James K. Galbraith eta Warren Mosler (2009an)

FEDERAL ACCOUNTING STANDARDS

ADVISORY BOARD MEETING

FEBRUARY 25, 2009

441 G Street, NW, Room 7C13

Speakers:

Jagadeesh Gokhale, Cato Institute

David M. Walker, Peter G. Peterson Foundation

James K. Galbraith, University of Texas

Warren Mosler, University of Cambridge

Stephen C. Goss, Chief Actuary, Social Security Administration

Joseph J. DioGuardi, Truth in Government

Victoria Vetter, Social Security Administration OIG

Edward J. Mazur, Association of Government Accountants FMSB

Eric S. Berman, Association of Government Accountants FMSB

Sheila A. Weinberg, Institute for Truth in Accounting

Representative Jim Cooper, D-TN, House of Representatives

(http://files.fasab.gov/pdffiles/hearingtranscript_2252009.pdf)

Court Reporting Services, Inc.

201 North Fairfax Street, Suite 21

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Phone: 703-548-3334; Fax: 703-684-7278

Dr. Galbraith and Dr. Mosler1

(i) Sarrera2

(ii) James K. Galbraith3

(iii) Warren Mosler4

(iv) Galdera Galbrath-i5

(v) Galdera Mosler-i6

(vi) Galdera Galbraith-i7

(vii) Galdera Mosler-i8

(viii) Galdera Galbraith-i9

(ix) Galbraith-en erantzuna10

(x) Galbraith-en erantzuna11

(xi) Mosler12

(xii) Galbraith13

(xiii) Mosler14

(xiv) Mosler-ek15

(xv) Mosler-ek16

(xvi) Galbraith-ek17

MR. ALLEN: Thank you very much. We appreciate that.

Stephen? Thank you very much. Again, I was, can I just assume that you will respond to written questions we have?

MR. MOSLER: Yes, and if anybody wants to contact me personally or whatever, I’d be more than happy, e-mail,

I’ll leave a card her.

MR. ALLEN: We’ve got your e-mail address in our briefing materials.

MR. MOSLER: Feel free.

MR. ALLEN: Thank you.


Mosler Bachelor of Arts‘ ekonomian zen, denbora hartan: 1971- B.A. in Economics, University of Connecticut. 2014- PhD, Franklin University, Honorary. (Ikus https://www.warren4governor.com/qualifications.html.)

Ingelesez: “MR. WALKER: You all can keep the ones that I had, I just want to make sure that they don’t’ have Tom Hanks’ autograph on them.

[Laughter.]

MR. WALKER: The reason I say that is because Tom Hanks is buying an option on the film, and I got him to sign several, so I wanted to make sure I didn’t give away those.

MALE SPEAKER: that’s the one we were after.

[Simultaneous conversations.]

MR. ALLEN: Please be very quick, let’s take a very, very quick break. We’ll give you guys an additional five minutes at the end.

[Recess.]

MR. ALLEN: Could we ask the audience to — we’d like to turn the time over to Dr. Galbraith and Dr. Mosler. Again, a very fascinating and different perspective. I talked about different planets, and there are several different planets out there. So I’ll turn the time over to you for any comments you want, and please allow us some time to ask you some questions.”

Ingelesez: MR. GALBRAITH: Thank you. I’m James Galbraith from the University of Texas at Austin. I’m accompanied by Warren Mosler, a Senior Associate Fellow at the [indiscernible] Center for Economic and Public Policy at the University of Cambridge [indiscernible].

I appreciate very much the opportunity to appear here, particularly given the somewhat sharp tone of my first intervention, which came in response to a request for comment from my colleague [indiscernible].

What we seek to do in our remarks here is to raise some fundamental questions about the project [indiscernible], in particular to pose the question very sharply whether it is appropriate to focus on these specters of solvency versus instability, which we believe are not well-defined questions, not problems that are likely to arise. And that the track, in fact, for a more appropriate focus on the actual problems that the issues that we’re examining could pose, namely, specifically, in the short run unemployment, if the management of the economy is not adequate to the current crisis, or in the longer run, inflation if some of the issue of excessive spending are [indiscernible] potentially are not addressed.

I want to first of all state some general principles and then to put some specifics on the table before you in just a very few minutes, and then turn over the floor to Mr. Mosler for a few thoughts.

