tv Nightly Business Report PBS September 4, 2012 1:00am-1:30am PDT
captioning sponsored by wpbt >> darren: are you in the mood for another recession? well, if you loved the last one, the nation's top economists say you now have something to look forward to. if congress doesn't make some changes and fast, we are headed for what could be the first planned recession in the nation's history. that's because the federal government is scheduled to cut spending and raise taxes all at once, in an event called the fiscal cliff. tonight on this "n.b.r." special edition, we're jumping off that cliff to see what would happen, who would be hurt and for how long. hello everyone. u.s. markets are closed for the labor day holiday, which makes this a great time to step back and tackle one of the biggest threats to our nation's economy. it's called the fiscal cliff. maybe you've heard about all the automatic tax increases and spending cuts that make up the fiscal cliff. now, before you say this is just another silly inside-the-beltway mess that doesn't affect my life.
we want to tell you that the fiscal cliff is different. tonight, we're going to tell yoo what all this means to you, to our economy and our future. thelma and louise made pop history when they defiantly drove off that cliff. but this january, congress could steer the u.s. off a different cliff. and when someone falls off a cliff in washington, there are no stunt men to pick them up. on january 1, 2013, tax breaks worth $416 billion will expire. spending on things like defense, medicare payments to doctors will be slashed by $65 billion. add it all up and you are talking about cutting roughly half a trillion dollars from the federal budget. and if we do go over this cliff and let all this happen, the economy is projected to stagger into recession. it could derail everything, it would really hurt the economy, the job market and obviously the housing market as well. now here's the surprise: if we do go over the cliff, our debt problems would be tamed for at
least a decade. after the cliff, debt would fall from 73% of our economy this year to a little under 60% in 2022. there's a name for this kind of jolting budgetary medicine. it's called austerity. it's all the rage in europe right now. you want to have enough austerity to get that deficit down, but you don't want too much austerity that you drive the economy into the ground. there is rare agreement in washington that cutting spending and raising taxes all at once would not be wise. in fact, lawmakers created the fiscal cliff hoping it would be so scary no one would ever want to drive off it. at least that was the idea. what the fiscal cliff represents is a fundamental divide between republicans and the democrats on the role of government and how we are going to deal with our long-term budget problems. >> darren: to figure out how all this happened and what we do now, we are going to spend a lot of quality time tonight with two men who have beaten their heads against our budget problems for year.
erskine bowles, former chief of staff to president bill clinton and alan simpson, former senator from wyoming. they are, of course, the co- chairs of the simpson-bowles commission on deficit reduction. erksine bowles let me start with you. here we are at the edge of the fiscalliff, how the heck did we get here? >> because for decades we've made promises in washington we simply can't keep. and to me it's really frightening. i think that we face the most predictable economic crisis in history, fortunately for us it'i also the most avoidable, but the fiscal path we are on is simply not sustainable in these deficits are like a cancer, a cancer that will destroy our country from within. if we don't put some of this mindlessness and senseless partisanship aside and decide we're going to pull together rather than pull apart.
>> darren: senator simpson let me ask you, i think people sitting at home hearing that there are all these temporary tax cuts and automatic spending cuts that are about to take effect they think, why do politicians do this? >> well they do it so they can get re-elected mainly. if they can go to the left, if the lefties can go to their base and say they're working their tails off trying to get this thing, as erksine said, we're the healthiest horse in the glue factory, so they go back to their base saying they're working like a dog, i've lost ten pounds, but then somebody mentioned doing something about the entitlements and doing something to precious senior citizens and i walked out of the room, i knew you'd be proud, and then the cheers go up and rightly goes back to his base and says you know i haven't slept for two months, i'm working i'm frantic, and then somebody mentioned a tax increase and i walked right out of that room and i knew you'd be proud and the cheers went up. that's where we're stuck.
