MS. SUSAN PAGEThanks for joining us. I'm Susan Page of USA Today, sitting in for Diane Rehm. Diane is out with a cold. Congress and the White House have two months or so to come up with plans to avoid across-the-board spending cuts, raise the debt limit, and fund the government for the rest of the fiscal year. Joining me to discuss the nation's short- and long-term spending and debt challenges are: Jared Bernstein from the Center on Budget and Policy Priorities, David Wessel of The Wall Street Journal, and Chris Edwards from the Cato Institute. Welcome to "The Diane Rehm Show."

MR. DAVID WESSELThanks very much.

MR. JARED BERNSTEINThank you.

PAGEWe invite our listeners to join our conversation with your comments or your questions. You can call our toll-free number, 1-800-433-8850. Send us an email at drshow@wamu.org, or find us on Facebook or Twitter. Well, David, the headline on your column in The Wall Street Journal reads, "Deal's Economic Grade: Incomplete." So this fiscal cliff deal that was so hard to reach and was finally signed yesterday by autopen at the White House, what did it not do?

WESSELWell, it didn't do three things. One is it didn't deal once and for all with these across-the-board spending cuts, the so-called sequester that Congress and the president agreed to in August 2011 to try and force themselves to do something about the deficit. It didn't, as you said in your introduction, raise the federal debt ceiling, which has to be raised, and it didn't really put the federal budget on a sustainable trajectory. So I've been thinking of this whole last couple of days as the half-time show in the Super Bowl, and we are not near the end of the game yet.

BERNSTEINBut the Super Bowl is fun to watch.

WESSELJared, this is like full employment for people like you and me.

BERNSTEINYeah, I guess you're right.

PAGEWell, Jared, in a blog posting that you did, you wrote, "What Did You Learn From the Cliff Debate, Dorothy?" I assume reference to "The Wizard of Oz." So what did we learn from this debate that applies to the negotiations and the disputes and the debates that we're going to have over the next couple of months?

BERNSTEINWe learned that the Congress has a great deal of difficulty in what I think an objective person might judge as kind of doing their job in a kind of functional way. Obviously, this occurred -- I was going to say at the last minute. It was actually after the last minute. And there are, as our show is very much based on today, a number of other cliffs just waiting to happen. David articulated one of the most important, in my view, which is bumping up against the debt ceiling.

BERNSTEINLast time this -- no. Let me just point out that there has been hundreds of times we've raised the debt ceiling in this country, and it hasn't caused a congressional cataclysm. The only time that happened was in 2011 when we did it, and that actually planted the seeds of what we just went through. So the debt ceiling has become a really contentious -- what used to be pro forma has become a really contentious and I would view kind of politically and economically dangerous issue. And the deal, which I actually am fairly favorable about, the deal did not deal with that.

PAGEWell, to talk first about raising the debt ceiling which might be the next most contentious debate that we face, Chris, the President Obama has said repeatedly that he will not negotiate on the debt ceiling, that he won't let it be used as leverage for what Republicans want to do on the spending side. Is it up to him? Can he avoid negotiating on the debt ceiling?

MR. CHRIS EDWARDSNo. Of course, he's going to have to. In fact, both the Republican leader in the Senate, McConnell, and in the House, Boehner, have already said after the inquest signed on this deal that they're going to attach spending cuts to any agreement to raise the debt ceiling. And, you know, the reality is that we have such a massive spending problem in the federal government that this is --- Americans are going to be hearing about budget battles for years and years to come.

MR. CHRIS EDWARDSWe have to cut spending. Some people in Congress know that, and they're going to be using every opportunity they can to try to trim back these entitlement programs. I mean, we have to. We're running trillion dollar deficits. If we don't start cutting spending, we're going the way of Greece. So this is something that's going to be in the news month after month, year after year for many years.

PAGEDavid.

WESSELWell, I don't -- I think we're a long, long way from Greece. But I think it's important for people to understand what the debt ceiling is. It's kind of this archaic thing which dates to the First World War. Before then, the Congress had to approve every time the Treasury sold bonds. In order to give the Treasury more flexibility, they said, well, we'll just give you a total, and you can sell one-year, two-year, 10-year, whatever.

WESSELIt's a little bit like saying after you've bought all the stuff at the store and the credit card bill comes, then we have to make a decision whether to pay the credit card. So it's -- it is a lever, that's for sure. But the reason it's so of such concern is that it calls into question the very capacity of the U.S. Treasury to pay its bills, to pay interest on its debt. And that's kind of a silly thing to do when you're as in hock as much as the U.S. government.

PAGEWell, that's exactly the point that the president makes in talking about the debt ceiling. But what do you think? Can he succeed in saying it's ridiculous to negotiate of where they're going to pay the bill on things we've already bought? Can he succeed in making that argument to Republicans?

WESSELI think the only way the president can sustain this is by assuming that Republicans won't push the country into default, that he must think, if he's serious about this, that he'll just say, send me the debt ceiling, and then he's going to sit on his hands hoping that they'll do the right thing. I think the Republicans figure that he talks tough, but in the end, he doesn't want to be the president who presides over an inability to sell bonds and he'll flinch at the end. So it's always dangerous to have these games of chicken when each side is trying to calculate just how far the other will go.

