MR. TERENCE SMITHThanks for joining us. I'm Terence Smith, sitting in for Diane Rehm. She'll be back tomorrow. President Obama is stepping up his involvement in deficit reduction negotiations. This morning, he and Vice President Biden will meet with Senate Majority Leader Reid. Later in the day, they'll meet with Minority Leader McConnell. Talks on long-term deficit reduction led the vice president -- by the vice president broke down last week.

MR. TERENCE SMITHIf no bipartisan agreement is reached, the nation could face default in August. Joining me in the studio to discuss what's at stake are Jared Bernstein of the Center on Budget and Policy Priorities, Janet Hook of The Wall Street Journal and Kevin Hassett of the American Enterprise Institute. Welcome to you all. Topic could not be more on the news.

MR. TERENCE SMITHJanet Hook, tell us what the expectations are for these two very high-level meetings today at the White House.

MS. JANET HOOKWell, the thing you can see in these meetings, first of all, is it is -- whatever comes out of them, it's kind of a fresh start for the budget talks, which is that there are three new faces in the room that haven't been playing such a high-profile role: President Obama, Harry Reid and Mitch McConnell. They're very important to the outcome of the deal. But, so far, the negotiations with Vice President Biden have been going on with other people.

MS. JANET HOOKSo it may be that get some new faces, some fresh voices, it might -- there's some potential for changing the dynamic. There's no sign going into the meeting that they will. The Democrats, including Harry Reid, are still saying no big cuts in Medicare entitlements. And Mitch McConnell is still saying hell no to any kind of tax increases.

MS. JANET HOOKBut I do think that it's important that what we've got is a situation where the Biden group came up, negotiated for seven weeks, came up with a bunch of ideas, and it broke down over taxes. And it became clear that this was an issue that needed a higher pay grade. And so these are the big guns coming in to talk about it.

SMITHKevin Hassett, are there any expectations of an actual deal coming out of these talks today?

MR. KEVIN HASSETTWell, I don't know if we'll see the deal today. But there is something of an urgency for a deal because, whatever deal they arrive at, they then have to put into legislative language. And they're going to want to pass that before they all go home in August. And it takes, you know, three or four weeks, often, to translate things into legislative language.

MR. KEVIN HASSETTSo I think that if there's going to be a deal without just as an extension, so what they might do is just kick it down the road, lift the debt limit just a smidge so that they kick it down to September and then announce the deal in September. If they're not going to take that path, then we need to see a deal really soon.

SMITHIsn't that sort of a legislative equivalent of an Excedrin headache? I mean, it's just -- it never goes away that way.

HASSETTYeah, that's right. But the thing -- yeah, I went back -- and, look, like, since I was born -- and I don't want to signal how old I am -- but there have been 63 struggles over the debt limit.

SMITHOh, no...

HASSETTAnd everyone turned out okay. And so it's kind of like in "Shakespeare in Love," where they say it's the mystery in theater. Somehow it always works out well. The debt limit somehow always works out, too. And, often, it's really a great theater. And that's what we're seeing right now.

SMITHWell, Jared Bernstein, I think everybody has assumed, frankly, that this is more brinkmanship and, as Kevin suggests, well, we'll reach an answer and a satisfactory one by the deadline. Do you agree?

MR. JARED BERNSTEINI do. But I'm more nervous now than I was last week. I think that the brinkmanship is especially unsettling, given how tough the underlying economy is. I mean, of those 63 debt limit arguments, it's a whole different thing to have an argument when the unemployment rate is 5 percent and there is not 20-plus million people either out of work or underemployed.

MR. JARED BERNSTEINSo the idea that you're fooling around for political leverage at the time when the economy is vulnerable is just, really, very unfortunate. And I've been writing, and, you know, I think, in fairly strong terms, that these guys need to sit down and get this job done.

SMITHMm hmm. Now, Janet was suggesting that certain things were agreed to in these several weeks of negotiations. And you recently served as chief economist and economic policy adviser to Vice President Biden. From your understanding, what were the areas of agreement that were reached? And how significant are they?

BERNSTEINWell, they're significant. They're exclusively in the area of spending cuts. Obviously the reason that Rep. Cantor gave for walking away was that once they strayed from spending cuts into revenues, he walked. So there hasn't been enough agreement there. There's actually been a little bit of movement on the revenue side. And it's all around the issue of closing tax loopholes.

BERNSTEINRepublicans have signaled some willingness to raise some revenues to help make this a more balanced deal by closing some loopholes. And listeners may not be aware of the magnitude of these loopholes. There's over a trillion dollars in revenue forgone to the Treasury every year through these things we call the tax expenditures, which, you know, kind of -- basically spending through the tax code to favor one thing or another.

BERNSTEINI think instructive in this regard with the ethanol vote in the Republican -- in the Senate a couple of weeks ago, where 34 Republicans voted to end that particular tax subsidy. So maybe some pinprick of light there.

