BOWLES : The big problem we have is how do we get there? As long as we have this huge debt overhang and as long as we don't bring our spending under control or increase our revenue, then we're not going to have enough resources to invest in education, invest in a high-value added research to invest in energy or infrastructure. You know, we— these— these are the problem areas that we have to face up to. You know, we spend twice as much as any other country in the world on health care. You know, health care is an enormous problem. It's growing at a much faster rate than GDP. Second problem is defense. We spend more than the next 17 largest countries combined on defense. Third, we have a tax code that is inefficient, ineffective, and globally anti-competitive. And fourth, you know, it's Social Security. Social Security is $900 billion cash deficit— debt— cash negative over the next decade. We've got to face up to those four big issues.
LIESMAN : Let me just be clear, though, because the head of the IMF, Christine Lagarde, was— out the other day warning countries against too much austerity. And—
BOWLES : Right.
LIESMAN : — also pointing out that countries who have done better are those who had a little bit less austerity. Is there a danger with what you're proposing that it's taken too religiously up front here and— and we end up plunging the country into recession?
BOWLES : No, because that's why— that's why what we did is we ought to— ought to phase it in over a long period of time. If you look at what they did in the U.K. compared to what we're doing, it's very similar. You know, we were one dollar— one dollar of revenue and $3 of spending cuts. You know, we wanted to go for a cost-benefit analysis for all the programs we do. You know, we raised the retirement age. They raised their retirement age. You know, we control the rate of growth of health care. But they're trying to get to balance in five years. That was too much, too quick. We recognize that. So what we wanted to do was phase ours in over a much longer period of time.
LIESMAN : But— Senator, it's hard to look at a 1.6 percent yield on the ten-year right now to see the money that floods into the U.S. treasury market, any time there's concern about anything in the world, and say, "You know what? The deficit's the big problem right now."
SIMPSON : Well, as Erskine often says, "We're the healthiest horse in the glue factory." Because the trajectory of debt and deficit and interest in this—
LIESMAN : Hold on, Erskine, do you really say that? Is that—
BOWLES : I actually say, "We're the best-looking' horse in the— "
LIESMAN : — or is that— is that a Simpson original?
SIMPSON : No, I've tainted him. Slowly over these last three years, I've tainted him. Anyway— the trajectory of debt, deficit, and interest in this country is exactly the same as the PIG countries, Portugal, Ireland, all of that, Italy, except we're lots bigger. And— and— and we— you know, all I know is this. There's a tipping point. I don't c— you don't care about whatever, you know, the big business world. He's the number guy, I do the color, but I can tell you. The tipping point is when the people who loan us money say, "You're addicted, obviously. You're $16 trillion. And so we're going to loan you more money, but we want more money for our money." And interest rates will kick up and— and inflation. And the guy gets hurt the worst is the little guy. What an irony.
LIESMAN : Lloyd, I want to get your— your take on this— 1.6 percent ten-year yield. Are people— are businesses concerned about the fiscal cliff? Or are they really long-term concerned about the deficit?
BLANKFEIN : Well, it's— if people are lending money to United— I mean, listen, would you lend money at 1.6 percent to ten years with someone with the characteris— the credit characteristics of the United States? Of course not. We're a reserve currency. People have dollars. Trade is conducted in dollars, pools of dollars. And they're financing us. And they're financing us with enthusiasm until the day they stop. And they don't— they don't— they don't blow a horn ten minutes before that happens. So we have to get ourselves— we have to get ourselves in gear.
LIESMAN : Does Goldman take action right now to prepare for that music— for the music stopping? Is it— do you protect yourself from that?
BLANKFEIN : Yes, of course. I mean, we live in— you know, we protect ourselves from much lower— you know, from very, very tiny— for very tiny probabilities. And that's not— there's a lot of things in the world. Look, we think— we have reason— we're optimistic about a lot of things. But we live 98 percent of our time in the 2 percent worst possibilities. And that's what we— plan and prepare for. Let me just say, on the last point, we— you know, we don't have a lot of room for maneuver, when our budget deficit is so big, to play Keynesian thing and spend a lot more now. At the same time, you don't want to have austerity tomorrow at a time when deficits are lowed and we're worried about deflation. There are some things that from a fiscal point of view, if they're not free, they're cheap. So phasing in tax deduc— tax— raises, where you don't have to have another voter down the road. Pha— phasing in caps on entitlements down the road, where they don't become implemented in the short term. Getting rid of some regulations and rules that are impairing people from investing v— vast pools of liquidity that are on the sideline, that are not owned by the government, that are theirs to invest but are just sitting on the sideline.
