MS. DIANE REHMThanks for joining us. I'm Diane Rehm. The looming sequester could trim $110 billion from the federal budget in January. That's the formal name for widespread budget cuts, the result of a bipartisan deal Congress passed last year. Joining me to talk about the debate over automatic spending cuts and the ripple effect they could have on our economy: Jared Bernstein of the Center on Budget and Policy Priorities, Mackenzie Eaglen of the American Enterprise Institute and David Welna of NPR.

MS. DIANE REHMI invite your comments and questions. Join us by phone at 800-433-8850, on email to drshow@wamu.org, on Facebook or Twitter. Good morning to all of you.

MR. DAVID WELNAGood morning, Diane.

MR. JARED BERNSTEINGood morning, Diane.

MS. MACKENZIE EAGLENGood morning.

REHMDavid Welna, I understand there was quite a shouting match yesterday at the House Armed Services Committee.

WELNAThere was. The two witnesses who were testifying were bringing the Obama administration's take on what's going to happen with the sequester next year. One of them was the acting director of the Office of Management and Budget, Jeffrey Zients. Things got pretty testy over the whole question of how should Congress deal with this looming threat of sequestration, which everybody there agreed was a disastrous idea and that was thought up simply to scare people into coming to a deal, which they haven't come to yet.

WELNAAnd Jeffrey Zients insisted that, really, the only way that Congress could cover the $109 -- or 10 -- billion that they have to offset next year is through a mixture of spending cuts and revenue increases, and that was something that was anathema to the Republicans, who are on Armed Services panel.

REHMJared Bernstein, you might be interested to know people all over the country are Googling the word sequestration, and nowhere is it more Googled than in Houston where you got a large defense establishment. Now, help me and our listeners understand exactly what sequestration means.

BERNSTEINWell, it means automatic spending cuts to the tune of, as you've heard mentioned so far, $110 billion next year from a specific part of the budget, the discretionary side of the budget. That's to be distinguished from the mandatory side, which is things like Social Security, Medicare, Medicaid. These things are kind of on automatic. They depend on your eligibility, et cetera.

BERNSTEINOn the discretionary side, we have defense programs and non-defense programs. And the sequester is a set of automatic cuts that are equally split between the defense side of this part of the budget and the non-defense side. Now on the non-defense side, you have things like a lot of education and training programs. You have some infrastructure things, environmental, research, a lot of things that are associated with, I'd say, Democrats. And so that's one of the reasons you're having this fight.

BERNSTEINI mean, Democrats are also obviously concerned about defense cuts. But one thing they don't want to see happen is for all of the defense cuts to be put off the table and then weighed down on that other non-defense side of the -- so that you get 110 all on the non-defense side. That would be very damaging as well, and that's what some of these Republicans are now trying to talk about.

REHMHow did we get here, David?

WELNAThis is the result of Republicans insistence last summer that they would not authorize the debt ceiling to be raised, which it had to be for the U.S. to continue servicing its debt, unless there were corresponding offsets from the budget. And in order to get past the November election this year and have the debt ceiling covered, they had to find $2.2 trillion in spending or deficit reduction. That could either be spending or increased revenues.

WELNAThey found a way to cover about $1 trillion of that by capping the annual budgets for the next 10 years at certain levels. That was against the projected growth and spending. They reduced it by $1 trillion. But then, $1.2 trillion remained to be worked out, and they were scrambling. And, you know, you had the prospect of credit rating agencies lowering the U.S. credit and of the treasury actually going into default, which it had never done before.

WELNACongress is about to leave town, and they were desperate for a situation so they said, OK, here's the deal. We will set up a super committee to figure out how we're going to come up with another $1.2 trillion in deficit reduction. And they would be tasked to do so by Thanksgiving of last year. But in order to go them into doing it, there had to be a sanction, a kind of a forcing mechanism, and that was the threat of sequestration.

WELNAThey agreed that if they did not come up with $1.2 trillion in deficit reduction, that then there would be the automatic across-the-board spending cuts. And they had to take place because this is law. I mean, the Obama administration cannot do the -- cannot increase the debt ceiling without having the offset in deficit reduction.

REHMAnd Megan -- Mackenzie Eaglen, I think they've chosen the word sequestration to confuse everybody, but you say that soft sequestration is here right now.

EAGLENThat's right. It is well underway. We're starting to see not only in the Pentagon changing its buying behavior and of all federal contracting over a half trillion every year, the Pentagon does two-thirds of that. So when they starting changing their buying behavior, the economy will feel that almost immediately. And what that -- we've seen this in previous years when the Pentagon had to operate under freezes in spending where they basically start hording cash. Near the end of the year, they become more conservative in their awarding of contracts.

