MS. DIANE REHMThanks for joining us. I'm Diane Rehm. President Obama will hold a press conference in about an hour. He's likely to defend the $3.7 trillion budget proposal he announced yesterday. He has described the plan as a down payment on fiscal reform. The proposal includes a five-year freeze on non-security discretionary spending and cuts the deficit by $1.1 trillion over the next decade. But many, including a number of House Republicans, believe his budget cuts don't begin to go far enough.

MS. DIANE REHMJoining me in the studio, Douglas Holtz-Eakin, he's president of the American Action Forum. Damian Paletta is a reporter for The Wall Street Journal. Joining us from a studio at the University of Texas, James Galbraith, and we certainly invite your calls, 800-433-8850. Send us your e-mail to drshow@wamu.org. Join us on Facebook or Twitter. Good morning to all of you.

MR. DOUGLAS HOLTZ-EAKINGood morning.

MR. DAMIAN PALETTAGood morning.

REHMDoug Holtz-Eakin, is the president likely to expand on his budget today at the press conference?

HOLTZ-EAKINWell, I certainly think we can expect more vigorous defense at the proposals he put out. He's received a lot of criticism because, in effect, this budget looks a lot like the budgets he's put out before -- trillion dollar deficits, no real plan to take on the large spending programs that threaten us with higher and higher debt in the future. And, you know, it is -- in the eyes of many who looked at last year's budget, saw big problems, and he came back with a commission that said, you know, this is a moment of truth in America, the time has passed for deferring tough decisions and playing budgetary games, and then seemingly discarded that advice and put out another budget full of deferring hard decisions and playing budgetary games.

REHMBut let's talk about some of the areas of agreement. Are there parts of the proposal that most members of Congress would support?

HOLTZ-EAKINI think if you divide the budget into three pieces, you've got the entitlement programs -- nothing is being done. You look at the revenue side of the equation -- it's the same proposals the administration has put out in the past, this time deferred till after the election. They saw no traction before. I don't see any reason to see that look different now. And that leaves the particulars of annual spending cuts in the defense and non-defense area. And I don't think it's an overstatement to say there's essentially no agreement on Capitol Hill at the moment.

REHMAt the same time, Damian Paletta, President Obama is proposing to dramatically trim or cut, all together, more than 200 federal programs. Give us a sense of those.

PALETTAThat's right. He really tried to focus. They want these programs to be things that resonate with people and things -- they want them to be programs that people would see what the impact would be so that it look like they're very serious about the cuts. We're talking about things like environmental protection, services for the poor, heating assistance for people, you know, that are low income, cuts to the Justice Department. He wants to cut agriculture subsidies -- things that would affect schools, businesses, families all across the country. Now, in aggregate, the dollar value of those cuts is, you know, very small compared to how much money the government spends each year. So that's what, I think, a lot of the criticism from the Hill has been.

PALETTAWhat's so interesting about this, this is his first budget since the November elections when the country's focuses really pivoted from the financial crisis to this idea of, you know, the fiscal problems that have burned through Europe. And so there was a lot of attention and expectation, which, quite frankly, the administration built up, you know, that this budget's going to be, you know, a symbol of what his presidency is going to do for the next two years. And there was outrage on the right who thought the cuts weren't enough and outrage on the left who thought the cuts would be too painful. So he really found himself kind of in this lonely spot where no one is really defending it at this point.

REHMJames Galbraith, how do you see it?

MR. JAMES GALBRAITHWell, from a political point of view, I think the president is actually in a rather good position, having elicited these complaints from both sides of the spectrum. I suspect that's very much what they had in mind when they designed this document. From an economic point of view, I find the whole discussion a little bit strange. In certain quarters, there seems to be a certain almost sadistic pleasure being taken in finding cuts that inflict real pain that cut back on worthwhile programs that diminish our ability to achieve important national objectives. There seems to be very little discussion of what is going to be lost in the face of an overwhelming desire to cut for the sake of cutting public spending. And I cannot see either the economic or the social logic in that.

REHMWhat about offsetting these cuts by new spending in other areas, James Galbraith?

GALBRAITHWell, there are some initiatives. The president, for example, has added, I think -- it's $80 million to train new science and technology, engineering, mathematics teachers. But one has to weigh that against the situation which is unfolding in public schools around the country. Here in Texas, my understanding is that there are large cuts being planned in the hiring in -- of existing teachers -- a firing of existing teachers in practically every school district in the state, partly as a result of the fading away of the stimulus money that was being used to keep teachers in place. So they have to raise the question, what do you gain by training new teachers when you're not providing the funds to retain the ones that you already have?

REHMJames Galbraith, an economist at the University of Texas at Austin's Lyndon B. Johnson School of Public Affairs. He is author of "The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too." You can join us, 800-433-8850. Send us your e-mail to drshow@wamu.org. Damian Paletta.