SMITHMm hmm. Janet Hook, is it your sense that the Republicans are willing to look at cuts in the defense budget that previously they've not been willing to look at? There's a headline to that, in fact, in The Washington Post today.

HOOKYes. I think there's actually already a lot of defense cuts that are already kind of built in to the assumptions of the negotiators because I do think that when you just look at the timeline for withdrawal from Afghanistan and Iraq, I think, already, the government is on tap to save a lot of money if those timelines are followed through.

HOOKI also think, just in recent votes, you've seen a lot more willingness on the part of both Republicans and Democrats to want -- there's just a lot more budget consciousness in the debate about the Afghanistan war. There are a lot of policy reasons to be thinking we should be drawing down troops more aggressively than President Obama has proposed. But you see much more sentiment, both among Republicans and Democrats, to move that along more quickly, in part, because of the financial burden that it's posing.

BERNSTEINJust one quick point. Not to get too bogged down right now in budget baselines, but it's actually important in this regard. In President Obama's budget, the assumption was made that the winding down of the wars would occur pretty much on the kind of schedule you're hearing lately. So that is actually "built into the baseline," meaning that most people, when they talk about deficit savings, already have that counted as a savings.

BERNSTEINAnd so, you know, it's great if we should do it. But if we're going to actually cut defense spending in a way that's going to seriously lower the deficit, we have to go beyond the drawdown and start to deal with some of the excesses that even military experts agree are wasteful there.

SMITHBeyond the drawdown, indeed, if it's already in effect, written out.

BERNSTEINIt's already baked in the cake.

SMITHYeah, Kevin Hassett, I wonder what you think of Eric Cantor's sort of dramatic walkout of -- from the talks at the end of last week? In your view, was it substance? Was it politics? Was it a little of both?

HASSETTWhy, I think that it was a lot substance. And, I guess, everything in Washington is also politics. But I think that there are really two risks that we need to put on the table. One risk is one that Jared's written a lot about, which is that if we don't lift the debt limit and we run out of money in the Treasury's general account and stop making payments, then it's a default.

HASSETTAnd that would be unprecedented in U.S. history 'cause Arkansas is a state defaulted once, but other than that -- and that's a serious risk because it could ignite a financial crisis. If it ever -- all of a sudden everybody thinks the, you know, U.S. Treasuries aren't good. But the other thing is -- and, again, the CBO highlighted this in their most recent report -- is that our deficit situation is totally out of control.

HASSETTI wrote an article a few months ago comparing our current debt to GDP to that of other countries in the year that they lost their AAA rating. And we're basically right in the sweet spot of losing our AAA rating. And so the U.S. is in a situation -- you know, and I don't want to blame one party or another, but we're in a situation where we have to get the deficit under control.

HASSETTAnd I think that the other risk with this debt limit debate is that it is actually a moment where we all have a chance to be serious about reducing the deficit in the medium and long term, especially. And we have a club to maybe --Republicans have a club to drive and say what -- who they think are reluctant Democrats to cut spending.

HASSETTAnd if we have a debt limit increase without any progress on the deficit, then I think that financial markets could have a real negative shock on the other side, which is that, you know, these Americans are so out of control that even when they have the perfect moment to get the deficit under control, they can't do it. And so I think that it's really important to lift the debt limit and to do so, you know, soon.

HASSETTBut I also think that if we just lift the debt limit, and that, you know, whether we do it in two pieces of legislations so that they don't look tied, you know, I don't really care about that. But we get -- can't just lift the debt limit. We also have to do something about the deficit.

SMITHMm hmm. Janet Hook, talk about the politics of this situation. In other words, when Eric Cantor walks out of the talks and says, I'm simply not going to negotiate if there's any discussion of tax increases -- you know, I know that's a familiar position, but is his assertion of it to be taken literally, politically, or how?

HOOKWell, there was a little bit of theatre in Eric Cantor's exit from the talks. I mean, I think, actually, it brought the talks to a place that everybody expected them to go at some point, anyway, which is...

SMITHOver the White House.

HOOKRight. Over to the White House to the, you know, upper management of the government. And it's just that it happened a little bit sooner, and in a little bit different way than people expected because Cantor decided to just quit rather than have everybody in the room say what -- which, probably, they would have in a couple of days. You know, we're kind of at an impasse on this tax thing, so let's pass it on.

HOOKAnd I think there had been some expectation that the handoff would have been a little bit more kind of packaged. Like, okay, here are the things we agreed to. But, instead, I think he did it with sort of an exclamation point.

BERNSTEINLook, maybe I'm not as...

SMITHJared.

BERNSTEINMaybe I'm not as hardboiled as my colleagues. I thought it was a deeply irresponsible move. I wrote a piece called "Cantor Canters" for him to walk away from these critically important talks in precisely the sense that Kevin mentioned with so much writing in the economy, and to do so on the basis of any revenues at all off the table. I think, probably, listeners would appreciate that the deal needs to be at least somewhat balanced.

