in some of the kinds of issues in terms of the leadership to address them going forward And so with that what I'd like to do is to open the floor for Questions, um, we do have a little bit of time for a question and answer period um We aren't going to try to distribute microphones around but hopefully people can hear quite well From those of us speaking from down here And so I'll try to briefly repeat questions to make sure that everyone in the back, uh knows what the responses are about Yes And how bad it's becoming internationally because of the great demand for grains both for uh food and also for uses energy alternative sources Yet we're also reading constantly that the economy is at the end of a business cycle and recession is ahead So my question is are we looking at another episode of stagflation? So the question focused on what we're seeing recently in terms of inflation in food prices Is whether we are looking at another stagflationary episode? Uh, we have a mild stagflation Um, I think and it's mild. This is nothing like A misery index of 17 or 20 percent, which we had in the early in the early 1980s But it is a combination of a recessionary thrust in the economy In part a consequence of some rather extraordinary excesses in housing and in finance in the financial world And we are unwinding those excesses Booms are great, but busts always follow booms And so we have to realize that In a boom the thing to do is take some money off the table and save for the bus because it's always going to come The difficulty is the timing of of when you do that. So On the inflation side, uh, I'm of the view That throughout the u.s. In the world and a lot of this is non us the forces are in place for Though it's quiet now In the u.s. For rising inflation on average It's in place in the growth of the global economy much of which comes from outside the united states And it's a place in politics And it's in place of monetary policy, which is very permissive Because of the fear of especially in this country of recession and so As much as I applauded the federal reserve Half point cut in the federal funds rate I was uh unhappy to see so little concern on their part about inflation After them having been so concerned about inflation Because uh, that's a sign That the politics of the situation And the instructions of what we call the dual mandate for monetary policy, which is maximize growth and achieve price stability Is making our central bank Contribute longer run to higher inflation. Certainly the fiscal side will always do it Governments will always want a good economy And we see all over the the world A lot of stimulus. So I think inflation on average They go down a little bit here as we slow down, but longer run. It's on its way on its way out mild stackflation Should you worry about it? No, that's a very analytical kind of concept Just keep doing your job best you can and hopefully your employer will Continue to pay you what you're worth Are there other comments? Yes Paul I've got a question for you. You talked about Unfunded mandates social security. You gave us this wonderful example if we put 23,000 Into the pot for every newborn person We could fund retirement for 25 years after they get to 65 You said the problem is how we get from here to there, but you didn't give us your views on that So how do we get from here to there? First of all, let me put the 92 A billion dollars a year in the context in the context of a 13 trillion dollar economy Where this year's federal budget is 2.8 trillion You know, so it may sound like a lot of money But it's half of what we're going to spend in afghanistan and iraq this year You know, so, you know, I don't do that in a pejorative sense, but but to dimension What it would mean as a society to actually have positive savings for the society because that's what this idea really is it's for the society to deliberately save for the future to make good on a concept of What old age should be about for people who are lucky enough to be american citizens you know, so for me Putting that part in place is a beginning To then think about How do we deal with this problem that we're headed toward and if you disaggregate Social security and medicare what you find out Is that social security Again in the dimensioning problems is not a major part of the unfunded liability And and if we were to put in place this 92 billion dollar savings program If if we could think about Actually going back and funding for people who were born last year and the year before that and the year before that in effect Prefunds even though we didn't actually do it The more of that we could do the more we could reduce the size of the gap going forward And then to disaggregate a little bit more back into the medical side If you can imagine if we could if we could In the next five years capture A substantial part of this 50 percent Of health medical care spending we're doing that produces no value and produce in in fact produces negative value A trillion A trillion dollars a year Is enough money for us to work our way out of the unfunded obligations for medicare You know and I have to hit one of the things that really vexing to me is the difficulty of getting political figures To think about complicated problems in a connected way So for me these are not separate subjects You know I I don't want to sit down and say okay today I'm going to think about medicare and everything else is out of my view I I think more and more if we're going to achieve anything like our potential We've got to think in a connected way about where we are and where it is We're trying to go and we need to do it in the context of an ever more Interconnected world. It's not we no longer live on an island Are arguably we lived on an island for a very long time It isn't true anymore But you know the thing that is energizing to me is to see that there are ways that we could do things You know just to borrow a little bit of what I was saying about this current A fed action with a 50 at 50 percent and 50 basis points and 50 basis points You know the root cause