1600 Pennsylvania Avenue with David Shuster, February 13, 2009

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DAVID SHUSTER, MSN ANCHOR: Hello, everybody, I`m David Shuster and welcome to "1600" and it`s the 25th day of the Obama administration. And this hour, Congress is headed toward the finish line on the President`s economic recovery plan. The U.S. Senate has begun what is known as the final passage, the vote will be completed this evening. Earlier today the $787 billion measure was approved in the House of Representatives.


NANCY PELOSI, (D) HOUSE SPEAKER: The conference report is adopted, without objection or motion to reconsider is laid upon the table.


SHUSTER: The vote in the House of Representatives was 246-183. And again, not a single Republican voted to support the bill. Seven Democrats joined the Republicans in opposition. The reason the process is going to drag on a bit in the U.S. Senate tonight is because of logistics. Democrats need 60 votes to approve the measure. So far our unofficial counting has 56 aye votes, that includes Republican Collin, Snow and Specter. The Senate is waiting for Ohio Democratic Senator Sherrod Brown. He is traveling back from Ohio where he attended his mother`s memorial service. So Majority Leader Harry Reid is essentially keeping the vote open. Once Brown gets back the measure will be formally approved and then it will be delivered to the White House for the President`s signature. Joining us now is Paul Krugman, a Nobel Prize winning economist, he`s also a New York Times columnist, a professor of economics at Princeton University Woodrow Wilson School. He is also the author of "The Return of Depression Economics and The Crisis of 2008." Mr. Krugman, it`s an honor to have you here, you`ve been arguing for months that what the plan Obama has been proposing is not big enough. What`s your reaction to what they`re getting through tonight?

PAUL KRUGMAN, NEW YORK TIMES COLUMNIST: Well, it`s still not big enough, it`s a lot better than nothing, but the odds are pretty good that they`re going to have to come back for more because the scale of the slump is so great that even $800 billion is not quite what the doctor ordered.

SHUSTER: And what do you imagine will be the economic reaction in the interim?

KRUGMAN: Well, you know, this is -- in all of the forecasts have basically got the stimulus in it built in and the money won`t be coming out all that fast. A lot will come on late this year and into next year, but there`s going to be a lot of negative economic stories. We`re just going to keep on getting lousy jobs reports. We`re going to keep on hearing about more problems and more trouble in the financial system. So it`s not going to be "happy days are here" again. It`s going to be well -- if we hadn`t passed the stimulus, then it would be all hell would have with a broken loose. But even with it, it`s going to be a very unpleasant few months.

SHUSTER: Here`s what the House Speaker Nancy Pelosi today said about what Congress and the President are doing. Watch.


PELOSI: The American people know, and historians are judging that this is one remarkable President. He did something faster than any other President ever has in our history and that is to pass this economic package in just a matter of weeks. And we salute him for his leadership.


SHUSTER: Mr. Krugman, what do you make of the President`s leadership in all of this?

KRUGMAN: You know, everything that Speaker Pelosi said is true. And yet, there had been a lot of talk about the possibility of actually having something like this bill passed even before inauguration so he could have signed it right away. There was a lot of talk from Obama aides that they were going to get lots of Republican votes behind this and we`ve seen how that turned out. So look, I mean, relative to what might have been this is really very good. Relative to what one might have hoped for, it`s not everything you might have hoped for.

SHUSTER: The Obama White House keeps pointing out that this is just one leg in the stool as they like to say. Here`s the President from today, talking about some of the other aspects of this economic crisis. Watch.


BARACK OBAMA, PRESIDENT OF THE UNITED STATES: To truly address this crisis, we will also need to address the crisis in our financial sector to get credit flowing again to families and businesses. And we need to confront the crisis in the housing sector, that`s been one of the sources of our economic challenges. I`ll be discussing that extensively soon.


SHUSTER: In fact we`ve learned that he`s going to have a speech next week which he`s going to talk about perhaps $50 billion for foreclosures. What do you make of that idea?

