Let's talk about what you see going forward from the way things are right now. How bad is it?

I think that the immediate deficit is going to be -- I've been calling it an OMG deficit; it's an "Oh my God" deficit -- ... could very easily be over a trillion dollars in the immediate term. But the longer-term issue --

I thought you said over a trillion dollars.

I said over a trillion. ... Not to scare people -- that hopefully will be just a temporary phenomenon. That will be the temporary cost of a large bailout and most likely a large fiscal stimulus. Now, if those things work, then we pay a temporary high price of a high deficit. But we get the economy going, and hopefully we get back to some long-term fiscal discipline, have some type of health care reform that brings down the cost of health care spending, therefore bringing down the long-term cost of Medicare and Medicaid.

So it is not impossible that the next president could inherit a huge deficit, which they even make larger because they need to put in a fiscal stimulus to get the economy going, but at the same time start laying the seeds for a return to long-term fiscal discipline.

That's the key: long-term fiscal discipline. We haven't seen that. We continue to see deficit spending that is growing and growing and growing.

Well, obviously for somebody who was there during the '90s, this decade has been a huge disappointment. In 2001, we not only had our fourth year of consecutive surpluses, but we were looking at surpluses as far as the eye can see. And what surpluses mean, essentially, is that the government is bringing in more than it's spending and [is] actually able to pay down its debt. So we were on a path of paying down our debt, making ourselves less dependent on the rest of the world.

What we've seen the last eight years is an explosion in our debt and, worst of all, an explosion of debt to foreigners. I'm not saying that to be nationalist, but what it does mean is that we're borrowing today and passing that debt on to our children, who are going to pay it back to people who live in China or Japan or the U.K. It's one thing if we as a country lend to ourselves if we have a deficit, because we're borrowing from our American people. Then, when we're paying the interest back, we're at least paying it back to our own citizens. ...

When President Clinton left and we had four consecutive years of surpluses and paying down the debt, what people were saying was, thank God we finally have returned to balanced budgets and paying down the debt, because we're about to hit the baby boom retirement years. And if we're paying down our debt and increasing our savings, then we're putting our country in a better situation to handle the burden that's going to come. ...

A trillion-dollar deficit, a new president who had [promised] a lot of programs -- are those programs now forced to be set aside? Are his hands essentially tied because of this debt?

I don't think so, but I think that it's going to take a lot of careful strategic planning. ...

I think there are ways that the next president can do some of the long-term goals people would like in a way that can be good for fiscal discipline. Universal health care, I think, is the best example. Yes, it will cost more money to provide the subsidies to allow almost all Americans to get universal coverage. But if it's done at the same time that we're reducing the cost shifting, reducing all the waste in our health care system that comes from having health care companies spend so much time figuring out how to exclude people instead of cover people, chronic care management, prevention, all of those things, then we can achieve one of these important social goals like universal health care. ... If you bring down health care spending growth for the country as a whole, then Medicare and Medicaid will go down naturally, and that will be the most important thing we can do for our long-term fiscal future.

You're someone who can bring some real institutional memory to addressing the problems that this president now faces. In 1993 you had a recession; you had deficits; you had some of the similar problems. Do you see similarities between the situation now and what President Clinton was facing?

There are some similarities. You could argue that it's worse now, but I think what was similar is that you had a progressive president who was coming in after a period of conservative administration where certain priorities had been cut. They both want to do great things on education and health, and yet they're finding out that the deficit is even larger than they thought.

In '93, what that meant was that President Clinton had to try to put together a deficit-reduction plan that included a lot of his key investments, but not everything he wanted to do. ... So he had to ... seek a balance between his investment priorities and the effort to bring down the deficit.

I do think in '93, the deficit was probably a larger issue in terms of confidence about the U.S. economy. The deficit had been going up for 12 years; people thought it would go up forever. I think there was a strong imperative for President Clinton to show he could break that trend. When he did, he was rewarded by lower interest rates and a rush of investment that helped strengthen the economy.

I think for the next president, it's going to be a little different. I think that what people want to see more than anything -- maybe even more than a strong deficit-reduction package -- is a sense that the United States is capable of fixing one of our major long-term challenges. So I think that showing that we can do something about climate change or do something about universal health care or do something about education is also very, very important, and I wouldn't encourage a president to put all of those on the back burner, because your first year in office is a special year. That is the year that you have the platform, the podium, the mandate to do something large. ...

