The former FDIC chair and current chair of the nonpartisan Systemic Risk Council weighs in on budget sequestration politics.
Former FDIC chair Sheila Bair
Tavis: Sheila Bair’s no stranger to the budget battles that have dominated Washington politics in recent years. Appointed by President G.W. Bush as head of the FDIC, she took on big banks, challenged her peers on Wall Street, and championed homeowners during the worst, early days of the ongoing economic recession.
Now a leading economist and author, Sheila Bair has been looking at the mandated $85 billion cuts and assessing the impact on our country’s fragile recovery, which is still not much of a recovery for so many fellow citizens. Sheila Bair joins us tonight from Washington. Good to have you back, Sheila.
Sheila Bair: Thank you for inviting me. Happy to be here.
Tavis: Let me start by asking very direct whether or not this was necessary. It seemed to me like a bad idea when they agreed to it.
Tavis: So is this whole sequestration process, was it necessary to even find ourselves here?
Bair: No. Like most of these, we go from one fiscal crisis to the next. They’re all avoidable. Sequestration was designed to be a bad thing. It was designed to be a gun to Congress’s and the administration’s head, to get a long-term fiscal plan in order to put our spending on a sustainable path, their spending (unintelligible) revenues on a sustainable path.
So it was meant to be a very bad thing, a punitive thing, so that members of Congress and the administration would want to avoid it. But unfortunately, because of the continued dysfunctionality with our electoral officials, that they haven’t come to resolution, so now we have sequestration.
Tavis: So your answer notwithstanding, if it was a bad idea to begin with, then why would the president of the United States and the leaders in Congress agree to this in the first place?
Bair: Right. Well, I think there’s a broader recognition that we do – look, our spending, based on the revenues we raise, our spending is on an unsustainable path. We cannot keep feeding these huge deficits, which feed an ever-escalating national debt.
So we have to get spending and revenues into some type of equilibrium and on a sustainable path. So the problem is if we don’t do sequestration, there’s nothing else there to do. When the spending is not – there was an agreement to have some combination of spending cuts and revenue increases.
We had some revenue increases with the fiscal cliff discussions, so now the Republicans are saying well, this time on the spending side, and the president’s saying well, I want some more revenues too.
Both probably have legitimate positions in their own ways, but the problem is they’re just talking past to each other and they’re not getting it done. So we have sequestration because there’s nothing to replace it with, and we need to do something. Our fiscal situation right now is not sustainable.
Tavis: There are two or three things you’ve said, Sheila, that I want to come back and kind of get you to unpack for me.
Tavis: In no particular order, number one, you referenced the fiscal cliff conversation back in January.
Tavis: I could not have asked you this question a couple of years ago when you were in the FDIC chair, but maybe I can ask you this question now. To your mind, how much of this is about politics?
That is to say, the president was reported by most of the media to have, my phrase, not yours, cleaned the clocks of the Republicans in the fiscal cliff negotiations, and everybody knew then inside the Beltway that when it came to this point that the Republicans were going to be looking, my words again, not yours, to exact some revenge to pushback on him for the victory, as it were, that he achieved in January.
So that’s a long way of asking whether or not you see politics all over this.
Bair: Well, I do see politics over this. I think the politics are on both sides. There’s legitimacy to both positions as well. I think the Republicans are right – you need something on the spending side. The Democrats are right – you need probably more on the revenue side. It needs to be a combination.
But you’re right, I think both sides really are too much playing this for political advantage and trying to make the other side look like the culpable entity, the party or the individual responsible instead of just coming to the table like grownups and getting a resolution to this.
We’re talking about $85 billion for this year. The actual reduced spending for this year, 2013, will be more like $42 billion, because some of the money that would have been appropriated this year would not have been spent until 2014.
So we’ve got a $3.5 trillion budget, so that’s a big number. But it’s not huge compared to the total size of the budget. The problem is the way sequestration was designed, the impact of those cuts are on a very small piece of the budget.
So broadening and looking at the entire landscape of our budget and fiscal policies, to come up with this amount of money, either through some combination of revenue increases or spending reductions, shouldn’t be that hard to do.
