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The nation’s next big budget battle is shaping up over the debt ceiling. Earlier this week, the ratings agency Standard & Poor’s changed its outlook for U.S. government debt from stable to negative. And when it did, it added new urgency to the debate. The U.S. has a current debt limit of $14.3 trillion. Economists predict that number will be reached in mid-May. The White House wants Congress to increase the limit immediately. But that support may come with a high price tag. House Majority Leader Eric Cantor says Republicans want to see serious reforms. We look at the political debate over raising the debt ceiling and its economic repercussions.
- Dean Baker co-director of the Center for Economic and Policy Research and author of "False Profits: Recovering from the Bubble Economy"
- Mary Miller assistant Treasury Secretary for Financial Markets
- John Feehery president of of Communications and Director of Government Affairs for Quinn Gillespie Communications, and a former congressional staffer for Bob Michel, Tom DeLay, and Denny Hastert
- David Smick global macroeconomic advisor, founder and editor of The International Economy magazine and author of The World Is Curved: Hidden Dangers to the Global Economy
- John Harwood chief Washington correspondent for CNBC; reporter, "The New York Times;" coauthor with Jerry Seib of "Pennsylvania Avenue, Profiles in Backroom Power"
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. The federal government has consistently raised the debt ceiling since it was established back in 1917. The limit has gone from less than $1 trillion in the 1980s to $6 trillion in the 1990s, to $14.3 trillion today. Raising the limit is usually a token practice, but this year, things are different. Today, we look at the forces driving the debate and the economic repercussions.
MS. DIANE REHMJoining me in the studio, Dean Baker of the Center for Economic and Policy Research, John Harwood of CNBC and The New York Times, global economics advisor David Smick and John Feehery with Quinn Gillespie Communications. I do invite your calls, questions. Join us on 800-433-8850. Send us your email to email@example.com. Feel free to join us Facebook. Send us a tweet. And don't forget. You can also listen live, streaming at drshow.org. Good morning, gentlemen.
MR. JOHN HARWOODGood morning, Diane.
MR. DAVID SMICKGood morning.
REHMJohn Harwood, first of all, what is driving the debt?
HARWOODWell, generally speaking, it's the fact that, for a number of years, we've wanted more government than we're willing to pay for. And so we've got to borrow the difference. And whether that's in security policy or whether it's in entitlement programs to support poor people and the elderly with health care. Or whether it's cutting taxes because people want lower taxes and, some people think it's going to help the economy. We've been running deficits for a long time, with just a few exceptions, since 1969, and so that -- we accumulate debt year by year, and in a period of economic downturn, like we've just been through, that mushrooms the amount of debt that we've got to experience because we had a big stimulus program and other expenditures.
REHMAnd do we sort of automatically just raise the debt ceiling every time we reach it? Is this year's debate unusual?
HARWOODWell, it's not unprecedented. Sometimes it's more pro forma than others. It depends on the political circumstances of the time. But, of course, back when John was serving in the House of Representatives as a senior staffer and Newt Gingrich was leading the Republican revolution, the debt limit was also figured in a big budget face-off between President Clinton and Republicans. So the drama associated with raising the debt limit can be very large because it has to be done. And if you don't do it, the consequences can be pretty severe.
REHMHow close are we right now?
HARWOODTreasury says that we will hit the debt ceiling if nothing unusual was done by mid-May, but that there are ways in which they can maneuver money around so that they won't truly exhaust their authority to borrow until the first week in July. And so that is the functional deadline that political Washington is operating under for when the debt limit has to go up.
REHMJohn Harwood of CNBC and The New York Times. David Smick, what happens if we breach that debt limit?
SMICKWell, I think it's going to be a real problem. But I've got to tell you, the -- you know, it does not necessarily mean default. This month's -- you know, not raising the debt ceiling would be a mistake and would be messy. But let's just -- there's still a lot of tax revenue coming in. This -- the current Economist magazine, for instance, says if you look at this month, we have a $5 billion interest payment. We have revenues of $343 billion. So there's a lot of revenue. If need be, the Treasury could pay off foreign bondholders. They could pay Social Security checks. They could go through a lot of things. Now, there will be a shortfall, but it's certainly not recommended. But -- and I hear this message that, you know, if you don't do the debt limit, it's automatically you default. That's not necessarily the case.
SMICKAnd I cannot imagine that the Geithner Treasury, if they have the tax revenue, wouldn't, you know, pay the interest. It's just -- what this whole situation reminds me of is World War I. It's like you have both sides digging the trenches. And, I think, in a lot of ways, the president has a pretty good political argument about, you know, the Republicans have to come to the middle, they have to talk about taxes. The problem is, I think, the markets are moving too fast to make it to July. You saw the S&P warning. This weekend, the -- all the central bankers and bankers were in Washington for the IMF-World Bank meeting.
