Welcome.

 

GLENN HUBBARD, DEAN, COLUMBIA UNIVERSITY BUSINESS SCHOOL, SENIOR ECONOMIC ADVISOR TO GOVERNOR MITT ROMNEY: Thank you.

 

ZAKARIA: So let's get right into it. Governor Romney has an ad in which he says the first thing he's going to do is a big tax cut. Now, you've talked a lot about the debt and the deficit, he's talked a lot about the debt and deficit. 

 

How can it possibly make sense if you're worried about debt and deficit, that the first act you would have would be a massive tax cut which will surely explode the deficit?

 

HUBBARD: Well, not really the case, Fareed. First of all, what Governor Romney said is first up is a spending reform that brings federal spending down to 20 percent of GDP by 2016. 

 

On the tax side, he's not proposing a net tax cut. He's proposing something that's in the flavor of the Bowles-Simpson commission which is cut marginal rates, broaden the tax base. So, yes, marginal rates would be cut, but it's revenue-neutral.

 

ZAKARIA: But the ad, then, is misleading. I mean the ad says first thing he's going to do on day one is cut taxes. 

 

HUBBARD: He is cutting marginal tax rates. He's doing so in the context of a tax reform, the kind of tax reform that economists on both sides of the political aisle have talked about for years.

 

But what's very important is he's doing that also in the context of a plan, day one, that would restrain federal spending so we get the budget back in order. 

 

ZAKARIA: So let's talk about the specifics of some of these issues because that's where it becomes -- is often hard to figure out how it works.

 

To cut marginal rates, you would have to do it, as you say, the way Simpson-Bowles does it. Now, the way Simpson-Bowles is able to do it is they get rid of a lot of the deductions or so-called loopholes.

 

But the big money is in the very popular deductions. The deduction -- the interest deduction for mortgages, you know the deduction for employer-based health care. Is he going to get rid of those deductions?

 

HUBBARD: No. What Governor Romney has said is, "Look, first of all, we need to cut marginal rates." And he would cut them essentially to exactly the same levels in the Bowles-Simpson so-called compromise plan. 

 

Part of that revenue is made up with economic growth, most of that though has to come from base-broadening about which he said two things. One, everything should be on the table, there's nothing eliminated, but everything on the table. And, second, that the bulk of the adjustment be borne by upper income households.

 

Remember that Bowles-Simpson was trying to raise close to 2 percentage points of GDP in revenue. Governor Romney is trying to be revenue-neutral, and so his tax plan wouldn't have to raise as much revenue from base-broadening as Bowles-Simpson.

 

ZAKARIA: But -- I mean, I want to press you on this because even if you're not trying to raise as much, it's very tough to get any significant revenue if you don't touch the big deductions. The big deductions are the interest on mortgages, the interest -- the health care and federal and state taxes - I'm am sorry, local and state taxes.

 

HUBBARD: Correct. 

 

ZAKARIA: Those three, collectively are --

 

HUBBARD: Those are the big ones.

 

ZAKARIA: So is he willing to look at those?

 

HUBBARD: He has said so. He has said everything is on the table. He looks forward to working with the Congress to do it. There are many ways to do it. We have Domenici-Rivlin, we have Bowles- Simpson, we have President Bush's 2005 commission. There are lots of ways, but everything has to be on the table and, again, the adjustment really has to focus on upper income households.

 

ZAKARIA: When you look at the spending reduction, you're saying he's going to take spending down to 20 percent of GDP.

 

HUBBARD: Correct.

 

ZAKARIA: That is from about 23, 24 percent. That's a very big drop. In order to do that, what is he going to do specifically? What programs will get cut, particularly, again, the big money is all in Medicare, to a lesser extent, in Medicaid/Social Security. What would he do to Medicare?

 

HUBBARD: Well, he's got two parts to the spending plan. The first is the near term to 2016. Getting spending down to 20 percent is not as radical as it sounds. Spending was 20 percent of GDP or a bit less before the financial crisis so this isn't some radical rethink of the size of government.

