Glenn Hubbard: "Balance: The Economics Of Great Powers From Ancient Rome To Modern America"

MS. DIANE REHM

11:06:56
Thanks for joining us. I'm Diane Rehm. Glenn Hubbard says narrow-minded American politicians have created a middleclass entitlement state. In a new book the former chair of the Council of Economic Advisers under President George W. Bush says we must lower our debt.

MS. DIANE REHM

11:07:19
He says we should begin by rolling back federal benefits for wealthier and middleclass Americans. His book is titled "Balance: The Economics of Great Powers From Ancient Rome To Modern America."

MS. DIANE REHM

11:07:35
Glenn Hubbard joins me from a studio at Columbia University to talk about how the U.S. can avoid being the next great power to fall. Throughout the hour, we'll welcome your questions and comments.

MS. DIANE REHM

11:07:50
Join us 800-433-8850. Send us your email to drshow@wamu.org. Follow us on Facebook or send us a tweet. Good morning to you, sir, good to have you with us.

MR. GLENN HUBBARD

11:08:05
Good morning, thank you.

REHM

11:08:07
You have written a book that really looks back at great powers of the past and their decline. As you look at civilizations from Rome to the Ming Dynasty and even to the State of California how do you connect all of that to what's happening now?

HUBBARD

11:08:36
Well, the book is actually a very optimistic book even though it talks about decline. The U.S. really is the dominant economic power and is likely to remain so if we continue to get our act together.

HUBBARD

11:08:48
Great powers stumble when their politics don't keep up with economics, when they turn inward, when they ignore the future. Those mistakes have been made many times in history but America can definitely avoid that trap.

REHM

11:09:03
What mistakes do you see the U.S. making now that could perhaps lead us down that destructive path?

HUBBARD

11:09:15
Well the easiest manifestation of our mistake is the continuing buildup of debt and even more problematic, the debt growth in the future that really threatens to rob us of the ability for government to do big things, to defend our nation, educate our children, to conduct basic research, tax burdens that could crowd out American growth.

HUBBARD

11:09:39
Underneath that is a politics of polarization that has made all this possible. We can change the politics. We can change budget rules and we can avoid this trap.

REHM

11:09:50
You're talking a great deal about entitlement spending. Tell me why you believe that particular area of the budget could lead to a downturn.

HUBBARD

11:10:08
Well, first to paraphrase Willie Sutton, it's where the money is...

REHM

11:10:10
Yeah.

HUBBARD

11:10:12
...and where the money will be. It really dominates the budget but more to the political theme of the book it's in a very non-transparent budget issue for the American people. It's not really on the budget but Congress isn't responsible year to year so we have a system in which entitlements are allowed to grow and threaten the ability of government to do many other things.

HUBBARD

11:10:35
There are ways to increase transparency for entitlements. To give you an example, you know years ago when the Congressional Budget Office started, that was an amazingly important institution for transparency. America needs another shot.

REHM

11:10:46
Another shot, what do you mean?

HUBBARD

11:10:52
Well, we need to think about changing the rules of it. You know, we use the example -- I say we, Tim Kane, my co-author and I, use the example in the book of basketball which is a sport that nearly died until the three-point shot and America needs a three-point shot.

HUBBARD

11:11:09
And the three-point shot is probably a change in our politics to allow more political competition of ideas and a change in budget rules to make the entitlement programs transparent so the American people really understand the gravity of the situation.

REHM

11:11:23
Okay. Let's take the first of those two, a change in politics. What do you mean?

HUBBARD

11:11:31
Well, if you look at the period from the early 1970s until relatively recently, we basically gave the two political parties, the Democrat and Republican parties almost a monopoly over fundraising. And at the same time the Congress became much more polarized.

HUBBARD

11:11:50
And that's not a purely Democrat problem or purely Republican problem, it's both. The idea to fix this is to allow more political competition and frankly the Citizens United decision is a breath of fresh air in that regard.

REHM

11:12:00
How so?

HUBBARD

11:12:01
It increases the ability to compete with the two parties. The optimal number of parties in the U.S. is two but it doesn't have to be these two. Over time the U.S. has evolved in its partisan structure.

HUBBARD

11:12:16
The Republican Party itself grew up as a party of radical abolitionism to challenge the status quo. We need to let ideas that could change America come forth and the politics is going to be important and getting new ideas out there will be very important.

