SYNOPSIS:

BROWN: This is budget week, the administration trying to sell its budget for 2006 to the country, to the Congress. There are plenty of skeptics, skeptics because the plan calls for some of the most drastic cuts since Ronald Reagan was in office, but still leaves a record deficit. In fact, it's kind of a misnomer to call it the president's budget. It belongs just as much to Congress, or it will when Congress rewrites it. But, even in that regard, traditional roles have changed. We begin this with CNN's Bruce Morton.

(BEGIN VIDEOTAPE)

BRUCE MORTON, CNN NATIONAL CORRESPONDENT (voice-over): The first thing you need to know about the president's budget is that it doesn't exist. Sure, there's a book and all those briefings. But likely nothing close to what he's asking for will ever happen because it all has to go through Congress. Last year Mr. Bush asked Congress to eliminate 65 government programs for a savings of $4. 9 billion. Congress eliminated just four of the 65, saving less than $300 million. This year he's asking Congress to cut or eliminate 150 programs. How well do you think he'll do? For every government program there's probably an industry that gives money to politicians that wants the program kept alive. There may be a trade union that gives money that wants to keep those jobs. There will be a congressional subcommittee that supervises the program. And if it dies, what will they be in charge of? When Ronald Reagan said the closest thing to eternal life on this Earth was a government program he wasn't kidding. And it isn't just the programs. It's the little goodies, a park for your district, a research program for the college in my district that congressman stick into spending bills. Earmarks they're called. The watchdog group Citizens Against Government Waste estimates that in fiscal 2005 there were 13,900 earmarks worth just under $26. 5 billion. A record. The president can veto appropriations bills, of course. The whole bill. He doesn't have a line item veto. But this president has never done that. In fact, the whole issue has changed. Deficit hawks used to be Republicans. The constitutional amendment to balance the budget was part of Newt Gingrich's contract with America back in the 1990s when the Republicans won control of the House. But it was Democrat Bill Clinton who actually ended deficits and ran surpluses. And so the issue has switched sides.

KEATING HOLLAND, CNN POLITICAL DIRECTOR: Now Democrats are almost twice as likely as Republicans to say that the federal deficit is a very important issue the Congress and the president have to deal with in the coming year.

MORTON: It's way too early to know what the budget Congress actually passes will look like. What we know is it won't look much like the one the president sent them this week. It never does. Bruce Morton, CNN, Washington.

(END VIDEOTAPE)

BROWN: "New York Times" columnist Paul Krugman joins us. He's been writing about the budget. He's been writing about Social Security. Sometimes he writes about them both the same day. So I feel free to talk about them both. Nice to see you again.

PAUL KRUGMAN, COLUMNIST, "THE NEW YORK TIMES": Good to see you.

BROWN: There's a little bit of a disconnect here, it seems to me, when we say that the Democrats have become the budget hawks, because, in fact, a lot of the programs that are being cut are programs that are traditionally supported by Democrats, talking about Medicaid programs, for one, assistance to the poor, education programs and others.

KRUGMAN: Well, but the elephant in the room, of course, is taxes. Under Bush, the taxes that fall most heavily on the affluent, which is the personal income tax and the corporate profits tax, are at their lowest level since 1942. So Democrats are deficit hawks in the sense they say, look, we need more revenue. And Bush is not prepared to do anything along those lines.

BROWN: I may have missed this, but the problem here is nobody really believes, do they, that they're undertaxed?

KRUGMAN: Well, I think you are. And I think I am, actually, relatively speaking.

(CROSSTALK)

BROWN: Speak for yourself here, if you don't mind.

(LAUGHTER)

KRUGMAN: OK. No, but the truth is that what we've had is a revenue collapse. If you look at why is there is a budget deficit, it's because tax collection, not on the middle class, who mostly pay the payroll tax, but on the high-income people, has really fallen drastically off, partly because of the Bush tax cuts, partly for reasons we don't -- you know, for other reasons.

BROWN: I think was yesterday -- I think I saw it this morning. The budget director said that, in fact, the rich, which in this definition -- whoever is rich, this definition seems to change a -- but I think it was $140,000 a year or more -- were actually paying a little bit more of the total income taxes.

KRUGMAN: That's the trick. That's the income tax, which is the one that -- but not total -- their share of the total tax burden has fallen quite a lot.

BROWN: Right.

KRUGMAN: So -- and the thing is -- the thing about the Bush budget is, if you're serious about tackling the budget deficit, you go where the money is, which is either tax increases or Social Security and Medicare.

BROWN: Right.

KRUGMAN: And where he is going is where the money isn't, like food stamps.

BROWN: That's chump change by comparison.

KRUGMAN: Exactly; $1.1 billion in food stamps does a lot -- which is the cut that is in the budget -- that does a lot of harm to a lot of people. But it's nothing. That's -- well, it's a day in Iraq -- not quite. But it's about a week's tax cuts for people over $1 million.

BROWN: One of the things you talked about today, which I think is the great -- I've been saying for a while -- going to be the great debate in the country this year, is what this -- what privatizing Social Security or parts of Social Security, whatever, what that really is about. And you make the argument today -- it's not the first time -- that this is really an attack on the central pillar of what conservative America considers the welfare state.

KRUGMAN: Yes. I mean, if you think of what -- look at what the Cato -- people at the Cato Institute, who -- it's basically people from the Cato Institute who are devising this plan, who are on the...

(CROSSTALK)

BROWN: This is a think tank on the right.

KRUGMAN: Think tank. And they -- you know, I quoted one this morning who said Social Security is the soft underbelly of the welfare state. Let's jab a spear through it. And if you look at the president's plan, there's been a lot of misunderstanding about it. People will say, oh, it's just a small part. Actually, if you look at it, by the time that people who are young, who are not yet in the work force, by the time they retire under that plan, Social Security as we know it would be gone.

BROWN: Do you think they see a world where this is no guaranteed at-retirement check of some amount?

KRUGMAN: That's what -- just run the numbers on the Bush plan. The typical worker who was born in 1990 will be getting 8 percent of his or her wages in guaranteed checks, which is nothing.

BROWN: And do you believe they see a world where there is medical care -- there is no Medicare at 65?

KRUGMAN: I think that's what they're looking for. Now, that, they have not said. That's -- I'm guessing. But they certainly have spoken out against a whole set of programs. And Social Security is the -- again, what we have, the hard stuff we have is a plan that will essentially eliminate any guaranteed retirement income.

BROWN: Just really quickly, yes or no, do you think the president will win on privatizing Social Security?

KRUGMAN: I don't think so. I think they weren't ready for the pushback.

BROWN: Nice to see you. I hope you will come back.

KRUGMAN: Good to see you.

BROWN: You're a splendid writer. Still ahead on the program, one of the more heartrending legal battles to flow out of the attacks of 9/11. How many can there be? We'll tell you that story. Morning papers are around again, so we've got some stuff to do. We'll be right back. This is NEWSNIGHT.

Originally broadcast, 2.8.05