SMICKThe German central bank told one of the bankers that I was talking to -- I noticed the regulator in the German central bank said, I noticed that you've just bought some treasuries for a hedging operation 'cause you needed additional liquidity, U.S. treasuries. We would warn against that. Now, it wasn't about dumping treasuries, but it was warning about buying new treasuries. So the global market, this bond market, is moving so fast. I'm not sure Washington is going to be able to string this out until the big showdown in July.
REHMDavid Smick, he's founder and editor of The International Economy magazine. Turning to you, Dean Baker, what does the White House want?
MR. DEAN BAKERWell, presumably, they want a clean bill. They want an increase in the debt ceiling that basically says we're increasing the debt ceiling. And, you know, again, as David said, they have a strong position here because what you're talking about is spending money that's been appropriated. So it's not as though, you know, President Obama wants to go out and grab money from out of the sky and spend it on whatever he might like. I mean, he might like the programs. The point is Congress has approved every single dollar in spending.
MR. DEAN BAKERSo they've approved the spending. They've approved the tax structure. And what increasing the debt limit means, just, you know, letting go through what Congress has already approved. And if Congress tries to put stipulations that -- you know, take an extreme case. You know, we want -- you know, they want Rep. Ryan's plan for Medicare. Well, you know, put that up for a vote. Don't hold the country hostage for it.
REHMYou mean, put it up separately.
BAKERThat's right, that's right. If Rep. Ryan, the Republicans in Congress say, okay, we want to, you know, put this voucher system in place for Medicare, I mean, that's a fine argument to have. But don't attach it to the debt ceiling. Let there be a clear vote on that. That's what President Obama is going to be saying.
REHMDean Baker of the Center for Economic and Policy Research. And, John Feehery, will Republicans vote to raise the debt limit?
MR. JOHN FEEHERYEventually, some will. I think they'll get a majority of the majority voting for -- to raise the debt limit 'cause ultimately you have to do it. My guess, though, is that you'll get a lot of Democrats having to vote for it as well. You know, I think a lot of Republicans look at the old Rahm Emmanuel admonition, never let a crisis go to waste. And, typically, in American history, when you raise the debt limit, you do get something out of it, especially if you have a major financial crisis.
REHMAnd what do Republicans want?
FEEHERYWell, they want significant spending reductions.
REHMWhat does that mean?
FEEHERYThat's the ill-defined thing. Jim DeMint says he wants a balanced budget amendment. I don't think that that's practical within the next month-and-a-half. I think that one idea would be a Medicare commission, like they had with the Social Security commission. I think that Republicans ultimately want significant spending reductions. And I think they're keeping their cards fairly close to the chest to give them the maximum amount of negotiating room.
REHMAnd do -- to what extent can what they want be separated out from the budget ceiling debate, the debt ceiling?
FEEHERYWell, you know, I think that, in the past, what we've done is we've done temporary increases to the debt limit. So that's a possibility, to kind of kick the can down the road a bit. I mean, this is going to be an ongoing negotiation, an ongoing -- it's been going since the Republicans got in control of the Congress. And, in fact, the matter with the S&P almost downgrading our debt right away, you know, this gives them additional impetus to say, listen, we've got to do something. And I think that this election was one of the first times where people said, okay, we've had enough. We've got to cut spending. And, now, the Republicans -- I think they feel like they have momentum on their side.
REHMBut, at the same time, hasn't Eric Cantor said we don't want to play around with the country's credit rating?
FEEHERYNo question. And I think that that's ultimately why you'll get an agreement, and the debt limit will be increased.
HARWOODDiane, I think it's important to point out...
HARWOOD...there -- it is popular for people to talk about what -- political Washington is a bunch of jokers who are fighting and don't care about the national interest. I do think there is something encouraging about the way both parties have conducted the debate over the last few weeks. They've reached a deal on the 2011 budget. And now, I think, they have -- in a way that you might want your public officials to do, they've shown signs of separating the things that they have to fight about over the next two years before the election. They are not going to settle the fate of the Medicare program in the next two months. From the things that they do have to settle the next two months, the debt ceiling is one of those.
HARWOODAnd I think the way to accommodate the spending cut desire -- and you mentioned -- or John mentioned that there was a big demand from the public for spending cuts. That's sort of true. But look at The Washington Post-ABC poll today and see strong numbers of people saying they don't want Medicare messed with. The public has contradictory ideas about these things. But I do think there is a common desire to cut spending over a long period of time by around $4 trillion, and that could be an outline that they settle on with fighting over enforcement and triggers and that sort of thing. And then they'll agree to have a big national debate before the 2012 elections on Medicare and on taxes.
SMICKWell, I think the public is scared for good reason. I mean, I'm not saying that we should believe the Republican data or the Democratic data. But when you look at the CBO -- and I think these are earnest people who were trying to do the right thing -- I mean, they describe entitlements as a giant Pac-Man. I mean, by 2025, which is not that long, federal spending on entitlements and interest payments will consume 100 percent of government revenues. And when you look at unfunded entitlement liabilities, the president of the New York Fed, a Democrat, came out just the other day, and he said those liabilities are nine times our entitlement liabilities. Now, the CBO made the data looks at one other thing. They looked and said, if you tax the upper income level at 100 percent, we still have Medicare exploding relatively soon.