The first and most basic general principles, there are two of them I’d like to mention, that separate the practice of accounting as it applies to the Government sector from the practice as it applies to the private sector. The first is that the Government’s interest is the public interest. The Government is there to provide for the general welfare. That is the objective. There is no particular correlation between this interest and a position of surplus or deficit nor of indebtedness in the Government’s books.

Secondly, the Government is sovereign. This fact gives to the Government authority that households and firms do not have. In particular, the Government has the power to tax and issue money. The power to tax means that the Government does not need to sell its products and the power to issue currency means that it can make purchase by committing IOUs. No private firm can do this. They can neither require that the market buy their products nor their debt.

Those are basic matters, in fact, they’re not controversial. But they tend to, I think, get overlooked to some degree when we are using the principles and ideas that derive from private sector accounting to develop appropriate financial standards for the U.S. Government. In the real world, of course, what we observe is that the U.S. Government does tend to run persistent deficits. This has been true since the beginning of the Republic, and it is matched by a persistent tendency of the non-government sector to save. The non-government sector accumulates net claims on the Government, the non-government sector’s net savings is equalized by identity to the U.S. Government’s deficits. Debt issued between the private parties cancels out, but debt between the private sector and the Government remains, with the private sector’s net financial wealth consisting of the Government’s net debt. So this is something which needs to be taken account of when you consider the position of the Government in relation to the national [indiscernible], two general principles I wanted to raise.

And then I want to raise very specifically a handful of more specific points that relate to issue that I think need to be addressed in the development of the exposure drafts. First is a very basic principle concerning the nature of a balance sheet. The [indiscernible] drafts are intended to be statements of financial condition for the Government and for the Nation. The first point is that these two concepts, the Government and the Nation, are not interchangeable. And to use them interchangeably as the exposure drafts do is a source of confusion.

And the second point, in our understanding, a statement of financial condition is in general a balance sheet. And that term’s been used already extensively this morning. But balance sheets, in our understanding, are generally constructed with two columns, one for liabilities and the other for assets. That’s a principle which istrue, it seems to me, for the public as well as for the private sector.

But in the drafts as we read them, there is essentially no effective treatment of the concept of assets, either as it applies to the public sector or as it applies to the Nation as a whole. And the important point about developing a balance sheet for the Nation is the transfer programs which have liabilities to the Government are offset by assets to the public. So that very same, very large number of $53.4 trillion [trilioi amerikar bat = bilioi europar bat] or whatever the number was of our net present value of Government liabilities in Social Security is simply offset by comparable asset, Social Security wealth held by the public is a matter of accounting, it seems to me. If we are talking indeed about financial statements for [indiscernible], the accounting should reflect the assets on the balance sheets [indiscernible].

A second issue of definition that troubled us in the development of the exposure drafts is the use of the term budgetary resource. It was never very clear exactly what the term budgetary resource is intended to mean. The apparent concern in the document is that the Federal Government operate within the budgetary resources available to it and that the draft say that the budgetary resources should be sufficient “to sustain public services and meet obligations as they come due.” What does it mean? If what is meant by budgetary resources tax revenue, then that’s clearly an inappropriate definition. As I’ve already noted, the Government does not need tax revenue sufficient to match spending in order to sustain public services and meet obligations as it comes due. It’s obvious. The Government almost never has and never has had sufficient tax revenue for that purpose. It has run significant surpluses for only seven very brief periods in the history of the Nation, each of them followed by a depression or recession because of the effect of those surpluses on the private sector’s capacity to spend. This is why we have a national debt to begin with.

And yet, despite this, the Federal Government has never in more than two centuries of operation lacked for budgetary resources sufficient to sustain public services and meet obligations as they come due. That’s also obvious insofar as the Federal Government has never defaulted on its debt, including making all of its interest payments.

But if on the other hand the term budgetary resources is to be construed more broadly, which is possible, as to mean tax revenues and public borrowings sufficient to sustain public services and meet obligations, apparently intended to inform the public about the borrowing capacity of the Government of the United States. That too is an interesting and important issue. Former Comptroller General Mr. Walker this morning has spoken about it extensively in the earlier hearing. But the procedures outlined in the exposure draft do not contain any information or guidance as to how to assess that situation and that question in an objective way.