BERNSTEINSo I don't assume that members of the House Republican caucus are using this default threat as a false kind of threat, which was I think, you know, I'm not saying David is there, but it's kind of implicit in David's reaction there. I actually think that some of those folks would, as crazy and destructive and reckless at it sounds, default on the U.S. sovereign debt, which is just unthinkable. And, therefore, I don't think the president can negotiate with them. The only way for this to work, in my view, is for the president to mean it when he says, I'm not going to negotiate with Republicans.

BERNSTEINAnd the only way he can do that is when push comes to shove -- and it looks like the Republicans want to push us over that cliff, this really is a cliff because it's not, you know, once it happens, it's deeply problematic -- tell your Treasury secretary, go forth to credit markets and borrow because I am the chief executive of the United States, responsible for its credit worthiness, and I'm not going to do this to our economy, to the global economy, to posterity, and then a whole another set of problems erupt.

PAGEWell, some liberal Democrats, including Nancy Pelosi, have suggested the president has it within his power to act on the debt ceiling without Congress going along, but the president...

BERNSTEINI agree.

PAGE...has said -- well, you agree, and Nancy Pelosi agrees. But Barack Obama has said he doesn't agree or that that's not a course he's prepared to take.

BERNSTEINWell, look, I'm not a constitutional lawyer, but...

WESSELAnd the president is.

BERNSTEINYeah, he is. That's a good point. I was going to say I know some, but then again, he is. And there is active debate about this. I hope that they reverse their thinking on this idea that apparently in the Fourteenth Amendment is this notion that the president as chief executive is responsible ultimately for the credit worthiness of the nation. I hope they tap that. They were actually a few other ideas that could be used in defense of that position.

PAGEWell, you know, one of the -- in today's USA Today, I wrote about lessons from the battle we just had, for the battles ahead. And one of them is something, Jared, that you just referred to. It looked to me like House Republicans -- a fair share of House Republicans are willing to go to the brink and over.

PAGEA majority of House Republicans did not vote for this deal despite the fact that John Boehner was urging them to. Is that a lesson we should draw from this, Chris, that you cannot count on House Republicans to flinch even if it seems like the most catastrophic possible consequences when -- on raising the debt ceiling?

EDWARDSI actually think that Republican conservatives might actually dig in their heels even more now that they figured they have given President Obama his pound of flesh with the tax hikes on wealthy people, and they haven't really got any spending cuts yet. I think the 2011 budget deal that puts spending caps on didn't really actually cut any programs. Those are, in a sense, promises a future spending cuts.

EDWARDSBut more important -- so I hope that conservatives in both parties do whatever they can, use whatever tools they can to cut spending because more important in these short-term issues with unsettling financial markets is the long-term problem that if we don't cut spending, federal spending now with about 23 percent of GDP is expected to rise up to around 40 percent of GDP a couple of decades from now as all these entitlement programs grow.

EDWARDSThat means -- that does mean Greece in the future, and that means that increasingly, elderly people are frankly going to be screwing younger people more and more and more. Younger people are going to have -- there's going to be less opportunities. Their salaries are going to be lower. Taxes are going to be higher. They're going to be crushed under this debt burden while old folks get more and more subsidies. That's the real crisis here, and it's important than the short-term issues.

WESSELCan I...

PAGESo, Chris, you think that House Republicans not only would but should...

EDWARDSAbsolutely.

PAGE...use the debt ceiling limit as a device to force these spending cuts.

EDWARDSThey should do that. They should use everything. There's a continuing resolution that has -- it's funding the government that runs out in a couple of months as well. They should use the expiration of that to leverage spending cuts. Politicians don't want to cut spending, most of them. So I think the few that do really ought to use whatever leverage they can to force the grants.

BERNSTEINSo with respect for Chris, who I know thinks deeply about a lot of this stuff, I couldn't differ more and argue more that that is a deeply, deeply reckless position which says nothing about the need for spending cuts. You and I could probably find some common ground there. But the notion that you'd undermine the economy and, in fact, the global economy by threatening default is, I think, you know, deeply irresponsible. We also have a factual disagreement.

BERNSTEINOn spending cuts, this Budget Control Act that was passed in 2011 is actually the legislation that's running the government right now cut over a trillion dollars in spending over the next 10 years. Now, Chris said something about, well, those are future cuts. All the budget negotiations are within a 10-year budget, you know, everything we've talked about, every number we've said so far. So it's all about your course for the future. But that is a widely accepted number, congressional budget office. I mean, Chris may disbelief that number, but he's an outlier in that regard.

PAGEDavid, I wonder -- here's another lesson we might draw from the experiences of this week and how they apply ahead, and that is at the end of the day, they made a deal. They passed it overwhelmingly in the Senate. They passed it a comfortable margin in the House. So is there a kind of encouraging lesson looking at the battles ahead from the fiscal cliff debate?

WESSELI've heard this view but I don't subscribe to it. Look, the whole -- we had set up a crisis for the end of 2012 that was supposed to, in the eyes of the architects, allow the president and the Republicans to come to some agreement on revenues and the kind of spending cuts that Chris is talking about. Even with all the pressure and all the focus and all the groundwork that notion that they were going to get a grand bargain disappeared. And...

PAGEWe're going to take it -- I'm sorry. Go ahead, David. Finish your thought.

WESSELNo, and I don't think the relationship between any of the players is better now, so it's going to be even harder in the coming months.

PAGEWe're going to take a short break. And when we come back, we're going to talk to Jared Bernstein about the emergence of his old boss Joe Biden as a key player in this. Stay with us.