REHMDavid Smick, he's author of "The World is Curved." Short break. Right back.
REHMAnd welcome back. We are talking about the current debate in Washington over the debt ceiling, which it is predicted, in mid-May, we'll reach the limit. Whether to extend that debt ceiling is the subject of Republicans, Democrats -- very, very strong feelings. John Hardwood, Standard & Poor's came out earlier this week, warning that its top credit rating for the U.S. could be in danger. So how does that statement from S&P, considering the fact that S&P has its own problems, affect the debate?
HARWOODI think it could help those people who want to make an agreement on reducing spending. It gives some momentum. It gives a talking point for people, and it reminds politicians of the stakes involved in this issue. Now, David was talking about how we wouldn't necessarily default if we don't raise the debt limit. And I defer to his knowledge of the economics and the way it would play out in a granular way, but it depends on your appetite for risk.
HARWOODIf in fact, you run the risk of spooking investors, having interest rates go up, destabilizing the economic recovery, which is the argument that Tim Geithner makes and the president is making, and that is accepted by a lot of people in Congress, then I think that argues for getting something done, and Standard & Poor's may be -- as several people said, be a wake-up call that helps that.
REHMBut, Dean Baker, should this debate over the debt limit be a political one?
BAKERWell, no. I think it's really kind of a distraction. And, you know, I think the fundamental questions -- again, first off, we have a short-term issue which should be getting people back to work. I mean, it's just kind of amazing to me. We're sitting here, we're close to 25 million people unemployed, underemployed, out of the workforce altogether. No one is talking about that. We're talking about the debt ceiling. I mean, those people should be furious because they're not unemployed 'cause they messed up. They're unemployed because people like Alan Greenspan and Ben Bernanke messed up. So they should be very, very upset. They've just left the picture -- we're talking about the debt ceiling.
BAKERBut, you know, in terms of some of these other issues, Standard & Poor's -- I sort of -- you know, I've been discussing this (unintelligible) about, what do they even think, because the U.S. cannot default. Our debt is in U.S. -- they weren't talking about the debt ceiling. Their immediate issue was talking about the U.S. sustainability of its debt, and our debt is denominated in dollars. We could print as many dollars as we want, so we started debating. We literally do not -- and maybe someone here could tell me. I don't even know what that means.
BAKERHow do you default on dollar-denominated debt when you print dollars? Argentina could default a dollar-denominated debt. I don't even know what that means. And, in fact, the markets don't seem to know what that means. Interest rates on U.S. government bonds fell the day they issued that warning.
FEEHERYOh, well, of course, this should be a political consideration. The...
FEEHERYThe debt limit was established in the throes of World War I because they had to make a political consideration that they're not going to spend more money than they had, and there -- so they had to make a promise to the voters. And so, ever since then, we made this promise to the voters, and politicians go through this exercise because they have to reassure their voters that they're looking out for their best interest. And the way they do that is by establishing a debt limit.
FEEHERYAlan Greenspan said, you know, this past weekend, we shouldn't have a debt limit. Well, guess what, you have to because politicians say, this is the way they reassure their voters, and there's always been this push and pull in American history. (word?) Alexander Hamilton and Thomas Jefferson. Alexander Hamilton said, we got to have debt. Thomas Jefferson said, no, we shouldn't. So, you know, the fact of the matter is this is all about politics, and it should be because politics ultimately makes the decisions for this country.
REHMHow strong of an influence will the Tea Party members of Congress play in this debate?
FEEHERYThe Tea Party members have a real decision to make. Do they want to be part of this process and get -- be part of the negotiations? Or do they want to sit on the sidelines, like Barack Obama sat in the sidelines, and said, I'm not going to vote for the debt limit, and he took himself out? You cannot take yourself out of this if you want to be a negotiator. If you want to be a workhorse, you have to say I will vote for this under certain conditions. If you want to be a show-horse, you'll say, I'm not going to vote for this, no matter what. And I think too many of the Tea Party members are saying, I'm not voting for this, no matter what.
REHMYou -- Sen. Jim DeMint of South Carolina says he's going to go to extreme lengths to prevent a vote on raising the debt ceiling, even if it hurts the Republican Party.
FEEHERYWell, I think that's silly. I think that, ultimately, you have to be a negotiator and you have to be able to negotiate because we have responsibilities. When you're in the majority, you have responsibilities. In the filibuster, this -- without really coming to some sort of agreement is not good for the country.
REHMAnd Sen. Marco Rubio of Florida says he's going to hold out for fundamental tax reform. I mean, everybody is sort of putting this big basket of items in the middle.
FEEHERYAnd if you look at -- it's easy. If you look at John Boehner and Eric Cantor, they're saying we're going to negotiate and where they're keeping their cards very close to vest, which I think is exactly where they need to be.