BERNSTEINI think most economists would agree. You just can't get from here to there solely on the back of spending cuts. And this is important, Terence, because a lot of times, these debates become, you know, revenues, spending revenues, like two cheerleading squads. Think about why you need the revenues to be part of the deal.

BERNSTEINIf you depend wholly on spending, in order to do what Kevin very correctly said we need to do, which is to get this budget on a sustainable path, you will have to cut so deeply into government services that so many people depend on, whether it's retirement security, health care, the safety net, that you won't even recognize what you're left with. And you'll take a bad situation, a bad economy with lots of vulnerable people hurting, and make it much worse.

SMITHOkay. Coming up, more about the debt, the deficit and the mess in Washington.

SMITHWelcome back. I'm Terence Smith, sitting in for Diane Rehm, who'll be back tomorrow. I'm joined by Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities, and a former chief economist and economic policy adviser for Vice President Biden, and by Janet Hook, congressional correspondent for The Wall Street Journal, and by Kevin Hassett, director, economic policy studies at the American Enterprise Institute.

SMITHPick it up, Kevin. Just before the break, Jared was making a point about the case for revenue increases.

HASSETTRight. Yeah, and also the action by Cantor to walk out, I think, is absolutely important to get President Obama's, I guess, cooperation in these talks and to get him into the room. And I think that he kicked -- you know, Cantor was basically kicking it upstairs. But he did so, I think, by signaling something that's really important as we try to think about this, which is that there's a very large number of Republicans in the House who really don't want to lift the debt limit at all.

HASSETTThey're going to -- it's going to be very hard to get their votes, and that Speaker Boehner has an almost historically challenging problem to get those guys all on board because you don't -- there are a lot of Republicans that don't want to only pass this thing if there are 100 Democratic votes, too. Because then they're going to have primary challenges.

HASSETTI think that -- you know, I mean, if you think that cutting spending right now is going to be bad for the economy, then raising taxes right now should be bad for the economy as well. And I think that any debt deal is going to have to do something that, as Jared says, goes after tax expenditures. So it does, you know, probably break Grover Norquist's tax pledge, which, you know, taxes never go up no matter what.

HASSETTBut -- and it cuts spending and it cuts entitlements, but it's going to have to be done. It's going to have to be done, not immediately.

BERNSTEINTiny point, Terence. All of the -- I kind of -- Kevin's right. But I object to this idea that there are Republicans who don't want to lift the debt limit in the House. Every Republican in the House voted for Rep. Ryan's budget. That budget unquestionably implies an increase in the debt limit. You can't implement that budget without raising the debt limit.

BERNSTEINSo it's this weird thing where they say, we don't want to raise the debt limit, which, by the way, you need to do to pay for a budget that's already in place. So it's a lot like saying, you know, I'm halfway through the meal. Don't bring me the check. But the Ryan budget lifts the debt limit, too.

SMITHBut, Janet, that's a lever, right, this whole discussion about lifting the debt limit or not?

HOOKYes. I mean, it's a matter of -- just to follow up on what Jared is saying is, I think, there are a lot of Republicans who -- it's not that they don't want to lift the debt limit. It's that they don't want to vote to lift the debt limit. And they -- at this point...

BERNSTEINWell, then don't pass a budget that implies a higher debt limit.

HOOKRight, right. Right, right. So -- and, no. It's actually the Republicans realized early on that this was going to be a huge point of leverage for them. You have all of these Republicans, Tea Party candidates who campaigned saying they didn't want to raise the debt limit. And you're right that the Ryan budget raises it hugely.

BERNSTEINYep.

HOOKAnd so they've already broken that pledge. But this is a real pivot point in divided government. And, you know, we were talking at the beginning about how Mitch McConnell is going to talk to President Obama. And he's been saying all along that, actually, divided government -- this is really the perfect time to be trying to negotiate some big-budget deal because nobody really wants to do all these hard things that you need to do to address the long-term deficit problem.

SMITHAnd, Kevin Hassett, that's what you're saying as well.

HASSETTYeah, that's right. And, again, conditioning a higher debt limit on the Ryan budget isn't inconsistent because that's kind of why we're negotiating. We want -- we want to get -- Republicans want to get what they want. Democrats want to get what they want. And so, I think, the Ryan budget is a really ambitious reform. I thought that President Obama's deficit commission, the Simpson-Bowles commission, had a really ambitious proposal.

HASSETTAnd I was very disappointed. The President shouldn't put it in his budget. And, you know, so we don't have a proposal from the president yet. Nut, you know, there's people starting to get serious here in Washington.

BERNSTEINThat's not quite true about the president. He gave a speech in April at George Washington University, where he went way beyond his fiscal 2012 budget and laid out a plan for reducing the deficit over 12 years by $4 trillion. I think the Ryan budget gets there a little -- by about $4.5 trillion in 10 years. So they actually sat down in a similar ballpark when the Biden talks began.

SMITHMm hmm. This Aug. 2 deadline, which now seems enshrined. Is it real?

HASSETTNo.

SMITHKevin, you're shaking your head.

