Economist Simon Johnson, co-founder of the popular blog, The Baseline Scenario, joined us here today at the AFL-CIO for a discussion of his new book, White House Burning: The Founding Fathers, Our National Debt and Why It Matters to You. Co-authored with law professor James Kwak, White House Burning shows why the debasement of our political system in the 1980s and 1990s has produced a dysfunctional Congress that perpetuates our debt-based economy.

The book describes our Founding Fathers’ divisive struggles over taxes and spending and moves forward to propose how the nation’s debt crisis can be solved while strengthening our economy and preserving the essential functions of government. They debunk the myth that such crucial programs as Social Security and Medicare must be slashed to the bone.

Johnson, a professor of entrepreneurship at the MIT Sloan School of Management, joined us in a Q&A on his findings and analysis of where we go from here.

Q.: Is there really a "fiscal cliff" at the end of this year? What does that mean exactly?

Johnson: If Congress does not act by the end of 2012, there will be a significant fiscal contraction in 2013—presumably slowing the  economy.  However, this does not mean that all of the Bush-era tax cuts should be extended. In fact, there is a strong case for raising some revenue by not extending the tax cuts for relatively high-income people. If the economy needs support, this can be provided by temporarily continuing the tax cuts for middle- and lower-income people.  If the goal is to support the economy, a temporary payroll tax would be more effective than extending tax cuts for high-income individuals.

Q.: Can we bring the budget under control without more revenue?

Johnson: Medium-term fiscal sustainability in the United States will be hard, unless we can return to the revenue levels (as a percent of the economy) we had before the Bush tax cuts in the early 2000s. If we could restore revenue to that level over the next decade, then bringing our budget and debt under control becomes entirely feasible.  We have time to do this—there is no need for precipitate and damaging austerity.

Q.: How do our budget problems compare with those in Europe?

Johnson: European countries in the euro zone are in great difficulty, mostly because the nature of their currency union has produced a broad economic and financial crisis —with budget problems as just one symptom.  Our economic issues are much more straightforward—we need revenue restored to where it was in the late 1990s.  But our budget debates are going to be difficult, primarily because so many Republican politicians have dug in around the idea that revenue must be at or below the levels that followed the Bush-era tax cuts.  That revenue level will not support Social Security and Medicare as the population ages.  Unfortunately, very few political leaders currently find it expedient to explain this to people.

Q.: Should we be optimistic or pessimistic about U.S. economic prospects, including for jobs?

Johnson: I’m optimistic about the ability of the American people to bounce back in the face of adversity.  We have many talented and skilled people. They will always find ways to work hard and take care of their families.  At the same time, however, we should be clear that reckless risk-taking in the financial sector has caused immense damage—it is now five years after the banking crisis began, and there is no sign that we will escape its consequences any time soon.  Large banks have become even bigger and more powerful since 2007. This is a recipe for repeated disaster.  Any bank that is “too big to fail” is too big to exist.