Why is it important to have or aim toward a balanced budget? Why is fiscal discipline important?

There are two dramatically different reasons you want fiscal discipline. The first is, it gives you tremendous ability to respond to a crisis. ... If you are in a situation that some countries get into, where you're so deeply in debt the interest you're paying on the debt is such a big part of your budget and you really have no margin, then in fact you have a very, very limited ability to maneuver. Britain, at some points, got into that kind of state.

The other thing is, I think, moral and practical. Politicians who have an open-ended budget can't say no to anybody, and so they take care of every idea, no matter how dumb, and they finance every bureaucracy, no matter how inefficient. If you have the discipline of a balanced budget, you begin to really look for savings, and you begin to really look for priorities, and you begin to really make demands about performance and achievement.

And so I think a balanced budget as a model is a very powerful part of how America ought to govern itself. ...

... Let's talk about government borrowing generally. It's difficult to bring home to people why it is the government shouldn't borrow massive amounts. How does that affect them?

The first thing to remember about government borrowing is you then have to pay interest on the debt. So if you're paying billions and billions of dollars of interest on the debt, that's money that could either have been lowering taxes, or it could have been spent on education or on health or on highways or the environment, but now you're spending it just to pay off bondholders. I don't think that's a very sound policy.

I think a relatively modest federal debt, just enough to help the Federal Reserve manage the currency, is probably the right number. [First Treasury Secretary of the United States] Alexander Hamilton understood that; the Founding Fathers understood it. We had a pattern of frugality up until 1932, where we really had a deep cultural bias in favor of balancing the budget. The American people still have a deep bias about balancing the budget. It's the politicians who have sort of gone off the wagon.

Why is it so hard for Congress to limit spending?

All of the biases of the modern bureaucratic state are in favor of interest groups who want more. And so all these interest groups show up, they all volunteer for your campaign, they all donate money, and they say, "Prove you're for more education; raise spending." ...

What Reagan did, and what [former Prime Minister] Margaret Thatcher did in Great Britain, and what we tried to do with the Contract with America, was establish an alternative world. To say to people: "What if we actually made government functional? What if we actually insisted that it be effective? What if we actually focused on being creative so we got more things done with less money? Would that be all right with you?" And it turned out most people ... liked the idea of the system actually working. ...

... I think people forget how high tax rates were in the late 1970s. Speak to that.

I have a good friend who's teaching a class at Georgetown on the Cold War, who realized that the average student in the class was 2 years old when the Berlin Wall came down. So how does he explain the Soviet Union? Well, the 1970s are the same way. ... People forget that we had 70 percent tax rates at the margin, and that had come down under Kennedy from 90 percent, which was the World War II number.

So when Reagan came along, ... he really brought the marginal tax rate down dramatically from where it had been. And that was a revolution, because what it did was it said to the entrepreneur or the business leader: "Don't spend your time with your accountant and your tax lawyer trying to figure out how to avoid taxes. Spend your time running your business, making money, and you'll get to take most of it home."

And you just had, starting about 1983, an absolute revolution in American energy and creativity and drive, which really only began to change in early 2008, when the Bush administration lost their nerve and decided to start going toward an interventionist, Keynesian model.

But when Reagan cut taxes, he wasn't able to rein in entitlements.

Yeah. Reagan always had a ground rule, and it was based on Milton Friedman, the economist, who had said if your choice is a bigger deficit with lower taxes and a smaller government, or a smaller deficit with higher taxes and a bigger government, always go for a bigger deficit. And so Reagan was prepared to say, "I'd rather cut taxes and build up defense."

And remember, Reagan was at a unique moment in American history. He designed and led the campaign at the end of which the Soviet Union disappeared. And so I think if you said to him, of the three values -- getting to a balanced budget, cutting taxes for economic growth, and military strength to end the Cold War -- he would have said that he saw balancing the budget as a very desirable goal which he wanted to get to as soon as he could, but not at the price of raising taxes.

