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Armey: We Have to Raise the Debt Ceiling

There used to be a joke that went like this. Two guys were sitting in a bar talking politics. "So what party do you support," one fellow asked. "I'm not a supporter of any organized political party," the other fellow said. "Me neither," said the first guy. "I'm a Democrat."

These days both the Democrats and Republicans seem to be fracturing under the weight of the government's budget deficit, taxes, and the still stymied economic recovery. I decided to speak with the Godfather of the Tea Party, Former House Majority Leader Dick Armey. FreedomWorks, his organization, has been a vocal supporter on the extension of the tax cuts. I asked him about the division within the Democratic Party and the Republican Party when it comes to taxes.

DA: The Democrats crack me up. They are fiscally conservative when it comes to cutting taxes or even in this case, avoiding a tax increase because they see the government is losing money and to them its all about the government. But it's not really. Being "fiscally conservative" is a line they can bend. Because the fact of the matter is at the same time they want to increase spending and resist any efforts to cut spending. So the fact of the matter is that we are avoiding a tax increase.

If you use dynamic analysis, you find that the tax increase would result in a reduced level of federal revenues because of the negative impact the tax increases would have on the economy. I find a lot of confused thinking going on here. I'm not as concerned as the Democrats confusion as I am with the confusion going on with the Republicans and Conservatives because you expect Democrats to be confused because they are not deep thinkers.

LL: I was going to bring up the division among some members in the Tea Party on this tax cut.

DA: I believe in a dynamic model while others believe in a static model. When Representative Michele Bachmann (R-MN) says she can't vote for these tax cuts because she believes it will result in an increase in the deficit and she's a purist on the deficit, essentially she is denying supply side economists which, ironically, was the argument when they asked for a positive reduction in taxes. It seems to me, there are a lot of people allowing their too quick reactions to lead them to their decision.

LL: What's your message to your fellow GOP and Tea Party members who are divided on this issue?

DA: My message is the same since Kennedy in 1962 (when I was a young economics student at the time) as well as during the time of Ronald Reagan in 1982. If you cut taxes you encourage growth in the economy which results in higher revenues. If in fact the economy is struggling and you allow taxes to go up what you have done is administer a sleeping pill on the economy. Why would you let this economy be subjected to a knock out pill when it is struggling to get back on its feet? For the life of me, I just don't get it.

LL: Wilbur Ross recently told me he thinks the Bush Tax Cuts should be made permanent. Do you agree?

DA: Of course they should be. I thought so when we passed them in the first place ten years ago but the fact was there was a bizarre rule in the Senate that made it impossible for the Senate to pass a permanent reduction in taxes. I'd love to see a permanent reduction in the rates, but you can't get it, so take what you can. Soon you will have a new Republican majority in the House, you'll have probably have a Republican majority in the Senate in two years, and you'll probably have a Republican President in two years so that will be the time to start talking about permanence.

LL: The President recently spoke about reforming the U.S. tax code. What would you like to see done?

DA: Flat tax is the answer. The Democrats want to keep the multi-tier tax system and to keep it more progressive. They want to keep the double taxation on capital earnings and they want to take away the mortgage deduction and tax exemption of health insurance. So basically, what the Democrats want to do is they want to simplify the code by taking away things that are beneficial to the taxpayer and effectively raising the rate. But, if you to rationalize the tax system in America and make it a system that is no longer counterproductive to economic performance than to do a flat tax.

LL: Extending the unemployment insurance has been a sticking point for some GOP and Tea Party Members. Is this just lip flap right now? Surely they must be happy with this compromise?

DA: At the end of the day, the Democrats can take the unemployment extensions and pass them with more than a few Republican votes, so essentially the inclusion of the unemployment extension in the Bush Tax Cuts deal is essentially a placebo to Obama's base. Republicans should not think that somehow they gave in on the extension of unemployment insurance. The Democrats are capable of passing it without this tax bill.

LL: FreedomWorks is in favor of this tax cut extension and there are Tea Party members who are very vocal in opposition. Do you think this leaves the Tea Party open up to criticism that they are not united and have strayed from their message?

DA: No, not at all. If I wanted to be entertained by intra-party splits and confusion, I would be more concerned about with what's going on within the Democratic Party. Things are being said by members in regards to this President on public airwaves that I would never even say in private. The grass-roots movement of the Tea Party has a broad, diverse point of view. The one thing that holds us together is our opposition to big government. The Democrats, if they want to say there is now a wide diversion in the point of view among members of a grass-roots movement while they ignore the fact that their own elected office holders are saying the most toxic things about this President is absurd.

LL: What are your thoughts on Speaker Pelosi? Her statement on the Bush Tax Cuts was noncommittal. Were you surprised she retained her leadership position for the next Congress?

DA: I think she has a lot of confusion going on right now.There is a lot of anger and people are upset on her side. Fundamentally she is a left-wing, big government type of person. That's the language she knows but they are not speaking that language right now in Congress. So now she is trying to figure out what to say in this new world being defined by these conservative activists. Remember how the President explained that the people who are disagreeing with him are doing so because they were scared? He said when they get scared, they get confused, and when they get scared and confused, they disagree with me. I think Nancy Pelosi is scared and confused.

LL: Do you think the President will address the deficit next Congress?

DA: Remember when Al Gore got all excited about the lock box? I said, wait a minute, that's our gimmick! I think the President will use the language but other than the language of income redistribution, the President doesn't really much understand any language of public policy. I'm sure he'll talk deficits and so on, but at some point he's going to get back to his fundamental belief in building a bigger government to create a larger private sector. He still believes the public sector carries the private sector.

LL: Next year the debt ceiling will be voted on. Do you think the GOP in the House should make it a single vote instead of lumping it into the budget? Should the debt ceiling be raised?

DA: I would make it a separate vote and put it this way when voting in favor to raise the debt ceiling: We have to raise the debt ceiling because of the prolific spending habits of past Congresses and of course we are the new Congress that will change those patterns. But we are required to do this now in order to avoid a national fiscal calamity. But this will be the last time and we will get our House in order.

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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."

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