EAGLENBut we're also seeing conservation on the part of aerospace ship building and defense industries, a major manufacturing component of the American workforce. And these companies are freezing hiring. College campuses all the way up to the senior levels, they're cutting their infrastructure. They're reducing their investments in research and development projects. And they're just sitting on the sidelines for mergers and acquisitions, all things that would stimulate the economy.

REHMSo, Jared Bernstein, do you say this is just part of a so-called fiscal cliff?

BERNSTEINThat's right. There are two parts really to the fiscal cliff. One part we've been discussing about, these automatic cuts or sequestration as we call it in Washington. And the other part is...

REHMRidiculous term, truly confuses everybody.

BERNSTEINRight, yeah. And we -- I just -- whenever I...

WELNASounds like kidnap taking.

REHMYeah.

WELNAKidnapping.

REHMExactly.

BERNSTEINWhenever I hear -- well, there is some sort of hostage stuff here.

REHMYeah.

BERNSTEINWhenever I hear it, I just think of automatic cuts, but, anyway -- and then on the other side, which is actually a far larger magnitude in terms of dollars, is the expiration of all those Bush tax cuts, the ones that we remember back from 2001, 2003.

REHMAll right. Let me stop you right there. We've got an email from Paul, who says, "Would the end of the Bush tax cuts bring in enough revenue to eliminate the need for sequestration?"

BERNSTEINA couple of times over. The Bush tax cuts amount to, you know, over $300 billion next year. The sequestration, as we've said, is 110. Now, the thing there to consider is that there -- I don't think you can -- David can back me up on it -- I don't think you can find a member of Congress who supports full expiration of all the Bush tax cuts. In fact, they agree on 98 percent of the extension which is for everyone except for the top 2 percent, that group that's over $250,000 that the president and the Democrats are saying, let's let that part expire. That actually raises real money for deficit reduction, about...

REHMHow much?

BERNSTEINA hundred -- I'm sorry, $860 billion over 10 years. That's real money for deficit reduction from that top 2 percent, and that's what the Democrats are saying, you know, we've got to start somewhere. We have to do some fiscal responsibility. We have to include revenues in the deals as others have said. And so that breaks that down.

REHMWhereas if you erase the tax cuts for everyone, then your lower income people are caught in that.

BERNSTEINOh, absolutely. That's right. So if you allow the tax cuts to expire for everyone, taxes go up across the board. And you're right. Some of this really affects people who we don't even necessarily think of as paying federal income taxes.

BERNSTEINSo, for example, you'll lose extensions to the child tax credit, the earned income tax credits, some very important programs to support low-income people at a time when, as we've said, the economy is still awfully wobbly, especially from the perspective of lower income people. I mean, if anybody has gotten ahead, it's that narrow group at the top. And so I think the White House has a decent rationale there.

REHMSo, Mackenzie, yesterday's hearing were strictly about the defense cuts, correct?

EAGLENCorrect.

REHMAnd it would mean that the five-year-old stance that $500 billion in cuts over a decade would be absolutely devastating for the defense industry. You agree with that?

EAGLENI agree, and not just for our manufacturing workforce that supports the military but frankly for those in uniform. Pentagon officials were very clear in painting a pretty dire picture for how it would hurt military families, for how it hurts veterans and retirees and even active duty service members and DOD civilian workforce.

REHMHow so? How so?

EAGLENIn a variety of ways. One, the Department of Defense is America's largest employer. Three million people work for the Department of Defense or get a paycheck.

REHMBut how many of those are contractors, subcontractors and so on?

EAGLENThree million is active duty military, guard and reserve and DOD civilians only.

REHMOK.

EAGLENAnd so that workforce would be constricted. So you would be looking at civilian furloughs of maybe up to a hundred thousand. You would be looking in active duty reductions of possibly the same amount in short order. But then you're also looking at real world impacts on the military, so reduced trainings of flying hours in aircrafts, steaming hours on ship, military family programs on bases that support communities.

REHMQuick comment, David.

WELNAOne note about that is that actually this week, the Pentagon said that there will be no personnel reductions in active military. So it's going to be all from the civilian side of the...

BERNSTEINThey're exempting them from the sequester.

WELNAAnd they're exempting them from sequester.

REHMDavid Welna of NPR, he is congressional correspondent. Short break here. Right back.

REHMAnd welcome back. We're talking about congressional efforts to arrive at some kind of agreement before as you've heard the threat many times before we go over the cliff economically. Here in the studio: Mackenzie Eaglen, she is at the American Enterprise Institute, David Welna, congressional correspondent for NPR, Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities.

