CBS News Town Hall With Erica Hill and Harry Smith

HILL: Hello and welcome to a special hour of "The Early Show." A town hall meeting with President Barack Obama. I'm Erica Hill along with CBS's Harry Smith.

SMITH: And we're at the Newseum in Washington, D.C. to talk with the President about the economy. As you know, Americans are still facing serious problems.

HILL: Unemployment now stands at nine percent. And it's expected to stay high for months or even years to come.

SMITH: Gas prices have hit an average of $4 a gallon nationwide. That's up nearly a dollar since the first of the year.

HILL: And as President Obama's overall approval rating went up in last week's CBS/New York Times poll, he received his lowest -- rating yet on his handling of the economy. 34 percent.

SMITH: So, today, we have invited some college students, residents of the D.C. area, people who have answered questions for previous CBS News polls, and also you at home to ask the President about the economic issues affecting your lives. It'll include questions sent to us online, as well.

HILL: So, without any further ado, why don't we get start -- started. Ladies and gentlemen, please welcome the President of the United States. [cheering and applause]

THE PRESIDENT: Well, wonderful to see both of you. And all of you. Thank you so much for having me.

HILL: Nice to have you hear with us.

THE PRESIDENT: You bet.

HILL: Welcome, thanks for coming in.

THE PRESIDENT: Thank you very much.

HILL: You know, for the past four years, Mr. President, it seems that we have been hearing whether it's on TV, at the office, around the kitchen table, things are tough. And there is some improvement. There's positive economic data coming through. Yet sometimes it can feel like for every two steps forward, it's one step back. There's definitely a psychological component to this recovery. How then do we change the mindset from "things are tough" to "things are turning around"?

THE PRESIDENT: Well -- there's no doubt that we're in a better place than we were when I first came into office. We had just lost four million jobs in the previous six months. The financial system was melting down. In the few months after I took office -- we lost another four million jobs. So, this was the worst recession since the Great Depression. And I think understandably, people still feel pretty bruised and battered from that recession.

Since that time, we've been able as a consequence of the actions that we've taken and most importantly the resilience of the American people, we've been able to turn that ship around. So, now the economy is growing again. Over the last -- year, 14 months, we've actually seen the private sector create two million new jobs. Over the last -- three months, we've seen three quarters of a million jobs created in the private sector. So, you're seeing -- improvement all across the country.

But you're absolutely right that people still aren't feeling it. Now, part of that is the fact that the unemployment rate is still high. And we've got a lot more work to do -- to get businesses to invest and to hire. But part of the problem is also that we had a lot of problems before this recession hit. And I think a lot of folks are still anxious about the fact that even if they have a job, even if they're working really hard that -- their wages haven't gone up, their incomes haven't gone up, but the costs of everything from gas to groceries to health care to a college education, those have all gone up.

And I think a lot of people just feel like -- the -- the American dream, the -- the core notion that if you work hard and you act responsibly that you can pass on a better life to your kids and your grandkids. A lot of folks aren't feeling that anymore. And so, that's why it's so important for us to focus not only on recovery from recession, but also dealing with some of those problems that existed before the recession so that middle class families are able to see their incomes go up, their savings go up, they can retire with dignity and respect, they can send their kids to college. They can meet -- the -- some of these rising costs. And -- and a lot of the work that we've tried to do from health care to energy policy -- all those things are designed to get at those structural problems that have been around for the last decade now.

SMITH: People aren't feeling it, though, that's the -- just to sort of reemphasize the question. So, you can read in the Wall Street Journal and the stock market is -- has -- has recovered -- really well. But at the same time, there is -- a lot of people have stopped looking for jobs. There's just -- jobs just aren't there.

THE PRESIDENT: Well, part of -- part of what's happened -- is that the recovery's uneven. So, certain sectors of the country are doing better than others. Manufacturing is actually doing really well, in part because the auto industry -- is getting back on its feet. And that has to do with decisions that we made early in my administration to make sure that we still had those big three auto companies here in America, making -- U.S. cars and innovating so that -- we could compete internationally.

But part of the problem is not just folks who don't have work, it's also folks who have work seeing their incomes flat line. And that is a decade long trend. That's part of the reason I ran for President was because too many folks were losing ground. Between 2000 -- and 2009, during that decade, the average income for American families actually went down. Even though, as you said, the stock market was booming, corporate profits were way up, CEO pay was --

SMITH: 27 percent in the last year.

