Following is the unofficial transcript of a CNBC interview with Senator Charles E. Schumer and Senator Kent Conrad today, Thursday, August 6th, during CNBC's Business Day programming.

All references must be sourced to CNBC.


JOHN HARWOOD, host: Senator, thanks so much for being with us.

Senator CHARLES SCHUMER: Good to be here.

HARWOOD: The bipartisan negotiators have been at it for some time. They haven't produced a product, but they say they don't want deadlines, they don't like the idea of being rushed. How much time do they have?

Sen. SCHUMER: Well, I think the realistic time is mid-September, because they've been at it for three, four months. If they can't do it by September 15th, I think the overwhelming view on the Democratic side is going to be then they're never going to get it done. And there's always a worry that, you know, delay, delay, delay, you lose any momentum whatsoever. So make no mistake about it, we prefer bipartisan agreement and we're willing to cut a lot of slack. The deadline keeps moving back. But sooner or later you have to draw a line. It doesn't have to be a public line or a set date, but after a while people are going to say we're going to have to try to do this ourselves if, big if, they can't come up with an agreement that is acceptable to the Democratic Caucus.

HARWOOD: Your caucus is pretty impatient with them, is that right?

Sen. SCHUMER: I wouldn't say impatient. I'd say nobody knows a lot of the details. About 90 percent of this has been worked out, and that's going to be a good basis for us no matter what happens, whether they come to an agreement or not. But the remaining 10 percent are the real tough issues where there's a lot of concern and disagreement. And I think Senator Baucus is mindful that on the one hand he has to look over his right shoulder at the three Republican negotiators, but on the other he has to always look over his left shoulder, too, with many people in the Democratic Caucus who have different views than Grassley, Enzi and even Snowe.

HARWOOD: Well, let me ask you about that, because we've heard from Senator Dodd, from Chairman Waxman on the House side that the bipartisan negotiators shouldn't just assume the Democrats are going to accept whatever they come up with. We've seen some of the details of what the gang of six is talking about: co-ops instead of a public option, an employer--a work around for the employer mandate, so--where they pay the subsidies if they're disqualified, an insurance tax rather an a tax on employee benefits directly. Do you see anything in that agreement so far that rank and file Democrats cannot support?

Sen. SCHUMER: Well, you don't know the details. For instance, I've been very much involved in the public option. I believe strongly in it. If you call it a co-op but it meets certain criteria--it's available on day one, it's available to everybody, it has the strength to go up against the big insurance companies and the big suppliers to bring down prices--fine. If it's going to be a measly little thing that's just a fig leaf, not fine. On taxing...

HARWOOD: Is your impression that they're coming up with a fig leaf or a real alternative?

Sen. SCHUMER: I don't think they're sure yet. The reason that this has stretched on so long is they're trying to thread that needle. And it's not easy, I give them a lot of credit for trying.

On the taxing the insurance companies for high-end policies, well, at what level does it start? There's a big difference between 20,000 and 30,000; although, obviously, 30,000 would bring in less income. I have, in New York, a lot of firefighters, police officers, who deliberately took lower salaries to get really Cadillac health benefit plan. Given their occupations, that's kind of natural. They'd all be caught at 20, they wouldn't be caught at 30.

HARWOOD: Yeah. The administration proposed initially limiting the deductions of high-income earners. The House has talked about a surtax on very high incomes, over a million dollars in particular. Are both of those dead in the Senate as--because that's the reason that they've gotten to the tax on insurance companies is because you hear senators saying we can't pass either of those other options.

Sen. SCHUMER: Well, I think they'd be dead if we're going to have a bipartisan agreement. I think the Republican--the three Republicans have made it pretty clear they would not be for changing any taxes outside the health care system.

HARWOOD: But what about you? You've got a lot of constituents who'd be hit by those taxes on...

