LL: S&P said it would immediately slash the U.S. rating if a debt payment was missed. Many of my contacts say Congress is so caught up with the political jabs that they are blinded by the consequences of their inactions.
Do you think Congress gets it? They clearly didn't get it in 2008 when they voted down TARP and then the market tanked and several days later voted to pass it. Can we be looking at another Congressional misstep?
DA: Wall Street bailouts and out of control government spending were the main causes of the Tea Party revolt. Bailouts send the worst possible signal: Go ahead, make dumb decisions with other people’s money, and don’t worry, because the taxpayers will save you. In terms of spooking markets and losing the AAA rating, the real threat is kicking the can down the road. It is clear that the current path is unsustainable. If we keep piling on the debt, who on earth is going to bail us out? Our debt crisis is a failure of political will to make the decision to get spending under control. That is ultimately what is spooking the market.
LL: We have talked about political will for quite some time. Congress loves a good crisis in order to get things done. Are you confident something will get done?
DA: There will be a deal. But it needs to be a good deal, or the grassroots will revolt. It’s in the Republicans’ interest to hold out for deep spending cuts and a strong balanced budget amendment. The tea party movement demonstrates that for the first time there is a voting constituency ready to support bold cuts to the budget. These folks are showing up at town halls and are chanting ‘we want less.’
The debt ceiling vote is an opportunity to finally make significant cuts and get out long term fiscal house in order.
LL: I recently interviewed former Federal Reserve Economist Arnold Kling who told me the United States financially may actually be in worse shape than Greece. How would you characterize the health of Uncle Sam right now?
DA: The numbers are staggering, and Greece’s problems are a rounding error compared to the debt we have piled on. Were more on the path of Argentina. Washington is broke and addicted to spending.
Our debt will be downgraded in the near future if we don’t reduce spending in a serious way. Mathematically, you can’t balance the budget by raising taxes, because tax hikes dampen growth and revenues.
So that leaves one option: cut spending. Slashing the budget will also free up capitol to invest in the private sector, where you can actually grow the economy. When the federal government is sucking up $1.5 trillion dollars a year, what is left to invest in business? The good news is guys like Paul Ryan gets this are taking the problems with our collapsing entitlement programs.
LL: No one wants to blink first in this debt ceiling showdown. We're at a point where both sides have to blink. The leverage is gone. What can both sides make a compromise on?
DA: The President’s leverage is actually lower than the Republicans’.
The American public overwhelmingly opposes raising the debt ceiling.
And they aren’t clamoring for tax hikes, either. Instead, they want Congress to do its job and start prioritizing spending. I support the notion of ‘cut,cap, and balance.’
1. Cut—Substantial cuts in spending that will reduce the deficit next year and thereafter.
2. Cap—Enforceable spending caps that will put federal spending on a path to a balanced budget.
3. Balance—Congressional passage of a Balanced Budget Amendment to the U.S. Constitution - but only if it includes both a spending limitation and a super-majority for raising taxes, in addition to balancing revenues and expenses.
LL: Do you want a balance budget amendment put in the constitution?
DA: Yes, but even more important than just requiring annual balance is having a firm cap on how much of our economy is spent by the government, plus protections against tax hikes. This is how you enforce the cuts. The debate shifts form do we cut, to what do we cut.
LL: While that sounds great, some constitutional scholars are worried about the loop holes that can be created. What would you like to see in terms of such an amendment?
DA: We want a BBA that requires supermajorities in the House and Senate to run a deficit, raise taxes, raise the debt ceiling, or spend more than 18 percent of GDP. That last piece, the spending cap, is the most important.
LL: Medicare and taxes both have to be put on the table. If you were on the Biden Commission, what would you say to both parties?
DA: Raising taxes won’t work. Serious entitlement reforms are essential, and overdue. At the end of the day economic rules are as strong as the rules of gravity. You can not indefinitely live beyond your means and spend money you do not have. We are running out of grandchildren to mortgage. What made this country prosperous is personal freedoms, free markets, and the rule of law. Our debt puts all of this at risk.
LL: Some argue the Tea Party is unwilling to compromise and are willing for the nation to default for the "greater good". What do you say that?
DA: Seventy percent of the public strongly opposes raising the debt ceiling. If the debt limit isn’t raised, President Obama will still have enough money coming in to avoid a default; but with only enough cash to cover 60 percent of the government’s bills, he and Congress would be forced to prioritize spending.
We have reached the end of the road and this moment is an opportunity to make serious cuts and get our fiscal house in order. The debt ceiling debate is the short vs.. long term. If we just go ahead and raise the debt ceiling, it solves a short term problem but does not thing for the long term. I’m for long term solutions.
LL: Out of all the GOP Presidential candidates right now, do think any of them can be a formidable opponent to President Obama? You have mentioned former Minnesota Governor Tim Pawlenty on Squawk Box that you liked him.
Do you think him backing off of "Obamneycare" was a political misstep? What about Texas Governor Rick Perry? Many GOP supporters tell me the field right now is not exciting and they are waiting for Perry to jump in.
DA: President Obama will be a weak candidate in ’12, running for reelection in the weakest economy since the Great Depression; but his coalition will be determined to hold on to power. The strongest candidate for the Republicans will be someone who provides a bold, principled defender of freedom, economic growth, and limited, constitutional government.
I think Governors Romney and Huntsman, and Speaker Gingrich couldn’t win — because of their support for the health care mandate and energy mandates, for example. Governor Pawley did miss a chance in the debate by not sticking to his "Obamneycare" line. The activists I talk to are interested to learn more about Governor Perry. I live in Texas, and we have a solid economy down here that produces jobs. He's got an opportunity. And so does Governor Christy. You’d be surprised how often his name comes up.
People appreciate how he is a straight shooter and is bold in addressing problems.
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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