'This Week' Roundtable: Economic Outlook

Paul Krugman, Doug Holtz-Eakin, Sheila Bair and Roger Altman debate the budget


BOEHNER: We're not talking about billions here, we should be

talking about cuts in trillions, if we're serious about addressing

America's fiscal problems. With the exception of tax hikes, which in my

opinion will destroy American jobs, everything is on the table.


AMANPOUR: House Speaker John Boehner throwing down the gauntlet in

negotiations over raising the federal debt ceiling. Here's that debt

clock again. We have got a live picture there in New York and it waits

for no one. Soon, the numbers will crash through the debt ceiling,

exceeding the amount the U.S. is legally allowed to borrow. The stakes

couldn't be higher, so what is the solution?

Joining me now, Doug Holtz-Eakin, who ran the Congressional Budget

Office and served as John McCain's chief economic adviser in 2008.

Nobel prize winning economist Paul Krugman of the New York Times.

Sheila Bair, who is wrapping up her term as chairman of the Federal

Deposit Insurance Corporation. And Roger Altman, a former deputy

treasury secretary in the Clinton administration. Thank you all for

being here.

This seems to be a never-ending conversation, but the limit we're

now hitting up against. How is President Obama to respond to the call

for trillions, not billions of dollars in cuts?

KRUGMAN: I think he cannot -- if he gives in on this, he's setting

himself up for repeated blackmail. He's basically saying that I care

about the economy more than the Republicans do, and therefore, every

time they threaten to blow it up -- even though it will hurt all of us

-- I am going to give in.

So I think Obama has got very, very little wiggle room, even though

it's a terrible thing.

AMANPOUR: Lots of economists are saying the Republicans are playing

with fire, that hitting the debt limit, exceeding it is not like

shutting down the government. It could cause a real cascading economic


HOLTZ-EAKIN: I don't think there is any great desire to hit the

debt limit. The key is to recognize the limit is a symptom and that the

fundamental problem is the underlying condition of the U.S. budget.

What you're seeing now are calls for, both from Speaker Boehner and from

the Senate minority leader, Mitch McConnell, for real solutions to the

real problems. It's not about the debt limit. It's making sure that in

the short term you get cuts, in medium term you have an enforceable

path, and that you take care of something in the long term. The

entitlements have to be on the table.

AMANPOUR: So, we do keep hearing this now. There obviously seems

to be the momentum for dealing with entitlements. But how? How does

one deal with Medicare, Medicaid? We already saw Paul Ryan and his plan

for Medicare. They seem to be running away from it now. So how does

one deal with this in a way that's real, rather than just ideological,

if that's possible?

BAIR: Right. Well, I'm a bank regulator, I'm not a budget expert,

as some of these other gentlemen are, but we have been following this

very closely because we are very concerned about the outcome and how it

could impact the financial sector. But I've also worked in Washington a

long time, and it seems to me that if the pain is evenly distributed and

the general population feels that there's fairness in whatever ultimate

outcome is agreed to, I hope, by the administration and the Congress,

then I think it can politically, it can sell.

I do think that both sides have a point. Last November, I published

an op-ed in the Washington Post, where I said if we didn't get these

deficits under control, I thought it would precipitate the next

financial crisis. I also agree with the administration, though, that

it's irresponsible even to entertain the idea of even a so-called

technical default on the public debt.

So I think both sides have a point, and I hope they come together.

And gentlemen, if you excuse me, I think maybe there's a little too much

testosterone in this debate. It's too much about winning and losing and

not enough of both sides are right, let's come together and have a


AMANPOUR: What would a default mean? What impact would it have?