PALETTADiane, you raised a really good point. One of the theme's of this budget is not just cuts, but it's sort of redirecting money from some programs and the new ones, things that he think will get the economy going -- you know, invest in the future jobs, job creation, that sort of thing -- and that's one of the areas the Republicans really focused on yesterday. And their reaction was, why are we spending new money? You know, get -- we got this picture from the November elections we need to stop spending and cut, cut, cut. We cannot be redirecting money in the government programs. Let the private sector invest in economy and get -- let them get going.

REHMBut what about Jim Galbraith's point that what he seems to have done is almost sadistic in looking at home heating -- looking at programs that affect lower income people seems rather contradictory.

PALETTAWell, that's a really good point. And we asked that question yesterday when the OMB director, Jack Lew, had a press conference. I mean, these are -- some of these cuts are really going to hurt people. And, you know, low income -- it's $2.5 billion dollars heating assistance and, you know -- but if you live in New England in the winter, that's -- you know, you're going to literally feel that.

REHMBig time.

PALETTAYeah.

REHMBig time. Doug.

HOLTZ-EAKINWell, I want to, first of all, agree with what Mr. Galbraith said about this being a carefully honed political document. I mean, certainly, it puts off all real budgetary stringency till after the election. It fixes the doctors until the election. It doesn't raise any taxes until after the election. The real -- 95 percent of the cuts come after the first two years. And, I think, you ought to look at it through a political prism. And, in that light, what the administration has done is put out a budget that says, we're going to cut the things Congress never cuts. And I don't think they expect Congress to cut those. These are entirely symbolic moves not meant to be real, and, as a result, they do not actually provide the leadership.

HOLTZ-EAKINAnd we've heard this from both sides of the aisle -- Kent Conrad and the Senate Budget Committee, many Republicans -- about the president needing to lead on this issue, which is not about cutting for the sake of cutting. It's about cutting because we owe it to the next generations to leave behind not a massive pile of debt and a broken economy, but a standard of living higher than what we inherited and the capacity to retain some of the earnings without paying higher taxes. So that vision of what is needed at this moment, what his own commission said was the moment of truth for America is missing entirely from this debate.

REHMSo what would be missing, in your eyes, would be the entitlement programs.

HOLTZ-EAKINNo question. That's 60 percent of the budget. That's where the money is.

REHMSixty percent of the budget, and that's where the money goes and no mention of it, Damian.

PALETTAA very small mention of Medicare and Medicaid. He was interesting. He did lay out some principles for reform of Social Security, but they, you know -- they really weren't that substantive. And I think what the administration says is, we're willing to work on these things. Let's all come to the table together. We don't want to jump off this bridge by ourselves, you know, and take arrows like President Bush did when he had his Social Security proposal several years ago.

REHMAnd came up with three different plans.

PALETTAExactly. So what they're saying is, let's all come to the table together and do this. Republicans are saying, you're the president, you're supposed to lead, you know. Come on and show us your plans.

REHMSo, James Galbraith, if the president had touched Social Security, would Republicans have fallen in line with it?

GALBRAITHNo, of course not. The Republican objective is to defeat the president at the next election. But I'm glad he left Social Security alone. I'm glad he largely left Medicare alone. These are two of the most successful, efficient and popular programs that the United States has ever had, that they are vital to the living standard of our elderly population, and they are not excessive. Certainly, Social Security benefits do not provide a lavish standard of living for most people who rely on them.

REHMBut wouldn't it have been a positive move to at least put in his feeling that the retirement age should be raised by two years over the next 20 years?

GALBRAITHRaising retirement age is simply a disguised -- a thinly disguised cut in the benefits that are received immediately by people who are obliged for one reason or another to retire early, and that tends to be lower income people and people who've worked for a long time in very physically demanding and debilitating jobs. So it is an attack directly on the weakest, most vulnerable part of the elderly population. It's a very bad idea, not withstanding the fact that it's very widely accepted in Washington circles. So I'm very glad that the president seems to be coming around to the position that Social Security should be left alone, not only because it's a vital and successful program, but also because it doesn't actually add anything to the budget deficit when you take into the count -- account the fact that it has a dedicated revenue.

REHMJames Galbraith, an economist at the University of Texas at Austin. Short break. We'll be right back.

REHMAnd we're back. Just before the break, we were talking with James Galbraith about Social Security. He feels it's absolutely right that the president didn't touch that. You, Doug Eakin, don't feel the same way.

HOLTZ-EAKINNo, not at all. On the facts, Social Security is running a deficit, and it will run larger deficits going forward. And so it is contributing to our overall fiscal problem. Secondly, no current retiree or even near-retiree is going to be affected a bit by Social Security reform. This is really about making sure the program lasts for the next generations. This is all about the kids, and that's what this debate should be about -- what are we going to leave for our kids -- instead of the current debate over what are we going to take from a couple of special interests in the United States. And so the urgency to do it...

