dizzy. >> welcome to our program. tonight, we begin a two party series, a conversation wit lawrence summers, former president of rvar d white house advisor. tonight we focus on the debt elimination talks taking place in washington. >> lay out for us as you see it the consequences of a default. >> lehman brothers post event on steroids. >> meaning what? >> meaning what the buck will be broken in money market funds. americans will rush to get cash and put it under their mattresses. major corporations will be unable to borrow. the stock market will crash. and quite likely, the basic

mechanis of payments that keep the economy going will break down. >> rose: we conclude with george stephanopolous of good morning erica on the political implications of the debt limitation talks. >> in the end, i think, even if the public, if we go in default, even if the pubc blames repuicans more the president bears more responsibility and has to deal with the consequences. >> rose: the economic consequences of the debt limit talks with george stephanopolous when we continue. funding is provided by the following: we can all root for.a hero who beats the odds and comes out on top.

but this isn't just a hollywood storyline. it's happening every day, all across america. every time a storefront opens. or the midnight oil is burned. or when someone chases a dream, not just a dollar. they are small business owners. so if you wanna root for a real hero, support small business. shop small. caioning sponsored by rose communications from our studios in new york city, this is charlie rose. rose: lawrence summers is here. he is a charles elliot

university professor at harvard where he was president of the university from 2001 to 2006. he has had a distinguished career in plic service at the highest levels of government. he was treasure secretary under president clinton. in 2009 he returned to the white house as dector of the economic council and in that role he was pivotal in providing president obama's response to the financial crises. i am pleased to have him back at this table. welcome. >> glad to see you charlie. >> first time since you left government which has been how long now? >> about six months. looking at the negotiations in washington today based on everything that you saw when you were there, based 0en a brilient career as an economist and based on having time to think about all of these things -- >> it's not inspiring. it's not inspiring texture at a couple of levels. the idea tt anybody would take the creditworthiness of the united states as a hostage to serve any objective really is

wrong. you know, the way i say it is, my children and i can argue about how mu they should spend in college, whether they should pay or i should pay. but as a family, we don't really get to say you will get stiffed because we're having a fight. and that's what his debt limit is about. >> so the first thick to say is that taking the creditworthiness of the united states as a hostage is badly wrong and that is in essence what the house majority is saying. secretary thing that i think is discouraging is that all of the energy is on the projected deficit over the next 10 years,

when the reality is that any deal that is struck nows going to get changed several times, when the reality that there are certain number measures that reflect low hanging fruit that will happen at some point, any which way, and when the problem right now is that the ecomy is in dange of stagnating from lackf dand so would lik to see the jobs deficit be as much of a focus in this conversation as the budget deficit. that's the second thing. and the third thing that i find discouraging is that taking the long run problem, which is a serious one, the president has been prepared to discuss all of the possible solutions. he has raised ideas that are

unthinkable to many in his political party like the idea of changing the medicare age and pushing it up to 67. and the other side has rejected tax reform, even when the tax reform in question is a few billion dlars special generous breaks for corporate jets and a few billion dollars in special breaks for private equity. those are small items and those items are not the difference between solving the budget and not solving the bget. but if the congressional side is unwilling even to contemplate thosmost minimal and legitimate of revenue measures, then you really are in a situation where it's very

difficult toave compromise. >> let me talk about several things here. number one, first, lay out for us as you see it the consequences of a default. >> lehman brothers, the post lehman event on steroids. >> meaning what will happen? >> meaning that the buck will be broken in money market funds, american less rush to get cash and put it under their mattresses. major corporations will be unable to borrow. the stock market will crash an quite likel the basic mechanisms the payments that keep the economy going will break down. >> irreparable. >> i think we will not forget the immediate aftermath and we will live with a long tail that will make us poorer and less

proud as a country and paying much more to borrow fo a very long time to come. >> so what do you think happened to our politics? >> charlie, i think in the end, churchill's doctrine that the unitedtates does the right thing after exhausting all of e alternatives will probably play out here too. >> rose: but the grand design is off the table, it looks like. there's no longer goi to be a $4.5 trillion deduction over 10 years. >> it certainly looks unhikely. and that's too bad. but let's distinguish degrees of bad. i still am confident, as the president has said, as senator mcconnell has said, that a default will be avoided. what the deal will be that will