ALTMAN: When I hear all this discussion about not voting to raise

the debt limit, absolutely not and so forth, as we just heard earlier on

the show, I have to roll my eyes a bit. Because, as Doug said, the debt

is a product of past budget decisions. And we have no alternative,

therefore, but to raise the debt limit. For example, we're running a

deficit this year between 1.4 and 1.5 trillion. Those amounts have to

be borrowed, just like a household which is spending more than it takes

in. It has to raise cash. So there is no alternative but to allow the

United States to continue to borrow. Therefore the debt limit has to be

raised. And should we somehow fail to do that and there be a default, I

agree with what the Fed chairman, Chairman Bernanke, said this past

this, which is that it would have severely destabilizing impacts.

In fact, he said it would probably bring back the severe chaos we

saw in the immediate aftermath of the collapse of Lehman Brothers in the

fall of '08.

KRUGMAN: If I can just weight in, that this is -- U.S. debt -- it's

not just that our credibility is on the line, that people could get

spooked by the fact that we start to look like a Banana Republic.

But it's also that U.S. debt plays a very special role in the world

system, right?

A U.S. treasury bill is the gold standard of value, so much so that,

during the height of the financial crisis, there were intervals where

U.S. Treasury bills had negative interest rates, because that's what

people had to hold.

And if you're going to suddenly say, oh, that's not safe because the

U.S. government is -- is a bunch of squabbling children, that is a real

possible catastrophe.

AMANPOUR: And even the -- the Chamber of Commerce leader is saying

that it's time to make this deal, raise the debt, and not even talk

about cuts right now.

KRUGMAN: That's right, because the cuts issue -- I'm sorry -- but

it's a huge thing, not to be settled in a few weeks of frantic yelling.

HOLTZ-EAKIN: So the U.S. is very unique in that it has a debt

limit. So imagine we didn't have one. We'd have an enormous problem.

We're on track to literally create a new financial crisis, given the


So dealing with the problem has to be the top priority. The

prospect of that financial crisis is anti-growth. It hurts the most

important job, which is jobs. And so I think the important thing is for

the Democrats who ultimately control this town and need to provide the

leadership on this to recognize that dealing with the problem, not the

debt limit symptom, is the key. And that's the route to real success.

ALTMAN: But you just made an important point, which is that the

business community and the financial community, which are largely

Republican, are entirely united in urging all of Washington, but

especially the Republican side, to pass the debt limit, don't trifle

with it and certainly don't trifle with default. And I think that's


HOLTZ-EAKIN: And the last thing I'd say -- and this is important to

recognize -- that nine out of 10 Americans oppose just a pure increase

in the debt limit.

So let's face it. This is a political exercise. They can't just

raise the debt limit. That's politically absolutely unacceptable. They

need to both raise it and fix the problem.

AMANPOUR: And you also heard Speaker Boehner saying that everything

is on the table except -- except taxes.

Has that battle basically, Sheila, been completely won now or

settled; it's just not going to happen?

BAIR: Well, I think that's a good question. I think probably

everything should be on the table.

I think there's a difference between tax -- raising tax rates and

tackling tax expenditures, and I think there is the potential for a very

broad bipartisan consensus on tackling, getting rid of most of these tax

expenditures which are very destroying for the economy and were -- some

of them were a driver of the crisis.

For instance, the mortgage interest deduction heavily subsidized

leverage, a lot of leverage with home borrowers. He favorable treatment

we give debt over equity financing also encouraged leverage with

financial institutions.

There's a tremendous amount of potential revenue that could be

raised through tackling tax expenditures and it seems to me where the

most likely place for a bipartisan consensus is. But tax revenues do

need to go up. I think that needs to be part of the solution.

AMANPOUR: And this week, President Obama said to the Democrats,

don't draw any lines in the sand; be flexible on this.

KRUGMAN: Well...

AMANPOUR: On not particularly this issue, but in general.

KRUGMAN: Yeah, and there's a problem because, if you're playing the

responsible adult in the room and the other guy is willing to blow up

the room if he doesn't get exactly what he wants, that puts you in a bad

negotiating position.