of that problem is is really a very straightforward problem We had We have a we continue to have a social belief That home ownership is inherently a good thing in our society And I think most people would stipulate that and then We went overboard in believing that somehow we could We could set aside simple laws of economics Which which tell you that you're not really a homeowner if you can't pay the mortgage Right and and so And I mean this is not really complicated stuff folks Right and but there is a way to address this problem that I think we still need to do So we don't get into this problem again. Here's what I would do I would say it's okay to for lenders To issue no document loans, which means you have no work history and no proof That you actually ever had a job for more than six months in a row or Subprime loans, which means you're a doubtful payer We could say to mortgage originators It's okay for you to continue to issue those kind of loans with this proviso When you do it you must establish a funded escrow in the amount of 10 percent of the mortgage value With your own money So that we will in in place of the homeowner having an interest in making sure the loan is service We'll make the lender make sure they know they're losing their own money Every month when the mortgage isn't paid and you know, it would it would art It would for sure reduce the number of such loans But if they went forward our financial system would be protected So we're not left in a situation where we've got to use the blunt instruments of the federal reserve To try to cure a problem that was not directly of their own making and kind of twist around other important aspects of our economy including worrying about inflation Because the Fed is them is the dealer of last resort, you know So again, we need to think in more interconnected ways about these things and we need to solve The real problem not the secondary consequence of things going wrong Thank you. Yes I think there's an open in the room That's being missed and I think we really are on the verge of oil picking and I think this is going to have A very significant impact for the economy and we're going to be operating in a structure That is very different from the ones that we've been dealing with in the past and I was wondering if you If you thought about this and you might address those issues Just to repeat the question which is to follow up on issues of interconnectedness the extent to which We might be on the verge of the end of some of the Increases in oil pricing and that that may have implications going forward for Structural issues in the economy and policy. Is that correct? Well, I think we're at the verge of peak oil and that's one. Yes Oil production And that's going to give us a very different environment than we've worked in the past And I convinced that we're really not facing up to this issue at all and we've waved far too long to Deal with it in this country and it's a concern So my question was did they think about if they thought about this and do they have some comments on it? Yeah May I if you go look at the proposals that president ford made in 1975 for energy independence. They still stand up to scrutiny Uh We have not built a nuclear power plant since then We we knew then that we needed to build nuclear power plants. Our political system has basically failed us because There was a concern and I'm not here to tell you it was an illegitimate concern But there was concern about the safety of nuclear power plants And yes, we had Three Mile Island, which was a scary kind of thing And the russians had chair noble which was worse than scary But it should not we should as a power as a society. We should not have allowed The possibility of things gone wrong to keep us from acting on the need for energy independence to use allen's term and You know again to to be interconnected for a moment If you think about one of the reasons one of the primary reason we haven't built nuclear power plants Because there aren't any places Where it's possible In a reasonable period of time to get through all the regulatory hurdles so that you can Believe that you're going to be able to make an economic investment in it for the private sector to actually do it Now there are a couple that have been announced With intentions in texas in the last couple of weeks But think about this if we we we should have done this actually in 1975 We should have us we should we the federal government should have assumed the responsibility for creating fully licensed Environmentally sanctioned sites for nuclear power plant construction So we could say to the beckons of the world and to the investment community If all set all you got to do is come here and build it Yeah, we would have taken away some of the excuses that have kept us from doing nuclear power you know I You know some of you sometimes it's frustrating to be old in You know in 1980 in 1986 I was out there saying we needed a 50 cent per gallon gasoline tax To raise revenue but also to put pressure on On the supply on the demand side and on the supply side You know I I got written up in the Atlanta Journalist some kind of a raving Maniac for suggesting that we should do this for energy and environmental consideration We still haven't done it and it's now actually a better idea to have carbon taxes We need to get on with that Because I would suggest this to you again in the interconnected world the environment and the energy are the same subject They're not a separate subject Right and as in again as supposedly intelligent people We've known for a long time. We needed to act on these things It is really frustrating to see the current level of debate if you saw the newspaper this morning the On the issue of reducing greenhouse gas emissions You know all of the presidential contenders have either said They they don't know or A batch of them have said we should reduce greenhouse gas emissions by 80 percent by 2050 Now do you believe it's possible To reduce greenhouse gas emissions by 80 percent by 2050, you know, I don't know They're smoking