>> rose: wcome to the broaast. tonight we lk at the growing ncern about the u.s. budget deficit with rer altman form dety treasury secretary during e clinton administration and wall street veteran. >> is the most serus and fascating fiscal policy challenge ve ever seen. an it's been 41 yes since i startein finance and i served twice in the treasury, which was a great privilege and i've never seen a chaenge like this, becae as you just said, at one level, the econy's going to be traordinary weak and stimulus is necessary. inde, the argument in the st w days has been do weneed a "sond stimulus but at another levels the deficits emerge-- d they haven't really zkin on main street yet-- b as they emerge and pele see how large they are, the public believe will

view them as unacceptabl this is alrey evident in the poll and e administration wi be in a vic wehould be pursuing stimus and should keep that ing, say, for tw moreyears. and we should wa-- as the president saidn your clip-- to confront the deficit uil the economy is strong. that's right. n eory. the question ishether it will be possibl in practice a i think that's aough one. >> rose:ltman for the hour next.

captioningponsored by se communications from our studios in neyork city, th is charlie rose. >> rose: wtalk about the ecomy this evening, the growinu.s. budget defit has alarm misdeanor in washington, many on wa street, and many across america. economists wn that rising debt levels could bdestabilize the dollar and bankrupt safety net progms like social security and medicare. the obama administrati has vowed to addres the problem once the economystabilizes. a recent intervw with al hunt of bloomberg news the president said the gernment's bt burden was a top concern. >> i a concerned about the long-term issuf our structural deficit and our long-tm debt. because ife don't get aandle on that, then there'so doubt

that at some point-- whether it's the chinese, the koreans, e japanese, whoever else s been snatching up treasuries-- are going to decide th this is too much ofa risk. and so that's why is so important for us to get a handle on our long-term structural deficit. and the key to that-- as i've been discussing over the last several weeks--s health care reform. that'she single biggest driv ofur federaldeficit. >> rose: joining me now is roger at map. he served as deputy treasury cretary during the cnton admistration. last wk he wrote an op-ed in the urinal warning that government will so need to raistaxes to address the deficit. i am pleased to have him back at this table. welcome. >> ros >> thank y, chaie. >> re: here's what you said in this article in the "wl street journa" twooun. "only five month after inauguration dayhe focus of washington's ecomic and domestic policy is already shifting. this reflects the ergence of much largerbudgeteficits than anybod expected, indeed,

federal deficits may average a stning $1 trillion annually over the next ten years." a trillion annually ove the next ten years. this worsened outlook is stirng unease on main street and begiing to reorder priories for barack obama and theemocratic congssional adership. by 010, redung theficit will become their primary focus. anthen you end ts by sayg "this challenge may the toughest onemr. obama faces in his first term. fortunaty, the new president is enormously gifted. that's imptant because it is no longe a tter of whether tax revenue must increaseut how." i continue in e-ml exchae betwn you and me. he administration is just a nearly impossibl situation. growth as i argued in that piece is goi to be distinctl subnmal for 2010 and 2011. at the same time,he ficit outlook will emerge as much worse. at one level, you can withdraw stimulus,i.e., pursue deficit

reduction, when the onomy is soeak. t at another, t publ and financiamarkets will be rebelled erne trillio dollar deficits as faas the eye can see. this wl be gets brg r obama. hofully he's in a blue unirm but who knows?" stng language. a huge problem. it is. it's the most serious and fascinatg fiscal policy challenge i' ever seennd it's been 41 yea since i stted in finance and iserved twe in the treasury, which s great privilege, and i've never seen a challenge ke th. because, as you ju said, at one level the economy's going to be extraordinarily weak and imulus is necessary. indeed, thergument in theast w days has been "do we need a second stimus?" but at anothe level, as the deficits emerge-- and they haven't reallyunk in on main

street yet, but as they emerge and people see h large they are, the public, believe, will view them as unacctable. and this islready evident in the polls. and the administration ll be in a vice. wehould be pursuing stimulus and we should ke that goi, say, for two more years. and we suld wait-as the president said i your clip-- to confront the deficit uil the economy is stronger. that's right in theory. the question is wheer it will be possible in practice. and i ink that's a really toug one. >> rose: if ty do that. they say "postpone." we're gointo have a new stimulus... some arg without a new stimulus we're goi to have a dig bepresention. i was told th today. paul krugman gues that pnt about needing a new stimulus. n this program last week. wh happens if they do that? >> the question in the context our discussion here would be whether the financial markets...

but even more so main street would accept en bigger deficits whi such a secon stimulus by definition would cause. because a second stimulus would mean comnation of mor spending and more tax cuts a erefore bigger deficits. >> rose: give me a short primer on deficits. >> well, firstf all, we've never seen deficits of this magnitude either in absote terms-- just the dollaramount ofhe dicit-- or in relative term the size of the deficit to our econy and the growing relationsh of the deb as it grows virtue of thes deficits. never seen theseefore in your lifetime omy lifetime. so for example the deficit for e year we're now in is going to be about a trillion nine. a trillion nine. >> rose:over 2009 the deficit will be $1.9 illion? >> that'right. and keep in mind, only a few years o, four orive years ago, the ente budget wasn't

$1.9 tllion. it would he been,ay, five yearago or six years ago. the deficit in relati to the size of our economy is going to 13% this year. it not goingto... it's going toveragepproximately 5% for the next ten years. and, b the way,e've only h deficitss of that magnitude, the 5%, twi since 1946. now, the debt, accordg, for example, to goldman sachs, is going to rch at the endf this ten-year period about 85% of the size of our economy. now, the last time that happened was at the set of world war ii 1942, 1943. we haven'tad anything remotely like that, since. the united kidom, the.k., is also facing an outlook like that and has recently been warned by the ting agencies that it will perhaps se its credit ratis if t debt gets to that size.