Sen. SCHUMER: Well, you know, I wouldn't take anything off the table. I think it's really important to get a health care bill done. And so there are better ways and worse ways. But to draw a line in the sand right now on anything, I think, is unproductive if you believe in a bill. And I'd say the one thing that unifies the Democratic Caucus and I hope the three Republicans--I know this is certainly true of Senators Bingham and Conrad and Baucus--we really want a bill. So to draw lines in the sand and say, `If it's this, no,' right now is not helpful or productive. That doesn't mean that the caucus has given the three negotiators a carte blanche. And they have said publicly, as has Leader Reid, that before anything is signed off--and Chairman Baucus has told us on the Finance Committee--they'll come back to us first. Harry Reid has told the caucus, the caucus, the Health Committee will have input before anything is signed off on. So this is just--I mean, it would be easy to those six to negotiate a bill on their own that they could agree to, but there are other considerations out there.

HARWOOD: So you're not ruling out the idea of a surtax on $350,000 incomes or million-dollar incomes?

Sen. SCHUMER: I'm not taking anything off the table. It wouldn't be my preference. There are other, better ways to do things. But to take things off the table now would be--would be the wrong thing to do.

HARWOOD: Senator Conrad says there are not the votes in the Senate to pass a public option, period. Is he right?

Sen. SCHUMER: I'm not sure that's right. You saw the House, the Blue Dogs--conservative group, just about the same level of conservatism as the conservative Democrats in the Senate--came up with the kind of public option that I proposed originally, which was a level playing field public optionIt is started by the government, but then it has to go forward on its own. It's not going to get constant infusions of government money. But the idea is give the individual businessperson or individual an option. If you want to stick with the private insurance, stick with it. If you want to try a public plan that is a different model, doesn't have to make a profit, doesn't have to merchandise, has a different way of thinking, try that.

HARWOOD: So do you think that you and Senator Conrad, for example--and you're not the only one that disagrees with him on that...

Sen. SCHUMER: Yeah.

HARWOOD: ...are simply getting different vote counts? Or is this real ideological resistance we're talking about?

Sen. SCHUMER: Well, it's not different vote counts.

HARWOOD: Or getting...

Sen. SCHUMER: No; it's that they haven't come to an agreement yet. I am trying to be as helpful as I can to Senator Conrad, who's doing a good job. He and I could put together a co-op/public option tomorrow. We would agree. The difficulty is when you have to get a guy like Mike Enzi and then you have to get members of our caucus, many of whom--Senator Rockefeller, for instance, myself, others--who feel pretty strongly about the public option, it's less easy. And so they're--it's not that we're up to vote counting, it's not that there are ideological lines drawn in the sand, it's just they haven't come up with anything yet that would please both.

HARWOOD: Are three Republican votes the optimum for bipartisanship; that is, the upside, that's the best you all could do...(unintelligible).

Sen. SCHUMER: Well, no, I don't think so. I think there are other Republicans. Those are on the Finance Committee, the three who are willing to negotiate. But there may be other Republicans. And look, if they can't come to the table, it may be another combination of Republicans who could, who are not on the Finance Committee. But I think there's a general view, Leader Reid or Senate leadership, even the whole Democratic Caucus, this is worth pursuing to see what they come up with, and not to just pull the plug. I mean, nobody got up there and said, OK, they didn't come to an agreement by the end of August. But sooner or later you're going to...(unintelligible).

HARWOOD: The--there are two things involved in bipartisanship. One is whether you can get Republicans to go along. If you can't, then you have the question of whether the Democrats are willing to shoulder the burden themselves, alone, for a massive change on a section of the economy. Are they?

Sen. SCHUMER: I think we are. I asked President Obama...(unintelligible)...hear this from most Democrats, we prefer a bipartisan plan. We're willing to make concessions, though it's not the ideal thing that the president or Max Baucus or Chuck Schumer would want. But there's a list, and it's better to do something that we think will solve the problem rather than come up with bipartisan--with a bipartisan agreement, with bipartisan say. And I would say this: The proof of the pudding in this is not going to be who votes for it, if you have Republicans or not. It's going to be when it passes and when it goes into effect, does it work? And that is the--you have to keep your eye on that ball.