THE PRESIDENT: That's exactly right. So -- so part of what's happened also is some structural changes in the economy. Where it used to be that there was broad-based shared prosperity, now if companies are doing really well -- they're not necessarily hiring back workers. They're just figuring out how to do more with fewer workers. That may increase profits, but it doesn't help folks who are looking for a job. And often times that look -- puts a lot of pressure on the people who are already on the job.

So, some of the changes that are taking place in the economy are ones that took a decade or two to get to. And it's gonna take us several years for us to get back to where we need to be. But the important thing, though, Harry is -- and -- and I'm sure -- as we get questions today, I want to emphasize. Is we're moving in the right direction. The fact that the economy is growing is a good thing. The fact that companies are making a profit is a good thing.

The fact that we're becoming more competitive is a good thing. But we've gotta stay with it. And that means improving our education system, improving our infrastructure, making sure that we've got an energy policy that actually makes sense so that -- you know, our economy is not subject to the whims of -- what happens over in the Middle East.

SMITH: And speaking of energy pro -- policy, we want to get to our first questioner. Peter Baca is here. Peter -- let's -- fire away.

PETER BACA: Good day, Mr. President. The American people have seen gas prices double and in some areas triple within the last year or so. This impacts every single American today, including the likes of retailers, grocers, and such. What changes can the American people expect to see and what actions, if any, are you willing to take to relieve this growing inflation? In other words, what measures can we anticipate?

THE PRESIDENT: Well, first of all, I think it's important to -- to know that -- although -- I don't -- pump gas myself these days, [laughs] the Secret Service doesn't let me -- [laughs] we pay attention every single day to what's happening with oil prices. Because you're absolutely right, this is something that affects everybody. You know, if you're some -- somebody who works -- has to drive 50 miles a day -- to get to your job. And you're not making that much to begin with. And you may not be able to trade in your old car for a new hybrid.

So, you're only getting 12 or 15 miles a gallon. This is taking a big chunk out of your budget. And you're right, it's also affecting businesses. Because nothing affects consumer sentiment, how people feel about the economy, more than gas prices, because they see it every single minute when they're driving, right? You're -- you're passing and you're -- seeing the -- the -- the -- the prices go up -- every time you go by a gas station.

So, this is something that we've really gotta -- get a handle on. Now -- some of this was inevitable, because the economy started growing again. When the economy -- was in deep recession, everybody was using less, because folks weren't producing as much, companies were not as active -- and so, worldwide demand for oil went down. And when the economy started growing again, worldwide -- demand for oil went back up.

What's also true is the disruptions in the Middle East. Particularly in Libya, ended up having some impact. Because people started worrying, "Well, even if there's still some supply now, what's gonna happen in the future." Those are -- things that we could not completely control. What we can control is number one -- are we producing as much as we can here in the United States? And in fact, we're producing more oil now than any time since 2003.

So, production is actually up. Even after what happened in the Gulf, we're still saying to oil companies, "You can drill, as long as you do it safely. We don't want to go through another oil spill like we had -- last summer. But -- we are gonna give you permits if you show us that you've got a good plan for containing it if something goes wrong." The second thing -- that we can do is we can make sure that speculation and -- and price gouging isn't taking place. And so -- my Attorney General's been assigned to make sure that nobody's taking advantage of the current oil situation. And as oil prices -- on the world markets go down, we want to make sure that's reflected -- in the pump. But frankly, the most important thing we can do is to have a long term energy policy. So, let me just give you one example.

SMITH: Quickly.

THE PRESIDENT: We increased [laughs] our fuel efficiency standards on cars -- for the first time in 30 years. We just did it administratively last year. That's gonna save us 1.8 billion barrels of oil. And it's gonna save the average consumer about $3,000 during the life of their car if and when you guys buy a new car, it's just gonna have better gas mileage. And by making our energy -- usage more fuel efficient, particularly in the transportation sector, that will bring demand down. And that will bring prices down.

But there's no single silver bullet. We're gonna have to do efficiency. We're gonna have to do alternative energy. We've gotta develop electric cars that can be cheaper. And those are all things that we've been investing in over the last two years, which is why it's gonna be important for us to continue -- making those investments -- in the years to come.