REHMSo why haven't Republicans proposed the same thing?

HOLTZ-EAKINIt's not to their credit. I mean, this is where 60 percent of the cuts have to be, and (unintelligible) the budget is. And we'll see. I mean, here's the moment. So far, we've had the president's budget. Now, the House will have to have a budget resolution. Senate will have to have a budget resolution. That's a chance to articulate a complete vision of what those bodies want to have for the future of the United States. And we hope it's better.

REHMAnd neither Democrats, nor Republicans, want to go first.

PALETTAWell, that's right. And if there's one constituency in every district or state across the country, it's the seniors. And it's the -- the people who vote are the seniors, and it's the people that come to the town hall meetings. And they feel very passionately about this, and they've been paying into the system forever. And it -- I think both sides have tried to say, we're not going to touch any programs for people under 55 or 50, but, you know, the people get very nervous about any talk about touching Social Security.

PALETTANow, it's not just -- some of the proposals are not just raising the retirement age. They have different ideas about indexing how much people can get paid, also changing how much money people pay into the system, maybe you pay taxes on a higher, you know, threshold of your income. So there's a whole different platform of ideas, but they're really nervous about going there.

GALBRAITH(unintelligible)

HOLTZ-EAKINBut I think there's really (unintelligible) overstate that...

REHMHold on, Jamie. Go ahead.

HOLTZ-EAKIN...because, if you think back to the president's commission, Bowles-Simpson. When they put their proposals out, they touched Social Security. They did a lot of things which were actually exactly the right thing to do. Everyone waited with bated breath, that these actual sitting politicians would vote for something that did that. There's no outrage. People understand this. People affected the fall elections. People understand that we're going to have to tighten our belt. So this conventional wisdom is just wrong, and it's time for politicians to update where we are in America.

REHMJamie Galbraith.

GALBRAITHSocial Security does a good deal more than protect the elderly. It also protects working people from the burden of having to support their own parents directly, and it protects a great many survivors and dependents. So it is a program which is deeply embedded in the fabric of American society. And, I think, there is no question that it is, as it presently stands, sustainable into the long-term future. I completely disagree with Doug Holtz-Eakin on that -- on his position on that point.

REHMBut aren't we talking about the recommendation that came from that commission talking about raising the retirement age two years in something like 2075? Damian.

GALBRAITHIt's worth pointing out that that commission did not have the threshold vote that it set up for itself as requirement for getting a vote in Congress. So its recommendations were the recommendations of a plurality on the commission, but they were essentially null and void.

PALETTAThey definitely came a lot closer than many people thought, though. And they did, you know, manage...

HOLTZ-EAKINWas that as a criterion?

PALETTAWell...

HOLTZ-EAKINThey said 14 votes. They didn't get them.

PALETTAThey managed to get people as diverse as Dick Durbin, the liberal Democrat from Illinois, and Tam Coburn, the, you know, conservative Republican from Oklahoma. I think the message that people got from that -- I mean, that process ended up getting people's attention, I think. And it said, okay...

GALBRAITHThe commission did what all commissions did, which was to put that issue basically into a closet until after the midterm elections and then bury it afterwards, which is fine. I have no problem with that. But to treat it as more than it was, I think, would be a mistake.

REHMGo ahead, Damian.

PALETTAWell, one thing that's so interesting about all this, I mean, a lot of people across the country listen to Washington and the Republicans and Democrats yelling at each other and say, what else is new? You know, this is just the way Washington works. There's real consequences for this debate we're having right now, and they're in the near term. I mean, there's a debate -- you know, President Obama's proposal was for 2012. The debate right now in Capitol Hill is about the rest of 2011.

REHMRight.

PALETTAAnd in the way they have the funding set up, the government runs out of money March 4, right? They have to pass a new bill to create new funding for the government to operate...

REHMWhich they will.

PALETTAWell...

REHMWhich they will.

PALETTAWell, you're looking into a crystal ball. I mean, it -- the White House and the Republicans are miles apart right now. And no one expects there to be a government shutdown, but the stakes are really high. The rhetoric is really flying around town, and there are some major decisions that have to be made in the next couple of weeks.

REHMLet's talk about 2011 for a moment, Doug.

HOLTZ-EAKINOne of the important things about 2011 -- and it seems to be lost in this debate -- is that we already have enough federal debt relative to GDP to meet the historic criteria for a financial crisis. The elaborate work over centuries and centuries...

GALBRAITHNo, we don't.

HOLTZ-EAKINIt's just factually wrong, Mr. Galbraith. Ken Rogoff and Carmen Reinhart have said that dividing line gross public debt (word?) GDP of 90 percent is where economic growth simply...

REHMHell, hold on. Hold on, James.

