Under current law, major tax policies implemented to ease consumers through the financial crisis are scheduled to end January 1, 2013. Income and payroll tax rates will rise, and many relying on extended of unemployment benefits will be cut from the rolls. In addition, federal discretionary spending will be slashed. Almost everyone believes the scope and magnitude of these changes, if they go through as planned, will trip up U.S. economic growth. After the election, the lame duck Congress could act to delay the cuts, but much will depend on who wins the presidential election. Please join us to talk about Congress, politics and the tax and spending policy choices between now and January 1, 2013.

Guests

  • David Wessel economics editor for The Wall Street Journal and author of "In Fed We Trust."
  • Ruth Marcus columnist and editorial writer for The Washington Post.
  • Alice Rivlin senior fellow, Brookings Institution, vice chair, Board of Governors, Federal Reserve System (1996-99); director, White House Office of Management and Budget (1994-96); and founding director, Congressional Budget Office (1975-83).

Transcript

  • 10:06:55

    MS. DIANE REHMThanks for joining us. I'm Diane Rehm. After the election, the lame duck Congress will have one especially important task on its agenda: coming up with a plan to avert the so-called fiscal cliff. Congress could do nothing in the face of potentially crippling tax increases and spending cuts. But the plan of action will vary considerably based on the outcome of the presidential election.

  • 10:07:24

    MS. DIANE REHMJoining me to talk about prospects for congressional action on tax and spending: Ruth Marcus of The Washington Post, David Wessel of The Wall Street Journal and Alice Rivlin of The Brookings Institution. Do join us, 800-433-8850. Send us your email to drshow@wamu.org. Follow us on Facebook or Twitter. Good morning, everybody, and thank you for being here on this extraordinarily rainy, windy day.

  • 10:07:59

    MR. DAVID WESSELGood morning.

  • 10:07:59

    MS. RUTH MARCUSGood morning.

  • 10:07:59

    MS. ALICE RIVLINGood morning.

  • 10:08:00

    REHMAnd, Ruth Marcus, you with your pink and white...

  • 10:08:03

    MARCUSI have pink and...

  • 10:08:04

    REHM...polka dot boots.

  • 10:08:05

    MARCUSI do. I have pink and white polka dot boots which...

  • 10:08:07

    REHMI love it.

  • 10:08:07

    WESSELDoes your daughter know you stole her boots?

  • 10:08:08

    MARCUSThat was about what I was going to confess. In the unlikely event that my teenage daughters are listening to "The Diane Rehm Show..."

  • 10:08:17

    MARCUS...because they're obsessed with the fiscal cliff, guys, I stole your boots.

  • 10:08:21

    REHMOK. Thank you all, really, for being here. Congress has to do something. But will it, Ruth Marcus?

  • 10:08:32

    MARCUSWell, I wrote a column last week that took the optimistic perspective because in some ways, contemplating the opposite is so dreadful. I think there are scenarios that you can imagine in which -- and, by the way, I think in honor of the weather, we might want to rename the fiscal cliff fiscal Frankenstorm because it could about as damaging and it could be about as long lasting. If president -- if Gov. Romney is elected president, I don't imagine that anything will happen during the lame duck to avert the fiscal cliff.

  • 10:09:10

    MARCUSThere may or may not be a decision to grant him some extension of some months so he can put in his solution as president or at least propose it. If President Obama is reelected, I think there is some -- a significantly better prospect and a prospect for action with the Congress that is actually really frustrated with itself and its inability to get anything done. And as we all know, Congress doesn't do anything unless it absolutely has to, sometimes not even then. But this is such an absolutely has to in terms of its impact on the economy that I have some hope.

  • 10:09:51

    REHMDavid, how do you see it?

  • 10:09:53

    WESSELI think it's likely that they will avoid the fiscal cliff. But it's not a sure thing because Congress has been so dysfunctional, and it will require some cooperation by Republicans and Democrats to avert it. I think the one question is, if they steer away from the fiscal cliff, do they do it with some kind of phony Band-Aid deal, the famous kicking the can down the road? Or do they do something that really makes a dent in the deficit, at least a framework agreement? My guess, unfortunately, is that they'll go for the fudge, that we'll avoid the cliff, but we won't solve the problem.

  • 10:10:29

    REHMAlice.

  • 10:10:31

    RIVLINI'm an optimist. I think there is a good chance -- I don't know how big a chance -- that Congress will act not only to avert the fiscal cliff but also to put in place a framework for the next Congress that will give them a good chance of bringing back the grand bargain, the solution to the long-run deficit problem in a few months into the next Congress.

  • 10:11:04

    REHMAnd before we get to the make-up of what that grand bargain could be, David, explain the tax increases set to kick in and who would be the hardest hit.

  • 10:11:19

    WESSELWell, if nothing happens on Dec. 31, there will be across-the-board spending cuts to hit much of the defense and domestic spending. And pretty much all the tax cuts that were initiated by George Bush and extended by Barack Obama and the additional tax cuts that Barack Obama pushed during the recession will all expire all at once. Income taxes will go up for almost every tax payer.

