Short-term vs. Long-term Solutions:
Paul Volcker believes that addressing the long-term problem of the U.S. budget deficit will take time and involve redesigning the tax system and controlling spending. Alan Greenspan emphasizes the importance of dealing with the short-term issue of unsustainable spending as it affects the long-term solution.

Problem of Entitlements:
Greenspan points out the significant increase in government social benefits, which have risen sharply even during fiscally prudent Republican administrations. He stresses the need to address this bipartisan issue decisively to prevent its negative impact on savings, capital investment, productivity, and economic growth.

Market Reactions and Advance Notice:
Greenspan warns that the markets may respond negatively to the U.S. fiscal problems even before policymakers notice. He emphasizes that markets do not provide advance notice of crises, and addressing the issue after a crisis arises is too late.

Creating a Convincing Program:
Volcker highlights the challenge of creating a convincing program that demonstrates a path towards a balanced budget over several years. He stresses the importance of convincing the American public and the world that the U.S. is on a sustainable path to address its fiscal problems.

Reserve Currency Status:
Volcker acknowledges the advantage of the U.S. reserve currency status in financing deficits at low interest rates. However, he cautions that this status is a “two-edged sword” and that relying on it indefinitely is not a sound approach.

Karl Marx’s Quote:
Volcker quotes Karl Marx’s statement, “give bankers enough rope, they’ll hang themselves,” as a warning against excessive reliance on borrowing.

Asset Values and Economic Crises:
Paul Volcker emphasizes that excessive borrowing can lead to a severe crisis. Alan Greenspan highlights the risk of asset evaporation due to rising discount factors, causing values to collapse.

Alternative Investment Options:
Greenspan argues that investors have various options besides traditional assets, such as goods and gold.

Credibility and Long-Term Solutions:
Pete Peterson raises the challenge of establishing credibility for complex reforms like tax and entitlement changes. Volcker suggests setting a GDP target for expenditures as a clear and accepted goal.

Simpson-Bowles Proposal:
Volcker mentions the Simpson-Bowles proposal as an example of setting a GDP target for expenditures.

Consensus on Spending Goals:
Paul Volcker highlights the challenge of reaching a consensus on spending levels due to unpredictable future circumstances. Historically, spending has been around 20% of GDP, but reaching that level again seems difficult. Setting numerical targets for spending and taxation is one approach, but implementation can be challenging.

Taxation vs. Spending:
Alan Greenspan argues that controlling spending through legislation for an extended period is nearly impossible. Rescinding entitlements is challenging due to legal and political implications. In contrast, taxes can be adjusted more easily without the same political pressures.

Prioritizing Spending Reduction:
Greenspan emphasizes the importance of addressing spending first, even if it means raising taxes temporarily. Avoiding a continuous deficit is crucial, even if it leads to a moderate recession. Painful adjustments are necessary, and the goal is to find the least painful alternative.

Political Implications:
Increasing taxes to reduce spending is politically challenging. However, it is more feasible than addressing entitlements, which face strong political resistance.

Short-Term and Long-Term Solutions:
Three different perspectives on addressing the fiscal issue are discussed: Prioritize short-term economic stimulation and leave the long-term problem for later. Focus on long-term solutions, even if it means hurting the economy in the short term. Combine both approaches: lay out a long-term plan but delay its implementation until the economy recovers.

Importance of Compromise and Communication:
Alan Greenspan emphasizes the significance of compromise and dialogue in a democratic society. He highlights the lack of communication and willingness to reach agreements among different parties as a major obstacle to resolving the fiscal issue.

The Debt Ceiling:
Greenspan questions the necessity of the debt ceiling, considering it redundant to the appropriations process and tax code. He argues that the debt ceiling is a political tool rather than an economic necessity.

Approaching Tax Reforms:
Paul Volcker acknowledges the difficulty in reforming the tax system due to the prevalence of deductions and loopholes that people want to keep. He cautions against expecting quick resolutions to tax reforms, as it involves complex debates and requires careful consideration.

Consensus Building:
Volcker believes that building consensus on both spending and taxes will take time, likely beyond 2013. He emphasizes the need for a thorough evaluation of tax deductions and loopholes to determine which ones to eliminate.

