RAY SUAREZ [narration]: Welcome to Need to Know. With the presidential election less than four weeks away, it’s hard to focus on any deadline beyond November 6th. But no matter who wins the White House, another deadline looms only 8 weeks later that could be almost as consequential. That’s when congress must act or individual tax rates on nearly every income group will go higher. Taxes on investments will increase. And so will payroll taxes.
On top of all that, unless an agreement is reached, federal government spending will be slashed by more than one trillion dollars over the next nine years, with defense spending absorbing half of all the cuts. The combination of tax increases and spending cuts could, by some estimates, lead to the loss of roughly 2 million jobs. Many economists say all this would drive the nation into another recession. How can we avoid the so-called fiscal cliff and put our long-term fiscal house in order? That’s our single focus tonight.
Joining me is economist Douglas Holtz-Eakin, a former Director of the Congressional Budget office and President of American Action Forum. Former four-term Oklahoma Senator Don Nickles headed the Senate Budget Committee. He’s now chairman and CEO of the Nickles Group in Washington D.C.
Economist Bo Cutter was the director of the national economic council under President Clinton and was Executive Director for Budget under President Carter. He’s now a Senior Fellow at the Roosevelt Institute. And Maya Rockeymoore. She is the Chair of the National Committee to Preserve Social Security and Medicare and is president of Global Policy Solutions a Washington D.C. based consultancy. Welcome to you all.
RAY SUAREZ: So Douglas Holtz-Eakin, is this really as scary as some people in Washington are talking about?
DOUGLAS HOLTZ-EAKIN: I– I think it’s worse than people in Washington appreciate. It is true that we have the train wreck on the spending side. It’s also true that we have a tax code that is basically all up in the air. We got temporary extensions of every piece of it. We patch it every year. And right now, we’re growing at one and a half percent at best. You don’t have to be genius to know that if you take a one and a half percent growth rate and hit it with something that big, we have big problems. And– I think it’s a very dangerous situation. And to go over the cliff would be irresponsible on the part of everyone.
RAY SUAREZ: A very dangerous situation Maya Rockeymoore or a step in the right direction to finally do what everybody says they want, which is to cut federal spending?
MAYA ROCKEYMOORE: You know, Congress came up with a Rube-Goldberg-like structure in order to deal with this issue. Now we have a situation where Congress was playing a high-stakes game of chicken with the president– over the debt ceiling. And– they couldn’t work it out; they thought that people would come to the table to do the right thing. And it hasn’t happened. We do face– deep deficits and debt. And so we definitely need to look at revenue increases. However, I’m not saying that sequestration is the answer. Because it’s like going into a very fine– it’s like doing heart surgery with a hatchet.
RAY SUAREZ: Well, Bo Cutter, isn’t it likely that we’re gonna do the easy things and not really go after the hard things?
BO CUTTER: The notion of taking the country through a recession in order to somehow or another take on the hard things is nuts. We are on a verge of a cliff. And to risk that on the bet that somehow or another a lame duck session of Congress, which is gonna be a zoo, would– would solve these problems in any long-term sense just is not in the realm of reality.
SENATOR DON NICKLES: Ray, just a couple of comments. One, I– I’ve been in the– was in the Senate for 24 years. There’s more pending, more work to be done in this lame duck session than any time in– in the last three decades, for sure.
We have enormous tax increases you’re gonna hit the economy right between the eyes. And to get specifically, there’s some of them that, you know, people haven’t even focused on. If nothing’s done, what happens? Well, you’re gonna have on investment taxes– you have capital gains tax gonna go from 15% to 20%, whoops, President Obama’s Obamacare added 3.8%, so it goes to 23.8%. Effective January 1. The tax on corporate dividends for individuals goes from 15% to about 44%, almost a 300% tax increase. That’s January 1. That’s because this Congress and primarily the Senate didn’t address these items, didn’t get their work done. So it’s all coming due, all has to be dealt with in lame duck.
RAY SUAREZ: So here comes time to pay the piper and some of these taxes are gonna go up?
