SYNOPSIS: Following an interview with supply-side crank Stephen Moore, which is obviously there for "balance," Paul Zahn interviews Krugman on recent good economic growth news and whether it implies a future recovery for jobs. This interview is of course part of Paul's promotional tour for The Great Unraveling

ZAHN: Is the U.S. economy really on the mend? If so, how much credit goes to President Bush? As we just saw earlier, the signs are intriguing and hopeful, with record growth in the third quarter of the year. We're going to hear from both sides, starting in Washington with the Club for Growth president, Stephen Moore. He's a contributing editor at "The National Review." Thanks for joining us tonight.

STEPHEN MOORE, PRES., CLUB FOR GROWTH: Hello, Paula. Happy Halloween.

ZAHN: To you as well. Let's, first of all, try to put some perspective to this number. On its surface, the number sounds terrific, but with six percent of Americans out of work in the workforce, can you sustain this growth rate?

MOORE: Well, this was a terrific number for the American economy. You know, we haven't seen a growth rate like this in 20 years, Paula. And it really, I think, is a very positive sign for the president's tax cut, because the tax cut that the president just passed started to take effect in July of 2003, which was the start of the third quarter. Since then, we've seen very strong economic growth. We've seen the stock market on a rip roaring tear. We've seen consumer spending up. We've seen personal income up, which was reported today. So so far, so good for this tax cut. The only people who I think aren't too happy about these numbers are people like Howard Dean and Paul Krugman, who have been railing against the advisability of cutting taxes.

ZAHN: Hang on a minute, though, Stephen, because it's -- the United States' own Commerce Department would suggest that there was a dip in consumer spending in the month of September by .3 percent. Does that trouble you at all?

MOORE: Well, the main thing is, though, that we see consumer confidence very strong, investor confidence is up. I've always argued that if we're going to get the economy really roaring again, you have to get the stock market up. And, you know, the Dow Jones has been up 16 percent, the Nasdaq is up 20 percent just since we did the capital gains and dividend cut. So I think a lot of this growth is really attributable to President Bush's tax cut.

ZAHN: Do you think we'll see job growth?

MOORE: I hope so. You know, we're starting with 6 percent unemployment, which is still too high, but, you know, when you compare that with other countries, Paula, we still have the lowest unemployment rate in the industrialized world. So if we can bring that rate down to 5.5 percent or so, it will be terrific. Usually, you see jobs coming in once economic growth accelerates, so you would anticipate a pretty healthy jobs numbers coming up in future months.

ZAHN: Stephen Moore, thanks so much for dropping by. Appreciate it.

MOORE: Thank you, Paula.

ZAHN: Now we can go on to a frequent critic of the Bush administration's policies. Joining me from Princeton, New Jersey is "New York Times" columnist Paul Krugman. He also happens to be the author of "The Great Unraveling, Losing Our Way in the New Century." Always good to see, Paul. Welcome.

PAUL KRUGMAN, "NEW YORK TIMES" COLUMNIST: Glad to be on.

ZAHN: Do you think we are in the middle of a full-blown recovery?

KRUGMAN: The answer is, I don't know and neither does anyone else. You know, I think the word for everybody is, "Calm down." It's one quarter. In fact, it's two good months, because the month of September, as you said, doesn't look all that great. Gosh, we don't know. It's actually kind of funny. You know, people like Stephen Moore spend eight years in the Clinton administration denying that sustained, very good news had anything to do with Clinton's policies, and now we've got two or three months of good news, and it's a vindication of Bush. The truth is, we don't know how it's going. For what it's worth, this quarter was very good. I was surprised. I think everyone was surprised. It was a much better growth than we expected. It was driven almost -- the bulk of it was a huge splurge by consumers. People bought cars, they bought washing machines, and they bought houses. That splurge was driven partly by the tax cut. Got to give some credit where it's due. It was driven to a much greater extent by mortgage refinancings, which is a wave that's mostly over. It was driven by low-interest loans from automobile companies, which are mostly over. And it remains to be seen. And we have no idea.

ZAHN: But is it sustainable?

KRUGMAN: It's not sustainable at this rate, because a lot of this wasn't -- it was huge, 27 percent increase in spending on consumer durables. That's not going to happen a second time. It's probably, if anything, going to be a slight decline in the next quarter in that purchases. If the business investment rises a lot, and it has to rise a lot, much more even than it did -- it was not bad in the third quarter, but has to rise a lot -- it's sustainable. But, you know, if the jobs don't come along -- this is the third time we've declared our troubles over. First quarter of 2002, big number revised downwards, and then it went flat the next quarter. Pretty good number the third quarter of 2002, much bigger job growth than we've seen so far, went flat, things went sour. Now we're declaring victory again. Maybe third time lucky, but it's certainly, you know, calm down. For once, I think the stock market had it exactly right. Basically, nothing happened to stocks, because they said, "All right, that's the past. What about the future?" And we don't know yet.

ZAHN: Finally, did it hurt for you to have to say tonight that you give this Bush tax cuts partial credit for these large numbers this month?

KRUGMAN: No, I mean -- of course, if you let me run a $400 billion-plus deficit, I think I could create a lot more jobs than Bush has. But, no, there's no question that putting -- I think it was Dick Berner (ph) at Morgan Stanley who said that we're not getting much bang for the buck here, but it's an awful lot of bucks.

ZAHN: Paul Krugman, always good to see you. Thank you, again, for spending a little time with us tonight as we head into the weekend.

KRUGMAN: Great.

ZAHN: Now to the man who, for the past year, has been the FBI's point man on terrorism. Larry Mefford is stepping down today to head into private industry, but before he left his post, he gave an exclusive interview to Justice correspondent, Kelli Arena.

Originally broadcast, 10.31.03