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MICHEL MARTIN, HOST:

This is TELL ME MORE from NPR News. Coming up, we'll check in with a panel of women journalists and commentators, our Beauty Shop roundtable, to hear what they have to say about the week's news, most especially last week's events in Newtown, Connecticut. We're particularly interested in how they as journalists and as parents are handling the news.

But first we want to take a look at another important story that will affect the country if it is not resolved. That's that package of automatic spending cuts and tax hikes that could kick in at the end of the year if the White House and Congress can't agree on a plan to reduce the deficit. It's being called the fiscal cliff.

Yesterday, House Speaker John Boehner presented a proposal he called Plan B, in case he and President Obama don't find common ground.

(SOUNDBITE OF STATEMENT)

REPRESENTATIVE JOHN BOEHNER: I continue to have hope that we can reach a broader agreement with the White House that would reduce spending as well as have revenues on the table. I think it would be better for our country. But at this point having a backup plan to make sure that as few American taxpayers are affected by this increase as possible. Moving down that path is the right course of action for us.

MARTIN: Now the White House has already said President Obama would veto the Plan B proposal which would increase taxes on Americans earning more than $1 million annually. And it hasn't gained much support among Democrats. And conservative Republicans don't like it either because it involves a tax hike.

Now, throughout these negotiations we've been having a series of conversations we call Why Not? where we've been looking at a few key issues and talking about the pros and cons of, say, getting rid of the mortgage interest deduction or scaling back entitlements. Today, we wrap up that series by asking what if we do go over the cliff? Why not do that?

Joining us once again to talk about this is NPR correspondent John Ydstie. He's been covering these negotiations. Also with us Alice Rivlin. She's a senior fellow for the Brookings Institution. She was also director of the White House Office of Management and Budget under President Clinton. John, Alice, welcome. Thanks for joining us.

JOHN YDSTIE, BYLINE: Thanks, Michel. Nice to be here.

MARTIN: John, could you start by bringing us up to date on the negotiation? What's in this Plan B? And it's getting a lot of excitement, and why?

YDSTIE: Yeah. Well, the Plan B basically is a fallback plan, as Speaker Boehner said. It would cut taxes for everyone under $1 million. It would also move the capital gains tax rate up to about 20 percent. It would fix something called the AMT, which was put into the tax code to make sure millionaires paid their taxes.

And it's getting down into the middle class now. So they would do a permanent fix of that, I think, in this Plan B and it would also keep current estate tax rates. And the speaker plans to have a vote on it in the House on Thursday. But I think...

MARTIN: Just reminding people once again, who may have forgotten it, is that Republicans control the House of Representatives...

YDSTIE: Right.

MARTIN: While Democrats are still in control of the Senate.

YDSTIE: So it's possible it could pass the House, although the problem with this fallback plan of Speaker Boehner's is that it includes no spending cuts. So we would go over the fiscal cliff in terms of spending and the big defense spending cuts would kick in.

I would think that that would make it a little less palatable for his own caucus because they've been calling for spending cuts. And certainly the Democrats have no interest in this plan at all. They've got their own Plan B. They passed a plan in the Senate back in the summer that would basically extend the Bush tax cuts for everyone under $250,000 in income and they think that's the best backup plan.

MARTIN: So Alice Rivlin, let me turn to you and go to the substance of what we wanted to talk about today. Let's just agree - you just heard John Ydstie talk about how complicated this is and he's just given you like a thumbnail version, you know, of all these issues. Why not let the deadline pass and hammer out these complicated issues in a normal legislative way?

ALICE RIVLIN: Well, we haven't had a normal legislative session in a very long time, in case nobody's noticed. We've had a bitter rivalry, bitter partisanship and name calling and finger pointing and whatever you want to call it, and no action. I think Plan B is just a sort of symbolic gesture. It wouldn't solve the problem.

So what happens if we don't solve the problem? Well, the cliff isn't exactly a cliff. You might call it more of a downward slope. But it's very serious. Right now we don't need to raise taxes on everybody, which is what would happen, not just on high income people but on everybody who pays income tax. Their taxes would go up.

And other bad things would happen. Like doctors would get a lot less money for Medicare, about 30 percent less, which is ridiculous. The unemployed would no longer get extended benefits and we've got a lot of unemployed people right now. And, as John said, the spending cuts that would come into play automatically are ridiculously unsensible.

Now, whatever you think about the size of government, what you would never do is cut every program of government - defense, domestic - each one by a set percentage. No priorities, no anything. So the defense establishment is very upset about that and the domestic establishment is too.