SMICKI think -- it would be reassuring if this was just a game of political tag back and forth, but I think it's a lot more serious because a lot depends on the level of interest rates on the debt. Now, we're going to have the deadline in July for the debt limit, but there's also something happening at the end of June. The Fed is ending its QE2 monetary policy. And so, we're going to have another, at least $70 billion a month that we're going to have to come up with that the Fed had been putting into the economy.
SMICKSo the question is do interest rates go up? I think it's a difficult argument to make to the public, but foreigners who hold our debt, in recent years, have moved to the short end of the debt, which means -- and it used -- they used to buy 30-year bonds. Now, they buy three-, you know, and four-year bonds. And that sounds technical, but what it means is that if interest rates go up, we have to roll over that debt. And so the bill grows exponentially for the interest payments. That's the time bomb that is making a lot of economists so worried about the debt situation, both Republicans and Democrats.
REHMAnd joining us now is Mary Miller. She is assistant treasury secretary for financial markets. Good morning to you.
MS. MARY MILLERGood morning.
REHMThank you so much for joining us. Give me your reaction to the S&P downgrading its outlook for the United States.
MILLERYes. Thank you for that question. Basically, we respectfully disagree with Standard & Poor's. We think that there's a lot going on in Washington right now, and they should have allowed a little bit more time for the political process to run its course here. So they're making a political judgment about the fiscal resolve of the United States, and we simply think that that's wrong. And I would add that the other major rating agencies have not taken the step. In fact, one of them publicly said they think that things are moving in the right direction.
REHMIndeed, Secretary of Treasury Timothy Geithner has said that Republican leaders have privately assured the administration that they will raise the debt limit. Is this still the case?
MILLERWell, I think, publicly, both parties have said that we need to raise the debt limit, and they expect to do that.
REHMWhy should the debt limit be increased and by how much, Secretary Miller?
MILLEROkay. Two questions. I talk about the debt limit as about the past. The debt limit speaks to authorizations that Congress has made for spending that have already been appropriated, so we simply have to raise debt to pay for things Congress has already asked us to do. The second question, I think, was -- I'm sorry, you asked me first about the...
REHMBy how much?
MILLERBy how much. That decision has always rested with Congress, and I think they have to determine, you know, how much time they would like to cement with the next debt ceiling. So we don't recommend an amount.
REHMSo, Secretary Miller, is the Department of the Treasury talking with Republican leaders to try to persuade them to put politics aside and to simply move forward on raising the ceiling?
MILLERAbsolutely. We've done a number of briefings with staff members in Congress to educate them on the debt limit issues. And there've also been a number of meetings that the secretary has had with the leadership of both parties and members of committee staffs about the debt limit.
REHMAnd what have been the reactions?
MILLERI think people take the matter quite seriously. They do understand that this is something that Congress needs to do. They want to understand all of the dates and issues and timing and steps around it. But I think as people are educated about it, they understand this is a necessary step.
REHMMary Miller, she is assistant treasury secretary for financial markets. Thanks for joining us.
REHMAnd, John Harwood, you want to...
HARWOODI just wanted to make a point on what Secretary Miller said about the recognition within the Congress that this needs to be done. I thought it was a telling moment after the president's speech last week. I wrote about this in The Times the other day. When Paul Ryan, the chairman of House Budget Committee, who had been in the front row while the president ripped his plan for Medicare as something that would take money from old people and give it to millionaires -- and he was interviewed by my friend, Larry Kudlow, on CNBC. And Larry said, Congressman Ryan, after the president hit you the way he did on your budget plan, how can you work with him on the debt ceiling?
HARWOODAnd Ryan went off on the demagoguery of the president. It was outrageous. He's the campaigner and chief, but then he made a distinction. And he said, now, on the debt limit, we're going to have to just put the president off to the side and realize that that's an issue that we've got to work with Democrats on and ignore the president. And I thought that was a signal that reflects the attitude among the leadership in the Congress that, in fact, they are going to do this and probably not push it too close to the brink.
BAKERYeah, just going back to the whole principle of a debt ceiling, I would differ strongly earlier -- with the point made earlier about how this is an important feature. No other country -- there may be an exception here -- I don't know of any other country that has debt ceilings because keep in mind what we're talking about here. Congress has approved every tax we have in place. Congress has approved every spending bill we have in place. So we're saying, given what Congress has approved, you borrow as a result. That was Congress' choice. So, now, they're saying, oh, we didn't like what we did. We're going to go back and change it, not by changing what we spend or changing what we tax, but saying, somehow the government can't do what we told them to do. That's a very strange institution.
SMICKI want to add a question for John Harwood, the -- who's close to, really, the politics of this. Obama's speech didn't make sense to me because it seems to me if he cuts a deal on the budget, the 2012 presidential election is over. I mean, the Republicans don't have strong candidates, and the bulk of the independents supported him in 2008 and left in 2010.
REHMWhat kind of a deal are you talking about?