Economic Impact of Taxing High-Income Earners:
Raising taxes on those earning above $250,000 could potentially have significant economic consequences. There’s a belief among some that increasing taxes on these individuals, often referred to as “job creators,” could negatively impact the economy.

Savings and Capital Investment:
High-income earners tend to contribute a substantial portion of personal savings in the economy. Increasing taxes on these individuals could lead to a reduction in savings, impacting capital investment and productivity growth.

Direct vs. Indirect Effects on Job Creation:
While some argue that taxing high-income earners directly affects job creation, Alan Greenspan views it as a secondary or tertiary effect. Greenspan emphasizes the primary impact of tax increases on savings and capital investment, which ultimately influence productivity and economic growth.

The Stability of Government Social Benefits and Gross Domestic Savings:
For the past 30-40 years, there has been a remarkable stability in the economy, where the sum of government social benefits and gross domestic savings has remained between 26% and 28% of the GDP.

The Trade-off between Social Benefits and Savings:
As government social benefits increase, gross domestic savings tend to decrease, indicating a negative correlation between the two.

The Impact on Long-term Growth:
The decline in savings due to rising spending affects the long-term growth of the economy, making it challenging to meet the growing entitlement benefits.

The Need for Fiscal Discipline:
It is essential to control the rise in spending to ensure long-term economic growth.

The Role of Taxes:
Taxes are used to fund government spending, and a balanced budget requires taxes to be equal to spending.

The Failure of Deficit Spending:
Attempts to manage taxes and spending separately have failed, leading to a fiscal cliff.

The Importance of Prioritizing Spending:
Spending should be determined first, followed by adjusting taxes to fund that spending.

The Bias towards Deficit Spending:
The sophisticated economic policies and models have led to a bias towards deficit spending, making it challenging to achieve a balanced budget.

Europe as a Case Study:
The European experience serves as a lesson in the consequences of unsustainable fiscal policies.

Possible Solutions from Europe:
There are signs that Europe is developing potential solutions to address their economic problems.

Financing Fiscal Deficits with Central Bank Money:
The European Central Bank has been financing a large portion of the fiscal deficits of the 17 countries in the Eurozone by lending money directly or buying bonds from individual countries. This has led to a significant increase in the European Central Bank’s balance sheet. There is no evidence that the Eurozone countries are converging economically, making it difficult to address these fiscal deficits.

Greece’s Debt Crisis:
The level of debt in Greece is unsustainable and there is no clear path to paying it off. This is causing political problems in the northern European countries that have been guaranteeing the debt of southern European countries.

Euro’s Cultural Problem:
The Eurozone is facing a cultural problem that makes it difficult to hold together. There is a lack of restraint in borrowing and spending, especially in southern European countries.

Lesson for the United States:
The Eurozone crisis is a lesson for the United States, which has also experienced a significant increase in debt and borrowing. The United States needs to learn from the mistakes of the Eurozone and avoid a similar breakdown.

Presidential Advice:
If the President were to ask for advice, the experts would likely recommend addressing the country’s fiscal deficits and implementing policies to promote economic growth and convergence.

Short-Term Deals and Fundamental Tax Reform:
Paul Volcker emphasizes the need for a short-term deal to address the unsustainable situation of budget sequesters and tax increases. He advocates a comprehensive review and reform of the tax system.

Social Security, Medicare, and Spending:
Volcker stresses the importance of addressing Social Security and Medicare alongside tax reform. He poses the question of whether the public is willing to pay a higher level of taxes to sustain government spending.

Alan Greenspan’s View:
Greenspan criticizes the lack of action despite positive rhetoric from both the White House and Congress. He emphasizes the need for concrete action rather than mere talk or posturing. Greenspan predicts that the Simpson-Bowles plan, which proposes tax and spending reforms, will ultimately be adopted, either before or after a crisis.

Pete Peterson’s Questions:
Peterson reflects on questions he should have asked during the discussion. He expresses his desire for the conference to consider and adopt the Peterson plan, which aims to address the fiscal deficit through a combination of tax reforms, spending cuts, and entitlement adjustments.