REHM

11:12:30
And what about entitlements, how do you see them becoming such a central part of the problem?

HUBBARD

11:12:41
Well it's interesting. If you look at the budget over time and turn back a few decades you'd see the government that Americans actually think government is. It defends the country. It pays for some education and so on. As the decades have gone on much more of the budget goes into spending and social security, in Medicare and other entitlement programs that aren't on the budget.

HUBBARD

11:13:02
What we argue in the book is we need to increase transparency by putting these things on the budget and in the limit. If we can't solve this in our political process literally have a spending limitation in the Constitution...

REHM

11:13:18
But...

HUBBARD

11:13:18
...where spending is limited to a moving average of past revenue.

REHM

11:13:19
But Glenn Hubbard, what about two wars off budget?

HUBBARD

11:13:25
Also a problem, but we kid ourselves if we think our long term budget problems are about military adventure. This is really the fallacy of Rome as well, that Rome's fault was over-stretch. Indeed as an economist looking at Rome, Rome's death was more under-stretch than over-stretch.

HUBBARD

11:13:45
It was looking inward. It was rent seeking. Military spending may be too high. I'm not an expert on the military but it's not where the money is.

REHM

11:13:49
At the same time, when you talk about deficits and deficit spending and the lack of transparency, what happened during the George W. Bush administration in which you served? Didn't deficits go higher and higher after Mr. Bush inherited a surplus?

HUBBARD

11:14:20
They definitely did. Some of it for reasons not the president's fault, a weaker economy but some frankly the president contributed to. The problem we have in the budget in the country is not a Democrat problem and it is not a Republican problem. We've had both sides of the aisle complicit in a system that has allowed debt to grow and has avoided making hard choices for the American people.

HUBBARD

11:14:45
The expansion of Medicare, Part D, under President Bush's watch was another example of a budget overreach that increased deficits and debt. There's no question about it. This is a bipartisan problem and if we're going to fix it we have to come together.

REHM

11:14:59
And coming together is something that even Republicans are having a tough time doing as you have seen in these current or this current lack of budget negotiations and that lack led by Tea Party conservatives.

HUBBARD

11:15:23
Well, we really have to decide as a country what is it that we want? The first big question is how big should government be and what should it do? Once we've answered that question we can then talk about the taxes that pay for it.

HUBBARD

11:15:36
And I think we need to have a debate over the size and the scope of government, but where I disagree with many on the right is the notion that we don't have to pay for the government that we have. We absolutely do. If we make a decision that we want a government of a certain size we have to pay for it. That's what transparency is about.

REHM

11:15:52
Glenn Hubbard is dean at Columbia University's Graduate School of Business. He is former chair of the President's Council of Economic Advisors under George W. Bush.

REHM

11:16:11
With Tim Kane, he's written a new book. It is titled "Balance: The Economics Of Great Powers From Ancient Rome To Modern America." And if you'd like to join us, call us on 800-433-8850. We talk about the cost of war, $2.2 trillion the estimate for two wars in Iraq and Afghanistan which certainly set us on a road leading to big problems.

REHM

11:16:51
How do you amend that? How do you erase that from the situation in which we find ourselves now?

HUBBARD

11:17:02
Well, I think it begins with a conversation with all the American people about what do we want government to do in normal times and I think most people would say we need a reasonable defense budget. We need to make sure that we can educate our children. We make sure that we can do basic research and support the nation's infrastructure.

HUBBARD

11:17:23
We need a budget that's right-sized to that -- and to that I would add we need a strong social safety net. So if we add those things together that gives us a size of government. And then we have to be honest with the American people about what it's going to take to pay for that.

REHM

11:17:34
Well.

HUBBARD

11:17:34
And we shouldn't kid ourselves that wars are free or entitlement programs are free because they're not.

REHM

11:17:39
If you talk about social safety nets, aren't you talking about a growing sector of the public who is going to need that social safety net and therefore that safety net has got to expand.

HUBBARD

11:17:59
Well, I don't quite accept that, but let me go at what I mean by a social safety net. I mean, taking care in a more muscular way the least well-off among us. That is very different from a cradle-to-grave entitlement state that treats everybody the same.