>> rose: what is it now? the de as a percentage our g.p. for this year. >>t's about 40%. >> rose: okay. so double. >> and t administrationsaid-- d i thinkuite correly and admirably the so-called budget blueprint itreleased just as president obama took office-- tt we as a nation needed t stabilize our dicit at 3% of g.d.p. and stabilize our debt of not higher than of g.d.p.. that's the administration's own view and there correct about , to their credit. so the problems,we're facing a mu worse outlook than at. the question is why a we facing that olook? and the answer eentially is that we're looking at a much weaker economic recovery than any of us would lik and it's so much weake that revenues will ll short of expectations, interest expense wilbe higher th therefore deficits ll be a lot gger. a lot bigger. so, for ample, the adminiration at the moment is official estimating that growth next year will be 3.2%,

so called real growth. and the following year 4%. but goldma sachs, for exale, is estimateding, d many others-- i wld agree with them--ut goldman sachss estimated 1.% for next yr and about% for 2011. so aboutalf the cumulative growth ratwhich the ministration is estating. now i know the admistration is going to lowerits forect, it has to and it's en saying so privately. >> re: lowering themto the goldman sachs numbers? >> i uldn't say that r, but they'll lowethem. the problem is,hough, charlie, and the differen from the d president rack obama took office is the olook fo covery is very weakthere are a lot of reasons for that, we could lk about it if you'd like. and that wear recovery ells much bigger deficits and thiis the problem. >> rose:kay, there's also the problem of whathe president was to do in terms o health care andnergy. and he's getting a chorus of peop now who are saying to him "you're tryi too too much at one me." and others are saying "because

of the increasing debt a beuse of the need to pay attention to the economic recory, you need to sw down in terms ofwhat you're dog." are they right on tt question? >>ot necesrily. no. cause a number of the iniatives which the president has putorward-- let's say energy actually would lower the deficit because one of the components of the energyill is the cap and trade portion of it, ich is the biggest portion of it and tt would actually rai revenue. so not all the president's initiatives expandhe deficit. d, in fact, as i pointut in that piece, it's quite telli that t presidenthetoric over the past thr months on health care has shifted. it was three months agofocused on the universality of coverage, which need, the public opti we need. and it's not that hs abandoned those, quitehe contrary, but today his focus if you lien carefully is aeficiteutral health care bill.

th's because the separation is keenly aware of thehange in the deficitoutlook and the challenge 's facing rose: to have a deficit-neutral health care bill what would he have to do to change in terms ofis origil oposals? well, to their cret, they originally..they've always said that the bl should be deficit neutral. 's just thawhen the campaign for health care really began, that was not one of the rst things that was out anyone's mouth. and, by the way, h been serving the i would have pursd it the way they did now that the deficit outlook has becomelearer to the- and i want to phasize, they're keenly aware othis-- they' been stressing above all the defici...ecessity for deficit neutral chlt in other words, they've alwa been in that place but they've said this is paramount. one of the reaso that the bill is proving toe a gat struggle, althoh i believe ultimately they'll get one, is because payi foit under the congressional budgetoffice scoring system youe miliar with so thatt's certifiably paid for is proving difficult. because this is going to cost

approximately triion over ten years and findg that amount of fancing, which can only b reducing speing below leve that otherwise wld occur or raisi revenues, the combation has to be $1.trillion over ten years, nding that is pring to very tough. >> rose: do they recogni t problem as it exists? do they, for exale, believe thathe recovy is not what they hoped and eected it to be at this time? >> yes. they do. >> rose: what else is coributing to the deficit? >> in esident obama's defense, the congressional buet office analyzed the various factors th contribute to the deficit. and their conclion was that only about 15% of these deficits 're talking aboutare attributle to obama initiatives. to steps he'saken since becomi president. the her5%, in other wor, reflts the economicondition

which he inherited, the very shp burst, it's really a burst of spending that we s under presidt bush. parentheticay federal spending rose two and a half times und george w. bu than it d under bill clinton. most peopldon't realiz that, but it did. and, of course,the intergenerationaproblem, the ing of america, theact that the deficits and the medicare trust fund, the actuarial deficits and to a much lesser extent social security a now coming closer. theye inside the ten-year window in a couple cases. >> rose: when theaby boomers have aess to those demands. >> the probl is primarily mecare not social security, but yes. rose: so at are the choices for the esident? >> well,here's.... >> re: if he recognizes the danger o deficitst that extreme level, the bt 8 after ten years of the.d.p. >> well, first he said in your clip-- ande didn't use a stattic-- but he said in effe that outlookwould not be acceptable. and i thin that's crect and