PAGEWelcome back. I'm Susan Page of USA Today, sitting in for Diane Rehm. And with me in the studio: David Wessel, economics editor for The Wall Street Journal -- he's the author of "Red Ink: Inside the High-Stakes Politics of the Federal Budget" -- and Chris Edwards -- he's an economist and editor of the Cato Institute website, downsizinggovernment.org -- and Jared Bernstein -- he's a senior fellow at the Center on Budget and Policy Priorities.

PAGEAnd, Jared, of course, you're also former chief economist and economic policy adviser for Vice President Joe Biden. He's become the butt of a lot of late-night comics. The picture of him cuddling up with a biker chick from the campaign is one that many of us will never erase from our minds, yeah...

BERNSTEINNo comment. Too bad this is radio, huh?

PAGE...and yet emerged as a really central player this time around. Will he do so again and why did he do that this time? Why did that happen and will that happen again?

BERNSTEINBecause he's really good at it and it will happen again. And if you think back to -- I remember back in 2008 when the administration which -- when the campaign was trying to decide who would be a good vice president complementary to Barack Obama, Joe Biden was a very compelling choice precisely for this reason. He's got 35, 36 years of experience in the Senate and, of course, Barack Obama had, I think, two.

BERNSTEINHe's worked for decades with some of these folks, including Mitch McConnell. And what you saw here is two kind of old school politicians getting into a room and doing something that some of these kids today don't remember, which is compromise. You know, the president said it, I thought, well.

BERNSTEINYou're going to have to give if you want to get, and nobody's going to get 100 percent. And what was interesting is that Biden and McConnell come from an era where you make those kinds of deals and you assume that your troops are behind you. That hasn't always been the case, and it was kind of remarkable the way the troops fell into place after the deal was cut.

PAGEAnd does Vice President Biden's role when it comes to negotiating deals with Congress -- and this isn't the first time this happened. This happened last year as well or in 2011 as well.

BERNSTEINHe's done this all along the way.

PAGEDoes that also underscore President Obama's weakness when it comes to relations with Congress?

BERNSTEINYeah. I don't know if it's -- I mean, it's probably a weakness, but it's also serve, I think, a personal preference. I mean, Joe Biden loves mixing it up with politicians and deal making. And by the way, it's not 2011. You have to go back to 2009. I mean, I was there: the Recovery Act, the health care reform, the -- every important piece of legislation he helped get over the goal line in this very unique Biden-esque way, which you just don't see enough of anymore.

PAGEChris, what about the lessons for John Boehner? We expect him to be re-elected today as speaker of the House, and yet his two top lieutenant split with him on this. He didn't deliver majority of his troops. Does he come in to the debates coming up on fiscal issues in a weakened position?

EDWARDSWell, one thing he's got to look at is two-thirds of his -- the Republicans in the House voted against this deal. And, you know, he's only going to be the speaker as long as he keeps a majority of Republicans in the House happy. I think some of them who voted against the deal in the House probably figured that, look, this was probably the best that, you know, Boehner and the Republicans could do, so they might not blame him so much.

EDWARDSWe'll see how he does in spending cuts down the road. That is what most Republicans in the House really want are spending cuts. And I would say in response to the positive, you know, things about Biden's role and the like, this deal was not a heavy lift, OK? Both parties...

PAGEIt sure looked like a heavy lift.

EDWARDSBoth parties agreed -- both parties supported extending most of the Bush tax cuts. And that's what they did. The heavy lift is spending cuts. That's what politicians of neither party wants to do. Republicans show that they don't want to touch military spending at all, which is crazy. We're not going to get the budget deficit under control unless we cut military spending.

EDWARDSAnd entitlements, we've got to control entitlements as well. The big challenge for the nation is cutting entitlements, cutting military spending, cutting other programs going ahead. That's the real challenge. We'll see how well they do in future months.

WESSELWhat I think this shows is that there are issues of substance and then there are issues of personality, leadership and politics. And the issues of substance are pretty tough. Somebody is going to have to pay more taxes and somebody is going to get less in benefits than they've been promised if we're going to bring the deficit down to a sustainable level. And it's not only going to be the top 2 percent of Americans.

WESSELSo that's hard. But it's made much harder by this kind of amateur hour that we've seen inside the beltway for the last couple of weeks. I mean, neither John Boehner nor Barack Obama seem to be able to negotiate with each other in order to get to a conclusion that they can hold hands on and sell. And Harry Reid doesn't seem to have any more luck with getting this thing done than John Boehner did in his caucus.

WESSELAnd so we're -- it's remarkable actually, as Jared said, how few people there are like Mitch McConnell and Joe Biden, who can actually get a deal on something that people agree on. We almost didn't get a deal on something that people basically agreed on. That's how bad this was.

BERNSTEINYeah. I mean, if this was a light lift, I'd be really scared to see what a heavy lift looks like.

WESSELWell, that's why I don't think we're going to get a heavy lift.

BERNSTEINSo you may be right. Look, I agree with a lot of what David just said. But I do want to avoid this kind of pox on both their houses in the following way. In mid-December, Barack Obama brought a plan to John Boehner that involved a lot of the stuff -- I'm sure it didn't go as far as Chris wanted -- but a lot of this stuff that Chris and others have called for in the spending cut arena. It included $400 billion -- these are all 10-year numbers, $400 billion of cuts in Medicare.