HUBBARD

11:18:14
If we want to right-size entitlements, we really need to make sure that we reduce the growth of benefits for affluent people and focus our support on the least well-off among us. We can afford that and do all the other things we need to do. But you're right, if we choose an alternative path, we need to pay for it.

REHM

11:18:30
Glenn Hubbard, his new book is titled "Balance: The Economics Of Great Powers From Ancient Rome To Modern America," When we come back, we'll talk further, open the phones, read your email. I look forward to speaking with you.

REHM

11:20:05
And if you just joined us, Glenn Hubbard is with me. He's joining us from Columbia University where he is dean of the Graduate School of Business. He's also the author of a brand new book. It's titled, "Balance: The Economics of Great Powers From Ancient Rome to Modern America." We are going to open the phones shortly. But first, I want to ask you more about these entitlement programs, which you say are present from the cradle to the grave.

REHM

11:20:47
Of course not everyone receives entitlement programs, but you say they're on auto-pilot. What do you mean?

HUBBARD

11:20:58
Well, this gets back to the transparency point. Social Security and Medicare are not part of the federal budget, even though they're increasingly dominating federal spending. They are simply on autopilot in terms of eligibility and growth over time. They're set by formula. An alternative would be to say to the Congress, you know, every year, changes in the liabilities of these programs will go on the budget.

HUBBARD

11:21:20
And you, the Congress, will have to decide to raise taxes to pay for that or cut some other spending or change these programs, in other words, make the choices that households and businesses have to make. Unless and until we get that kind of transparency, it's hard for Americans to understand the physical mess we're in.

REHM

11:21:36
Are you in favor of raising taxes right now?

HUBBARD

11:21:41
I don't think this is a good time to raise taxes.

REHM

11:21:43
Why not?

HUBBARD

11:21:44
But I think this -- well because the economy is still in a nascent recovery. We just had a very large tax increase. I do think, though, that we have to think about a tax increase if people want the size of government that's built into current budgets. I personally don't. But if that's what the majority of Americans want, we have to be honest with the American people about how much taxes will have to go up and how much on every individual to make it happen. Absolutely we have to have that conversation.

REHM

11:22:12
I wonder whether you think that the political issues out there are going to be resolved or if you happen to hear our last hour's program whether politically there is no resolution that Tea Party members are absolutely resolute in their thinking that there should be no compromise.

HUBBARD

11:22:41
Well, I think as Winston Churchill has said the American people do the right thing after all other options are exhausted. I am very optimistic about this country's ability to get out of its fiscal mess. But I'll call it political system, our current budget rules are absolutely not structured for it. We are designed for a world in which budgets are all about war and peace. That is not the budget world we live in today. So, yes, we have to make some changes, but we can do this.

REHM

11:23:08
How?

HUBBARD

11:23:10
Well, again, it's bound to two things. It's politics and rules. On the politics, we need to allow much freer competition of ideas. For example, I don't agree with much of what folks in the Tea Party advocate, but I have to say, I'm happy to see those ideas. I'm happy to see new ideas on the left as well. We need a free flow of ideas and not two monopoly parties telling us what to do.

HUBBARD

11:23:34
On the rules side, we need a budget system that actually accounts for the modern entitlement state and has rules in place to make sure that we can't promise away our children's future and our grandchildren's future and stop our ability to educate kids do research and defend ourselves.

REHM

11:23:54
There has been some concern that your whole thesis about government has actually been tarnished by the recently discredited research of Harvard economists Reinhart and Rogoff. We actually have an email on that from Mary in the Woodlands, TX, who says: The austerity argument put forth by Reinhart and Rogoff has been discredited in 2013, but I do not hear anyone who propagated this falsehood since 2010 retract their destructive, cruel austerity measures in, including Glenn Hubbard, because he's still talking to you right now at the end of May 2013 about cutting entitlements and the debt.

HUBBARD

11:25:00
Well, it's a great question and it's important to understand what Reinhart and Rogoff said and how it's different from certainly my argument and many others. They had argued for a tipping point in government debt passed which economy slump. I've never believed that to be the case, even before their result was questioned. It's undeniably the case that as you increase debt -- now I'm going to speak only of arithmetic, one doesn't even need economics to get to this point.

