Dealing With Sequestration Fallout

MS. DIANE REHM

10:06:56
Thanks for joining us. I'm Diane Rehm. The blunt budget cudgel known as sequestration became reality last week. Congress and the White House failed to come up with a plan to avert across-the-board federal spending cuts. Another budget deadline is fast approaching. Without an agreement by the end of March, the government will be forced to shut down.

MS. DIANE REHM

10:07:23
Joining me to talk about the seemingly endless budget crisis: Kevin Hassett of the American Enterprise Institute, Jared Bernstein of the Center on Budget and Policy Priorities and Jim Tankersley of The Washington Post. I hope you'll join our conversation, lend your voice to the discussion. Call us on 800-433-8850. Send us an email to drshow@wamu.org. Follow us on Facebook or send us a tweet. Good morning to all of you. Thanks for being here.

MR. JARED BERNSTEIN

10:08:04
Good morning, Diane.

MR. KEVIN HASSETT

10:08:05
Good morning.

MR. JIM TANKERSLEY

10:08:05
Good morning.

REHM

10:08:06
Good to have you here. Let me start with you, Jared. Talk about the timeline for really implementing these cuts.

BERNSTEIN

10:08:17
Well, the timeline began -- I think it was midnight, March 1. Eighty-five billion in cuts over the course of what's called the fiscal year, which -- we make this very confusing in Washington -- that goes through the end of September. The -- what we talk about are the negative outlays that is the actual decline in spending over the course of the year, the calendar year, the full years, about $66 billion. Some of those cuts have actually begun already, but it's going to be a rolling and a cumulative kind of process.

BERNSTEIN

10:08:46
I think the furloughs will come later if this sticks. But right away, for example, the unemployment insurance benefits of people on long-term unemployment insurance have come down. There's been the beginning of some furloughs at some contractors, some cuts along the way. So it will be a rolling cumulative impact expected ultimately to cut about half a percent off of GDP growth this year and as many as 700,000 jobs.

REHM

10:09:14
Kevin Hassett, who is most likely to feel these cuts?

HASSETT

10:09:21
Gosh, I think that if we lose half a percent of GDP this year because of these cuts, and I think that Jared's assessment is ballpark. The right number, I think there's probably some dispute of whether it 0.3 or 0.6, but it's in there. Then the people who will feel it most will be probably the long-term unemployed who are currently without a job because that growth will make it much less likely to -- that our economy will create jobs.

HASSETT

10:09:45
It'll be harder for people to find jobs. And so, you know, the extreme suffering, that as you know I've written a lot about, of these long-term unemployed is likely going to be worse this year because of this and because also the big tax increase at the turn of the year, which is about twice as big as the spending cut that we're talking about.

REHM

10:10:04
Jim Tankersley, you agree?

TANKERSLEY

10:10:06
I agree. I think that what we've seen now for years is this lack of focus on job creation has perpetuated this problem with the long-term unemployed. And the worry is that the longer that this lasts, the longer we go with slow growth, with high unemployment and high long-term unemployment, the more the possibility rises that we could have people who become almost permanently unemployable. Their skills deteriorate, and they just have a much, much harder time finding a job.

REHM

10:10:40
Jim, over the weekend, we heard lots of talk about whose fault all this is. Who did or did not do what was needed? What's needed now?

TANKERSLEY

10:10:59
Well, that's a broad question, and I think that the answer is what's needed now is something to boost the economy and help reduce the deficit over long-term via growth. And what we manage to get through sequestration is the least -- one of the least optimal ways of doing that by any economists' reckoning. If you're a Keynesian economist who believes that you should be spending a lot more money in the government right now, you didn't get that. You're pulling back.

TANKERSLEY

10:11:29
If you're an economist who believes that businesses aren't feeling confident because the path of fiscal policy in the United States, we didn't really get that either because we haven't touched the big drivers of long-term deficits, which are health care costs with this bill. So what would be nice would be something to address either those concerns in a way that would make at least some group of economists think that we're on a higher growth path.

REHM

10:11:55
Kevin, what would make sense now?

HASSETT

10:11:58
Sure. You know, and in fact, I think that we can focus on the negative -- and there's a lot of negative -- but I think that you could also focus a little bit on the positive, which is that there's bipartisan agreement that we need to have some kind of big fiscal adjustment that phases in, you know, fixes to our entitlement programs and our tax code over time in a way that creates a foundation for job creation and long-term growth and doesn't create a big, negative stimulus this year.

HASSETT

10:12:27
I think that if you look at the way that they structured the sequestration, it really was designed to be kind of a credible commitment to that fiscal adjustment because the sequestration was designed to really be harsh as with the sort of fiscal cliff that came at the end of the year. They were designed to be harsh as of commitment from both parties that we're going to finally be adults and get together and address our problems. In fact, there are even little nuances that haven't been covered.

HASSETT

10:12:53
So for example, if you go back to Gramm-Rudman where they invented sequestration, they had what Phil Gramm likes to call lifeboats in the legislation. The sequestration itself was kind of harsh. But in the original design of sequestration, either the speaker of the house or the majority leader could fast-track a bill to the Senate and get a vote right away if he had a better way to get the same amount of reduction. But they would remove the lifeboats for this one, again, because they were trying to force action.