HARWOD: So if there are zero Republican votes, you--you're confident you can get 50-plus votes with the Democrats?

Sen. SCHUMER: I think so. Yes. I think that we could--you know, we're still figuring out how reconciliation works, and it's not that easy. And again, the preference would be to be bipartisan. But it's certainly a possibility, the bipartisan agreement that will please the Democratic Caucus, or even what the Democratic Caucus will go along with fails.

HARWOOD: You remember...(unintelligible) the House members are. How do you fight the challenges your members are going to face in town hall meetings, some of the information out there with senior citizens who stand up and say, `Is your bill going to tell people like me that it's time to die?' That's some tough stuff. How do your members deal with it?

Sen. SCHUMER: It's tough stuff, but we're used to that. Anyone who gets elected to the Senate is up against all kinds of stuff like that. There are people who spread--deliberately spread misinformation. They tend to be ideologues at the extremes. And most senators, you know, especially senators who represent states that are in districts that may be drawn to be a Democratic or Republican district, they're used to dealing with that. You know...

HARWOOD: Well, you don't think numbers are going to be scared off by that?

Sen. SCHUMER: No. Most senators have a pretty good nose. You know, I was at a street fair Saturday. I could tell the people who were genuinely concerned from the handful of ideologues who weren't listening and just trying to sort of spread false information and rabble-rouse. And that's politics. I mean...(unintelligible).

HARWOOD: The--you've used the mythic Bailey family in the past...

Sen. SCHUMER: Yes.

HARWOOD: you your touchstone. One of the questions that's arisen about health care reform is for your average, middle-class couple, what do they get out of it?

Sen. SCHUMER: OK, that's...

HARWOOD: What do you tell the Baileys?

Sen. SCHUMER: That's the fundamental question. This will make it or break it, if the Baileys are pleased. It'll make it if the Baileys are pleased, it won't if they're not. And we can't lose sight of that as Democrats. That's the lesson I always try to follow and inform my colleagues about. The Baileys have health care, but every year it costs them more, they get less back. They are worried that eventually they'll lose it or it'll be too expensive, so they want change. But at the same time, they want to make sure that the basic plan that they're happy with is improved, not radically changed.

HARWOOD: Now, the--one of the things that a couple like the Baileys might ask is should the government--shouldn't the government be able to negotiate with drug companies for lower prices in Medicare?

Sen. SCHUMER: Right.

HARWOOD: The White House has cut a deal with the drug industry where they are--have drawn a line on that. Is the Congress bound by those deals, and do you think they're going to stick?

Sen. SCHUMER: Well, Henry Waxman has already said he's not bound by that deal, and there's stuff in the House bill about it. I would tell you that the agreement--I just read about it in this morning's paper--causes me a little heartburn, and I want to find out more about it. I think the drug companies have gotten away easy, too easy, particularly when the biologics bill that they're pushing will not bring generic biologics to the field for 12 years.

HARWOOD: So you're not prepared to say that whatever agreement's been made, that's as much as you're going to get out of the drug companies.

Sen. SCHUMER: I think there's--there would be--I mean, this is new and no one knows all the details. But I do think there are a large number of Democrats in the Senate and the House, a deal like this, you know, where the drug companies, in the opinion of some of us, got off much too easily is going to cause heartburn.

HARWOOD: A couple other things before I let you go. Financial regulation, there's been some controversy. Tim Geithner, the Treasury secretary, says there's turf battles going on that may complicate the ability to sell a reregulation of Wall Street. What is your assessment of where that effort stands, and are you also critical of those regulators or those public turf battles?