it's also... makes clearhat at someelatively near term moment the administration is goingo have to confront the deficit outlook and put together a deficit reduction pkage. now al hunt, w did that terview with the president and i had a debe, a private discussion the other day a he read my piec and he sa ou're dead wrong on when they will do tt. they cldn't possibly do that as early as next year because the economy will be too weak. the congressionaelections will be approaching" and so forth and so on. they would have to doitlater. there will be a gate debate er when to confront it and a great debate, charlie, over actly how toonfront it. but as i said in the piece, there's real no debate iide thadministration about whether they will have tdo it. >> rose: so theyave the do it. the question is time and method. right. >> rose:ll right. so you s they'vegot to do it earlier, al says they can't do itecause of pitical

considerations and you say if they don't do it now, t consuences are? >> no. t meust put tha in context. the question i was addressing is when they will be forced to do it >> rose: oh. >> and tt comes down towo things: main street, public opinion, and fincial markets ani was suggeing that some combination of the gra-roots reaction to these enormous deficits and the financial markets reaction may-- i can sure-- force their hand sooner than they wld otherwis like. i hope not. >> rose: i'll get to the choices in a moment but i want to make sure we understa that. main street going to react to a deficit? is that wh has happened or will the marketseact and main street will be frightened by e reaction of the market is that the way itwill happen? >> i was particurly fascated by the last two really mor

polls. the cbs/"new york times" ll an the "wall street journa/nbc poll. eacheleased two wee ago and they botasked about the deficit. i thought it was qui surprising tt the public registered already-- before having seen e outlines of these much worse deficits-- twice as much concern about the deficit as, for examp, heth care. and for the last thr or four year, health care on e domestic ledr has been number one. so alreadyhe public sing by a two to one mainwe're more worried about the deficit than we are about hlth care." no ask yourself a ye from now when the deficit outlk thate're discussing he becomes the univeal vw what the public reaction will be. i spect it will be nsiderably more adverse an we saw in last month's poll a there will be a lot of pressure on the congres, for example on the esident and so forth, to do sometng about it. and this is th conundrum you discussed the beginning. the economy ll be weak and in macroecomic theory one suld not withdraw stimulu at a time when the ecomy is that we. but the public may be and/or e

financial markets may be demandg it. and how will the handle that? that's why i sayt's... the litical equivalent of gettysburg. rose: i'll come back to that point interms of what theyan in terms of the political equivalent. t is there nothing the administration can d to make the economic recovery faster? >> relatively little. >> rose: dothey recognize tt? >> well, as we discussed a minute ago, there's a debate that's brokeout in theast really 4 to 7 hours about a send stimulus. we had a roughly $0 billion, $787 billion stimulus passed, as weell know, in the early days of this administraon. relatively littlof it has been spent or so far or jected into the bloodstream ofhe economy yet. so a lot of it has to pay out but already a bate has broken out as to whether we need a second stilus, mning another round of tax cuts and/or spending incrsing say ely next year. paul krugman, who you hadn your show, is arguing that

it's mainstream economics in tes of what you wouldormally do. >> rose: spend money a time of crisi >> yes. and the question will be ether more stimus-- which by definition makes theeficit even bigger-- would be acceptable to main street. i notid the replicans are alreadsaying you could never do that d a lot of others david brooks, for emple, arguing that the fir priori s to be to get our fisca house order and not todo that and so forth. ether the publicould accept that andhether the financi markets would accept that, don't know the answer to that but it seems it's up i the air. >> re: a stimulu program, that's the onl option they have to try t.. >> that's the only option the ministration has. now the biggest ayer when it comes to stimulus is n the executive branch, it'she fed. >> rose: right. >> on monetary policy, which is a much more powerful too , of course, o thing that washington as a whole could do-- justhat the administration wouldn't be doin it-- would be to pursu t extraordinarily

accommodate monetary policy we're now seeing for a longer period than th otherwise would do. at would be something that shington could do to provide adtial stimulus. but it would come from the fed, t the administration. >> rose: wt do weknow about bernanke's ideas abo that? >> well, i would expect the federal reserve in theace of an economi outlook that we're talking about here to keep interest rates a low as they are now foa longer riod of ti than they otherwise would do if e economy werehowing e kind of strength that the administration hoped >> rose:o you expectthe federareserve to look at this crisis and say "we have go to chge, we've got to do this"? >> they're at maxim accommodation now. short-term interesrates are approximately zero >> rose: so we've run o of moneta policy? >> we coulhave a technical deba about things like qutitative easin but essentially we're no at ximum accommodion. but you can ay there. u me, pedal to the metal longer if you think you need to