BERNSTEINIt included cuts in Social Security benefits. That's a crossing of the Rubicon for a lot of Democrats, and it included considerably more revenue on the tax side. And, in fact, this was a plan that achieved, you know, we're throwing around too many numbers here without kind of a foundational idea of what is it we're trying to accomplish. I think -- and I would hope that we would all agree, I think the goal here has to be, at least in the near term, achieving a sustainable debt-to-GDP ratio.

BERNSTEINThat is getting to a point where the debt is growing more slowly than the economy. That's something that we -- that's not happening that needs to happen. David's written books about this. In order to do that at this point, given the deal that was just passed and given the spending cuts -- real spending cuts that have passed, we need another $1.2 trillion in cuts, OK?

BERNSTEINWhen I listen to Chris and his admonitions about Greece, you know, I don't think -- I think you have to really anchor that down. And what -- actually if you go by the numbers, what we need to achieve a sustainable debt-to-GDP ratio over the next 10 years, $1.2 trillion more and a combination of spending cuts and tax increases, and that's actually not impossible to get to in a rational...

WESSELIn an economy that's about 15 or $16 trillion a year.

BERNSTEINIn -- good point.

PAGEAnd so the $1.2 trillion in cuts over 10 years...

BERNSTEINWell, I would say -- go ahead.

PAGE...where would -- what would get cut?

BERNSTEINI certainly wouldn't do it just on the cut side. It would -- and this is the president's view and he's right. It would have to be balanced between more revenues and more cuts. On the revenue side, I would probably start looking at some of the tax exemptions, the expenditures, the loopholes that we haven't closed yet. On the spending side, look, I really think you probably do have to go to the entitlements in much of the way the president offered.

PAGEEntitlements meaning Social Security and Medicare.

BERNSTEINAnd Medicare. I would leave Medicaid alone. It's already cut to the bone.

PAGEAnd...

EDWARDSOne of the problems with what Jared is saying, though, is that, you know, you can make cuts within this -- the current 10-year window. But, in fact, if you look at most of the entitlement programs, the real spending growth for Social Security and Medicare, spending starts exploding in the 2020. So you might be able to sort of keep debt a little bit under wraps in the next few years. But frankly, in 2020 and 2030, things start getting worse and worse and worse. So to solve the entitlement problem, you need to make serious fundamental restructuring of these programs to control spending in future decades.

WESSELI disagree. I think the goal right now should be to achieve a sustainable debt-to-GDP ratio in the next 10 years. And to do that, you're going to have to control the growth of health care cost in the private and the public sector. And some of that is being phased in through the affordable care. We're actually beginning to see health care cost grow more slowly.

WESSELThe problem is when we're talking about going after entitlements like this, you have to remember that for the typical Social Security beneficiary, 70 percent of their income comes from Social Security. So we have to do this in a way that protects vulnerable, elderly people who depend on this type of social insurance.

BERNSTEINRight. And, of course, during the campaign it was clear that neither party wanted to do anything on the benefits or very little on benefits for people who are 55 and over.

WESSELRight.

BERNSTEINSo it's going to be phased in. But I do agree with Chris that no matter what budget window you use, Congress has a habit of gaming this stuff and kind of doesn't get credit for the long view. And if -- but given that the debt-to-GDP ratio will be rising in the next -- over the next decade, you would agree, Chris, it would be better if we stabilize it now. It will put us in a better position to deal with this when we have...

EDWARDSOf course. But, I mean, why is this sort of small ball? I mean, we should be able to balance our budget. Many other countries, like Canada, who have got into deep debt trouble, actually ended up balancing their budget by cutting spending. Fifteen years ago, Canada was where we are. They had a debt at 80 percent of GDP. Their credit rating -- their bonds were being downgraded. They cut spending dramatically. They cut spending by 10 percent in two years.

EDWARDSThe sequester that we've been talking about recently would only cut spending 3 percent, and everyone thinks that's too big a cut. Canada dramatically cut spending and it was great for their economy. Their economy boomed with these spending cuts. We've cut spending in the past. In the 1990s, at the end of the Cold War, we dramatically cut defense spending.

EDWARDSWhy? Because both the leadership in both parties agreed. We spent too much on military. They got together. They dramatically cut defense. They closed hundreds of bases. It turned out to be a very good thing for the economy. So I think spending cuts are good for the economy, and we need to...

BERNSTEINI applaud Chris' -- Chris is very much in the responsible camp of putting defense on the table. I very much applaud him for that. A lot of conservatives don't go there. But I will say that the kind of spending cuts he's talking about right now will undermine what is still a fragile economy. I mean, let us not forget, all we're talking about is fiscal policy.

BERNSTEINWhat most people care about right now -- and they're absolutely right, and I agree with them -- is the immediate economy that they face: jobs, earnings, the unemployment rate. And the reason we had to do what we just had to do with this fiscal cliff was to avoid making this fragile economy go back into recession. We can't forget about that.

EDWARDSJared, it didn't hurt the Canadian economy. The Canadian economy boomed for 15 years, coincident with the dramatic reduction in their federal spending.

BERNSTEINWell, I think it would hurt our economy.

WESSELBut look. And I think the point is that we don't really have a problem right now. The federal government is borrowing money for 10 years at about 1.8 percent, an extraordinarily low rate. We're fortunate to have the world's most important currency. Everybody wants to lend us money 'cause the rest of the world's in even worse shape than we are. So we don't have to do this instantly, but we do have to do this over the next decade.