  • 10:11:45

    WESSELPeople who pay the alternative minimum tax, that kind of pesky complexity in the tax code, will be particularly hard hit because that will apply to their income for this year, 2012. The payroll tax holiday, the 2 percentage point payroll tax holiday will expire, and a number of provisions of the tax code that were intended to encourage businesses to keep investing will also expire.

  • 10:12:08

    REHMAlice.

  • 10:12:09

    RIVLINAnd, remember, there are a couple of other bad things that happen. One is the so-called doc fix. It doesn't get fixed, meaning that doctors who serve Medicare patients will be paid very significantly less, something like 27 percent less. And also, remember that the spending cuts are really mindless and stupid. They are across-the-board equal percentages program by program. Now, even if you favor spending cuts, you would never do it that way.

  • 10:12:47

    REHMAnd, Ruth Marcus, what about unemployment benefits?

  • 10:12:51

    MARCUSI think those are also part of the package that's about to expire. I think in some ways, the fiscal cliff -- I know I've already tried to rename it once -- it's a little bit misleading in the sense that not all of -- not -- the entire bulk of this does not hit in one fell swoop. They -- for example, the tax cuts expire, but there are ways for the government to sort of fudge around with that, to not change withholding tables, to change things back retroactively. It would be silly, it would be dumb, but the immediate shock does not happen all at the same time.

  • 10:13:29

    REHMAlice, what happens to the economy as a whole if all of these spending cuts come into effect?

  • 10:13:41

    RIVLINWell, Ruth is right. It doesn't all happen at once. It can happen gradually. It probably could be called the fiscal slope rather than the fiscal cliff. But it's not good news. Raising taxes and cutting spending quite drastically in a weak economy is bad news. And the Congressional Budget Office, among others, have said it's likely to throw us back into recession. But it isn't just the macro-economic impact. It's -- the big uncertainty is, what do the markets do?

  • 10:14:17

    RIVLINIt shows that the United States is not in control of its destiny, that it's just letting something really bad happen that was structured to be really bad, and nobody can stop it. Now, that's not a good advertisement for the greatest democracy for the world as we like to call it.

  • 10:14:33

    REHMDavid.

  • 10:14:34

    WESSELYeah, I agree completely. In fact, my guess is what happens is that if Mitt Romney is elected, they do give him a few months to straighten things out and come up with his own budget. But if Barack Obama is reelected, there will be an attempt to negotiate something.

  • 10:14:48

    WESSELIf it looks to the markets and outsiders like these talks are going nowhere, if people are storming out of the room or refusing to return phone calls, or the leaks out of the talks are discouraging, my guess -- and I want to underscore guess -- is that the markets react negatively and that that is one thing that could get Congress off their collective butt.

  • 10:15:08

    REHMHere's what I want to know about. There's a group out there called the divers. Who are they, and what would happen if the divers took control? David.

  • 10:15:21

    WESSELWell, divers refers to people who are refusing to take Ruth's attempt to change the metaphor and Alice's attempt to change the metaphor, people who believe that they would get some tactical advantage if we went over the cliff. Many of them -- I think it's a very small band of people, and I don't think they're serious. I think what they are is saying, we will have an easier time negotiating with the other side if the other side believes we're crazy enough to drive the economy off the cliff.

  • 10:15:50

    REHMRuth.

  • 10:15:51

    MARCUSAnd this goes back to our old friend, who we've talked about on this show in various times, various incarnations, Grover Norquist and the pledge. So the theory is this: All the Republican -- nearly all the Republican members of Congress have signed Grover Norquist's pledge not to raise taxes. If the tax cuts expire, going on from there, allowing them to stay in place will not "be raising taxes" and therefore -- so this argument goes.

  • 10:16:23

    WESSELThe Republican members of Congress will have more political flexibility to be reasonable. I think that assumes a stupidity on the part of American voters, that they would hold these same -- very same members of Congress responsible for one level of taxes if it was allowed to expire but not hold them responsible if it wasn't allowed to expire, a little bit silly.

  • 10:16:46

    REHMAlice.

  • 10:16:47

    RIVLINI don't think it's so silly. I don't agree with these people. But the argument is, if we allow all these things to happen, taxes are going up, but they go back to the rates in the 1990s which weren't so terrible. And then you can argue about how much do we want to cut them, which is what Congress likes to do. And spending gets cut. It gets cut in a mindless way. Then you can argue about how much we want to increase it, which is another thing Congress likes to do.

  • 10:17:19

    REHMBut you would not see that happening, that is, allowing them to go over the cliff if President Obama is reelected.

  • 10:17:30

    RIVLINI don't know. I think he has indicated his strong willingness recently to cut -- to go back to the table to try to cut the grand bargain, and there would be no time like the present to start right after the election if he's reelected.

  • 10:17:48

    REHMRuth, you wrote that a bipartisan group is at work.

  • 10:17:53

    MARCUSRight. Two quick points. One is the risk of cliff diving is, if you jump off a cliff and you don't have a parachute on and you can't pull the ripcord, you're going to crash. And so maybe we jump off the cliff, and that would get everybody moving to create a grand bargain or some kind of deal. But maybe we'd just crash, and that would be bad.