REHMOf course, yesterday's hearing, David Welna, was strictly on the military. But what about other federal programs, Mackenzie, non-defense interest that are perhaps being drowned out?

EAGLENThere is not doubt about it. We would see workforce reductions across other federal agencies. So, for example, the Department of Justice would be looking at a 10 percent workforce reduction, everything from FBI agents to federal marshals and 975 attorneys who work for the Department of Justice. The FAA would lose -- would have layoffs of 2,000 employees. That would include over half of air traffic controllers.

REHMBecause we're talking about across-the-board, there could not be a piece by piece problem.

WELNAIt is indiscriminate, and as such, it's meat cleaver. And so, you know, 100,000 kids would lose access to Head Start as a result of this.

REHMAnd, of course...

WELNAThis is nothing that anyone advocates, but it would happen.

REHMYesterday at Washington's National Airport, you had a near collision of two planes. Let's not even think about what could happen there, Jared.

BERNSTEINWell, there is some work out, I think, yesterday this morning by Scott Lilly at the Center for American Progress on precisely this issue of the FAA cuts that Mackenzie mentioned. He pointed out that there's going to be some airports that will have to close if they don't have the requisite air traffic controllers and...

REHMBut, of course, never, never access to Washington, D.C.

BERNSTEINYeah, well, that's the thing. I mean, this is going to be very indiscriminate. So it's hard to see exactly how it lands, no pun intended, any way that is at all intelligent. I mean, I'll say one that thing that goes slightly the other way to gist of the conversation so far, particularly on the defense side, and Mackenzie obviously knows what she's talking about there. So I'd be interested in her reaction.

BERNSTEINThere is a -- this gets a little in the weeds, but it's important. There is a pretty big gap in time between when we authorize spending and when we actually spend it. It's a difference between what's called budget authority and budget outlays. And so the way the military defense contractor typically work, especially the large ones, is that there's a lag of a year, two, three years. They're doing projects now that were funded years ago.

BERNSTEINSo I don't expect to see the magnitude of cuts that some people are saying right off the bat. I think that it's going to be tougher for smaller suppliers down the supply chain. But I think there's a bit of, I don't know, alarmism is too strong a word because this is so such a crazy idea. But there are some manipulation going on out there where people are saying, oh, we're going to lay everybody off, we're going to send out all these notices about layoffs, in part because they just don't want to see the cuts coming down.

REHMDavid Welna, who owns the sequestration issue?

WELNAWell, if you listen to Republicans, they would say President Obama is the one who has to do something about this. In fact, John Boehner, the speaker of the House, attributed authorship of the sequester to the president when, in fact, this is an idea that got kicked around in Congress, and it goes back to even the 1980s. But it's something that other Republicans will, in private conversations, say, yeah, we're all in on this. Our fingerprints are all over it.

REHMAll right. OK. Here's an email from Vincent, who says, "If Republicans believe government is the problem and needs to be shrunk, don't they want to see sequestration? What could possibly shrink the government more than that?" Mackenzie.

EAGLENI think that's fair, and there are actually a segment of the Republican caucus that probably would -- could learn to live with sequestration. What's universally hated about this sequester is that it is blind, so the cuts are automatic as we said. It's just a trigger where you don't have discretion in choosing priorities, particularly for the military, which causes heart burn.

EAGLENBut if you gave the Pentagon flexibility and even some of these other agencies and maybe reduce the amount a little bit, I think you'd find a lot of Tea Partiers would align with a lot of liberals who wouldn't mind seeing more defense cuts. And that's majority of Congress.

REHMAnd here's another email from Fran, who says, "It's time to call the bluff off, Republicans. Let the economy go over the cliff on Dec. 31 then revisit and reinstate the cuts to the middle class and the military." Jared.

BERNSTEINYes, that is a plan. That's actually a plan that we've heard from some influential members of Congress, particularly Patty Murray, and it seems like the White House is kind of coming around to that plan, too. By the...

REHMWhy does that make sense?

BERNSTEINWell, the politics, I think, kind of push it. I personally think we're probably going to go over the cliff. I just don't see how.

REHMAnd explain precisely what's going over the cliff means.

BERNSTEINSo what -- good question. So going over the cliff means this sequester that we've been talking about automatically kicks in Jan. 1 or 2.

REHMAnd...

BERNSTEINAnd all those tax cuts expire.

REHMRight.

BERNSTEINNow, the way we've talked about this at the Center on Budget is it's -- it's kind of starting on a slope, and I think it's very important. It's not so much a cliff as it is a slope in the following sense. All the damage to the economy does not occur on Jan. 2. These things bleed in quite slowly, tax payments, the spending cuts. They are bad. This is a crazy idea.

