SYNOPSIS: Paul Krugman debates House Rules Committee Chair David Dreier (R-CA) about Bush economic policy and how to getting the economy growing enough to decrease the unemployment rate

PAULA ZAHN, CNN ANCHOR: We're going to turn now to what Americans say is their No. 1 concern, the economy. The National Bureau of Economic Research today confirmed what some economists have been saying for a long time, that the recession beginning in March 2001 ended just eight months later in November of 2001. Now, with high employment and a record deficit, how does that information play to the American pocketbook -- or wallet, depending on which of the two you carry? I'm joined by economist Paul Krugman from Princeton University and the chairman of the House Rules Committee, Republican David Dreier. Welcome, gentlemen.

REP. DAVID DREIER, (R), CALIFORNIA: Welcome back to a civilized time, Paula.

ZAHN: Yes, it is much better, I must concede, than waking up at 4:30 in the morning to work.

(CROSSTALK)

DREIER: You used to be on that other channel. I remember we did this in the evening.

ZAHN: Yes, we did that frequently. Congressman Dreier, I'm going to start with you this evening. How would you characterize the state of the economy tonight?

DREIER: Obviously, if there is a single American who wants to have a job who doesn't have one, we've got challenges. And the president has acknowledge that. I happen to believe that we've put into place policies that will lead to economic growth. Obviously, we have brought about a reduction in the top rate on capital gains and dividend income. We have provided a stimulus for a consumer-oriented growth plan, which, frankly, is already taking place. But we have the three challenges that the president talked about when he was a candidate for president, the three things that he said would lead us to deficit. He said war, recession, national emergency. We all know of September 11. The downturn that really began the last two quarters of the year 2000 and then became a full-fledged recession, as was just reported and as we have all known, in 2001. And we're not enjoying strong enough economic growth. We need -- we have great productivity. We have terrific productivity, but we need job creation. And we have to get back to 4-percent-plus economic job growth for us to really have a chance to generate more jobs, which are needed. I acknowledge that.

ZAHN: All right, let's bring Mr. Krugman into the conversation here. What would be your suggestion for promoting economic growth here?

PAUL KRUGMAN, ECONOMIST: Well, it's clear that we're doing something wrong, right? We now have the biggest deficit that any country has ever run in history. We've had tax cuts one after another for more than 18 months now. And we're still losing jobs. We still -- we have an unemployment rate that's steadily rising. This thing about, well, the recession ended, there's been some discussion about what we should call what we're in now. Is it a growth recession or a jobless recovery? They said, OK, it's a jobless recovery, but it certainly feels pretty awful to the ordinary American. As some people have been saying, this jobless recovery make the last jobless recovery, which was under the first George Bush, look like a hiring spree. So it's a really grim situation. Clearly, tax cut after tax cut heavily targeted towards the wealthiest Americans doesn't do much to resolve the situation.

(CROSSTALK)

ZAHN: And, Professor, before you go any further, when you say it doesn't do much to resolve the situation, are you suggesting that that is what is hurting the economy right now?

KRUGMAN: No. I think what we're seeing is that we're -- it's not helping. What it does is, it compromises our long-run position. It's worth remembering, the big number from this week was $450 billion deficit just for this year. You remember that, in the first Bush budget, they projected a surplus of more than $300 billion for this year. Now they're saying, oh, $450 billion deficit. By the way, it's not the security situation. In 2002, after September 11, they told us we were going to have only an $80 billion deficit. And they told us that the budget would be balanced next year. Now they say, oh, 455 deficit this year, 475 next year. So that's not the problem. What they've done is tax cut after tax cut for a very small number of people receiving the bulk of the benefit, which is not getting the economy moving. All it's doing is building up our national debt.

(CROSSTALK)

KRUGMAN: So it's about time that somebody says, hey, maybe we've got the wrong theory here. Maybe handing more and more -- digging ourselves deeper and deeper into deficit in order to help a very small number of people is not actually what's going to deliver jobs to ordinary Americans.

(CROSSTALK)

ZAHN: All right, Congressman Dreier, give us evidence that the tax cut is working. You heard Professor Krugman basically saying it's not helping the economy.

DREIER: Well, let me say, there is nothing theoretical about this. We have ever shred of empirical evidence that putting in place the kinds of tax growth packages, like we have, yes, over the last 18 months that are modeled after John F. Kennedy's cuts in the early 1960s and Ronald Reagan's cuts in the early 1980s, when I first came to the Congress, clearly do provide a prescription for economic growth. We know that, even as we saw the deficit grow during the decade of the 1980s, Paula, we saw a doubling of the flow of revenues to the Treasury. And Paul and I will acknowledge that what we need to do is, we need to generate economic growth. The downturn began, of course, in large part, due to the war with Iraq, the war on terrorism, which is an ongoing war. And we can't afford not to deal with that. It's very costly and very challenging for us. But the most important thing for us to do is, yes, of course, be fiscally responsible, try to restrain spending here in the Congress, which we are struggling with, and it is a challenge, but putting into place -- and Paul, you will acknowledge this. Obviously, tax reductions encourage economic growth. When you have a slowdown, increasing taxes are not only not a prescription, but they exacerbate a slow-growing economy.

(CROSSTALK)

ZAHN: Let's see if the professor does agree with that. Professor?

KRUGMAN: I don't think anyone is proposing that we raise taxes this year.

DREIER: Good.

KRUGMAN: The problem is that this endless prospect of deficits without end -- because, in fact, any claims that this is going to resolve itself are clearly not borne out by anybody, except those with a political stake in the administration -- are actually depressing the long-run prospects of the economy and, to some extent, feeding back into our current problem. What we need to do is reorient and we need to say, let's not have -- let's cancel those out-year tax cuts. Let's do something more to stimulate the economy now. Let's do something to help desperate state and local governments. Let's do something different. And let me give you one more number.

(CROSSTALK)

ZAHN: Well, you are going to have to do it quickly, because we're going to have to do a commercial break here.

KRUGMAN: OK. Tax cuts are costing three times as much as the war on terror, by the widest possible definition. This administration is hiding behind terrorism when the core of its agenda, if you look at where the dollars go, is tax cuts.

(CROSSTALK)

ZAHN: Congressman Dreier, you get the last word and you've got to do it in 10 seconds.

DREIER: That's just not true. We're clearly on a path towards encouraging economic growth. It's going to take some time. It won't happen overnight. But I believe we've put into place monetary policy and economic growth policy which can do it. We're counting on it. We're going to work hard. We're going to be fiscally responsible. But we've got to also make sure we win this war on terrorism. Great to be with you, Paula.

(CROSSTALK)

ZAHN: Great to be with both of you. Thank you both for joining us. You've given us a lot to think about and to digest. Glad to have both of you with us tonight.

Originally broadcast, 7.17.03