  • 10:18:12

    MARCUSThe second thing that people should know is there has been -- while everybody else has been talking about the election, including me, and while the political -- the two presidential candidates have said next to nothing about the fiscal cliff and have shamefully not been asked about it, there's been an extraordinary amount of bipartisan work going on both in the Senate, in the House and also from the administration, which has been developing a program that it plans to unveil after the election.

  • 10:18:39

    REHMAnd we'll talk more about that after a short break. Do join us, 800-433-8850.

  • 10:20:03

    REHMAnd we're talking about the prospects or, indeed, the possibility of the U.S. government taking its spending over the cliff. Here with me in the studio: Alice Rivlin, she's senior fellow at the Brookings Institution, vice chair of the Board of Governors of the Federal Reserve System from 1996 to '99, David Wessel, economics editor for The Wall Street Journal and author of "In Fed We Trust," Ruth Marcus is columnist and editorial writer for The Washington Post.

  • 10:20:51

    REHMJust before the break, we -- Ruth, you were talking about that bipartisan group of senators who's been working to craft a deal. I gather it's along the lines of Simpson-Bowles.

  • 10:21:06

    MARCUSRight. It's along the lines of Simpson-Bowles, and Simpson-Bowles -- everybody talks about Simpson-Bowles, and nobody...

  • 10:21:12

    WESSELKnows what's in it.

  • 10:21:12

    MARCUS...knows -- nobody tends to sort of go back and say, yes.

  • 10:21:14

    REHMAlice does.

  • 10:21:15

    WESSELWell, Alice is Domenici-Rivlin.

  • 10:21:17

    REHMYeah. Right.

  • 10:21:19

    WESSELAlice is Domenici-Rivlin. That's true. That's true.

  • 10:21:19

    REHMYeah.

  • 10:21:19

    MARCUSBut people will say, oh, I -- this is along the lines of Simpson-Bowles. For example, Gov. Romney says his tax plan is along the lines of Simpson-Bowles. Here's what I think Simpson-Bowles means and should mean. It fundamentally means two things. We should deal with our tax system by getting rid of the enormous amount of inefficient, ridiculous underbrush in the tax code so that we can both eliminate a lot of deductions and loopholes and credits and everything else, broaden the base, lower the rates.

  • 10:21:53

    MARCUSBut -- and this is the really essential second point -- to do that in a way that doesn't simply stay revenue neutral, which is what Gov. Romney says, but allows us to raise revenue so that we can begin to tackle the debt. And the, I guess, third point of Simpson-Bowles is that needs to be done, but it also needs to be done in conjunction with spending cuts that include serious entitlement reform.

  • 10:22:22

    REHMAll right. So, Alice, since you were a member of Simpson-Bowles, what are the major elements thereof?

  • 10:22:30

    RIVLINWell, Ruth has mentioned them. Every bipartisan group that's looked at this problem has come to the same conclusion, basically, that we need to slow the growth of the entitlements, especially Medicare and Medicaid, because our older population is a tsunami. It is going to nearly double in the next few years, and health care costs are rising rapidly.

  • 10:22:57

    RIVLINSo if we don't do something, Medicare, Medicaid, and to a lesser extent Social Security, are going to drive federal spending up faster than revenues can possibly grow. Then we have to do, as Ruth said, a thorough reform of our tax code so that it's a simpler and more pro-growth code -- and we can do that -- and it raises more revenues. So it's a double whammy.

  • 10:23:20

    REHMAll right. So you had Simpson-Bowles' ideas, proposals presented to President Obama. Why'd he walk away?

  • 10:23:33

    RIVLINWell, that's a mystery to a lot of people. What he said was that if he had accepted Simpson-Bowles, the Republicans would simply have trashed it, and he had a lot of evidence to support that point of view. I think he wasn't ready, nor were the Republicans to go against the desires of their base. In the Republican case, it was raising revenues. In the Democratic case, it was taking on Social Security and Medicare.

  • 10:24:07

    RIVLINBut I think now things have changed, especially after the election. And one of the reasons, arguably, that Simpson-Bowles didn't move forward is that it didn't use the regular order, the regular committees of Congress. It was an extra legal or an outside the regular process idea, so was the super committee, if you remember, the super committee.

  • 10:24:38

    RIVLINThe idea now being talked about by this bipartisan group is to use the regular order of the Congress for the lame duck session to pass a bill similar to a reconciliation bill in the budget process that would instruct the regular committees to come back with a package in the next Congress by date, certainly like June 30 or something, that would do these things we've been talking about that would change the tax code and that would reform the entitlements in order to accomplish a stable budget, a stable debt.

  • 10:25:22

    REHMSo wouldn't that just be kicking the can down the road for six months, David?

  • 10:25:27

    WESSELNo. If they did what Alice said, they would kind of have to agree in advance on some targets, how much do we want to raise taxes? How much do we want to save over the next decade from heath care? And they would probably have to put in something: If we don't succeed, something we can live with this time. I talked to a Democratic senator, who said, I'm not sure what I was thinking when we said that if we can't succeed, we'll get something horrible. He said, a much better strategy in going forward would be if we can't succeed, we'll get something, well, it would be OK.

