Why is it important to have or aim toward a balanced budget? Why is fiscal discipline important?

There are two dramatically different reasons you want fiscal discipline. The first is, it gives you tremendous ability to respond to a crisis. ... If you are in a situation that some countries get into, where you're so deeply in debt the interest you're paying on the debt is such a big part of your budget and you really have no margin, then in fact you have a very, very limited ability to maneuver. Britain, at some points, got into that kind of state.

The other thing is, I think, moral and practical. Politicians who have an open-ended budget can't say no to anybody, and so they take care of every idea, no matter how dumb, and they finance every bureaucracy, no matter how inefficient. If you have the discipline of a balanced budget, you begin to really look for savings, and you begin to really look for priorities, and you begin to really make demands about performance and achievement.

And so I think a balanced budget as a model is a very powerful part of how America ought to govern itself. ...

... Let's talk about government borrowing generally. It's difficult to bring home to people why it is the government shouldn't borrow massive amounts. How does that affect them?

The first thing to remember about government borrowing is you then have to pay interest on the debt. So if you're paying billions and billions of dollars of interest on the debt, that's money that could either have been lowering taxes, or it could have been spent on education or on health or on highways or the environment, but now you're spending it just to pay off bondholders. I don't think that's a very sound policy.

I think a relatively modest federal debt, just enough to help the Federal Reserve manage the currency, is probably the right number. [First Treasury Secretary of the United States] Alexander Hamilton understood that; the Founding Fathers understood it. We had a pattern of frugality up until 1932, where we really had a deep cultural bias in favor of balancing the budget. The American people still have a deep bias about balancing the budget. It's the politicians who have sort of gone off the wagon.

Why is it so hard for Congress to limit spending?

All of the biases of the modern bureaucratic state are in favor of interest groups who want more. And so all these interest groups show up, they all volunteer for your campaign, they all donate money, and they say, "Prove you're for more education; raise spending." ...

What Reagan did, and what [former Prime Minister] Margaret Thatcher did in Great Britain, and what we tried to do with the Contract with America, was establish an alternative world. To say to people: "What if we actually made government functional? What if we actually insisted that it be effective? What if we actually focused on being creative so we got more things done with less money? Would that be all right with you?" And it turned out most people ... liked the idea of the system actually working. ...

... I think people forget how high tax rates were in the late 1970s. Speak to that.

I have a good friend who's teaching a class at Georgetown on the Cold War, who realized that the average student in the class was 2 years old when the Berlin Wall came down. So how does he explain the Soviet Union? Well, the 1970s are the same way. ... People forget that we had 70 percent tax rates at the margin, and that had come down under Kennedy from 90 percent, which was the World War II number.

So when Reagan came along, ... he really brought the marginal tax rate down dramatically from where it had been. And that was a revolution, because what it did was it said to the entrepreneur or the business leader: "Don't spend your time with your accountant and your tax lawyer trying to figure out how to avoid taxes. Spend your time running your business, making money, and you'll get to take most of it home."

And you just had, starting about 1983, an absolute revolution in American energy and creativity and drive, which really only began to change in early 2008, when the Bush administration lost their nerve and decided to start going toward an interventionist, Keynesian model.

But when Reagan cut taxes, he wasn't able to rein in entitlements.

Yeah. Reagan always had a ground rule, and it was based on Milton Friedman, the economist, who had said if your choice is a bigger deficit with lower taxes and a smaller government, or a smaller deficit with higher taxes and a bigger government, always go for a bigger deficit. And so Reagan was prepared to say, "I'd rather cut taxes and build up defense."

And remember, Reagan was at a unique moment in American history. He designed and led the campaign at the end of which the Soviet Union disappeared. And so I think if you said to him, of the three values -- getting to a balanced budget, cutting taxes for economic growth, and military strength to end the Cold War -- he would have said that he saw balancing the budget as a very desirable goal which he wanted to get to as soon as he could, but not at the price of raising taxes.

Furthermore, Reagan would have told you every time you try raising taxes in Washington, Washington spends more. Washington is a city which will spend as much as it can get away with, without regard to tax rates. ...

