SYNOPSIS: Paul discusses our never-ending recession, outsourcing, poor Greg Mankiw, the radical course on which Bush is taking our country, and the U.S. fiscal outlook. I'm not sure why, but this transcript reads very poorly for some reason. Maybe the transcribing was outsourced. Just kidding.

HAYS: OK, a lot more coming up on THE FLIPSIDE. We'll update you on what's being done to regulate the mutual fund industry and pinpoint abuses. Mary Snow will have that report. Plus, how can you teach your kids about money? How about trying a game in today's "Smart Assets." Valerie looks at games that make learning about money fun. And the statue of Jesus' crucifixion is causing quite a stir in Scottsdale, Arizona. Two officials say it is an obstruction. But the sculptures creator doesn't want it touched. Have a question or comment about any of this? You are welcome; we're looking forward to your calls. And we know you won't be able to resist, 1- 800-304-3638, THEFLIPSIDE@cnn.com is the e-mail address. And when it comes to the state of the economy our next guest field the Bush administration solution is actually part of the problem. He is Paul Krugman, columnist of the "New York Times" and the author of "The Great Unraveling." Losing our way in the new century. Paul, great to have you on THE FLIPSIDE.

PAUL KRUGMAN, COLUMNIST, "THE NEW YORK TIMES": Great to be on.

HAYS: Well let's start with one of the -- you know we did primaries, another set yesterday John Kerry, clearly the front runner and one of the biggest issues. We talk about this a lot, I know you too, is jobs. In your opinion, what is going on with the labor market? We have strong home construction, manufacturing activity picking up, GDP looks good, consumers are still spending, and businesses are buying computers. No jobs, why?

KRUGMAN: Well, the short answer is nobody really knows. But there are bit and pieces. The economic growth is strong but not that strong. We had one quarter, the famous 8 percent quarter. But now it's around 4 percent, which is not much faster than those who have long run growth rated economy. Not enough to take up much economic slack. It's still kind of a mystery why we aren't at least getting some significant job growth from that. And then we talk about productivity being unusually high. Out sourcing the official numbers at least don't show that could a major part of the problem but some of us suspect there's something wrong with those numbers. It is kind of mix of things but what we all talk about is, gee, we have all of these policies that were supposed to create lots of jobs. Where is the payoff?

MORRIS: So what would you describe then as the real keys to making a recovery, job filled rather than jobless?

KRUGMAN: Well, what you need is, I mean, this is a demand problem, although consumers are spending, although businesses are spending more than they were, they're not spending enough. I mean the proof in the pudding is in eating. Whatever we've done to increase demand has not been enough. And the things that we need to do are to have a lot more spending. It's -- the government spending is responsible for all of the tiny job growth last month but it's n enough. Private demand, well, I guess, you know, we've had all these tax cuts but they seem to have gone to the wrong people, not to the people who are spending the money. So it's the usual -- I think any economist would say what we need is the usual remedies. Why aren't we doing them in.

WILLIS: You know Paul, I get so tired of people saying it's up to the consumers to spend money to keep the economy going. And naturally, you know, it is a lot of consumer spending. It does so much work for the economy, but let's talk about business spending here for a minute. You know, we've talked about out outsourcing a lot on this show. I know it's an important topic for you. What's going on here? I think it's mystifying some people. How many jobs are actually going overseas and is this a trend that can be stopped in any way?

KRUGMAN: It's not a trend that can be stopped. Let me do this backwards. Let's put it this way, we could stop it but the consequences could be catastrophic. They would be catastrophic for the U.S. economy; it would be bad for the U.S. economy. Risks to the economy, we can handle it but it would be bad if we do, in fact, get some benefits in efficiency. It would be catastrophic for the world economy if the United States stopped being part of the world trading system. So you can't stop it. Now, can you try to, you know, slow it up a little bit, at least give workers a little chance to respond, give more adjustment to assistance to workers? You can do all that, but it's not going to be a big part of the solution. We don't -- what a lot of us hope is that this is going to be like 2004 is going to be like 1992, when we had a jobless recovery, although compared with this one, that jobless recovery looked like a hiring boom.