But when you are trying to play political advantage, you just don’t want the other guy to look good. If you come together with a bipartisan agreement, then everybody looks good, and maybe that doesn’t serve partisan purposes.
So I would have to say – I have to ding both sides on this. I think neither has been really as adult as they should be, and our country is suffering as a result of it.
Tavis: So inside the Beltway there has been a media spin over the last two or three days that maybe the president has overplayed his hand on this. Joe Scarborough writes an op-ed piece.
Bair: Right, yes, yes did.
Tavis: You saw it in “The New York Times.”
Bair: I did.
Tavis: Tonight, he and Paul Krugman have a debate on “The Charlie Rose” show about this very issue. So Joe and others believe that the president has overplayed his hand on this, in part because, as you said a moment ago, the impacts of these cuts are on a small slice of the budget, number one.
Bair: Right, right.
Tavis: Number two, and we’ll talk about this in a moment, poor people ultimately are going to be impacted by this, but they’re not going to feel the worst brunt of this, at least not initially.
So the president’s holding all these press conferences with all these people standing behind him in the background, so has the president to this point overplayed his hand on this issue, since you want to ding both sides. We’ll come to Republicans in a moment.
Bair: Yeah. Well, I think there may be some truth to that. I think the impact will not be immediate, it will be over time. It will be bad over time. I don’t think the president’s overplaying his hand in that regard. I think maybe in terms of setting up people’s expectations there’s going to be some immediate, terrible crisis, that’s not what will happen.
This is going to be gradual, but it will be painful. It’s absolutely the wrong way to cut spending, to put it on a very small slice of the budget and just do it with a meat axe, not make any judgment about programs that are working or not working, or where we’re getting better efficiencies and bang for our buck.
It’s just a meat axe, so he’s right to say it’s very bad, and again, sequestration was something that was designed to be bad. But the immediate impact will not be severe, and so that might create some credibility issues with him.
I think, though, more fundamentally, both sides, the rhetoric is so heated it makes it harder to come to the table and get an agreement. So I guess on that score I think both sides, understating the impact or overstating the impact with a lot of this very red-hot rhetoric, it makes it more difficult for them to take a deep breath and go into a room together and get something figured out on this.
The numbers we’re talking about, they’re not insignificant, but again, if you look at the full swath of spending and some potential additional revenues as well, it shouldn’t be that hard to figure this out.
Tavis: So if the president gets dinged for potentially overplaying his hand on this, might the Republicans get dinged down the road for being responsible for shutting down the government, as it were?
Bair: Well, they may. I don’t think they’re going to shut down the government. They tried that back in the Newt Gingrich days, and that didn’t work out so well for them.
So I think they got smart and they will not be doing that, but certainly over time the impact of the sequestration cuts are going to be very focused and concentrated in certain discrete areas that people rely on. So I do think they have some vulnerability there, and again, this is all so unnecessary.
The reason I don’t like to say it’s one side’s fault or the other is that at the end of the day, they’re all accountable for running the country. They, the president, the Congress, Republicans and Democrats, they have a responsibility to govern, to lead, to manage our budget responsibly, to manage our fiscal situation responsibly.
At the end of the day, they’re not doing their job when you get into situations like this.
Tavis: I had Alice Rivlin on my radio program this past week, and she and I had a very spirited conversation about her disagreement with Paul Krugman, who I referenced earlier in this conversation. Alice, of course, is on the same side of the political ledger that Paul Krugman is on, and yet they disagree about one fundamental issue, and I want to get your take on this, because it’s not just the two of them.
There are many of us who are debating whether or not the timing is right for deficit reduction. There are a lot of folk on the left, certainly progressives, who think the president has sold out by even going so far into this conversation in a bad and horrible economy.
Krugman would argue this is not the time to be talking about deficit reduction. Where do you come down on that debate?
Bair: Well, I think there are things we can do to get our economy going that would not increase our deficit problems, and over time improve the situation. I wrote an op-ed in “The New York Times” earlier this week where I argued two key areas would be tax reform, clean out the tax code of all these special breaks, a lot of which benefit upper income people for no good reason, like the lower rates that we apply to investment income.
