SYNOPSIS: Paul discusses the recession, the deficit, and The Great Unraveling

CHRISTINE ROMANS, CNNfn ANCHOR, STREET SWEEP: In this week's STREET SWEEP cover-to-cover segment, a tough challenge to the Bush Administration. Economist Paul Grugman write as twice weekly column for the "New York Times." Those pieces plus a few from "Fortune" and elsewhere have been collected into a book and shaped into a cohesive argument, the book is called "The Great Unraveling: Losing Our Way in the New Century." Paul Krugman joins me now from Washington. Welcome to the program.

PAUL KRUGMAN, AUTHOR, 'THE GREAT UNRAVELING": Great to be on.

ROMANS: You blast what you call the conservatives agenda in this country now. Tell us what is the conservative agenda.

KRUGMAN: We have is a very radical challenge to the way our system has worked for about 70 years. They've pushed through a series of tax cuts that are inconsistent with the programs that ordinary Americans have come to count on. They've also pushed through substantial and ongoing rollback of environmental protection. They've pushed through, of course, as we know, a foreign policy that's deeply controversial. It's been an extremely - a revolutionary challenge in the way to America as we know it, pushed through all -- at each point with the claim that the goals are more moderate. But we take it all together, it's actually something that is quite frightening for those of us that think America as we know it is a pretty good place.

ROMANS: Let's talk about the stimulus. First of, because there are those who say that is a wind at the back of the market, and it the economy, low monetary policy as well, very easy monetary policy and all of this is going to come together and be boom for the American economy. I mean do you think that is over stated?

KRUGMAN: Oh, I think it is definitely the case of (UNINTELLIGIBLE) to be running budget deficits now. What we shouldn't be doing is we shouldn't be locking in tax cuts that ensure that we are going to have huge budget deficits even after the economy recovers. And all honest forecasts show the deficit remaining above $400 billion for the next decade and then getting worse, once the baby boomers hit the retirement program. We also should have had a program deficits that were designed producing (UNINTELLIGIBLE) instead of a program which consists in large part of tax cuts for high income tax payers who are the people most likely to save the money, least likely to create jobs. Think about it, we've have a 500 billion plus deficit, now looming. Which is equivalent to the salaries of ten million average workers. We are not producing anything like 10 million jobs. In fact, it is a near certainty that Bush will be the first president since Herbert to end a term with fewer people working than when he began.

ROMANS: And is he going to end one term or is he going to get another term? If he is reelected what happens in your view?

KRUGMAN: I would like to image that after his reelection he would actually start to govern. As opposed to campaign. The thing that has been going on. This term is, these guys don't have policies. Whenever there is a problem, they don't view it as something that needs to be solved. They view it as an excuse to as the agenda they had already. And it has been alarming, there has been (UNINTELLIGIBLE) to try to manage the country as opposed to always gearing up for the next campaign. I like to imagine it would change if Bush was reelected, but there is nothing to suggest that that is the case. So I'm really very alarmed about the state of the country.

DONALD STRASZHEIM. STRASZHEIM GLOBAL ADVISORS: Paul, I would like to go back to the nature of the tax cut announced inactive by Bush. What part of those do you think should have been done in a different way and just how would that make the economy do better?

KRUGMAN: Ok, first of all we never recession, there is one thing that the government all of the federal government always does. Which is substantial revenue sharing program. At the state and local level, because state and local governments are not allowed to run deficits, and we provide aids so they don't have to lay off schoolteachers or they don't have to do savage cuts bad for the country and depression to the economy. Incredibly, we didn't do that. In this down turn. It's not just about tax cuts. We've forgone the normal fiscal stimulus you use to help dampen a recession. We've had -- nobody can object to the tax cuts, to the rebates, tax cuts for lower income working Americans. In fact, it's kind of amazing that they avoided making the rebates fully refundable. Because putting money in the hands of working people at the bottom of the wage scale, those are the people most likely to spend it. To boost consumer demand. What they have done instead is pushed through tax cuts that are repeal of the estate tax cuts in the top bracket. Reduction of the tax rate on dividend income, which is worth nothing to most middle-class families but worth a lot at the top of the income distribution. All of these things that are part of their political agenda, but also exactly what the doctor wouldn't order if you were trying to fight an economic slowdown.

ROMANS: OK. So, we recently heard about the $87 billion to fight the war in Iraq. Why did the U.S. go to war in Iraq?

KRUGMAN: Well, this is again pre-existing agenda. A lot of people in the administration, including Dick Cheney, have been agitating for an Iraq invasion since the early 1990s. And what they did what they saw 9/11 as a reason or excuse to pursue their old agenda. Whether or not you think the war was a good thing. Obviously, I don't. But you should be deeply disturbed with the dishonesty with which it was sold and which they continue to sell. Dick Cheney basically lied to the nation just last weekend about the reasons for the war. And, of course, the fact that we cut taxes in the face of a war. Nobody does that. That's the most irresponsible thing you can imagine. It's, again, a mark of the radicalism irresponsibility of these guys.

ROMANS: This is a pretty gloomy outlook you have in general for the economy and for Washington, and frankly, it comes at a time when other economists are telling us they're feeling better about things and look for a 5 percent growth in the economy, maybe in the third quarter, four quarter and next year, should be pretty good?

KRUGMAN: Well, we're going to have close to 5 percent this quarter, and probably an ok growth number. There's so far no hint of an upturn in jobs. And if you'll bear in mind, we're 3 million jobs down. We are really 5 million down from where we would have to be just to have avoided a substantial worst in labor markets, because the population grows. Although we're probably -- we're probably looking at a over the next year, there will be some job growth, we're not looking at anything that will make up this enormous amount of lost ground, enormous amount of ground ordinary families are experiencing. Again, $500 billion deficit.

ROMANS: Yeah.

KRUGMAN: Let me run a $500 billion dollar deficit and I could do a whole lot better than this.

ROMANS: Paul Krugman author of the "The Great and Unraveling" fascinating stuff. Thanks for joining us today.

KRUGMAN: Thank you very much.

ROMANS: Hope to see you again soon.

Originally broadcast, 9.17.03