The third point concerns the use of, or I should say, in our view, mis-use of economic projections and assumptions. The exposure drafts seek to assess what they call “the impact on the Country of the Government’s operations and investments.” It’s very difficult to do this without assessing explicitly the economic effects of such operations and investments. For example, if a stimulus bill produces a higher rate of growth and a lower rate of unemployment, then that is surely an impact on the Country of the Government’s operations and investments. What else could it be.

But the procedure of the exposure drafts, by fixing the economic forecast for the long term, explicitly propose to ignore those [indiscernible] and it sets to draw the inference that there are no real economic benefits associated with the higher growth or lower unemployment, only financial costs of measures such as the stimulus bill. It’s clearly not a sensible procedure when you are talking about policy that is specifically intended to influence the economic gaps.

Government spending can indeed be excessive, and the consequence of excess Government spending is not a refusal on the part of foreign creditors or anyone else to hold the bonds associated with that deficit spending, it’s rather a possible devaluation of the dollar and a possible decline in the real terms of trade with a country and a rise in the rate of inflation. And that’s an appropriate concern up to a point and under certain conditions.

But it is also ruled out by the proposed assumption and the exposure drafts of unchanged economic conditions. Unlike the non-issues that we mentioned briefly, this is a real concern and it’s one that deserves actual attention. But if one focuses on the non-concerns then getting to the real one is something that doesn’t seem to happen.

Fourth point, there is in the exposure draft a certain amount of back-door policy-making, and this is related to the concepts of fiscal GAAP and fiscal sustainability. In the draft, the board introduces this concept of fiscal GAAP and states as a policy norm that it would be desirable “to maintain public debt at or below target percentage of gross domestic product.” And this seems to be accepted in the drafts as a non-controversial position. And we do agree that setting such a target would be better than setting the target arbitrarily to zero. Because it does imply that the public debt can essentially grow alongside GDP, which is normally the case.

But there is no such policy objective in any statute of the United States Government. Nor can any such objective be justified by reference through any economic theory or operational constraint that we know of. There are times when the share of GDP, of debt in relation to GDP could rise, there are times when it should fall, and there are times where it will rise or fall irrespective of what policy does. So there doesn’t seem to us to be any justification, either in law or theory, to attempt to legislate that matter in an accounting standard.

A fifth point concerns the question of time horizons, which you’ve already talked about at some length this morning. We believe that it is really unproductive to spend a great deal of intellectual effort trying to project the financial consequences of unknown events 75 years or more into the future. And that there is a tendency when you do so to incorporate in the assumption projections, which are prima facie unrealistic. An example of this is the idea that health care costs can grow without limit as a share of GDP. Nothing can grow without beneficiary GDP, or it will end up absorbing all of GDP and is simply an unrealistic assumption. Something will happen to prevent that from happening. There will be health care reform or some other phenomenon but we will not be in an economy with no resources left to produce food, shelter, industrial goods and education.

So to project that out over an indefinite time period is simply an exercise which is in violation of Herbert Stein’s law as articulated to President Nixon that when a trend cannot continue, it will stop.

We believe, and I’ll be very brief, that it serves very little purpose, and no useful purpose, to project financial shortfalls for Social Security and Medicare and to refer this into the future, and no purpose whatever to revise those programs today on the basis of such projections. And in general, we believe that the notion that there is some unfunded liability amounting to tens of trillions of dollars in the U.S. Government’s accounts, and that this has some material effect on the current condition of the economy and the economy in the future is a simple misunderstanding, I use a stronger term in the testimony. There cannot in fact be any such underfunding because the U.S. Government always has the operational ability to make all payments as they come due, and we know, could do so, even if, through some strange accounting mistake or trick, one concluded that Government liabilities exceed private assets.

It’s very important that these matters be dealt with in a way which is consistent with what we think are correct accounting principles and correct economic principles. Because otherwise, there will be a strong tendency for the policy effect of these proposals to lead to the unjustified gutting of Social Security and Medicare, two programs which certainly in my view and my colleagues’ view, are ofbabsolutely vital importance for sustaining the well-being of the elderly population of the United States and the population which is to be elderly at some time in the future.

I will turn it over to Mr. Mosler for a few brief comments.”