>> darren: now erksine bowles you think we're going over the cliff. why do you think that and what do you think will happen when we hit bottom? >> because i think both sides see it to their advantage to go over the cliff, their political advantage. to me it makes no sense whatsoever. what they're doing is really you know making a bet on the country. they're really risking our country. we got $7 trillion worth of economic events that will hit us in the gut come december- expiration of bush tax cuts, the expiration of the payroll tax cut, mindless and senseless across the board cuts that came about because of the sequester which came about because of the super committee, and if we do nothing by the end of this year the negative impact on economic growth in 2013 will be enough to throw us back into recession,
and it won't be just 2013 because companies will have to start preparing so we will start seeing negative growth in the fourth quarter of this year. >> darren: now we come to the critical issue: jobs. lots of people have different opinions about the impact of stimulus. but there is no real debate among economists about what happens if the government cuts spending and raises taxes all at once. if all that goes away, so will two million or so jobs. sylvia hall took a look at exactly what that means. >> reporter: in this baltimore lab, dr. curt civin researches leukemia in search of a cure. it's hardly a political job, but these days, he's keeping a close eye on the federal budget. you see the sequester-- the severe spending cuts headed our way in january-- could affect him. if it takes affect, it will cut
more than $2 billion from the national institutes of health. dr. civin and researchers like him depend on grants from the institutes for funding. >> it's tough enough to cure cancer. tough battle. going to take a long time. to cut the funding, to have unevenness, to take a project all the way, and then say well, we can't scale this up the way we should, or even maintain it the way we should? how can we do that. and it's not good for us. >> reporter: dr. civin says labs across the country may have to lay people off if their grants are defunded or reduced. eventually, that could lead to less research and fewer cures. he's especially worried about young scientists. some of them have new- potentially breakthrough- ideas, but might struggle to get financial backing when grants are harder to win. >> i have a pile of ten of those to review, and only one of those gets funded. i'm going to fund the surest
thing. or recommend funding of the surest thing. that means by definition, the stuff that i'm used to. that i expect. that is an incremental gain. but this risky one, down at the bottom of the pile, well that could be great, but i'm just not sure. it's so new, it's so different, i'm not going to fund it. >> reporter: the sequester would have a similar effect on a wide range of programs across the country, from science, to public safety, to education. defense spending would take a huge hit with $500 billion in cuts. in phoenix, mayor greg stanton calls sequestration the number one threat to his city's economy and disastrous for arizona jobs. >> in arizona, we would lose almost 50,000 jobs immediately. and we know that they're the right kind of jobs. 35,000 of those jobs would be in the defense and aerospace industries and in arizona, those are some of our highest paying jobs. >> reporter: that's the case in regions across the country where the defense industry is strong.
one of those is johnstown, pennsylvania. the manufacturers that used to make steel here found new life making things for the u.s. military. but here at j.w.f. industries, defense orders are already starting to decline. they estimate the seqeuster could lead to a 60% profit cut and layoffs of more than 100 workers. >> we're in small town america. and it's not like we're in the beltway where if you lose this job, you can go to another job. there's another opportunity, you don't have that here. so anyone in the defense industry that's in small town america, is going to have a huge impact. >> reporter: so while all these cuts are one way to help washington get its fiscal house in order. c.e.o. bill polacek says it would take a massive preventable and personal toll here in johnstown. >> everything i've worked for, everything everybody worked for, in 25 years of business that we're celebrating this year, could all be for naught, only because the people in congress, and the senate, can't vote to do what's in the best interest of the american people. >> reporter: congress has unl january first to avert the
sequester. until then, manufacturers, researchers, teachers and a host of others will be waiting to find out if and how the fiscal cliff will affect them. sylvia hall, "n.b.r.," washington. >> darren: as we just heard, going over the fiscal cliff will cost jobs. but we do have to get a handle on our debt. so how do we strike the right balance between jobs and the economy and the need for fiscal restraint? again we turn to simpson and bowles. >> i think that's a pretty easy answer.ç let me just kind of frame it first. what our commission recommended is that we have $4 trillion of deficit reduction. and we didn't make that $4 trillion number up just because the number four bus passed us on the street. $4 trillion is not the maximum amount we need to reduce the deficit. it's not the ideal. it's the minimum amount you need to reduce the deficit to stabilize the size of the debt and get it on a downward path as
a percent of g.d.p. and we got a majority of republicans on our commission, a majority of democrats on the commission to vote for it. and several people ask us, well, gosh, if we take these steps now, then we do run the risk of accelerating this downward turn in the economy. that's why we made our number one principle we wouldn't do anything to disrupt a very fragile economic recovery. so we delayed the early actions that would cause these cuts to take place and skewed them out into the out years. what people want to see is a plan so we actually do get to balance in the not-to-distant future. >> darren: but mr. bowles let me just follow up quickly. some people, not a lot of them, but some people would make the argument well if we have a shallow recession but we get our debt under control in ten years maybe that's not a bad deal. maybe it's painful but maybe that's what we need to do.