WILLIS: Right.

KRUGMAN: And when we had a lot of complaints about jobs lost to Japan. Which had some validity but the combination of a strong -- finally strong economic recovery in the United States and a little bit of, you know, a weaker dollar and a few other things, basically made the issue fad back into something that was manageable. And that's what we all hope. But I don't think that a politician these days can reasonably do anything except say I want to do something to help and try to steer that very narrow line between not caring and being an out- right protectionist.

HAYS: I like to just to ask our viewers real quickly that you're welcome to call, 1-800-304-3638. And obviously Paul can talk on a wide range of topics, jobs, free trade, you name it. He's the man for your questions or comments. There's the number on the screen.

KRUGMAN: You can call me about home redecorating.

HAYS: Home and decorating, good. OK.

MORRIS: Paul it's almost an understatement for me to say this, but I'll say it to try and put it a framework. The whole issue of outsourcing is so hugely emotional. And understandable with the number of people who have been unemployed and for the length of time that people have been unemployed. Are there any business imperatives with regard to out sourcing that you see as beneficial to the United States?

KRUGMAN: Well yes, look, if we had a generally good economy, if we were generating jobs, if we were you know, creating 300,000 jobs a month, which is really what we should be doing at this stage of the business cycle, then you can say, look, out sourcing by focusing on what we do best. And shifting the things that can be done abroad, then we get faster growth, and then we get lower consumer prices. All of which is still no comfort at all to the guy whose job has just been outsourced. And these days that means white collar highly trained workers, in some cases as well as the traditional blue-collar victims, but still it would be a lot easier. People like me have been basically free traders all our lives are preaching the gospel here is not good enough. As long as the economy looks the way it does, then you can't just say free trade, free trade. You've got do have a list of solutions to offer.

HAYS: Paul, you just said -- I want to ask you about something very specific because I think it really got a lot of people's motors running. As your columns often do. You just said by now the economy should be creating about 300,000 jobs a month. That is what a lot of economist say, a lot of Wall Street economists are predicting that we will make it to 200,000 jobs a month. Your column yesterday was very critical of the Bush administration for having these forecasts that haven't come true. And I just have to ask you, Gregory Mankiw is the head of the CEA, he is responsible for that forecast. In that column your basically almost accuse them of out right lying on purpose to deceive the public. Is that column a superbly or do you really think someone like Greg Mankiw sits down and decides to deceive us purposely?

KRUGMAN: I don't know what Greg does. You know, the economist.

HAYS: Well, you know Greg, right? I mean you are colleagues.

KRUGMAN: We've known each other all our lives. I don't know what's going on. I mean I do know that his role has been demoted in a major way. The first thing that happened when they hired this (INAUDIBLE) economist to chair the Council of Economic Advisors, was they moved it out of the White House and over to a rented space upstairs from the Starbucks on G Street, or something like that. But the -- I mean, those forecasts, let me say, that's a troika. Technical, the forecast that you see in the (INAUDIBLE) president is not Greg Mankiw alone. It's actually negotiated between also Management and Budget, Treasury Department and the Council. And I would actually suggest -- my guess is it's the other two parties that sort of bullied him into it. The number that was in there, the projected average employment for 2004, funny thing about number, it's just slightly above the job total when Bush took office. And everyone I know who looked at it says, you know, they must have just said we cannot, cannot project the number that's lower than when the president took office. And that's -- we don't know that. I don't know.

HAYS: You would agree there is some thing odd right now in the labor market that in other, ten years ago, 20 years ago, maybe even five years ago with other conditions like this we probably would be seeing more jobs by now.

KRUGMAN: Yes. And actually let me say I think that the labor market is worse even than we have an unemployment rate but that's every other indicator is looking much worse. If you looked at even the, various services, they all suggest if you look at the household service, which is better, it is still, everything else about it suggests we should have an unemployment rate of 7.5 percent. If you look at the payroll data it suggest we should have an unemployment rate of around 8 percent. So this is really a terrible labor market. And it's a mixture; I mean economic growth has not been all that strong. I mean it has been again 1/8 percent, a quarter, but it hasn't been all that strong. It's not a roaring recovery. It's not the Reagan recovery. But beyond that, yes, there's funny stuff. And we do, you know there's a puzzle. I would say if I knew the economic growth numbers and didn't know the employment numbers, I would have expected us to have a million, maybe 2 million more jobs than we now have.

