Debt Crisis Was Long In Coming, Ex-Reagan Aide Says

What impact will the debt ceiling turmoil have on the financial markets? Host Scott Simon talks with former Reagan budget director David Stockman, who predicts some panic ahead.

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SCOTT SIMON, host: We turn now to David Stockman. He was President Reagan's budget director and was once a Republican congressman from Michigan. Mr. Stockman joins us by phone from Aspen, Colorado. Thanks for being with us.

DAVID STOCKMAN: Glad to be here.

SIMON: Is this a crisis of finance or politics?

STOCKMAN: It's a crisis of politics, but also it's a crisis of 30 years worth of, you know, extend and pretend, sweeping the problem under the rug and believing that whenever it's convenient we just get out the national credit card and borrow some more money. So I say the crisis is not the debt ceiling, the crisis is the debt. The gong show going on today, which is disturbing I'm sure to most Americans, is due to the fact that each party is dug in to a position built up over 30 years that is totally non-supportable, unrealistic and ideological, relative to the facts.

We are raising 14 percent of GDP in taxes, the lowest since 1948. The Republican position that taxes aren't part of this solution, raising taxes is just nonsensical and can't be defended.

The Democrats say Social Security isn't part of the problem. Well, this year Social Security will be fifty billion short, in terms of revenue coming in from payroll tax versus what's going out, and it will get worse every year, and it's the biggest single program.

So when you have both side lined up in rigid ideological positions saying no, and you have the military industrial complex laughing all the way to the bank on an $800 billion budget that neither side seems to want to cut and which is totally unrealistic given the state of the world that we're in today, it can be cut dramatically, you end up with the kind of paralysis, the silliness that we've seen over the last couple of day from both parties.

Neither party is addressing the problem, which is the here and now and the fact that one of these days the bond market is going to run out of buyers for this $6 billion of debt that comes in every day.

SIMON: Mr. Stockman, all sides find something to embrace in Ronald Reagan. You were at President Reagan's side. What instruction do you take from his example right now?

STOCKMAN: Well, one that I would take is that it was the summer of 1982, a very dark time. The recession had hit with full force, unemployment was 10.5 percent. It was not clear if the recovery was coming or when it would start. But we had a massive deficit and even though he hated taxes, he kind of swallowed hard and signed a major bill to raise taxes, as well as cut spending, right in the middle of a weak economy in order to reduce to a tolerable the amount of red ink that we had to finance in the bond market. Now he did that in 1982, and all of the Republicans who are citing Ronald Reagan seemed to forget that was the parallel situation to what we have today, and that then he went on and raised taxes a few more times, not because it's a good thing to do but because it was an unavoidable and necessary thing to do. He did that 1983 and 1984 and so on.

So we need to get out of this trap of mythology and ideology and deal with our real circumstances. There's a lot of talk we may lose our credit rating. I think we should. We're not a AAA country. When we spend 24 percent of GDP and tax 14 and have gap 10 percent that we're borrowing, and this is the third year in a row, then there's no reason why the rating agency should extend our AAA. We basically are getting away with financing way too much debt, way too cheaply. You know, two year money we're borrowing at one-third of 1 percent. And until the market requires the Congress to pay a real interest rate on the debt, I'm not sure they'll do anything more than kick the can around the road as they probably will end up doing this weekend.

SIMON: Well, let me ask you, Mr. Stockman, you were in a private equity fund now; how do you think the market might react when they open for business on Monday, and will that move events along?

STOCKMAN: I don't, you know, I think there's the possibility of some panic in the market. It's been over predicted. You know, the movements in the market are complicated. The economy is so weak that some of the big funds and institutions are buying bonds so that's helping reduce the interest rate, when you would think the scare coming from missing the deadline and the possible downgrade would be increasing the interest rate.

So I think it's a mixed picture, but I don't take the deadline seriously on Tuesday. I think that is an artificial manufactured date that the Treasury has put out. We have $200 billion of revenue coming in a month. Interest is 20 or 30. They could set aside enough to pay the interest. There's not going to be a default. Social Security is $50 billion a month. They could set that aside and the checks will go out on August 14 or 15.

So we should not believe that the whole crisis is the ceiling and do anything to raise it. The crisis is the debt and the need for both parties to put defense, revenue raising and entitlement reform on the table and hammer out something. And if it takes two or three weeks and we have to defer payments to military contractors or to Medicare suppliers, we should do that. We...

SIMON: Former Reagan budget director, David Stockman. Thank you so much, Mr. Stockman.

STOCKMAN: Okay. Thank you.

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