I think having fundamental tax code reform would get our economy going. It could be done in a way to produce revenues; Domenici-Rivlin’s proposal would have raised some revenues and lowered rates for everybody by getting rid of these loopholes.
So that is one thing, even if you do it on a revenue-neutral way, I think it would help get the economy going, which would produce more revenues just by better economic growth.
Another area is infrastructure. My gosh, there will be no time in history I can think of where you will have the ability to fund, on a very long-term 30 or 40-year basis, issue some very cheap debt to fund long-term infrastructure programs. Construction costs are very low right now, again, because the economy is so weak.
It is fiscally irresponsible not to be issuing long-term debt to repair our nation’s infrastructure, and those can be repaid over time through special taxes, through user fees. There is a way to generate revenue streams to support those infrastructure improvements in a way that would not contribute to the deficit.
So I think those are two areas where we can take government actions which will help our economy get back on its feet again in a way that won’t exacerbate our long-term fiscal problems.
But this idea of just government’s too big, cutting it back, government is too big and that’s the problem, just slice it back, that’s not going to help anybody, especially when it’s being done this way, when you’re not making any kind of judgments about the programs that are helpful and maybe the ones that are inefficient.
You’re just taking a meat axe to a very small slice of the budget, and with no differentiation about whether the program’s a good one or not.
Tavis: I read your piece, your op-ed, in “The New York Times,” which is one of the reasons why I wanted to have you on this program. I thought it was a good piece.
I love the suggestions that you made in the op-ed, one of which you just talked about now, which is about the tax code and how unfair it is, and how some of our tax policy, clearly a good part of our tax policy, benefit those who don’t need it as much as those who are obviously disenfranchised economically, and suffering the most.
I raise all that to ask why it is that we can’t seem in Washington to get a real conversation about that. My sense is, and you and I have discussed this before, my sense is that Washington is bought and bossed by Wall Street and by big business.
I know we don’t always agree on that particular issue, but how much of not getting serious about that issue, about the benefits and the advantages for the super-wealthy, the rich and the lucky, why does that conversation, never mind your suggestion in “The New York Times,” why does that never get off the ground in Washington?
Bair: Well, I do – all these breaks in the tax code have very well-heeled, a lot of financial money, lobbying money, behind them that got them there in the first place, and want to protect them.
Some of them have broader popular appeal, like the mortgage interest deduction. I would like to scale that back, or replace it maybe with a tax credit that gives people credit for building equity in their homes as opposed to taking out bigger and bigger mortgages.
But the most egregious example of a special break, and I haven’t seen any good economic literature to support is, is the lower rate that we apply to investment income, and this, as I said in my “New York Times” op-ed, basically, a manager of a hedge fund can pay half the rate of a manager of a shoe store because of these very favorable breaks, lower rates that we apply, to investment income.
So if you make money through wages, through labor, you get a salary or a wage, you can pay very high rates, but if you make your money mainly through investment, it has been 15 percent. It’s going up to 20 percent, but that’s still about half of what the top rate is for wage income, 39.6.
So that one, the rationale for this is that oh, we need all this investment income, we need to encourage investment, so it will create jobs. But there’s just no credible economic evidence that that’s the case. What you have now is a lot of people trying to make their money through investment income, you have a lot of tax arbitrage, a lot of financial engineering, trying to structure investment income to qualify for these very low rates, and it’s wasteful.
There’s a study that Bain and Company did that shows by the year 2020 we will have $900 trillion of investment capital sloshing around the world, supporting a real economy of only $90 trillion of GDP. We have way too much investment already. We don’t have enough jobs.
So taxing wages, taxing work at a higher rate than investment just makes no sense to me at all, and there are, for middle income people who do get a little bit of investment income, there are ways to deal with that by exempting the first several thousand dollars from tax. That would be fine with me.
But these billionaire hedge fund managers paying 14, 15 percent tax on their investment income I just think is outrageous and needs to stop.