MAYA ROCKEYMOORE: Absolutely. I’m actually not sympathetic, Senator Nickles, with– some of the– the tax breaks that you’re talking about. Because the reality is is that they’re too low. When you have billionaires complaining that they have a lower tax rate than their secretaries, then you know that something is unfair about this in this nation. So if we’re talking about capital gains, you know, take it back up. And if you’re talking about levels, let’s go back to the Reagan Era of levels. Let’s go back to the Clinton Era levels. But what– we–
MAYA ROCKEYMOORE: –we have historically-low levels now. And frankly, our country needs the revenue.
BO CUTTER: But there–
RAY SUAREZ: Quick responses.
BO CUTTER: There– there are two different problems. There is the– there is the problem of what’s– what’s the right tax structure for the long run, which I would agree with a lot of what Maya has said. There is the problem of what do you do for the first of January of this coming year. And that– you cannot go through those– those tax increases right now with the economy in the shape it’s in. So the– the– the Congress is gonna have to do a very difficult thing. It’s gonna have to walk and chew gum at the same time.
DOUGLAS HOLTZ-EAKIN: I– I think he’s right about those two different problems. I think Don’s right about the tax policy. But I think the most important thing to remember is that the fiscal cliff is hurting this economy right now. We’re already hearing defense contractors and non-defense contractors of the federal government talk about how their contracts are gonna be cut back. There are gonna be layoffs. Their workers are nervous. We’re seeing the impact of– of– of potentially higher taxes. We hear firms talking about– putting their– their acquisition plans on hold. We’re growing pretty slowly already. And this is yet another danger. Second thing that’ll happen is we’re already gonna have a payroll tax increase for sure. The sunset’s gonna go away. We’re gonna have the new taxes in the Affordable Care Act. They’re gonna go up. There’s probably no way around that. That puts a premium on making sure the rest of this doesn’t happen. Because if we go into a recession, I promise you, we’ll get no deficit reduction. There is just no way in– in a recession after the experience we’ve had that a Congress is gonna say, “Hey, you know what I feel like doin’? Let’s– let’s raise some taxes and cut some spending.” Won’t happen.
RAY SUAREZ: Part of the problem with this conversation is that we talk about the federal budget. We behave as if there’s a lot of different places to cut that bear some looking at. But mandatory spending for Social Security, Medicare, and Medicaid totaled more than $1.5 trillion in 2012. And that’s almost half of all federal spending, which means that unless you want to go there, and most Americans say they don’t, there’s not a lot of other places to cut over the next decade. Doesn’t any grand bargain on deficit reduction have to tackle entitlements, particularly given the fact that we’re about to have a demographic wave break over our heads of people just probably a little older than Doug and I.
DOUGLAS HOLTZ-EAKIN: Well, I mean, I agree with–
MAYA ROCKEYMOORE: But I’m not– and I– I should tell you that I’m very concerned– about the fact that people are talking about– substantially cutting and dismantling even– Social Security, Medicare, and Medicaid– in this nation. Because we have a generation of people coming up– who will absolutely need– we have a retirement crisis in this country. And they will absolutely need those benefits. With that, there are ways that we can actually address that without cutting benefits for those who most need it. And the primary way that you get to solvency under Social Security is actually raising the cap on wages. Most people in America don’t know that high earners, those who earn above $110,000 a year, are not paying Social Security– FICA taxes on that amount above $110,000. By raising that cap, you get 75% of the closure in the long-term solvency issue under Social Security. Under Medicare, Medicare is facing a solvency crisis that is more immediate– than Social Security. But we have an issue in this country and it’s only been partially resolved by the Affordable Care Act. And that is the issue of rising health care costs. That is what’s driving– the– the challenges under Medicare. We’ve gotta get that under control.
DOUGLAS HOLTZ-EAKIN: This discussion’s honorable, but divorced from fiscal reality. Right now, Medicare runs a cash flow deficit. $300 billion more dollars go out of the Medicare system than come in in premiums and payroll taxes. It has fallen under its own financial weight. It’s a disservice to future seniors to have a system that won’t be there for them. Our plan in Social Security is to cut benefits across the board, during retirement, for future retirees. That’s how it’s kept solvent on the books. That’s a disgrace. Both of these programs, in the interest of future seniors, ought to be fixed so that they’re durable and don’t threaten the country with enough red ink that we’ll actually have big problems.