just wanted to get... do you agree with that or is that too harsh? >> no. i think it is unnecessary. if you look at our plans, we have cuts in 2013, 2014. we reform the tax code. i think the best thing we could do for economic growth is to adopt the tax plan that we put forward. we suggested, because today we have the most inefficient, ineffective, globally anti- competitive tax code that man could dream up. and what we said is what we ought to do is broaden the base, simplify the code and we ought to get rid of all this backdoor spending in the tax code and use 92% of the money to actually reduce income tax rates and use 8% of the money to reduce the deficit. since there are $1.3 trillion worth of spending in the tax code, these deductions and credits, if you'd gotten rid of all of them and went to a zero base, then you could, by using 8% of the money you could reduce the deficit by about $100
billion a year over ten years. that's where our $1 trillion of revenue comes from. >> darren: senator simpson the plan that you put together with mr. bowles didn't get a lot of support from democrats and republicans. a lot of people ran as fast as they could away from it. now that you've had two years to think about this, what is going to bring them back to a plan like yours? >> damned if i know, but the probably the markets will call the shots and forget about the ratings agencies. that is small potatoes. it's going to be the markets that call the shots and when they call the shots, people are going to look around who have to pay more interest who get diddled on this program or that or lose this program. and they are going to look around and say who were the guys in office when this happened. who knew this was going to happen and let it happen?
>> darren: listening to all the worries about the fiscal cliff, it is easy to think that the cliff itself is the problem. but it's not. the real problem comes a little ways down the road and it is much bigger. >> reporter: think about all the things the government does. you, know, some of the stuff that's so exciting they make into tv shows and movies: there's the army, the f.b.i., nasa. spending on all of that, it's actually shrinking. in fact, by 2022, federal spending on everything except social security and health care, is set to fall from its historical average of about 11% of our economy to less than 8%. it will soon be smaller as a share of the economy than back in 1974 when richard nixon resigned. so where is the spending growing the fastest?
the real budget challenge is you. and it's me. and, the older we get, the more expensive we become for the federal government. it's no coincidence then that the programs driving our debt are medicare and social security. aby boomers retire and tap into the programs, there's no relief in sight. spending on social security and medicare will almost double over the next ten years. it's the fast-growing part of the budget. >> i think the american people increasingly understand that we have incredibly severe budget problems and they cannot be solved by getting rid of foreign aid and waste fraud and abuse that most of the money that the federal government spends goes to entitlement programs and most of that money goes to middle income seniors. >> reporter: the easy fixes many people offer for our budget problems will do little to solve the problem. consider foreign aid. you'll hear a lot of people suggest we slash it to get our spending under control. but, if the empire state building represented every dollar the federal government
spends in a year, cutting out foreign aid completely would only lop off about half a floor. another common suggestion is to cut waste fraud and abuse. but you'll find the biggest source of abuse is not that easy to fix. the i.r.s. figures americans duck out on $385 billion in taxes every year. but fixing that would require much tougher audits and a far more intrusive i.r.s. you will hear a lot of talk about tax reform as a solution. there's just one problem. >> tax reform is more a distraction than anything else, because what we have to do is figure out what taxes we are going to increase or whether we are going to increase taxes. rearranging the way you do it doesn't address that problem. >> darren: unfortunately, the budget math is relentless. if our deficits continue to grow at an unsustainable rate, eventually our debt will swallow up the federal budget. >> ultimately that is what is going to sink us. if the amount of money we owe
continues to grow faster than the rate of growth in our economy, our ability to service that debt, to pay back that debt-- at some point investors are going to say, hey i'm not going to get my money back. the risk is that i'm not going to get my money back and you're going to have to pay me a higher interest rate to take that chance. >> darren: of course, alan simpson and erskine bowles have a plan to make sure our debt doesn't sink us. it carefully balances spending cuts with tax increases... but when it was released in 2010 it also drew fire from both democrats and republicans. i did want to ask you both and i'll start with you mr. bowles because i think that uh i've been doing this a long time and what i often what you hear from people who care about the budget deficit is a lot of eat your spinach, take your lumps, you have to do this, but they don't necessarily talk about there's positives to this, what good can come out of getting our fiscal house in order. can you address that?
i mean if we go through all this short term pain is there any pay off down the road? you know get a six pack fiscal abs or something? are we going to be better off if we do this? >> that's a good way to put it. i'll give you the answer that the prime minister of australia gave to bob zoellick who is or was the head of the world bank. and he turned to him and said, look, if you guys will just get a long term fiscal plan the markets have confidence in, then the economic growth of this country will be unbelievably high. and that's what we are facing. people have lost confidence that america is going to stand up to its long-term fiscal problems. and all you have to do is look at europe today to see what happens when the markets lose confidence in you and what happens to your economic growth. if we can put our fiscal house in order, then i am confident that the future of this country is very, very bright.