4 Ingelesez: “MR. MOSLER: Thank you.

I just want to say, I’m 59 years old, I grew up on the money desk at Bankers Trust in the early 1970s. I know how the checks clear, I know how the accounts work. I’ve managed, on one of those, a hedge fund manager, I stated my own fund in 1982. And fixed income [indiscernible] space. So I’m here again because I know how the monetary system works, how the debts and credits work. So I’m going to give you a couple of examples, five examples here.

For example, what happens when a Treasury bond matures? What happens when China’s $1 trillion in treasury bonds matures? What actually happens? Well, their securities account at the Fed is debited and their bank account at the Fed is credited. Done. End of story. There’s no financial event that happens beyond that. Has their wealth changed? No. The financial assets are the same. Instead of having a securities account, which is nothing more than a savings account at the Fed, they have a checking account at the Fed. And then we ask them, what do you want to do then. And if they spend that money by buying or selling something else, we debit that account and we credit the account of whoever they bought it from. There is no money flowing overseas. That whole thing’s been a big misunderstanding.

How does Government make a payment? We’re talking about Social Security. But let me look at the side of collecting taxes, Social Security taxes. So if I go into the Federal Reserve and I decide, I was a waiter and I’ve got $10,000 in cash, I’m going to pay my Social Security payment in cash. The Fed takes the money, they give me a receipt, they say thank you very much, you’ve just helped Social Security. And as soon as I leave the room, they throw it in the shredder. That’s an operational fact.

Now, how does taking my cash and throwing it in the shredder pay for anything? Well, of course it doesn’t. The purpose of taxes, we go back into macroeconomics, is to reduce aggregate demand. It has nothing to do with our current currency arrangements for collecting the thing we actually need to spend on anything else.

And how does the Government make a payment? So I’m looking at my computer screen, I’m 75 years old, I have nothing else to do. I have $1,000 in my bank account and today’s the day my Social Security payment hits. All of a sudden, the 1 turns into a 2. I’ve just gotten paid. How did that happen? Somebody at the Fed changed the number on my bank account. They didn’t take some gold coin out of some box and hammer it into the system. They didn’t take somebody’s taxes and give them to me. In fact, the person who made the payment doesn’t even have the phone number of whoever’s collecting taxes at the IRS or whoever’s borrowing the money.

And where else do we see that happen? You kick a field goal in a football game and your score goes from 7 to 10. Where did the stadium get those three points? You go bowling and you knock down five pins and your score goes from 12 to 17. Where did the bowling alley get your score? Do we believe that all bowling alleys should have reserves of 10,000 points in case bowling gets popular and people come in and get a large score to make sure that they don’t run out? Of course not. It’s the exact same thing.

So, let’s look at the intergenerational transfer. Does this mean that in 2029 when our children build 20 million cars, they’re going to have to send them back to 2009 to pay off the debt? I’m sure a lot of you can trace a lot of our debt to World War II. Are we still building goods and sending them back to 1945 to pay for World War II? Of course not. There is no intergenerational transfer of real goods and services. Whoever’s alive gets whatever’s produced that year.

What it can affect and alter is the distribution of those goods and services produced in any given year.

Yet, that’s what government’s all about, altering distribution, whether it’s through altering income, altering spending power, altering tax advantage, whether it builds consumption grids or investment grids. We can alter the distribution any way we want. We are not burdening a future generation with anything by making these nominal changes to a spreadsheet at the Federal Reserve. They have full control over doing whatever they want with it.

And the last one that we talked about is that deficits add to savings. And this has been completely dismissed recently. I know some of you are from CBO and OMB. The first macro equation is the Government deficit equals the non-Government savings or surplus of financial assets. Which means, if the Government deficit is $500 billion, [Amerikar bilioi bat = mila milioi europar] this year, that adds exactly $500 billion to the accumulation of financial assets o the non-government sectors, domestic, residents, non-residents, business. Add them all up, it has to add up to exactly $500 billion, not $599 billion and not $501 billion, or somebody at the CBO has to stay late and find their arithmetic mistake and make sure the books balance.

And yet we’re bombarded with this idea that deficits somehow take away our savings.

And let me go through a very quick transaction here, again, operationally, this is no theory here, this is just accounting fact. The Government borrows $100 billion. What does it do? It issues Treasury securities. How do they get paid for it? Somebody uses their bank account. A hundred billion in what are now reserves at the Fed withour new access reserves because the way the Fed’s building their portfolio. So bank accounts at the Fed are reduced by $100 billion, and somebody’s securities account now has $100 billion of those securities.