avoid a default is in some sense not the most important question relative to making absolutely certain that we avoid a default. that has to be the first priority. for me. second priority is making sure the economy grows. third priority is, which we need to address now and we're going to need to keep addressing over the next few years, is, bringing the level of spending in ou country d the vel of revenues in our country back into balance. >> ok. fair enough. what does larry summers think is the red line in which this administration, because it has made compromis it did not expect to make on the revenue side, has it not? >> three bottom lines. one, default must be avoided. and default must be pushed out of reach as a possibility until after the election. second, demand has to be supported through continuation

of the payroll tax cuts and other measures. >> rose: that's immediate. >> that's the immediate stimulus to demand. and third, there has to be a balance between core interests of the two parties. if the core ierests the democrats have in protecting medicare are to be sacrificed in the me of deficit reduction, there has to be a willingness on the republican side to look to revenues. >> rose: if they're not prepared to look at revenues, then what then? >> then medicare has to be protected. the debt limit has to be extended. the economy has to be suorted. and we need to have an election campaign that debates the merits of these two philosophical things. >> rose: can the country wait for that? can the economy wait?

>> the economy can wait for that. the priority for thenext 18 months is ming sure ts economy grows. the onomy can wai f that. it would be better if it didn't ha to wait. wou be better if we were able to find a compromise in which both sides compromised. t there's no reason why all of the compromising should happen on one side. you know, i'm an economist not a political scientist but if you look at the polls, it's not that the polls all say that raising taxes on corporate jets is an inconceivable thing, or closing corporate tax -- >> rose: in the end that's not a lot of money, is it? >> corporate jets is not a lot of money. but it is a powerful symbol of a highly problemat attitude. if you're not even prepared to raise taxes on corporate jets,

then you can't possibly be prepared to address the revenue issue in a way that will make it possible for us to get anywhere near the deficit target. >> rose: when you talk about raising the tax on corporate jets you're talking about deductions. there are a whole lot of deductions for people that do oil and gas and for people that do things abroad. look, some of the deductions, charlie, actually make sense: special favorable treatment tore people who do research and development is probably a good idea. special favorable treatment right now when the economy is demand short for people to invest in new equipment is probably.right thing. but people who transfer intangibles to the cayman islands, no, that's not something that we should have a special deduction for. and that's something that the president has tried to address

in his budget for the last two and a half years and frankly he has not made the progress that i think he should have been able to make. >> why do you think that republicans belief that the growing debt that we have and the economic is responsible for the economic stagnation? why do they think if you cut spending you can stimulate the economy? is that economically sound? >> no. it's not. >> under certain circumstances it might be. >> rose: what are those circumstances? when is it and when is it not? >> that's a great question, great question. in 1993, bill clinton, bob ruben, those of us who supported bill clinton and worked in his administration looked at an economy where we hadeen very

high capital costs, very high interest rates,businesses opering with very high utilization of capacity, but still not investing more because capital costs were so high. and we said if government stopped borrowing then interest rates would come down and when interest rates would come down, it would be cheaper to invest and people would invest in more capital and the capacity would increase and we would get more output and the economy would grow. so we advocated deficit reduction, in order to push the economy forward, and the results proved that president clinton was right. but notice what was crucial then. what was crucial was that capacity utilization was high. factories weren't sitting empty. the capital costs and interest rates were high and could be brought down. none of that is the case right now.

10-year money is today at 2.85 percentage points. pele aren't investing, aren't failing to invest because 2.85 is a prohibitive interest rate. they're failing to invest because why build a new factory when the factory that you have is empty. so the logic through which defici reduction crowds in investment is a logic that applied in 1993. it's a logic that applies in some countries at some times. it's not logic that applies in an extraordina low interest rate economy with an extraordinary high degree of excess capacity. >> are you saying if the president cannot convince the republicans to allow some kind

of revenue enhancement, some kind of revenue to come from consulting deductions and the like, that the economy will stagnate beyond what it is now? >> as long as the debt limit is extendedo weavoid a default -- >> rose: right. >> -- as long as we do