SYNOPSIS:

ZAHN: My interview with Paul Bremer, the U.S. administrator in Iraq. Well, it is one thing when your political enemies criticize you, but this week the president finds himself taking flack from a former treasury secretary and part of the U.S. military. Our next guest thinks that may prove what critics of the president have been saying all along. Paul Krugman is an columnist for the "New York Times." He also happens to teaches economics at Princeton university. His latest book is called the "The Great Unraveling, Losing Our Way in the New Century." And I asked him the meaning of the report from the Army War College which called Iraq "a dangerous detour in the war on terrorism."

(BEGIN VIDEOTAPE)

PAUL KRUGMAN, COLUMNIST, THE "NEW YORK TIMES": This report doesn't dispute that it was an evil regime and bad stuff, but it's saying, look, we have limited resources. We had one specific kind of threat, and rather than focusing on that specific threat, which is from al Qaeda and Islamic fundamentalists terrorists, the Bush administration -- it doesn't say the Bush administration, but just generally the U.S. broadened this to an assault on evil wherever it is, which would be a good thing if we had the resources, but we don't and, in fact, we've dropped the ball.

ZAHN: Do you agree with that? Are you basically acknowledging it's a good thing Saddam Hussein is gone?

KRUGMAN: Of course. It's a good thing Saddam is gone. It's a bad thing that Osama hasn't been caught, and it's a bad thing that Afghanistan is not doing well, that the Taliban has had a resurgence. The trouble is that there was a linkage by taking resources off the primary goal, by not focusing on the people who actually attacked us and going after a bad guy who was, however effectively contained. We have allowed the primary, our primary concern to deteriorate. We haven't done -- this was a mistake in priorities.

ZAHN: Let's move on now to some of the continuing fallout from Treasury Secretary O'Neill and what is said in a book that he helped out on. One of the things he says is that during a cabinet meeting he heard Dick Cheney utter a phrase that deficits don't matter. Does that come as any surprise to you?

KRUGMAN: I'm surprised it was that blunt. What's important, by the way, is to say that not very far in time from that remark, Cheney in public said I am a deficit hawk. That's telling you what they say in private and claim to be in public is very different. It's one of many moments like that in the book.

ZAHN: Let me ask you this. Is there anything you've seen in the public polling you've been exposed to that would suggest the American public gives a darn about budget deficits?

KRUGMAN: Very little. There's a little bit of concern out there, but it's quite possible a budget deficit is rather an abstract thing. But they should be concerned, right? It does -- in fact, deficits do matter. If the import of what you're saying is that these guys might be able to roll through having irresponsible fiscal policy, no one will notice it until after November, that may be true but it's also, as I say, awfully cynical. The key message of this book done in cooperation with O'Neill is that this is an administration where politics trumps the national interest every time, and this is just part of that story.

ZAHN: Well what about some of the improvements we've seen in the economy? Some economists attributing that to the tax cut.

KRUGMAN: Well, some of it is, but there could have been other things that wouldn't have burdened the budget forever, the way the tax cut is that would have done the same thing. It's worth reminding people that for most people what matters is jobs and wages, and neither of those is growing at a rate that makes any difference at all. The labor market, by most measures, is as bad or worse now than it was six months ago, which means that unless you derive most of your income from stocks and investments, you're probably -- you're not seeing any improvement at all.

ZAHN: And what do you foresee down the road on election day?

KRUGMAN: If I have to make my guess, I would say that the economy will be good enough for Bush to claim victory and bad enough for Democrats to say you call that success, and the election will actually hinge on other things.

ZAHN: Like?

KRUGMAN: Like how things are going in Iraq, perceptions of honesty, on the whole question of administration, double dealing, on its -- there are a number of scandals that are simmering just under the surface. Whether they actually make a difference in the public perception is going to have a lot to do with the election.

ZAHN: Paul Krugman. We appreciate your dropping by. Thanks so much for your perspective.

KRUGMAN: Thank you.

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ZAHN: And the future of space exploration, President Bush is about to announce a return to the moon. Can the United States afford it? Also, the latest try at changing young people's destructive behavior with TV commercials. We'll check out a new campaign with a frank and direct approach to getting help.

Originally broadcast, 1.13.04