r reasons of economic weakness. and the fed, in other rds, may prove toe the more important participant, as usually it does, th the ainistration and the congress wn it comes to what can you do now. >> ros all right. is is what david brooks said "and the irony is tt obama supportersill be cononted by the problem for which they ve the least experience and for which they are the least prepared, the probleof scarcity raised in prosperity, favoredy netics, these young merocts will have th demands on the nation's wealth tstrip supply. they will grapple with the owing burdens of an aging society, rising heah care costs and high energy prices. they will have tomake up for the trilli plus dollars the governnt will spend to oid a deep recession. they will ha to struggle to ke their promises to cu taxes create an energy revotion, pass anxpensive healthare plan and all the rest." dad brooks. do you agr with that. i do largel agree with that, ye >> rose: so now what... beyond

monetary policy keepi health care as deficit neral, looking at som befits from climate corol policy,hat else is there do to raise renues? to reduce the posbility of an overwhelming defit? >>ere is one possible scerio beyond whawe discussed already. if the achieve a health care bill, and i think after quite a struggle,specially a bloody one at the end, they will, tn they could follow that up.... rose: 60 democrats on th nate side. >> then they could follow that up wh an eort to address cial security. peterorszag, the budget direct hinted at this inn op-ed piece he wrote the "financial times" a couple weeks ago and jerry sibe wrote about this in the "wall stre journal" this moing. and even though social surity is a relatily small part of the long-term deficit pblem, it's a vy important part symbolically. d if the administration were to follow up health care-- which

would be qui a big victory and triumphal moment-- use that momentum to ta social security deal, which wld be tough but possib doable, that would bud confidence in their abilityo deal efftively with the deficit over the longer term even if thectual impact of cial security deal would moderate, not enormouss it relates to the deficit. that's what i believe is being considered. i don't know if th'll do it. it's being consided. so that uld be another step. >> rose: so they're looki at health care euphori ging them creased leverage to deal with the deficit in a way that will be unpalatable otherwise? >> well, we've all seen tha over the past... since the greepan commission of '83, so all that time, it's proved... a cial security solution has proved elusive. president bush tri that a every presidt in recent tim hasaid "we have to deal th this so, yes it's proved elusive and rhaps this is the moment whe at could be achieve thatould be quite an accomplishment and vy importanstep. it woun't solve the eire

budget problem, it wouldn't make the deficit suddenlycceptable anfind but it would ban important ep. >> rose: andouldn't have anything to do with privatization of social secuty. which ishat the pvious president was committed to.. >> they wouldn't gohat way. >> rose: so what are the options? >> wel, "the ultimate red sox show" matly there' going to have to be a defit reduction paage. if you want think back, for example, tthe andrews a foe base summit, budt summit of believe 1991. we'll have sething like that. and a diciteduction package by definition has to include a combination. it's either all spending.... rose: spending cuts and taxes. >>r a combinatn. it would e up being combination. you can't do it all the renue side or the spendg time. >> rose: is it hard to say the word "raise tes." >> not iyou're in the private ctor, no it'sot. (laughs) >> rose:s it hard for them? they say ty'll raisetaxes for people over $250,000 and they also y they're going irease... coinue the bush tax cuts and incrse the tax cutsor the

middle-class. that's what ty say. can they d that? >> well, of coue, f them at this moment they have so ma immediate priities, heah care fir. get the ergy bill passed. possly do social security. let alone thenternational agenda theresident is going withight now with russia and so fth. nody wants to addrs the deficit and wouldn'tecommend it either in 2009. we're on halfway tough 2009. so they shoun't be talki abt raising taxes right now. it compromising their near-term agenda. ey shouldn't inject that into the health care debate if you' rahm emanuel or.... >> rose: okay. but therefe they're notoing to address thi until after the congressional eltions in 2010. possibly, sure. if theyan stave off or hol back t pressures i referred to from main street, financial markets or bot, yes. >> rose:hat's the srt thing to do if they ca withstandhe prsure. >> that's rit. yes. >> rose: because it's politically deadly toubje we

need new tes to reducethe deficit. >> i don't know about deadly but it pretty hard. >> rose: and your taken this presidenand this admistration is that they would not be prepared to do it? >> no. i believe weill see n revenue or hher taxes it's just a queion of when. >> rose: i understand that. but u're suggesting that politically they're no prepared to think about raising taxes until after the cgressional election of 2010. >> along as theressures don't become irresistie i think theyon't want to address is, nor should they. >> rose: do you thi the essure will become irresistible andhat's when gettysburg is he? >> i don't know the answer t that, charlie. but if you sp back and take a wider perspective, wheer this is addressed in 2011 or wheth it's addressedn 2010-- and think this is the fundamental choice-- is going to be tough and brutal and the primary

challenge am-- this ismy point-- of the first term of prident obama's. >> rose: the priry challenge. you made that ry clear and i madehat car. let's ke you beyond the congressional election let's take you into 2011. >> all right. >> rose: the president ss "roger, inow you supported hiary clinton but i respect your viewsnd i've been reading the "walstreet journal" and the way yo expssed them and watcng you on television. forget my politicalife. telle the right thingto do looking athe deficit that i face. whats it?" timings no longer a question. its what? >> well, first,he problem is so large that it' going tohave to be alt with partly on th spending se and partly on the revenue orax side. nojust one or the oth. >> rose: where's the spending you want to cut? >> well, we have a really big budget, charlie, $3.6 trillion