Sen. SCHUMER: First, I think, for instance, financial regulation, we have a far greater consensus than say on health care when we started, and it'll be easier to do. The general consensus: We need a large, systemic risk regulator, we need some consolidation among the banking regulators, we need some more consumer protections is large. Filling in the details, we haven't gotten up to that, but it'll happen. I have been on the Banking Committee since 1981. The regulators always defend their turf. But make no mistake about it, when you talk to them privately, they've got thousands of employees doing these things, and they don't want to say it's worthless or not...(unintelligible).

HARWOOD: So we should discount when we hear some of the banking regulators, for example, say they don't want to see...

Sen. SCHUMER: Discount is too strong a word; take with a bit of a grain of salt would be an accurate way to put it.

HARWOOD: And how--are you with Senator Dodd or Chairman Frank on the issue of whether the Fed should be invested with the systemic risk regulator power and not diffuse too much with the council?

Sen. SCHUMER: I think both Dodd and Frank--well, I don't know which--I don't know who's different on that. My view is--my view is you need a systemic risk regulator who's as smart and knowledgeable as the people they're regulating. And so I have to be shown who would be better than the Fed for that.

HARWOOD: So you're inclined to accept the administration's...

Sen. SCHUMER: Inclined to believe the Fed, with some real oversight, would do better. A council--if the council has power, then the buck stops nowhere. We've learned that is a problem. An independent new regulator might be a good idea, but how long will it take them to learn this stuff, and the people they're regulating won't run rings around them?

HARWOOD: There was a report last night that the Treasury is considering splitting Fannie and Freddie's assets into a good bank, bad bank. Do you like that idea?

Sen. SCHUMER: It's an interesting idea that's worth pursuing. Again, I'd have to study it more thoroughly, see the details. But on the surface it seems interesting.

HARWOOD: All right. And finally, you had a victory this week on flash trading, where you had said that you wanted the SEC to regulate, otherwise you would put in a bill. What other steps do you think can be taken, are you going to prod the SEC and other regulators to take going forward in advance of financial regulation?

Sen. SCHUMER: The vitality of our markets depends on the belief by both the large investor and the small investor that they are on the level. And if certain people, because of size or something else, have a advantage--not because they thought something up, but because they get information more quickly than somebody else--it will ruin, ruin our markets. And so I feel very strongly that flash trading should be abolished. We have to look and see if the same thing isn't happening in dark pools or in high speed trading. It may or may not be. You don't want to be a Luddite and throw out new technology, but you've got to sure--got to be sure that the benefits of that new technology apply equally to the guy in his living room who's doing an investment as well as a big, big trader.

HARWOOD: How are you exploring that question?

Sen. SCHUMER: The SEC is looking into that. Chairman Schapiro not only told me that she was for getting rid of flash trading and believed her commissioners would follow suit, but that the SEC would take a very serious look at these other new technological changes--dark pools, high speed trading--to see if the same kinds of inequities that we know are going on in flash trading is going on there. And if they are, she'll move to modify them. You have to thread the needle. You don't want to be a Luddite and throw out new technologies, but you have to make the markets even play--level playing field there.

HARWOOD: When are you expecting an answer on that?

Sen. SCHUMER: I'd say within the next couple of months.

HARWOOD: And finally, you're confident financial regulation legislation will pass? And if so, when?

Sen. SCHUMER: Well, the hope would be by the end of this year. Obviously, health care is sitting there taking up Chairman Dodd's time and all of our time. I'm on the Finance Committee and the Banking Committee.

HARWOOD: I've heard from the Banking Committee that it's much more likely to be next year than this year.

Sen. SCHUMER: It could be the first quarter of next year, but we'll still shoot for this year. As I've said, on the broad issues there's a pretty strong consensus, and so we'll have to work out details. And they're significant and they're not just little tiny details, they're important details. But I think we'll get a bill done. I'd be confident we'd get a bill done, you know, by the first quarter of next year. And there's a very good possibility we could get it done by this year, particularly if we're in session after Thanksgiving.

HARWOOD: But from your perspective it's a slam dunk certainty that it's going to happen?

Sen. SCHUMER: No, not a slam dunk certainty. Just easier than say health care.