RAY SUAREZ: Quick point.
BO CUTTER: There are at least two points here. The first is that– that the current growth of the entitlements, Social Security and– and Medicare and Medicaid, is a growth rate we cannot afford. And we don’t have a clue, at the moment– about what the political solution to that is and how to solve it. But there’s another problem is that within 20 years, our federal budget is gonna consist of interest on the federal debt, the entitlements, and defense. And that’s it. Which means that everything you ever heard about government, whether it is NASA or whether it is the– the parks or whether it is investment in infrastructure goes to my– my most recent calculation was about 3% of the federal budget. Which means that our government in the– the track it’s on right now can we not– not only can we can’t afford it, but it won’t be able to do any of the things that we think– positive government is for.
RAY SUAREZ: The defense industry, Senator Nickles, has been vocal that cuts in the Pentagon will directly cost an estimated 325,000 jobs. How much damage would it really do if we go over the cliff, if no grand deal is available to in– at least in the short term, make the cuts that are called for by this– this deadline?
SENATOR DON NICKLES: Well, the sequester will affect defense. Those are big hits. They’ll hurt the economy. Certainly hurt defense. Certainly hurt any contractor. Administration’s now telling the contractors, “Don’t notify your employees, but they’re gonna be laying off a lot– if Congress doesn’t fix this, there’s gonna be a lot of– there’s gonna be thousands and thousands of– of layoff notices sent out January 1– Happy New Year.” Because Congress didn’t get its job done, didn’t do its work.
RAY SUAREZ: Now– spending on defense represents more than half of all the discretionary spending in the U.S. In fact, we spend more on defense in the United States than the next 13 nations in the world combined. Can we get our long-term budget house in order without cutting back on defense? Because that’s been getting the lion’s share of the attention of the– of what’s going to happen when we go over the cliff.
MAYA ROCKEYMOORE: Absolutely not. But you have– amazingly, you have people who actually agree to– the sequestration and who are now– back– backing off of– the defense cuts. Saying that we need to only focus on non-defense– discretionary items. But the reality is is that we’re in a situation– where no one takes the defense budget seriously. It’s bloated beyond belief. You’ve got weapon systems that cost– end up costing three, four, five times– what they were originally budgeted as. You’ve got waste, fraud, and abuse in the defense budget– like you wouldn’t believe. And so there’s a lot of cutting to be done on the defense side of this that– many people– don’t want to take on. And it needs to be– prioritized.
RAY SUAREZ: Quick point.
BO CUTTER: Yes, the rate of growth of defense over the long run is gonna have to slow down. But– but you gotta decide what you want for defense. I mean, I think, frankly that waste, fraud, and abuse is an over– as an ex– as an argument for what you ought to cut in anything in the federal budget is just– is– is hiding behind the tree. The waste, fraud, and abuse is those sets of expenditures for the most part that you don’t like. Remember, we run a global defense force. We are the only country on Earth that manages globally– both our security and the world’s security. I think that one can– one can look at it and can– one can raise all kinds of questions about what kind of defense forces we want. But you’ve got to come to basic grips with what do you want to do with defense. And as nearly as I can see, there’s no other nation on Earth that’s willing to provide the– the security role that the United States has shouldered for the last 60 years.
DOUGLAS HOLTZ-EAKIN: Remember, when you talk about the defense budget, it’s not all planes and tanks. The Pentagon has, in a smaller version, the same problem the federal government has. It’s got rising retirement costs. It’s got huge health care costs. And we’re not gonna cut the military’s health care. We’re not gonna cut the military’s retirement. So there’s a lot of that budget that’s really off-limits. Now you’re down to some really tough choices, as Bo pointed out. The idea that there’s just easy cuts in the Pentagon is really overstated.