SMITH: And the anticipation is with the price of oil going down, the price of gas could be down significantly by the summer.

THE PRESIDENT: That's our hope.

SMITH: We need to take a break. Thank you for your question, we have a lot of more questions to come. With -- more of our town hall meeting with the President here on CBS. We'll be right back.

THE PRESIDENT: Thank you.

HILL: And welcome back to this special edition of "The Early Show." CBS News presents a town hall meeting on the economy with President Barack Obama, who of course joins us this morning. Thanks again for being with us. We do want to get straight to the questions, because this is about the American people asking you those questions. Karin Gallo is joining us in the audience -- with one of her questions.

AUDIENCE MEMBER: Hi, Mr. President.

HILL: Hi, Karin.

KARIN GALLO: About three years ago, just under three years ago, I took a job with the federal government, thinking it was a secure job. Recently I've been told I'm being laid off as of June 4th. And it is not an opportune time for me, I am seven months pregnant in a high-risk pregnancy, my first pregnancy. My husband and I are in the middle of building a house. We're not sure if we're gonna be completely approved. I'm not exactly in a position to waltz right in and -- and do great on interviews, based on my timing with the birth. And -- so, I'm stressed, I'm worried. I'm scared about what I -- what my future holds. I definitely need a job. And -- I just wonder what would you do, if you were me? [laughs]

THE PRESIDENT: Well, Karin -- first of all -- I think you'll do great on interviews, just based on -- the way you asked the question. And congratulations on --

KARIN GALLO: Thank you.

THE PRESIDENT: -- on the new one comin'.

KARIN GALLO: Thank you.

THE PRESIDENT: Where were you working?

KARIN GALLO: The National Zoo. And -- I would be non-essential employee number seven. [laughs]

THE PRESIDENT: Well -- look, I -- let me -- let me just first of all say that -- workers like you for the federal, state, and local governments are so important for our vital services. And in -- and it frustrates me sometimes when people talk about "government jobs" as if somehow those are worth less than private sector jobs. I -- I think there's nothin' more important than -- workin' on behalf of the American people. And --

KARIN GALLO: Well, I -- I thought that -- I'd be more important and secure.

THE PRESIDENT: I -- I agree with you. I think the challenge has been that -- in some of these negotiations to try to reduce the deficit I think the feeling -- particularly on the part of -- some folks -- on the other side of the aisle has been that we want to just cut and cut and cut. And that somehow is gonna create economic growth. Now, the truth of the matter is, our biggest problem when it comes to jobs right now is not in the private sector. We've been creating a lot of private sector jobs.

The reason the unemployment rate is still as high as it is, in part, is because there have been huge layoffs of government workers at the federal level, at the state level, at the local level. Teachers, police officers, firefighters, social workers -- they have really taken it -- in the chin over the last several months. And so, what we're trying to do is to see if we can stabilize the budget.

For awhile, for example -- people were a little frustrated with me when I said, "We needed to freeze federal pay." Now, we already freezed pay over in the White House, as my aides can testify, they haven't gotten a raise since they came in. But we imposed the federal freeze and some folks were upset. The reason we did that was so we don't have to cut as many workers -- as we try to get control of our debt and our deficit.

But -- my main message to you is that the work you've done -- at the National Zoo's important. Every child that you see who comes by and is amazed by those animals, you know, they're benefiting from your work. I don't want to sort of -- find out more details in front of everybody about what your status is. But -- we can have a conversation may -- maybe afterwards.

I do want to make a larger point to people, though, that folks like Karin provide vital services. And so, when we have discussions about how to cut our debt and our deficit in an intelligent way, we have to make sure that the -- we understand this is not just -- a matter of numbers, these are people --

SMITH: But in 20 --

THE PRESIDENT: -- behind these decisions.

SMITH: But in 20 seconds, assume the economy -- improved dramatically. Say in the next year or two.

THE PRESIDENT: Right.

SMITH: Would Karin get her job back?

THE PRESIDENT: Well, I would hope so. I mean --

[overtalk]

SMITH: But in reality?