Furthermore, Reagan would have told you every time you try raising taxes in Washington, Washington spends more. Washington is a city which will spend as much as it can get away with, without regard to tax rates. ...

... You were instrumental in the first balanced budget in I don't know how long, in 1997. Can you tell me how that came about?

Yeah, we balanced the budget for four consecutive years. We paid off $405 billion in federal debt. It was the first time since the 1920s that you had that level of balanced budget.

We did it by basically doing two very profound things. The first was we controlled spending. We controlled spending at a practical level by saying no, and we controlled spending by having a very significant reform, both welfare reform, where 65 percent of the people on welfare either went to work or went to school, and Medicare reform, which I personally chaired the task force on. And then second, we cut taxes designed to increase investment and designed to increase economic growth. ...

Do you feel the fiscal discipline of the government in the '90s was catalytic for the growth that we experienced in the '90s?

Absolutely. ... When President Clinton and I finally got the budget agreement done, the Congressional Budget Office had projected a $5 trillion surplus over the next decade. That's how big the change had been. And of course it all disappeared. It became increased deficit spending.

How did we go from surpluses to deficits?

A couple of things. One is 9/11, which was a real shock to the economy. The second was that President Bush and the congressional Republicans made a disastrous decision. The Constitution is designed so that the legislative branch will investigate bureaucracies that are incompetent, and the president will veto bills that are stupid. And they got into a deal where the president said, "I'll sign anything the Republican Congress passes because, after all, I'm a Republican," and the Congress said, "We will ignore any bureaucracy no matter how stupid, because, after all, we have a Republican president."

And six years of that was a disaster. You had this horrendous performance after Katrina. You didn't have any kind of serious oversight and serious overhaul. You had spending bills coming up that were an embarrassment. Any Republican who had spent their career talking about fiscal discipline, lower taxes, the private sector had to be deeply, deeply angry about what the Republicans in the House and Senate were doing.

Let's talk about Medicare Part D, [which added a prescription-drug benefit to Medicare]. What were your feelings about that?

I'm actually in the minority among the conservatives on that. I thought Medicare Part D was essential. ... When Medicare was created in 1965, prescription drugs were such a small part of medicine that people didn't even think about it; it wasn't even thought of as medical care. But the extraordinary explosion of pharmaceutical breakthroughs, the miracle drugs, things that changed people's lives, have all come in the last 40 years. And I thought that to have a Medicare system that took care of doctors and hospitals [but] that discouraged you from buying drugs was inherently bad medicine. It was a generation-old, obsolete model. ...

... What is the future of Medicare if we were to do nothing?

If we do nothing, Medicare will eventually go broke, and in the process of going broke the politicians will intervene, and they will steal from the hospitals, and they'll steal from the doctors, and they'll steal from the medical technology companies, and they'll steal from the pharmaceutical companies. And over the next 20 years you'll have a steady, consistent decline in the quality of health care in America. That's been the track record: Politicians steal when they run out of money. Medi-Cal, the California Medicaid, pays about 39 percent of the real costs. The rest is covered by other payers.

I feel like the fight to reform Medicare in 1995 has been largely forgotten by the public. Can you talk about why it was necessary to reform Medicare?

We were committed to balancing the federal budget. ... You couldn't balance the federal budget if you were going to run huge Medicare deficits, and the Medicare Commission had reported that Medicare was drifting toward bankruptcy. It was a really sobering moment.

So we formed, I think for the only time in history, a speaker-led task force that members of [House Committee on] Ways and Means and members of Energy and Commerce served on, and we collectively designed a Medicare reform plan.

Now, we did so with the help of AARP and with the help of the American Medical Association, the American Hospital Association, the pharmaceutical companies. ... The result was we ultimately were able to put together a bill that became an integral part of the Balanced Budget Act of 1997 and was really intellectually one of the greatest achievements of the House while I was there. ...

But we're still in a Medicare crisis.