this yr. and i kn that in recent years in washiton no one has cut anything. and as i sai a moment ag, spenng exploded uer presidenbush. but if you haveto, for exple, free spending, we've d those before, you cando it. now, of course, you wouldn't freeze every lt dime o your spending, u wouldn't necessarily freeze social security payments or medicare paents and so forth but if you wanted to freez spending across half the budget or 60% of the budget in anemergency, you can do it. now, tt saves a lot of money becae savings, you know, in this lexicon, rer to money you would otherwisepend that now you won't. in other words, spending always project to grow. so savings reflts spending less than u were going to spend, not necessarily cting the program from 10to 9 or 10 to 8. so remember that, it's important. sof you freezespending, you save mey because othwise it was going to grow. and so a freeze-- which we've rerted to from time to time in american htory-- is e way to address spendi. >> rose: okay. on t revenue side. wh kind of tax wld you

proposin 2011. >> wel there aren't a lot of... tre's not a longmenu of oices. and i id in tha piece that i thought for the first time at least in mery we mit see a rious debe-- i'm not here to recommend it i'm noture it's the right step-- but a serious debate over a valuadded tax. >> rose: but youdon't believe in itnough toecommend it or.... >> no, no. value-added taxemean different things to differt people. for exale, thereare some intereing proposals that have been made, profess grets at yale, michael grets, has made so of them on how totructure vue-added tax sothat it can berelatively progressi. for exple,ou take.... >> rose: what is a value-added tax? >> well, there a different versions of them. in someountries in eure, like france, a value-added ta is essentially a national sales tax. in oer cntries,because rember the term "value-add," you x, for examp, production at its varioustages as value is added. so if someone is producing a

piece of original equipment which en goes to some otr equipment fore it becomes the final product,ou would taxt at each stage of production. there are various different types of value add tax. >> rose: what'the argument against it? >> they're regressive. the simplest versionf it is a national sales tax everyo pays itegardless of income as compared to a progressive x where the more you make theigher share of it you pay. so any value-added taxou would seriously debate in is coury would haveo have a big prressive element. as an example, you take... you put one place, b at the same time yo take a lae number of lower and middle-income x roles, taxpayers, out ofhe incom tax system. so they wouldn't be paying incomeaxes anymore, they'd only be playing val added taxes, state and local taxe, property taxes and so forth. that's one version of retively progressive value-added tax. none of them are goi to be perfectly ogressive and the argue againsthem is theye no progressive enough. but alst every one of the other really advced societies

in the world tay has a value-added tax. and wheer we should have o or not would depend on whether weould ructure one to be progressive ough to fit the american way. if we could, i think it's something thishich we would ha to very seriously explore. the other alternatives inmany cases don'taise enough money and in some cases are less palatable. >> rose: if i was presidt of the uned states and i surroundedyself with all these high powered minds like larry summers and tim geithner, i'd expect them to be thinking about thisoday and all the eventualys and to have some opinion on i even tugh it may be 2011. do you know that kind of discussion,ebate, is taking place in this white house? >> tthe best of my knowled it isn. but the president charged his econom recovery advisoryoard chaired by paul volcker with addressingtax rorm." and at so point over the next w months, that will get

organized and e work will begin. one alternative is to... that s at when that group comes forward andaul volcker has uniq standing to propose variouforms of tax reforms, some of which would raise revenue not just be revenue neutra and that would be one wafor this tobe evaluated and proposals to come forward other than direcy from the white house. >> re: is the bottom line of this piece tt you've written for the "walstreet journal" at we've got this huge problem and in t end the only way t cure it is going to b a value-added tax? >> no. the only way to cure it is going to be combinationf spending straint and new revenu. we could go wit a value-aed tax. you could obviousl go with a rtax on high income earners like me instead opaying 39.6% we pay gher rat than that. you could goith higher capital gains and dividen. >> rose: how would you g from 39.6%, howigh? >> well, 39.6% byong-term historal standards in the united states of americas not one of the high inme tax rat

we've had. if you look bag over american history, we've had rates higher than that most the time. now, i don'tike to pay higher taxeany more than anydy else and i sure don like going aroundaying, gee, it's easy, let's pay higher taxes. it's n easy and not anything you would like too if you could oid it. but the solution is gog to involve a combinatioof spenng restraint and new revenues. it could be a value added tax, higher capital gains taxes and dividend taxes but will see more revenue. >> rose: wlive in enormsly fficult times and evebody is talking about uncharted waters. let me do little history here. when paul volcker was chairman of the fed during the time of rona reagan, ronald reagan came int office a he realize head had inftion at a huge level, correct >> uh-huh. >> rose: and he decid th he wod take th pain then in order to deal with... have a better economy four years late

is that a good idea? >> wel, a little historical correction. paul volcker took office as chairman of thfederal serve bod in 1979. ronald reagan came psident at thebeginning of '81. >> ros right. >> the fedal reserve slammed on the brakes, began to inflict the pain well before president rean took offi. to reagan's credit, he realized it was the right medicine. but the fed had already adnistered the medicine before reagan.... >> rose: but paul vocer is the guy who d it? >> yes. and president reagannderstand it w neceary and he h to sit there and take i fortunateltwo years later, begining in the fallf '82 it began to work and bythe fall of '84 as youemember it was morning in erica. >> rose: now turn to the... bill clinton comes office in 12, comes into offic in january '93. what is that bob rubin and you did in terms of deficit reduction and e legistion in