[overtalk]

THE PRESIDENT: Because -- because part of my argument is that we're having to make some decisions about cuts to federal programs now, but also states and local governments are making these decisions, on programs that often times are doing a lot of good. I mean, these are good things. You know? So, everybody has a tendency to think that somehow government is all waste and if we just sort of got rid of all the waste -- well, that somehow we would solve our debt and our deficit.

In fact, most of the government services that people get are ones they really like. Social Security, Veterans Affairs, our military, our -- the help we give in terms of law enforcement, preventing terrorist attacks, making sure our food is safe, making sure that our national parks and -- are functioning. I mean, those are all things that all of us appreciate and care about. Well, that's what our government does. And so, these are not abstract questions. And -- and I think Karin -- makes it really clear that -- there are real consequences when we make these decisions.

KARIN GALLO: Yes.

SMITH: We've gotta take a break.

KARIN GALLO: Thank you.

SMITH: All right.

HILL: We are gonna take a quick break. When we come back, we'll be hearing -- more, Mr. President, from the folks in the audience. Also, for many of you at home who have submitted your questions online, stay with us for those.

HILL: Welcome back to this special hour of "The Early Show." A town hall meeting on the economy. With President Obama. And as we've been mentioning, we want to hear from as many Americans as possible. So CBS News Business and Economics Correspondent Rebecca Jarvis has been monitoring the questions you have sent into us online. Rebecca?

REBECCA JARVIS: Good morning, Mister President.

THE PRESIDENT: Hi, Rebecca.

REBECCA JARVIS: And not surprisingly, a number of the questions in this room today have focused on jobs. The same is true of the online community. Let me read you one from a viewer who comes from an e-mail. Her name is [audience member]. She's in Charlotte, North Carolina. And she asks, so many of the good paying jobs have been outsourced, leaving nothing but low wage jobs. How can employers feel good enough to hire again or increase wages with so much uncertainty about the economy?

THE PRESIDENT: Well, I think that -- a lot of employers are feeling more confident about the economy. As I said, the economy has now grown -- for a pretty good stretch of time. We're seeing -- terrific -- jobs numbers over the last three months, and we've seen sustained job growth in the private sector for over a year now.

And I think the key is to recognize that some of the jobs that left aren't going to be coming back, but we've got to be creating new industries and new jobs here in America. And I'll -- I'll give you one good example. When I took office, we had about two percent of the world's advance battery market.

Those are the batteries that go into these new electric cars and hybrid cars. In a couple years, we'll have 40 percent of that market, because what we did is we invested in small businesses, medium-sized businesses, and some large businesses, in Michigan, giving them research dollars so that they could start developing new technologies. The same is true on green energy.

Creating wind turbines, creating new -- types of solar panels that are more energy efficient. So what we've got to be doing is looking at what are the jobs that are going to be there 20 years from now, 30 years from now, whether it's in biotech, whether it's in clean energy -- whether it's in energy efficiency, and make sure that we're funneling basic research dollars there. Making sure that the infrastructure is in place, so that those companies can succeed. That's where a lot of these new jobs are going to be coming from.

REBECCA JARVIS: At the same time, though, that we've seen some job growth, there are still 13.7 million people in this country unemployed. Wages have stagnated for the last decade. And you mentioned stocks are up ten percent away from their all time highs. Companies are making records profits. They have $2 trillion of cash to spend. If this isn't the right circumstance for raising wages, and really going out and employing new people, what will be?

THE PRESIDENT: Well, I -- I guess that's my point when it comes to -- companies. When I talk to CEOs -- the issue here is not uncertainty. The issue is they've got to start placing their bets on America. It is time for companies to step up. When we're in the middle of a recession, our whole job was to make sure the -- the economy was still growing and we stabilized the financial system. And we did that. And American taxpayers contributed to that process of stabilizing the economy.

Companies have benefited from that, and they're making a lot of money. And now's the time for them to start betting on American workers and American products. And we've got some companies that are doing that. I -- I was up at Intel -- the microchip manufacturer up in Oregon -- and they've just built a new multibillion dollar plant. And they are hiring -- hundreds of new -- or American workers to work at this new plant. And there are a lot of companies who are doing the right thing. Making investments here.

And it turns out, in fact, that a lot of the advantages that -- other companies had in terms of low wages are -- are now offset because quality is better here in the United States. We have these most productive workers in the world, and we've got the best -- universities in the world. We -- we don't have the best infrastructure in the world unfortunately anymore. And we've got to improve on that.