HASSETTNo, no. It's not real in the sense that there are lots of games that can be played and nobody knows exactly. The basic idea is that the Treasury has an account that it can write checks from called the Treasury's general account at the Fed. And the Fed cashes the Treasury's checks when the Treasury writes them, as long as there's money in the account. And so what happens once you get to the point where you're at the debt limit is you can't borrow money and stick it in your checking account.

HASSETTIt's like being at the max on your credit cards. But if you still have money in your checking account, then you can still write checks. And now, every day, there's money coming in and money going out. There's tax revenues 'cause people are mailing in their quarterly statements, and then there's spending. And the Treasury secretary has quite a bit of leeway, which is how we've gotten so far, really.

HASSETTAnd in the past, I can remember Secretary Snow once said that the drop-dead date was the beginning of November, and the Congress didn't give him the higher debt limit until near the end of November. And so there's a long history of going past the drop-dead date. In fact, I would even say there's a tactic for that.

SMITHSo the -- so that...

BERNSTEINI'm much more nervous than Kevin is about this, I think, in the following sense. You may be right. He knows the inner workings of these things as well as anyone. I think -- and, Kevin, I suspect you would agree with this -- I think that if we start missing deadlines, you're going to see interest rates begin to rise. Interest rates have been very low for government borrowing, basically, because the bond market assumes we're going to get our act together.

BERNSTEINFor every 10 basis points -- that means every 10 out of 100 percentage points -- the interest payments on that, it goes up $10 billion. So if interest rates go up half a point, which is absolutely plausible if we hit the scenario that Kevin described, that's $50 billion extra in interest payments a year. We need to avoid that.

SMITHMm hmm.

HASSETTBut when we went past it in the past, then we didn't see that spike in interest rates because, you know, it's a mystery. But people think that it's going to work out, and I think they'll think that this time. And don't forget that interest rates get spiked as well if we have a deal that doesn't do anything about the deficit because then people get very pessimistic about the U.S. fiscal situation down the road.

HOOKAnd I have to say, knowing how Congress works, I mean, we should all just talk as if this is a real deadline because this is -- Congress needs a deadline like a college student needs it.

BERNSTEINDon't encourage them, Kevin.

HOOKYeah, right. When they were negotiating about the spending cuts earlier this year, they had the advantage of -- there was a real deadline. The government ran out of money, and the government would start to shut down. And so these mushy deadlines are not good for their character.

SMITHYou know, I've been asked by others. Why doesn't Congress just immediately cut spending and thereby bring us under the limit? And my suspicion is that it's -- that you can't do that, at least not in the short run. Is that right, Kevin?

HASSETTYeah, in fact, I would hand this off to Jared in the sense that, I think, that one thing that we all learned as economists is that when the opposite was desired, when they wanted to increase spending right away, it turned out to be a lot harder than you might think because you have a lot of hoops that you have to go through. So I think that we should think of government spending as being kind of like an oil tanker, and it just changes direction relatively slowly.

SMITHThis is interesting. In February, the nonpartisan Congressional Research Service said that in order to avoid having to increase the debt limit at all, the federal government would need to eliminate all spending on discretionary programs, cut nearly 70 percent of outlays for mandatory programs like Medicaid, Medicare and Social Security, and increase revenue collection by nearly two-thirds or some combination of those actions. So that sounds pretty drastic.

BERNSTEINLook, I mean, government sector -- I guess I'm thinking federal, state and local -- is 20 percent of our economy. And so it's unthinkable that, you know, we wouldn't pay the military, and we wouldn't pay our Social Security beneficiaries. And Medicare payments would stop, and we'd stop, for that matter, paying the -- our creditors what we owe them on the loans they've made to us.

BERNSTEINSo I think it's pretty fair to say that a default is unthinkable. Look, I agree that it is -- spending cuts don't happen with a snap of a finger. But I will say that every fiscal -- there's been this whole -- you can't turn around in this town without bumping into somebody who's got a fiscal plan. And whether it's the Bowles-Simpson commission or Rep. Ryan's plan, the plan the president introduced in April has trillions of dollars of spending cuts.

BERNSTEINAnd, in fact, the Biden talks -- Janet, back me up on this if I have it right -- I think the Biden talks actually progressed in such a way that spending cuts were fairly far along. I suspect when the president sits down with Senate leadership, they're going to be starting from a place of having spending cuts well out.

SMITHJanet?

HOOKRight. Yes. And -- but you have to remember, when they talk about trillions of spending cuts, they're talking about over 10 years. And when -- I think that it's important for people to have a realistic expectation on just this point because, you know, the Paul Ryan budget that Jared was talking about, the one that's thought to be such a dramatic and drastic change in the federal government, it didn't balance the budget in 10 years.

HOOKIt didn't balance the budget in -- I don't know. Do you remember how -- it -- this is a very long-term project that people are setting out on in spending cuts.

BERNSTEINI would just...

HOOKAnd the part of the budget that's easiest to cut is the appropriations, the part of the budget that's discretionary. And so much of the focus so far has been on the non-defense -- not the Pentagon spending, and that only makes up 12 percent of the budget.