SMICKAny -- some kind of a long-term deal on the budget that gave some sense, and I was just surprised the -- at the -- the question I have for John, was the kind of partisan nature of the president's -- the tone of the president's speech, was that kind of a response to the fact that they had been negotiating with the S&P, according to The Washington Post today, throughout the week, trying to get them to hold off?
SMICKAnd so there needed to be some kind of diversion because I think the president makes a point, you know, the Republicans can't have it all. They have to compromise. And to have a compromise, presumably taxes will be on the table. But, on the other hand, it just didn't seem like the kind of thing you would do to create your deal. Now, there are going to be some far-right Republicans who will never do it.
REHMOkay. Let him answer.
HARWOODWell, I don't see it that way. I think what the president's been doing throughout the year is feeling out the Republicans, seeing how far they were going to push, figuring out where he could ultimately draw a line and say stop, enough, okay? And I think when they got -- he made the deal on discretionary domestic spending, which mostly involve programs that aren't familiar to a lot of people. They aren't huge programs.
HARWOODBut when you get to the defined benefit character of Medicare, that was a line the president felt he could stand his ground and fight on, just as Democrats stood their ground and fought on payroll taxes for Social Security when President Bush tried to partially privatize. And this is where President Clinton stood up against the Republicans in Congress. I think that's what the president was doing.
REHMJohn Harwood of CNBC and The New York Times. You're listening to "The Diane Rehm Show." We'll open the phones now, 800-433-8850. First to Ada, Mich. Good morning, James. You're on the air.
JAMESGood morning, Diane. We understand that government spending spikes due to wars and then make an attempt to rescue an economy falling off a cliff. I heard Sen. Bob Corker this morning on CNBC say that government spending needs to be reduced to a historical norm of around 20 percent of GDP. Where is the recognition of government tax revenue being at the lowest level of GDP in more than 50 years?
REHMHow do you respond to that, John Feehery?
FEEHERYWell, obviously, tax revenue is an issue. And I think that's probably an issue because the economy has been really lousy. And, hopefully, I think the calculation the Republicans are making is if we keep tax rates low, the economy will come back quicker, and we'll get more tax revenue. There are some justifications of that theory because it happened in the late '90s. When they cut taxes -- the capital gains taxes -- and they had the economic boom. So Republicans -- this is a part of Republican theology, that they believe if you keep tax rates low and not raise taxes, you'll have a county bounce back quicker. And I think there was also the president's calculation at the end of last year when he signed on to two more years of the Bush tax cuts that he now condemns so often.
BAKERYeah, well, I'd agree with that in the sense that deficits will boost the economy in a downturn. That's what President Obama agreed to, and that's the point -- there's a huge amount of economic evidence to support that. In terms of tax rates per se leading the growth, sorry, we've tested that. We've tested in the '80s. That was the weakest decade of growth in post-war period until the last decade. And we tested that again with President Bush. So you go, how many times are we going to test this with the whole economy?
REHMAnd you even had Alan Greenspan this weekend saying you got to let all those tax cuts expire.
HARWOODWell, right. And a lot of deficit hawks in the Democratic Party want to do the same thing. I'm sure that Dean disagrees with that, but, you know, Peter Orszag, the former budget director for the president, has also advocated that position. One of the dramas about this negotiation, and on David's point about what kind of a deal he want, I think the president wants -- and I think Republican leaders think it's realistic to get a hollow deal. That is to say, the outlines of how much we're going to cut. Then you fight over how much. And there are a lot of Democrats who think that a realistic way of closing our long-term deficit is going to require the president to give up his pledge not to raise taxes on middle-class people. Can I ask John Feehery one question?
HARWOODJohn talked about how he thinks, in the end, a majority of the Republicans will vote for the debt limit increase. Do you see the coalition that was assembled for the 2011 budget, when you lost 59 Republicans, got 81 Democrats? Is that roughly what we're going to see in the debt ceiling?
FEEHERYI would think that you'd probably lose a few more Republicans, and you'd probably gain a few Democrats. My guess, what'll happen with this debt ceiling as it often happens with debt ceiling, especially when you have divided government as you have, you know, a deal is cut where you get half of the Democrats and half of the Republicans -- maybe one more of each to put this thing together. I think ultimately that's what you're going to get because this is going to be very politically, a very highly charged vote because it's always a very politically, highly charged vote.
FEEHERYAnd most people want to take a walk on it because they don't want to go back to their constituents and say, guess what? I raised the debt limit because it's just bad politics. So my guess is that that'll be part of the deal -- get a significant number of Democrats, get a significant number of Republicans, one plus each and make it a close vote.
REHMJohn Feehery, he is a former congressional staffer for Bob Michel, Tom DeLay, Denny Hastert. Short break and more of your calls when we come back.
REHMAnd welcome back. Time to go back to the phones, to Sal in Orlando, Fla. Good morning. You're on the air.
SALMorning. Yes, I have a question. Why should we have so much faith in S&P's latest action when this is an agency that helped spark the subprime mortgage crisis by rating these mortgage bonds...