That's part of the reason why I'm pushing to make sure that we are rebuilding our roads, and our bridges, our ports, our -- our airports. But we've got so many advantages here. But we do have to get companies to start saying to themselves, you know what, we're gonna make sure that we are putting back these profits to work here because if we're hiring people, those are our future customers, and we're going to be able to sell more products, and we're going to be able to do better in the long run.

REBECCA JARVIS: We want -- we do want to switch gears a little bit here now. When we talk about the economy, so much is focused on the housing market, which in many ways started this road that we're on. I know Nancy -- is joining us here in the audience. She has -- a housing specific question for us this morning.

LOGAN: Hi Mister President.

THE PRESIDENT: Hi [audience member].

LOGAN: I'm a college-educated single working mom in Fairfax County with an 11-year-old daughter. And I've been divorced for four years, and receive little to no child support. After my divorce, I worked with my mortgage company and was given a loan modification so I could afford to -- to pay my mortgage on one income. My loan modification ends in January of 2012, and although my credit is good, I can't refinance the house because I owe more than it's worth.

My new mortgage payment may increase up to $1,000 more a month. And my question to you, Mister President, is do you have any plans to help improve the housing market so hardworking Americans like myself don't lose their homes?

SMITH: One in four mortgages in the United States underwater right now.

THE PRESIDENT: This is probably the biggest headwind, along with gas -- high gas prices. This is the biggest headwind on the economy right now, is the housing market. Part of what happened was the -- the housing market got way overbuilt and a lot of people got way overextended -- because these subprime loans. And so there was a housing bubble that popped. And -- it's just now starting to recover.

And because prices have gone down, a lot of folks are what's called underwater. Where their mortgage is higher than -- the value of their home. So -- we've done a lot of work already on this. There have probably been about 3 and a half million people who've been able to get loan modifications as a consequence of some of the programs that we've done, and encouraging banks to negotiate.

Because our attitude is, you know what, you're going to be better off -- speaking to the banks. You're going to be better off is somebody's still paying on their mortgage than if they get foreclosed on and you end up not only having to go through all those legal processes, but you also end up -- sit -- selling the home at a fire sale price. And -- and some banks have been better than others on this. But we've got more work to do. So, we are trying to expand the loan modification program to reach more people. One of --

SMITH: But a lot of -- a lot of what you -- first introduced -- hasn't worked -- hasn't worked very well.

THE PRESIDENT: Well, it's not that it hasn't worked. The problem is, is that the need is so great. So it's like you have a huge pothole, and you only have so much gravel. And if you're talking about -- $5 trillion worth of home value, and a program that only has a few billion dollars, then there are a lot of people who are not going to be helped. And so what we're trying to do is to figure out how can we get the banks to do more. And -- you know, we're going to continue to work with Congress to see if we can propose more legislation to encourage longer loan modifications.

I'm not sure about your particular circumstance, Nancy, but if you've already gotten a loan modification -- I don't know why it would expire in 2012. It seems to me that -- it should be able to continue if you are making regular payments on it.

LOGAN: It was just for -- for three years, and they won't extend it.

THE PRESIDENT: Well --

LOGAN: As far as I know.

THE PRESIDENT: Well, and this is why --

LOGAN: Maybe you can make a call. [laughs]

THE PRESIDENT: This is why we're gonna --

LOGAN: You know, it worked for Karin, so.

THE PRESIDENT: This -- this is where we're going to be talking to the banks. And -- I mean, on a regular basis, our attitude to them is how do you benefit if the house goes into foreclosure. You know, if somebody's there, they're making regular payments. You know, stick with those -- those customers. And -- and remember -- we help the banks a lot. As everybody here knows. Now -- now -- I know -- this was probably the most unpopular thing that -- government has maybe ever done -- was helping banks who helped cause the crisis.

And the program -- the TARP program was in place when I was sworn in. We tried to manage it in an effective way. And the truth is, is that we have -- the taxpayers have gotten their money back from the banks. They've paid back the money. In fact, we'll end up making a little bit of a profit on it. But the point -- the -- the bigger point is, if we were there for you when you got into trouble, then you've got to be there for the American people when they're having -- a tough time. And that's why in addition to these short-term loan modifications, we want to see if we can get longer-term loan modifications. And in some cases, principle reduction, which will be good for the -- the person who owns the -- owns the home, but it'll also be good for the banks over the long term.