KRUGMAN: Well, it will help. You can mitigate, the fundamental fact of the matter is that we have an enormous housing bubble, prices got way out of line. Lots of people borrowed more than they could reasonably afford to pay and nothing you do is going to prevent there from being a lot of people unable to pay their mortgages, a lot of people losing their homes. But there`s probably a lot of -- a fair bit of unnecessary pain in there. There are places where a deal should be worked out to let somebody stay in their house and it`s -- from everything I hear, they`re working on a fairly sensible measure, which is, you know, mitigating.

SHUSTER: I wonder if you might take us through parts of this, despite what you have been saying in terms of this proposal is not big enough. And for our viewers here`s where the money goes, 38 percent of this package is aid, $299 billion; 38 percent for tax cuts, $299 billion; and 24 percent for spending $189 billion. And Mr. Krugman, let`s take for example the aid: $87 billion federal funding for Medicaid; $40.6 billion to help local school districts; $27 billion to extend jobless benefits; $17 billion to increase student aid. How does that help and where does it come short just in terms of the spending there?

KRUGMAN: Well, a lot of it is, first of all you`re helping people who are in distress, so Medicaid, unemployment benefits, those are people who not only are they suffering a lot and this is going to make them suffer a little bit less. But also this will help them maintain their spending so the demand and the economy stays up. It helps reduce the extent of the slump. The aid to Medicaid, aid to state and local government; that`s going to help because those are governments that are slashing spending. And again, that`s cutting services we need and also it`s depressing on the economy. So this averts some of that. All of this is kind of protection against some of the downturn. All of that stuff, basically what -- one of the ways we`d like to put it is the President of the United States has the option of doing something, state governors basically have to be Herbert Hoover because they have to trim down his budgets. So this is helping states governors not to be so much like Herbert Hoover and not raising taxes and cutting spending in the face of the slump. All of this is good, all of this is going to shave one and a half, maybe two points off the peak unemployment rate. But still it`s going to be high.

SHUSTER: The other of course big argument has been over the shape of the tax cuts. Republicans have been insisting that if fact there will be no more spending, that it`s just a tax cut. Here`s what the proposal does have: $116.2 billion for payroll tax credits; $69.8 billion for the AMT tax fix; nearly $7 billion in terms of tax credits and first time home buyers. What`s the good and the bad in this list?

KRUGMAN: Well, I`m not very fond of any of it. The main argument, economic argument for having even any substantial amount of tax cuts in here is that it`s hard to spend a lot of money fast. And tax cuts are a way of putting some additional money into the package. And the payroll tax cut was an Obama campaign promise. The rest, the AMT fix doesn`t belong in this bill. It probably had to be done but it`s not part of the stimulus. The thing is -- you know I can go into the economic arguments about why tax cuts are not effective. But you know and maybe the easiest thing is to say, look, George Bush passed $2 trillion worth of tax cuts. That didn`t work very well. How can the Republicans still cling to the faith that tax cuts are the answer to all our problems?

SHUSTER: Well, I think you`ve asked the question that a lot of us just simply don`t know the answer to. Thank you so much for coming in. We appreciate it, Paul Krugman, "New York Times" columnist and Nobel Prize winning economist, thank you so much.

KRUGMAN: Thanks a lot.

SHUSTER: And as we mentioned -- you`re welcome -- the economic recovery bill did not get a single Republican vote in the House. It`s not exactly the bipartisanship the White House and many Democrats were hoping for. Joining us now from our studio, is Democratic Congressman from Maryland, Chris Van Hollen. He`s also the Democratic Congressional Campaign Committee Chairman. The bipartisanship did not work. Who`s fault was it?

REP. CHRIS VAN HOLLEN (D-MD) D-CCC CHAIRMAN: It did not work. Despite the fact that the President reached out on numerous occasions the Republicans, they came up to Capitol Hill, he invited them down to the White House. The last time they came up to Capitol Hill, the head of the Republican Party is in the House sending out an email, before the President even arrived, instructing his Republican colleagues to vote no on the bill. I think that`s been symbolic of what we heard, my counterpart the Republican counterpart on the campaign committee side said that they had learned the tactics of the Taliban. I mean, he said that. So it`s pretty clear they made a very calculated decision to bank on failure. Which I think is a terrible message to send to the American people. Whether you`re a Republican, a Democrat or an Independent, you want this plan to succeed.

Originally broadcast, 2.13.09