The wealth, nominal wealth of the private sector has not changed. Somebody transferred debt, had their bank account debited for $100 billion and their securities account credited. Instead of having $100 billion in balances at the Fed, they have $100 billion in T bills. Nothing’s changed yet.

Now, the Treasury takes that money and spends it. What does that mean? We’ve got the $100 billion back. So the net result of borrowing $100 billion and spending it is the balances are exactly the same in the private sector, but there’s an additional $100 billion of Treasury securities out there. And that constitutes the net nominal wealth of the private sector, because everywhere else, it’s loans equals deposits, again to the penny, that someone has to find an arithmetic mistake, assets and liabilities. The net nominal wealth is always equal to Treasury securities outstanding, reserves at the Fed and cash in circulation. Again, these are just fundamental accountings of macroeconomics. We’re trying to bring this discussion back to the fundamentals that have somehow gotten lost. They give a very different picture of what’s happening.

The two issues of sustainability and solvency are not issues. And that’s where all the attention goes, and it’s diverting the real attention from how this spending over time will have effects on inflation, and there of course we’re, and so what’s happened is that 100 percent of our resources are going into an issue that’s of no consequence, where zero percent of our resources are going into the side where it could be of some consequence. Thank you.

Ingelesez: “MR. ALLEN: I have a question, but let me go ahead and open it up for board members. Jim, then David.

MR. PATTON: I think your point about focus on the Nation versus the Government is a good one. And it is true that in our objective we talked about the condition of the Nation and the Government. think practically we have focused more on the condition of the Government. If that’s right, how does that affect some of our comments?

MR. GALBRAITH: Well, it seems to me it’s appropriate to focus on the condition of the Nation, particularly when dealing with transfer programs. Because as I said a minute ago, the liabilities for the Social Security benefits are simply a counterpart of the wealth, Social Security wealth. Corresponding, the assets of expected tax revenues are simply corresponding liabilities of the working population. So that once one becomes clear about that, a lot of the drama associated with these very [indiscernible] numbers and with a kind of [indiscernible] I think an unnecessary degree of fright in the general population when trillions of dollars are associated with phrases like unfunded liability would tend to be dissipated. And that would be a good thing because it would enable us to discuss these issues in a much less politically inflamed environment.”

Ingelesez: “MR. TORREGROSE: I’m from the Congressional Budget Office. I guess we would agree that health care cannot rise forever at 2 and a half percent above growth rates. But we do long-term projections that show various sensitivities. But under most scenarios, CBO still concludes that we have an unsustainable fiscal path. And by that we mean that the Federal debt will grow faster than the economy in the long run.

I think this goes to your first principles, I will take this directly from a long-term report, substantial budget deficits would reduce national savings, which you agree with, or Government savings, would reduce national savings, which would lead to an increase in borrowing from abroad and lower levels of domestic investment that would in turn constrain income growth in the United States. In the extreme, deficits could seriously harm the economy.

Now, I think it’s important to put the fiscal gap in terms of expected GDP, so that the numbers don’t leap out without context. But the idea that a fiscal gap shows that some debt is sustainable over time, but not a rising level of debt.

MR. MOSLER: How do you define sustainable? Does that mean when the Government goes to make a payment the guy’s going to get an electric shock when he tries to –”

Ingelesez: “MR. TORREGROSE: The definition here is sustainable in terms of not having a negative impact on the economy, which is the big question.

MR. GALBRAITH: Well, let’s talk a little bit about the CBO model. Because I suspect the difficulty here lies in fixing certain terms of the model, while allowing others to grow. That is to say, what you’re doing is you’ve got this assumption about, which is based in recent history of the rising share of health costs and GDP. And you’re trying to force that into a long-term economic outlook in which you’ve got a real growth rate governed by productivity growth and an inflation rate govern red by I’m not sure what.

But I would argue that if you got a problem with health care costs rising more rapidly that it’s going to be translated into a higher inflation rate so that your model is not consistent in that sense. A higher inflation rate does mean that GDP will rise more rapidly and the debt to GDP ratio will tend to rise less rapidly than you’re projecting. So in some sense, the problem that we’ve, I certainly concede, is a potentially serious problem. You’ve got some engine that is going to generate, you genuinely thing you’ve got some engine that’s going to generate a higher than tolerable rate of inflation, that’s the terms in which you should be addressing this problem. It is not sensible to say that something’s going to happen that’s going to cause the rest of the world to refuse to accept payments in dollars, or for that matter, the American citizenry to refuse to accept payments in dollars, except possibly through that mechanism. It has happened in history, in 1923 in Germany, for example. But I don’t think we’re anything, in your projections, looking at anything quite that severe.”