  • 10:25:58

    WESSELBut I think it's important to think about what would have to be the dynamics for this scenario to come true? So if President Obama is reelected and Congress looks much as it is today, we know that there are a significant number of senators of both parties who are trying to get something going. It's not at all clear that the leadership of the Senate, either Harry Reid or Mitch McConnell, is with them.

  • 10:26:21

    WESSELBut assume for the moment that they actually can come up with some plan that Simpson-Bowles-like or Domenici-Rivlin-like, and the president maybe doesn't endorse it because for the reasons Alice said, every time he endorses something, 15 percent of the Republicans have to vote against it on principle or maybe 75 percent of the Republicans. And then it's going to -- the questions going to come down to the House. And the only we get somewhere is if the Republican leadership in the House is willing to tolerate a split in their ranks.

  • 10:26:50

    WESSELSome people will vote against it and some will vote for. The Democrats will have to do much the same thing. It's not at all clear that that can happen, and it's very hard right now to know what the climate will be after the election. Is it one of these really tight elections where neither candidate really can claim a mandate? Do a few more Tea Party people get knocked off in the House than are expected?

  • 10:27:14

    WESSELDoes Paul Ryan, if he loses as vice president, comes back as a bridge builder, or is he running for president in 2016? So it's very hard, even for people like us, who generally have a lot of confidence in our ability to pretend that we know what's going to happen in two weeks, to know because there are so many variables.

  • 10:27:32

    REHMYou bet.

  • 10:27:32

    WESSELA few of which will be resolved on Tuesday.

  • 10:27:34

    REHMRuth.

  • 10:27:34

    MARCUSTwo quick points. In David's very good synopsis, one question he left out is, is House Speaker John Boehner willing to risk his speakership...

  • 10:27:44

    WESSELCorrect.

  • 10:27:44

    MARCUS...to take the -- he really would like to see a grand bargain. Will he risk his speakership to bring enough of the caucus, but not necessarily a majority of the caucus along to do that? I think the answer to that question is maybe. The other thing -- just in case people didn't have enough to worry about -- they wanted to point out is in addition to the fiscal cliff, we have a looming question about the debt ceiling.

  • 10:28:07

    MARCUSWe're going to be starting to scrounge for the change in the couch cushions and the debt ceiling, which, as we all recall, the Republicans were willing to allow us to risk default in order to extract concessions on the debt ceiling. That's also about to be hit again.

  • 10:28:23

    REHMAlice.

  • 10:28:24

    RIVLINYes, the debt ceiling would have to be part of any deal that was struck. Let me come back to the possibility of a Romney win. If he were to find himself president-elect, he might want to get this behind him and actually work with the lame duck session to get the debt ceiling raised, which would be absolutely necessary and something like a grand bargain in place.

  • 10:28:56

    REHMBut, you know, it's interesting, Gov. Romney has already said that everybody knows you've got to do something about the tax rates. You've got to do something about entitlements. And he has said, it would take him eight to 10 years in order to fix this system. But does anybody have any idea what his plans would include? Ruth.

  • 10:29:28

    MARCUSWell, no, is the short answer. The longer answer is he has -- well, one thing on what happens during the lame duck, he has said he would not like the solution to be during the lame duck. I actually think it might be good politics for him to get it out of the way, but he said he wants his time to come in there.

  • 10:29:44

    MARCUSAnd the one piece of the solution that he has resolutely resisted is the notion that we need to raise revenue, not simply by the hope of economic growth and cross our fingers and hope even if we lower tax rates, that will somehow make up for it by hugely quicker growth. He has not recognized the need to raise revenue in that way to reduce the debt.

  • 10:30:11

    REHMAll right. So if you had, for example, home mortgage deductions, a cut in capital gains, an elimination of a tax deduction for charitable giving, what are or what is the combination of things that would help prevent this country from going over a cliff, Alice?

  • 10:30:48

    RIVLINWell, you mentioned all the difficult parts of tax reform that have made it difficult in the past. I think the hope now is that they might take everything out, start with a kind of clean slate. We did this in the Domenici-Rivlin task force and also in Simpson-Bowles and said, suppose you taxed all income at the same rate. Then you could get the rates down.

  • 10:31:15

    RIVLINNow, you'd have to put some things back. Home mortgage deduction is not a great idea because deductions are much more favorable to people with high income. But a home mortgage credit, which was -- would be much better for middle-income people and would not be so...

  • 10:31:32

    REHMHow would that work, Alice?

  • 10:31:34

    RIVLINWell, credit means that you -- we had, in our plan, we had two rates: 15 and 28. And we said you'd have a credit for your mortgage interest -- that is, 15 percent up to a limit-- and you take that off your tax, not off your income. So it would be equally valuable no matter what your income was, and that means that a lot of people would get this credit who don't even itemize now. Now, for upper-income people with very large mortgages, it would not be good.

  • 10:32:08

    RIVLINYou'd have to grandfather the houses that they're already in so it would phase in slowly. You could do the same thing for charitable deduction. You would need a child credit, and you would need an earnings credit. But you could live without the other things, and that would make it possible to have lower rates and to tax capital income at the same rate as other income, which is really important, without raising the rate so much.