SMITHMm hmm.

BERNSTEINWhich is -- by the way, this -- what Janet just said is as it should be. No less than Ben Bernanke, who I don't think is, you know, some wild-eyed, big spending Keynesian-type said that if we cut spending too deeply, too quickly, we will take a fragile recovery and potentially send it into a double-dip recession. Any of the interventions that we're talking about on the spending side need to start a year or two from now, so that you don't strangle a recovery that's still trying to gain momentum.

SMITHMm hmm. Kevin Hassett, let me ask you this, is there a possibility or a danger that the ratings agencies or the stock market could end -- become so unnerved by this process, this brinkmanship between now and Aug. 2, that they would either signal a downgrade or that the market would signal a downgrade in its own fashion? In other words, anticipate the problem becoming increasingly serious?

HASSETTYeah, and I think it could go either way. Again, I think that the ratings agencies are very wary of the U.S. deficit situation, how high the GDP is climbing in the medium term. And they're weary that the U.S., I would guess, might stop making interest payments. And so that's why we need a deal soon that addresses both problems. And whether it's two deals, you know, at that part I don't know.

HASSETTBut we absolutely, you know, are at risk. We've already been warned, really, that our rating is in trouble. If you look at history, our rating is in trouble. It would be -- in three years, we would have the highest debt to GDP of any country ever with a AAA rating. And so something has got to happen. It's got to happen soon.

SMITHI'm Terence Smith. You're listening to "The Diane Rehm Show." If you'd like to join us, call us at 1-800-433-8850. Or send an email to drshow@wamu.org. Find us on Facebook or send us a tweet. We'd love to hear from you and have you join this discussion. Janet, I wonder if we are running out of time here partly because of the congressional schedule. There's a July 4 break and the time -- Kevin referred to it earlier -- required to draft the legislation and actually get it acted upon.

HOOKYes. I mean, Congress does actually take time to put any general deal into words, and then they have to kind of build the -- accumulate the votes it takes to pass it. And, actually, we've got a kind of weird situation on the Hill right now. Usually, the House and Senate take their recesses at the same time and there's just -- for -- I don't know why. There's a disconnect now that the House is in recess this week and back next week, and the Senate's in this week and back next week.

HOOKNow, the fact is that the big decisions are going to be made by leadership right now. But it is the case that leaders, I think, feel better about making big compromises if they can run the deal by their rank and file before they put their pen to paper on it. It is also possible that they could, you know, get close enough to a deal that they could, God forbid, pass a short-term extension while they finish it.

HOOKBut I think there's enough time still for them to cut a deal, write it, find the votes and pass it.

SMITHMm hmm. All right. Let's take the first of several calls that we have waiting. This is Chris in Putney, Vt. Chris, you're on the air. Go ahead.

CHRISGood morning.

SMITHGood morning.

CHRISI was interested particularly in the idea of not raising revenues at all. And, you know, when you look at polling the majorities of population in the United States, they want to see revenue collection increase particularly from the top 1 percent of the income earners in the country and from the corporations that are sitting on, literally, trillions of dollars in profits and those kinds of things right now.

CHRISI mean, if we only let the Bush tax cuts expire and, you know, do a very moderate even increase in revenue, this won't be a problem. And the deficit itself is, you know, kind of a false problem anyways. It's not going to be a problem long term, you know? If we don't raise the debt limit, which the Republicans did 18 or 19 times during the Bush administration, you know, without a fuss they didn't seem (unintelligible).

SMITHAll right. Well, let's ask Kevin Hassett of the American Enterprise Institute about that.

HASSETTSure. And thanks, Chris. I spent a lot of time in Putney when I was growing up. It's a nice town. Look, the problem with the U.S. tax code is that, unlike just about every country on Earth, we collect as much revenue as we do from the income tax without having something like a value added tax. And so what it means is that our income tax is -- our rates are relatively high. We're about to have the highest corporate rate amongst all of the OECD nations.

HASSETTAnd so we don't have a lot of room to squeeze more blood out of the stone with the income tax because the income -- or high-taxed country, even though our government is still relatively small relative to GDP. And so I'm very wary of trying to get more money out of the income tax. I have no idea how you would do it with the corporate tax, for example, because we're already the high-taxed place.

HASSETTAnd we're already seeing a lot of outsourcing and location of activity overseas to take advantage of lower taxes. And so I think that, to the extent that you go after revenue, you need to do it by, as Jared said, going after tax expenditures, putting -- I thought that what the best idea, maybe, that came out of the administration since Obama took office was a cap on itemized deductions at 28 percent.

HASSETTYou know, I thought it was a really good idea to get the GDP. It gives you...

SMITHThat raises over $300 billion over a two-year...

HASSETTYou know, that -- but -- so that kind of thing, which...

SMITHExplain how that would work.

HASSETTSo instead of a person who's in the top tax bracket, they get a 35 percent benefit out of their mortgage interest deduction. You cap the benefit. You get out of any deductions at 28 percent or chargeable deduction or so on.