HAYS: OK, well don't worry. We're going to -- Paul's going to sit tight. We're going to sit tight; we don't get Paul Krugman on the show very often so we're making him stick around longer. And when we return we're going to keep talking about the economy and many other aspects. Stay with us.

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HAYS: We're back with "New York Times" columnist Paul Krugman. Of course, we want you to join in on the discussion. I think we have someone waiting.

MORRIS: We do, Ron from Missouri. Thank you for calling; what's your question?

CALLER: Hi, Paul. I am unemployed. And I was in the high-tech sector. So I feel what we're going through and the outsourcing I disagree with, but I understand it. And ever since being employed back under Clinton, where I was making almost $80,000 a year, I'm now totally unemployed now with no income. And I see that as huge problem for our tax base. But more importantly I see a government that is kind of out of balance that when we have spending that doesn't match the government income, but that really hurts confidence. And spending dies during that period because not only do businesses see that as a negative thing but so do consumers. I looked back for empirical proof and I see during the Clinton years that we had a tax increase that actually started to balance the budget. We found economic flourish. And I'd like to know why this is not played up or more because I believe that it's a significant factor.

KRUGMAN: Well, let me say a word. There is most economists, me included, would say that running a budget deficit during a -- when the economy is in trouble is not a bad thing, as long as you have a credible plan to climb out of it. You know that a budget deficit for two years, three years even, as part of a -- you know, as part of a stimulus program, as long as it's definitely temporary, as long as it's definitely tilted towards employment. Now, the fact that it isn't is probably weighing on confidence, weighing on expectations. The fact that people are serious looking at this and seeing deficits, enormous deficits for the next ten years and then they get worse because the baby boomers start getting assistance. That probably weighs on the economy. The -- so, I mean, I wouldn't say that any -- you know, that the administration should be trying to eliminate the deficit this year. That would probably be a big mistake. But it should be saying, if we're running deficits we should know why we're running deficits and then we should have a plan to make them temporary. And that is not the way it has been done. This has all been let's cut taxes permanently for upper brackets and for people who get their income from capital and not from working and never mind the future and then let's sell it as an economic stimulus job creation program. And that's the problem.

WILLIS: We got question about that, but let's go to the caller first. Garrett in Georgia. Go right ahead.

CALLER: Yes. I would like to know what is the projected long-term negative spin-off from outsourcing. Example, a person making $60,000 -- say $7,000 per month, the person goes out and purchases goods and services which are provided by others. This all results in the collection of taxes, the furthering of employment, et cetera, et cetera. Now if we therefore outsource jobs, we eliminate one job eliminates maybe four impact (INAUDIBLE) jobs. How can we justify that outsourcing of our tax base, not the total tax base, but the difference between the -- that is outsourced and --

KRUGMAN: Well I think the -- you know, the answer is that all the arguments that are pro international trade, let's just not say outsourcing. All the arguments the are pro free trade start from saying, well, let's assume that we have enough spending in the economy so that we have full employment. So that the actual limit on employment is not -- that there isn't enough demand but it's that Alan Greenspan is afraid of inflation and so he raises interest rates if the economy is too strong. Which is the way it was during the most '90s. In that situation, that's not the issue. The question is if the jobs at take the place of the outsourced jobs are higher paying, or higher valued ad or what ever, then we're in great shape. Under -- right now, with the depressed economy and it's very hard to answer that question. Right now, you take a job, you out outsource it, that means that it's not replaced by some other job it is just gone. There are secondary impacts. This is all, you know, again, unless we can get the domestic economy moving, then the outsourcing is not a plus, except the only thing you can say is that, you know if we try to stop it, this is a zero some game. If we say we're not going to import because it cost us jobs, then other countries will say well we're not going to import from you because it costs us jobs and you're going to end up with the whole world cracking down, which is what happened during the 1930s. So we don't want to go there. But again domestic stimulus, job creation programs are the only answer to get out of these impossible sets of choices.