I think there has to be some lines in the sand. There have to be --

you know, we're not going to dismantle the New Deal and the Great

Society in a couple of weeks because the Republicans refuse to raise the

debt limit.

AMANPOUR: What would each one -- I want to go around the table and

ask you, what would each of you want to see coming out of these debt

ceiling talks that are going on right now?

What is the best-case scenario?

ALTMAN: Well, I think it will have to be, as Doug said, a serious

agreement to cut the deficit, or a downpayment, as the administration is

talking about, negotiated beforehand, and then pass the debt limit

increase in effect in exchange for that.

So there will have to be a serious budget agreement. It will just

be a downpayment. It won't solve the entire $4 trillion 10-year

problem. But if it's not serious and pretty large, then I don't think

it will get the votes to pass the debt limit.

BAIR: I guess I would like to see even more than that and have a

long-term plan. Four trillion over 10 years, I think, was a good

number. I think the Bowles-Simpson plan wasn't perfect, but it was a

good -- a good framework, a good example of how the pain could be evenly


But I agree, some short-term downpayment and some meaningful time

sequencing to get this done, I think, is necessary for credibility.

KRUGMAN: I actually -- I think it may be necessary to take this up

to the limit. Because the fact of the matter, we do not...

AMANPOUR: And default?

KRUGMAN: Possibly, if -- if we have complete -- if we have demands

for a large change in policy under threats of debt limit. This has to

be the point where you say, no, we don't believe in letting hostages be


AMANPOUR: Do you -- I mean, do you agree with that?

ALTMAN: No, I don't. I respect Paul, but I don't. I think default

would be a profound and hugely negative step. I think it would be

terribly destabilizing. I think it would reduce the amount of

institutions around the world that would, in the future, buy Treasury

debt and be...

KRUGMAN: But let me make my case here. We...


OK, but let me just say, we have an enormous budget dispute. We

have vastly opposed poles of policy. That's not something we should

resolve with a, you know, with a bomb hanging over our head. It's not

something we should try and change. And so Democrats have to make clear

that they're not going to let themselves be blackmailed in that way.

HOLTZ-EAKIN: The first choice is real solutions, so real cuts in

the near term, real targets over the medium term and real changes in the

entitlement proms.

It has to be -- the most convincing thing for markets is the actual

changes in the policy. It's what Americans know has to be done and it's

what would be best for the country. The backup is just a framework; we

promise to hit this target or that target with enforcement -- that's

less compelling. It might be easier to say, but less compelling.

AMANPOUR: An article -- a story that's in The Washington Post

today, talking about the negotiations between Vice President Biden and

congressional leaders, talking about federal pensions and what would

amount to about a 5 percent cut in salary. Does that -- is that a goer?

HOLTZ-EAKIN: I believe, as a matter of politics, the federal

government employees can't be exempt from whatever the deal is. The

perception that somehow everything has to change for Americans, but that

the sheltered few in D.C. are exempt -- nah, it's not going to fly.

BAIR: Can I just say I really -- I'm sorry, but I'm truly

frightened by even suggestions that we could default on Treasury debt.

I think the knock on impact on that would be tremendous. We would lose,

I assume, our AAA credit rating. A lot of institutions who currently

hold Treasuries would no longer be able to hold them. They would have

to liquidate them. That would create tremendous down-pressure on bond


The fact that interest rates would spike in terms of what Treasury

has to pay -- those yields all consumer and business credit price off of

Treasury yields, so borrowing costs for the real economy would go up.

Both consumers and businesses now are very hesitant and uncertain,

so they're not committing capital. If their borrowing costs go up, it

will -- it will be very detrimental to the economic recovery.

So I'm sorry, but I think -- it truly frightens me.

KRUGMAN: No, I'm terrified...

BAIR: I don't think we should be talking about it.


KRUGMAN: But I'm also terrified by a blackmail political system.

BAIR: Yeah.

AMANPOUR: On that note -- on that terrifying note...


... we're going to have to pick this up another time.