SYNOPSIS: An interview with Jack Cafferty, Susan Lisovicz, and Andy Serwer where Krugman discusses the Bushies and The Great Unraveling

CAFFERTY: Edward Djerejian, the director of the James Baker Institute of Public Policy at Rice University. Interesting stuff. Coming up on IN THE MONEY, a look at whether President George W. Bush is making our world better or worse. Sort of depends on who you talk to. And coming up, we're going to talking to Paul Krugman, one of the administration's toughest critics and the author of a book called "The Great Unraveling." Plus, working hard, going nowhere. Find out whether America's convicts should do some of the jobs nobody else seems to want to do. And the Kobe beef as basketball star Kobe Bryant goes to court. See what his problems could mean for the National Basketball Association. You're watching IN THE MONEY and we'll be back whether you like it or not.

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LISOVICZ: The president's popularity is taking a hit. The latest CBS/"New York Times" poll shows only 51 percent of Americans think Mr. Bush is doing a good job. That's a 15-point drop since June. Some say the president will bounce back. But others like our next guest think his handling of the economy and post-war Iraq have turned Americans off for good. Paul Krugman joins us today to talk about his new book "The Great Unraveling: Losing Our Way In A New Century." He's also an economist at Princeton University, op ed columnist for "The New York Times," and a frequent critic of the Bush administration. Welcome, Paul Krugman back to the program.

PAUL KRUGMAN, ECONOMIST, PRINCETON UNIV.: Glad to be on.

LISOVICZ: Two big issues that the president has to deal with. Let's just talk about the economy because we have a lot of interesting, new data. And a lot of it is promising. The weekly jobless claims this week came in lower than expected. Last week's, September unemployment report actually created jobs. We Hadn't seen that in a long time. The September retail sales, giving us clues as to what consumers are thinking. Very good. Corporate profits for the third quarter could be the best since the second quarter of 2000, the height of the market. Oh, speaking about the market, hitting 15-month highs. So is the economy really so bad off? Aren't we seeing the light at the end of the tunnel?

KRUGMAN: If we are, we're seeing it for the third time. We had a great first quarter in 2002 that was temporary. We had a pretty good third quarter in 2002 that was temporary. We are having a pretty good third quarter in 2003. On the output side, the jobs number you know, that's not -- that isn't even enough job creation to keep up with the growth and the working age population. So we haven't yet seen anything that points to the job market improving, you know, enough to make up any of the shortage we've had of jobs since all of these past couple of years. The main thing to say is, you know, let me run a $500 billion deficit. And I could create a whole lot more jobs than we're now seeing. And so given the size of the budget deficit, this is actually a pretty disappointing performance.

SERWER: Paul, it's our former colleague, Andy Serwer "Fortune" magazine. How are you doing?

KRUGMAN: Hi there.

SERWER: Listen, aren't you being a little bit of a chicken little? A doomsayer. Listen, we have deficit throughout history. We run a deficit when the economy is weak. When there's a war on you run a deficit. When the economy's weak you cut taxes. I mean what's wrong with this picture, Paul? When the economy picks up, the deficit will go away. Isn't that what happens in the history of the economic cycles here?

KRUGMAN: Not if the deficit is this big and if the tax cuts you've passed are permanent tax cuts. Look, you know, it's not just critics of the Bush administration. A couple weeks ago, the controller general in the General Accounting Office delivered a hair- raising speech about the budget outlook. If you ask -- and we've got probably next year, $550 billion deficit. How much of that would go away if the economy fully recovered to unemployment rates like we had when George Bush took office? The answer by most estimates is well under 100 billion of it would go away. We have got a fundamental shortfall, even taking into account future recovery. But also taking into account that, you know, baby boomers are going to retire. And we're going to need Social Security and Medicare payments. We've got a fundamental shortfall in federal revenues; long term, now about 25 percent to federal spending. We want to compare that. And we just had a voter rebellion in California over a budget deficit that was about 10 percent of the state of California spending. The federal government is two and a half times worse off than that and it's not a short-term problem. It's a long-term problem. We really -- these are disastrous finances. Everyone who isn't basically on the administration's payroll says it's a disastrous long-term outlook. This is not -- this is not -- this is not trivial stuff. This is actually scary. This is Banana Republic finances.

CAFFERTY: Paul, Jack Cafferty. Any chance the government spent last money; they could cut into the deficit or is it all about taxes?

KRUGMAN: Well, yes. Let's take a look what we're going to cut on spending. You know, what is the federal government? It is, as Undersecretary of Treasury Peter Fisher said, it's a -- the government is a big insurance company with a side business in national defense. So, OK. Let's take...

CAFFERTY: Fair enough. OK.

KRUGMAN: Defense is off the table, I think. Payment of interest on the debt is off the table. If you look at the rest, in order to close that gap, we'd have to cut spending between 40 and 50 percent. And spending what? Well, it's Social Security, Medicare and Medicaid. That's where the government's money goes.

CAFFERTY: I understand. But surely you would allow that, one; there are probably pockets of significant ways even in those entitlements programs you alluded to. And that there are others outside of those three entitlement programs, other government programs that don't exactly meet the test of being sound investments in the country's future?

KRUGMAN: There's always some of that. If you could find me $100 billion of that you would win a big prize.

CAFFERTY: Well I can't.

KRUGMAN: The truth is we're talking $500 billion. You know, we're just -- we're way past that point. If you were talking about a deficit of $100 billion, $200 billion, we could talk about that. But this is ridiculous. The idea that we're still talking about waste and fraud being the solution to this problem, it just means that you're not facing reality.

CAFFERTY: Quick question. And I've got no more time. If the job situation continues to improve, if the stock market continues to rally, if corporations continue to make money, it's likely President Bush's approval ratings will go up. And 13 months from now, he might be re-elected, no?

KRUGMAN: Oh, indeed. I -- look, I mean most of the -- you know, he might get credit for a recovery. But the trouble is, of course, the deficit won't go away. And somewhere down the line, he may be able to lob this off into a second term, he maybe able to lob this on to the next guy holding office. But the truth is that he has created and enormous budget hole and winning an election doesn't solve that problem.

CAFFERTY: I hear you. Paul, it's always a pleasure. Thanks for joining us. Appreciate you being on the program.

KRUGMAN: Thanks for having me on.

CAFFERTY: Paul Krugman, he's op-ed columnist for "The New York Times." He's a very bright guy. Enjoy reading his stuff. He's also the author of "The Great Unraveling: Loosing Our Way In The New Century." Still ahead on IN THE MONEY, we will effort to find our way. We will look at a proposal for keeping jobs in America by sending them to prison. And find out if LeBron James has the moves to lift pro basketball out of a slump that might be made worst by the Kobe Bryant situation. And something to Yahoo about. See how the Internet portal is delivering big time for investors. Stick around.

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Originally broadcast, 10.11.03