MORRIS: So do you feel that we need to do a lot more in the training area because this has been a point of contention? We have people on who suggest that if you are lower-paying jobs you can be retrained for something else. But there are a huge number of people who are so highly trained and skilled that to train them is almost redundant.

KRUGMAN: Training is a piece of the problem. Mostly it's a piece of the answer, but it's not the core of it. I mean I don't think you can say, well, if only we had educational retraining. If we had -- what would I do now? I would say, look let's rethink the whole way we're running this budget deficit. Not so much to eliminate it, which we don't want to do. But think about how we're running it. How about how we have instead of the kinds of tax cuts we've had, how about instead we have tax cuts for lower and middle-income people who are going to spend the money. How about we have aid to staple the local governments, how about we have government spending on things we need. There's a huge backlog of Homeland Security stuff that just hasn't been funded. How about we do all of that? The way I like to think of it is we've got a $500 billion budget deficit. About $270 billion of that can be attributed directly to the tax cuts that we've had. $500 billion is roughly the salaries of 10 million average workers. Even the tax cuts alone are the salaries of 5.5 million average workers. If we were actually spending that money employing people, then we have a lot of jobs. And then you could say to somebody whose job has been outsourced, well, OK there are other jobs. Still, probably people who lose their jobs to imports or people who lose their jobs to anything, where are they going to get a job that pays as well on the next one? So they are still suffering but it's an easier case to make. It's not as bad.

HAYS: OK, viewers, sit tight if you're on the line because we are going to come back and answer some more of your questions and some of ours perhaps with economist Paul Krugman with THE FLIPSIDE. Coming right back.

(COMMERCIAL BREAK)

HAYS: OK, we're back with economist and "New York Times" columnist Paul Krugman. Got a caller on the line. We're going to get right to our caller.

WILLIS: Ostis in New York, go right ahead.

CALLER: Yes, good morning Mr. Krugman. My question is about the dollar on a weakness against starting against the euro, 11-year low. What is the economic logic if any of the dollar being so low and what do you see in the medium to long term in terms of it against starting the euro.

KRUGMAN: Well, we're running a huge, huge trade deficit which in and of itself is telling us that U.S. firms are not really competitive, at least at the level that the dollar we had until recently. So it sort of has to fall. And the only thing that supports it, that has supported it in the past is huge inflows of foreign capital. Daimler buying Chrysler, because they think it's such a great place to invest now they don't think it is such a great place to invest. And it makes since to for it to fall. For what's worth, the dollar is now against European currency is about where it was in the mid '90s. It's not unprecedented weak. It's actually still considerably stronger than it was against Asian currencies. So this is not -- I've done, you know, my back of the envelope and I think that my dollar may be about right against the euro and actually still has a ways down to go against most other currencies.

HAYS: OK.

WILLIS: Paul, I wanted to ask you question because you occupied this very interesting niche right now in terms of being a spokesman who is both an economist and also on the left. And in fact, there are Web sites out there where people are, you know debating you every day.

KRUGMAN: Attacking me.

WILLIS: What is that like?

KRUGMAN: Well, my life is very quiet. In fact, I just sit quiet being sent from New Jersey and teach classes and do my stuff. So it doesn't really, you know real life is not like what you see in the column. But its look, I would love to go back to the way I was five years ago. Writing about, you know, disasters in far away places and I would actually be happier if I could do something that was calmer. But you can't. I mean if I looked at the way things are in the United States right now, I'm scared to death of the direction we're taking. And I have been given, for the time being the use of this particular piece of journalist real estate that is the most important in the world. And I got to say what I think.

WILLIS: And, in fact, the introduction to your book, you describe the thing that's going on, that you just said, as America's radically right controlling the White House, Congress and parts of the judiciary.

KRUGMAN: Yes, when you say I'm on the left, that's an amazing thing. Not very long ago, at least in my memory, I was being attacked as being a dangerously free market, pro free trade guy.