WESSELAnd what the Canadian example tells me is it's important to do this when your economy can sustain it. So if we put in place spending cuts and tax increases now that take effect over the next decade as the economy gets better, we will leave to the next generation a stronger economy. There is absolutely no excuse for not doing this other than the pettiness of members of Congress and their inability to accept that neither side here is going to be able to prevail.

PAGEI'm Susan Page, and you're listening to "The Diane Rehm Show." We're going to take your calls in just a moment, 1-800-433-8850, or send an email to drshow@wamu.org. Well, David, both Chris and Jared have talked about the possibility of Pentagon cuts, significant Pentagon cuts. But I think it's fair to say that a lot of House Republicans and Senate Republicans would disagree that that's a place where you can have significant cuts. What's likely to happen when it comes to the Pentagon budget?

WESSELI think the Pentagon budget will be cut. The Pentagon accounts for about one-fifth of all federal spending now. Measured as a -- in inflation-adjusted dollars, it's higher, projected to be higher than it was during the wars to the Cold War. I think that, in the end, the defense budget will be cut more than it has already despite the Republican or some Republicans' insistence. I wouldn't give the Democrats a pass on this. A lot of them have defense contracts in their districts that they defend mightily as well.

PAGELet's go to the phones. We'll talk first to Ken. He's calling us from Alford, Fla. Ken, hi. You're on "The Diane Rehm Show."

KENHi. Thank you for taking my call. I'm deeply concerned about a comment made earlier, pitting younger people against older people. Entitlements -- Medicare and Social Security -- are not part of the budget. If somebody can point to a line item in the budget and show me Medicare or Social Security, I would laud them because they're not part of the budget.

PAGESo, Ken, do you think they should be off the table when it comes to talking about controlling spending?

KENWell, as far as controlling spending, they're not on the table because they're not in the budget.

PAGEAll right. Ken, thanks so much for your call. Now, Chris, I think he was referring to a comment that you made. What would you say to Ken?

EDWARDSWell, I'm afraid, Ken, you're completely wrong. If you send me an email, I'm happy to show you the line item. It's in the budget, where we have Social Security, Medicaid and Medicare exploding in cost, rising five, six, 7 percent a year in cost, and frankly those programs are bankrupting the nation. In my view, you know, people refer to Social Security, for example, as a pension program. It is not. There are no real assets behind Social Security.

EDWARDSIt is essentially a welfare program. We tax young people heavily to give money to old folks, and it is true that people have grown up in this system and they've counted on it for their retirement. So you can't swipe the rug under elderly people right away. But we do need to transition to a new system where young people save more for their own retirement or else the country is going bankrupt.

PAGEChris, I'm not sure it's fair to call Social Security a welfare program when people do contribute to it throughout their working lives, although perhaps they draw more benefits than they contribute to it.

BERNSTEINWell, look, not only is it not fair, but, I mean, I think listeners really need to know that the view that Chris just espoused again with respect to his deep knowledge of budgetary issues -- excluding Social Security, I'm afraid to say -- is a very unusual outlier, radical view that has nothing to do with the program or the way most people think about it, which doesn't mean, by the way, that it has some solvency issues not nearly as severe as Medicare. In fact, Social Security could be relatively easily solved with a rational Congress of the type that David Wessel has been asking for.

BERNSTEINBut it's also -- and key to, I think -- look -- by the way -- and I agree with Chris that there are budget lines, of course, for these issues, for these programs. But the point is that it is an intergenerational transfer -- that is, that people working today help pay for the pension of people who used to work and created the productive economy that today's workforce is benefiting from. And it's actually a very elegant intergenerational transfer that's working very well and will work very well in the future with actually a few minor tweaks. Medicare is a different story.

WESSELRight. So let me just make -- I want to follow up on Medicare. So the payroll tax does finance Social Security. Workers pay the payroll tax. The money goes to people before they retire. That's not true in Medicare. Medicare beneficiaries do not pay the full cost of Medicare. The general taxpayers -- people like you and me and the people listening -- pay regular taxes, and some of that goes to Medicare.

BERNSTEINBut here's the way I like to look at it. About a third of the federal budget is the annual appropriations that go for defense and to pay the salaries and keep the lights on at -- in the White House and so forth. And about two-thirds of it are benefit programs which are not subject to annual appropriation by Congress, and that includes Social Security, Medicare, many of the farm programs, veterans' benefits, interest on the debt and all that stuff. If we don't cope with that two-thirds of the budget, we're never going to get to a better place.

PAGEWhich is why they're called entitlements...

BERNSTEINExactly.

PAGE...because they're not subject to budget authorizations.

BERNSTEINYou'd get them if you're eligible.

PAGEBut I wonder. The feeling that I think a lot of Americans have, especially seniors, that these are programs they supported when they were working. These are programs they count on...

WESSELRight.

PAGE…counted on to rely upon once they retire. You can't ignore that perspective.

WESSELNo, no. Look, people need to be -- people need an explanation. I can't imagine either Ronald Reagan or Bill Clinton giving a very persuasive explanation of we may -- we promised you benefits. We're going to do everything we can. We're going to make sure that the people who are poor and rely on Social Security get it. But for those older people or people of my age -- I'm 58 -- who will retire in 10 years or 12 years, you're going to get slightly less than we promised.