HOLTZ-EAKINThese are just the research facts, say, that's the dividing line between a high probability of financial crisis and a low one, good economic performance and worse -- 1 percentage point difference in GDP growth. This is the imperative of the moment, which is to grow, create jobs for Americans and to lose sight of the fact that if we don't address these issues, we imperil our ability to do that, I think, and get that lost in the debate over House, Senate, Republican and Democrat is to miss the big picture.

REHMAll right. Let's hear from James.

GALBRAITHOkay. In the first place, about a third of U.S. government debt is held by agencies with the government itself. When you take out that third, the levels of our debt are not high by comparison with their own history, their -- roughly where they were in the mid-1950s, and they're not high by comparison with other advanced countries around the world. But beyond that, there is a fundamental difference between the United States and the countries of the eurozone, which are in trouble, still less the countries of other parts of the world which borrow in dollars. We borrow in a currency that we control.

GALBRAITHThere is absolutely no way that the government of the United States is going to default on its debts. And the capital markets know this, which is why U.S. Treasury bonds and bills remain the place that capital flows to in times of trouble. That is why, in the crisis, yields on U.S. Treasury bonds and bills fell rather than rose while they rose sharply in, let's say, the Mediterranean countries of Europe and elsewhere in the world. We are not in danger of defaulting unless the Congress does something extraordinarily insane and orders the government to default.

REHMOkay.

GALBRAITHIn which case, of course, it's on their responsibility.

REHMDoug, what I'd like to know is how do the cuts proposed in the president's 2012 plan compare with the cuts Republicans hope to make in the current fiscal year?

HOLTZ-EAKINWell, it's hard to compare them because it's not apples to apples. I mean, in cleaning up the 2011 budget, which never passed by Congress, you have only a limited set of leverage you can pull, and they're heavily concentrated in the non-defense, non-security they call discretionary spending. The president had the whole budget with which to play. Having said that, you've seen the president take on more programs with less deep cuts than you've seen the Republicans, thus far, talk about.

HOLTZ-EAKINAnd the real action, quite frankly, begins today in the debate over the continuing resolution. It's going to be today, tomorrow, Thursday. It will be, I think, an important debate because we will see the divides within the Republican Party as well as between the parties, and we'll start to get some sense of the ability of the Conservatives to articulate not just the ability to cut, but the -- to articulate the meaningfulness of their cuts and the foundations, both moral and economic.

REHMDamian.

PALETTATo show how interesting this is, you know, the Speaker of the House, John Boehner, had proposed some pretty significant cuts, and then a lot of the Tea Party members of the Republican House said no, no, no. We won't win more than that. And so the Republican leadership is also having to come to grips with this new kind of political reality in town, you know, very different philosophy from what the White House is doing about this cut and invest idea. They want cuts. They want the Obama government spending to shrink, and they want it done immediately.

REHMWhat about defense spending, Damian?

PALETTAThat's a -- that's a third rail, you know, as much as Social Security. And one of the...

REHMEverything's a third rail, for heaven's sake.

PALETTAThat's why they're focusing on some of these, you know, really small programs. But defense spending, it's a little confusing what they did -- what they proposed yesterday. It, essentially, would cut the growth of defense spending over five years, and it's a significant amount of money -- about $80 billion. But it wouldn't, you know, take -- it wouldn't really slash major defense programs. They're sort of cutting some programs and reinvesting in others.

HOLTZ-EAKINI think the defense is a big deal.

GALBRAITHThe veteran budget expert...

HOLTZ-EAKINSo go ahead, and then I'll make mine.

REHMGo ahead.

GALBRAITHYeah, the veteran budget expert, Scott Lilly, published a piece a couple of days ago in which he pointed out that Mr. Boehner, in the midst of all of his cuts, had managed to preserve what is essentially an earmark for a $450 million program to build a second jet engine for the Joint Strike Fighter -- happens to be built in Dayton, Ohio, which is in Mr. Boehner's district.

GALBRAITHAnd this is in spite of the fact that the Pentagon doesn't actually want the engine, doesn't need a second engine. The plane already has one. So it's interesting to see that, in spite all of the talk about waste and inefficiency and the need to cut, when it comes to something that is home district, the Republicans are behaving the way any politician always has, except that it's in such flagrant conflict with what they'd like to do with every program that doesn't affect their direct constituents maybe so much.

REHMDoug.

HOLTZ-EAKINSo, in a cosmic convergence, that's the point I was going to make, which is that defense can't be off-limits. I don't think anyone who studied the defense budget and compared it to what -- for example, the quadrennial defense review by either the Obama administration or the Bush administration says we need -- they don't match at all. And the litmus test is things like a second engine for the Joint Strike Fighter, which is something the administration's on the right side of, which Secretary Gates has said multiple times is not needed.

REHMWe don't need.