You're pretty widely known as something of a deficit hawk, and part of what I hear you say is maybe cutting those deficits should be put on the back burner not just for a year, but maybe a little bit longer in order to get some programs implemented. Is that true?

I think your goal can never be just an accounting balanced budget. I think you have to have a balance in your budget, and part of that balance has to be a commitment to fiscal discipline. But if you're just bringing down the deficit and your schools are terrible and nobody's learning and your bridges are crumbling and we're bearing the cost of climate change each and every year, that's not a very balanced economic approach. ...

How bad is the problem of the national debt and the continuing budget deficit? Is it, as some say, a ticking time bomb? Is it just a problem we have to address over time?

I think it's one of the great challenges we have. I think it's not the only one, and I think some are related. I think you do want to take on the long-term deficit, but you don't, as Ben Franklin said, want to be penny wise and pound foolish. ...

So I do think that you have to beware anybody who says, "Let's just invest in our future and not worry about the deficit." But I think people should be aware of people who say that just bringing down the deficit is going to bring strength and shared prosperity to our country if we're not dealing with energy independence, health care and education.

And that's what makes the job of being president a tough one: You've got to find those balances. It's the ultimate walk and chew gum at the same time. You've got to show that you can restore a sense of fiscal responsibility and yet be making gains on the country's great challenges like health care, energy and education. That will, as much as anything, determine what our long-term growth and prosperity is.

One of President Clinton's great legacies is coming to terms with the federal deficit and dealing with fiscal responsibility. ... From the inside, tell me what that was like. ...

It is important to remember that in 1993, the deficit had become even larger than an economic issue. It had become somewhat a sign of whether you could trust the government, whether the government was in control. And I think one of the things that President Clinton understands -- and I think Prime Minister Tony Blair understood it in the U.K. as well -- is that if you're actually a progressive president who believes in government, you're the one who almost has to show that you can get your house in order.

In other words, you have to show you can trust us to try to do some more bold and expansive things. If you don't believe in government, you might not worry about it. And of course, they often say people who are very conservative don't mind running up the deficit because they want pressure to cut back on government and "starve the beast," as the expression goes. ...

One point I would make, to make a general point, there is a certain industry out there of people who simply tell politicians to do something about the deficit as if it were easy; as if they were just asleep at the switch; as if they hadn't thought of it before.

The truth is, these are extremely difficult choices, and while it might make everybody feel good to have a president or speaker of the House give a brutal speech or proposal to reduce the deficit, if it's not politically savvy, if it doesn't build support well, it just dies on the vine and doesn't get anything done.

It's easy on the outside to just say: "What's the matter with those bums? Why don't they just bring the deficit down?" But when you're in there, bringing the deficit down may mean cutting programs that are really dear to peoples' hearts -- it could be for veterans or education or for health care. Well, that's a lot more complicated, and it's a lot more difficult.

So I don't want to let our political leaders off the hook, but I don't think that anybody should think that it's just a simple exercise. Often a deficit-reduction plan is something that nobody likes but everybody dislikes equally. There isn't this easy waste that's out there that everybody just forgot to cut. And so you have to figure out, what's the package you can put together? And that package may mean putting together some very positive things that can get support for a budget plan with some tough medicine. And if you look at 1993, you saw a bit of that. You saw some difficult Medicare, Medicaid savings, but you also saw a big increase in education and the Earned Income Tax Credit. These things have to come together. The same could happen with health care. ...

I'd like for you to talk about that from the inside. Paint a picture of what it was like. ...

It was an eight-month white-knuckler. I mean, it was just hand-to-hand combat, just battling each and every step of the way. And that's the important thing for people to know: This is not easy, and this doesn't look pretty. ...

The thing about 1993 was that it was the one time in the last quarter century where one party decided to go it alone. In 1983, with Social Security, it was bipartisan. In 1990, the deficit reduction package was bipartisan. 1997, the one we did later, was with [then-Speaker of the House] Newt Gingrich [R-Ga.] and bipartisan. But in 1993, the Republicans announced pretty early, "Democrats control government; you're on your own." ...

