1600 Pennsylvania Avenue with David Gregory, December 2, 2008

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DAVID GREGORY, HOST: Tonight, the president-elect and Congress hear the same plea -- show me the money -- from governors and CEOs in desperate need of help. How will the new president respond when he get to 1600 PENNSYLVANIA AVENUE? Forty-nine days until the inauguration of President-elect Obama. Welcome to the program. I`m David Gregory. The headline tonight, "Hat in Hand." Several sizeable hats were extended by many prominent hands today, thrust before the president-elect and Congress with high hopes that relief is on the way for state governments and an automotive industry that is feeling the crush of a collapsing economy. The nation`s governors met with President-elect Obama in America`s birthplace, Philadelphia, to plead for a dedicated portion of his upcoming recovery plan, a plan which aides say might carry a price tag nearing $700 billion. For so many of them, help in their states can`t come soon enough. Forty-one states already looking at budget shortfalls this year and next. Obama challenged the old notion that beggars cannot be choosers, vowing to do more than consider their requests as he formulates his plan. He said he plans to rely on them for help in actually crafting it.


SEN. BARACK OBAMA (D-IL), PRESIDENT-ELECT: But the partnership we begin here cannot and will not end here. As president, I`m not simply asking the nation`s governors to help implement our economic plan, I`m going to be interested in you helping to draft and shape that economic plan. My attitude is that if we`re listening to the governors, then the money that we spend is going to be well spent.


GREGORY: In the spirit of cooperation, the president-elect brought a specific message to the Republican governors in the group -- there is "... a time for campaigning and a time for governing," saying he offered his hand of friendship. He asked them to do their part in building a relationship that will help put the country on a path for long-term recovery. Meanwhile, Detroit`s big three automotive industry CEOs headed back to Capitol Hill today, not via private plane this time. And they`re there to issue a revamped request for an industry-wide bailout. This came on the same day that the November sales report shows sharp plunges for an already suffering sector. Light vehicle sales at GM and Chrysler plunged more than 40 percent in November, as Ford Motor Company sales dropped over 30 percent. Joining me now to weigh in on all of this is Paul Krugman, "New York Times" columnist and author of the "Return of Depression Economics and the Crisis of 2008," and this year`s winner of the Nobel Prize in economics. Also with us, Steven Pearlstein, Pulitzer Prize-winning business columnist at "The Washington Post." Everybody`s got a prize. I don`t have a prize. Anyway, welcome to both of you. Paul, let me start with you. Such serious matters. You`ve got the governors hat in hand to the president-elect and the big three automotive companies. Do we keep redefining the full extent of the need in this country in the middle of this economy?

PAUL KRUGMAN, COLUMNIST, "NEW YORK TIMES": Well, I think we do because not a week goes by without numbers that were worse than you expected. I mean, this looks like an economy in free fall. It really -- you know, the number have been just terrible, the anecdotal stuff is just terrible. This is -- whatever you thought was big enough as a rescue last week has got to be bigger given what`s happened this week. And that`s been true week after week. So, no, this -- we have not seen the full scope of this, even now.

GREGORY: Steve, how do we understand this? We`ve had this conversation in weeks past on this program. As Americans struggle to understand what role the government is playing, what good it is doing in trying to manage this? And yet, the need becomes greater, the shortfalls are greater, the distress seems more pronounced, almost on a daily basis, despite what you and others have said, which is it could be a lot worse, there`s a lot that the government has accomplished.

STEVEN PEARLSTEIN, "THE WASHINGTON POST": Well, we don`t exactly know because we don`t know the counterfactual of how bad it would have been if we had done nothing. But it seems to me the government has two roles here. One is to act as a lender of last resort. And that`s not just the Federal Reserve. The government can borrow money now for 10 years at, what, 2.6 percent, and lend it out to people at even more than that. And since a lot of other lenders, whether they be banks or bondholders, are unwilling to do lending. It`s really the government`s role at this point to step in and say, OK, if no one else will take those risks, people are willing to lend to us, the government, and we can turn around and lend to somebody else at a higher interest rate, maybe make a little money, and keep finance going. So that`s one important thing that the government is doing.


PEARLSTEIN: And even when we talk about the automakers, they`re asking for loans. And there`s a lot of people who are asking for loans, rather than just outright spending. Then, of course, as Paul points out, the government has a good role to play in terms of just stimulating aggregate demand for goods and services when so many people are cutting back and so many governments are being forced to cut back on their spending.

GREGORY: Here`s the president-elect talking about money today. Listen to this.


OBAMA: We are not as a nation going to be able to just keep on printing money. So at some point, we`re also going to have to make some long-term decisions in terms of fiscal responsibility. And not all of those choices are going to be popular.


GREGORY: Paul, long-term fiscal responsibility, is that a political statement or is that a wise economic priority?

KRUGMAN: Well, it`s both. I mean, in the end, you know, the United States is a big, rich country. And we can borrow a lot of money in an emergency. And this is an emergency. But we can only do it because people believe that in the end, the U.S. government will bring its spending and its revenue in line. So there has to be long-term fiscal responsibility. There`s a little bit of -- everybody is quoting St. Augustine these days. You know, "Grant me chastity and continence, but not yet." So we have to be fiscally responsible, but not next year, thanks, because this is an emergency. But look, the numbers that are being thrown around are scary -- a trillion here, a trillion there. Soon you`re talking about real money even for the U.S. government. But we do need to do this spending now. Now is not the time to be penny-pinching. But five years out? Yes.

GREGORY: So Steven, when we talk about the prospect of a stimulus that has real effect, what level do you think that has to be? And then what happens as a result of all that increased spending on stimulus? What has to give?