but i am equally sure that if we don't, we're going to stay on this path that we are currently on to becoming a second-rate power. i don't want to see that happen. >> darren: senator simpson, medicare is red hot in the presidential election right now. is-- are we in danger of medicare becoming so hot that nobody is going to want to touch it? >> that's where it is already. what's news? they're all terrified to touch it and every cent of revenue that came in 2011 to this country in income and excise taxes went for only three things until it was exhausted. it went for medicare, medicaid and for social security and we borrowed to fight two wars, do homeland security, culture, infrastructure, r&d. is anybody missing what happened? >> darren: the number one thing i get from people is they are convinced the budget problem is someone else's problem, they shouldn't have to pay more and
their program shouldn't be cut. it's somewhere else, the problem is someone else's problem. how do you change that and is it changing? are people beginning to take personal responsibility and say we have to come together and help fix that. >> we talk about shared sacrifice. we use that in our 67 page report. we talk about skin in the game. we talk about that. we talk about going broke and we also say-- really quite effectively-- pull up a chair. you're talking to two guys who don't do b.s. or mush. >> it's simply with facts and what we have to do is make sure that americans know what the real effects of this debt is and just give you one example. ask anybody what do you love? do you love education? do you love the research that helps create the next new thing that helps create the jobs of the future in america.
well, if you love these things, then you have to worry about the debt. let me just give you one example. if you look at the interest cost on the debt today, even at today's very, very low interest rates, we're spending about $250 billion a year on interest. and do nothing, by the end of this decade, we'll be spending over a trillion dollars in interest costs alone. that's crazy. that's what we want to stop. we want to bring these deficits down. we want to get them to a level where we can stabilize the debt and get it on a downward path as a percent of g.d.p. so america can compete in this new knowledge-based global economy.
>> darren: for all the gloom and doom over the fiscal cliff, there are some people in washington who are still hunting the grand bargain. that's a big deal to raise some revenues and cut some spending and get our budget in line or at least into manageable shape. and for all the talk about the fiscal cliff, there's still optimism 2013 will be the year we bag a bargain. on wall street, the say the best time to buy is when the brokers are crying in their beer. when everyone else has given up hope. when all looks lost. which may explain why analysts like andy laperriere think 2013 will be a big year. >> when you start adding these things up-- the debt ceiling has to be increased, the sequester has to be dealt with. the bush tax cuts have to be dealt with. i don't think you can pass a package that deals with all those things without reducing the deficit. >> darren: what might that package look like? it will raise taxes.
over ten years, look for roughly $800 billion in higher revenue if president obama is reelected. but if romney takes the white house, he'll like raise taxes somewhere in the range of $250 billion. the rest would come from spending cuts. more from cuts in health care and entitlements under romney. more from defense under president obama. add it all up, and the size is somewhere around two or three trillion dollars. the goal of the package is clear. >> all three of the major ratings agencies have said that if congress doesn't pass significant deficit reduction-- enough to make debt to g.d.p.-- put is on a sustainable path within a reasonable period of time, that they'll all downgrade. and i think that's going to become the bogey. >> darren: a $2 trillion or $3 trillion deficit reduction package would be a sizeable step towards stabilizing our debt. but not everyone thinks such an outcome is likely. >> i don't see how the politics of this has changed very much. i don't see more people suddenly willing to change on anything.
the election is polarization, hyper partisan, and not really providing the kind of forum you need for an honest debate. >> darren: one thing is clear: the path to a big deficit reduction in 2013 will very likely be messy, uncertain and unsettling for investors. but the payoff may be worth the long battle. >> fiscal nirvana is when we solve or address adequately three problems: the fiscal cliff-- scaling that back. increasing the treasury debt ceiling again, so that we can continue to issue debt and pay on the debt that we owe. and also, third, laying out a credible path to fiscal sustainability. >> darren: and if we do reach fiscal nirvana and we can navigate our way past the fiscal cliff, several good things can happen over the next few years. a major uncertainty will be lifted from the world and our economy. economists predict we'll see more investment, boosting our economy and our wages. and we would likely create more jobs. now that's something worth hoping for on this labor day.
you can watch our continuing fiscal cliff coverage on the web. just click the "fiscal cliff" link on the homepage. you'll find it at nbr.com. thanks for joining us this evening. i'm darren gersh. good night, everyone. we'll see you online at nbr.com and back here tomorrow night. captioning sponsored by wpbt captioned by media access group at wgbh access.wgbh.org