So that meant you had very little margin for error. You had to pass it solely with Democrats in both the House and the Senate. And you have Democrats from different parts of the country who have different sensitivities. Some thought that we were cutting the deficit way too much and were sacrificing a more progressive agenda. Others, like [Sen.] Bob Kerrey from Nebraska, thought that we were not going far enough.

And we're in the middle at each step, through each committee -- through the House, through the Senate, through the conference committee. We're in that place trying to juggle, trying to put it together, trying to barely get that majority plus one so that we could pass this.

Is there a moment that you remember, something that sticks out?

Oh, there were so many, but I think that perhaps around May, it looked like it might all fall apart. And I think that was maybe the most depressing moment of my eight years of all that went on. ...

In eight years in the White House, there are a lot of things that happen that are anticlimactic. They're great, but by the time they happen, you already knew the outcome. The 1993 Deficit Reduction Act was not one of them. I mean, when they were voting in the House, we were just beside ourselves. We did not know if we had the votes, and of course [Rep.] Marjorie [Margolies-]Mezvinsky [D-Pa.] courageously cast the deciding vote; passed by one vote.

And then after that, in the Senate, we went through the same thing. We did not know at 2:00, 3:00, 4:00 that day whether we would be able to get that 50th vote from Sen. Kerrey that would allow [Vice President] Al Gore to cast the tie-breaking vote in the Senate. Each of those votes were as exciting as or nerve-racking as an extra-inning World Series game. ...

When Al Gore casts the deciding vote, the gavel comes down, it's done, you got your budget, where were you? How did you react?

We were in the Roosevelt Room, which is the main meeting room in the West Wing that's right across from the Oval Office. Somebody had put a large screen up there, and people were kind of wandering nervously from the chief of staff's office, even walking in to talk to President Clinton. But the Roosevelt Room was where we were all huddled together, and when it passed it was truly a celebration.

A cheer went up, and then people would call for different people to get up -- first Lloyd Bentsen, our secretary of Treasury, and then our OMB [Office of Management and Budget] director, [Leon Panetta] -- and they would get up and thank everybody. So when it got to my turn, I just had a little piece of paper with me, and I had just written down the positive sides -- what were the things we had increased. And so when my chance came up, I went and said, "In this budget, 15 million working-poor Americans are going to get the Earned Income Tax Credit; 400,000 more children are going to get nutrition; 200,000 more children are going to get Head Start."

That was just an important moment, because I wanted to essentially remind everybody who had been with us through the campaign that within this deficit-reduction plan that we had passed, for all its difficulty, for all its pain, we had still achieved a lot of the progressive goals that President Clinton had set out to do. ... So I thought that was certainly one of my most special moments of my eight years at the White House.

Today, the U.S. government has become the lender of last resort, has become the bulwark of holding people's fears at bay. This phrase, "the good faith and credit of the U.S. government" -- now that we are so extended, now that we owe so much money, can you really believe that phrase?

You have to believe it. The good faith and credit of the United States government, this was established by [first U.S. Secretary of the Treasury] Alexander Hamilton, who took the extraordinary step of paying back pre-Revolutionary War debt so that the United States' financial word would mean something, would be a bulwark of confidence. And it has all these years, but it's not something that you want to take for granted. Even if you can pay your bills, you still want to be operating form a position of strength.

Consider the Asian financial crisis in the late 1990s. ... We were the country with a surplus. We were the country with strong economic growth. That allowed us to play a real leadership role in helping the world not fall into a devastating economic crisis. Now we're facing the same situation, but rather than being in that position of strength, people are looking at us and saying, "Oh, well, you're the place where the real mortgage crisis started; you're the place that's doing the most borrowing." ...

When President Bush came in and had to face 9/11 and a recession, it was tough, but because we were expecting surpluses, the deficit went up, but not so bad. We were still in a relatively strong position. Well, if you are expecting $700, $800, $900 billion deficits, what if something else goes wrong? You don't have as much flexibility, as many bullets in your gun, and that's not the way you want to be. ...

These are troubled times. There are people who are actually asking if it's possible for the U.S. government to go bankrupt. People are really wondering just how solvent this government can be.

... I think that the real question is not whether the United States will ever break its word or not be able to pay its debts; I don't think that's a fear. But you also do not want the United Sates paying its debt by inflating its way out of a huge deficit. You don't want to do this by having us have such a weak dollar that we have inflationary troubles, that we become essentially poor. ...