Ingelesez: “MR. TORREGROSE: I certainly hope not.

MR. MOSLER: And if you’re going to define sustainability as that, I would just use those words, the word sustainability, insolvency and implications for readers that there’s going to be some kind of default and that’s why it’s not sustainable. It’s going to come to an end. And the end isn’t going to be the inflation rate’s going to go up or we’re not going to have enough food because there’s too many health care workers.

Ingelesez: “MR. ALLEN: Let me broadly ask a question. As I read the letter that you sent to us, I thought there were a number of excellent points. And I thought, okay, how could we deal with that, and onto the next issue where you raise the point. I concluded, and as I listen to you today, I’m struggling to say, my initial question would have been, okay, well, how can we deal with that in our sustainability report.

But I suspect what you’re saying today is that we’re not telling you to correct your report, we’re telling you the whole concept of what you’re trying to gather is wrong, it’s sort of a misdirected effort on our part. Am I reading too much into that? Like I said, I was hoping to be able to correct this. But I think you’re saying, do something else.

MR. GALBRAITH: Let me suggest some useful things you could focus on in your discussions. I tried to highlight them in my summary. If you could get your minds around this particular distinction that we were talking about between the Nation and the Government and deal with that question, if you could put assets alongside liabilities, and the concept of a balance sheet, which is the term everybody has been using around the table, as opposed to financial statement, which is again something whose meaning I’m not entirely sure of.

If you could deal with the question of what is a budgetary resource, that seems to me a phrase which is very imprecisely defined. And if it means, again, tax revenues, you’ve got a problem that the tax revenues never need to be adequate to cover spending and never will be to be adequate, because the Government has the capacity to increase its net debt over time, if you’re talking about taxes plus borrowing, then, as again you were earlier this morning, it’s appropriate then to ask the question what do you know about the Government’s capacity to borrow.

So those issue all seem to me to be questions which can be raised form within the framework of what you’re doing. I think that once you push those lines of argument sufficiently forward, you’ll run into some more difficulties. But that would be at least a constructive way of looking within the exposures drafts as they are [indiscernible].

10 Ingelesez: “MR. ALLEN: Okay, thank you. Nancy, and somebody else —

MS. FLEETWOOD: I might get killed with my question, but I’ll ask it anyway. I guess what I’m hearing, and again, I’m an accountant, not an economist. So when I listen to your discussion, what I’m hearing, and tell me if I’m hearing this wrong, is the way we present this thing is just unrealistic because it’s not going to happen that way, because something would happen, inflation or something else that would not make us get up to where GDP would be that high or the percentage of GDP would be that high.

I guess actually, I think even from an accounting perspective, we all agree that this is not going to happen. I guess from my perspective, the point of these, to do charts like this or projections like this is to show more of a simple reader that if things continued as they were, this unrealistic picture would happen, and so we do need to make changes. Not to make it so that we really believe that this ultimately would be there.

So I guess what I was thinking, take into account what you’re saying, if we adjusted it for inflation or adjusted it for taxes or printing money or whatever, other things that we would do not to let this happen, I don’t know that we would be showing the people anything that would be — I guess I’m trying to figure, like Tom, I’m trying to figure how could I take into account what you’re saying and adjust what you’re doing. And I’m not sure I got my, I still understand. If you had the pencil and you were sitting to write what it would be, what would you want to show? What would be meaningful for us to show the public as best as we could at this moment so the decision-makers could make decisions to avert whatever may be the future?

MR. GALBRAITH: Well, it gets to a question of what the policy priorities really are. I think there

probably is agreement around this table that there is a major problem in the Country with the provision of health care, that the share of health care in GDP is larger than it is in other countrieswhich provide perfectly adequate health care and do so to their entire population. Now, some of that in our system has to do with the fact that we use real resources to justify our accounting to provide private insurance and keep that section of the industry going that other countries simply have dispensed with by providing a universal coverage. And that is a very resource-saving activity, which has to do with the share of health care expenditures in the private rather than the public sector.