HUBBARD

11:25:28
Increasing debt will require some other offsetting cuts and spending -- that's the defense, research, et cetera cuts -- or raising taxes. That's math. That doesn't even require economics or sophisticated calculations. The austerity that I talk about in the book is not here and now. Indeed I blame politicians in this country and in Europe for too much here and now austerity. What we need to focus on is something that gradually brings future debt under control.

HUBBARD

11:25:54
And that's why the listener's question is so important because that's the political rough. It's easier to hurt people today, politically, than to do the right thing of gradual future adjustments because the entitlement programs are so politically popular. It's a critical point.

REHM

11:26:10
But the entitlement programs like Medicare, like Social Security, which had been in place for decades have their own surplus, certainly Social Security does and has been on the books, has been transparent, has been flushed. But the U.S. government in its overspending has had to borrow from that Social Security trust to meet its own agenda. Why is Social Security always at the center when people talk about austerity?

HUBBARD

11:27:00
Well, Medicare certainly, a bigger long-term problem than Social Security. Social Security is actually relatively easy to fix, gradual adjustments to reduce benefit growth for upper income Americans can completely fix Social Security's problems. This is not hard. Medicare reform is more complicated because of health care reform dynamics. But you're absolutely right that we played budget games with Social Security…

REHM

11:27:21
Yes, yes.

HUBBARD

11:27:22
...for a very long time. This is part of the process problem I'm talking about. You're hitting on something very important. And we shouldn't do this to the American people. People really understood or thought they understood. They were building up surpluses that they want.

REHM

11:27:36
So the surpluses are still there, are they not, and will remain there for at least 30 years?

HUBBARD

11:27:48
Well, unfortunately, there isn't a lock box or something that locks up surpluses.

REHM

11:27:53
Right.

HUBBARD

11:27:53
You're right as a matter of accounting, but it's simply spent. We need to move to a system that if we're going to have entitlement programs structured in this way, that we do safeguard those funds for the purpose for which they're intended.

REHM

11:28:06
Now, there's been a great deal of criticism about Europe and its austerity measure and aren't you talking about the same kind of austerity which would fall on the American people as opposed to really taking the toll where it ought to take the toll at the high-income level?

HUBBARD

11:28:36
Well, actually not at all. I mean, I've been very critical of current European austerity measures. I think they impose way too much short-term pain simply because the politics of challenging the long-term problems -- and by the way, when we talk about entitlement problems in the U.S., they're much larger in many European countries. And so, because we lack the political courage to do the right thing in the long-term, yes, we have way too much hair-shirt austerity.

HUBBARD

11:29:02
And there should be no doubt that the bulk of the austerity needs to be borne by the most well off among us.

REHM

11:29:08
What would you do about defense spending?

HUBBARD

11:29:12
Again, I'm not a military expert. I can observe that relative to GDP, defense spending has declined over decades and is projected to continue to do so. The issue for the defense budget is, you know, are we getting the right bang for our defense buck? It's not by any means clear that we are. My only point in the book is that we can't kid ourselves that cutting defense is the way out of this problem. You could cut the defense budget by a third relative to GDP and that wouldn't even equal the rounding error on the entitlement share of GDP.

REHM

11:29:46
All right. I'm going to open the phones now. We'll go first to Brandenburg, KY. Good morning, Ron, you're on the air.

RON

11:29:58
Hello, good morning.

REHM

11:29:59
Morning, sir.

RON

11:30:00
Well, I didn't catch exactly when you started the program, but I appreciate your guest's subject balance. But I think he's insincere on that balance. What I thought when I first tuned in was that military is not where the money is. Now let me press this with, I just retired from the military. My wife is still active duty. I have a daughter in the reserve, Army Reserve and a son-in-law in the army. I love our military.

RON

11:30:31
But we have to be honest, we had a $300 billion debt before -- I mean defense budget before 9/11 and now it's over 700 billion.

REHM

11:30:47
Sire, I'm afraid you're cutting out on us. Your point to Mr. Hubbard is what?

HUBBARD

11:30:55
We spend more than the rest of the world combined on military.

REHM

11:30:59
All right. Glenn Hubbard, do you want to respond?