HARWOOD: Thanks so much for being with us.

Sen. SCHUMER: Nice to see you, John.


JOHN HARWOOD, host: Senator, thank you so much for being with us.

Senator KENT CONRAD: It's good to be with you.

HARWOOD: Let me ask you first about time. I interviewed Senators Baucus and Grassley a few weeks ago. They said...(unintelligible). Of course, it's been weeks, it hasn't happened. We're now going over the recess. Senator Schumer a few minutes ago said that Baucus is going to give more time, but if it's not done by mid-September maybe it's never going to get done. Do you agree with that? And is, in your own mind, mid-September a deadline for you?

Sen. CONRAD: First of all, I think any artificial deadlines are just...(unintelligible). The most important thing we can do is to get this right. That's what the American people expect, that's really what we need to do. But obviously, a conversation just can't go on forever. You--we've got to find a way to reach a conclusion, or we've got to find another way to get the job done.

HARWOOD: And what is your assessment of whether or not, after all this talk, you're going to get there?

Sen. CONRAD: I feel confident that we are. But this is the most complicated thing I've ever worked on. The work of this group has been, I think, exemplary. It is methodic, it has been disciplined. The reason it takes a long time is because as you review options, we don't just arrive at a conclusion with respect to what we might propose to our colleagues. We have to send it to the Congressional Budget Office for their review and analysis, the Joint Committee on Taxation for their review and analysis. And every time we make a change, it all has to be redone in terms of their work. So it is time consuming.

HARWOOD: I'm sure you're cognizant that so many of your Democratic colleagues are impatient with this effort and concerned that the August recess, when members go home, is going to be a period where this effort loses altitude. Do you feel--if that happens, do you feel any responsibility for having been part of this process that dragged it out a bit...(unintelligible).

Sen. CONRAD: Look, you know, I think what we've got here is an extraordinarily difficult challenge. And time spent on the front end getting it right is time well spent. I've got a friend that was in the Marines stopped me the other day, and he said, `Kent, in the Marines we've got a saying: Time spent on reconnaissance is rarely wasted.' And really, that's what we have been doing. And I say to my colleagues who are impatient, and I absolutely understand that, that if we get this closer to being right, if we deal with the hot button issues in a way that's more acceptable, that will make what follows far easier. This is going to be tough. The reason it's not been done is because it is hard.

HARWOOD: So August, in your view, is not the month when health care dies?

Sen. CONRAD: Well, I hope not. But, you know, you can see what's going on. There are groups that are out...(unintelligible)...trying to disrupt public meetings with specific strategies that they have put on the Internet on how to disrupt meetings--shouting, yelling, people in different parts of the room with a very orchestrated script on how to disrupt public meetings. I mean, is that what we've come to in the United States, that we're going to have people basically functioning as thugs coming into meetings, trying to disrupt them, shouting people down? You know, you really have to wonder...(unintelligible).

HARWOOD: (Unintelligible)

Sen. CONRAD: It's a very hard thing to deal with. You've got some determined groups--I don't know whether the--where the money is coming from for these efforts, whether it's ideological, whether it's self-interest in terms of money, because we're talking here about one-sixth of the entire economy. So there are some who are threatened by change, but change we must. We have no option here. We are spending twice as much per person as any other country in the world, not getting particularly better health care outcomes and we're spending one in every $6 in this economy. On the current trend line, we'll spend one in every $3 in this economy on health care. That's totally unsustainable. That'd be a disaster for families, businesses and the government itself.

HARWOOD: One of the most emotionally powerful objections that...(unintelligible)...senior citizens who have come to believe that there's something in this legislation that's going to try to cause their treatment to be cut off...(unintelligible)...cause them to die. On the other hand, it's a reality that end of life care that makes only a marginal improvement in people's lives is a big driver of health care costs. So how do you deal with the fear while also addressing the reality of those end of life costs?