HASSETT

10:13:18
So they haven't made the action yet, and so we should criticize them for that. But I do think that there's hope because they both recognize at the beginning that we need to make a credible commitment to fix things, and the sequestration was designed to do that and then it failed. But, you know, I tend to focus on the positive with that.

REHM

10:13:33
Jared, let me ask you. Kevin is talking about entitlements. Hasn't president Obama acknowledge that he is willing to make cuts in entitlements?

BERNSTEIN

10:13:49
Yeah. This is very important, and in fact, he's actually -- with the Affordable Care Act, Obamacare, he's actually made some big cuts in Medicare's spending growth over the next decade. And interestingly in the campaign, I remember Mitt Romney saying two things. He said, the president won't tackle entitlements, and the president just cut your Medicare. They, of course, can't both be true.

BERNSTEIN

10:14:09
So there were significant cuts in the growth rates of Medicare in the Affordable Care Act, but the president has since put forth -- in his play, he keeps talking about I do have a compromise plan here that involves both revenue increases and spending cuts, and part of those spending cuts are cuts both to Social Security and Medicare. So that is true.

REHM

10:14:27
And, Jim, have you heard that expressed publicly and clearly?

TANKERSLEY

10:14:35
That the president has a plan? My colleague...

REHM

10:14:39
No, that the president is willing to make cuts to Medicare and Social Security.

TANKERSLEY

10:14:46
So my colleague, Ezra Klein had a very interesting piece over the weekend talking about this, where he basically said, look, if you look on the president's website, on the White House website, you can see that the president is offering a change to Social Security called a chain CPI, which would slow the growth of Social Security benefits over time.

REHM

10:15:03
Do Republicans want that?

TANKERSLEY

10:15:05
Well, yes, they do. And Ezra's point in his column was they might not know this because they keep calling on him to say this. However, he also had a follow up to the column over the weekend where when he brought this to the attention of some republican consultants on Twitter, they then said, well, we don't believe he's serious about that. Well, we don't believe that's enough. Well, we don't we believe this is credible. So I think we have a case where the parties just don't trust each other on this. And the president -- Republicans do not trust the president on what he's talking about.

REHM

10:15:34
So the president has made it clear, at least in his mind, that he's willing to make those cuts, and Republicans are saying, we don't believe him. Kevin.

HASSETT

10:15:49
I think that that might be right. I think that there's a question of what's going on with the cuts, and then there's a question of additional revenues right now. And the Republicans voted to have a very large tax increase at the end of the year. If you look at the CBO's current 10-year outlook that includes those tax hikes, then revenue to GDP at the end of the 10-year period is going to be about two percentage points higher than its 40-year average, so there's a lot more revenue coming in. But...

REHM

10:16:14
OK. Don't get me too far down in the weeds now.

HASSETT

10:16:17
No, it's -- that's not weeds because the point is the Republicans just passed the big tax hike that makes it -- so the tax revenue is actually coming in at a very high percentage to GDP by historic precedence. The president is saying, I'll do some of this other stuff that you like but only if you give me even more revenues. And that's why we're hung up right now.

REHM

10:16:32
OK. Jared.

BERNSTEIN

10:16:32
I think that's basically misleading in the following sense: Republicans like to start their clock counting what's gone on in terms of fiscal policy with the tax increase that very much did occur as Kevin said in January of this year. Well, if you go back to the Budget Control Act, which was the big fiscal legislation that set all this craziness up back in 2011, the parties agreed to over $1.5 trillion in spending cuts over the next 10 years.

BERNSTEIN

10:17:02
So we've had $1.5 trillion in spending cuts, $600 billion in tax increases. When you present it, as Kevin just did, it sounds like all we've done is increase taxes. But in fact, we've cut spending far more than that.

REHM

10:17:15
Do you agree with that, Jim Tankersley?

TANKERSLEY

10:17:18
I think the math is pretty clear that we have done both spending cuts and revenue increases. I think the question here though...

BERNSTEIN

10:17:27
But do you agree with the numbers I cited, that we've done considerably more on the spending cuts than the tax increases?

TANKERSLEY

10:17:33
I think it is clear that there have been over 10-year period spending cuts than tax increases now.

BERNSTEIN

10:17:39
Right.

TANKERSLEY

10:17:40
However, I would also say this: what we haven't seen in the last two or three years are a paired set of policies to try to really produce more growth because that is the third part of this equation that we're just done talking about...

BERNSTEIN

10:17:52
Right. I agree with that.

TANKERSLEY

10:17:55
...which is how do we get the economy growing faster, creating more jobs, putting those long-term unemployed people back to work and bringing down our deficit because that's what higher growth will do for the budget standpoint.

HASSETT

10:18:07
It's as if we're so...

REHM

10:18:08
But -- hold on a minute.

HASSETT

10:18:09
Sorry, sorry.

REHM

10:18:09
But Kevin and Jared have both said that sequestration is really going to hurt the long-term unemployed more than any other sector of the population. If that's the case, then what more do they want to see sequestration come to an end? President says he's willing to give on Social Security. He's willing to give on Medicare. I'm baffled, and I have the feeling that many of our listeners are baffled as well. Going to take a short break here. When we come back, we'll hear more explanations about what's behind all of this.