The notion of fiscal discipline, which is kind of a highfalutin notion for most people, can you bring it down to the kitchen table? ... Why is that important to me and to my family?

The simplest way to think about fiscal discipline is really the idea that if you're going to spend on something, you find savings from somewhere else. That's a basic discipline that any family, any company, any government, can do. ... When the federal government decides on a long-term basis that they can just do anything, then they have to borrow it from somewhere. And so we make ourselves more dependent on foreign countries. We give ourselves less resources to actually invest in things that could actually be good for our productivity and education and health care.

And as we see right now, we put ourselves in a less strong situation to deal with that rainy day. One reason that a family making those choices might decide to save a little more is that they know that they are going to come to a time when somebody gets laid off or somebody gets sick. They are going to need a little extra money, and so you save some for a rainy day and your retirement. Well, the U.S. government is the same. When President Bush came into office, we had saved for a rainy day. We got a very, very bad storm in 9/11 and at least a mild recession, but in a sense, at least we had saved up enough so we could deal with it.

I think we have to return to that theory: If you do something, you have to figure out what's the choice you are making, that it's not just a free lunch. I think in anything in life, when someone tells you that can have everything with no pain, sacrifice, trade-offs, there's always going to be something wrong in the long term. Look at what happened in our housing market. A lot of that is a whole lot of people believing that there was in fact a free lunch, and you end up paying the piper.

So for the typical family, what does it mean? Well, it means that your country might have to borrow more, and you could face higher interest rates on your mortgage. It could mean that there's less money to invest in your children and, when they're adults, in their children, because we're paying interest back to pay for living beyond our means. So it's really about taking away the ability of a country and families to be able to invest in their future and to have our ultimate goal in our country, which is to have shared prosperity.

It is important to remember that no budget goal, no balanced budget, no surplus, no deficit number is a goal in and of itself. They are all means to having a country that has shared prosperity, where you have a growing middle class that makes room for everyone. So you have to look at deficits and fiscal goals as part of that blend. It's not an all-or-nothing thing. ...

No one knows the complexity of the decision making more than you. You've lived through it. Let's say you have the president's ear. Your best advice: What are the things he should focus on right now?

I would say that the president wants to let the country know that the stimulus that he is putting forward ... is a temporary measure, and that he wants to also show concretely that over the four or eight years of that presidency, we're going to take on the big things -- the long-term health care cost, the Social Security. ... That's going to be a tough challenge, but I think it's a doable challenge.

The other thing I would say is that whenever possible, you want to try to do things in a bipartisan way; that when you can essentially get the leaders from both parties to put a little skin in the game, it makes it easier for everybody to vote for that bill. Why did so many people make such difficult choices in 1983 to vote for Social Security? Because Ronald Reagan, a popular Republican president, and Tip O'Neill, a popular Democratic speaker of the House, were both supporting it. That gave everybody political cover to make a tough vote for fiscal responsibility. In 1997, Bill Clinton and Newt Gingrich did the same thing.

So I would say that if you have to do something one party alone, then you do it. But the best way is to see if you can bring the bipartisanship, because that may allow you to do more that is fiscally responsible. ...

I appreciate that, but in this Congress and this climate, don't you see such a difference in worldview, in ultimately what they even want to accomplish, that bipartisanship is going to be ever so much more difficult?

I think it is going to be difficult, and at the end of the day, Democrats may have the numbers to do a lot of the things they'd like. But I think that our country would function better, and I think that people might be able to make braver choices on difficult fiscal issues, if you can get Republicans as well as Democrats to share in that. Now, it may be that Republicans say, "You guys control the government, go it alone; we're going to obstruct." But I still think that it makes sense for any new president to at least do everything in their power to make clear to the other side and to the public that they did reach their hand out. And it may be that just enough of the Republicans on the other side will find some issues that they can come together and work on.

I think you have to hope, and I think one of the reasons that it could happen is because the American people might demand it. I think the American people want to see people work together on common solutions. And I think there could be a cost to a new president saying, "I'm going to take on health care and climate change and education," and the other side just saying, "Good luck; you're on your own." That may not be a very good strategy. ...