BERNSTEINBut I just don't see how members can come to a -- who refuse to compromise will all of a sudden change their ways. Therefore, what we need to do is much what Fran just suggested, if we find ourselves over the cliff, we have to quickly reverse course.

REHMDoesn't this come down, Mackenzie, to a question of whether or not to raise taxes?

EAGLENThat's exactly right. This sequestration challenge is wrapped around the tax debt and downgrade axles simultaneously. We may not have to increase the debt ceiling again during the lame duck session, but it will come at some point this winter. And the threat of another sovereign debt downgrade scares a lot of members of Congress even it may not scare the markets.

EAGLENAnd the fiscal cliff is, of course, the combination of the tax increases and the automatic spending cuts that the Fed chairman and the Treasury secretary have all said would put the U.S. into at least a mild recession early next year. So this really is about solving the tax question first. That's why we cannot address it until the lame duck session is because no one's going to take that vote until then. The problem with that plan is that the markets hate one thing more than anything else, and that's uncertainty and that will not go away. It will only accelerate as they continue to not pass the plan.

BERNSTEINJust one tiny correction.

REHMSure.

BERNSTEINWhat the CBO, Congressional Budget Office, said, in fact, was not that there'll be a recession that hits right in early January if we go over the cliff. They said if we go over the cliff and stay over the cliff, that's when we would definitely see a fiscal contraction (unintelligible).

REHMOK. And hasn't the Office of Management and Budget already begun to make plans for these broad layoffs, David?

WELNAYes. They say that they've actually had a bit of practice doing this, preparing for possible government shutdowns, and they are seasoned at this. They actually haven't had to go through with it. But they say they're laying out contingency plans. Now, members of Congress want the Obama administration to spell out exactly what is going to be cut in January.

WELNAIn fact, both the House and Senate have passed legislation that President Obama has yet to sign that would order the Office of Management and Budget to detail the impact of the sequester. They -- politicians think that this would make it much more palpable and give that much more impetus to finding some way to avoid this.

REHMSome way. Exactly.

WELNAAnd the other thing is to -- that this is -- this is something that would take place between January and September of next year, which is only three quarters of a fiscal year. They'd have to find a $110 billion to save. It's as if they were trying to cut maybe $145 billion over a full year, just in terms of the month-to-month impact on agencies. So OMB is estimating that this will be a 10 percent drop in Pentagon spending next year and an 8 percent drop in non-defense related discretionary spending next year, a huge impact.

REHMAnd would firms that are facing these federal cuts, contractors and the like, or individuals, would they begin receiving layoff notices if during this, you know, crazy, silly situation, we have no resolution?

WELNAThe Labor Department put out a memo this week saying that the private sector does not have to go along with something called the WARN Act, which requires businesses to let employees know if there is an imminent chance of them being laid off. The Labor Department says that that wouldn't be necessary to do until after the election. Of course, Republicans pounced on that, saying that's simply President Obama trying to hide the ball on this and not take the political heat for the prospect of sequestration going ahead.

WELNAOf course, the entire Republican leadership in Congress voted for the Budget Control Act, which has the trigger of sequestration in it. So their fingerprints, once again, are in that, too.

REHMMackenzie.

EAGLENThese layoff notices are basically for companies over a certain size, and a lot of small- and medium-sized businesses that do work for the Defense Department would certainly be affected by this. The Labor Department's guidance was considered political because this is adjudicated in courts. Employees can take their company to court if they feel like they weren't given proper notification.

EAGLENSo at the end of the day, I think the companies and their executives have already told Congress, as an earlier hearing, that they're probably going to have to move ahead with some form of smaller notifications, not blanket layoff notices by any means. And I think you'll see that hit, you know, in the next month or so.

WELNAWell, actually, I think it's a two-month window. So those notifications might be coming right at the beginning of November, days before the election.

REHMAnd here's an email from Mike in Raleigh, N.C., who says, "As we approach the cliff or slope, the markets will go crazy. Not dealing with it now is suicide for the nation." Jared?

BERNSTEINThe markets are assuming -- why aren't the markets going crazy already, by the way? I mean, you hear this discussion. There were -- everybody in this room, all four of us, are just kind of shaking our heads at this. The markets are not going crazy the way markets typically don't in situations like this because they're assuming we're going to make the right move at the last minute. And they saw that happen with the debt ceiling and various other kinds of midnight deals that have come up.

BERNSTEINWhether or not that happens is a matter of kind of the grownups in the room on Capitol Hill finally getting together and saying, you know, what the heck are we doing here? And, frankly, I'm not hearing a ton of that, and I don't think David is either.