REHM

10:20:06
And welcome back. We're talking about what has become an overused but necessary word in today's vocabulary, sequestration and its impact. Here with me studio: Jim Tankersley of The Washington Post, Jared Bernstein of the Center on Budget and Policy Priorities, Kevin Hassett, director of economic policy studies at the American Enterprise Institute. Jim Tankersley, just before the break, you were talking about what the president has offered. But what he's asking for, the Republicans do not want to give.

TANKERSLEY

10:20:55
Right. I think it's really important to think of what the president is putting on the table versus what the Republicans want in the following terms. He is putting on the table things -- changes to entitlement programs, such as reduction in Medicare spending and a change in reduction in Social Security benefits over time that they would like but only in the context of, I will do this if you agree to raise taxes by closing loopholes and limiting deductions for rich people.

REHM

10:21:21
What loopholes?

TANKERSLEY

10:21:22
Right. He hasn't really specified all that. But essentially, if you agree to the goal that we're going to raise more tax revenue by closing loopholes and reducing deductions for wealthier people, then I will put these things on the table. They, the Republican leaders, are saying that's not a serious offer because we're not going to raise revenues. So this is the problem. The revenues are the big hang-up between the two parties right now.

REHM

10:21:46
And, Kevin, this is a basic philosophical difference.

HASSETT

10:21:51
Right. And I think that Jim nailed it. And it can help clarify these issues for all if us to think about it as maybe being a three-step process that ultimately when this all works out, hopefully, favorably...

REHM

10:22:04
If it works out.

HASSETT

10:22:04
...then we're going to see that three steps happen, I believe. The first is the tax increase that just occurred. The second step is they're going to work out some change to spending so that the sequestration cuts are back-loaded a little bit more or maybe a little bit larger off in the future, a little bit smaller today. And then the third step is going to be there's a tax reform where the admissions ticket for tax reform that Republicans have to be willing to pay is that they are willing to accept more revenue.

HASSETT

10:22:32
The problem is that the Republican -- President Obama is trying to make the second and third step happen at once. The Republicans just really broke their vow to increase, you know, not to increase taxes at the turn of the year. They want this to be about spending only and then have a next step of tax reform. And Mr. Camp, the chairman of the Ways and Means Committee, is having hearings on this and so on.

HASSETT

10:22:52
And then at that point, my guess is that revenue would be on the table again because tax reform -- Republicans think that the benefits of that are really large. But I think that combining the tax cut -- I mean, the increase with the spending change right now is kind of fast forwarding to the third step before they finish the second. And that's why we're sort of hung up right now.

REHM

10:23:09
Jared, we're hung up on this idea that the tax increases in January should be part of the negotiations now. Do you see that differently?

BERNSTEIN

10:23:26
Yeah, I do see that differently. And by the way, while Kevin's three steps are -- sound extremely reasonable and if he and I were sitting in a room together, I'll bet we could implement those three steps. That's not at all...

REHM

10:23:36
I bet you could. I bet you could.

HASSETT

10:23:39
I'm always reasonable, Jared.

BERNSTEIN

10:23:41
Yeah. The problem is you're way far away from where Republican Party leaders are who have been incredibly adamant -- Jim will back me up on this -- have been incredibly adamant about no more revenue. So their third step of getting to new revenues has been something they have consistently said no on. Look, in January, there was this increase of $600 billion in taxes over the next 10 years falling largely on families at the very top of the income scale, above $400,000.

BERNSTEIN

10:24:09
Now, the president won an election based largely on that policy, so that shouldn't have been a surprise to anyone. As I mentioned earlier, we've cut a lot more on the spending side than we've increased on the tax side. What the president is saying to now is that we need a balanced deal. We are actually not that far from achieving a sustainable path in our budget.

REHM

10:24:30
They're quite close.

BERNSTEIN

10:24:31
We're quite close. We're -- and this isn't going to sound quite clear. We're $1.5 trillion over 10 years away from stabilizing the growth of the debt as a share of the economy, which is the first order goal of fiscal rectitude. That's actually not that heavy a lift if you look over history with a functional Congress. But that's what we're lacking. You only can get there with balanced deal. You can't cut your way there just on spending side alone without deeply compromising key government functions.

REHM

10:24:58
How do you think people across the country are reacting to this discussion, Jim?

TANKERSLEY

10:25:05
It's interesting. So I talked to a lot of folks across the country. The first thing that everyone says is why can't people in Washington just get together and solve this? Why can't -- if they're close -- if they're moderately close, even if they're far apart, why can't the president and the speaker of the House and the Senate majority leader sit down and hammer out a deal the way that people like to think they remember Washington hammering out deals? Second thing, though, is there's a little bit of exasperation, especially among conservatives.

TANKERSLEY

10:25:31
There is this exasperation of, look, we elected these guys in 2010 to cut spending, and we don't feel like they have cut spending nearly as much as we wanted to. And that, I think, very much explains why the sequester went into effect, that conservatives started feeling real pressure from their base to let the cuts take effect, regardless of what they did to the military, which was supposed to the be forcing agent on Republicans. Their pressure came from the side that said, spending is out of control, we need to bring it down, do something. You've got something that's going to happen. Let it happen.