SMITH: Let's get another question right here. Anna Urman. Anna? Where are you? There you go.

URMAN: Hi Mister President. As you are well aware, small businesses make up about 40 percent of -- the GDP. And as a sector employee -- the majority of -- public sector -- private sector employees. What can your administration do to ensure that any new laws and regulations not only not hurt small businesses, but in fact help them grow and thrive?

THE PRESIDENT: Well -- it's a great question, and you're exactly right. Small business employs the majority of Americans. And -- is the area where we see the fastest job growth. So -- and -- and by the way, they were the ones who were probably hardest hit during the recession. So what we did was put in a whole bunch of emergency lending -- provisions, because small businesses were having the hardest time getting credit. And the SBA, the Small Business Administration went out, you know, real hard -- to these folks and said, how can we help you get some financing to keep your doors open and make payroll.

The second thing we did was we cut taxes on small businesses. And -- and I want everybody to -- to hear this because -- a lot of times -- the rumor is perpetrated that somehow we've been raising taxes. We cut taxes for small businesses 16 times. We cut taxes for the investments they make in new -- new equipment. We cut taxes for -- the costs of -- of health care premiums that they pay for their workers. We cut taxes -- for capital gains that they may -- obtain because -- they've started up a business.

So we have cut small business taxes significantly. The other thing we're trying to do is to help small businesses -- find new markets, including exports. Because a lot of small businesses have great products, but they sell locally. And so the Small Business Administration, working with the Commerce -- Department and others, are trying to get them to say, you know, maybe you can sell -- that terrific product you're making overseas. Maybe you can find a new market in -- in England or Korea. And so -- you know, giving them the -- the -- the support and the backup so that they can expand sales.

SMITH: But as a small business person, do you feel overregulated? Because that's the other theme that we've heard over the last two years.

URMAN: Yeah. Part of that is that. I'm taxed -- because -- as a small business owner, my business's income is my income. So I feel like I'm being taxed higher than somebody, you know, who earns a regular job -- with the same amount of -- annual

THE PRESIDENT: What -- what kind of business do you have.

URMAN: I -- I'm a researcher. I help companies -- figure out how to work with federal government.

THE PRESIDENT: [laughter] Well there you go. Well -- well I -- I tell you, the -- there are some legitimate complaints about -- regulation. A lot of it's overstated. But there's no doubt that let's say applying for -- a loan sometimes through the SBA, we found that the paperwork was way too complicated. A -- a lot of times, if you -- want an obvious -- everybody knows this example.

If you are filing your taxes, and you want to take advantage of one of these tax breaks -- if you end up having -- to hire some accountant and pay them thousands of dollars to get the tax break, it -- it takes away whatever savings you were going to have. So we've got to do more on simplification, reducing paperwork. There's a lot of work we can do on that front. And actually, in the next couple of weeks, we're going to be announcing having worked with the Chamber of Commerce, worked with the Business Roundtable, and other business organizations and small business organizations.

We're actually looking through the entire -- federal register, which is where they keep all the regulations, and we're going through 'em and seeing what are some of these old laws that don't make sense anymore. And -- and what are the regulations or -- paperwork burdens that we can eliminate while still making sure that -- we're getting the job done. So I -- hopefully, you'll see some improvement -- over the next couple years.

URMAN: Thank you.

REBECCA JARVIS: Our -- our next question is maybe somebody who can help you with that. He's a self-employed accountant.

THE PRESIDENT: Well there you go.

REBECCA JARVIS: So if you need a little help. [laughs] Bernard Miller has a question now for us.

BERNARD MILLER: How you doing, Mister President?

THE PRESIDENT: I'm good.

BERNARD MILLER: First, I'd like to thank you for the great job you did last weekend keeping America safe. [applause] And my question to you is you're proposed budget changes to Medicare, I'd like to know how they still would be able to keep the 45-year promise that's been made to the American public?

THE PRESIDENT: Well let me -- let me talk about the budget overall, and then talk about Medicare in particular. Because this is something that we're -- you're going to be hearing a lot about -- in the weeks and months to come. When I came into office, I had wrapped in a big bow waiting for me as -- as a -- present -- a $1 trillion deficit.

