Douglas Holtz-Eakin on spending cuts and the debt ceiling

Douglas Holtz-Eakin, president of the American Action Forum.

JEREMY HOBSON: Vice President Biden will meet with members of Congress again this week to try and come up with a deal to raise the federal debt ceiling. The Treasury Department has said the nation will start defaulting on its obligations if no deal is reached by early August.

But on ABC News yesterday White House economic adviser Austan Goolsbee had this warning for lawmakers who want to push the debate right up to the limit:

AUSTAN GOOLSBEE: This is not an alarm clock. It would be extremely dangerous to get right up to the edge or you've seen some people even saying, 'Well, it'd be OK if we defaulted for a short period.' That's not true, we shouldn't do that, we should resolve this.

Now, last week on this show, we spoke with Jared Bernstein -- the former chief economist for Vice President Biden about this issue. This morning, we're pleased to welcome conservative economist Douglas Holtz-Eakin who heads the American Action Forum. Welcome to Marketplace.

DOUGLAS HOLTZ-EAKIN: Happy to be here.

HOBSON: Well, you think that Congress will raise the debt ceiling in the end. What do you think is going to be necessary for them to do that?

HOLTZ-EAKIN: I think that in order for it to happen, there will have to be associated with it, some real cuts in spending, both in the near term. And them some changes to the long term entitlement programs, the big one being Medicare, which would demonstrate to financial markets that we're serious about the real core problem.

HOBSON: Do you have a ball park figure in terms of how big those cuts might end up being?

HOLTZ-EAKIN: The speaker of the house, John Boehner, has said that he would like to see more in cuts than the increase in the debt limit. And so that gives you a ball park. If you want a bigger debt limit increase, you need more cuts.

HOBSON: We're talking hundreds of billions of dollars.

HOLTZ-EAKIN: I think there's no question the U.S. problem is a trillion-dollar problem. So, anyone who's playing with small billions is in the wrong ball park.

HOBSON: Would conservatives like you accept tax increases as part of the deal?

HOLTZ-EAKIN: There's no real intellectual case to be made for the tax increases. If you look around the globe, the countries that have a simultaneous growth problem and we have a very bad growth problem, and a budget problem -- the recipe for success has been to keep taxes low and then cut spending on transfer programs and government employment. That really is a playbook that the U.S. should run and be much more successful.

HOBSON: Well, some people would disagree with that, but the argument that would be made is if the poor are going to have to suffer in terms of cuts to services they rely on, why shouldn't the rich also have to suffer a little bit in terms of paying some more taxes?

HOLTZ-EAKIN: Raising taxes is not going to be good for growth. Period. And so the question then is can you have a balanced package of spending restrictions with affects both the affluent and the poor. The answer of course is yes.

HOBSON: If you look over seas you see the United Kingdom which enacted steep cuts to get their deficits under control. And their economy is now shrinking. Isn't that evidence that if we make big budget cuts that's exactly what's going to happen here?

HOLTZ-EAKIN: Well, I think if you look at what we're doing right now, we're perilously close to being in that position anyway. So what we really have to do is build a stronger foundation for jobs, and sailing directly into what the president's chairmen of his fiscal commission said was the most predictable crisis in history. We will have a financial crisis if we don't change course. That has to be the right thing to do for the American economy.

HOBSON: Douglas Hotz-Eakin, President of the American Action Forum. Thanks so much for joining us.

HOLTZ-EAKIN: Thank you.

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