REHM

10:26:03
So even conservatives, as they support the military and don't want to see cuts to the military, were willing to let sequestration happen with these across-the-board cuts to the military?

HASSETT

10:26:22
Right at this moment, that's right. And so I think that there are a lot of conservatives that are very unhappy about the military cuts. And I think that was part of the original calculation was that the sequestration would kind of divide the party because the military folks would say, oh, I just can't handle that. In fact, we've even seen this notion that an aircraft carrier is not going to be in the Gulf. It's a serious issue because it takes about a month to get it there, right? And so there are serious costs now being borne by our defenses because we're -- we are unable to make a deal.

REHM

10:26:54
OK. So to what extent are Republicans divided at this point, Jim?

TANKERSLEY

10:27:01
I think they are feeling pretty solidly united on the question of let's cut spending. I think they are divided maybe on the questions of how to alleviate some of the military burden and whether to do that in the next thing that's going to happen, which is the continuing resolution to fund the government over the next few months, which brings me to a point that I'd like to make. The other thing you hear talking to people throughout the country, real people, economists who I only sometimes call real people, is this idea...

BERNSTEIN

10:27:32
I resemble that.

TANKERSLEY

10:27:32
Right.

HASSETT

10:27:33
We're surreal people.

TANKERSLEY

10:27:33
Right. Is this idea that having a budget fight every two or three months in Washington is really, really bad for sort of the nation's economic psychology. People are getting really sick of it. But we're going to keep doing that until either they come up with a big plan or they just sort of declare that it's going to be all-out war in the next election and we'll solve it then.

REHM

10:27:53
This is -- it's so discouraging to hear this kind of we're not going to budge. I wonder who's going to bear the burden of this.

BERNSTEIN

10:28:07
Yeah. That is the -- one of the important questions right now. But let me stop before -- and just focus on your first sentiment, which you have been expressing throughout the show and which I very much share, which is bewilderment, bafflement, disgust. And Jim was talking about that outside of the Beltway.

BERNSTEIN

10:28:23
The idea that, you know, in my day job as an economist talking about this, I'm constantly catching myself and saying, boy, I'm just sort of rationally ticking through the moving parts of what is just crazy. The idea that somehow this kind of damage to an economy that's already too wobbly, as far I'm concerned, is the new normal is nothing more than political malfunction and political malpractice by our policymakers. And I do believe that Americans need to stand up and tell their representatives that.

BERNSTEIN

10:28:57
And that answers -- gets to the answer to your question. If, in fact, the difficulties associated with sequestration are what I think they will be -- not yet, but as furloughs come online, as people start to experience delays in airport and food production slows down, as so many civilian military employees are furloughed, then I do think that people will start to recognize just how damaging that it is because there's this myth in too many people's head that every dollar spent is a dollar wasted when it's the government spending. That's just not true.

REHM

10:29:32
But hold on a minute. Has President Obama done everything he could to help the American people understand what he is willing to give in this deal? Kevin.

HASSETT

10:29:51
I don't think he has. I certainly follow it closely, and I'm puzzled by it. I know Jared is close to them and probably knows the best, but...

BERNSTEIN

10:29:58
Oh, I would agree with you. I would agree.

REHM

10:30:00
You would agree.

HASSETT

10:30:00
But I think, though, also that -- and it's natural in our democracy to do this -- that we have to remember that this thing could be solved with President Obama just signing at the end. So it's not just him. If the Senate Democrats and Republicans can come together and come to some kind of reasonable agreement, then, you know, they can talk to Mr. Boehner, and they could pass a bill and send it up to the White House.

HASSETT

10:30:23
So if people are mad at President Obama and the Republican Party, then they don't even have to deal with them. They could still solve this. And so I think that President Obama has been kind of playing it both ways, that, on the one hand, he wants to perhaps make space for the moderates in the Senate to come together. On the other hand, he wants to be a leader. And I don't think he's really found his voice in that space, and that's why we're confused.

REHM

10:30:42
Jim, would you agree?

TANKERSLEY

10:30:44
I think it's -- the folks who think that the president can do this all on his own are wrong. The folks who think that the president is powerless in this to effect a change are also wrong. I would agree with the sentiment that Kevin said and that Jared echoed that there is probably a lot more everyone in Washington could be doing right now to actually talk to each other and try to make a deal. I actually think it probably starts in the Senate.

TANKERSLEY

10:31:08
The Senate is the place where sort of because of the filibuster and the way it's been used lately and because of all sorts of electoral sort of hitches because of who's up in two years and sort of constantly there's not a lot of tough votes, there's not a lot of -- there hasn't been a budget passed in years, there's -- it's hard to have negotiation between the House and the Senate, as Kevin was just suggesting, if the Senate is not passing anything.

BERNSTEIN

10:31:29
Let me be clear. I agree -- this is Jared. I agree only up to a point in the following sense. The president said something important the other day. He said, I can't -- he's talking about Jedi mind melding -- I can't get the -- I can't force the Congress to agree that new tax revenues have to be part of the deal.