BAKERYeah, well, it's a pretty good question. I mean, S&P's track record is a disaster. You know, in addition to the -- rating subprime mortgage bonds AAA in many case -- or investment grade for every case -- they rated Lehman as a top investment grade until the week it went bankrupt. Bear Stearns, Enron -- they've a long list of failures. And, you know, this is their opinion. One hopes that it's made based on their judgment. But even that, you know, they've -- they're facing regulation from Congress and the Dodd-Frank bill. You know, you just have to ask the question. You know, are they looking over their shoulder at politics? Are they trying to? Or is this really their best opinion?
REHMHere is an email from Richard. He's in Mount Vernon, Ark., who says, "If there is a fight over raising the debt ceiling and the delay, is there the potential that home buyers with variable rate interest mortgages could see an upward bounce, further hurting the economy as well as the home building markets?" David Smick.
SMICKWell, I certainly think if they don't pass a debt limit, as I said earlier, it'll be a lot of confusion. And so that confusion will probably disrupt the bond market short term. But, you know, this is a global bond market. And, you know, the Treasury is nervous right now -- and they have reason to be -- because, globally, we don't control our destiny on interest rates entirely. And, you know, we've had the Fed then buying. But the Fed has announced, in all probability, they'll stop buying bonds at the end of June. So that means we're basically vulnerable to the moves in the bubble.
SMICKThere is a theory, by the way, some pretty smart people in Wall Street -- maybe Wall Street is presumed to be trusted -- but this is a long-term cycle. The global bond market first took down the Asian economies because they were fudging their books in the '90s. Now, they're taking down the European economies, particularly the European banks that have fudged their balance sheets, the sovereign debt on the balance sheets that then created fictitious values. And next stop will be the U.S.
BAKERYeah, just very quickly. I mean, I expect that interest rates are going to rise. They're at extraordinarily low levels today. I mean, they were even lower if we go back to last summer. But still, a 30-year mortgage is somewhere around 4.8, 4.9. This is really extraordinarily low. So if people are asking about the general course of interest rates, I'd be very surprised to say two or three years out from now, they aren't, say, a percentage point or so higher. The impact of this, unless it really gets out of control, which, you know, again, I won't rule out, probably will be pretty minimal.
REHMTo Farmersville, Ohio. Hi, Kurt. You're on the air.
KURTOh, yeah, I'd like to ask about repealing the Bush tax cuts, and in relation to, really, where, you know, government stimulus programs began, you know, under Roosevelt, that they were intended for the most needy. And we're now sort of in a situation where it's not just the rich but the middle class are living in conditions of relative luxury. So why can't everybody kick in a little more to try to take care of these problems?
FEEHERYWell, you don't have to repeal the Bush tax cuts. You just have to let them expire, which the president decided that he wasn't going to do. And I think that...
FEEHERYWhile under pressure, sure.
FEEHERYBut -- yeah, but he had signed the bill. And the Democrats had vast majorities in both the House and the Senate, and he let it happen. The point being that raising taxes, especially for people making below $250,000, is extraordinarily unpopular. The Bush tax cuts get a bad rap, but they're still pretty popular with a lot of folks. And that's why the president and the Democrats decided to extend them.
HARWOODDiane, one thing I think that gets lost in the debate, though, is that as we move forward, it's possible that the Bush tax cuts will become irrelevant because tax reform is an important part of this discussion. Don't know how quickly...
REHMWhat kind of tax reform?
HARWOODWell, there are many ways you could go. You could go to broaden the base and lower the rates. That's one thing that people like to do. You could -- if you had economists draw it up on a chalkboard, they'd have a value-added tax and get rid of the income tax. It raises a lot of money, and it also realigns incentives in favor of taxing consumption and encouraging investment. I don't know -- I think it's difficult to go that route or to go quickly in that route, but I do think there are ways in which the tax system is likely to change that will put some of this discussion behind us.
REHMTo Melvin Village, N.H. Hi, Judy.
JUDYHi, Diane. I'd like to know why the subsidies -- such as the farm subsidy and oil subsidies -- aren't being reduced to improve the deficit, rather than programs that people have paid into, like Medicare and Social Security.
BAKERWell, that's a good question. I think there's sort of a simple answer. They have powerful lobby. So -- but, you know, as a practical matter, I do have to say it's not that much money in the scheme of things. It's still -- you know, it's wasteful spending. Why would you have that? Just to go back to a point earlier, though, I think one of the reasons we -- that there is so much resistance to raising tax to the middle class is middle class have not actually done very well in the last three decades.
BAKERThe bulk of the gains of growth have gone to the top 10 percent, particularly top 1 percent. There's been a redistribution to the richest 1 percent in the country equal to 10 percent of GDP -- that's $1.5 trillion a year. That could double the income of everyone in the bottom half of the income distribution. So you have a lot of middle income people that have not, in fact, done very well over the last three decades.
REHMAll right to Haverhill, Mass. Good morning, Richard.