We were a temporary fix. We were a little bit like having a car that needed an engine overhaul, and we changed the spark plugs and got you to the next phase. But we didn't fix the underlying problems. ... And this is why I helped found the Center for Health Transformation. Only by having very substantial transformation can you have a survivable, long-term Medicare system.

Do you think this transformation should take place just within the government-run program, or within the health sector as well?

I think we have to have a transformation of the entire health sector, because the number one factor of the next 40 years is the rise of China and India. China and India are going to be legitimate, good competitors. And they're going to make us earn our money, and it's not going to be just coasting along on what our parents and grandparents did. And we cannot afford to have 16, 17, 18 percent of our economy going into health in an inefficient way. We have to think through, what would a modern -- what I call a 21st-century, personalized, intelligent health system, what would that be like not just for government, but for businesses, for individuals, for the entire system? ...

... You're saying 16, 17 percent, but looking forward, that number's going to grow, correct?

Right. Let me make it quite clear: If we have a personalized health system and you're spending your money and you want to go and get Botox, for example, or you want to go and get Lasik [eye] surgery or 100 different things, then that's a quality-of-life issue, not a health issue. And we may well see a rise in that, because ... Americans want to have the longest possible life with the greatest independence, and they're willing to pay for it.

But you don't have to have a system where, because we can't figure out how to get insurance for everybody, we have people showing up at emergency rooms for aspirin. That is so stunningly wasteful and inefficient that it should be seen as a major scandal.

Is it fair to say that part of what motivated the '95 government shutdown was resistance to Medicare reform?

No. I think what motivated the '95 government shutdown was that the Clinton administration could not bring itself to go through the scale of change needed to balance the budget, and we would not back off on balancing the budget, and you had a genuine collision, and a collision, by the way, which I believe has been entirely misinterpreted by the news media. We were the first re-elected Republican House since 1928. ... That was after the shutdown. I think what the shutdown did is it sent the signal that we were serious.

The Washington elites, they've never forgiven us for it. They always say it was a big mistake. I don't think it was a mistake. I think it was a shock therapy that was designed to say, "We are serious about balancing the federal budget." And three years later we did.

The Democrats would say, in response to that, the path began [with the Deficit Reduction Act] in '93, and the House Republicans were against it. What was missing from the '93 budget agreement?

The problem the Democrats had both in the '90 budget agreement with President [George H.W.] Bush and the '93 budget agreement with President Clinton was they are passionate about raising taxes to build a bigger public sector. ... In addition, they wanted to spend all the money. We had the exact opposite. We wanted to control spending and cut taxes, and we particularly wanted to cut taxes in ways that were designed to maximize economic growth. ...

... You were opposed to the 1990 budget agreement. ... Tell me why.

President Bush, George H.W. Bush, had made a very big deal in his acceptance speech and then in his campaign: "Read my lips: no new taxes." I believed him. I thought that was a firm pledge for the American people.

I thought that if he wanted to break that pledge, he should have gone to the country and said: "The Democrats are insisting on a tax increase, and let's have the off-year election on that question. If you return a Democratic Congress, then you will have spoken, and I will sign the tax increase because you spoke." If he had said that to the Democrats, they'd have caved. There was no possibility they were going to run their campaign in 1990 on raising taxes.

Instead, he decided to go sign a tax increase. I thought that violated every aspect of the conservative movement. I thought it was what distinguished the Reagan Republicans from the old-fashioned, traditional Republicans. And I thought I had no choice. I would have betrayed everything I had stood for in my career. ...

... Do you think it's fair to say, within the conflict, there was a cooperation in '97 between yourself and the Democrats?

Oh, sure. One of the amazing things people never understood, and there's recently been a book [Steven M. Gillon's The Pact: Bill Clinton, Newt Gingrich, and the Rivalry That Defined a Generation] about it, is that President Clinton and I cooperated all the time. We did so within a very tough negotiating environment. We did so, I think, with mutual respect, sometimes a sense of humor and sometimes anger.