BERNSTEIN

10:31:47
So as long as they're refusing to agree to what I would consider a balanced plan, which involves spending cuts -- including entitlements, as you yourself have been stressing, Diane -- spending cuts and revenue increases, which I would call balanced and which I think most Americans would recognize as balanced, as long as they're refusing to accept that, it is hard to see any way forward. And Jim's right. The president can't make them compromise.

REHM

10:32:13
He also said, I'm not a dictator.

BERNSTEIN

10:32:17
Right.

REHM

10:32:17
The thing I would like to understand is, what are the loopholes that the president is talking about that he wants to see Republicans agree to? It strikes me that the public needs to understand what those loopholes are. Specifically, do you have any idea, Jim?

TANKERSLEY

10:32:42
I think that not specific loopholes, but I think that one thing that the president has indicated a real willingness toward, whether you -- and you can look at it a bunch of different ways, whether it was the Buffet Rule that he proposed last year or whether it was sort of the White House kind of coming out in favor of limiting deductions for rich people.

TANKERSLEY

10:32:59
So, basically, it doesn't matter what deductions you take. You can only take a certain amount of them, and then they're capped. Now, the effect of that would be, especially if you carved out an exemption for charitable giving, the effect of that would be to limit the mortgage interest deduction, health insurance. Yeah.

REHM

10:33:15
On high-income people.

TANKERSLEY

10:33:16
Yeah, on high-end people, so that would be the effect. And that's -- my guess is if there's a compromise to be had here, that's a much easier compromise to make than targeting specific deductions which have very limited interest groups behind them.

REHM

10:33:31
And you're listening to "The Diane Rehm Show." Kevin Hassett, where does incoming Secretary of Defense Hagel stand on cuts to defense programs?

HASSETT

10:33:46
You know, I've not seen him speak about it. I know that former Secretary Panetta was adamantly opposed to them, and they really are causing the Defense Department a lot of grief. I think that something will likely be done about that at some point.

REHM

10:34:00
About defense spending.

HASSETT

10:34:01
Right. Because don't forget that this is another thing, and it's a problem that we in Washington have that I know that our listeners outside of Washington are very aware of, which is that we tend to think that each bill, each debate that we're having is the penultimate one. But you could, for example, let sequestration happen and then think of the three or four things like Jared mentioned: the unemployment, insurance or the defense spending.

HASSETT

10:34:23
You could have a stand-alone bill to send an aircraft carrier to the Gulf. You could start passing fixes to the sequestration one bill at a time. And so that's a possibility as we look forward to how this might work itself out.

REHM

10:34:32
But, you know, as historians look at this very period, say, 20, 30, 50 years hence, what do you think they're going to see and wonder about, Jared?

BERNSTEIN

10:34:48
I just think it's quite simple. I think they're going to look back and try -- be very -- scratching their heads very hard trying to figure out why were policymakers making things worse. What happened in our process? And I think it's very much a political problem such that the federal government lost its ability to accurately diagnose what's wrong and to prescribe fixes because, you know, you can talk about all the steps we could take if compromise were an option to fix this. There are ones.

BERNSTEIN

10:35:19
Our system has the flexibility to do that. But the political gridlock -- and I've been around for a long time, and I've talked to a lot of other old-timers. We've never seen this level of dysfunction. And I think historians will look back at this period and say, remarkable how upside down policymaking became.

REHM

10:35:37
Kevin.

HASSETT

10:35:38
Yeah. I think Jared's right, and I think that what historians might say is that we as a nation have lost what you, Diane, in particular have oodles of, which is just grace. We don't have grace. We need to let the other guy have a win now and then. We need to not feel like that we have to put a knife to everybody's throat on every single bill.

HASSETT

10:35:54
And I wonder why we've lost the grace. But I know that if I look back at the early Clinton years before it blew off, or if I look at Herbert Walker Bush's administration or Ronald Reagan's administration, there were times when the president would step out and just say to members of his party, hey, guys, you don't like it, but do it...

BERNSTEIN

10:36:13
Yeah.

HASSETT

10:36:13
...because these guys have a point. And it's just been a long time we've had two presidents that haven't been able to do that for some reason. And I'm sure -- I don't want to place blame on President Obama, but we've wandered into this place that just needs more grace.

REHM

10:36:25
Jim.

BERNSTEIN

10:36:25
I'm sorry.

TANKERSLEY

10:36:26
We have a more polarized Congress. The vote ratings are clear. We have -- we've come to a point in our history where there is no single Democrat who is more conservative than a single Republican in the House of Representatives or in the Senate. That's totally different than it used to be. It used to be these regional variations of the parties. You had liberal Republicans from the Northeast, conservative Democrats from the South.

TANKERSLEY

10:36:48
The sorting that has happened along partisan lines has affected this, and we should be wary of that. I mean, we have, right now, parties that are as responsive or more responsive to their base voters. They're more worried about a primary challenge than they are about losing a general election. And when that happens, you see this sort of polarization that leads to difficult negotiating outcomes.

REHM

10:37:08
So what happens next?

TANKERSLEY

10:37:11
I think what happens next is a lot more fighting and, best case scenario, maybe some small-bore agreements to keep getting things done at the last minute, to keep the lights on in the government, to raise the debt ceiling one more time, whatever.