HUBBARD

11:31:02
Sure, again, it's a great question. It follows the one you asked. I'm sure that there are inefficiencies in the defense budget as there are in any budget. What I would warn is an easy answer that says, oh, defense, we could just cut that and we're done, again, you could cut the defense budget by a third. You can cut it by half and you're barely at rounding error on the entitlement programs.

HUBBARD

11:31:23
So unfortunately, while there may be a lot of waste in the defense budget, that's not the key to the solution.

REHM

11:31:28
All right. Let's go to Julie in Englewood, OH. Good morning, you're on the air.

JULIE

11:31:37
Good morning, Diane. I just love your show. Thank you for presenting a lot of thoughtful ideas that other outlets don't.

REHM

11:31:46
You're most welcome. Thank you.

JULIE

11:31:49
My question has to do with just even calling Social Security and Medicare, why are they considered an entitlement program? I have paid into both of these programs since I was 15 years old, I'm not 57 and have not had to take advantage of them, but I'm frankly afraid about whether it's going to be there. But I'm just wondering why they're always called an entitlement if working people are paying into them?

REHM

11:32:18
All right, thanks for your call. Glenn Hubbard.

HUBBARD

11:32:22
You ask a great question and it's actually an extremely important one in this entire debate. They're often called entitlements because people have a right to them, precisely for the reasons that you have suggested. The problem is, in Medicare in particular, a typical household will pay in only about a third of what it will collect. That's not a system that's sustainable. So we need to reform this system so that we provide substantial aid.

HUBBARD

11:32:49
I would argue even stronger aid to people who really need it and slow down the benefit growth for others.

REHM

11:32:55
And you're listening to "The Diane Rehm Show." I presume, however, Glenn Hubbard, that you do appreciate the terrific quality inherent in calling them entitlements, which some people have done, sort of undercutting the fact that as our caller pointed out, she's paid into them since she was 15 years old. She doesn't think of them in that way. She thinks of them as something she has earned from her working life.

HUBBARD

11:33:42
I agree. And this is why this budget discussion needs to be more honest with the American people, because I think if people understood that in fact they're only paying a fraction of the cost of these programs it would lend a different gloss. And we need to really help a lot more people than we're currently helping by helping a little bit less, some more affluent people who don't really need it.

REHM

11:34:05
So where would the cut-off be in your own mind?

HUBBARD

11:34:10
Well, you know, that's a political question. It depends on how much money you want to spend. But we could save enormous amounts of money even by phasing down benefit growth for people who are in the top 1 or 5 percent of the income distribution. It strikes me as unusual that we want to give the same subsidies to very affluent people rather than strengthening these programs for people who really need them.

REHM

11:34:35
All right, to Houston, TX. Andre, you're on the air.

ANDRE

11:34:40
Thanks for taking my call. I have a question, Grover Norquist has -- he think dogmatically that cutting taxes is definitely off the table. You've addressed that...

REHM

11:34:51
No, you mean raising taxes, sir?

ANDRE

11:34:54
I'm sorry, yeah, raising taxes.

REHM

11:34:56
Yeah.

ANDRE

11:34:56
I apologize.

REHM

11:34:57
That's all right.

ANDRE

11:34:58
I think he's missing the point. I think bringing in revenue is an all right. What's the guest's opinion on how we spend the money, not necessarily what we spend the money on but how we spend the money? I was in the military and I saw a lot of inefficiencies in how we spend the money. And I think if we were more efficient on where we put the money, people would be a lot more happy with what the government can offer.

REHM

11:35:29
All right, thank for your call. First on Grover Norquist.

HUBBARD

11:35:33
Well, it's absolutely the case that if we want to have a larger government, we have to pay for that government and that means raising more revenue, that means raising taxes. And there are a variety of ways to do that and ways that aren't so harmful to economic growth. Personally, I'd like to see a smaller long-term government and a smaller tax burden. But that's a political choice. The honest thing is, though, once people make the choice, we have to pay for it.

HUBBARD

11:35:58
On efficiencies, of course there are efficiencies in government as there are in any aspect of life. And we need to focus on better management in government. I would just caution that even if we were as efficient as possible in every activity, the budget problem isn't going away. And source really isn't the classic waste, fraud and abuse.

