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Conservatives: Only Obama and Geithner Can Cause a Default

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We're less than a month away from the all important August second deadline for Congress to pass the debt ceiling. With an all star cast for Thursday's big debt summit, you can almost script the partisan comments going into the meeting and going out. But will partisan politics continue or will sanity prevail? Will we see a deal where there are serious entitlement cuts and tax measures that in the long run will cut into the deficit?

I caught up with Phil Kerpen, Vice President for Policy at Americans for Prosperity which was part of the "Cut, Cap and Balance" protest about the state of the debt ceiling talks and his expectations of the big meeting.

LL: What is your message to the debt summit members as they prepare for their meeting?

PK: The Cut, Cap, and Balance coalition is holding firm. Any debt limit bill will be opposed without CCB.

LL: There is a lot of fear of what will happen if Congress does not pass a debt ceiling vote by August 2. Do you believe all hell will break loose if Congress misses the August 2 deadline?

PK :Meeting the August 2 deadline is no more crucial than meeting any of Geithner's previous deadlines that have come and gone with no great calamity. There are lots of cash-management strategies available to the Treasury, and more than enough revenue to easily cover dead service and take default off the table regardless of how long this fight drags out.

That said, Congress wants this behind them when they head home for August recess. So I think there's a better than even money chance they get something done.

LL: Are you concerned of a market meltdown because of the fear of default?

PK: There is no default risk related to the debt ceiling unless Obama and Geithner choose to prioritize other spending over debt service, which would be crazy. That said, if spending as usual continues, bond markets could lose confidence at some point.

LL: During the Week of July 18th, the balance budget amendment will be voted on in the Senate. You also have the House vote the following week. Will this just be another symbolic move of the GOP?

PK: This will be a very telling vote, not just because it will show who wants to balance the budget, but because the amendment also includes tough spending and tax limitations that would finally create structural restraints on the federal budget process. I think senators who vote no will have a difficult time explaining themselves to voters.

LL: Both sides are butting heads on the tax issue. What would you like to see here?

PK: Tax reform should focus on lowering rates and broadening the base—but not to worsening double-taxation by increasing surtaxes like capital gains, dividends, or the corporate tax. Government already takes too much of our money, so a key test for any tax policy change is that it not be a net tax hike.

LL: Do you think the President can get both sides together and strike a compromise?

PK: It's certainly a good thing that Obama is finally taking the spending crisis seriously. Sending Biden didn't inspire confidence in anyone. Obama stepped up last year and preventing the impending tax hike with the expiration of the Bush tax cuts. He could lead again now on spending, and should.

LL: What do you think will be the magic number when it comes to debt being a percentage of GDP?

PK: Returning government to historic norms of no more than 20 percent of GDP should be a happy medium.

LL: Is this just political theatre on the side of the GOP?

PK: No, the GOP is serious about using the leverage they have for meaningful policy changes.

LL: Distrust is playing a big part on the side of the GOP who say they were duped with the true savings of the 2011 budget. How will Boehner and McConnell convince their party if a deal was struck today that they should go with it.

PK: It has to go beyond numbers, which people have good reason to distrust. There have to be real, serious policy changes. The biggest and most important would be to block-grant Medicaid, on the model of the bipartisan welfare reform of 1996. The blue state of Washington and the red state of Texas are requesting block-grant waivers, so this could be a real bipartisan opportunity. Another great idea would be to gain the $200 billion in savings from eliminating duplicative and unnecessary programs recently identified by the GAO.

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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