And then there's the economic impact. If the government is spending less money over time, over, say, a year and people are paying higher taxes, that's a double whammy. People have less money in their pockets to spend, so they don't spend it. And then I think there's a worse thing. Worse than the direct economic impact is the way our government looks.

Our government looks totally incompetent if they can't solve this problem that they created for themselves and that could have ramifications in the markets. We could have a drop in the stock market. We could have an increase in interest rates. That's not something we should play around with.

MARTIN: We're talking with Alice Rivlin, a senior economics fellow at the Brookings Institution, a research institution here in Washington D.C. and NPR correspondent John Ydstie. We're talking about, why not go over that fiscal cliff? So, John, after that kind of bracing analysis from Alice Rivlin, it seems almost unfair to ask you this question.

But some people make the argument that going over this fiscal cliff would be kind of like a forest fire in the sense it would be painful in the immediate term, even the intermediate turn, but in the long run beneficial because it would really clear out kind of the underbrush. It would force the country to think about kind of the deeper issues around fiscal policy.

So is that a point of view which has currency among the people who are conducting these negotiations?

YDSTIE: Well, I think there are a number of people who think it would be useful to go over the fiscal cliff for a number of reasons. One of them is to deal with the broader issues. But I think mostly people view it as a sort of a tactical thing. For instance, if you go over the fiscal cliff and everyone's taxes go up automatically, then there's no vote that goes on that Republicans have to take a vote on in which someone doesn't get a tax cut.

So you go over the fiscal cliff and the next vote is about restoring tax cuts to the middle class. So it's sort of a tactical idea there. The other one is that, you know, I think people who want to go over the fiscal cliff think of it as a very short-term thing. You know, that we'd do it for a couple weeks. It would focus everyone's mind.

We would get Republicans lined up to vote on the tax proposals without having to vote for a tax increase. And so it would be done very quickly. The other thing people say is, you know, it actually does put the budget on a much more sustainable path. It cuts spending. It raises revenues. And so you begin to negotiate from a path that's sustainable about what is sensible.

MARTIN: What would you - you heard Alice Rivlin say that her argument is the cost is just too high both economically, politically to the standing of the country around the world, to the standing of the government among its own citizens. Is that point of view the prevailing one from what you can tell?

What I guess I'm asking is, for the people who think it's tactically or strategically reasonable versus the people who think the cost is too high, which do you think is the prevailing view?

YDSTIE: I think the prevailing view is that people think this would be an awful thing. If we went over the cliff, one thing that Alice didn't mention is there's a psychological hit that happens for both businesses and consumers. And people don't trust their government anymore. They don't - they pull back on their spending. Businesses don't invest. And you end up in a recession.

MARTIN: Final question to each of you. Alice Rivlin, I'll start with you. Based on your experience in addressing these issues over many, many years, what do you think the thorniest issue is? And understanding that the politics have changed over time, that the players have changed. In fact, the players are going to change in January. What's your sense of the thorniest issue here?

And can I also ask you to give me your wish list of what you think is the most important issue or principle for the parties to keep in mind?

RIVLIN: I think we've gotten past the thorniest issue, which was the absolute refusal of Republicans to raise rates, tax rates, on anybody. They've now said, well, OK, on millionaires. And the president is saying, well, how about people who make over 400,000? That's still an awful lot of money.

So they're just dickering there about that. But what's really important falls out of these discussions; namely, we have a long-run deficit problem which is caused by the fact that there are a lot more older people and we are committed to their medical care under Medicare and Medicaid and to a Social Security program. And our revenues are not going to support that.

So we need a grand bargain, a deal that will very gradually over a long time reduce the rate of growth of Medicare-Medicaid and put Social Security on a firm foundation. And we need tax reform that will raise more revenue. So that's what we're trying to get here. And we shouldn't forget what the objective is.

MARTIN: John Ydstie, final thought from you?

YDSTIE: Well, I think the most difficult thing right now for the Democrats is this compromise that the president has made to change the way cost of living increases are figured for Social Security and other government programs. But the concern the Democrats have is that there's going to be a cut to benefits in Social Security.

So I think that's the toughest thing for them. But I also think - I think the two sides are compromising in good faith right now. I think we're moving - they're not very far apart right now on a deal that could get us past the fiscal cliff. So I think right now things are kind of hopeful.

MARTIN: That was NPR correspondent John Ydstie. He was with us here in Washington D.C. along with Alice Rivlin. She's a senior fellow at the Brookings Institution. They were kind enough to join us in our Washington D.C. studios. John, Alice, thank you so much for joining us. Happy holidays to you both.

YDSTIE: Thank you.

RIVLIN: Thank you, Michel.

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