Honeywell CEO Dave Cote Discusses the National Debt

Serving on a national panel gave Dave Cote, chairman and CEO of Honeywell, an inside look at the political stalemate that's hampering the nation's ability to address its fiscal problems, Cote told a Yale SOM audience on February 5. Cote shared his thoughts on how to reduce the national debt as part of the Yale SOM Leaders Forum.

In 2010 President Obama appointed Cote to the National Commission on Fiscal Responsibility and Reform, often called the Simpson-Bowles commission—a bipartisan panel charged with finding ways to get the country's budget deficit under control. He said that the experience offered him a glimpse into how partisan politics and fear of constituent reprisal have paralyzed legislators and kept them from making legislative compromises on budget issues that most privately agree are necessary.

The U.S. currently has a 73% debt-to-GDP ratio, Cote said. He predicted that the figure would rise to 86% by 2022. "It's tough to look at this and say there's not a problem ahead," Cote said. The nation's debt escalation is being driven by two factors: the escalating costs of Medicare and Medicaid as the baby boomers begin retiring and fallout from the 2008 financial crisis, he said.

The challenge for national legislators now, Cote said, is to rise above the politically polarized environment in Washington, D.C., and create an actionable plan. Cote said that a $4 trillion reduction in the deficit over 10 years would effectively address the issue. The question, he said, is whether the U.S. will proactively take corrective measures "like a great nation does," or allow the bond market to force the change, as was the case in Greece.

One solution would be that recommended by the commission, Cote said: a reduction in mandatory entitlement spending, which accounts for two-thirds of the federal budget and will account for three-quarters by 2022, with accompanying tax reforms including eliminating most deductions; lowering rates; establishing a single top rate for companies, individuals, and capital gains; and giving companies access to overseas cash.

Cote encouraged business leaders to help solve the problem by urging their elected representatives to compromise on debt issues. The process will be difficult. "None of this is easy," Cote said. "Nobody likes this. No congressman wants to say, 'I'm going to raise your taxes and decrease spending.'"