RICHARDGood morning, Diane. Yeah, Alan Greenspan, I wish he had talked against Bush tax cuts when he was the Fed chair. Now, he's on a mea culpa and change of heart. But, Diane, I'm an investor in the market, and I'm over 70. So every, you know -- I have to take an annual automatic withdrawal every year, and I'm only paying 15 percent. And it used to be 15 percent on capital gains -- I'm sorry. It used to be 20 percent on capital gains, and now it's 15 percent. And then these hedge fund guys there -- they're multimillionaires and billionaires -- and they're only paying 15 percent taxes.
RICHARDAnd, also, Diane, you know, I know Republican friends that I have. I'm liberal. I got to say that. But I find a lot of Republican people -- they seem to be very self-centered and selfish. They do not think of the civic community as a whole. They don't believe in the social safety network of people. And so I'd like to have the panel comment on that, please.
FEEHERYGive me all the softballs, huh? Listen, I think Republicans believe in a strong social safety net. What they don't believe in is a government that keeps growing with no accountability, with a budget that is bursting at the seams. And, frankly, if you do not deal with entitlement spending, we are all going to go broke. The fact of the matter is that entitlement spending, especially in Medicare spending, is crowding out all other spending. The reason we don't invest enough in education and other things is because, exponentially, you look at from 1964 to the growth of the program, we are going broke, folks. And we've got to deal with entitlements.
BAKERWait a minute. You're talking about my mom's health care there.
FEEHERYI know, and that's the problem. That's the hard part.
SMICKI think the caller is on to something. But there is a perception around the country that Washington is just enmeshed in crony capitalism and that everybody gets a special deal. Big business, big labor, big -- everybody's got their deal...
SMICKBig banks. I mean, it's -- look, it's the private equity firms. They go around now and talk about we need to have deficit reduction, but they pay 15 percent tax rate on carried interest, which is their principal source of income. But it's not just them. Everybody gets a deal, which is why, I think, John Harwood is on to something. Every 10 or 15 years -- and I was involved in this in '86 with Bill Bradley and Reagan when they had a bipartisan effort to reform the tax code. You got to clean out the barn. This town is just -- Washington is full of just special deals -- both parties.
REHMGo ahead, John.
FEEHERYJust 50 percent of the country pays no income taxes -- 50 percent. The bottom 50 percent pay no income taxes. They get money back from the government. So this is one of the problems we have. It is -- I agree that we should -- if you're going to deal with -- everyone needs to share in the sacrifice.
SMICKWe have the highest corporate tax rate in the country, and yet GE and a lot of corporations pay no taxes.
REHMHere is an email from Mark in Little Rock. I'm going to be interested in your reaction. He says, "I'd like anyone to show me an American voter who had ever heard of the debt ceiling before this year. Republicans and those in the Tea Party are overplaying their hands if they actually believe that Americans give two hoots about the debt ceiling."
FEEHERYThey don't care about the debt ceiling, per se. But they do care about debt, and they care about debt about once every decade. This happens. It happened in '85. It happened in '95. Every time we are about to go broke, our debt becomes a big political issue. And then we somehow deal with it, and then it goes away as an issue. Dean is going to tell me right now -- and I think he's absolutely right -- that most people, back in the country, are worried about jobs and job creation and their personal well-being. When the debt starts to impact their personal well-being, as it's going to do, that's when people start -- that's when it becomes a real political crisis.
REHMWhat about the Gang of Six, John Harwood? Who are they? What role will they play in this whole issue?
HARWOODThe role the Gang of Six may play is to change the conversation to a place where you can't -- could have a long-term deal. And the requisite for that, from the Republicans, is that Democrats have to agree to significant cuts in entitlements, including Social Security. Republicans have to agree that we need some more tax revenue. Don't know how that -- it could come in various places. It could come from a tax reform. It could come from higher rates on the rich. It could come from -- in any number of ways.
HARWOODBut until those two things are stipulated by both sides, there will not be a long-term deal because neither party can muscle through a deal on their own, and neither would want to because it would be too politically risky. So they're negotiating something. It's a long road to get from six to 60, which you need in the Senate. You probably can't get to 60 until after you fight a presidential election over some of the underlying issues. But that's the breakthrough that they potentially represent.
BAKERI just wanted to run quickly back to a point John Tierney had made earlier about exploding entitlement costs. This really does get down to health care and particularly Medicare. And one of the things that, you know, I would give President Obama credit for -- it's a mixed story here. If you follow the projections, both from the Medicare trustees and the Congressional Budget Office, his health care plan brought down projected expenditures hugely. Now all these people respond by saying, that won't be followed. That's not real. Well, that is the law. So, you know, what they're saying is, well, we can't count on Congress to follow the law. That may well prove right. But that was a huge step in reducing projected deficits going out 10, 15, 20 years.
SMICKYeah, but the CBO -- I hate to go back to it, but they -- you know, they say that if you raise taxes significantly on everyone earning joint income $114,000 and above, Medicare still goes broke. It's not -- that's not what a Republican or Democrat says. These are independent. Now, they could be wrong, but...