REHM

11:36:16
But, you know, it's hard to ignore someone like Grover Norquist and his effect on the politics of taxation, the politics of the conversation going on between or among Republicans and Democrats. It's as though they say, the Republicans say, they've signed a pledge which they will not break. Now, how does that affect political discussion, the ability to reach compromise and find those avenues of discourse that lead to transparency?

HUBBARD

11:37:06
It's a great question because the problem is on both sides we have one side that says, well, we just like to cut taxes and another side says we just won't cut any spending. So if we allow the political equilibrium in that world, that's debt.

REHM

11:37:23
Glenn Hubbard, his new book is titled, "Balance." More of your calls, your comments when we come back. Stay with us.

REHM

11:40:05
And we're back talking with Glenn Hubbard. He's dean at Columbia University School of Business, former chair of the President's Council of Economic Advisors under George W. Bush. Here's an email from Jerry in Kalamazoo, Mich. who says, "Your guest is making an old argument. When he talks about social programs he talks about horrendous growth in real dollars. When he talks about the defense budget he talks about the fact that it's actually going down when compared to GDP. Does he not see the dishonesty in that?"

HUBBARD

11:40:57
Well, I have to break it to our listener that these programs are escalating radically as a share of GDP. In 1970 healthcare spending and entitlements was about one percent of GDP. It grew to about six times that a year or so ago. And healthcare and Social Security entitlement spending are projected to grow by ten percentage points of GDP over the next 25 years according to the Congressional Budget Office. It really is the problem as a share of GDP.

REHM

11:41:26
And what about defense spending can you make the same comparisons?

HUBBARD

11:41:31
Defense spending's about three percent of GDP having fallen a lot in recent decades and heading down further.

REHM

11:41:40
So you don't see any comparable growth in defense spending despite the off budget wars we just fought.

HUBBARD

11:41:53
No, again, defense spending may be too high. That's a political question or a military question, but it's nowhere close as a share of GDP, not only to the entitlements today, but especially what they're projected to be 20 or 25 years from now.

REHM

11:42:07
All right. Let's go to Rockford, Ill. good morning, Tom.

TOM

11:42:12
Good morning. I find this to be a very interesting conversation and what concerns me, besides some of the other comments that have already been voiced this morning, is the inequality of economy growth in this country. And by that I mean where the money really lies. NPR within the last year and a half, two years has reported that three percent of the population of this country holds 97 percent of the wealth. You have CEO's who earn 200 percent more than their workers.

TOM

11:42:44
And, actually, workers -- the average American has lost four percent a year since the '70s. Thereby there's a decrease in tax revenue. I think this is part of the problem that needs to be addressed. You know, if we're talking transparency let's have true transparency and, you know, let's have everyone share the load.

REHM

11:43:06
All right, Glenn Hubbard.

HUBBARD

11:43:09
I couldn't agree more with the listener's observation. We have got to do more in government to strengthen and empower people's ability to succeed in the labor market. And that means more spending on education and training. That means more support. And it does mean asking the most well off among us to make more sacrifices. To my mind that's best done through the entitlement programs, but that's a political question. I couldn't agree more with the listener.

REHM

11:43:34
But why is it done through only the entitlement programs? Why wouldn't it be done on the taxation side not the entitlement side? You're stressing that upper income people should receive less on the entitlement side, but that's not going to even out, as our caller said, three percent of the population owning 97 percent of the wealth.

HUBBARD

11:44:07
The most progressive tax system among any industrial country is already the United States. And if we continue to raise marginal tax rates on business income and business owners we're not going to have a very good recipe for economic growth. We're better off doing this on the spending side. The secret that people aren't telling the American people is if you want the government that we currently have we would have to raise taxes on all Americans. European countries with big governments pay for them with a value added tax, a broad-based consumption tax paid more by middle income people.

REHM

11:44:44
But how can you really simply do away with spending on the upper income level with entitlements and achieve the kind of balance that you say you're looking for if the business side, the corporate side, Mr. Hubbard, has gained trillions of dollars. The banks are sitting on trillions of dollars of wealth, not spending, not lending, not doing anything with that wealth and certainly not creating the kinds of jobs you're talking about. And yet you still don't want to see taxes raised on corporations or those at the top of the income level. It doesn't make sense.