  • 10:32:37

    REHMAlice Rivlin, senior fellow at The Brookings Institution. And you're listening to "The Diane Rehm Show." Going to open the phones now, 800-433-8850, first to Covington, Ky. Good morning, Kim.

  • 10:33:00

    KIMGood morning. Thanks for taking my call.

  • 10:33:01

    REHMSure.

  • 10:33:03

    KIMI am curious as to why not necessarily on this specific program, but most of the political commentary assigns all of the blame for the looming fiscal cliff to Congress, even to the extent that President Obama gets away with making it sound like it was Paul Ryan's idea when my understanding is that the idea came from the White House, and we're not really seeing any public presidential leadership on this.

  • 10:33:27

    REHMDavid.

  • 10:33:28

    WESSELWell, the caller is correct that this plan has two parents, and one of them is in the Capitol, and one is at -- in the White House. This was a compromise that was designed to get us out of a bad situation in Aug. 2011. The details of the spending cuts of the fiscal cliff were modeled on ones in the past, and the White House was intimately involved with them. I think the president would say, I've been trying. I've been trying. They won't listen to me. After the election, I'll fix it all. But the caller is right that this was not just Congress. This was a joint venture.

  • 10:34:03

    REHMAll right. To Dayton, Ohio. Good morning, Mike.

  • 10:34:07

    MIKEGood morning. Thank you for taking my call.

  • 10:34:10

    REHMSure.

  • 10:34:11

    MIKEI just want to point -- say that I'm kind of disgusted. Maybe that's a strong word, but that's how I feel. I'm kind of disgusted by the effort of some people in the Republican Party and people I've heard to try to blame this fiscal cliff mess on the president. I feel like really both sides failed to compromise on this issue. This was, like the panel just said, this was an idea to try to get us out of a situation, and both sides failed to compromise on this situation.

  • 10:34:41

    MIKEAnd -- but, honestly, I put a lot of the weight, the situation, more towards the Republican Party, and the reason is is because Mitch McConnell as much has said that it is our number one goal to see that President Obama is a one-term president. And that's how the Republican Party has acted for the last four years. They stood in front of everything that he's tried to do to accomplish anything, to make things better. And as soon as they -- he comes up with an idea, it's instantly toxic to them.

  • 10:35:11

    REHMRuth.

  • 10:35:12

    MARCUSWell, David is completely right that Republicans and Democrats and the White House and Congress together built the fiscal cliff. But I do think that the caller is right in the sense that the reason we are approaching the fiscal cliff, the reason we haven't figured out a way to screech ourselves to a halt and avoid jumping off is that congressional Republicans have been unwilling to acknowledge the need to raise revenues along with cutting entitlements and dealing with other spending issues.

  • 10:35:41

    REHMTo Pittsburgh, Pa. Hi there, Bob.

  • 10:35:45

    BOBHi, Diane. Our show -- or your show has just recently been picked up in the Pittsburgh area, so I have the opportunity to hear you for just over the past couple of months.

  • 10:35:55

    REHMI'm so glad.

  • 10:35:56

    BOBYes. The point I'm going to make is completely diametrically opposed to what most of the nation is worried about -- going over this fiscal cliff. I'm about as liberal as you can get, but I still think that you ought to just allow the thing to happen. We have not been trying to do anything about our national debt for years and years and years. When Bush was first elected, those were good times. He didn't try to attack the problem then. Now that we have bad times, no one's really trying to attack the problem now. They are just kicking the can down the road.

  • 10:36:25

    BOBAnd consider this: We may be in a new steady state economy. This may be the new normal, what we're in right now. So rather than saying, oh, we'll wait until our national economy recovers and gets better, then we'll address it. Well, there may be no then. It may be right now. And I would say the best economic minds, of which I certainly include Alice Rivlin among them, you ought to pull out your laptops and figure out how to go from here, given that this is all going to happen, and figuring out how to attack the problems...

  • 10:36:54

    REHMAlice.

  • 10:36:55

    RIVLINWell, I'm not for kicking the can down the road, and I am for doing any combination of slowing the growth of entitlements and raising more revenue that can help us solve this problem. But I don't think that letting the fiscal cliff happen is smart at all. We're -- our economy is growing slowly. We risk going back into recession. Then it's much harder to get any kind of a deal on anything.

  • 10:37:25

    REHMAlice Rivlin of The Brookings Institution. Short break here. More of your calls, your email when we come back.

  • 10:40:03

    REHMAnd just before the break, David Wessel, author of "Red Ink," you wanted to mention something in regard to our caller's point about going over the given, Alice.

  • 10:40:17

    WESSELI think Alice, I'm sure, would agree with me. The point is not to raise taxes and cut spending right away when the economy is weak. The point is to make decisions today to do things that will take effect over the next decade when we hope the economy will be getting stronger, so that five, seven, 10 years from now, we find ourselves in a better position.

  • 10:40:38

    WESSELCongress has a very hard time making policy today that takes effect in the future, but that's what they have to do now. That's what they did when they did the fix of Social Security in the '80s. That was the nature of previous budget deals. And it's hard for people to understand that we actually don't need for the government to save more now to spend less right away, what we need them to do is right away put in place plans that restrains spending over time.