RAY SUAREZ: Let me– let me move on, because President Obama points to his budget proposal for 2013, in which he says his plan cuts the deficit by $4 trillion over the next decade, partly by raising taxes on high earners. Is this a serious starting point for any grand bargain? Or is there– a sort of line in the sand that cannot be—
SENATOR DON NICKLES: Well, couple of comments, Ray. One, that is very m– misleading. His $4 trillion in spending cuts wasn’t over a decade. It was over 12 years. Over 10 years, it was about– $1.6 or something. So– so– that’s very– very important. I mean, if you want to get into the budget weeds– you have to be consistent and so on. And– and– and– yes, you have to put everything on the table, defense, entitlements, taxes, you name it. I happen to be a big proponent of tax reform, because I think you can raise more money with lower taxes. When we cut capital gains from 28% to 20%, guess what, we raised a lot more money.
RAY SUAREZ: Couldn’t we go back to the Clinton Era levels of taxation on incomes–
SENATOR DON NICKLES: No, well–
RAY SUAREZ: –over $250,000?
SENATOR DON NICKLES: Well, just two or three comments. I like goin’ back to the era– or the Reagan Era of– of– taxation, when it was 28%. I think that would be better. But we worked with the Clinton Administration. Republicans actually controlled Congress and– and– President Clinton’s– l– after two years in– from ’94 on. And we did some things. We did pass welfare reform. He didn’t sign it the first two times. He signed it the third time. We did pass capital gains reduction. It did help the economy.
DOUGLAS HOLTZ-EAKIN: I think the important thing is to not look back and– to either Clinton or to Reagan. But to look forward and recognize we have a tax code that basically is always up for grabs every year. That means we have to do tax reform. There’s nothing so wonderful about the– the Bush tax cuts or– the Clinton tax rates that we should go back to either of them. We have a terrible tax code. We need to fix it. That’s serious work. It should be done. But it can’t be done in a lame duck. And it can’t be done–
RAY SUAREZ: It can’t be done in a lame duck? Let me put it this way. ‘Cause — nobody wants to play with higher rates yet. But I’ll keep asking till somebody does. How come we can’t just say, “Income is income is income?” Whether you get up at 7:00 in the morning, put your clothes and go to work, and then in the end of a week or two weeks get a check. Or– whether part of what you’ve earned over your whole lifetime is sitting there busily making money for you and you don’t actually have a 40-hour-a-week straight job anymore and that’s how you’re making your money. What would change if we said, “Income is income is income is income”?
MAYA ROCKEYMOORE: Well, what would change is that the wealthiest individuals among us– would feel like they’re getting more money taken out of their pocket that they’re currently getting untaxed. And the reality is is I actually agree with you that we actually should treat unearned income as we treat– income that comes from wages. We need to look at this in a balanced way. And we need to consider the needs of middle and working class Americans– too.
RAY SUAREZ: Governor Romney has said he would cap federal spending, cut tax rates across the board, while getting rid of some tax deductions, and support a balanced budget amendment. Is this a serious starting point for an eventual grand bargain? Bo Cutter?
BO CUTTER: The numbers aren’t serious. It’s already been shown in all kinds of analyses that there’s no way on Earth that you can lower the rates the degree that– that– Governor Romney wants to.
RAY SUAREZ: 20% in– most cases.
BO CUTTER: And– and come out with anything close to his numbers. Where– I mean, that’s– that’s just a given. The– now if I want– if you w– want to generalize from that, that is it– is it reasonable to cap– the– de– deductions or– or to reduce deductions, bring down rates, reduce some ex– reduce expenditures? Yeah, but the– it’s the devil’s in the detail. And the devil’s– the– the devil is in the numbers. And the– the– the fact is that that– I hate to sound like this. But that– that is not numerically a serious proposal.
DOUGLAS HOLTZ-EAKIN: Just to balance it. I mean, these are the same tax rates Bowles-Simpson had. No one said that theirs was numerically impossible. So it– it’s just wrong to say you can’t do this. There have been– equal demonstrations by Martin Feldstein at Harvard, by Harvey Rosen at Princeton, places that are serious about the numbers, that show that this– you can make this add up. What exactly would he do? We don’t yet know. That’s fair. But it’s not impossible. And we do know that the route to success is tax reform. The route to success is entitlement reform. And the Governor has put both those on the table.
RAY SUAREZ: Senator Nickles, it sounds like the Senate is willing to countenance the possibility of higher taxes in one form or another. And the House is, under its current leadership, absolutely unwilling to accept any tax increases.