He understood that if he didn't have our help in the Congress he would get nothing. And we understood if we didn't get his signature, we couldn't override him. So if we wanted to genuinely fix things, ... we had to find a mutual ground. And he really wanted a role in history where he achieved things. ...

I know the book you're speaking about, and it speaks about a grand bargain [on] Medicare. Tell me that story.

Because we had passed the balanced budget and because we'd actually gotten a fair amount done, in the summer/early fall of 1997, [Clinton Chief of Staff] Erskine Bowles, on behalf of the president, and Arne Christensen, who was my chief of staff, began having a very private conversation. ... We were actively collaborating together to try to get to very fundamental reform. We were looking at reform of Medicare and reform of Social Security.

Basically we had an agreement because he knew that there was a huge surplus coming, and he knew that the first instinct we had would be to cut taxes. And he said, "Well, how about instead of cutting taxes, what if we were to reform Social Security?" That struck me as a pretty good, pretty interesting opportunity.

And so we literally, in the fall of '97, had basically worked out an agreement that he would come to the Congress for the State of the Union in January 1998 and propose very bold changes -- obviously a little more liberal than I would favor, but nonetheless very bold -- and that I would then be very positive and say, "Yes, we should start hearings," and I'd offer a somewhat more conservative version.

I actually went to the Cobb County Chamber of Commerce in January 1998 and outlined the kind of changes that I thought were possible. And tragically, I think the whole [Monica] Lewinsky affair just destroyed it, made it impossible. But there was a brief period when it looked as though we might have a second big wave of reform that would have put us on a very different track than we are right now. ...

What were the broad outlines of this?

We were basically going to move toward a substantial, more personal choice of Medicare, and we were going to move toward having a savings component built into Social Security. There have been a lot of arguments about the details, but I think that the principle of talking that through was really a very big step in a direction that would have been very healthy for the country.

And that would have put Social Security and Medicare on the path to solvency?

Yeah, our goal was to try to get it into solvency in the 50-year range, which is actually pretty theoretical. ...

Apparently there was a meeting just before the news of Lewinsky broke?

... I think it was maybe a month before, but we had a private session. All of this, by the way, stayed secret for about a decade, and none of the participants ever went out and blabbed about it, because we were really trying to do something that wasn't a hotdog thing. It wasn't a PR thing. It was, you know, if you had the ability in a rare moment to have the people who had power and who had responsibility actually sit down together in private and talk through things.

Now, whether I could have carried my party and whether he could have carried his party I don't know. That would have been the next step. But we certainly had talked out a framework that would have, I think, surprised almost everybody in how willing we were to work together and define things. ...

... It must have taken a great deal of political courage. It seems to me that any great reform requires political courage. Can you speak to that?

Many years ago, I called Steve Hanser, who's been my mentor since 1973, and I said, "Why is it that some people take extraordinary risks?" And he said, "Because they're trying to change history, and so they're playing a totally different game."

I don't think either President Clinton or I would have said it took courage. I think we would have said, this is why we were in public life. If we had a chance to fundamentally solve a major problem for America, why wouldn't you do it? Politics is really hard. ... But if you can actually accomplish something -- balanced budget, the tax cuts, welfare reform -- that was worth a lot. That justified 20 years of my campaigning.

And I think President Clinton and I both had come out of a background -- were both relatively poor, we'd both risen in one generation -- and I think we kind of liked the idea [that] maybe we can put this thing together and do something real for the country. It was a genuine tragedy when it all fell apart. ...

... Would such an agreement like that be possible now?

I think with President Obama it might be possible. The key thing for President Obama is whether he wants to try to govern the House and Senate through Speaker [Nancy] Pelosi [D-Calif.] and [Senate] Majority Leader [Harry] Reid [D-Nev.], in which case it will be very hard for him to create that kind of bipartisanship, or whether he's willing to actually reach out directly to Republican [House Minority] Leader [John] Boehner [R-Ohio] and Republican [Senate Minority] Leader [Mitch] McConnell [R-Ky.].