  • 10:41:07

    REHMAlice, let me ask you whether we learned anything from how Europe has dealt with its own fiscal crisis.

  • 10:41:19

    RIVLINYes, I think we have. We've learned what not to do. Don't put it off. David's absolutely right. What we need to do now is make the decisions that will slow spending and raise revenues in the future. Europe didn't do that, and they have been driven to really counterproductive policy. They are doing austerity now which is the worst thing you do in a weak economy. And, unfortunately, the Greeks and others are just in a disaster situation for that reason.

  • 10:41:49

    REHMBut could we be headed for the same kind of disaster?

  • 10:41:54

    MARCUSWell, maybe but probably not because of the inability to get agreement. The difference between a parliamentary system and our system is that in the parliamentary system, if your side is elected, you can get it done. You know, we saw that in Britain. We have checks and balances for better or for worse, and there may be times when gridlock may be better than a parliamentary system. The thing about Europe that's so interesting is they're our best friend and worst enemy.

  • 10:42:23

    MARCUSThey are our worst enemy in the sense that their economic problems have a huge ripple effect over here, but at the same time, and this goes to a point that David was making way earlier in the program, the threat of the markets looking at our inability to get anything done and taking a dive because of that, it may be that investors decide there is no place else that is functioning any better and that we've been sort of waiting for that market reaction to our gridlock for a long time, and we haven't really seen it.

  • 10:42:54

    REHMAlice.

  • 10:42:54

    RIVLINWell, I just wanted to dispel the notion that gridlock is a good thing.

  • 10:42:58

    MARCUSWell...

  • 10:42:59

    RIVLINIt's a bad thing for a problem which gets worse if you do nothing.

  • 10:43:03

    WESSELRight.

  • 10:43:03

    RIVLINAnd that's the characteristic of this problem. If we do nothing, our debt rises faster than our economy can grow, and that's not sustainable.

  • 10:43:12

    REHMAll right.

  • 10:43:12

    MARCUSAnd I'm -- I never disagree with Alice as a general matter, and I'm not disagreeing with her on that.

  • 10:43:16

    REHMOK. To Little Rock, Ark. Tom is on the air. Good morning.

  • 10:43:22

    TOMYes, Diane. I love the show. I have a question regarding some definitions that I've noticed have been shifting. Social Security and Medicare used to not be entitlements, but now they're called entitlements. I'm paying into both of those for over 40 years. And now a millionaire is not somebody that simply has a million dollars, but it's somebody that makes million dollars a year.

  • 10:43:41

    RIVLINOh, by entitlement, I think most people mean a spending commitment which is there because you've paid into it and because you are entitled to the benefits as a matter of being of a certain age or having certain characteristics. It's not something that the Congress appropriates every year. That's all that's meant by entitlement.

  • 10:44:08

    REHMOK.

  • 10:44:09

    WESSELIt's -- also, it's not true that people have, through their Medicare payroll tax, put in enough money on the system to pay for what they get at the other end. There's a substantial amount of general tax payer money that goes into Medicare.

  • 10:44:20

    RIVLINMost of it.

  • 10:44:21

    REHMAndrew in Cleveland, Ohio, has a question about Grover Norquist. Go right ahead.

  • 10:44:29

    ANDREWYes. Good morning. That is my least favorite name in our current government's situation. I find it really abhorrent that that many of our elected officials has handed their legislative power over to one individual that the people in their state or their district may never have met, then they certainly didn't elect him or do they want him dictating policy to their government officials.

  • 10:44:55

    ANDREWAnd I would hope, and I'm wondering if the panel has heard anything of this, that there is something that is being done about his pledge. I feel that it ties our hands down and that they have no power to do their jobs.

  • 10:45:13

    REHMAlice.

  • 10:45:14

    RIVLINI agree with the caller, and some members of Congress have said, maybe we should take a pledge to take no pledges, and that would be...

  • 10:45:22

    REHMThat would be a good idea.

  • 10:45:23

    RIVLIN...that would be a good idea. But I think the power of Mr. Norquist is fading. And the reason I think that is that many Republicans, including Gov. Romney, now talk about spending through the tax code and tax expenditures, and they're beginning to realize that we spend on both sides of the budget, and that the spending through the tax code is keeping our tax base very narrow. So that's progress.

  • 10:45:56

    REHMHere's an interesting email from Lisa, who says, "Why is the child tax credit still viable? This was implemented after World Ward II because of the laws of youth to work the family farms. There is no longer a need to have any sort of financial incentive for more children in this country. I don't understand why people should be rewarded for having children. You want to cut my mortgage deduction. Then cut their children's deduction."

  • 10:46:38

    WESSELI don't know about this World War II history, but I think that -- I don't think -- unlike some countries, we're not trying to create an incentive for people to have children. Some countries have tried that with mixed results. I think we're trying to say that families with children in the lower and middle class deserve some help in order to raise their children because we all benefit when their children grow up strong and smart.