SMITHI see. So...

HASSETTAnd that is an increase of taxes on the wealthy, but it's not something that goes right at the marginal rate that maybe is going to distort behavior. And so, I think, that's the kind if idea for revenue. If we're not going to have a value added tax in the U.S., that's the kind of thing we have to do.

SMITHOkay. Jared Bernstein.

BERNSTEINYeah, I agree more with some of the sentiments in Chris' point than Kevin does, although we're on -- Kevin and I are on the same page regarding the tax expenditures he just mentioned. You know, you look back at the Clinton years where you had a tax structure that was more like Chris kind of described. Taxes on upper-income people were slightly higher than they are now.

BERNSTEINAnd that's really what we're talking about. Now, that was a time when we had much stronger employment growth. The middle class did a lot better. GDP grew faster. I mean, we added over 25 million jobs over those years versus the Bush years when you had a different type of a tax code. And we didn't do very well on the job side. So I think Chris is right in terms of those adjustments at the top end.

SMITHComing up, your calls and questions for our panel on the debt, the deficit. Please stay tuned.

SMITHWelcome back. I'm Terence Smith, sitting in for Diane Rehm. I'm joined in talks about the debt and the deficit by Jared Bernstein, who's a senior fellow at the Center on Budget and Policy Priorities, by Janet Hook, congressional correspondent for The Wall Street Journal and by Kevin Hassett, director of the Economic Policy Studies at the American Enterprise Institute.

SMITHJared, what would be the impact on individual investors and consumers, all of us, really, of a default?

BERNSTEINInvestors who lent money to the U.S. government...

SMITHIn the form of...

BERNSTEIN...in the form of buying treasury bonds or T-bills...

SMITHRight.

BERNSTEIN...would find -- and by the way, that's not just in the U.S.. It's global. Half of that debt is financed from abroad, would be in shock as they found that the most reliable investment in the world would be threatened. And they'd have to worry about whether they were going to be paid back. I mean, a default essentially means you're breaking a contract with a creditor that you're not going to stick to the deal you made.

BERNSTEINI mean, it's not like stock equity, where you buy stock and the company goes bust. I mean, that's bad. But you threw the dice, and you lost. That's different. But, I think, even more perhaps germane to everyday folks who don't necessarily go around lending billions to the U.S. government are things like Social Security benefits, things like Medicare, things like going to a national park, veteran's benefits, veteran's hospitals. I mean...

SMITHWhat would happen to those?

BERNSTEINIf the government wasn't able to finance those operations, it would have to decide whether it could keep making those payments, whether Social Security checks would go out, whether a better -- whether a VA hospital would stay open, whether a national park would have to close. So people would feel this in their everyday lives.

SMITHAll right. It sounds serious to me.

BERNSTEINIt is serious. I mean, let me just say -- you know, Greece, okay? Greece is -- has a GDP of about, oh, I don't know, maybe 2 or 3 percent of ours. And they're threatening default, and you've got a global economy, a contagion, that is really shaken up by this.

SMITHAnd imagine...

BERNSTEINImagine a $15 trillion economy versus a $3-, $400 billion one.

SMITHThat would be contagious in the extreme. All right. Let's take another call. Angela in San Antonio in Texas. You are on the air. Go ahead, please.

ANGELAYeah, I -- a couple of months ago, they had talked about redoing the Bush tax cuts and, you know, just letting it fall away.

SMITHRight.

ANGELAEverything would go back to where it was. And, you know, I look at that, and I make well above. I'm in that 1 percent range. I don't mind paying taxes. It's part of my responsibility of living in the United States. And the other thing is, this month, I have finished paying all my Social Security tax. Now, I have six months that I don't pay on my $250,000 a year income.

ANGELAAnd if we would just nudge up the amount you have to pay on the amount of income interest a few brackets, money would be there, and the cuts could be made, you know, in tier steps versus giant whacks out of social services.

SMITHAll right.

ANGELAI'm wondering what your contributors have to say.

SMITHAll right.

ANGELAAnd I don't understand why people are so upset about paying taxes. It's what we do in order -- it's, you know, the good -- the group pays for everybody...

SMITHOkay.

ANGELA...no matter how much you have to pay.

SMITHLet's -- thank you, Angela, for that. Janet Hook, Angela is part of your demographic at The Wall Street Journal and -- at least you hope so -- and I wonder you think of her point. I wonder whether -- how typical you believe that is and, more importantly, how typical politicians on the Hill think it is.

HOOKWell, I think that politicians on the Hill think that it's political poison for them to raise taxes. But I do think it's interesting when you look at polling about taxes. I think Kevin referred to a poll -- or one of the callers referred to a poll. If you ask people, you know, should we raise taxes on corporations and rich people -- you know, that's 98 percent of the people talking about the upper 2 percent -- you get a lot of support for tax increases for the upper income.