Tavis: Since you raised the issue, let me ask how it is in your mind at least, the notion of austerity, and whatever people in Washington don’t want to call it, that’s exactly what this is. Sequestration is a big, fancy word. This is austerity masking as a conversation about deficit reduction, as far as I’m concerned.
But how did the conversation about austerity get ahead of, get higher on the American agenda than the point you raised a moment ago – jobs, jobs, jobs, with a living wage for fellow citizens?
I haven’t heard nearly as much talk about that in Washington as I have about sequestration or austerity cuts.
Bair: Yeah. Well, we haven’t, and I must say again I need to ding both sides on this. I think the president, two of his biggest issues for this year are immigration reform and gun control, and I’m with him on both of those.
But jobs, there’s never been as big of a focus as there should be on jobs and economic policies that will create jobs, and I know there’s been resistance on the Hill, there’s been resistance from Republicans on some of his proposals, but I do think at the end of the day he can find a – it’s funny.
Reagan had his blue dogs. He always had a group of Democrats he could work with to get his votes. Of course, Lincoln had his team of rivals, and this very famous movie that just came out that showed how he worked with the other party to put together a governing coalition.
Mr. Obama, I think, really needs to do that. He needs to find that working center that can get this country moving forward, because yes, it’s all about economic growth, it’s all about jobs, and the economy’s really not performing very well at all. It’s pretty much flat on its back.
A lot of the improvement in the unemployment rate has come from people dropping out of the workforce, not from the creation of more jobs. Even when we do get job creation, they tend to be lower-paying jobs. Almost all of the country is losing; their real wages are going down. Real income is only going up for the top 1 percent.
So this needs to be a singular focus for Republicans and Democrats. It’s really basic to what our country is about, and again, cleaning out the tax code, lowering everybody’s rates but making sure that the rich people don’t get all these special breaks, or the well-heeled corporate interests don’t get all these special breaks, that is just fundamental fairness.
You can do that and lower everyone’s rates that ultimately, whether the corporations or the special interests want to admit it or not, will be in the longer-term interests of the economy and their interests as well.
But we need to get a bipartisan governing coalition in place to do that, and I think the president should look more strategically at Republicans he can work with. Reagan used to go visit them in their offices.
I remember I worked in the Senate in the ’80s, and I can remember stories of him visiting members of Congress in their office personally to woo their support and their willingness to work with him. So we need some of that strategic thinking.
Tavis: He’s taken that criticism on the chin for all of his first term and now into his second term. So however many times you or others say that – “Go see them, spend time with them, play golf with them -” pardon my English, he ain’t changing his strategy where that’s concerned.
I don’t know what that’s all about, but there is no evidence at the moment that (unintelligible).
Bair: Well, look, in fairness to him, yeah, the Republicans have not treated him well either, and that, again, there’s blame on both sides. But I do think being strategic about this, trying to reach out to Republicans in swing states, people that have more moderate voting records, people that have been willing to vote independently, I think those are the folks that he really needs to make a concerted effort to deal with.
I’m not sure they’ve been as strategic as they should be on this. It’s interesting. Tip O’Neill and Ronald Reagan had a great working relationship. Tip O’Neill was the Speaker of the House, the Democratic Speaker of the House when President Reagan was president.
One of the reasons Tip O’Neill worked very well with President Reagan was because Tip O’Neill knew there was a good bloc of Democrats, blue dog Democrats, that would vote with Ronald Reagan, so it gave the opposition leadership an incentive to work with the president, knowing that he had those swing votes.
So I think you need to get strategic and tactical about this. I know it’s easy for us to say, sitting here in a studio talking about it, but it’s the best advice I can give, because we don’t have a governing coalition in this country right now. We don’t have a center that can produce votes, move this country forward, produce good, responsible legislation, and we need it desperately. We really do.
Tavis: So the one thing that Washington does not need desperately is another blue ribbon commission, another white paper about how to fix this problem.
Bair: No, we study things to death in this town, that’s for sure.
Tavis: Yeah, it’s the paralysis of analysis, as one of my friends says.
Bair: Yes, it is.
Tavis: But I raise that because I’m curious, Sheila, as to why, when we do have these commissions with outstanding Americans who know these issues well, you referenced earlier in this conversation the Domenici-Rivlin plan, and I think now Simpson-Bowles.