Sen. CONRAD: You know, the reality that we confront is that we are on a course that is completely unsustainable. Anybody who spends five minutes examining the current state of American health care can see, even if you've got a policy now that you like, that too is endangered because of skyrocketing costs. And I think most people who are rational understand that. So we're concerned about every stage of life. We're concerned about end of life. We're concerned with people with critical illnesses. We're concerned with the young and trying to prevent them from becoming ill, having prevention programs for all Americans so we have less illness in the society. Frankly, that's the key to holding down costs, being healthier. With respect to the end of life, the--as I understand it, there's a provision in the House side, one of the...(unintelligible)...over there, to have counseling for people with respect to end of life issues. We've just gone through this with my sister-in-law. And counseling is not about how you end a life, counseling is about how you fight these battles, how you help people deal with all of the issues. That has nothing to do with taking a life prematurely.

HARWOOD: Do you think your numbers can withstand that particular attack?

Sen. CONRAD: Oh, absolutely I do, because it's...(unintelligible)...relationship reality of the legislation will work with the public option.

HARWOOD: You have said you don't believe the public option can pass the Senate. Senator Schumer says he doesn't think you're right, that they may be able to get the votes. Are you guys counting votes differently?

Sen. CONRAD: Perhaps we are. Let's just go to do the math. You've got to have 60 votes to pass health care in the United States Senate, unless you go to reconciliation...(unintelligible). So if you have to have 60 votes--Senator Kennedy and Senator Byrd are...(unintelligible)...that's 58 votes. There are at least three Democrats who've indicated they will not support public option. So now you're at 55 votes.

HARWOOD: Do you support the public option personally?

Sen. CONRAD: I could under certain conditions. I'm not one of the three. Under certain conditions. And I can tell you, some of the provisions on the outside are extremely damaging to my state, because at least in the Ways and Means Committee's approach they've tied public option to Medicare reimbursement for hospitals. You know, if my hospitals get are tired to Medicare reimbursement, because we have the lowest reimbursement in the country for Medicare, all of my hospitals will go. So you know what, the devil is in the details here. People have got to be very careful about not just accepting words. They've got to go behind the words and examine what are the results of the specifics that then follow the label.

HARWOOD: Let's go back to your math. So you take away Kennedy and Byrd, the three Democrats who are opposed, that's still 55 votes. If you do reconciliation, that's a majority.

Sen. CONRAD: A-ha, careful what one wishes for. The way reconciliation works, I think, is quite a bit different than many people know. And part of it is the rules about change after negotiators to make it more difficult to run up deficits. Remember, reconciliation is a special procedure in the United States Senate: 20 hours, limited amendments, no ability to filibuster. That was designed for deficit reduction and deficit reduction only. It never contemplated major, substantive legislation being written under that format. And so there are rules that say if provisions don't score budget purposes, they are to be stricken. And there are many other rules that apply here. The upshot of it all is the parliamentarian has told us if you try to write substantive legislation using reconciliation, you'll be left with Swiss cheese. There's one other critically important piece of history that people need to know. Under the rules of reconciliation, everything would have to be deficit neutral over five years. Under the budget resolution, you have 10 years. That makes a dramatic difference. And under reconciliation it all has to be deficit neutral every year after the five. That makes trying to cover virtually everybody in the country almost impossible.

HARWOOD: Let me ask you about a different aspect of what we're talking about. Some people would argue that a majority of the Senate can basically do what it wants and get around some of those procedural objections. But is part of your concern that a majority of Democrats are simply not going to be willing to shoulder the burden of making this huge change in a sixth of the economy on their own? That if there are no Republicans, you're not going to get 50 Democrats to go along. Is that your concern?

Sen. CONRAD: That's part of my concern. I think my larger concern is this. This bill not only has to be paid for--and what we're going to do in the Finance Committee will be fully paid for. But much more than that, it has to bend the cost curve down on health care, because otherwise we are going to have a disaster on our hands; a disaster especially for the very people--the very people that most deserve help and most need help, the most vulnerable among us. So, you know, Medicare is going to go broke in eight years. We have to, as a country, face up to the fact we're on a course that is utterly unsustainable. And it is critically important that we reduce the exploding cost. It's important to every part of our society.