REHM

10:37:24
Unless?

TANKERSLEY

10:37:27
Unless somebody can break through.

REHM

10:37:29
All right. Taking a short break here. I hope that some of our listeners will come up with an idea to break through. Short break and right back.

REHM

10:40:06
And we're back talking about that baffling word, sequestration, what it means, who says what and where it's going. First email for you, Kevin. It's from Kate, who says, "I am beyond baffled by the Republican's mantra of taxes having gone up in January beyond the 2 percent payroll hike on everyone.

REHM

10:40:35
"The only federal tax increases are to the wealthiest Americans. Correct me if I'm wrong, but my understanding is the wealthiest Americans saw their taxes go back to pre-Bush era levels. I and everyone I know do not consider this a tax increase. It's simply a repeal of a set of tax cuts that benefited the wealthy unfairly."

HASSETT

10:41:11
OK. So Kate is correct that tax rates went back to where they were before President Bush reduced them, except that there are a few little footnotes where it's actually a little bit more than that, and in particular, the Obamacare or Affordable Care Act taxes and so on will also increase taxes. But I think the problem that Republicans have with that tax increase, let's say Republican economists -- I won't speak for Republican politicians -- is that while wages that high-income people make are not very responsive to tax rates, the activity of small business is.

HASSETT

10:41:47
And about half of small business income is affected by that top rate. And so precisely when we want people to be creating jobs, then we've increased the tax rate and reduced the take-home profit from the typical small business, about half a small business income. And so I think that that's a really bad idea. But I agree that in a big tax reform, that taxes on wages and taxes on capital income or taxes on consumption and taxes on capital income could address these equity concerns.

REHM

10:42:15
But weren't the Bush tax cuts supposed to be temporary?

HASSETT

10:42:21
The Bush tax cuts were legislated to be only 10 years because of this thing they call the Byrd Rule in the Senate that they had -- they could only pass it for 10 years without exposing it to filibuster. And so the design -- in fact, one might argue that if Democrats had offered Republicans at the time what ended up happening just now as a permanent cut, then they might've accepted it. They might've accepted it because they basically dealt without Democrats when President Bush was elected.

REHM

10:42:47
Jared.

BERNSTEIN

10:42:48
Well, I think it's actually even a little bit worse than Kate makes it sound, and I think her email is very perceptive. The 82 percent of the Bush era tax cuts are now permanent. So it's not like we got rid of the Bush tax cuts. In fact, we cemented 82 percent of them in permanent tax law. And, by the way, folks at the very top of the income scale benefit from that because the way our tax system works as your income grows, you're now actually facing lower tax rates than you were in the Clinton years until you get up to these very high rates at the top.

BERNSTEIN

10:43:21
And Kevin is right. There have been some other taxes on top of that. Where Kevin and I very much disagree -- and I would argue that the evidence supports what I'm about to say -- is that he very much overestimates the impact of these tax changes at the top, what I would call pretty marginal tax changes on savings, on investment, on business formation. The historical record shows that in fact those are very insensitive. You don't see investment behavior, for example, change when you tweak the tax code like that. What you see is a lot less revenues when you cut taxes and a lot more inequality.

REHM

10:43:56
To Bill -- I think I just lost him. Let's go to Petersburg, Mich. Good morning, Matthew.

MATTHEW

10:44:06
Hey, Diane. How are you?

REHM

10:44:07
I'm good. Thanks.

MATTHEW

10:44:09
Hey. Thanks for taking my call. I got a couple of quick points I want to make. One is, let's face it, you guys, both sides of our government, both Dems and Repubs, are guilty for where we're at right now. I didn't cause this. You guys didn't do it, but they did, all right? And, you know, the Bible says, "As you sow, so shall you reap," and we're now reaping their benefits or lack of, of what they have done over the last 20 years.

MATTHEW

10:44:37
Now, you might say, well, what did they do? Well, let's say right now I think if you just swim far and upstream, none of -- nobody in government's got the courage to do it. And I don't think that even the media, you guys, wouldn't want to swim far enough upstream to figure out that we made these bogus, lopsided trade deals with communist China. And I'm sick and tired of knowing that a communist, socialist Chinese slave is making all my stuff.

HASSETT

10:45:07
Yeah. I very much reject the ultimate analysis there from the caller. I don't think that trade deals with -- personally, we have no trade deals with China, just to be clear. We've never had a bilateral and multilateral trade deal with China. We did support China's entry into the WTO, and that type of globalization is very much part of today's economy. Now, it is true that lots of workers have been hurt by increased trade. That's true, but that's -- I don't believe that has much to do with what we're talking about here.

REHM

10:45:38
All right. To Charlotte, N.C. Good morning, Debbie.

DEBBIE

10:45:44
Hi, Diane. I've been enjoying the show very much, listening to it on the way to work.

REHM

10:45:49
Good.

DEBBIE

10:45:50
And I actually have quite a number of points, but I'm going to try to limit it, especially since I'm on my way into class.

REHM

10:45:57
Yes, please.

DEBBIE

10:45:58
Yes. My big question is everyone always talks about entitlement. How about subsidies? Why do we never hear about limiting subsidies which could save the United States a lot of money? I specifically target the farm bill and why school lunches are mixed in with aid to rich farmers?