BERNSTEINJust one number, one number, the median income of the typical Social Security or Medicare beneficiary is $23,000. So let's be aware of who we're talking about here.

PAGEWe're going to take another short break. And when we come back, we'll continue our conversation with Jared Bernstein, David Wessel and Chris Edwards, and we'll go to the phones and take your calls. Stay with us.

PAGEChris Edwards, we've gotten any number of emails about your comments on Social Security referring to it as welfare program and calling for recasting the retirement system. And several of them accuse you of ageism. Here's an email from Richard, who writes, "You've got to at least flinch as Chris Edwards keeps making some of the ageist statements I've heard on the air for a long time blaming deficits on old people." What's your response?

EDWARDSI think we need to cut federal spending. Else we are going the way of Greece. And I think, to be fair, we need to cut just about every department and program in the federal budget. Elderly people get a huge amount of subsidy, so that is an important place to look for spending cuts. But -- so the Americans will accept spending cuts if they are perceived to be fair.

EDWARDSSo I would like to cut, you know, military spending, programs for the elderly, business subsidies, corporate welfare across the board. We were talking about Canada earlier. That is how Canada did it. Canada chopped 10 percent basically across the board: unemployment insurance, welfare programs, business subsidies. That's the way to do it. For cuts to be accepted, they have to be broad-based.

BERNSTEINI couldn't disagree more. I mean, to me, this is an example what Chris is engaging and is an example of this kind of deficit and debt hysteria that's targeted not at fiscal responsibility but at destroying social insurance programs that are critical to the well-being of retired Americans and programs that they -- in many cases, they worked for all their life. Let me just give a number to this again. We've got to stick with the numbers if we're going to be economist about this.

BERNSTEINIn order to sustain -- in order to achieve a sustainable debt projection over the next 10 years, we need to cut another $1.2 trillion over 10 years. Now, GDP over the next 10 years is expected to be $200 trillion, OK, if you just put all that growth together. So that's half a percent of GDP over the next 10 years. We can do that with a functional Congress. I'm not saying it's going to be easy, but that's a very different story than Chris is talking about these massive Greek-like tragedies out there. That's nonsense.

EDWARDSCan I just -- I mean, Jared, though, you're talking about stabilizing debt. We're still going to be running annual deficits of hundreds of billions a year. That is all the cost that we're shifting on to young people in the future. Young...

BERNSTEINThere's nothing wrong with deficits. There is nothing wrong with deficits.

EDWARDSOh...

WESSELOf manageable size.

BERNSTEINOf manageable size, exactly.

EDWARDSOh, I think that's nonsense. I think it's bad for the economy. But I also think it's extraordinarily unfair. We're going to make young people, in the future, are going to have a lower standard of living with less opportunities...

BERNSTEINWrong. Deficits less than 3 percent of GDP are totally manageable. Always have been, always will.

EDWARDSYeah, but they're not good economics, though.

PAGESo different perspectives here on the deficit. David Wessel.

WESSELAm I supposed to settle this dispute? I guess Chris is moving to Canada. I guess he wants the Canadian health care system or something.

WESSELLook, I think Social Security is very difficult to deal with politically, but Jared makes exactly the right point that compared to health care cost, it's relatively easy to solve. And what we're going to do is some combination of raising the payroll tax, changing the retirement age and changing the formula by which we calculate benefits. And different people have different always to do that. But it's manageable if it can be sold to people as making Social Security stronger for the future.

PAGEBut just before the break, you said you could hear President Reagan or President Clinton making that argument to Americans in an understandable way that they would trust. Can you hear President Obama doing that?

WESSELNo. And I -- that's a really brig surprise to me that President Obama has had so much difficulty after this remarkable campaign he ran four years ago in which he seemed to be the best order of his generation. Somehow, he doesn't have that ability to connect with people and convince them that what he's doing is in their interest all the time. It's always seems very competitive and combative against the Republicans. Now, partly that's because of the Republicans he'd had to deal with.

WESSELI think there's very little trust among the American people in the political leadership of the country, and that's a fundamental problem if their leadership of Congress and the president are going to have to go before people and say, OK, we're all going to tighten our belt for the good of the future. Trust us. Well, the reason that people like you and me and the press -- Susan love the Gallup polls that ask people to rate trust in institutions as no matter how bad the press gets, Congress is always one wrung by this.

PAGEJared, you worked at the Obama White House. Do you think that's a fair comment on President Obama?

BERNSTEINI was listening to David very carefully to figure out where I could wedge in a disagreement to the -- in defense of my former employers. But I think he has a good point. I think the president is great at conceptual communication, and that's no small thing. In fact, he may be even better than Bill Clinton at that, and Bill Clinton's one of the best in the business.

BERNSTEINSo he can really inspire you talking about investments in the future and the direction for the future economy in ways that are really important. But when it comes to the kind of more granular stuff that David was talking about and Bill Clinton's so good at explaining and selling, there is a limitation there.

PAGELet's go to David -- he's been holding on patiently -- from Moultonborough, N.H. David, hi. You're on the air.

DAVIDHi. Thanks for taking my call. I was really pleased to hear -- I called to talk about what I consider to be sort of a white elephant or the new third rail that you're not supposed to talk about, which is the military spending that, you know, military spending that we do in this country. And it's, on a scale, some much greater than all those other discretionary spending that we have. And to my surprise and delight, I heard several of you speaking about cutting -- the need for cutting spending at the Pentagon.