HOLTZ-EAKINIn which it's had its protectors on both sides of the aisle in Capitol Hill. And we will genuinely be serious about addressing the needs of this country when the need to cut these things out trumps the local politics.

REHMSo what about...

HOLTZ-EAKINAnd that's a crucial test that's going to happen. Say there's going to be an amendment offered to put that second engine back in and it shouldn't be there, and we'll see.

REHMAnd where is the Tea Party going to be on...

HOLTZ-EAKINThey're going to say, kiss the engine good-bye and maybe in less gracious language.

REHMDo you think?

PALETTAI think they will. I mean, they have really been able to hold ranks and -- on this. And they've gotten everyone's attention, and it's going to be really hard for folks to vote -- to cast votes that they could potentially be campaigning, trying -- having to defend, you know, in just less than two years.

REHMBut why would Boehner do that when it's such an obvious ploy and in an atmosphere where people are saying, you've got to cut?

PALETTAI think it's a good question. It's a little confusing to see, you know, who's fingerprints were necessarily on that. There's a lot -- there's so many defense programs, and they're so expensive that -- and they have such defenders, like Doug said, on the left and the right that I think if once people are sort of called out on some of these things, in this environment, they might just say forget it.

GALBRAITHI think the only defense -- not the best that one can come up with -- is that Republicans are trying to do what they can on the CR, but they're also trying to hold some opportunities for when they do their budget and have some, you know, a chance to do...

REHMSome trading away stuff.

GALBRAITHSo let's not do everything in the continuing resolution for the last year's budget. Let's have some things that we set up for next year. Other than that, I can't give you good defense.

REHMYou know, it comes back to what Washington does in the way of politics, which is not too pleasant every now and then. All right. And at -- you're listening to "The Diane Rehm Show." Let's open the phones now, 800-433-8850. To West Palm Beach, Fla. Good morning, Chris. You're on the air.

CHRISThank you. Two quick questions.

REHMSure.

CHRISWhy does no one ever talk about raising the income threshold for Social Security? In Roosevelt's time, $100,000 and change was a lot of money. It is not now. And, number two, when one speaks of entitlement, does that include the millions of retirement pensions that our legislators get via the taxpayer?

REHMAll right. Doug.

HOLTZ-EAKINPeople do mention raising the taxable cap on Social Security. It was one of the Bowles-Simpson suggestions. And it's become a standard part of the dialogue in all Social Security reforms. So I would be surprised if that disappeared from the radar any time soon. And at the federal level certainly and, especially, at the state and local level, the pensions of government employees are becoming an increasingly apparent budgetary stress. And I can't imagine that the American public will put up with a strategy that insulates the federal government from any sort of cuts while imposing them on programs that, in many ways, are popular and serve needs.

HOLTZ-EAKINI mean, this is all about tradeoffs between what you get now versus what's left for the future. And it's painful to give things up now in the interest of the future. The federal government is not going to be exempt.

REHMAll right. To McKinney, Texas. Hi there, Michael.

MICHAELGood morning. I wanted to just have one comment in regards to the opposition to Obama's current budget proposal from both sides. I just want to say that it's a good thing from both sides. Whether you're a Republican or a Democrat, it's a good thing because, at this point, it finally has both sides taking the budget seriously, spending seriously. And it's something that we have not done in Congress over the past eight, 10, 12 years.

REHMDamian.

PALETTAI think that's a really interesting point. And, like I said, we've shifted from this debate about the financial crisis and what we should do to the -- everyone is focused in Washington on government spending and the size of government. And, I think, what happened in Europe, you know, with Greece and Ireland really was a wakeup call to the -- to a lot of people in this country. And one thing that no one has done, though, is sort of called anyone's bluff. So, you know, the president's held back on Social Security and Medicare, afraid that, if they propose something, Republicans will attack it.

PALETTASome Republicans say, we won't, we're serious. We'll, you know -- we'll really work with you. And I think that was one of the messages that came out of that Bowles-Simpson exercise. So, you know, it's come to the point now where someone's going to have to, you know, make that first step.

REHMMake that first step and see how the water changes. To Kirkwood, Mo., and to -- let's see, Margie. Good morning, Margie. Margie, are you there?

MARGIEI'm there. Yes, thank you. And I love your show.

REHMThank you.

MARGIEI'd like to know why, during all of this discussion of our budget, nobody discusses how much the war in Afghanistan and the war in Iraq is costing this country.

REHMDoug.

HOLTZ-EAKINThose costs are unmistakable, but, I think, the focus of this budget is about the future. And the troubling part for most budget analysts has been that, if you roll the clock forward 10 years to 2021, you have budgets where the wars are soon to -- have long since been over, the financial crisis is a memory, the economy is supposed to be back to full employment and ticking along, and we still have enormous financial problems. And it's that future, despite everything supposedly going well, the budget being so bad. That's what troubles people.

REHMDamian.