REHMWhat about the White House? Where is the White House in all this?

BERNSTEINOh, the White House has been pushing very hard for the deal I described a few minutes ago, articulated by Patty Murray recently, Sen. Murray. And this is a deal that says, look, everybody knows we can't get from here to there without some new revenues in the deal. We're squabbling about 2 percent of households. Everybody agrees about the -- extending the tax cuts for the bottom 98. It's that top two.

BERNSTEINAnd Republicans, you know, most of whom have signed this pledge that they'll never ever raise taxes, are stonewalling on it despite the fact that they, as David has said, are partially responsible for backing us into this.

REHMJared Bernstein of the Center on Budget and Policy Priorities, so do you think that the White House can exert sufficient pressure to get a move on that 2 percent?

BERNSTEINMy honest opinion is that I don't think so until after the election and after the lame duck, meaning we go over the cliff, and at that point, I think and hope that leverage -- the White House has the leverage -- it depends on who gets elected -- but that the White House has the leverage to make this a slope that we go down just a little bit before reverse and come back.

REHMAnd some emails are saying, "Why waste time talking about this? Won't everyone pull back at the last minute and make a deal?" Well, our guests here are not quite sure of that, and therefore I think -- and it was my idea to do this program this morning -- I think it's important we all understand the implications of what could happen. I'm going to open the phones now, 800-433-8850 -- send us your email to drshow@wamu.org -- to Port Orange, Fla. Good morning Lucille.

LUCILLEGood morning, Diane. You know, it's obvious that the spending cuts are the result of the wealthy and the corporations not wanting to pay a fair share of the taxes. And the Republicans' excuse is we don't want to tax the job creators. Yet these corporations are sitting, I believe, on almost $2 trillion in assets. They won't spend a dime to create jobs for Americans, but they will shell out millions, possibly billions, to super PACs in order to put a Republican in the White House and the Congress. You know, Sen. Bill Bradley -- I think he was a former presidential candidate.

REHMYes.

LUCILLEHe recently said that if the corporations would spend only 20 percent of that money that they're sitting on, on jobs, that it could bring the unemployment rate down to 5 percent.

REHMMackenzie.

EAGLENI would like to reference some remarks that Sen. Kyl, Jon Kyl of Arizona, gave recently as a member of the super committee because we've heard indications to what Sen. Patty Murray said as also a member of the super committee. They've been dueling it out publicly, talking about what really happened behind closed doors and why the super committee failed.

EAGLENAnd Sen. Kyl talked about the GOP's proposals for tax increases, which indicates that they're actually already there in many ways. They're just not there and then totally in the same way. But Sen. Kyl basically said that, on the super committee, that they identified $200 billion in revenue, discretionary and mandatory. And the Democrats on the committee said only tax increases are going to be considered revenue for purposes of the super committee.

EAGLENSo Sen. Toomey went back and said, we're going to use strictly scored revenues on the table, and new revenues will come only from the wealthy, but it was through the closing of loopholes. In particular, they would lose all credits, deductions and exemptions. But the part of the deal for the Republicans was that this would reduce everyone else's tax rate by 15 percent.

EAGLENAnd then there were some revenue effect savings from CBO for a total of basically $400 billion in new taxes and revenues that Sen. Dick Durbin, Democrat, called a breakthrough for the Republicans. So to say that they're not there, that they haven't put forth tax and revenue combinations as part of a proposal, is not true.

REHMDavid.

BERNSTEINWell, can I quickly respond?

REHMGo ahead, Jared.

BERNSTEINLook, I'm not sure I followed everything Mackenzie just said. But I will say this -- and this I know to be true, and others will back me up -- I don't want to lose Lucille's key point here, which is that the disagreement here -- and you said it earlier, Diane -- is about revenues, adding revenues to the deal. Ninety-seven percent of House Republicans have said, no, we will never raise any new taxes. Now they may not have...

REHMNamely Grover Norquist.

BERNSTEINBingo. Now they may not have been in the room that Mackenzie was just describing, but those people went out of the room, went back to their caucuses and could not get new revenues. As long as they're going to stonewall like that, Lucille's point is absolutely on target.

REHMDavid.

WELNAForty-three Republican senators signed a letter, as the super committee was deliberating, stating that they would not support any increase in tax rates. And so it all had to be coming from closing loopholes or one thing or another, and that hamstrung the committee.

REHMMackenzie.

EAGLENBut, boy, how times have changed. Now that Republicans see the threat of sequestration on the military as a real possibility, their tune is changing.

REHMMackenzie Eaglen, she's at the American Enterprise Institute. More of your calls, comments when we come back.