something funny, you know I mean, it's a really weird thing to even be able to get away with that and have five or six of them all say Oh, yeah, I'm for 80 percent by 2050. I guess it you know, it it's a response to the rule that if it's beyond your lifetime You can say anything you want There is there's even another interconnected, you know Problems that are now addressed and the causes of them tend to continue They may go into hiding for a while and then they have other effects Unintended they look unintended antecedent effects that nobody can see and then one of these days They're short-sighted as we all are and our political system is we wake up and we get hit in the face with it And then we have a crisis in an emergency. This one's had a lot of a long lead time and the people who cry out 50 cent galling as excise taxes are Treated as you were treated even though in the long run they're going to be right It's very interesting to watch what's going on in the non G7 world with regard to oil least it is to me And the foreign exchange reserves of china of russia of south korea japan And in the case of russia A very strongly growing economy foreign exchange reserves are about 400 billion dollars now. That's pretty big And if you ask why well, they have they're the world's largest producer of oil They know that The outgoing head of russia knows that all the russians know that They've gotten kind of rich And what are they going to do with that? Foreign billion dollars of foreign exchange. It's tied to oil the opa countries the middle east countries They're rich right now. They're rich. They're coining money I don't think they want oil prices to come down all that fast all that soon And china china also produces some oil. It has some capacity to do it China has 1.4 trillion of foreign exchange reserves in part helped by a currency That china continues to artificially keep low What are they doing with that foreign exchange? Well, they wanted to buy An oil company Not too long ago. They've set up a private Publicly run but somewhat private sector to take 300 billion dollars of foreign exchange and invest it all around the world And every time if you look closely, what's china trying to do? I think they're trying to secure oil Yes, it's a strategic price in the world Are we in the middle east because of oil not because of oil? That's very arguable. There's a lot of debate about that I don't believe we went after saddam Hussein because of oil But a lot of people do think that including our friend ellen greensman who said it's all about oil I don't think he meant that there was a political motivation He means that oil is a strategic price in the in the global global economy and so an unintended effect of The oil price rise in our inability and unwillingness to come to grips With energy independence alternative fuels and to bite the bullet that we have to bite in the short term To sacrifice to have that happen is showing up in a lot of other ways that at the moment are making us relatively poor in the global economy It's uh, I share with paul As an older man Younger older american I I call people like you and me yoas Those are younger older americans There is some cynicism that goes with that age and haven't been around a while And but still I can tell that paul has the same youthful Exuberance and zeal on issues that he probably has had all his life and I do too And I I have to tell you i'm with him 150 percent There's something really wrong with our system if we can't Come to grips with stuff like this Um, we only have about five minutes left, which means one more question and um, Let me take the one from jim hack Then let me just expand then question one of the things you said ellen was that It was a supply side issue that drove stag flash and it was oil At the time 30 years ago the u.s economy was a much bigger part of world gdp Now that we're a smaller part aren't we subject to more supply side Shocks and disruptions take the issue of grain Take lumber take structural steel again take oil You know, you can name a number of commodities where we no longer Consume, you know the lion's share of it and we are really much more economy Is it mercy of what of what's happening in other economies? What effect does that have on our fiscal policy? What do we do about that? Assuming that's true the You know oil prices at 83 bucks, uh barrel and uh gasoline at 270 $2.70 Uh is is hardly is slowing us down in consumption a little bit, but not very much This is very much a demand induced phenomenon Coming from worldwide demand for this resource in a non-us world. It's growing much faster than we are And at 83 bucks inflation adjusted. It's still cheap gold is cheap Uh, we think those commodity prices are going higher. I don't share with you the supply restriction side of it But the uh, I share with you the view that the prices are going to go higher on crude oil That's less of a problem Same with food inflation, which we are absorbing in all its many forms. It's quite noticeable that similarity food and oil to the 70s Is very clear, but what happens when we slow down our vulnerability when we slow down? jobs growth slows the unemployment rate rises and that's going to happen The vulnerability and fragility to the rest of the world pushing those prices up A further difficulty for us will increase And the means to deal with it from a macro economic policy view are really very limited Very limited the central bank will reduce interest rates And that will give us yet another problem. Uh, it won't really allow inflation with the energy costs rising in food inflation to come down much And we will be stuck in a fairly slow growth environment With a higher hopefully static unemployment rate And then the politicians whoever they are will go to work on the problem And I wonder how they'll do Um with that, I hope you'll join me in thanking our panelists for their presentations At this stage, we'll take a break of about 10 minutes before we reconvene for the second panel. Thank you All right


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