HARWOOD: And critics have said certainly the House legislation, that it doesn't do enough to bend the cost curve. In your mind, what are a couple of the specific, vital elements that would achieve that?

Sen. CONRAD: The Congressional Budget Office has made a very clear list in terms of their analysis of what would be most successful in bending the cost curve. Number one is reform of the delivery system. That is that we've got to change how we pay for health care. Right now we pay for procedures. As a result, you get a lot of procedures, many of them unnecessary, duplicative and, in some cases, actually harmful. So instead of paying for procedures, we need to pay for performance, we need to pay for quality outcomes. And, you know, we have to explore all that stuff...(unintelligible). Well, it gets relative modest scores in the first 10 years, but it helps you dramatically, according to their assessment of whether you're bending a cost curve in the right way, beyond that. So we do make very clear that is one of the two major things we have to do. Second major thing we have to do, according to them, is reduce the income subsidy to health care. Over the next 10 years the income tax subsidy to health care will be $2.4 trillion. What they're saying to us is to reduce overutilization, you need to get at least place levees on the Cadillac plans; plans that are--have a value of over 22, 23, $24,000 a year. You need to start having a levy placed on the companies or the policies themselves.

HARWOOD: And would the so-called Kerry plan to go after the insurance companies rather than the employee benefits directly achieve that goal?

Sen. CONRAD: It would. I know the CBO has...(unintelligible)...that for us.

HARWOOD: Let me ask you about another financial...(unintelligible). The House has proposed taxing incomes over 350,000 and over a million at a higher rate to help pay for this. Many senators have said it's a--it's a nonstarter for the Senate to pass this. But Senator Schumer just told me that a state like New York, he's got a lot of million-dollar incomes. He's willing to keep that on the table. Why aren't you?

Sen. CONRAD: Well, I'm not taking a position on whether that should be on the table or not. I've taken a position that if we're going to bend the cost curve, the things that we need to do need to be in the health care sector. The CBO has said to us, yes, you could raise the revenue that way; it does absolutely nothing to bend the cost curve. If you want to bend the cost curve, whatever you do on the spending side or on the revenue side needs to affect health care expenditures. So we have chosen to go that direction.

HARWOOD: Fair enough. But for additional revenue, are you will to consider those options voted by the House on those high incomes? Not on cost curve purposes, but for revenue purposes.

Sen. CONRAD: Well, again, we don't need to do that to pay for this package. We can pay for this package fully and bend the cost curve, but we do it with revenue that is directed at health care expenditure. Because virtually every analyst that's come before us--conservative, progressive, liberal--has said that is one of the two things that is most important to being effective.

HARWOOD: The New York Times has a story today indicating that the White House has told the drug industry that they will assist efforts to make them negotiate with the government over the cost of Medicare. Are you--do you consider the Congress bound by the deal between the White House and the...(unintelligible).

Sen. CONRAD: I do not.

HARWOOD: And do you think that deal is going to stick? Do you think it's a good idea to tell the government that they can negotiate with drug companies on Medicare?

Sen. CONRAD: I have supported and always believed that it's been in the interest of the United States to be able to negotiate lower prices with all providers. In fact, that has been an important part of our effort. You know, people say to me--I had colleagues yesterday say, you can't cut Medicare. You know, I think what they mean by that is don't cut benefits to beneficiaries. And we are not. Instead, we are asking providers to give up some of the gains they will experience as people who have coverage are increased. So for example, the hospitals have come to us and said they are willing to put up $155 billion over the next 10 years, because they know they are going to get additional business because more people are going to have health insurance. That means there will be less care that is uncompensated. The drug industry has come forward to say they're willing to put up $80 billion as their piece of this, because they also know they're going to get much expanded business when more people have health insurance. So we are going to providers and asking them to give back some of the gains they will experience as a result of this legislation to pay for it. In fact, about two-thirds of the cost of our legislation is paid for precisely in that way.