REHMAnd my question to David Welna during the break is, OK, what happens if President Obama is re-elected in November? What happens if Mitt Romney is elected in November? Give us the two scenarios.

WELNARight. And this is why we can't imagine any resolution to this gigantic mess facing us at the end of the year until we know the results of the election. If President Obama is re-elected, Republicans, as is the situation right now, will have little incentive -- little political incentive to sort out the whole mess because, you know, as Mitch McConnell said after the mid-term elections, their number one priority is to make sure that President Obama is a one-term president. I don't think that they'd want to wish him a whole lot of success in a second term...

REHMBut...

WELNA...and there's a problem with that. And it...

REHMBut suppose Democrats took more seats in the House and Senate than is currently expected.

WELNAIn the Senate, it would be extremely hard for them to get anywhere close to 60, which is the number that they would need to really be effective to get past Republican filibusters.

REHMAll right.

WELNANow, if Mitt Romney were elected in November, Republicans would have a real incentive to work out this mess and make sure that the economy doesn't run off the cliff. But the problem is that their candidate is promising, if anything, a huge expansion in defense spending rather than cutbacks in defense spending and also gigantic tax cuts, so there's a real dissonance there. And it's hard to see how Republicans could work out a deal at the end of the year that would take into account the wishes of their candidate.

REHMMackenzie.

EAGLENI've never heard a presidential candidate promise things they couldn't deliver. Of course, that's nothing new. We all know that governing is quite different than campaigning.

REHMQuite right. Quite right.

EAGLENSo -- but, you know, what's interesting about this punting into the lame duck is that both sides believe that the election will give them the mandate to answer this question: steeper defense cuts, more tax increases on the wealthy. One side will be wrong come November, and that's how we're going to resolve this, is when the other side finally understands that they're going to capitulate to the other.

REHMJared.

BERNSTEINLook, I don't see Democrats capitulating on this issue of adding new revenues to any budget deal. That's the reason the super committee failed. That's the reason why we've been stuck in this gridlock. And, you know, interestingly, you've seen some Democrats cave along the way when we've had these arguments before. I've seen real spine from the White House, from congressional Democrats in both chambers that have said, look, enough already.

BERNSTEINWe've already -- I don't know. We kind of blew past this earlier on. We've already cut $1 trillion from discretionary spending. Now, there's another $1.2 trillion on discretionary spending. You can only cut so far before government is no longer recognizable. Again, you'll get the Bowles-Simpson, the -- all these plans that everybody touts they've all included new revenues.

REHMBut what Mackenzie brought up was defense spending and how that could move the issue.

EAGLENI believe so. Basically, the reason you're seeing so much spine from Democrats is because they have the upper hand in this negotiation. They had it back when there was a budget control dealing. This really came down to three men in the room: John Boehner, Harry Reid and Barack Obama. The sequester base -- it was tax hikes or more defense cuts, and the conservatives chose more defense cuts. Now, granted they hoped it wouldn't happen, but nonetheless, that shows you where the party was a year ago.

EAGLENGoing into the lame duck, Republicans still do not have the leverage that they need to negotiate this down further with Democrats. And so you're going to see -- that's why we've seen Republicans caved. Speaker Boehner, the Senate Minority Leader Mitch McConnell, John Kyl, John McCain, Lindsey Graham, Kelly Ayotte, Pat Toomey, Sen. Thune, plus House Armed Services Committee Chairman Buck McKeon, they've all said, we'll take increase revenues as part of this deal, because they're so scared about the defense cuts.

REHMBut do I understand a group of senators is about to go out around the country to lobby for a defense, holding on to defense spending, David?

WELNAYes. We have Senators McCain, Graham and Ayotte who actually were out earlier this week going to military bases where they were, you know, raising the human cry about this and saying, you know, you people could get slammed by these cuts.

REHMBut they are the ones who got themselves into this the first place.

WELNAWell, McCain voted for this. Graham and Ayotte voted against the Budget Control Act. So they can be a little bit more virtuous on this.

REHMBut Boehner?

WELNAThat's true. The leadership all backed this. Now, there's this one thing. If they were to get rid of the defense sequestration, I think Democrats would never ever go along with that unless they got rid of the entire sequestration. Democrats say there is no way you're going to put this onto non-defense discretionary spending...

REHMGot you.

WELNA...you know, and let the military get off without any kind of sacrifice. And I think that maybe ultimately what this will lead to is a realization that this was all done in the name of inspiring confidence in the economy by saying, you know, we're not going to go so deeply into debt that people aren't going to bet on the dollar anymore, and we're going to, you know, inspire industry to reinvest and so on.

