Honeywell CEO: Let’s go big on deficit reduction by Nin-Hai Tseng @FortuneMagazine September 14, 2011, 4:19 PM EST E-mail Tweet Facebook Google Plus Linkedin Share icons David Cote, CEO of Honeywell FORTUNE – Honeywell International HON CEO David Cote has become one of the most vocal deficit hawks in corporate America today. The 59-year-old head of the Morris Township, NJ-based manufacturing conglomerate was a member of President Barack Obama’s debt commission, which called for nearly $4 trillion in reductions. The Simpson-Bowles plan was ultimately rejected by the commission, but Cote hasn’t given up on it. On Monday, he was among a wave of business executives and former government officials urging the new Congressional committee on deficit reduction to go beyond its mandate to cut as much as $1.5 trillion from budget shortfalls over 10 years. Signers of the petition have different opinions on how this could be done, but Cote insists that the committee should “go big” and adopt something similar to the Simpson-Bowles plan. But who should pay for the plan – the rich or the poor? What would a substantial slowdown in government spending do to the U.S. economy, which barely grew during the first half of this year? Fortune caught up with Cote to hear his answers. Below is an edited transcript of our talk on debts, deficits and slowing spending amid an economic recovery. Why should American companies care about soaring debts and deficits? It’s not just American companies, American consumers should care also. Our debt problem will get resolved but it will happen in one of two ways. One is we can do it now – proactively, thoughtfully, with careful consideration. Or we can let this thing continue to build. And at some point the bond market forces you to do something. Now a lot of consumers and voters might say, ‘Well, the bond market – that’s Wall Street – that’s not going to affect me.’ However, if all of a sudden the people who hold our debt start getting nervous about the nation’s ability to pay, they’ll start demanding higher interest rates. Let’s say the rate on our long-term debt goes to 7%. That means home mortgages will more likely be at 10%, car loans at 13% and now you have a real problem that impacts Main Street. There’s a tendency amongst a lot of people to just think that with growth this problem will go away. I would say as a CEO what frightens me is that even with 10 years of assumed 4.6% nominal GDP growth the debt still grows from $9 trillion to $20 trillion. It grows to over 90% of GDP and that’s unconscionable. You’re among those who think the nation should “go big” as far as reducing the federal deficit. How big? A reduction of $6 or $7 trillion over 10 years would make the most sense. When I was on the Simpson-Bowles fiscal commission, I said the minimum I would vote for was $4 trillion. Even at that number, I thought there was a chance we would have to revisit the reductions in four or five years but at least we would be starting to move in the right direction and avoid a big problem for a number of years. These are substantial cuts. What policies should be included in this plan? First of all, people talk about the steep cuts and I think it’s important to put that in perspective. If you look at the Simpson-Bowles proposal it was about three-quarters spending, one quarter taxes. So the annual growth rate in spending would be reduced from 5% a year to 4% a year. Only in Washington can that small a change be considered drastic or draconian – pick a word. Everybody talks about how something is being totally destroyed when it’s not. I think the super committee should, at minimum, implement the recommendations from Simpson-Bowles. The proposals are extremely rational, but I would say the only failings were that the reductions weren’t big enough to really solve the problem. If this were a business problem you would be going for a number much bigger. Also, it didn’t really address entitlements – specifically, Medicare and Medicaid, which is where most of the spending problem is going to come from because the baby boomer generation is retiring. What do you think of President Obama’s $447 billion jobs plan – would you say it complicates the super-committee’s work? No. I’d say it’s independent of that. In terms of the plan to pay for it that will be a different discussion. I’m generally in favor of the payroll tax reduction, especially for employees just because I do worry about them all of a sudden having less income in their pockets. The rest of it I haven’t had as good a chance to understand or look at but that in particular is an important element. There are two things we’ve got to manage here. We don’t want to let a double dip occur just because people don’t have money in their pockets at a tough time but by the same token you need to be developing your plan for the long term. And that’s why I think coming up with more than $4 trillion makes a big difference here and whether it’s $4.4 trillion I don’t think is that big of a difference. So as far as reducing the deficit following the Simpson-Bowles recommendations, who are the winners and losers? When you reduce spending, especially along the lines of what we did on the Simpson-Bowles commission, everybody wins. Everybody sees the impact of lower spending but everybody also sees the benefit on the economy of that lower spending. And the losers? Nobody. What we did would affect everybody. We didn’t have any Medicare or Medicaid reductions in our plan, which I think was a mistake and issues we need to address. If we act now we can reduce these programs in a way so that current receipts are not affected and it’s only people who will retire in the future. They’ll know what the program is going to be. So it’s not like you have something and then have it taken away. Should higher earners pay more for these reductions? How much should someone –say, of your tax bracket – contribute? We tried to be a little smarter about it with the Simpson-Bowles proposal. If you take a look at our income tax code today total recipients from that are about $1.1 trillion. In reality, however, it is really more than that – about $2.2 trillion, but about $1.1 trillion are given away through various tax breaks including individual and corporate. The commission recommended eliminating all of those tax breaks – all $1.1 trillion, all 169 line items. Instead, we would reset the breaks to a lower rate and raise them a little bit in every bracket, especially the higher brackets. This would generate about $1 trillion over a 10-year period and that’s across companies and high-earning individuals. In our proposal, low earners actually benefit versus the current tax code. Wouldn’t slowing government spending put economic growth at risk, especially since GDP barely grew during the first half of this year? No. If we were to save $4 trillion this year then it would be a problem. But with the proposal we pulled together in Simpson-Bowles we didn’t even start the reductions until 2012 and most were more heavily skewed toward the out years. And as a result of that I think you get kind of two benefits. One, you ensure you don’t fall into recession because of the drag effect you get from reducing spending. By the same token you assure markets that you know there is a problem and there is a plan already in place to make sure nothing gets out of control over the next five or 10-year period.