HOOKAnd I think it's rarer, but not unheard of, to hear upper income people say, raise taxes on me. In fact, there's a -- Bill Gates' father is big on the idea of eliminating the estate tax, which for very rich people is a bigger deal. But I think that right -- well, first of all, the caller, Angela, referred to the extension of the Bush tax cuts at the end of last year. That was a bipartisan decision, I think, based, in part, on the politics and economics of that particular moment who is the...

SMITHWell, of course, it just followed the election.

HOOKIt just followed the Republican's victory in the mid-term elections. And it was also when the economy was really just -- there was no end in sight to recession. So there was a lot of caution involved there. They were only extended for two years, so that, just next year, we're going to have to face the debate all over again. And the economy may or may not be in better shape, but the politics will sure be pretty intense heading into presidential election.

SMITHMm hmm. Jared Bernstein?

BERNSTEINI do begin to get the feeling that the politicians that Janet described are out of sync with America on this issue. And I'm not saying that everybody is out there clamoring for a tax increase. But I do think that Angela's sentiment, which I thought was extremely well expressed, part of my responsibility of living in the U.S. is one that more people feel than you'd recognize walking around this town.

SMITHKevin?

HASSETTI think it's interesting that President Obama came in with, really, a super majority on the Hill and, you know, going back -- Jared and I have been arguing about the Bush tax cuts for a decade, it seems, on television and radio. And every single Democrat has been vilifying the Bush tax cuts for their entire political career for a lot of the younger ones, and yet they were unable to let the tax cuts expire.

HASSETTI think that that's just an interesting thing to observe. I think with regard to the deficit situation, it's kind of a sidebar 'cause the rich just don't have enough money to address the problem that we have. I think that, you know, we've talked about how revenues will probably need to be part of the solution. But you can't raise taxes on rich people enough to pay for the shortfall on the debt.

SMITHWell, you say it's a sidebar, but, surely, the solution here is going to be a number of sidebars.

BERNSTEINOne data point on this...

SMITHJared Bernstein.

BERNSTEIN...a couple of the callers, Kevin, interestingly, were not just saying allow the high-end Bush cut -- tax cuts. And so they were talking about the whole thing. And if you did that, you actually would bring the budget deficit down to below 3 percent on an annual basis, and the debt would stop growing. So, you know, that is a big deal.

HASSETTBut you would break Obama's pledge not to raise taxes on people with incomes over 250.

BERNSTEINCorrect, correct.

HASSETTSo I just assume that he would never break that pledge. But, yeah, I mean, maybe he would, and that would be more money.

SMITHOkay.

ANGELAI think every...

SMITHGo ahead.

ANGELAI think everybody needs to pay taxes. You know, I understand that there are lower incomes, but they are incremental things. Why does my Social Security -- last Social Security payments stopped and stopped being deducted in June?

BERNSTEINYeah, now, that's a great point, Angela. And I'll tell you, it used to be the case that Social Security taxes covered about 83 percent, 84 percent of earned income. I'm sorry. They used to cover 90 percent of earned income. But because there are so much accumulated earnings way at the top of the earning scale, now, they only cover 83, 84 percent.

BERNSTEINAnd if we just did as you said and took that back up to 90 percent of taxable income, you'd close about, I think, a third of the Social Security payroll gap. So that's a good idea, Angela. I'd like to get you down here.

SMITHAll right. Let's take another call. This is from Clara in Cleveland, Ohio, who's been very patient and has a question for us. Go ahead, Clara.

CLARAThanks. Good morning.

SMITHGood morning.

CLARAMy question is a bit of an emperor has no clothes question, and there's a simple proposal that goes with it. It seems that there are more than just two ways to get money, more than just from taxes and debt. The government makes or backs our money. And we can print more electronic paychecks from the government for specific, very highly desired jobs, such as more teachers or more disaster recovery workers.

CLARAAnd even if it were to cause a little bit of inflation, that's much preferable to major unemployment, which seems pretty false.

SMITHAll right. Well, let's ask Kevin Hassett of the American Enterprise Institute what he thinks of that.

HASSETTOkay. Printing more money is actually kind of going on. In fact, we have an unprecedented amount of reserves in our banks. Now, there was this a very funny moment where Mr. Bernanke was on "60 Minutes." And then the first time he was defending quantitative easing, he said, just think about it as printing money. And then in the second interview, they said, well, you know, critics say you're just printing money.

HASSETTAnd he says, no, that's not true at all. We're not printing money. There's this technical thing, is what they're doing, is they're printing reserves. They're printing cash, if you like, or turning up the knobs on the accounts of banks, and the banks will have the money in their vault. And if the banks put the money to work, then it becomes money in the economy, and it becomes inflationary. We've been lucky.

HASSETTI walked us through that very boring thing because we've been lucky, in some sense, in terms of inflation because these massive reserves have sort of sat in the back. But we've been unlucky in terms of employment because of that. And so, if the banks start lending money like crazy, then we're going to have a serious inflation. And I think we've really pushed the envelope on printing money about as far as I should be comfortable with.