That seems to me to be a problem of which there’s wide understanding. It’s not obvious to me that these fiscal projections are constructive, because they tend to focus on Medicare. And Medicare is the portion of health care which has the least of that basically unnecessary use of resources for accounting purposes. So that it strikes me that there’s a problem of focus in the way in which the health care issue is addressed.

With respect to Social Security, there are two questions here, issues that are important to bear in mind. Insofar as we’re concerned about the welfare of the elderly population now and in the future. One is that the elderly population is getting larger as a share of the total. So how we, the resources that we use to maintain them are going to grow as a share of GDP. And if they grow just 6 and a half percent of GDP and Social Security, it’s not the end of the world, that still leaves 93 and a half percent of GDP in other channels. And those are, that’s a valuable population, it’s a population which has contributed through their entire working life and has every reason to expect that it will get a modest and reasonable retirement safety net from the Social Security system.

But the other thing I would bear in mind about that is that as we speak, in the present crisis, for the population that is now elderly or about to become elderly, so much of what we expected as a Country to them is clearly not going to be. The value of their houses has fallen, in some cases by over half. The value of their holdings in the stock market has fallen by half or more, and we have no assurance that it will recover, that it will recover for this generation of elderly.

And a third way, to the extent that they have cash holdings, in this environment of very, very low interest rates, the income that they can get on their cash holdings has fallen very, very shortly. So the elderly are under a terrific financial squeeze. And to compound that squeeze by threatening the future value of Social Security benefits strikes me as really piling it on to a very vulnerable population.

And so it seems to me that one needs to be conscious about the way in which the framing of these issues drives the debate the focus on the so-called Social Security and Medicare entitlement question, when really what we have here is in Social Security, a program which effectively keeps a large portion of the elderly population out of dire poverty, has done so for decades. And in Medicare, we have the part of the health care system which actually in many ways consumes, besides the fact that it’s dealing with the elderly population who are per se more expensive to deal with, but consumes per unit of health care probably less than much of the rest of the health care system, and is not by itself the size just of the health care issue, in other words, when you have to do the amount of care that we provide and the fact that we provide it very inefficiently by allowing chronic conditions to develop amongst uncovered people who then come into Medicare as expensive cases.

11 Ingelesez: “MS. FLEETWOOD: So you’re kind of seeing this, the way this is going to be, just making sure I’m understanding you, that this is alarming, that presenting it in this way is somehow going to cause, like you said, adding on, I take that to mean that it’s going to give a message that isn’t a message that you think ought to be given out?

MR. GALBRAITH: That’s right. I think it distorts the policy debate and I think it is unnecessarily alarming. It’s through a glass darkly, if you like, and it’s raising questions in people’s minds about issues that are connected loosely to real concerns over the structure of our health care system in particular, but in ways which will tend to drive the discussion away rather than toward measures that would actually make their lives better and deliver health care to them at a lower cost.”

12 Ingelesez: “MR. ALLEN: John?

MR. FARRELL: I’m afraid my question is going to disclose the grade I earned in economics in college. But if the real concern that you’re speaking of here is devaluation of the dollar or inflation or real terms of trade within a country, if those are the things we as a Country should be worried about, and some of our policies are driving those things in the wrong direction, how do we then as a board who’s proposing on preparing financial statements to help people understand that, how do we get at those metrics if that’s what we’re supposed to be doing, as opposed to some other things we are doing. Have I missed this point?

MR. MOSLER: No, and I’d say that’s exactly our point, that there are no resources going in that direction, there have been no studies commissioned in those directions. They’ve all gone into other directions.

Just to add quickly, on the previous question, if you look at Japan, with a GDP of over 100 percent, downgraded below Botswana, and their securities, three month bills go through at zero percent and 10-year notes at 1.3 percent. Clearly these are not, these concerns, there’s more going on. It’s not about creditworthiness, it’s not about somebody willing to buy your debt.

All these countries, Turkey would have gone out of, defaulted long ago. They issue quadrillions [europar mila trilioi] of lire of securities every week. They don’t even have calculators that go up that high. So it’s got nothing to do with the normal concerns. And yet, you’re exactly right, and that’s what we’re trying to do, I think. Go ahead, you can elaborate on that.