order to producesome say, you know, a rather attractive surplus at thend of eight years and larrysummers and others. >> wl, there were a whole seri of things and erybody knows it's been widely chronicled. t me mention one tha hasn't gotten as mu attenon. president clinn and the congress installed tough budget rules-- two of the- an authentic pay-as-you-g system meaningay-go,ny time you were to crease spending cut taxes yohad to offset that. >> rose: president obama is favor of that now,sn't he? >> buthere are some nditionalitys of that. and the other oneas a cap on domeic discretionary speing whh couldn't rise abe the rate of inflation backed up by whathe technocrs call a seesterment meaning if you allospending to go above inflation, there's an automatic acrosshe-board cut. the budget rules were a straight jacket, they really worked and as someone who served that time, they played a big

role-- not the oy role but a dione-- in producinghose rpluses. that's w spending under president clinto rose at 40% under e rate of george w. bush. >> rose: that's why ey called you deficit hawks, you and bob rubin andthers. so now these two last questions. number one, and then george bush comes in and he has the surplus. helso got a... 200 and later afghanistan and then later iraq and all those unexpected expendites and other thins and spent... had a huge spenng progm. and reduced taxes. >> yes. rose: ending up with a huge deficit. >> biggest fiscal swing in the historof the count. >> re: my queion is, just in economic picy, th idea that lowering taxes increases growth and is a good ideaall other thingseing equal. >> well, look, if tax rates ar

90%, as we saw, for example, in britain years ago and actually at oneoint in the united states 50 years ago and you rece them, you're goi to get owth because taxes at that level are stiing growth. they're suffocang growth. if taxes are where they are today, % for people like m at the highest ra and you raise them, for example, to 39.6, which esident obama is talki abt, which we had under president clinton, that'sot going to have any suffocating affect on growth. >> rose: butne of the presidents whoought into this idea wasack kennedy, correct? >> yes, tt's right. >>ose: what would tax rates... when he ca in and said "'re going lower taxes to increase goat." >> i can't give you the number but they were much hher than today. i want to say the hiest rate was 60%. esident john f. kendy, we had ta rates ughly 60%. i'm not sayinthat was right and we should do it again. but we have to kee in mind tax rates today are not hily loepl

historical standar. they're just not >> ros how are they in terms of europe? >> much lower. ank 24th out of the 28 o.e.d. countries in terms of federal revenues as aharef ou country. >> rose: the enomic recovery, ople like paulrugman and others and you hear this noise ming out of the administraon we may have a second stimulus bill. u are suggesting that is a ba idea for the present time to create an economic recovery or to add to an economic recovery? >> i'm suggesting that it will be difficult for the american public and the fancial markets to accept the dicit conseqnces of that. if you wer to say to me "roger, don't worry aboutthat, don't rry, trust me." >> rose: i can handle the public pressure. >> then a second stimulus fits with traditional maceconomic theory if, indeed, wesee the kind of weak recovery that i

believe we wil i'm not debating whetherit's good theory. i' debating whethern practi it wilbe acceptable given the enormouseficits we're already facing before you migh increase them with a second stimulu m skepticalt would be acceptle. >> rose: wheare we going to come out of all this? >> well, there's go news. this economic and financial crisis, i think, in the medium and longer run, will prove to be caartic. let me giv you one example. for many yea, the persol savings rate in this country bumpedalong around ze. zero and 2%. no society is going to continue to increas its standard of living with no savings. it'sxiomatic, you can. sangs equal investment, investment eals productivity, productivity equals standards of living. no savings, no investment, so foh. now, becausef the cris, the personal savin rate has sho up. it's 7% n which we haven't seen in years. and clearly because the average american houhold has lo so

much here at a time wn it was so leverage the savings rate is going totay up for quit a while. on optimistic scenario i think s a real shot. it's that we return to a period of better sings. maybe we'reot at 10%, but we're... our society turns back to a point wher it rlize it is virtu of som savings. in the short term, tha constrainsur recovery, as we just discusd. in the medium and longer term it's positive for getting incomes risi again in this countr i think that y be a very good meum and longerterm result of this csis. >>ose: well, and man people make that point. i mean, the oblem ise've en a consumption socie rather than a vings society china has been a savings socty rather than a csumption society. th're trying to change in creating a $500 bilon stimulus so that they ca sell their stuff to tir own people rather than selling it to us. >> the savings rate in chi is often estimated ound 40%. we w't go to tha >> re: but that's changing, too. they're changing. >> well, they're trying

>> rose: tir stimulus program is working. >> i know, but that dsn't necessarily reduce the savings rate. savings te is the private savings rate thati'm talki about. inny event? we were to move-- and i think we may well-- into a period where the country in general is saving more than it was. nothina's rate, not japan's rate, but more an it was, that uld beood for our long-term income growth and standardsf living. >> rose: so that's a good thing that may come out of this. what bads going to come out of it? is something dmatically going tochange about standard of living because of this global onomic crisis? and could we tip o into a deprsion as some of the people at you and i both know believ >> well, mynswer tohe second one is no. don't think we're at risk of depression. in fact, i don't think we're at risk of dipping backown to where we were x months ago. >> re: okay. so t ctraction has ended?