PALETTAOne of the things that the wars and their costs remind us of, though, is we never know what the world is going to look like in 10 years. You know, you never know what the unexpected costs are going to be. You can try to project and cut and trim here and prepare for the retiring baby boomers. But who knows what the world and the Middle East will look like in 10 years and what the involvement that the U.S. is going to be abroad? I mean, that's -- that can sort of blow up the whole budget and change the way everything is going.

REHMAnd, of course, as we mentioned earlier, you've got the president having a press conference today. To what extent do you think, Doug, he's going to be talking about what's happening around the world as well as his own budget?

HOLTZ-EAKINI fully expect that he will come out, say some things about his budget, defend it on its merits and then quickly change the subject because there are important events around the world. And had -- they have a legitimate need for presidential attention, and he, quite frankly, is showing no appetite to lead on this. He wants to leave it on Capitol Hill, and that's exactly what he's going to do.

REHMDouglas Holts-Eakin. And we'll take a short break here. When we come back, more of your calls. I look forward to hearing from you.

REHMAnd we're back, talking about the president's budget, which was unveiled yesterday. At the top of the hour, he is going to have a press conference in which he'll likely be defending that budget and perhaps talking about events happening around the world as well. Here's an e-mail from James in Dayton, Ohio. He first says, "Your show is always on in my office, which I love." He says, "Your guest's statement a few minutes ago that Speaker John Boehner's home district is in Dayton, Ohio, is incorrect. He represents the west central part of Ohio. But the Dayton area is represented by Congressman Michael Turner with assistance since Wright-Patterson Air Force Base is also in Green County by Congressman Mike Austria, who is on the Appropriations Committee."

GALBRAITHWe stand corrected.

REHMOkay. All right. Thank you very much. Let's go to Tacoma, Wash. Hi there, Robert.

ROBERTHi. I have a quick comment about defense spending.

REHMSure.

ROBERTI'm in the Army, and I've spent two years in Iraq. And I've seen a lot of unnecessary excessive spending with contracting via agencies and things like this. It's just kind of astounding that, in spite of all of this, there's always emphasis on cutting Medicaid, Medicare and entitlements. And there's nobody really talking about defense spending, like it's some kind of taboo thing. So it's kind of irritating as a soldier.

REHMDamian.

PALETTADefense spending, I think, is about $750 billion in the budget. I mean, it's a large portion of a $3.7 trillion budget. And, I think, one thing that we were starting to see -- I mean, both parties -- Democrats have always kind of wanted to go after defense spending more aggressively. But Republicans, in the last, you know, six months, have said, okay, we'll put it on the table. Let's put a lot of programs on the table. We're willing to talk about defense spending because there's no way to really cut the budget and get into the deficit unless you go at defense spending.

PALETTABut one of the things, like we were talking about, you have to -- then you start looking at individual programs. We were talking, you know, earlier about this -- the health program in the Defense Department called TRICARE. That's -- I think it's over 10, 15 percent of the Defense Department's budget is their health care program. So they have a lot of different programs, and each one has its own defenders, you know, quite frankly, on both sides of the aisle.

REHMAnd for James Galbraith, here's an e-mail from Tony in Grand Rapids, Mich., who says, "I think President Obama's budget is a finely calculated fiscal and political move. It shows we need to cut spending and raise taxes and that this will be painful for a populous still struggling with the economy. If the Republicans push their agenda -- deeper cuts in spending -- causing even more damage to the economy when it still needs a boost, it will not be popular come election time in 2012." James.

GALBRAITHI think that's an entirely correct statement. It is a finely calculated political move. What frustrates me as an economist is that there is very little in the budget which addresses the ongoing problems that we face right now. We have not...

REHMSuch as?

GALBRAITH... recovered from the financial crisis. We have a massive crisis in the housing sector, massive crisis of foreclosures. We still have 9 percent officially unemployed and a great many more people who have withdrawn from the labor force. We are not addressing those problems. As Doug said, the official approach is to assume that they will go away over five or 10 years on their own. But that's extremely questionable. It's extremely doubtful. And to the extent that we continue to have a depressed housing sector, continue to have a high unemployment rate, we are going to have a high budget deficit no matter what the budgeters attempt to do. But with changes in spending or taxes because the economy will not recover by enough to generate the revenues, that would reduce that gap.

REHMDamian.

GALBRAITHSo that's the issue, and I don't think the issue is being addressed by either the president or the Republicans in Congress. In fact, it's being denied by both of them.

PALETTAHe raises a point that's on the minds of so many people right now. I mean, 9 percent unemployment rate, the fact that it has come down so much and it's still at 9 percent is -- and that's a scary, scary number. And the housing market, I mean, they're really confounded about what to do, you know, to get the housing market thought out and to get homes moving again. So those are -- the administration really feels passionately that the economy isn't fixed -- it might be on the mend, but there are some major problem spots -- and that they need to -- that's why they have this kind of reinvest, you know -- redirect money in the budget to get the economy going.