 

How to do that would be cuts in discretionary spending and block- granting the Medicaid program. He's been very specific about that. Medicare and Social Security are longer terms issues. He's specifically said those are not short-term budget issues.

 

How would he do that? For Medicare, he said that he would support move to more of a premium support system which would limit Medicare support, particularly for more affluent seniors. For Social Security, he's talked about delaying the retirement age and slowing the rate of growth of benefits for upper income people.

 

So, again, the same kind of progressive solution that he's proposing on the tax side, there needs to be adjustment, but it needs to happen for upper income households.

 

ZAKARIA: You've worked with Governor Romney a lot now. 

 

HUBBARD: Yes.

 

ZAKARIA: How would you characterize his economic philosophy? Is he a supply-sider? Is he a classic Republican kind of business-type? Is he sympathetic to the Tea Party? And don't tell me all of the above, because that's what people worry about, about Mitt Romney.

 

HUBBARD: No, I think the way I would describe Governor Romney is he's a problem-solver and I think the issue for him is, how do you raise economic growth in the country and how do you make it more inclusive and once you raise those questions, he's interested in practical solutions, not theoretical solutions. How practically can we do that? 

 

And if you look at what he's proposing on the budget, on taxes, on regulations, on financial reforms, they're with those two things in mind. So I think of him as a practical problem-solver that has elements of all that you suggested, but he's not literally all of the above. ZAKARIA: We're going to come back and talk more with Glenn Hubbard, Mitt Romney's Chief Economic Advisor. We're going to ask him about the fiscal cliff, about Obamacare, more when we come back.

 

(COMMERCIAL BREAK) 

 

ZAKARIA: And we are back with Glenn Hubbard, senior economic advisor to Governor Romney.

 

You've talked a lot, Governor Romney has, about the uncertainty -- the climate of uncertainty that makes it difficult for businesses to invest. I can't imagine something that would be more uncertain than this issue of the debt ceiling.

 

Do you believe that John Boehner and the House Republicans should make it clear that the United States will not default on its debt?

 

HUBBARD: Well, first, the United States is not going to default on its debt. We have a witching hour where the debt ceiling, budget sequestrations and the so-called fiscal cliff and tax rates are all occurring. And that will be part of a political negotiation.

 

As an economist, I would think that if we get to a situation where Governor Romney becomes the president, then the lame duck Congress ought to simply shift things down the road a few months to the enactment of Governor Romney's tax plan.

 

If the president wins reelection, that's a different negotiation, but it should center quickly on the appropriate tax policy. But there's no question that the nation isn't going to default on its debt.

 

ZAKARIA: But should we make that clear to prevent uncertainty? Should John Boehner make clear that the United States will not default?

 

HUBBARD: I can't give political advice to politicians. All I can say is the real economic issue here is both addressing the size of spending and then now you want to deal with the fiscal cliff.

 

ZAKARIA: Obamacare, this is a subject you know a lot about. You wrote a book about fixing health care. When I look at the problem, it does seem as though if you have an insurance-based system and you don't include everyone, you end up in a kind of negative spiral for insurance companies where they're trying to kick people off with preexisting conditions because they don't want to just have sick people on. 

 

That is the reason that Governor Romney of Massachusetts decided you had to have a mandate. Doesn't it make sense then to preserve the individual mandate in Obamacare because that's what makes an insurance system work that you have healthy and unhealthy people in it?

 

HUBBARD: No, I don't think so, Fareed. First of all, you have to start with what's the goal of the reform? And I think, from an economic perspective, the goal of health care reform is to slow the rate of growth of health care costs to make both health care and health insurance more affordable. That, in turn, increases coverage.

 

You don't need an individual mandate to do that, but you do need to help markets work better and you identified some of the problems. You really do have to go after preexisting conditions. You have to make sure that the chronically ill are taken care of in a way that doesn't hurt the functioning of private insurance markets.

 

You have to change insurance regulation and make it possible to buy cheaper policies. If you do those things and you fix the tax bias against many ways of purchasing health insurance and health care, you can go a very, very long way toward cost reductions. That's really what a market-oriented health care reform is about and you don't need the individual mandate to do anything.