>> wl, the fall... we're not falling anymore. we've bottomed. for example, t first quarter of thisear, general, february, marc we had think a 6.3% gative growth rate. the quarter which just ended a few days ago widely seen as having been out a 3% negative growth rat so 've bottomed and we're starting to ve up. the second half of th year is going to be weakened,s i id early in the show. 2010, 2011 going toe much weaker than we would s. are we going to see a depression.... >> rose: but 2010 will be better than 2009? >> it will be gwth, just subnormal. i mean, historically, t further you fall,he faste you come back. and we could have whole her discussion abouthy that is. but that's bn thease historically. unfortunately in ts case, that's not goingo be true. we have had this extraordinari sharp fall, worsthan the great depression, and fo reasons we're talkg about here, the recoveryate instead of being a very rapid sharp one as we've seen historicay, is going to be a tepid one, thas the

problem. no what's the badnews? look, we both saw over the weekend e data in terms of the employment pictu. all of the jobs created during this most recentconomic upcycle from 2001 throh the presenhave now been lost. we saw that. >> rose: 2001? >> every single job that was created-- which i believe is 6.5 miion-- from 2001 throughthe beginning this crisis, mid-2010 has now bn given back. >> rose: paul krugman says we're going to have in 2010 double digit unempyment? >> everyone agree on that. >> rose: and that's the primary reason we need to ve more governnt action? >> wel everybody agrees we' going to see dble-digit unemplment. we're alrey at.6% and jobs are contuing to fall as we just saw in last thursday's port. >> rose: b uneloyment is always a laggin indator. >> but it's ing toget quite high this time a it may not come down until 21. >> rose: how do y think it might ? not only what you believe, what do the smart peopl you know

lieve about how high unemployme could go? because my argument would be at's when you'reoing to get a main strt reaction. >>ell, it's hd to be precise on that. own view would be in the mid-10s. >> rose: 10.5, 10.6. what abo the dollar? at's going to happen to the dollar durg all of thi well, having servedn the treasury twice i've learned e hazards of commenting that. even as a private citizen. it's ptty damn hard.. >> rose: believe... >> no, to forecast the dollar. theotically the dollar shou ween for a whole series of reasons. but, of course, it aays has to weaken agast something. so, you know, you have t say to yourself, what'she outlook r e dollar and what'she outlook for the euro and the dollar going to ween agnst the ro. i think 's very diffult to know thee theoretically th llar should weaken and not the least of rich which is the

deficit outlk we face. it should have been weaker in cent months than it has been. so i.... >> rose: why hasn't it? theoretically it should ha been weaker than it has been. >> a the dollar a safe haven currency in times of fare and real seanic people move into the dollar. so it's d a safe haven halo around it. second, r current count deficit, the amoun we borrow from abroad, actuallys going to come down bause of the this economic weakness. that's been sothing that's beenutting downward pressure on the dollar and will put less down war preure on the dollar. third, interest rates have ce down around the worldas low as ours. so usually on oveight basis people p money into the cuency which pays the highest short-te interest rates, now they're about the me in the vanced countries so there's no benet to being out of dollar from a short-term rern point of view. that's why the dolr has been stablen recent month buthe theorie if you had red six months agor nine months ago would have had it should get

weak ye. >> rose: japan. ebb keeps talkingbout the japanese example. what was that? >> well, it's in a cole of parts. first ofll, beginning in the mid-'80s, japan fell into wt turned out to be avery long-lasting recession. what they mean byhe japanese example is that the their recessiomore or less lasted a deca. smup ten yea, right. >> and ere's a couple reasons why it did. one was unlike thunited states they had very difficult time facing up to thecondition of their bankin system and taking all the losses and takg all the pain quickly. that really isn' the japanese way. we, to our credit, whether it was th savings and loanrisis of theate 0s and early '90s or this crisis today, we're taking the pain in e classic amican way, get itover with. wee doing it quick and i think history will treat the unitedtates and very favorably in terms ofow it's resolving this banking crisis. japan let it linger and fester and so forth.

a seco thing was in japan, they kt putting in place fiscal stimulusrograms but after a while ey had repaved every road and rebuilt every bridge d built additional bunker hill bridges in the countrand there was little room for actual additiona effective stimulus. they'd gone to the wl too many times. and then, of course, the very high japanese savings rate, which mas it difficult to have a domestic driven.... rose: and what happened to the banking system? >> well, it ok actually more than ten years for the japanese banking systemo get back to what the regulators d others said was healthy condions. >> rose: wt do you recomnd is administration do about... and the financial stor that they hav't done? ist public/private partnerip de, is it going to work? >> i think that'seing.... >> ros evaluat. >> no, it' being derred. and i don'know whether that will actually take effect or it won't. but i give tm highmarks beuse the stepshey've tak under th most crushing pressure ha been very effective.