I think that Senator Obama's record when he was the editor at the Harvard Law Review was one of conciliating, bringing people together, trying to get things done. If he wants to go down that road, I think he'll find a lot of Republicans who feel that patriotism and national duty require them to try to work with him if there's a way to do it.

One thing I know you've been out in front on, that Obama is talking about in terms of stimulus, is a health IT infrastructure.

At the Center for Health Transformation, we've actually been studying, how could we have the maximum investment? But I would call it an investment, not a stimulus. We would favor -- I favored, frankly, during the Bush administration and just failed to convince them -- a very substantial investment in health information technology.

We believe and, the Rand Corporation believes, it could save as much as $80 billion a year in administrative costs, in avoiding medical errors, in enabling you to not need second and third tests of exactly the same material when you go to different doctors, in capturing fraud.

And so I believe it will actually pay for itself pretty rapidly, remarkably rapidly. So I hope that President Obama will work very hard to create a health information technology initiative that is a genuine investment in moving all of us to having electronic health records and moving the entire system to be paperless. ...

... What needs to be done in our health care sector, broadly speaking?

I think you want to re-establish that the individual has a big responsibility for their own health, because otherwise you can't deal with diabetes and obesity and things that are chronic conditions. Second, I think you want to empower the individual to know price and to know quality and to be able to make choices in an intelligent way. Third, I think you want to build a system which constantly migrates to best practices.

We've launched a health-based health reform at our Center for Health Transformation. And health-based health reform is based on the idea, let's go out and find best practices, and let's make those the standard. Let's move every hospital up to the best hospitals, every doctor's office up to the best doctor's office, every lab up to the best lab. It turns out you would probably save 40 percent on the current cost of health care -- that's more than the entire national defense budget -- if you had every system migrating toward best practices.

So I'm optimistic. I think we could have a better system of health with longer lives at lower cost with greater independence, but it would be an electronic system. It would be a system that was honest and public about price and quality, and it would be a system with a constant bias in favor of changing toward the newest best practices. ...

... What effect will that have on our fiscal outlook vis-á-vis Medicare?

It would be dramatically less expensive. If you could take 40 percent out of the cost of health care while getting better health outcomes, you've just balanced the Medicare program for the next half century.

Do you think it's fair to say that we don't have a fiscal crisis looking forward to entitlements but rather a health crisis?

No, I would say that we have policy crises in both health and Social Security, as a result of which we have a fiscal crisis. We have two obsolete models that were designed for a totally different world, and both have to be fundamentally rethought. And if they are, the fiscal problem will disappear.

... When you say empower the individual, you're talking about having individuals make choices and take the consequences for that. Speak to me about that.

Let me give you an example that I find fascinating. In LaCrosse, Wisc., the Gundersen Lutheran Hospital system is, according to the Dartmouth [Atlas of Health Care], the least expensive place in America for the last two years of life. They have an advanced directive program, and over 90 percent of their patients have an advanced directive. They have electronic health records, so everybody on the staff knows what the advanced directive is. They have a very strong palliative care program for using drugs to manage pain. They have a hospice program.

The result is today, the last two years of your life in costs are about $13,600. The last two years of your life at UCLA are $58,000. Now, why should Medicare pay $58,000 for the same outcome if it could pay $13,600? You can say, well, Los Angeles is more expensive; they do a couple of more complicated things. So fine. So let's say it ought to be $20,000 at UCLA. That's still [$38,000] less than it currently is. ...

We don't think the politicians can ever fix this because the hospital lobby is so powerful, and the doctor lobby is so powerful, and the pharmaceutical lobby is so powerful, and the medical technology lobby is so powerful. You're not going to politically solve this, but if I could empower you to know that, people start making choices. We know, for example, that if a doctor knows price, 60 percent of the time they will prescribe the less expensive drug, just because of their common sense. It's practical. We know that people are willing to look at practical outcomes.