... You were instrumental in the first balanced budget in I don't know how long, in 1997. Can you tell me how that came about?

Yeah, we balanced the budget for four consecutive years. We paid off $405 billion in federal debt. It was the first time since the 1920s that you had that level of balanced budget.

We did it by basically doing two very profound things. The first was we controlled spending. We controlled spending at a practical level by saying no, and we controlled spending by having a very significant reform, both welfare reform, where 65 percent of the people on welfare either went to work or went to school, and Medicare reform, which I personally chaired the task force on. And then second, we cut taxes designed to increase investment and designed to increase economic growth. ...

Do you feel the fiscal discipline of the government in the '90s was catalytic for the growth that we experienced in the '90s?

Absolutely. ... When President Clinton and I finally got the budget agreement done, the Congressional Budget Office had projected a $5 trillion surplus over the next decade. That's how big the change had been. And of course it all disappeared. It became increased deficit spending.

How did we go from surpluses to deficits?

A couple of things. One is 9/11, which was a real shock to the economy. The second was that President Bush and the congressional Republicans made a disastrous decision. The Constitution is designed so that the legislative branch will investigate bureaucracies that are incompetent, and the president will veto bills that are stupid. And they got into a deal where the president said, "I'll sign anything the Republican Congress passes because, after all, I'm a Republican," and the Congress said, "We will ignore any bureaucracy no matter how stupid, because, after all, we have a Republican president."

And six years of that was a disaster. You had this horrendous performance after Katrina. You didn't have any kind of serious oversight and serious overhaul. You had spending bills coming up that were an embarrassment. Any Republican who had spent their career talking about fiscal discipline, lower taxes, the private sector had to be deeply, deeply angry about what the Republicans in the House and Senate were doing.

Let's talk about Medicare Part D, [which added a prescription-drug benefit to Medicare]. What were your feelings about that?

I'm actually in the minority among the conservatives on that. I thought Medicare Part D was essential. ... When Medicare was created in 1965, prescription drugs were such a small part of medicine that people didn't even think about it; it wasn't even thought of as medical care. But the extraordinary explosion of pharmaceutical breakthroughs, the miracle drugs, things that changed people's lives, have all come in the last 40 years. And I thought that to have a Medicare system that took care of doctors and hospitals [but] that discouraged you from buying drugs was inherently bad medicine. It was a generation-old, obsolete model. ...

... What is the future of Medicare if we were to do nothing?

If we do nothing, Medicare will eventually go broke, and in the process of going broke the politicians will intervene, and they will steal from the hospitals, and they'll steal from the doctors, and they'll steal from the medical technology companies, and they'll steal from the pharmaceutical companies. And over the next 20 years you'll have a steady, consistent decline in the quality of health care in America. That's been the track record: Politicians steal when they run out of money. Medi-Cal, the California Medicaid, pays about 39 percent of the real costs. The rest is covered by other payers.

I feel like the fight to reform Medicare in 1995 has been largely forgotten by the public. Can you talk about why it was necessary to reform Medicare?

We were committed to balancing the federal budget. ... You couldn't balance the federal budget if you were going to run huge Medicare deficits, and the Medicare Commission had reported that Medicare was drifting toward bankruptcy. It was a really sobering moment.

So we formed, I think for the only time in history, a speaker-led task force that members of [House Committee on] Ways and Means and members of Energy and Commerce served on, and we collectively designed a Medicare reform plan.

Now, we did so with the help of AARP and with the help of the American Medical Association, the American Hospital Association, the pharmaceutical companies. ... The result was we ultimately were able to put together a bill that became an integral part of the Balanced Budget Act of 1997 and was really intellectually one of the greatest achievements of the House while I was there. ...

But we're still in a Medicare crisis.

We were a temporary fix. We were a little bit like having a car that needed an engine overhaul, and we changed the spark plugs and got you to the next phase. But we didn't fix the underlying problems. ... And this is why I helped found the Center for Health Transformation. Only by having very