And part of the reason was is that for the last ten years, we cut taxes, but we didn't pay for those tax cuts. And we didn't have corresponding spending cuts. We started two wars, and then we started a new prescription drug plan that was very, very expensive. And all that created what's called a structural deficit. Just -- and all that means is more money was going out than was coming in. Then you had the recession, and that made things worse. Because, first of all, we had to help state and local governments -- with their budgets that were falling apart.

A lot more people were getting unemployment insurance, a lot more people were making demands -- on the system. And less tax revenue was going in. So that grew the deficit temporarily. All told now, we're looking at trillions of dollars of debt, and we've got to get that under control. And I don't care whether you're a Republican or Democrat, whatever your politics are, we can't keep on living beyond our means. And our government has to make sure that it -- is -- only spending what it's also taking in.

What we've done is we've proposed $4 trillion in deficit reduction -- over the next 12 years. And Republicans have also said that they think that $4 trillion -- over ten to 12 years is the right number. But we have very different ways of going about how to reduce the deficit. What we've said is let's look at all the spending we're doing, and making sure that we're doing it -- we're doing what we should be doing and stop doing things that aren't benefiting the American people.

And we think we can identify $2 trillion worth of cuts -- in spending, including defense spending -- which has grown very, very rapidly over the last decade. But also including some things that I care deeply about. Some programs that I think are good to have, but are not absolute necessities.

But that only gets you about half of the way there. So what I've also said is let's get a trillion dollars in revenue from those of us who can afford to pay a little bit more. Because I think the concept of shared sacrifice is something that most Americans believe in. Now the tax rates generally for individuals -- are the lowest that they've been since 1958. They're especially low for millionaires and billionaires. And for folks like me, you know, I can afford to pay a little bit more.

And if we got a trillion dollars of revenue from high income -- Americans who've been blessed by this great country of ours, we would then also save a trillion dollars in interests costs, so we'd get to that $4 trillion. Now what the Republicans say is we're not going to ask any sacrifices from folks like me. In fact, I get a $200,000 tax cut. And in order to pay for that -- we're going to slash education by 25 percent.

We're going to cut transportation by 33 percent. We're going to cut investments in clean energy by 70 percent. And that doesn't, from my perspective -- make sense if we're concerned about how do we create jobs for the future. One last point with respect to Medicare, though. I'm sorry, Harry, but this is a big question. So.

In addition to the first ten years, we've still got to deal with the long-term problem which is our health care costs are skyrocketing. Both in the private sector and in -- government-run health care programs. And unless we control those costs, it's going to gobble more and more of our budget. Now the health care reform act that I passed last year started on the road of reducing health care costs, and in fact, is estimated that we'll save about a trillion dollars once we implement that plan fully. But we're going to have to do more. And that's where this issue of Medicare comes in.

What I've said is let's continue to try to improve the health care system, by, for example, reducing unnecessary tests. If you go into a doctor, and the doctor's testing you once, well if you then go to a specialist, he should just e-mail the test. He -- you shouldn't be charged to have another test at the specialist's office, right. Or Medicare shouldn't be charged for that. About 80 percent of the patients -- or -- or about 20 percent of the patients account for about 80 percent of the costs 'cause they have chronic illnesses.

How can we manage those chronic illnesses more effectively. So what we've proposed is let's continue to make the system smarter to reduce Medicare costs. What the Republican proposal is, is to basically just say we're only going to pay this much, we're going to create a voucher system for Medicare. Here's the amount of money that you get, and then if health care costs keep on going up, that's your problem. And it's estimated that that's going to cause an additional $6,000 for the average Medicare beneficiary. $6,000 per person.

And again, if -- if the choice is between me getting a $200,000 tax break, or 33 of you folks who eventually -- or your parents, or your grandparents -- having to pay $6,000 more for Medicare -- I know the choice that I'm going to be making. I'd rather make sure that I'm carrying some of that sacrifice so that our seniors have security -- over the long term.

SMITH: And in 20 seconds, what do you think your chances are of getting the Republicans to go along with the tax hike? [laughs]

THE PRESIDENT: Well, I -- I think what we're going to end up having to do probably -- is to set some targets, and say -- you know, those targets have to be hit if not automatically, some cuts and tax increases start taking place. And that will give incentive for us to negotiate -- and figure something out.