REHMHere is an e-mail from Bill in Sylvania, Ohio, who says, "Remember the base closing study that was done years ago and then promptly shelved? Let's revisit that and actually do something with it." Damian.

PALETTAI think some people think that's the kind of model that they're going to have to do, is sort of get everyone in a room, put everything on the table, you know, take away some of these parochial interests and try to get some kind of deal making done. The problem is it's unclear who would sort of be negotiating with who. There are these different factions within the Democratic Party, different factions within the Republican Party. The administration seems a little cautious about, you know, how to approach this. So,, I think it might be hard to get to that position where everyone's around the table.

REHMAll right. To Tampa, Fla. Good morning, Ivan.

IVANGood morning. My comments are related to the beginning of your show when you stated that you don't want to pass on a tremendous debt to the next generation. What it comes down to -- if I were Boehner, I would send back to the president a simple statement that says, you propose that the government has $2.6 trillion in revenue. Please send us a budget that exists within that $2.6 trillion envelope. Because what's happening now is when your people talk about the entitlement programs, they're missing the most significant entitlement program of all. And that is the interest that has to be paid on a $15 trillion loan.

HOLTZ-EAKINWell, certainly, one of the reasons to get the debt under control is this. If you go out to 2020, we're going to be spending a trillion dollars a year on interest. It's an extraordinary number. It reduces your ability to have any flexibility in the budget 'cause you have to pay it, reduces your ability to meet needs in other programs, and, you know, the Speaker is going to have an opportunity. Republicans and Conservatives in the House are going to have their opportunity. They're going to get to draft a budget resolution. They can put it on the floor of the House. They can debate it on its economic and political merits. And that is coming, and so this debate is far from over. This is the opening bid in what will be the fiscal future of the United States -- far from the last word.

REHMTo...

GALBRAITHIf I could just add.

REHMSure. Go ahead.

GALBRAITHIn the history of the United States, there have been only about seven short occasions when the government's revenues have matched or exceeded its expenditures. We always run deficits. It is the normal practice, not only of our government but of all large governments. And it is essential and a fact, in fact, for the economy to grow that we do so. When the government takes in too much revenue relative to expenditure, the private economy shrinks. The two are in a kind of balanced or reciprocal relationship to each other. So that's really not the issue.

GALBRAITHI also want to contest the scare numbers on future interest payments because they depend very much on an assumed track of interest rates. And there's just really no reason to expect, as the CBO does, that the Federal Reserve will raise the interest rate on short-term government debt from zero to 5 percent in the next few years with no change in inflation. Those assumptions are really extremely questionable and so are the projections which make the debt and the deficit into the largest problems.

GALBRAITHThe largest problems that we face right now are unemployment, they're energy, they're climate change, that the challenges that we face to build a country and an economy going forward with which we can live and work in some comfort and security, they -- the accounting issues facing the federal government, which everybody seems to get fixated on, are very small in relationship to those real problems, which are real physical and economic challenges.

REHMDoug.

HOLTZ-EAKINSo that's a recipe for continuing down a course that international rating agencies have said are unsustainable, that economists of all stripes have said is unsustainable and that, you know, thoughtful politicians on both sides of the aisle and the president's fiscal commission said -- and a private sector commission led by Alice Rivlin and former Sen. Pete Domenici -- there is literally no reason to be that complacent about what we are doing to the future of this country and the next generations. And action is imperative, and quick action is imperative as well because the baby boom is now retiring. Many of the spending pressures come from the demography.

HOLTZ-EAKINThe sooner we address the solvency of these programs over the long term, the sooner we will have addressed the fundamental question on which you can build all these other policy goals. But we have to have a decent foundation, and we don't have one right now.

REHMDouglas Holtz-Eakin is president of the American Action Forum, chief economist, director of the Congressional Budget Office from 2003 to 2006. And you're listening to "The Diane Rehm Show." And, now, to Hap who's in to Greensboro, N.C. Hi, there.

HAPYes, thank you. I have two suggestions, and I would like your feedback on it. It seems that I'm not sure there's a nickel's worth of difference between Republicans and Democrats. But if the Republicans want to make a show -- they want to roll back Obama's health care package. Why not start with putting it all on equal footing and get rid of the special health care that members of Congress have, and then start from there? And the other would be, how much would we save if we just had the flat tax -- do away with the IRS?

HOLTZ-EAKINOn the latter, Conservatives love flat taxes. You still need an IRS to collect them. And, I think, one of the lessons, again, of the recent bipartisan reform commissions we've seen is that the route to better -- to route to higher revenue and the route to better growth in the United States is through tax reform. And, certainly, that is on everyone's radar screen.

REHMAnd, certainly, on the president's as well.

HOLTZ-EAKINYes, yeah, the president has...