HUBBARD

11:45:50
That's also not what I said. The reason businesses and banks are sitting on a lot of money is not because they don't want to invest. I've never met a banker or business leader who wouldn't love to invest, to grow, to hire, to make profits, but the situation of the world economy, the regulation and tax policy affecting businesses is leading them to be quite uncertain.

HUBBARD

11:46:11
We do need to pay for the government that we have. And the question is what size is that government and how are we going to pay for it? European countries with big governments do not pay for them with high corporate taxes. Corporate taxes are actually lower in Europe than in the United States.

REHM

11:46:26
You know...

HUBBARD

11:46:26
They pay for them with consumption taxes.

REHM

11:46:29
I have heard that argument about uncertainty for at least three years. Uncertainty is always the case with business. It seems that that uncertainty card is being brought out with much greater frequency and force these days almost as an excuse rather than as a legitimate reason.

HUBBARD

11:47:04
Well, I have to be frank. As an economist I don't see it that way. I've never met a business leader that wouldn't love to invest simply because they make money by doing that. It's not out of any grace or act of charity. But there is a lot of uncertainty in the economic environment, an awful lot of policy uncertainty. Frankly, both of those are getting better and I expect the situation to get much better. Your question raises an extremely point which is this discussion needs to be about growth. What would it take to keep America's position as not only the biggest economy, but the fastest growing economy?

REHM

11:47:37
Give us some of the historical perspective that you use in the book to demonstrate how some empires have fallen because of their wrongheaded approach.

HUBBARD

11:47:57
It's a great question. Often empires fall because they don't understand that economic power comes from innovation, from entrepreneurship, from ideas. Rome looked inward at a time when it could least afford it, trying to define people away from being Roman to based its currency, borrowed from its future and fell.

HUBBARD

11:48:16
In the case of the Ming China the Ming Chinese explorers had been the envy of the world. Every kid learns in school of the seven great voyages of Cheng Ho. That's a staple. And yet future leaders turned inward saying no that threatens the status quo. We don't like that innovation. We don't like that imagination. And China, the great power at the time, then stumbles.

HUBBARD

11:48:42
The Ottoman Empire was not always the basket case we were taught in our school history books. It was once a very strong and important power, but fell internally from rent seeking, from people trying to avoid the development of new technologies. If you fast forward to the British Empire, as well, while over stretch is often a thesis for Britain's ultimate decline, and it's certainly a factor, Britain tried to be too narrow in its definition of Britishness. We all know that here in this country. We fought a revolution over that very point. By not being very inclusive, by looking inward Britain avoids capitalizing on its greatest advantage.

HUBBARD

11:49:23
Japan is another terrific example we use in the book. We use the metaphor of the game of go where at the beginning anything is possible, the end not so much. And in the middle is where all the action is. Japan's been in that middle quite a while. And it had a big pop in growth after the Second World War, but then by looking inward, by not advantaging innovation and entrepreneurship it stumbled.

HUBBARD

11:49:49
California is a case study we use in the book, as you mentioned earlier. It's the only big land mass in the world that has the beautiful climate of the Mediterranean that's not also in the Mediterranean. The problem is California has something else the Mediterranean has, which is dysfunctional politics. California is a rich state. It doesn't have long term problems if it gets its act together. And we close, of course, with the United States itself. That we currently are on this precipice because of where we are and our budget process and our political system, but both Tim Kane, my coauthor, and I are very optimistic this country can work it out and 25 years from now we're still on top.

REHM

11:50:29
All right. Let's go back to the phones to Creekside, Pa. good morning, Gwen.

GWEN

11:50:37
Good morning, Diane, thank you.

REHM

11:50:39
Certainly.

GWEN

11:50:40
And my comment is related, excuse me, to transparency, but I would call it clarity. With one of the callers that called in a little while ago and said why do we call it an entitlement when I've worked for it? I think that, Dr. Hubbard, you might have missed what she was saying, in a sense, because somehow the word entitlement, which in its pure dictionary definition is neutral, has picked up a pejorative sense. So I think what she was saying is why is this looked at as some of welfare gift that I don't deserve. And so I think part of the problem is maybe it's that that word, entitlement, has run its course.

HUBBARD

11:51:27
I couldn't agree more with that observation. It is the case that these programs, Social Security and Medicare, are incredibly important. And, frankly, we need to make them stronger. The problem is on their current path we can't do that. We can make a program that's more focused on people who need it really strong, but if we wanted to pay for the programs on the path they're on now we couldn't do anything else.