REHM

10:46:18
All right. Thanks for calling. Jim Tankersley.

TANKERSLEY

10:46:21
I believe -- correct me if I'm wrong, guys -- that this is something on which we've seen a lot, at least rhetorical bipartisan agreement, that limiting farm subsidies, for example, would absolutely be -- I believe it's in the president's plan, too. It was in his offer to avert sequestration, and it is something that a lot of Republican members of Congress have expressed a lot of sympathy with.

TANKERSLEY

10:46:44
Also, this idea of what are called tax expenditures which are ways that we subsidize people by giving them tax breaks through the code. I think the problem with all of those, as I mentioned earlier in the show, is they have very specific constituencies around them. And it's hard to win passage of the repeal of subsidies when you have a very motivated interest group that benefits highly from them.

REHM

10:47:05
All right. Here's an email from Jean in Anderson, Ind. She says, "I don't believe this is about philosophical differences at all. Republicans had never agreed to work with the president on anything, whether it be the budget or who he wants in his Cabinet. Convince me it is still not about trying to make the president look bad." Kevin.

HASSETT

10:47:39
Back right after President Obama took office, I asked one of my close friends who's one of the top young Republicans on the House Ways and Means Committee, a very bright guy. I said, so they are designing all of this stuff right now. Has anyone asked you what you think ought to go in the bill? And he said, no. In fact, there's no Republican on Ways and Means Committee that has had any communication at all from Democrats.

HASSETT

10:48:04
No one has called up and said OK, we're going to give you one-tenth of 1 percent of this bill. What do you want it to be? There was zero. But then he added this as a joke. He said, but, you know, that upsets me, but I understand we just lost an election, and that's how it works sometimes. The people who are really upset are the Democrats on Ways and Means 'cause nobody asked them either. It was a total top-down bill.

HASSETT

10:48:24
And that the thing is that from the very, very beginning, and I think that we saw this also during the Bush administration, that there's been this absence of grace, letting the other guys have a little bit of a win, conceding that they might have an argument. And so for sure, there's a broke relationship and pointing at President Obama and saying he's 100 percent responsible would be inaccurate. But it's bilaterally broken because back to what Matthew said that they're all -- they are all to blame.

BERNSTEIN

10:48:50
I mean, President Obama says that, I tried to reach out to Republicans in my first term and was slapped away. And I, you know, I'm just not going to come back. I think it's just not true. No, no, I was there actually for half of the first term and a lot of that did occur. I mean, you'll recall...

REHM

10:49:12
Give me an example, Jared. I think, you know, I've heard this said -- I hear it said from both sides. Give me a specific example where President Obama reached out and was slapped down.

BERNSTEIN

10:49:24
Sure. I can give you a great -- well, I'll give you a great example. First of all, let's not forget that it was Mitch McConnell who has said, our first goal needs to be making sure this president doesn't get re-elected.

REHM

10:49:34
OK. Now, wait a minute. Stop right there. How do you interpret that?

HASSETT

10:49:39
He's dodging your question.

BERNSTEIN

10:49:39
No, no, I have...

REHM

10:49:40
No, no, no. I'm going to make him answer the question.

BERNSTEIN

10:49:42
I have another -- yeah.

REHM

10:49:43
But I want to hear your response.

HASSETT

10:49:44
Right. Partisans are partisan in a way that we don't find attractive as listeners and economists did. For sure, President Obama's job right now is to try to crush Republicans in the next election. He's made it clear that he wants to, and it's vice versa. They're in the bad relationship.

REHM

10:49:57
OK. You've gone (unintelligible).

BERNSTEIN

10:49:59
So here's my very tangible example. See, that was framing it and teeing it up. President Obama negotiated with Speaker Boehner before this budget deal that set up all this nonsense we're dealing with now, and they actually got pretty far. Speaker Boehner agreed to $800 billion in new tax revenues, OK? The president agreed to the kinds of cuts we were talking about earlier on entitlements. He went way outside of Democrats' comfort zone on this, but he was willing to make a deal.

BERNSTEIN

10:50:30
Speaker Boehner then came back and said, I cannot get to yes, I cannot get my conference to agree on this plan that we've just hammered out together. So the president, and, in fact, John Boehner agreed on a deal, but that deal never became law because Tea Party Republicans said, no, we will not accept new revenues. The president was then pilloried by Republicans for raising -- wanting to raise taxes, wanting to cut entitlements. And so I think, you know, once you try to compromise and you can't get to yes, then it teaches you.

REHM

10:51:07
All right. I want to take another call right along that line in Cincinnati, Ohio. Good morning, Nile.

NILE

10:51:15
Thanks for taking the call. I'm glad that the last speaker brought up the Tea Party because, in as far as I can see, it's the Tea Party that is responsible for all of this mess. They came into Congress, and they just said no to every single thing that the president ever proposed. They blocked and they filibustered, and they, I think, are responsible for destroying the fabric of the government.

REHM

10:51:43
Jim Tankersley, I want you to weigh in here from the perspective of reporting you've done.

