1600 Pennsylvania Avenue with David Shuster, March 9, 2009

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MARTIN: Thanks, David.

SHUSTER: You`re welcome. So, is the Obama administration doing enough to turn around the economy? Joining us now is Paul Krugman. He`s a professor of economics and international affairs at Princeton University`s Woodrow Wilson School. He`s also a professor at the London School of Economics, and op-ed columnist for "The New York Times." And he`s the winner of the 2008 Nobel Prize in Economics. Mr. Krugman, what do you make of the White House argument that was made today that health care reform and freeing up federal money for stem- cell research, that that is part of helping the economy?

PAUL KRUGMAN, PRINCETON PROFESSOR: Well, to the extent that you can get health care money out -- I mean, basically anything that puts money out there is going to help stimulate the economy. So that does help. But, you know, it`s clearly not the core of the economic policy. I have no problem with him talking about other things, but this is not an answer to the critique that the administration isn`t doing enough.

SHUSTER: You`ve said repeatedly that the stimulus needed to be bigger, and that your argument has essentially been underscored by the unemployment numbers that came out last week. Clearly, you`re hitting a nerve in the West Wing. Obama`s chief of staff, Rahm Emanuel, told "The New Yorker," "How many bills has he passed?" Referring to you. "Now, my view is that Krugman, as an economist, is not wrong, but in the art of the possible of the deal, he is wrong. He couldn`t get his legislation." "No disrespect to Paul Krugman, but has he figured out how to seat the Minnesota senator? Write a (EXPLETIVE) column on how to seat the (EXPLETIVE). I would be fascinated with that column. OK? Any time they want, they can have it. I give them my chair."


SHUSTER: Your reaction?

KRUGMAN: Well, you know, Rahm Emanuel is right that politics is hard. But there are things they can do. And particularly, there is a possibility -- it`s kind of an extreme option, but maybe necessary -- which is to -- there are ways to structure the process through budget reconciliation which makes it not subject to filibuster. There`s going to have to be a second round of the stimulus. It`s just clear now. This is -- you know, the bill promises 3.5 million jobs saved or created by the end of 2010, which I think is about right. It`s a plausible number. But we`ve already lost 4.5 million jobs. And in fact, if you count in the fact that we have got a growing population, we`re almost six million jobs short of where we ought to be now, and we`re losing 600,000 jobs a month, so this thing is not big enough.

SHUSTER: By so many counts, this economic debate really doesn`t get solved, I suppose, until we fix the underlying problem with the banks. You seem to be coming out in favor of bank nationalization. Explain what that is, why you support it. And how would it work?

KRUGMAN: Well, the way -- look, nationalization is not a -- in a way, it`s an unfortunate word, because it gives you the impression that we want the government running the banking system forever. What we`re really talking about is we`re talking about receivership. We`re saying if there are banks that are really not able to stand on their own, then they need to be -- they need to be, you know, propped up with government money. But you don`t do that to the benefit of the stockholders, you don`t do that to the benefit of the existing management. You take them over, you clean up the balance sheet, you pay off some of the debts, you re-privatize it. We do that all the time. The Federal Deposit Insurance Corporation seizes about two banks a week these days, basically doing exactly what I`ve described, but they`re small banks. They`re banks where the problem is that they have guaranteed deposits, and there`s a well-established procedure. Unfortunately, we`re probably in a situation where we`re going to have to do that with some big banks. It`s going to involve putting federal money in to make the banks whole again. It`s probably going to involve some guarantees of bank liabilities, the things banks owe, not just for the banks that are nationalized, but for some of the other banks so that you create a level playing field. It`s a huge thing to do. No question. But it`s very hard to see how you resolve this situation otherwise. And what we`re doing right now is they`re sort of -- they`re kind of vague. Well, the federal government won`t let a major institution fail, which people sort of believe but don`t quite believe. There`s a steady trickle or almost a gusher of money flowing into financial institutions without solving the problem. Something more decisive has to be done.

SHUSTER: I want to play for you what a couple of Republicans, key Republican senators, argued over the weekend about banks that are in trouble. Watch.


SEN. JOHN MCCAIN (R), ARIZONA: I don`t think they`ve made the tough decisions. Some of these banks have to fail.

SEN. RICHARD SHELBY (R), ALABAMA: Close them down, get them out of business. If they`re dead, they ought to be buried. We buried the small banks, we`ve got to bury some big ones. And it will send a strong message to the market.



KRUGMAN: Yes. We don`t bury small banks, we take them over, we nationalize them. We don`t -- you know, the bank branch at your corner doesn`t turn into a smoking ruin. It, in fact, continues to operate temporarily under government management, and then it`s re-privatized. So if what they mean by shutting them down is in fact putting them into government receivership, yes, that`s right. I don`t think they`ve got that clear in their minds.

SHUSTER: The other thing that seems a little bit unclear is how much some Republicans in the House seem to know about economics and basic economics. John Boehner suggested that there should be a freeze now on government spending. What`s your reaction to that?

KRUGMAN: Boy, you know, we`re right now in a situation which is known as the paradox of thrift. Everybody is trying to save more, which makes sense for an individual, but when everybody does it at the same time, it destroys the economy and makes everybody worse off. What Boehner is saying is, let`s get the government to act as well. Let`s make sure that the same problems that are afflicting the private sector now spread to the public sector, and let`s make this recession worse. It`s astonishing. It`s as if the last 80 years of economic thought have just passed them by.

SHUSTER: Paul Krugman, Nobel Prize-winning economist, also professor at Princeton. Mr. Krugman, thanks so much for coming on. We appreciate it.

KRUGMAN: Thanks a lot.

SHUSTER: Up next, a few southern Republican governors have been complaining about federal spending, so we followed the money. And the fact is, a lot of these southern states receive more money from the federal government than they pay in federal taxes. We will bring you the list. Plus, over the weekend, Karl Rove complained that the Obama administration is going to be increasing the federal debt. Bush`s brain lands again in "Hypocrisy Watch." And we are taking your questions and video suggestions during the hour over Twitter. Just go to twitter.com/shuster1600, or we have the link at shuster.msnbc.com.

Originally broadcast, 3.9.09