SYNOPSIS:

Announcer: This is SPECIAL REPORT. Once again, Maria Bartiromo.

MARIA BARTIROMO, host: Welcome back. Lots more to come this half an hour, including ABC broadcaster Al Michaels is with us on going long and short. And just to be clear, he's talking football as well as stocks. But first, an economics professor from Princeton, not MIT, now turned journalist, who made a big splash with his stridently anti-Bush book, "The Great Unraveling: Losing Our Way in the New Century." Joining us once again, this time from Princeton, New Jersey, New York Times columnist Paul Krugman. Mr. Krugman, welcome back to the program. Good to have you with us.

Mr. PAUL KRUGMAN (New York Times Columnist): Glad to be on.

BARTIROMO: Let me start with a question about Howard Dean. You have said that if you had an endorsement, it would go to Howard Dean. He's one of...

Mr. KRUGMAN: No.

BARTIROMO: No?

Mr. KRUGMAN: I'm--I'm--I--I'm--I'm sure I didn't say that, no.

BARTIROMO: Well, you did say he is one of the ones who "gets it." That's a quote. You wrote...

Mr. KRUGMAN: That's what I said.

BARTIROMO: OK.

Mr. KRUGMAN: That's not the same thing. But, yeah, I--look, he--he's--he un--the--the good news about Howard Dean is he understands that, you know, we're--something very serious is happening. This is not politics as usual, but I think you could say that probably now about several of the other candidates as well.

BARTIROMO: Well, what exactly do they get?

Mr. KRUGMAN: Well, let's just talk--since we're going to be talking economics here, let's just talk about the budget. You know, we have a--this--today the--the Congressional Budget Office announced that they're--we're going to have a $477 billion budget deficit this year, that if you're going to take--if you take their real numbers--they're obliged to produce some numbers they don't even believe in themselves, but if you do the adjustments that they themselves pretty strongly indicate you need, it's going to stay above $400 billion for the foreseeable future and then it's going to explode next decade. You got to--you know, we--we cannot pay for the government programs that we depend on without rolling back at least a large part of those Bush tax cuts.

BARTIROMO: But--I mean, we've been talking about this and I--and I certainly ask this of all of the major economic thinkers who--who happen to be vocal Democrats: Do you think that the Bush tax cuts have not been a clear reason for the swift turnaround in the US economy over the last eight months?

Mr. KRUGMAN: Well, if you took--Economy.com did an estimate and they--they actually said that about 13 percent of the growth can be attributed to the tax cut. That's not a lot of return for a tax cut that big. It should have been very easy to have something that added a lot less to the deficit and still got that much stimulus. And the main thing, of course, is that these tax cuts don't go away when the economy recovers. And then when you start to ask what's going to happen over this next 10 years, with--with the government really starved with revenue--look, there was a number. It turns out that the government tax take, as a share of Gross Domestic Product, is now at its lowest level since 1950. We cannot afford the programs like Medicare that we've added since 1950 with--with the tax take this low. And that's basically the important thing.

BARTIROMO: Ke--let's talk about jobs, which, of course, is the other important thing, certainly in this election. 8.3 percent growth in the last quarter; wouldn't you agree that, with that kind of growth, you've got to see more job creation over the coming quarters?

Mr. KRUGMAN: Yeah. If somebody showed me the various numbers that we have and I didn't know, I would say one of these numbers is wrong. That GDP growth, job growth, they don't seem to go together. Unfortunately, they all seem to be solid numbers. So something is very weird here. I think, you know, we're just kind of puzzled. But the fact is that the--the job performance has been terrible, as--as one of your earlier guests said. It's--it's now almost a dead lock that Bush is going to be the first president since Herbert Hoover to finish a term with fewer jobs than when he started.

BARTIROMO: Moving on to the Democratic contenders, the three top candidates: Kerry, Dean, Clark. Differentiate for me their economic plans and, as an economist, what makes the most sense to you?

Mr. KRUGMAN: Well, actually, I'm having a hard time here. At--at one level they're all unrealistic, although not as unrealistic as Bush's plan. That is, they--they all don't really address the magnitude of the budget hole we're in. Given that, what I would say is Clark's is actually the most imaginative. What we've been seeing over the past--really, past 20-plus years is a steady loss of the progressivity of the tax system, a steady loss of the system where we--where we--you know, people with high incomes pay a higher share of their income in taxes. Clark's is a serious tax reform effort and attempt to restore some of that progressivity. Major points for imagination. Dean is the most tough-minded. He says, 'We couldn't afford any of that. Let's roll it all back. Let's crack down on--on corporate tax evasion and get lots of money.' The trouble, of course, is that it does--there were sweeteners in there for the middle class. It's a very small part of the total but they--it's a very politically explosive thing to roll them back, so you wonder whether he's being politically smart in proposing all of that. Kerry is the most cautious. He says, 'Let's roll back the upper-income parts of the tax cut, let's--let's actually increase the child tax credits.' That's--that's--you know, it--it's--it's reasonable and it will--it's certainly a step in the right direction. It's a smaller step than I know we're going to have to take eventually.

BARTIROMO: And real quick, how about Edwards? John Zogby earlier in the program saying that he is looking like a number three for sure.

Mr. KRUGMAN: Well, Edwards is actually talking. It's an interesting thing. People view Dean as the big radical, but he was actually a very moderate governor in Vermont. And Edwards, who is go--comes across as this nice guy, is actually a--talking a very strong populist line. If--if he ends up, you know, surging up to the top, people who liked Howard Dean may be surprised at what they see in Edwards.

BARTIROMO: All right. We'll leave it there. Good to have you with us, Mr. Krugman. Thanks.

Mr. KRUGMAN: Good to be on.

BARTIROMO: Economist and columnist Paul Krugman joining us tonight live in Princeton. When we come right back, another political ad featuring Hitler hit the airwaves today, this one from conservative Grassfire.org. Is last year's campaign-finance-reform legislation to blame? We'll get some answers from Moveon.org and the Club for Growth when we come right back.

Originally broadcast, 1.26.04