WELNAIf they see that this is actually going to be hugely harmful to the economy, I think they'll all step back from the ledge and say, OK, it was a bad idea. We're just going to get the whole thing out now.

REHMAll right. To Terry in Detroit, Mich. Good morning.

TERRYGood morning, Diane. And it's such a pleasure to speak to you. I'm so glad you did this show today.

REHMThank you.

TERRYSo here's my comment, and I would like to just leave it for you guys to discuss. We've talked about reducing government spending as a means -- and reducing the government as a means to spur overall economic activity. And now that we're talking about cutting what could only be described as an extravagant defense budget, we're talking about it being terrible job losses. It'll be devastating.

TERRYSo please comment on that. Is the budget -- is the defense budget extravagant as it exists now? And two, is a decrease in government spending going to be good for the overall economy or not?

REHMJared.

BERNSTEINBacking into the question -- Terry has a great question. First of all, is defense spending...

REHMExtravagant.

BERNSTEIN...extravagant? It's very high right now, about $700 billion. I looked this morning at the real numbers, adjusting for inflation over the last 10 years. Defense spending is up almost 90 percent. Everything else is up about 50 percent. Now, of course, there's a couple of wars in there, and so there was a big elevation of defense spending. And I think it's...

REHMBut that first war was off the books.

BERNSTEINWell, I'm including the wars.

REHMOK. All right.

BERNSTEINAnd I think you should when you talk about these budget levels.

REHMOK.

BERNSTEINBut every -- I think it's widely agreed upon that those numbers have to come down. So in a sense, Terry is making a point that is agreed upon, although, as we're discussing, how quickly and how much is up for grabs. There's another point that she hit and that I want to quickly reference. You know, Republicans go around saying government doesn't create jobs. Government is a job killer. Government is -- got to get the government out of the economy.

BERNSTEINNow, all of a sudden, all those same Republicans are big Keynesians, just about as big a Keynesian as I am. Every dollar the government spends is tied to a job. So I guess it's not a newsflash to point that hypocrisy. But as someone who has been pointing out for a long time that, yes, government spending plays a key role in our economy, I find it a little ironic.

REHMMackenzie.

EAGLENI'm asked this question every day as you might imagine. It is a big defense budget as it should be when you have forces engaged in hostile combat operations up until recently in Iraq and Afghanistan. We still have 100,000 forces in Afghanistan right now, U.S. only. It's expensive. And I agree it should not have been debt financed, and that's a debate for another show. But the defense budget that's not war spending, it's big. It's about a half trillion dollars.

EAGLENIt's -- in real dollars, it's very high. But as a percentage of our economy, it's almost at a historic low. So it really just depends on how you look at the defense budget. And I'll go back to the point I made earlier. Half of that budget pays for people. And so when we're talking about the defense budget, most people tend to think, well, it's just all these fancy weapon systems and we can just get rid of those. There's all these waste. The Pentagon is not immune to belt tightening. It certainly should be a part of reform initiatives.

REHMBut am I correct in saying that that defense budget in total is 15 percent of the overall...

BERNSTEINTwenty.

REHM…budget? Twenty?

WELNAWell, that's if you look at all of the government's...

REHMEverything.

BERNSTEINIt's political war.

WELNA...all the -- everything that the government pays on interest on debt: Medicare, Social Security, all of the mandated spending. The discretionary spending is only about a third of the federal budget, and then defense spending is about half of that. So that's where you get the 15 percent.

EAGLENIt's about $1 in every five goes to the defense budget.

BERNSTEINYeah. That's correct.

WELNARight.

REHMOK.

BERNSTEINCan I just make one quick point on this?

REHMSure.

BERNSTEINAnd you raised this earlier, Diane. You know, we've been talking a ton about defense, and that's really important. I stipulate to a lot of Mackenzie's points with exceptions I've raised so far. But, you know, the non-defense side is in many ways equally important, cancer research. Think about that. Think about the food safety, the FBI, veterans' benefits. There are veterans' health benefits in the nondiscretionary side. All of these strike me as equally important, yet somehow the debate is focusing just on the defense side.

REHMTo Hamilton, Md. Good morning, Eleanor.

ELEANORGood morning. I'm a little confused. I watched the hearing yesterday on my computer. I thought that it was established that the defense salaries of perhaps in an active duty service member was not going to be touched. And so -- and I thought that maybe they were talking about defense contractors. But another point I want to make is, you know, there is no way any country can keep up an endless war stance. We just can't do it.

ELEANORAnd when we're talking about cutting teachers, cutting jobs from people that are actually helping our country grow instead of putting $700 billion a year into the Pentagon to do whatever they feel like doing with it, we can't sustain this. And I thought the average American family paid $2,500 a year to the Pentagon. And I'd give your guest that to work with. And also, I'd like to say, one of the problems I have with your show -- one of the few problems I have is that people like the American Enterprise Institute sometimes dominate the discussion.