let's look at what's happened. there's been an ermous reliquefyi of the banking system. a lot of theinstitution which is initily received tarp money ten of tm already have paid it ck much earlier than anybody thout possible. and the banking syst because of the federal reserve's monetary policy, the fact that banks are borrowing about zero every performing asset they have whicharns themnything makes them a prot, so theye earning a lot of money right now, the banki system is getting hethy at a faster rate than anybodyad a right t expect is it going toe great the nths from now? no, we had the worst crisis since the grt depression. but th are doing a good job on this. whher the public/private investment partnersp happens or doesn't, ihink theyet high marks. >> rose: and do you give the adminiration high marks for what it said about executive compensation? >> well, i think if you sty what they have said and what they haven sd, what they're talking abouts guilines for boards of dirtors and so forth and trying to align risk with compensation and sforth.

principles tt any shareholders r example-- inuding you and me-- would support. they're not talking about the fedel government determining tual levels of compensati. there's been a l of rhetoc abt it. there's been a lot of misunderstanding. >> rose: not put any ceilings on compensati. >> the adminisation is not saying let's have the government decide w gets paid what. they're not saying that. >> re: davidrooks, th aforemtioned david brooks, also has sai in a vy interesting columnhat this administtion is different from many, including the onyou rved in, because 's letting coress write everything. 's sortf almost legated to.... i studied that, yeah. >> rose: that tr? and is it good >> actually, i think the administrations shrewd. they udied careful some of the mistakes that were made historically, including by the clinton admistration. >> ros you mean health care .... >> even more broadly thanhat. and i think they... you watch. on health ce, i thk here's what's happening.

initially th oppositeof presiden clinton, theyet up a sete... sentup to the hill a set of principles. very broad princips and they have allowed t congress to rk on tryingo turn ose principl into precise programmat directions and figure outays to pay for it and so forth. but we're getting towar crunch time. d i think admistration will be cenally involved in shaping the final bill. i coulbe wrong. but i think that's how they'll do it. so i don't thinkthat did... i think david suggestethat they areust saying "look, pass whatever you can pass, that's great." no, i don't think that's. it's that way. i think peopleike rahm emanu anso forth are very astute about this. >> rose: part of the reason i think they're dng it is becausrahmmanuel's... you've got the esident was a senator, the vice president was a nator, the chieff staff was a leang member o congress and you' got others, you know, w have the understanng of ngress. >> m understanding is that the degree o interaction between the congress and the whiteouse is at an all-time high.

>> rose: rlly? >> yeah. just for the reaso you just mentioned. at the people in senior level of the administrion who come straight from the hillknow how to do this. >> rose: they're woking like s dety chief of staff and those jobs we don't know about. >> that' right. >> rose: pete petson was here at this table last week d he talked t us, as he has for a long time, abt coming t coming burden of entitlements. helso talked aut the fact that thehinese hold much of our deb is that going to change and a th going to change it? a, they'r clearly conrned abouit, about the concentration ri that they have. b,heir options f changinit are relatively few and there's no scenario in which the can change it quickly. there just isn't >>ose: they'd haveto take that money and find another... >> it would be sf-defeating. it would beelf-defeating to act quickl therefore, any diverfication

which e chinese pu sue... and they will-- will be slow and gradual and the ri that so manyeople talk about, i thi ve loosely,ou know, the chinese may "dp the dollar" or "flethe dollar." that's misguided. >> rose: because it's not in eir interest. >>t's not in tir interest and it's not possible to do it. so it' not a good thing for over the long term, as present oba himself sa, for china to be... for uto be the consumer d china to be the lender. we have to sp that. but china not going to make... take self-destructive actn and dumpinthe dollar or quickly trying to exit t dollar would be very self-destructive and they're way too smart for that. >> re: thank you for coming. >> my pleasure. >> rose: roger altmanerved in the clinto administration, a i said, an advisor to hillary clinn during her campaign, a principle economic advisor to her. he'seen a very successful vestment banker and private

equity person, evercorps being the name of hi company. but he has always been enged in t economic cversation of this country. thk you for come canning. we'll see you xt time. on t next charlie ros, robert mcnamara in his ownords. the former secretary of defense during the vietnam died at age 93. >> two men who i ink loved and respected each oth, johnn and i, came to the poi where i couldn't convince him and he codn't convince me. and had to part. now, who took the initiative? honestly don't know but i wrote a memorandum inmay of '67nd another memorandum on november 1 o67. >> rose: allbout halng bomb about halting bombing, turning the litary action, in a see, over tothe south vinamese, reducing u.s. casualties, pressuring the north vietnamese to knos in order to

try t disengage. d he, i kn, wasn't prepared at that time to accept that. the nomber one memo i delivered toim by hand. it has a note on it you can see there. i saidmr. president, i haven't shown this tonybody, not to dean russ, not to thechairman ofhe joint chiefs, not the national security adviso because i know y may not agree with it. and i won't showt to them until you authorize me to." i never to this day have received aanswer. i'm not criticizing jnson. i'm ju saying that this was the dilma we were in. it was an possible situation. captioni sponsored by rose communications

captioned media accessroup at wgbh cess.wgbh.org