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CHRISTINE ROMANS, CNNfn ANCHOR, STREET SWEEP: The Congressional Budget Office gave new ammunition today to opponents of the Bush tax cuts. The CBO said the wealthiest Americans are seeing their share of the federal tax burden decline, while middle class taxpayers are seeing their share rise. Americans pay $1.1 million a year or more, saw their share of federal taxes fall from 22.2 in 2001 to just over 20 percent this year. People making about $76,000 a year saw their tax burden jump by almost 1 percent. The Bush tax cuts are just one of a number of administration policies that Paul Krugman (ph) has opposed in his regular column for the "New York Times". Krugman's book, "The Great Unraveling" is now out in paperback. He joins us today from San Francisco. What's your read on what the CBO put out today about the Bush tax cuts, and what Democrats have been saying for a long time, that the Bush tax cuts favor the rich?

PAUL KRUGMAN, NEW YORK TIMES COLUMNIST: It really is a man bites dog story. It's been obvious; these are roughly the same numbers that independent think tanks have been producing for four years. But all along it's a tribute to the power of Republican spin that they've managed to create this air of doubt about what is actually totally obvious. These are tax cuts that are very very heavily tilted towards the very, very affluent. The CBO numbers are actually a little bit stronger than what some of the supposed liberal think tanks have been saying. They really do say what we've been saying all along. This is a tax cut that doesn't really do much for ordinary people.

ROMANS: President Bush has said, and his supporters have said for some time that it's important for this part of the economy to feel good, because these are small business owners who are hiring people. What do you say to that?

KRUGMAN: There are very few small business owners who are actually in the top 1 percent of the income distribution, which is where this is going. Remember, the top 1 percent is people with incomes of an average of more than a million dollars. Most small business owners do not have incomes of more than a million dollars. This is really not helping ordinary people directly, and if you look at the results on the economy, you would have to say, look, this is not -- trickle down isn't working either. So what is this? This is a policy that is very good if you happen to be very rich to start with.

ROMANS: Let's talk about the trade numbers today. The trade deficit with China, enormous, trade gap overall, $56 billion. We've heard all kinds of people saying the next president, whether it's president Bush or President John Kerry must address the current account deficit, and the trade deficit, and the budget deficit. All of this stuff rolled into one is long-term -- a big problem for the United States.

KRUGMAN: Yes it is. The United States gets a lot of the benefit of the doubt from markets, from financial markets, because it's America, because we're a first-world country. Because they will assume that we'll get our act together. If a developing country, Argentina had numbers like this. These are worse numbers on trade and budget than Argentina had before its crisis. The markets just said you're a Banana Republic, we don't trust you, wham. The United States has been getting the benefit of the doubt, but if the next occupant of the White House doesn't do something to bring this under control, we are going to start losing that benefit of the doubt. And we will be in big, big trouble.

ROMANS: Your book is called "The Great Unraveling". You say that something is happening here, and that the U.S. economy, the U.S. has been misled by this administration. Do you think John Kerry could do better?

KRUGMAN: It's hard to do worse. Let's put it that way. I think so. There's a big contrast between the proposals of the two of the candidates. Kerry's proposals, they actually add up. They give you details. You can see how the arithmetic works. Bush is still promising something for nothing. Two minus one equals four. I would like to see more aggressive deficit reduction plans from Kerry. I would be -- I'd like a little more green eyeshades even than the campaign has, but there's a big difference between the campaigns. Whether Kerry would be able to pass legislation in the first two years is a big question.

ROMANS: It seems as though the whole two Americas theme -- at least the latest numbers I have seen, it has been playing right into this. The CBO numbers. The jobs numbers. I just looked at some statistics yesterday that showed that we keep hearing that the important thing for the jobs market is education, educating American workers. Except in this recovery, college-educated workers have done just as poorly as people with just a high school education. I mean, can the Kerry campaign get a hold of this and actually use it to win?

KRUGMAN: Well, it plays into their theme, certainly. The education thing is much overstressed. I always like to say that high school teachers and CEOs typically have about the same number of years of education. And CEO pay has skyrocketed over the past 25 years, and as you may have noticed, high school teacher pay has not.

ROMANS: I guess you could argue which one is the most important. If you have CEOs, who are employing tens of thousands of people, but you have these teachers who are educating and filling the minds of just as many.

KRUGMAN: I'm not aware of a lot high school teachers that have looted the high schools. There are some CEOs who have looted their companies. That's a little unfair. But no. It's something -- it's not just education. Something has gone very wrong with the way we reward people in this country.

ROMANS: Let's talk about Alan Greenspan quickly, and the Federal Reserve raising interest rates. Given the economic data we've seen most recently, should the Fed be raising interest rates here?

KRUGMAN: No. They locked themselves in. They gave themselves a big problem by basically building expectations that they're going to raise interest rates to deal with a big gross economic expansion which we don't have. So I think they were locked in on Tuesday. They had no choice. If they had not raised rates, people would have said, my God, the sky is falling. Greenspan doesn't believe in the recovery anymore. But I think they really had better stop now because the economy is just not playing out the way Greenspan has been claiming it would.

ROMANS: Paul Krugman, Thank you so much. The book is called "The Great Unraveling". Thank you very much. Losing our way in the new country.

Originally broadcast, 8.13.04