But this is going to be a topic not just over the next couple months. This is going to be a values question for the American people -- over the next several years. I know my answer. And -- I'm going to be interested in having a -- vigorous debate with the Republicans about this issue.

REBECCA JARVIS: We'll continue to follow it here.

SMITH: Thank you very much, Mister President. We're going to take a break, we'll be back in just a bit.

THE PRESIDENT: Thank you.

AUDIENCE MEMBER: Mister President, I have a great story for you about health care.

THE PRESIDENT: Go ahead.

AUDIENCE MEMBER: My wife was -- pregnant with my son. She had to be in the hospital with him -- for preterm labor for three weeks. And our doctor knowing that she needs to be there because our first child that was born was a high risk pregnancy as well. He just -- I just want you to be here for three weeks. Well, in order to keep her in the -- in the -- hospital administrators, they want to make sure that bed's making as much money as possible, he had to order tests for her that he pretty knew she didn't really need. He just ordered tests for her. So at the end of the day, you know, three weeks later really all he really wanted to do was just to keep her in the bed.

THE PRESIDENT: Just to keep her there, right.

AUDIENCE MEMBER: But in order to -- to keep her there, he had to order a bunch of different tests. But at the end of the day, I mean, our insurance company picked up a lot of that.

THE PRESIDENT: Yeah, but -- but indirectly you're paying for that.

AUDIENCE MEMBER: $40,000 -- $40,000 was from me.

THE PRESIDENT: Right.

AUDIENCE MEMBER: And, you know, thank God we had our equity line at the time unfrozen. But we had the equity line. That's what we -- had -- had to pay for that.

THE PRESIDENT: Right. Well and -- and that's a great example. Look, you know, we have more than enough. We spend more than enough on health care to cover everybody with good quality care. The problem is the system is so inefficient. You know, there's so many readmissions just because of -- of -- of infections that are preventable in hospitals. That we know how to prevent, but we just haven't put in place -- sort of -- clear rules and given incentives for hospitals to make themselves -- more efficient. And that's the kind of stuff that we're trying to get at.

But it doesn't happen overnight. It -- it requires changing systems -- that have been built up over years -- and changing incentives in terms of how folks are getting reimbursed on Medicare. So it -- the -- but that's -- what you don't want, is a situation where instead of making the system more efficient, the system's inefficient as ever except -- you have to foot more of the bill. And that's what's happening for more and more Americans.

SMITH: As you can hear, there's still a lot of pain in this country, and there's still a lot of people who are saying when is it going to start breaking my way. And Mister President, we just really appreciate you taking the time to -- spend some time with our audience and answer our audience and our online questions as well. We really do appreciate it.

THE PRESIDENT: Well -- Harry, look, I appreciate you guys hosting this. To the audience -- not only here life -- but who are watching -- just remember -- that we've gone through tougher times than this. We always come out on top. You know, Bernard was nice enough to -- to thank me for -- what we did -- a week ago. Obviously, that's 'cause of our men and women in uniform, as well as great intelligence work.

But it's an example of when America puts its mind to it, there's nothing we can't do. The same is true for the economy. If everybody's pulling together, Democrats, Republicans, business, labor. If everybody's focused on how are we investing in this future, how we're making sure the kids are getting the best education, how are we making sure that we're building good infrastructure, how are we getting our debt under control in the way that shares the burden. If we do those things, we are going to be as strong as ever and I'm confident we're going to be able to do that.

REBECCA JARVIS: Mister President, thanks for being with us today.

THE PRESIDENT: Thank you.

REBECCA JARVIS: Thanks to all of you who came in as well, and thanks to all the folks who submitted their questions online.

SMITH: And you can see more of -- the town hall meeting on the economy with President Obama Sunday morning on "Face the Nation." And to view the entire town hall meeting, all you have to do is -- go to youtube.com/CBS or cbsnews.com and be sure to log into cbsnews.com for a special edition of "Washington Unplugged" with reaction from our participants here today. And get -- how -- how well they felt like they got their questions answered.

And our most sincere thanks also to -- President Obama. All of our questioners, and our studio audience, and -- our host here today, the Knight Studio at the Museum here in Washington D.C.

HILL: Thanks for being with us. Have a great day.