REHM

11:51:51
Gwen, does -- go ahead.

GWEN

11:51:52
So -- and I agree with you, Dr. Hubbard. What I'm saying, though, is that the language is making us talk at cross purposes. I think that that word has -- you know, it's got so much baggage now it's almost like saying socialism or communism -- all rational thought stops. So we can't talk about transparency because we have grudges associated with those words.

REHM

11:52:20
I think that's an interesting point.

HUBBARD

11:52:23
It's a very good point.

REHM

11:52:24
Yeah. All right, thanks for your call, Gwen. Let's go to Edgewater, Md. good morning, Jim.

JIM

11:52:34
Good morning.

REHM

11:52:36
Go right ahead, sir.

JIM

11:52:37
Mr. Hubbard just mentioned being in the precipice and I guess that's related to our debt, but all I've heard with regard to the inappropriateness of our debt is related to our income. Well, I think most people who make lending decisions are less interested in income than they are in wealth. And I think when you compare the United States' culture's wealth to its debt -- and I believe the wealth is in the $75 to $100 trillion range, you know, then the debt becomes much less significant. I mean if you -- if when you're making a decision to borrow money for a mortgage, you know, you aren't...

REHM

11:53:31
Sure.

JIM

11:53:31
...Just looking at your income. You're looking at your wealth.

REHM

11:53:35
Of course, and you're listening to "The Diane Rehm Show." Do you want to respond to that?

HUBBARD

11:53:41
Sure, just quickly. The caller's absolutely right. Wealth is a very important metric. The caution I would have is that the Congressional Budget Office's estimates of the unfunded liabilities of Social Security and Medicare that is over and above the tax revenues that are about to be collected to pay for them is well over $70 trillion.

REHM

11:54:00
All right. And to a caller here in Washington, D.C., Andres, you're on the air.

ANDRES

11:54:07
Good morning, thanks for taking my call.

REHM

11:54:09
Sure.

ANDRES

11:54:09
So I just finished an MBA program and founded my own company. And so I'm interested in what Mr. Hubbard, as the dean of a business school, has to say about the belief I have that business should be taking a leadership role in helping to reduce dependence on entitlements and correct the problem that an earlier caller mentioned about the 200 percent disparity between CEO's and workers. How is Dean Hubbard at Columbia teaching future business leaders to work on increasing pay and increasing benefits and run a profitable business by doing that in order to help reduce employees' dependence on entitlements?

REHM

11:54:48
Thanks for your call.

HUBBARD

11:54:50
And thank you for that question. There was a time in this country's history not even too many decades ago where being a business leader meant more than just being a successful head of a company. It meant solving big social and policy problems. You know, the Marshall Plan didn't come about because of a wise Congress. It came about because the business community led a reluctant Congress.

HUBBARD

11:55:10
We need to do this again today. We need to think much harder about what kind of healthcare system could be delivered at lower cost so that people can take home more pay. We need to figure out how to support education and training more to support the kind of jobs we want in this country and business can't simply say, oh, we'll let government figure that out. We have business organizations like the business roundtable, the Committee for Economic Development, groups of CEO's and business leaders. This needs to be their problem. No business person should just say, ah, that's the government's.

REHM

11:55:40
What about focusing on infrastructure? We've just seen a bridge collapse a few years back another bridge collapse in Minneapolis, roads are in need of repair, isn't that a way of boosting the economy, boosting economic growth and at the same time providing the needed jobs. Surely there's no uncertainty there.

HUBBARD

11:56:12
Infrastructure's extremely important. I would start with energy, which is one of the great optimistic hopes for the United States. North America could be energy independent in 20 years if we allowed the construction boom to finance it. We also have the ability to build more public infrastructure. The only caution I would have is that's not really stimulus. It can't happen immediately, but you're absolutely right for the long term it is what government should be doing.

REHM

11:56:36
Glenn Hubbard with his coauthor, Tim Kane, they've written a new book titled, "Balance: The Economics of Great Powers from Ancient Rome to Modern America." Thank you so much for joining us, sir.

HUBBARD

11:56:57
Thank you.

REHM

11:56:59
And thanks for listening all. I'm Diane Rehm.
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