DAVIDBut we've -- you know, over the course of the last 15, 20 years, talked -- it's almost become unpatriotic and to talk about reducing the size of our military-industrial complex as Eisenhower would call it. So, anyway, could you -- just for everybody else's sake, can we -- can you guys put in perspective for everyone else the proportions that exist in total military and the secret agencies that we have in combinations to just the military as a proportion of the overall expenditures of the government, relative and then related to our "entitlements" that we have?

PAGEDavid, thanks very much for your question. Jared.

BERNSTEINYou know, I heard David Wessel earlier giving the percentages of GDP which, I think, now are in the three or 4 percent range in terms of defense spending. And, you know, the caller is correct in that we're talking about a fifth of the budget right now, something in the neighborhood of about $500 billion for the Defense Department per year, with another couple of hundred billion on top of that for other security parts of the -- but I can't speak about secret agencies because they're secret. I don't know about them.

BERNSTEINBut I think the important thing, and Chris may have insights in here as well, I think the important thing is that we don't just sort of blatantly, almost like the sequester, talk about cutting defense, you know, with a meat cleaver, but actually try to get in to the stuff that they're doing, to the projects, to the internals that the department is doing and figure out what's inefficient and ineffective there, because I guaranteed you, there's lot of fat there. And there are a couple of experts who I've read who've convinced me that there are cuts we absolutely should be making.

WESSELNow, let me make two observations about that. One is that, here's a question, how many aircraft carriers does the United States need? Congress has mandated that the Navy had 11 aircraft carriers which, as former Defense Secretary Bob Gates once said, is 10 more than any other country. These things are very expensive, and the Navy wants to replace each of them with a new one over the next 50 years. Each one of these is like 11 or $12 billion, and so it's a lot of money.

WESSELA second thing is that -- and I think people really don't realize this, although the people in the Pentagon do is that Pentagon has the world's most generous health care system for people who have "retired from the military after 20 years." We're not talking about wounded warriors. We're talking about people who spent 20 years in the service and who have an extraordinarily generous health care program, much more generous than any other American has.

WESSELAnd every president, Republican and Democrat, for the last several, has tried trim it and always runs into opposition from the veteran's lobby which sends members of Congress scurrying for cover. This is something that Alan Simpson, the Republican Senator for Wyoming who was chairman of that commission that Obama appointed, has made a point of.

WESSELAnd so there are ways to reduce defense spending that will not leave us vulnerable to missiles from Iraq or from Iran rather or North Korea or will make it impossible for us to defend against Chinese cyber hackers or leave the sea lanes vulnerable to pirates.

PAGELet's go -- Chris, I'm sorry. Did you want to weigh in?

EDWARDSI mean, just really quickly. I agree with David that I think with all of these spending cuts, we do need to be strategic, and we need to have an open discussion about how to do it and how to -- you know, the least efficient spending, let's cut it. So with the military, let's figure out our strategy first. Let's not be the world's policeman.

EDWARDSLet's close foreign military bases. Let's do things that make sense for the long run. But it's the same with these other programs too. We should cut farm subsidies. We should cut housing subsidies. But let's have a detailed discussion about the problems with these programs then we'll cut.

PAGEYou know, and lot of Americans I think would say even without doing anything on Pentagon programs, shouldn't the end of the war in Iraq and the withdrawal -- the scheduled withdrawal of most U.S. combat troops from Afghanistan result in a kind of automatic peace dividend? Would it, Jared?

BERNSTEINWell, it does. And that -- those savings are already on the books. In fact, one of the arguments we've had is that people are trying to count them numerous times. But, in fact, those are hundreds of billions of dollars that we would have spent that we're not going to spend anymore. I will say when I say that there's been over $1 trillion of spending cuts so far, I'm very carefully not counting war savings. So those are real savings.

PAGEWell, Jared, we actually have an email about how you count savings that I think is directed to the comment you made earlier in the hour. Here's the email -- actually a comment that was posted on Facebook. "Exactly what were the 2011 spending cuts that the president counts as part of his contribution to a compromise? I understand that he is counting the debt ceiling debate of 2011, whereas the GOP doesn't count those cuts. What were they and what was the total cut? Did the GOP give anything other than raising the debt ceiling?"

BERNSTEINSo that's a great question. The cuts, as I mentioned, were about $1 trillion and a little bit more, by the way, if you include interest savings. Since we're cutting that spending, we won't have to pay interest on as much. And they were fully on the discretionary side of the budget. That is they didn't get into any of the entitlements that we've been discussing. Now, the discretionary side is split between defense and everything else, so all the other programs, the agencies and all of that.

BERNSTEINAnd those cuts are, in fact, counted by the president and me and probably others, certainly the CBO, when we're -- the scorekeeper down here, the Congressional Budget Office. And, you know, some people -- and let me just make one point. Some people object to counting these spending cuts as real deficit reduction because they happened in 2011. I have, I think, what's a good analogy for that. Suppose you're on a diet, and you run into your friend. And your friend says, boy, you look great.

BERNSTEINYour diet is really working out well. How many pounds have you lost? Do you say to your friend, I've lost 20 pounds since I started my diet six months ago? Or do you say to your friend, I've lost half an ounce today? And, of course, you say the former. And to me, you know, people who say you shouldn't count savings that happened before, you should always start the clock today, are really trying to just game the system.