REHMYeah.

HOLTZ-EAKIN...talked about the desirability...

REHMRight.

HOLTZ-EAKIN...of revenue-neutral corporate tax reform -- one piece of the puzzle. I don't think there's any dispute about that. That's a -- I will point out that we have an income tax that's almost 100 years old, and we've had one -- count them, one -- serious tax reform in 1986. So this isn't going to be easy.

REHMWhat about health care, James Galbraith?

GALBRAITHWell, the gentleman who just called suggested putting everybody on the same footing. One way to do that would be to go to a single payer system and put everybody, basically, under Medicare. And that would reduce the burden of health care on the economy as a whole because Medicare pays less than the private system does. So when one wanted to proceed down a -- you know, a path of fundamental reform, that would be a way of doing it. What we're going to see, however, instead is a very evolutionary process on which, I think, the health care reform bill that was -- that has been enacted represents a certain degree of progress. But whether it provides us with a sustainable system, is still, I think, very much in doubt.

REHMHere's an e-mail from Bill in Miami, Fla. He says, "It's hard to believe this discussion has not mentioned the American budget for war. Here is the current budget. Defense Department gets $720 billion, CIA and other spy agencies get $80 billion, Homeland Security gets $45 billion, the VA gets $120 billion, interest on the national debt -- due to wars -- at least $100 billion, Guantanamo and other prison camps, $10 billion, State Department and aid budgets for war, billions in other agencies. Total for war making, at least $1.3 trillion." Do you come to the same conclusion, Damian?

PALETTAI think when you add all those numbers together, it is -- it's kind of scary. I mean, when you look at the size of the, you know, amount of money the government spends every year, we're talking about $3.7 trillion with a T. And to think that over a trillion dollars of that is in some sort military or defense, you know, area, you know, that's a lot of money. I mean, the -- although this country takes great pride in its ability to defend itself, and there's a lot of veterans who have, you know, done a lot for this country. And so going into the programs, I mean, it's really hard to go into any sort of defense program, especially when you're talking about defense health care, defense -- you know, the veterans. I mean, that's -- those are really sensitive areas.

REHMBut if we were no longer in Iraq or Afghanistan, how much money would there be, Doug?

HOLTZ-EAKINWell, I mean, we are essentially out of Iraq. But, remember, the entire cost of the war in Iraq cost less than the stimulus bill. So people think these are the biggest numbers we've seen in the budget -- they're not. And the Defense Department is not all about war-fighting capability. I think that's very important. This is one of the reasons why defense can't be off the table. There's a lot of it that's health. There's a lot of it that's retirement benefits. There's a lot of it which is, quite frankly -- you know, this is the big corporate welfare state. And we are, for example, developing an amphibious landing capability when we haven't landed an amphibious force since Inchon. And it's hard to believe that's about war-fighting capability. That's about the contractors.

GALBRAITHThe wars in Iraq and Afghanistan will continue to cost us for decades because we have many tens of thousands of young soldiers who have returned from those wars with injuries or disabilities who will require care for the rest of their lives -- 50 or 60 years in many cases. And those -- that care is extremely expensive, so one of the points about war is that, when we get into one, we should do so with extraordinary caution because the costs don't just end when the war ends. They go on, not only in human terms, but in financial terms for another lifetime.

REHMAnybody care to project what this budget is going to look like after everybody has had a say in it?

HOLTZ-EAKINWell, I will simply say that I hope we have one. One of the great failures of governance in recent years is the failure to even have a budget. We didn't have one at all for 2011. We never finish the spending bills on time. And my reading of the recent electoral fortunes of Republican and Democrats alike is the American people are sick of someone who can't run the government. And it's time to run the government. So we shall see.

REHMWell, you're talking about Republican difficulties within their own party as well as Democratic difficulties.

HOLTZ-EAKINYeah, last year, Democrats never passed a budget in the House for the first time in history. This year, Republicans are clearly going to have to meet that test. But the broader issue is, can we get a system that actually effectively runs the government? That's the question.

REHMDouglas Holtz-Eakin, he is the president at the American Action Forum. Damian Paletta is a reporter for The Wall Street Journal. James Galbraith is at University of Texas. He is the author of "The Predator State: How Conservatives Abandoned The Free Market And Why Liberal Should Too." Thanks for being with us. Thanks for listening, all. I'm Diane Rehm.

ANNOUNCER"The Diane Rehm Show" is produced by Sandra Pinkard, Nancy Robertson, Susan Nabors, Denise Couture and Monique Nazareth. The engineer is Tobey Schreiner. Dorie Anisman answers the phones. Visit drshow.org for audio archives, transcripts, podcasts and CD sales. Call 202-885-1200 for more information. Our e-mail address is drshow@wamu.org. And we're on Facebook and Twitter. This program comes to you from American University in Washington. This is NPR.