  • 10:47:04

    REHMAnd we create the next generation, Alice.

  • 10:47:06

    WESSELRight.

  • 10:47:07

    RIVLINYes, I think that's the point. And our tax code is imperfectly modeled on the idea of ability to pay. And if you have several children, you are -- with the same income as a couple that has no children, you have less ability to pay.

  • 10:47:26

    REHMAll right. You want to add to that, Ruth?

  • 10:47:29

    MARCUSNo, I think we can move on. Thank you.

  • 10:47:30

    REHMOK. Let's go to Drawer (sp?) in Potomac, Md.

  • 10:47:36

    DRAWERYes. Good morning, Diane.

  • 10:47:37

    REHMHi.

  • 10:47:37

    DRAWERThank you for taking the call.

  • 10:47:38

    REHMSure.

  • 10:47:38

    DRAWERI'm a Ph.D. student at the University of Maryland, and my research focuses on lame duck sessions of Congress.

  • 10:47:44

    MARCUSWow. Leave us your number.

  • 10:47:48

    DRAWERMy statistical model suggests that any change in control of the House or Senate at the moment would lower the chances of passing significant legislation during the lame duck session. I was wondering if the panelists could talk a little about the strategic and political choices that the majority and minority leaders in Congress will face after the election results are in both in relation to the fiscal cliff and more generally to lame duck legislation.

  • 10:48:12

    REHMRuth.

  • 10:48:13

    MARCUSWow. Well...

  • 10:48:14

    REHMNow, you're going to rush.

  • 10:48:14

    MARCUS...never answer questions from a Ph.D. student with a model. I should've gone on, taken the child tax credit opportunity. I do think that what the -- Drawer found in his model is also intuitively make sense to me. When you have a lame duck -- it's not, as general matter, a great idea to have a bunch of people who may or may not be continuing in office, making significant critical policy decisions that would bind the next Congress.

  • 10:48:44

    MARCUSAnd so that's especially true when you have a change in one House or another. A bunch of basically lame ducks, crippled, thrown out of office, a bunch of them are going to be passing legislation. We don't want that. But I think that the state that we will probably find ourselves in is...

  • 10:49:07

    REHMJan. 1.

  • 10:49:07

    MARCUS...in Jan. 1 is a continuing narrow majority in the Senate, certainly no party with 60 votes to stop the filibuster. I think very, very likely Democratic control and very, very, very likely Republican control of the House. So in that situation, there is a political incentive, as we were talking about before, for a lame duck to get some of the unpleasant business out of the way.

  • 10:49:36

    MARCUSAnd that would be particularly true if you had a status quo presidency as well. Not status quo in the way that Gov. Romney has been arguing that we'll just have status quo if the president is there, but if you don't have a new president that's going to come in and want to put his own stamp on things.

  • 10:49:51

    REHMAlice.

  • 10:49:52

    RIVLINI think the main point is, is this an emergency? Do we -- do the members of the lame duck session and the incoming president, whoever it is, collectively feel that going over the cliff is so bad that they better pull all their forces together and do something to avoid it?

  • 10:50:10

    REHMDavid, how do you feel about going over the cliff? Does it have some merit?

  • 10:50:19

    WESSELI think it has very little merit and mostly for the reasons that Alice said earlier in the show. You can do all the diagrams about what it means to taxes and spending, and the Treasury had some flexibility on the withholding tables, and the White House budget office can soften the blow, and maybe there is this bizarre thing that you can make Grover Norquist happy by raising taxes and lowering them and all that.

  • 10:50:40

    WESSELBut I think unappreciated by the economic models is the point that Alice made, the notion that both consumers, businesses and the markets will have, that the U.S. government is unable to function, that the political system has created a collision for itself and can't manage to deal with it. And I think that would far outweigh a lot of this kind of easier-to-model economic affairs.

  • 10:51:04

    REHMRuth.

  • 10:51:04

    MARCUSAnd there's one thing that happened last week that we haven't mentioned that really bears mentioning, which is a group of, I think, it was 80 chief executive officers, Republicans and Democrats, came out with a statement that called on Congress to deal with this emergency -- and I agree with Alice on that -- and called on Congress to deal with it in, yes, a balanced way, and this statement from corporate chieftains explicitly acknowledged the need for increased tax revenue. And so...

  • 10:51:32

    WESSELRight. And I talked to some of those people and there are two concerns they have. One is we thought that, in the end, Congress always manages to muddle through, and the debt ceiling crisis frightened us 'cause we didn't realize how close to the edge they were willing to go. And secondly, although they disagree on this, some of them think it's already hurting their business, that businessmen are reluctant to order because of their fears of what's going to happen.

  • 10:51:56

    REHMAll right. To Syracuse, N.Y. Good morning, Jeff. Jeff, are you there?

  • 10:52:05

    JEFFYes.

  • 10:52:05

    REHMGo right ahead, sir.

  • 10:52:07

    JEFFYes. Hello. Thanks for taking my call. Basically, since it's human nature to buy things and to produce things, I'm just wondering what you guys thought of the basic idea of government departing from the economy gradually, you know, 'cause too many people who suffer all at once, such as -- in such areas as health care, education, just areas where they're spending and they ought not to be in the first place, and then letting the free market basically say, hey, look where there's money to be made.