TANKERSLEY

10:51:51
I would say from the perspective of reporting that I've done that we had real problems getting Democrats and Republicans to agree on things in Congress even before the Tea Party came in. And I would give the example of right after the president was elected when I was working for the Chicago Tribune and Los Angeles Times, I covered the -- I was covering climate and energy.

TANKERSLEY

10:52:09
And I covered the big push the president had for an energy bill, which passed the House and then got bogged down in the Senate where he had a Republican partner, where Lindsey Graham was working very hard with him on that. But they could not get a critical mass of Republicans or Democrats. They could not get to the 60 votes they needed.

TANKERSLEY

10:52:24
And it comes back to the Senate needing 60 votes for everything now, and that bogged down that bill, and it never -- nothing ever came of it. So I think we would be deluding ourselves to think that the Tea Party has been the start of dysfunction in this government. There has been dysfunction in this government, as Kevin was alluding back into the Bush years, and this is, again, I think a real function of the polarization of America.

REHM

10:52:48
And, Kevin, I want to ask you about the example that Jared put forward.

HASSETT

10:52:55
Well, I think it's an interesting example, first, because it came right at the end of the first term more or less, right? It was pretty late in the Obama administration example. And it is one example where there were negotiations going on, and it might have been the first time where they're actually trying to concede that, well, I have to do something if you wanted and so on. And so that was pretty late, but, you know, Bob Woodward doesn't cover it that way. My contacts on the Hill don't cover it that way.

HASSETT

10:53:20
They argue that the deal broke down because the president broke his word to them, that he said, we're going to do this, and then he change to do that. Actually, I wonder, Jim, if you have a take on this as a reporter because it's not something -- I wasn't in the room. Diane, you weren't in the room. We can't know exactly who's to blame on that.

REHM

10:53:34
Exactly.

HASSETT

10:53:35
But even -- but I think that it's interesting is just the one point that Jared's, you know, prime example of collegiality is itself in dispute, and it's not a Republican that's disputing it but Bob Woodward. And I think that's a metric of him not being collegial enough.

REHM

10:53:48
What do you think, Jim?

TANKERSLEY

10:53:50
I certainly didn't write a book about it like Bob Woodward did, and I wasn't covering the budget negotiations at the time. I certainly think the perception has been, again, that we have a total dearth of trust between these two parties, that the president's -- as Jared would say, Democrats adamantly believe that Boehner walked away from this, and the Republicans adamantly believed the president changed his word.

REHM

10:54:13
All right. And you're listening to "The Diane Rehm Show." And to Virginia Beach. Good morning, George. Thanks for joining us.

GEORGE

10:54:24
Good morning, Ms. Rehm. Two quick points, and on point, as far as government saving money and helping people, one, let's negotiate with Big Pharma about the price of drugs to Medicare, and, number two, let's decrease the age eligibility of Medicare from 65 to 60, which would have a lot of net positives in terms of cost both to the government and private business.

REHM

10:54:47
Steve Brill was on the program just last week talking about that very issue that is rather than arguing about raising the age of eligibility for Medicare lowering it. What -- how are Democrats reacting?

BERNSTEIN

10:55:07
Well, first of all, let me say that I listened to that show you did with Steve Brill, and I very much commend it. It's really important. He is not a health care wonk, which makes it, in many ways, all the more interesting 'cause this is just a journalist who sort of looked at all those hospital bills and worked backwards to find out all the profiteering and inefficiencies in the health care system.

BERNSTEIN

10:55:25
And he did make the case very strongly that Medicare, by dint of its large bargaining cloud, is able to get very good deals on drug prices. And, in fact, if you look at the increase in health care spending, it's much lower in Medicare and Medicaid than it is in the private sector. It's still too quick, but it's better. And so, yes, it would be a great idea to tap those efficiencies by lowering the eligibility age for Medicare.

BERNSTEIN

10:55:49
But you'd have to then find the resources to fund that. Now, those resources, as Brill said, would be saved if you took them from the private to the public sector. That is, you'd be spending less on private health care for 60 to 65 year olds, but you'll be spending more on Medicare. And expanding an entitlement right now kind of goes against the grain.

REHM

10:56:07
Kevin.

HASSETT

10:56:08
Yeah. You know, I don't want to give a knee-jerk, oh, that's a ridiculous idea, because I listen to your show almost every day, but I missed that one. And I just, you know, I haven't informed myself on what he's saying enough to have an opinion, but I think that...

REHM

10:56:18
It's a really good piece, a cover story in Time magazine last Monday, so take a good look. And, you know, all this talk, where do we go next to try to get some of this resolve, Jim?

TANKERSLEY

10:56:38
I'm going to give the answer that I've been giving for maybe three years now, 2 1/2 years. There is very smart, very well-respected economist named Doug Elmendorf, who's the head of the CBO, the Congressional Budget Office, and he has been saying for years that we need more juice for the economy now, coupled with a credible commitment to deficit reduction in the future and that those two things together could unlock a lot of growth, which will bring down the deficit.

REHM

10:57:07
Jim Tankersley of The Washington Post, Jared Bernstein of the Center on Budget and Policy Priorities, Kevin Hassett of the American Enterprise Institute. Let's hope that at some point, all these people can get together and do something. Thank you for being here. Thanks for listening. I'm Diane Rehm.
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