WESSELRight. But -- so -- but let's be clear of what happens. So, first of all, I think Republicans do count them. When the Republicans do their tables about deficit reduction, they are pleased to take credit for this. But what they did was set ceilings on these annual appropriations, and in the future they'll have to decide how do they fit all their wish list under these ceilings. Now, we know in the past, we've tried this before, it works for a while. It worked pretty well in the '90s for a while until it didn't work.

WESSELAnd one of the reasons that the Congress has been choking over the 60 billion or 50 billion, whatever it is, for Hurricane Sandy victims is that that's on top of these ceilings. So it -- I think what's important here is it only works if there's a shared commitment by members of Congress and the president to kind of stick to these things. They can always do an end-run, change the law. They can always do that. But for now, I think there is a commitment to live within these ceilings, which affect both defense and domestic spending. But it will take some discipline.

PAGEI'm Susan Page and you're listening to "The Diane Rehm Show." We've been taking your calls and comments, 1-800-433-8850. Well, you know, we've talked about Canada to a surprising extent in this debate. And, Chris, here's an email from Ann, who is -- I thought she was from Canada, but this says she's from Indiana. She says, "A guest..."

WESSELClose to Canada.

PAGE"A guest points to Canada as an example of fiscal responsibility. I would like to point out that Canada has national health care." This is a point I think David made. "Having -- while perhaps counterintuitive that would tremendously improve our national budget." Is she right?

EDWARDSYou know, interestingly enough, the health care system is one area where Canada did not cut. But Canada is slowly -- and, you know, they have a government-run centralized kind of health care system. But they are very slowly but surely moving more toward a market-oriented health care system, which I think is good for them. But they cut virtually everything else when they did their left-of-center government in the 1990s: cut welfare, unemployment insurance, defense, aid the lower government's business subsidies and many other things.

EDWARDSAnd it worked out extremely well for the Canadian economy. And I would note, there are a number of other high-income industrial countries -- Australia is a good example -- who now have smaller governments than United States, and they have been highly successful. Australia is another model we ought to look at. Their economy has been being growing very rapidly. And if you look at data put out by the OECD, the big group of rich countries, the Australian government is actually substantially smaller than ours now, and it's worked out very well for them.

PAGELet's go to Chelsea, Mich. and talk to Mike. Mike, you've been really patient. Thank you for holding on.

MIKEWell, thanks for taking my call. I have a comment pretty much. Congress won't do this 'cause it pretty much cuts their own throat. But I have a suggestion. When companies have a deadline, especially road construction and things like this, they miss a deadline, they have to pay out of their own pocket until the job is the done.

MIKEI suggest, within 90 days of a deadline, Congress does not get any more pay -- senators, House representatives, the whole lot of them, all right? After 60 days, if there is no agreement, we take 2 percent of their annual pay per day. Something ghastly like this, just wake them right up, and they go, oh, my God, we got to do our job.

EDWARDSAs an economist, I must endorse your plan based on its very clever incentive structure.

PAGEYeah. I think a lot of Americans --- but, I mean, we do -- we have had emailers expressing frustration with what seems to be a pretty dysfunctional system in Congress. I mean, they did finally act this week, but it was because they faced a cliff that we would fall over otherwise. And even then...

WESSELOf their creation.

BERNSTEINYeah.

PAGEThat they created. So what can be done? Is there anything Americans can do to try to make the system work better, David?

WESSELWell, we elected these clowns, so there is a way -- yeah, you know, people vote. And you don't have to vote for the people you don't like. I'm continually frustrated by the some of the businesses that have been lobbying very strenuously and I think in the public interest for doing something on the deficit, but it hasn't affected their campaign contributions.

PAGEWe've talked a lot about these debates and some of the numbers seem -- trillion dollars even over 10 years seems like a lot of money. For Americans who are sitting down thinking about, what will my household economy be like, what would my household finances be like this year, to what degree are they going to be affected by these coming debates over the next few months in Congress?

BERNSTEINFirst of all, let me just point out that $1 trillion over 10 years is half a percent of GDP. OK. It's a great question. And, in fact, households -- particularly middle and lower-income households do not come out of this compromise agreement unscathed. And that's largely because there was this payroll tax break, 2 percent of your paycheck up to about $110,000, that every working person was benefiting from over the last couple of years. That is now done. That's expired. And so you'll see middle-income households facing about $1,000 loss in their paycheck because of that expiration.

PAGEJared Bernstein of the Center on Budget and Policy Priorities, David Wessel of The Wall Street Journal and Chris Edwards of the Cato Institute. Thanks so much for joining us this hour on "The Diane Rehm Show."

BERNSTEINWelcome.

WESSELThank you.

EDWARDSThank you.

PAGEI'm Susan Page of USA Today, sitting in for Diane Rehm. Thanks for listening.

ANNOUNCER"The Diane Rehm Show" is produced by Sandra Pinkard, Nancy Robertson, Denise Couture, Susan Nabors, Rebecca Kaufman, Lisa Dunn and Jill Colgan. The engineer is Erin Stamper. Natalie Yuravlivker answers the phones. Visit drshow.org for audio archives, transcripts, podcasts and CD sales. Call 202-885-1200 for more information. Our email address is drshow@wamu.org, and we're on Facebook and Twitter. This program comes to you from American University in Washington, D.C. This is NPR.