13 Ingelesez: “MR. GALBRAITH: Just to take another hat out of my background, I have served as an advisor to, of all places, the government of China, so I have some sense of their, the place that financial policy plays in their, the architecture of their development strategy. It plays a very secondary role. And I think it would be useful to devote some resources to attempting to understand what drives the foreign sector to hold or to not hold U.S. Government [indiscernible] assets and why, just for example, what happened in the last four months. We’ve had a sharp rise in the dollar. The pound has dropped and perhaps heading toward parity, the Euro has dropped sharply. The Swiss franc, very fragile.

Why is this happening? Why was there a flight to the dollar and to U.S. dollar-denominating securities just a moment when a financial crisis was hitting that actually originated in the deregulation of the housing finance sector of the United States? I don’t think that that question has been asked in official circles in Washington, and I think the answer to that question would give us some real insight into these matters of just to what extent and to what degree of the U.S. Treasury’s borrowings, long-term borrowings at the current rate, 3 percent or so over 10 years, is, are sustainable.

We haven’t studied the question. Until we’ve studied it as a group and as an official community, I don’t think we’re going to have, we’re going to be, reduced to caricatures about the intentions of foreign entities who in fact we don’t, we could in fact I think know a great deal more about what they are than we do. It’s not difficult to find out what the Chinese are thinking, you only need to ask them.

14 Ingelesez: “MR. MOSLER: And in terms of concern over whether or not they will buy our securities, I’ve been in these financial markets for years. And I can tell you, they’ll get sold to the second highest bidder, which is one basis point higher in yield, or maybe two, especially in the short end. Maybe not even that. And in the long end, of course, that’s, they’re not operating along that for the most part. But the worst thing that happens is that it affects the yield curve a little bit. It’s certainly not our concern for political purpose like it’s been made out to be.

And the term national savings, I just want to go back to that just briefly, because it was mentioned, that’s a gold standard term that was used to determine what foreign claims were on our gold supply. It’s basically equal to the trade deficit. It’s just not applicable with today’s non-convertible currency, where the only thing you can get for a $10 bill is two fives at the Government.

[Laughter.]

MR. MOSLER: It’s not an applicable term to use.”

15 Ingelesez: “MR. ALLEN: Jeannette, let me let you ask the last question and we do need to wrap up.

MS. FRANZEL: I’ll preface this by saying I’m an accountant, and I just want to make sure I’m not

misunderstanding the main point you’re trying to make.

Because when I think about how financial statements are used in the private sector, and given the state of the stock market, this is probably a really bad example right now, but I’m going to use it anyway, you know, the accountants prepare the financial statements and they’re audited and that’s really used as a starting point for objective, neutral, fact-based information with proper disclosures. And that’s a starting point for some of the financial analysts and others who are taking a look at that data, they’re making some adjustments, they’re looking at the broad, overall economic context, the industry conditions, et cetera. And then really making recommendations about the future of the company.

I’m kind of thinking that the point here would be somewhat parallel that these financial statements should provide some good, neutral, objective information with proper disclosures. That would really be a starting point for the economists to take a look at the current scenario, the economic situation, the international situation and so on, to then do much of the analysis that you all have been alluding to today. I can’t fathom how we would put that analysis into financial statements, but rather use the financial statements as the starting point for that type of economic analysis.

MR. MOSLER: Right. They would be, the structure would be useful for that type of analysis, yes, for public purpose. “

16 Ingelesez: “MR. ALLEN: If you were going to comment, and I’ll ask you to do that in writing, if that’s okay. What we have, how it could best meet the goals that Jeannette laid out. In other words, if we go ahead with the project, what ought we to provide some additional information that would help in the analysis that you’re talking about after the issues that you’ve identified as —

MR. MOSLER: I’d say you line it up as to what you expect it might do for aggregate demand going into the future and for distribution. Distributional issues into the future, rather than solvency and sustainability. I would look at aggregate demand and distribution [indiscernible].”

17 Ingelesez: “MR. GALBRAITH: I think that’s right, but I also think that just from an accounting standpoint, a financial statement, to be clear and useful, should have all of its terms very carefully and precisely defined, and if the term financial statement was not clearly defined, was not clearly a balance sheet [indiscernible] the assets, the question of budgetary resources is not clearly defined. And you think about it, the focus of the policy changes. And there were several other points that I made in my statement that would bear very careful consideration as you move forward.

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