BAKERNo. I think you're thinking of the alternative fiscal scenario, which is assuming, in effect...
BAKER...that the law is not followed. So I'm going, well, suppose the law is followed? Now, if you're telling me Congress won't follow the law, that's fine. But don't blame President Obama for not having put something on the table.
REHMYou know, there was a ton of brinkmanship over this last vote over the government spending bill. Did anybody learn anything from that, John Feehery?
FEEHERYI think that John Boehner and Harry Reid actually learned that they could work together, and they could work together very effectively by keeping Nancy Pelosi out of the conversation. And I think that you'll see that once again.
REHMWhy keeping Nancy Pelosi out of it?
FEEHERYWell, I think Pelosi tends to bring the more liberal wing of the party. And she actually voted against the agreements. And I think that Boehner and Reid think that they can do business by keeping her out. I think that's the one thing that they learned.
REHMWhat about the extreme right?
FEEHERYWell, the extreme right also voted against it. But it was enough to -- they got enough votes to pass this, and I think that that's going to be the way they're going to go through this (unintelligible).
REHMJohn Feehery, he's president of communications, director of government affairs at Quinn Gillespie Communications, and you're listening to "The Diane Rehm Show." All right, let's go back to the phones. And, let's see, to Birmingham, Ala. Good morning, Brooks. You're on the air.
BROOKSHi. How are you? I got a simple question. I've never heard anybody talk about this. But it seems to me that before we fix the deficit, we need to fix the budgeting process. My question is why do both parties and their budgeting create these wild, high-in-the-sky projections that are absolutely, totally unattainable? Why don't we do zero-base budgeting like, you know, a lot of local and state governments do?
BAKERWell, zero-base budgeting has a mixed record. Jimmy Carter actually tried that back in the '70s, and it didn't work very well. I mean, what you often find is you end up spending a huge amount of time going through these budgets, and at the end of the day, you end up pretty where -- pretty much back where you started. So I don't think you're going to find a procedural fix. I mean, the bottom line here is we have spending that most people do value. They value their Medicare, they value their Social Security, and they don't want to pay higher taxes. I mean, that's the immediate obstacle.
REHMDean Baker, how do you see this debate playing out? When do you see a vote coming?
BAKERWell, I'm sure we'll pass that May 16 deadline, and we probably will get...
BAKERPass it, yeah. 'Cause, you know, for both sides, I think it's -- the Republicans will be seen as giving in if they agree to something by May 16. So I think we will get to somewhere well into June, quite possibly July, before you get a deal. And my guess is that most of the big things will not be included. There certainly will be something that the Republicans have to show, but probably not any of the big things.
HARWOODDiane, Steny Hoyer, the Democratic whip, who did work with John Boehner, Kevin McCarthy, Eric Cantor and the House leadership on the 2011 budget, told me that in a meeting at the White House last week, he proposed avoiding the drama, suspense, which could be damaging, of the countdown clocks we saw on cable TV over the government shutdown, and proposed that they resolve the debt limit by June 8. Republicans didn't commit to that, but he said that nobody said we can't do it. That might be a rough goal that they're trying to execute.
REHMWhat do you think, David Smick?
SMICKI think, in a lot of ways, the markets are going to be -- have a say in this. It just has a feel that...
REHMWhat does that mean?
SMICKThat means that suddenly it's not just S&P. Somebody else comes out. Some central bank issues a statement questioning the American debt, and suddenly there's a real fear of interest rates rising. And that kind of motivates Congress because the average congressman doesn't want to hear his constituent complaining that their variable rate mortgage is suddenly soaring. You know, if you go back to the last decade of when we had high inflation and high interest rates in the '70s, I went back and I looked at the interest rates. It was, in this case, a 30-year bond. In July of 1977, the interest rates was the same as it was in July of 1970. And you say, how could that be? That was the decade of double digit interest rates.
SMICKIt was suddenly -- it just popped up. Suddenly, you know, it looked like everything was fine, and then the interest rates soared. And by the end of -- three months later, by the end of '77, six months later, interest rates were soaring. And so we are assuming everything is stable. We have a free lunch on the interest rate side, and I think that's going to potentially dry this...
BAKERWe had the Iranian revolution quadrupling the price of oil.
REHMOkay. John Feehery.
FEEHERYDiane, my guess is that we'll get this resolved. There's usually a big recess. So it's either going to be July 4 recess or August recess. My prediction would be August. That's my guess because it's going to take a lot of time for them to come -- they might -- the treasury can do all kinds of things. I've been through this. They did it for three or four months after they passed the deadline in 1995. They did it again in '85.
REHMWho's going to come out a winner here?
FEEHERYI think that -- nobody. It's going to be tough. I mean, you know, if the Republicans get all their spending reductions, they come out the winner.
REHMJohn Feehery, David Smick, John Harwood, Dean Baker. Thank you all.
BAKERThank you, Diane.
REHMThanks for listening. I'm Diane Rehm.
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