  • 10:52:38

    JEFFWell, there's education. Now, we can get into health care, and competition will drive down the price eventually. And I wondered what you thought of it since people aren't just going to stay there stagnant after the government would depart.

  • 10:52:51

    REHMAlice.

  • 10:52:52

    RIVLINI think there is plenty of room for government to finance things. And we need the government to do that even in a strong free market society, which we really are. And health care is a good example. Doctors and hospitals are not part of the government, but we do need the government financing health care for people who can't do it themselves in order to -- for there to be health care delivery for those people.

  • 10:53:24

    REHMAnd you're listening to "The Diane Rehm Show." Do you want to add to that? All right. To Alpharetta, Ga. Hi, John.

  • 10:53:34

    JOHNYeah. Hi. I just like to mention that it is the Republicans that started this by refusing to extend the debt limit. And they're 100 percent responsible for the fiscal cliff.

  • 10:53:47

    REHMDavid.

  • 10:53:49

    WESSELWell, look, we elected a president of the United States and we have a system, a Constitution that requires the president to do business with Congress. President Obama would have you believe that he did everything humanly possible, and it was only because the Republicans refused to cooperate that we have a problem. I don't actually read it that way. I think that there were places along the way from the very start where the president just was not successful, skillful, tried enough to cut deals to divide the Republican Party to see if he could do better. I...

  • 10:54:22

    REHMDo you think he could have? Do you really think he could have given the statements coming from the Republican leadership?

  • 10:54:33

    WESSELI think that -- I would predict he would have succeeded. But I would be shocked if President Obama, in his heart, thinks he did everything right. Let me give you just one example. Shortly after the Republicans took over Congress, I was at a dinner with Dave Camp, the Republican who became chairman of the House Ways and Means Committee. And he told us that he had met Tim Geithner, the Treasury secretary, for the first time that day.

  • 10:54:55

    WESSELThat is -- the president did not do what some presidents do, which is to kind of buddy up to all the Republicans so they feel like he listens to them. I don't think the president had the same Lyndon Johnson-esque skills as to get people to do things that they thought was in their interest but that were really in his interest.

  • 10:55:13

    REHMHas anyone had the LBJ-esque skills?

  • 10:55:19

    WESSELBill Clinton was pretty darn...

  • 10:55:21

    REHMPretty good.

  • 10:55:21

    WESSEL...deaf at turning Newt Gingrich around from time to time.

  • 10:55:24

    REHMAll right. Alice.

  • 10:55:25

    RIVLINI think we have to get past this whose-fault-it-was discussion. The blame game doesn't get you anywhere. We are in a very bad situation. We need to get our debt on a more stable course so it isn't rising faster than the economy is growing. The fact that we are in this situation is everybody's fault or nobody's fault. But the point is both parties have got to come together and work on the solution.

  • 10:55:51

    REHMRuth.

  • 10:55:52

    MARCUSOf course, Alice is right. But as David's been noting, whispering to me here, what would we do as journalists if we couldn't play the blame game...

  • 10:56:01

    MARCUS...that there -- I have been talking about this all along. The Republican Congress has been incredibly intransigent, so now I am going to pick on the president a little bit and just pile on David's piling. I think there were two particular inflection points at which the president might have been able to make a difference. The first was, after Simpson-Bowles came out or even as it was getting itself together, there was a lot of energy to get something done. He could have taken the plunge and really gone for it.

  • 10:56:25

    MARCUSThe second was when he was crafting the grand bargain with Speaker Boehner. He came back and raised the question of whether the speaker would be up for more tax revenue. That may have given the speaker an opportunity or an excuse to blow up the grand bargain. Would it have succeeded if he had seized those moments or played them more? Deftly, I don't know. But if you don't try, you're not going to get it.

  • 10:56:49

    REHMAll right. Last quick question for each of you: Do you believe we will go over the cliff, yes or no? Alice.

  • 10:57:01

    RIVLINI hope not, and I don't think we will. I think better -- cooler heads will prevail.

  • 10:57:06

    REHMDavid.

  • 10:57:06

    WESSELNo.

  • 10:57:08

    REHMRuth.

  • 10:57:08

    MARCUSYou know, I think of the fiscal cliff like what was said about marriage as the triumph of hope over experience. So I'm going for hope.

  • 10:57:17

    REHMDoes that mean...

  • 10:57:18

    MARCUSWe will not.

  • 10:57:18

    REHM...we will not go...

  • 10:57:19

    MARCUSYes.

  • 10:57:20

    REHMAll right.

  • 10:57:20

    MARCUSYeah. Sorry.

  • 10:57:21

    REHMRuth Marcus, columnist and editorial writer for The Washington Post. David Wessel, economics editor for The Wall Street Journal. He's got a new book out titled "Red Ink." And Alice Rivlin, senior fellow of the Brookings Institution, thank you all so much.

  • 10:57:43

    RIVLINThank you.

  • 10:57:44

    REHMAnd stay dry, stay safe. Thanks for listening, all. I'm Diane Rehm.

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