BOWLES : The r— the reason we have to do it, Steve, let me just give you the very simplest arithmetic. If you take last year, not 20 years ago or 20 years from now, but last year. 100 percent of the revenue that came into this country was spent on what's called our mandatory spending and interest on the debt. Mandatory spending is principally what we spend on Medicare, Medicaid, and Social Security. That means every dollar we spent last year on these two wars, national security, homeland security, education, infrastructure, energy, homeland security, every single dollar was borrowed and half of it was borrowed from foreign countries.
LIESMAN : Do you like the— Romney litmus test that he's going to take every program and see if it's worth it to borrow money from China?
BOWLES : Well— you know, that's— that's— a fun way to say it. But I think you should do a cost-benefit analysis on all the— all the money you're spending. You know, I can tell you— let me give you an example. You know, I just ran a university for the last six years. You know, I wanted to see if we could find a program to improve the quality of— of teacher education. We did. We found 82 of them. Do we need two or three good ones? You bet. We don't need 82.
LIESMAN : Senator Simpson— there are some Republicans who think we can get where we need to go without raising taxes. And some Democrats who think we need to get where we c— where— where we can go— we need to go without really substantially cutting entitlements. Are— are both of them wrong? Is one of them right?
SIMPSON : There are really not some. There are a lot of them. And— and— and they— you know, you have a situation where Grover Norquist has obtained this pledge in the '80s and the early '90s, he got this pledge that you wouldn't raise taxes under any circumstances, unless there's commensurate, you know, spending cuts. And those guys are in thrall to him. There are 82 guys in the House who didn't run to limit government. They came to stop it. You got the lefties saying if you touch anything in— in health care or any— call it anything, you're throwing old ladies off cliffs in their wheelchairs. And then you got the— the— the Republicans. But you don't have to raise taxes. You go into the tax code and you rip around in $1, 100, 000, 000 worth of stuff, which is used by only 20 percent of the American people. Only 27 percent of the American people—
LIESMAN : People who itemize.
SIMPSON : — itemize. So these— guys have never heard of it. But if you want to know about a stimulus like whether you're listening to Krugman or whoever, we do a pretty good stimulus. It's called the deficit. $1, 100, 000, 000 buck, what the hell do you think that is?
BOWLES : But— but the answer to your question is, we cannot solely grow our way out of this problem. You could have double-digit growth for a decade and that alone won't solve it. You can't solely tax your way out of it. Raisin' taxes doesn't do a darn thing to change the demographics of a country or the fact that health care's growing at a faster GDP And you also can't solely cut your way out of it, without hurting the truly disadvantaged or without making' such significant cuts in education and infrastructure, energy, and research, that we're not competitive in a knowledge-based global economy.
LIESMAN : Lloyd, we— we don't get to talk to you a whole lot. I want to ask you—
BLANKFEIN : Sure.
LIESMAN : 'Cause a lot of this is predicated—
BLANKFEIN : Can I just say one thing on that?
LIESMAN : Yeah, go ahead.
BLANKFEIN : Even if it's a matter of economics, you could live life on one extreme or the other. As a matter of political reality, you can't. We're having— the country is divided on this. Whoever wins the election, I hope they realize that you have to bring the entire country with you. And you have to do this in a bipartisan way or else we're going to be a very volatile system as we go from one extreme to the other extreme as the parties trade— tenures in office. Whoever does this is going to have to do something more in the middle, just so— the whole country can form a consensus and go forward. And I see with these two gentlemen here, you have such a great bipartisan spirit. After the election is over, whichever way it's resolved, I hope everyone takes that as a referendum that these questions are decided and that the winning party is generous enough and wise enough to realize you better take the other side with you or you can't—
LIESMAN : So let me just be clear about something on your— your personal views. Somebody comes to you and says, "Lloyd, you need to pay 5 percent more on— on your— on your income taxes, in order to solve the deficit." Are you— are you— are you in favor of that?
BLANKFEIN : Of course, to s— let me say— let me use my formulation. If you paid 5 percent more, you would solve the problem in a heartbeat. I don't know anybody who wouldn't pay that kind of price to benefit the— you know, the— you know, our country. The questions that come up, are people going to— the pressure that's put on people who would otherwise advocate tax raises is, "How would you spend it? And will this defer the hard choices that have to be made down the road?" No one is so unpatriotic that they wouldn't contribute a little bit more to resolve it. The issues is over what resolves it.
BOWLES : And you shouldn't pay 5 percent more unless you're willing to also make some cuts in the spending side. You know, we've got to put the fiscal house in order and just paying more won't get us to the promise land.
SIMPSON : And if you can't learn to compromise an issue without compromising yourself, you sure shouldn't be in Congress. In fact, you shouldn't even get married. If you
BLANKFEIN : By the way—