SMITHJanet -- yes. Go ahead. I'm sorry.

CLARAMight I add, in a sense, I think that the money really isn't backed by gold. It's backed by the educatedness (sic) and skilledness (sic) of the people of the nation in our working hours. And so that, if we specifically added money just for not calling it college debt but just paying college tuition and paying teachers' salaries, that if it were just specifically through that occupation, then it would be really, really beneficial.

BERNSTEINClara, the only thing -- I think Kevin's right on the printing money problem. But I think you're on to something important. And it's something we did in the recovery act that was quite successful and that was provide states with, what we call, fiscal relief. That is, help states preserve some of the jobs for some of the very important workers in their communities. And school teachers are among the most important, and they're being laid off in scads.

BERNSTEINSo I think another round of state fiscal relief would actually scratch that itch pretty well.

SMITHOkay. I want to take another call because I can see that this is a topic that has got people more than involved and interested and possibly worried. Robert in Portsmouth, Va. You've been very patient. Go ahead, please.

ROBERTThank you, Mr. Smith. To me, the president need not even negotiate with the Republicans and no one else. That vice president office is higher office than any member of Congress. And, really, there is nothing to negotiate. You either raise or you just stop paying your debt off and see how you come out. So in a negotiation by the president who's already been advised that we must raise it, it is unnecessary.

ROBERTThe whole thing that got us in this situation was we had less tax gathering during the early 2000s on up -- all the way up through the 2000s, we hardly gathered no taxes. It was very relaxed, and then we went into two wars. So the only way out of this mess is to get rid of the war and save money, spend it on defense and then aggressively gather taxes. And if you don't aggressively gather taxes, we're going to sink. And I don't want to sink.

ROBERTI mean, a lot of the people that can pay more taxes, they don't want to see America go and get into this peril that they're headed into by having someone like Congressman Boehner say don't raise taxes. He don't want to see America start just paying off his debt while we're waiting on his vote.

SMITHOkay. All right, Robert, thank you. Let Jared Bernstein respond.

BERNSTEINJust, very quickly, I mean, we do have a divided government, where Congress, the administration all have to weigh in on this. Nobody can make this deal on their own. One point I took from your comments, Robert, that was right, was that the Bush tax cuts and the wars are very instrumental in keeping the deficit into unsustainable places over the next decade or so. So to deal with those, really, would make the thing more sustainable.

SMITHI'm Terence Smith. You're listening to "The Diane Rehm Show." If you'd like to join us, call 1-800-433-8850, or send an email to drshow@wamu.org. Find us on Facebook or send us a tweet. All right, let's see if we can take another call here in Dallas. Sayed, (sp?) you've been very patient as well. Go ahead, please. Are you still with us?

SAYEDHello?

SMITHYes. You're on the air. Go ahead, please.

SAYEDHi. Yes, sir. My question is -- I'll be brief. You see, the problem in the economy is consumption at this time. Companies are not investing in the economy because they are not sure how they will get returns. Now, if you will scale back the public spending, how will it impact the old economy? Because, I mean, there will be fewer dollars to be spent by people. And wouldn't it have a shrinkage in the economy?

SMITHIt certainly would seem so. Kevin Hassett?

SAYEDAnd the second part is...

SMITHYeah, I'm sorry.

SAYEDNow, the second part is all these companies are sitting with trillions of dollars. I mean, $3 trillion, the Wall Street balance are something that was mentioned before. And now -- and those dollars are not very efficient because they are sitting with them. They are not investing. Wouldn't it be easier, or wouldn't it be better if our government tax those corporations and spend the money through the public spending? And so...

SMITHWell, that's, of course, one side of the debate. Kevin Hassett, what's your thought?

HASSETTRight. Yeah, you know, the companies in the U.S. are sitting on a lot of cash. And they're sitting on a lot of cash because they're not optimistic about the future. And I think a key reason why they're not optimistic about the future is that Washington doesn't seem to function very well. We're in a really bad policy spot. You could take just about any tax -- corner of the tax code and change anything at a random direction. It would be an improvement.

HASSETTAnd the deficit is so large that if U.S. companies paid about 10 percent of the current present value shortfall, which is about their share of taxes historically, then they'd all have negative book values. That's how big the fiscal situation is as a negative. And so what we need to do, to make people optimistic about the future again, is work together to fix our problems so that they have cause to be optimistic.

HASSETTIf we don't do that, the money will stay on the sidelines, and we'll continue to grow slowly.

SMITHAll right. Jared, in just a few seconds.

BERNSTEINOkay. I think Sayed has a point. If we were to cut government spending too aggressively right now, we would actually hurt a vulnerable economy because that spending is still helping to boost things while the private sector remains somewhat in remission.

SMITHI want to thank Jared Bernstein and Janet Hook and Kevin Hassett. I'm not sure we've solved all the problems. And, Janet, I am certain this debate is not over, and, obviously, the politics of it will continue for some time. I'm Terence Smith, sitting in for Diane Rehm. Thank you for listening.

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