 

ZAKARIA: So was Governor Romney wrong to do it in Massachusetts because the philosophy behind it is exactly the philosophy behind Obamacare?

 

HUBBARD: No. What Governor Romney was doing in Massachusetts was taking a particular set of state circumstances and a particular --

 

ZAKARIA: Which are the same --

 

HUBBARD: No.

 

ZAKARIA: -- which is you don't have the young, healthy one buying insurance and that was kind of screwing up the insurance system.

 

HUBBARD: What he has said is that individual states may do all kinds of experimentations --

 

ZAKARIA: But, then --

 

HUBBARD: It doesn't follow from that that a national mandate makes sense.

 

ZAKARIA: But that only makes sense logically if you said the Massachusetts example, then, was a failure. Was the Massachusetts -- was Romneycare a failure because if it's a success, of course, the federal government should adopt it?

 

HUBBARD: I don't think you can say that. Again, it goes back to the question that you're trying to answer is the goal lowering health care cost, is it increasing the number of insured individuals? I think all of those are in the mix.

 

So I don't think you can draw the link between Massachusetts and the national system. I think what's on offer for the American people to decide is, effectively, Obamacare that would double-down on all the flaws that I mentioned; all the flawed insurance markets, or the flawed tax system or a more market-oriented health care system. That's really what's on offer.

 

ZAKARIA: What is the central focus of the Romney economic plan? How would you describe it very briefly? HUBBARD: I would say it's really single-mindedly focused on two things and an important byproduct. The two things are how do we get economic growth back to what this country is capable of and, second, how do we make that growth inclusive so that all Americans see the benefits of it?

 

The key byproduct of that will be job creation when people see that America's a country in which you should want to invest whether you're an American saver and investor or a foreign saver and investor. It's really that simple.

 

ZAKARIA: I had Paul Krugman, the economist, on recently and I asked him what he thought of Governor Romney's plan and he said, "Governor Romney's plan, as I understand it, is we need to cut government spending substantially to restore confidence in the markets. What he should look at is the experience of Europe where they have cut government spending. As a result their economies are in a tailspin, their budget deficits are widening, their debt is growing because by cutting spending you are, in effect, reducing demand, destroying the economy in a weak economic climate." 

 

And that, to him, it's bizarre that given this evidence that Europe provides of countries from Spain to Britain, that they've cut spending and it hasn't worked, why should you adopt austerity-type programs in the United States.

 

HUBBARD: It is unfortunate, I think, in Europe and, to a lesser extent, even in the United States that policy-makers define austerity as being about this year's budget. 

 

The real problem, particularly in the American setting, is how do we get the budget on a glide path towards sustainability? So in the U.S. case, to be concrete, how do we change and slow the rate of growth of entitlements in the long run? How do we gradually reduce discretionary spending; all the things we were talking about before?

 

If we do that right, we don't have to have such dramatic austerity this year. That's a valid point, but it is not a valid point to say that the act of austerity is growth-diminishing. The question is whether it's forward-looking, like getting government on the right path, or just budget cutting this year. That's really the question.

 

ZAKARIA: That suggests you would be comfortable with, you know, a much longer term plan where you would tolerate large deficits for a while as long as there was this long plan. And I would suggest to you that the Tea Party will not be happy to hear that.

 

HUBBARD: Well, and that's not what Governor Romney's proposed. If we can get federal spending to 20 percent of GDP by 2016, the deficit will be very small. A healthy tax system and a healthy economy would produce 18, 19 percent of GDP in revenue. So those won't be large deficits.

 

The very big deficits that the country should be very afraid of are the deficits that are coming in the next decade and the decade after that, and there we do have time for gradual adjustment.

 

But, no, we shouldn't tolerate enormous deficits today. My point is we simply don't have to make huge changes in our entitlement programs today. We can do those gradually. We do have time. But we don't have time if we wait four more years.

 

ZAKARIA: Glenn Hubbard, pleasure to have you on.

 

HUBBARD: My pleasure.

 

Watch the interview on CNN.com