PEARLSTEIN: Well, I only won a Pulitzer, not a Nobel. So I`m not going to give you a number. I can`t tell you what the right number would be. I would probably be a little more cautious than Paul in this respect - - we have come through a period, and the reason we are here, or one big reason we`re there, as I`ve said before on your show, is that we`ve been living beyond our means. Now we have to live beyond our means even more. But in doing so, and in framing the stimulus, I think we have to do things that don`t exacerbate that original problem. So what does that mean? I think it means not giving out a lot of tax rebates to people so that they can think that they don`t have to get their standard of living in line with their income. I think that`s a bad signal to send to people. But it would be a good use of that money now to invest in public goods and in public infrastructure, and in human capital with long-term -- good, long-term payoffs that we have been underinvesting in for the last 20 years. That, it seems to me, is a good use of that money. It has a stimulative effect, but it also has good long-term payoffs. And so you want to look for things that have that sort of double bang to it and not try to reinflate the bubble. hat`s what I think you have to try to avoid doing right now.

GREGORY: How do you do that? How do you avoid that point?

PEARLSTEIN: Well, you can invest in infrastructure, but what you don`t want to do is be doing things, for example, to try to put a floor under house prices.


PEARLSTEIN: You don`t necessarily want to be giving people tax breaks so they go out and they say, OK, well, now I have a tax break. I can continue to go on vacations and go out to dinner that I can`t afford to do.


PEARLSTEIN: You don`t want to send those signals. And so you don`t want to give breaks, for example, for college tuitions now so that those breaks wind up being captured by colleges that have been raising their tuitions too much over the years.

GREGORY: To this point, Paul, this is Governor Mark Sanford in the course of the meeting today from South Carolina, taking on this idea of the efficacy of a stimulus package. Listen to him.


GOV. MARK SANFORD (R), SOUTH CAROLINA: We`ve been told for a long number of months that this stimulus, that stimulus, this stimulus, that stimulus would opportunity the economy around, and it hasn`t. The ultimate stimulus package for the United States of America is the entrepreneur with a dream working on the project of tomorrow. The ultimate stimulus package is, again, that market-based economy, rather than a political economy wherein people come as simple plaintiffs to Washington, D.C., for yet more money.


GREGORY: Paul, reaction to that?

KRUGMAN: You know, that`s catastrophic. If that become the way the decisions are made, that`s real know-nothing economics. That`s just saying, oh, you know, we`re going to -- the reason that this market-based -- total faith in the free market didn`t work is that we didn`t do it enough. We have a lot of experience here. We have the 1930s. We have Japan in the `90s. And we do know that government spending helps when you`re in a big problem -- when you`re in a deep slump of this kind. It`s, in fact, about the only thing we have to keep us from being in something that would look more like the Great Depression than we want to contemplate. This is a time that the private sector is pulling back. The private sector is pulling back because consumers are nervous, because the financial system is a mess. There`s a huge hole in the economy. Government has to fill it, or we`re going to look at double-digit unemployment.

GREGORY: Steven, can you explain -- I`m sorry. Go ahead.

PEARLSTEIN: This is not one of those problems that entrepreneurship is going to solve. We have a great entrepreneur economy, but it`s broken right now, and it will be broken for a while.

KRUGMAN: Yes, exactly.

GREGORY: Steven, can I have you try to explain this notion of an economy that is rebalancing, rebalancing to reality? What does that mean to people, to workers, to businesses, to major financial institutions, when that -- I mean, deleveraging is one concept that we`ve been seeing that`s been going on for several months in the financial industry, but an economy that is finding a new set of balance, if I`m using the right kind of vocabulary? Can you explain how that`s happening?

PEARLSTEIN: Well, it`s happening because households are not being able to borrow money as easily and as cheaply as they used to, to maintain a standard of living that was beyond what their income was. And they thought they could do that because of their assets, their house or their stocks were worth a lot more. But it turns out that they`re not. So how it is that we make this -- you know, this is an adjustment that we have to make over the longer term, over the medium term. In the short term, we may need to do things that we don`t really want to do. That is, borrow even yet more money in order to prevent the whole thing from collapsing.

KRUGMAN: But David, could I just say that this is...

GREGORY: Yes. Go ahead, Paul.

KRUGMAN: We really don`t want to fall into this belief that we`re all being punished for our sins. There were sins in the financial sector, but I think Steve agrees with me. There were thing that were wrong, but this doesn`t mean that we have to all be unemployed, that we have to...


KRUGMAN: You know, consumers didn`t behave that badly. Yes, they need to save more, but mainly, we have a screwed up financial system. Fixing it is going to take time, and we want to not have a depression while we`re fixing it.

PEARLSTEIN: You know, one of the things...

GREGORY: But I understand, but can I just ask this question as a follow-up? Which is, that may be true that this is sort of sector-based, but you see companies that are healthy companies, tat are well-capitalized companies, that are falling prey to either a seizing up of lending which doesn`t allow them to meet their overhead, or just irrational fear in the marketplace.

KRUGMAN: Yes. That`s what happens when the economy is a mess, because, you know, one collapse of your banking system can ruin your whole day. I mean, that`s what happened in the 1930s, and that`s what happening, in effect, now. But this time we know what happened in the 1930s, so we have to take really strong measures to make sure it doesn`t get that bad again.

GREGORY: All right. I`m going to have to leave it there. Steve Pearlstein, Paul Krugman, thank you both for being with me tonight. This is a conversation that will continue. Thanks to you both. Coming next, foreign policy challenges from Iraq to Iran, to India to Pakistan. Where does this new administration start? How does it assess its priorities? And what would success look like for Secretary of State Hillary Clinton? When 1600 PENNSYLVANIA AVENUE returns right after this.

Originally broadcast, 12.2.08