And we also know -- this is the great irony -- the best places in America are always less expensive than the worst places. Health is not like jewelry and automobiles. In jewelry and automobiles you pay a lot more to get a lot better. In health, because the best places do it right the first time, they do it very efficiently, they pay real attention to quality, they're actually less expensive than the places that are bad.

So how did we get to a place where people don't know the price of something they're consuming?

You have to remember, this has all been a 60-year evolution. When I was a child, doctors showed up at your home. Doctors were friends. They knew who your family was. ... And so we have never had a tradition, because people didn't shop. You go back to 1950 or 1960, health wasn't that expensive. It's really become dramatically more expensive in the last 20 years.

So it's because everything is insurance and people are not getting a bill?

That's part of it. I think third-party payment models have a real problem, because the person who's paying doesn't get anything, and the person who's getting something isn't paying, and the person who's delivering knows that he has no respect for the person he just saved, and he is being suspected by the person who's paying.

So triangular, third-party models are, I think, always an invitation to fraud, they're an invitation to inflation, and they're an invitation to social discontent. You have a much better life if you have a binary system. Think about walking into McDonald's: If they don't give you the Quarter Pounder with Cheese, you don't give them the money. Very straight relationship.

Now, it's not that simple, and I understand it's more complex, but ... on chronic conditions, if we can't get you engaged in your life and get you taking care of yourself, it is impossible for the doctor or the nurse to do it.

And you won't be engaged unless it's your money.

I think it's got to be your money; it's got to be your knowledge. You have to know what your circumstances are. Now, we have examples of dramatic investment. Think about how many people you know who brush their teeth every day. Think about how many people you know who may floss every day. Think about people you know who go in and actually get their teeth cleaned regularly.

We do have models. They are socially driven, but they're pretty remarkable models. And I think what happened was health got to be this thing over here I didn't have to think about because somebody else would pay. Somebody else would pay for it, and somebody else would take care of me when I got sick. ...

... Let's talk about the stimulus. Can a fiscal stimulus stimulate the economy?

No. Look, a fiscal stimulus in the narrowest sense -- the $600 [tax rebate] 2008 deal, which I think was totally stupid, frankly -- it means that you are borrowing the money to loan you so that you can pay interest on it as a taxpayer for the rest of your life. And because you're fairly smart and you know it's a one-time check for $600, you're going to be careful. It leads to no behavior change. Peter Ferrara and I wrote an article in which we outlined a real tax cut that was specifically designed to change behavior. But to do that, it has to be permanent. ...

What you want, particularly in a world where you're going to compete with China and India, is you want an investment strategy. And it can be very big; it could be hundreds of billions of dollars. The Transcontinental Railroad was a huge investment for a country the size of America in 1861, but people understood that it was an investment in a bigger, better future. It wasn't just throwing money away. These stimulus packages just throw the money away. ...

... Looking forward, should we be having large deficit spending in our current recession?

I think you'd probably want to run a fiscal stimulus, but I like Louis Gohmert, who's a [Republican] congressman from Texas, who has proposed that for the same number of dollars that people want to use in the second half of the bailout and in the so-called stimulus package, you could give every American a total tax holiday through June. ...

But how would that lead to investment?

Look, if you ask me my choices, my ideal choice would be a serious investment strategy, both on the spending side and on the tax-cut side. I'd like to zero out capital gains [taxes]. I'd like to make the elimination of the death tax permanent. I'd like to make sure that we had lots of incentives for investment. I'd like to get 100 percent expensing, for example, so people could write off investments. And I'd like to see a very serious, long-term tax credit for wind and solar and clean coal and a variety of energy breakthroughs, hydrogen.

So that would be an investment strategy, and in that context, I'd be prepared to say we need an infrastructure investment strategy, and we need health information technology, real investments that would lead to a better economy, more productivity and a better future. That package would make sense to me. That would be my idea.

But if you said to me, would you rather just throw money away through the government or throw money away with a tax holiday, frankly I'd rather have a tax holiday. ...