WILLIS: And you haven't moved, is what your saying?

KRUGMAN: I haven't moved. I'm in the position formerly known as the center. Which makes me on the left of this debate right now, which is telling me, just how radical the direction in which these people are trying to steer the country.

HAYS: But Paul where are the Democrats going to take us if they win? Where is John Kerry going to take us, he's made some ramblings about trade. Particularly when you get back to jobs, John Kerry can't pass a law which forces people to hire. So what can the Democrats do? What promise do you see in John Kerry if he becomes president that will really right this ship that you think is so dangerously listing to the right?

KRUGMAN: Well, it let me say, first question right off is going to be, if it's John Kerry and Tom D'Mato (ph) runs Congress, it's going to be two years of political civil war. And the main virtue from my point of view would be at least all the bad stuff that wouldn't happen but there wouldn't be a lot of positive action. If there's a miracle and we have a Democratic Congress as well as White House, then it would be a lot of refocusing. It would be doing the textbook stuff about job creation, not the strained stuff that the administration has done. Would that be enough? No idea, the actual plans on the table are fairly modest. And, you know, we all look back at what happened in 1993, 1994, when the jobless recovery miraculously blossomed into a job-filled recovery and I would like to say that Bill Clinton did all of that. He helped a bit. I would like to hope that the same thing happens again.

MORRIS: We have another caller, Ron from Ohio. Thanks for your patience. Go ahead, please.

CALLER: Yes hello. I enjoy your show very much. I would like to just say this. So many things are made overseas the bigger percentage of what we buy in the stores. How in the world do they expect the economy to get better? And the other question was tax breaks should go to those people who create jobs. That's it.

MORRIS: That is an interesting point.

KRUGMAN: Well, all right. I mean the first thing is, look imports are a big thing. But they are not it's not everything. I mean the United States tends to produce things at the front of production chain. China tends to produce the things at the back of the production chain. So when you see something that is made in China a lot of it is not actually made in China it is only that they have assembled in China. Which is not to minimize it, but it is no aggregate. About the job, who creates jobs, gosh it is not. Do people who invest in stocks create jobs? Well.

HAYS: Companies, business owners, people who start businesses they hire people right?

KRUGMAN: Yes, but then if you - well, or consumers who buy things that enable the business to - you know, I just think this line that we've got to give tax cuts to people who create jobs, I think, is just off-base. And the fact of the matter is a lot of tax cuts have gone to people who, in no way, shape or form, create jobs. Actually, the big beneficiaries of the 2003 tax cut are people who clip coupons.

WILLIS: Retirees and seniors, right?

HAYS: Very interesting.

KRUGMAN: Rich retirees.

HAYS: OK.

KRUGMAN: You know, most of the tax cuts go to - or a large portion goes to seniors, which sounds good, except the real answer is most billionaires are elderly.

MORRIS: Another caller -- Jim in New York, thank you for calling.

CALLER: Yes. Mr. Krugman, I'm more or less in favor of outsourcing. I don't see how this country can really compete with the rest of the world. I mean, our labor force, compared to Japan and China, we don't - our educational system has failed us, and we just don't have the people to do the high-tech jobs, and is shows in the lack of engineers and mathematicians that we're producing. Instead of keeping the bar higher in our country, we've lowered it, and I don't see how we could possibly compete with these countries. Thank you.

KRUGMAN: Well, I think that's unfair to American high-skilled people. I mean we do have a shortage of engineers, and we do have a big educational problem. Although everyone I've talked to says that the real problem is at lower-level education. Our problem is not a lack of Ph.D.s. We've got the best Ph.D.s in the world. That's probably negative for economic growth, but at any rate, we've got really great people at the top end. What we don't have is good enough basic literacy, basic arithmetic skills, and that is a problem.

HAYS: Well, Paul Krugman, we have to leave it there. We thank you for joining us. It's been great having you on THE FLIPSIDE today. And as this election year progresses, we hope you will come back.

KRUGMAN: I will certainly try, New Jersey transit allowing.

HAYS: OK, thanks so much.

Originally broadcast, 3.10.04