HARWOOD: Two things before I let you go. Over the weekend, Tim Geithner and Larry Summers both on the Sunday shows indicated that they couldn't rule out taxes on middle-class Americans to close the deficit over the long term. They were quickly slapped down by the White House press secretary. Were they telling the truth and the pullback was from the political operatives in the White House? Or is it possible, in fact, to address the debt deficit over the long-term without a middle-class tax?

Sen. CONRAD: You know, this is one of those very interesting moments when words really matter. We need more revenue, but that does not mean you have to have a tax increase, at least a tax rate increase. Let me explain why. Under the current tax system, we're only collecting about 76 percent of what's owed. If we just collected what's owed under the current rates and the current tax structure, we would not have the structural budget gap. The problem is we've got a tax system that is woefully inefficient and hemorrhaging revenue. We're losing $100 billion a year to offshore tax havens. We're losing $50 billion a year to abusive tax shelters. We've got the spectacle now, John, of companies buying sewer systems in Europe; not because they're in the sewer business, but because they want to depreciate them on the books for US tax purposes and lease the sewer systems back to the European cities that built them in the first place. I mean, that's the kind of stuff that's going on under the current tax code. Tax code's got to be changed. We've got to collect more of the revenue that's due. That does not mean you need a tax increase. You need a more efficient, effective tax system.

HARWOOD: So even you, the biggest deficit hawk in the Democratic caucus, say that President Obama can keep that pledge never to raise taxes on the middle-class Americans.

Sen. CONRAD: Well, let's be clear. He can keep his pledge not to raise income taxes on people earning less than $250,000 a year...

HARWOOD: He said any taxes.

Sen. CONRAD: ...if we're going to have a tax system that more effectively and efficiently collects what's actually due. You know, on the offshore tax havens, we'll punch that in and google it, you get over a million hits. And we're losing, according to the Permanent Subcommittee on Investigations, $100 billion a year. You know, that kind of scam has got to be shut down.

HARWOOD: Last question. As a Democrat from a red state--and President Obama did very well in a couple of red states in the last election--how concerned are you, given what's happening with his approval ratings and the agenda that he's pursuing in the Congress, that there's going to be a large-scale reaction from voters in 2010, especially in more conservative parts of the country, that it's just too much spending, too much tax increases, too much government?

Sen. CONRAD: Well, interestingly enough, there haven't been any tax increases. What there've been is tax cuts. There's been massive tax cuts as part of the stimulus package. So, you know, there's a certain, I don't know, falsity of charges...(unintelligible). He inherited massive deficits of debt. The deficit for this year alone that he inherited, 1.3 trillion. Yes, it was increased by 500 billion in order to provide stimulus to the economy in the short term. That had to be done to avert a collapse. But now we've got to pivot and we've got to get us on a stronger, more firm financial foundation. That means deficit reduction long-term. I think it would serve the president well to commit to a process to deal with the long-term deficit debt. And we can do that. We've got to take on the entitlements. We've got to take on a totally ineffective, inefficient tax system.

HARWOOD: Is your party going to take a big hit next year?

Sen. CONRAD: I think it could be a very challenging year. Look, this president inherited the worst circumstance any president has going back to the Great Depression: a severe economic downturn, a crisis in the banking industry, crisis in housing, two wars. This is what he walked into. I think he has done, really, a rather extraordinary job of preventing a financial collapse. We now anticipate...(unintelligible)...resuming the second part of this year, and that he's put us on a course to reduce the deficit two-thirds over the next five years. The great challenge before us is what happens beyond that. That's why health care reform is also particularly important, because it's the 800-pound gorilla not only for our families' finances and business finances, but for the government's finances as well.

HARWOOD: Senator, thanks so much for speaking with us.

Sen. CONRAD: You bet.

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