How Reagan Would Have Handled Debt: Ex-Advisor

One of Ronald Reagan's best-known advisors on economics told CNBC that the former President would have started negotiations much earlier than President Barack Obama has.

President Ronald Reagan watches as British Prime Minister Margaret Thatcher speaks November 16, 1988 in Washington, DC.
Brad Markel | Liaison | Getty Images
President Ronald Reagan watches as British Prime Minister Margaret Thatcher speaks November 16, 1988 in Washington, DC.

The President made an address to the nation Monday nightin which he called on Republican and Democratic leaders to reach a compromise on raising the debt ceiling to avert a "reckless and irresponsible" national default.

He quoted his predecessor Reagan in the speech, which was made just over a week before the US Treasury will run out of cash to pay its bills.

Obama's quote from Reagan said: "Would you rather reduce deficits and interest rates by raising revenue from those who are not now paying their fair share, or would you rather accept larger budget deficits, higher interest rates, and higher unemployment? And I think I know your answer."

Obama previously said of his predecessor, who died in 2004: "I think Ronald Reagan changed the trajectory of America in a way that, you know, Richard Nixon did not and in a way that Bill Clinton did not."

"He (Reagan) would have negotiated much earlier than President Obama has," Mary Jo Jacobi, former US Assistant Secretary of Commerce, told CNBC Tuesday.

"He would also have expressed considerable dismay that for more than 800 days the US has operated without an approved federal budget. Reagan was good at compromise."

The impasse between Republicans and Democrats has come about because Republicans are adamant that public spending should be cut and taxes should not be raised.

Jacobi, who is still a Republican, cited IRS data showing that in 1986 the top 5 percent of earners in the US paid 43 percent of all income tax in the US, while now that has risen to nearly 60 percent.

She believes that more than half of all eligible taxpayers don't pay income tax.

"It's the spending side, not the tax side, that's the problem," she said.

She added that the current US tax system is "too big, too complex and invites tax evasion.

"It's probably going to take 10 years to sort out, but we have got to bite the bullet and start now."

The Democrats' proposals would raise the debt ceiling and cut spending by $2.7 trillion.

John Boehner, the Republican House speaker, answered Obama's speech Monday by claiming he was seeking a “blank check” to raise the debt limit.

He added that the Democratic plan was laden with “phoney accounting and Washington gimmicks.”

"The Democrats' plan kicks it into the long grass until after the 2012 elections. A lot of spending cuts will come from wars that will no longer be waged," Jacobi said.

The plan put forward by the Republicans would increase the debt ceiling by about $1 trillion, and have a second vote in six months.

Jacobi believes that the "Back in Black" plan put forward by Senator Tom Coburn, which would cut spending in each department, would be the most effective of the solutions proposed, even though it is not currently under consideration.