SENATOR DON NICKLES: Well, I happen to agree with the House. I think if we’re not in a recession, we’re close. And a tax increase would be very counterproductive. I think whatever they do on taxes should be reserved towards this idea of a tax reform. And– and at the same time, yes, it’d have– it’d have some– you might lose the deductions, but you have lower rates. There’d be a trade off. This problem has to be resolved, but you’re not gonna resolve it in high weeks with higher taxes.
RAY SUAREZ: It’s been reported that members of the Senate have already started working on a comprehensive deal, a deficit reduction plan to be taken up in the lame duck session. Is there any hope that some of the dysfunction of the past couple of years can be worked out before we hit this fiscal cliff? In short, can you believe that we can make a deal? And I’ll just go right across the table, Bo Cutter?
BO CUTTER: I think there’s a deal. I– it depends very much on the leadership, and I’ll say it, of President Obama on the day after the 6th of November, as he starts his second term. It depends critically on what he does. I think there is absolutely no way there is a deal accomplished by the end of the year. So what’s gonna have to happen is some outline of a deal and then an agreement to push off the cliff. Because– again, I’ll say it again, the short-term effects of that cliff, forget the long-term big decisions, the short-term effects of that are awful.
RAY SUAREZ: That sounds– but it sounds like– a plausible reason for–
BO CUTTER: I’m an optimist.
RAY SUAREZ: –optimism. Okay, Senator Nickles.
SENATOR DON NICKLES: Well, I’m not sure I’m gonna give President Obama– reelection. I-
RAY SUAREZ: But the lame duck session arrives, whether he’s reelected or not.
SENATOR DON NICKLES: That’s true. And– and so you have to kind of see how the election works out. I would agree with Bo. I think you can’t rewrite the tax code. You can’t do all the entitlement things that need to be done. They haven’t legislated in this area in three years in the Senate. So are they gonna get that done in– in– in a few short weeks before January 1, after the election? I don’t think so.
RAY SUAREZ: Maya Rockeymoore?
MAYA ROCKEYMOORE: So the leadership of the Senate– calls themself a gang, a gang of six, a gang of eight, but just like street gangs– they are actually seeking to undermine the wellbeing of Americans who experience income insecurity and health insecurity. And so with that, I think that there is the possibility of a deal. But it’s not based on Simpson-Bowles. It’s based on a more progressive outlook about how do you actually make sure that we don’t undermine– middle and working class Americans, while also providing the– the stimulus that we need in the short term, but the deficit reduction that– and debt reduction that we do need in the long term. And– and doing it with the precision of a heart surgeon and doing it well.
RAY SUAREZ: Doug Holtz-Eakin?
DOUGLAS HOLTZ-EAKIN: Well, I hope– we have some leadership and intelligence and avoid the recession in the near term, certainly. And then there’s gonna be a deal. And the reason there’s gonna be a deal is that the– the unmentioned actor here are the rating agencies and the international financial markets who have said quite clearly to the United States, “You have the capability of solving your problems, but your politics appear to get in the way.” If we go through the beginning of 2013, in the honeymoon period of any new administration, the first hundred days, a new Congress. And we get to August or God forbid December and we haven’t done anything significant on this problem, those rating agencies and the international financial markets will correctly conclude the U.S. is so politically broken that it can’t solve its problems. We’ll see a downgrade and huge problems. So whether Republicans want to have a deal or Democrats want to have a deal isn’t gonna matter. We have to have a deal. And they better get ready in 2013.
RAY SUAREZ: Thank you all for a terrific conversation. Good to see you.
VARIOUS: Thank you very much. Thank you.
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RAY SUAREZ : And that’s it for this edition of Need to Know. For continuing election coverage from PBS programs please visit pbs.org/election2012. On next week’s program, Maria Hinojosa reports from Florida – where carrying the Latino vote might be the deciding factor in November’s presidential race.
SOT: The people are saying that if Mr. Obama stays in place he may be able to continue doing what he started.
SOT: We’re going to do the best job we can in explaining Governor Romney’s job plan and about our economy which is suffering.
RAY SUAREZ: That’s next week on Need to Know. I’m Ray Suarez, thanks for joining us.