ELEANORIt's a conservative think tank, and we need a more balanced approach. But thank you for your show, and I recommend everybody listen to the C-SPAN coverage on that hearing. Thanks.

REHMYou know, Eleanor, what I want to say here is that I think Mackenzie Eaglen has done a fantastic job this morning of presenting the realities as they are. I don't hear a bias here. I'm sorry you do. We have Jared Bernstein, who worked for Vice President Biden, and we have David Welna, who is a reporter for NPR. Sorry, I have to disagree with you. Now, as far as yesterday's hearing, David.

WELNAYes. It is true that the salaries of military personnel would not be affected by the sequester. That's been decided. Now, as to the larger point about the amount of defense spending the U.S. is engaged in, if you take all of the defense spending in the entire world outside what the U.S. spends, it adds up to only slightly more than what the U.S. is spending. And we're four, 5 percent of the world's population. We account for close to 50 percent of defense spending in the world.

WELNAAnd, you know, there are people who question whether the U.S. can continue to sustain this role of maybe being the world's policeman or keeping things in a U.S. order of the world, being the world's superpower. There's a huge price that's paid, and that's what we're looking at.

REHMDavid Welna, congressional correspondent for NPR, and you're listening to "The Diane Rehm Show." She also brought up the issue of teacher salaries, which -- and other people salaries in the civilian part of our economy, which I think is an important point. Mackenzie.

EAGLENI agree. The ranking member in the House Armed Services Committee recently said at one of the hearings, the Republicans hold to lament the defense cuts, basically said, wow, isn't it amazing? Everybody now sees government spending as somewhat important. And he meant across the government because the impact is so far and wide. It's also on other civilians. It's not just the military.

REHMAll right. To Oklahoma City. Good morning, Russ.

RUSSGood morning, Diane.

REHMHi.

RUSSMy comment is that, though I would not like it, I would concede that my taxes could be increased to deal with fiscal problems, which we have already created. I resist having my taxes increased to continue to support the creation of more fiscal problems. If what we want to do with my tax money, my increased tax money, is pay the debts that we've already incurred and pay that down, then I would concede that we all need to do that, but I don't want to continue to support trillion dollar deficits every year with my increased taxes.

REHMRuss, can I ask you a very personal question?

RUSSYes.

REHMWhat is your general range of income?

RUSSWell, it's in the highest bracket.

REHMOK. That's all I want to know. Jared.

BERNSTEINOK. First, let me just start. I've got to just go back for a second to Eleanor. I just want to respectfully disagree as well. Not only is this show, I think, really strains to be balanced, but I think Mackenzie brings a critical view point to the discussion.

REHMAbsolutely.

BERNSTEINI appreciate her being here. Look, Russ is, in my view, speaking -- I guess the word that comes to mind is patriotic. He is someone who's saying I am willing to step up and make a fair sacrifice to help this nation resolve its fiscal conundrum that is -- has us all tied up a knot, as you've heard from the last caller.

REHMBut he's also saying, I don't want my taxes to go for brand-new programs.

BERNSTEINSo here's the thing, I think you have to look -- I think you have to actually look at the budgets that people are proposing. Now, I know the president's budget well, and he is proposing a budget that, I think, accomplishes the goal that Russ says. He raises significant revenue. He pays down the deficits such that we get on to a stable fiscal path. If you look at some other budgets, then Russ has a legitimate problem when they, in fact, they cut taxes for people like him.

REHMMackenzie.

EAGLENI can understand his concern about a lack of trust in Washington. And that's because we are talking about what David said as a third share of the pie, and it's shrinking. But what we're not talking about because Congress isn't, is that two-thirds of the pot, that's Social Security, Medicare and Medicaid that's on automatic spending growth every single year, nobody votes on it. It just happens.

EAGLENAnd so that's the concern, and I respect his concern that if I give you this money and we don't address this two-thirds of this budget, then it's not going to do anything to bring down the deficit in the long term.

REHMWell, let us not forget that President George W. Bush did assign a Social Security commission, which came back with three different approaches. Of course, we've got to deal with that. But I appreciate your all being here this morning. Jared Bernstein of the Center on Budget and Policy Priorities, Mackenzie Eaglen, research fellow with the American Enterprise Institute's Marilyn Ware Center for Security Studies, and David Welna, congressional correspondent for NPR, thank you all.

BERNSTEINThank you.

WELNAThank you.

EAGLENThank you.

REHMAnd thanks for listening. I'm Diane Rehm.