You read these two plans as I have, they really aren’t that different in many of the recommendations that they make.
Tavis: But why is it, now with the president, specifically President Obama, he commissioned Simpson-Bowles. The report was done; he put it upon the shelf. It’s been collecting dust. Nobody took Domenici-Rivlin seriously.
So my question is, why do we have these ideas in these texts, in these reports, that now we find ourselves in sequestration that nobody heretofore has taken seriously?
Bair: Yeah. You’re right, those are both good plans. They were very similar because they were great plans. Great minds think alike, as they say, and there was a lot of overlap and similarity. Fundamental tax reform, getting rid of most of the special breaks, lowering the rates for everyone.
They would have taken the rates down to 28 percent, and much lower for lower-income folks. So that would have been a huge benefit, and I would still love to see it happen.
It’s just the lack of process anymore. Washington just doesn’t work the way it used to. You used to have a process in place where when you had sticky issues – 1983 is a good example. Again, that was my context when I worked in the Senate under Republican leader Bob Dole. I remember in 1983, there was a commission, a bipartisan commission that he and Pat Moynihan and Alan Greenspan were involved with.
They produced bipartisan recommendations for getting Social Security fixed, which was then in the near term was going to run into some serious trouble, and it worked. It was a combination of tax increases and benefit cuts, and it worked and it put the system on a solid footing for over 30 years.
That’s how it used to work. You would set up these commissions with prestigious people to think it through, and then they’d make these recommendations. We just don’t have process now anymore. There’s just so much acrimony and so much distrust, even the best ideas are, as you say, they’re put on the shelf to gather dust.
People are just too busy fighting with each other to lead. But again, Congress, the president, their job is to govern, to govern this country, and they are not doing their job.
Tavis: Look at your crystal ball and tell me, because I can’t figure this out at the moment, the reason why there is no conversation in Washington as we speak tonight between the White House and Republicans or Congress is because there’s no pressure to do anything at the moment, as far as I’m concerned.
If the cuts aren’t going to kick in immediately and they’re not going to hit the poor and the disenfranchised, help me understand what the rationale is, what is the reason for them coming together at the moment, at least, now that we’re already in this. What’s the reason for solving the problem?
Bair: It would be nice because look, they need to fix it, right? So why wait until it reaches crisis proportions when it’s really starting to have a big drag on the economy?
Tavis: Because that’s how Washington works, Sheila, that’s why. (Laughs)
Bair: Well, it doesn’t need to work that way. I think this is another problem, is the partisanship plus the short-termism, jumping from one crisis to the next unless the problem’s right in front of you and you have to deal with it.
Not being able to make a decision, and if businesses were run that way or if households were run that way, they would have a disastrous results. You send your kid to college, you want to buy a car, save up for a down payment on a house, you think several years in advance and you budget and you plan, and Congress needs to do this same thing.
The frustrating thing is that as we launch from crisis to crisis and just come up with patches to deal with these short-term problems, these short-term emergencies, our longer-term problems like our infrastructure, like our educational system that still is not delivering what it should, like our healthcare costs that are really far excessive to what we’re spending and what other countries spend, those long-term problems aren’t getting solved the way they should.
So we need to think long-term. But right now, Washington isn’t doing that either, and I think this is an important message for your viewers to communicate to their elected representatives, to their Senators and their congressmen, and write to the president as well, and let them know you’re tired of the finger-pointing.
You don’t care whose fault it is. It’s everybody’s fault. They’ve got a job, do it. Put this acrimony aside and make some decisions, and get things done, and get things done for the broad benefit of the country.
Tavis: I’ve got more questions; I have no more time. So on that note, I will say thank you.
Tavis: Until the next time, Sheila Bair.
Bair: Okay, thanks, Tavis, great to be here.
Tavis: Former head of the FDIC. Good to have you on.
Bair: Thank you.
Tavis: That’s our show for tonight. I’ll see you back here next time on PBS. Until then, good night from L.A., thanks for watching, and as always, keep the faith.
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