SYNOPSIS: Paul Krugman debates Ben Stein on the terrible new jobs numbers and the lousy Bush economy. Please click here to read about an earlier dispute that Stein had with Krugman over Paul's valedictory for the late James Tobin

ALAN MURRAY, co-host: Let's turn now to New York Times columnist, Paul Krugman, professor of economics and international affairs at Princeton University, the author of the book "The Great Unraveling: Losing Our Way in the New Century." What do you make of these numbers today?

Professor PAUL KRUGMAN (New York Times Columnist; Princeton University): This was pretty bad. I mean, he's right, we should look at the long term. But the thing is--the thing always to remember is the US economy needs about 140,000 jobs a month just to keep up with growing working-age population. So 1.5 million jobs over the last 11 months--do the math. We're actually--we're not making progress. There have been very little real improvements in the job market since last summer when everybody agreed the job market was terrible; and this is not good enough.

MURRAY: And what's the reason for that slow growth? I mean, does it have anything to do with the policies of the Bush administration, or does it really have more to do with the nature of the bust that occurred at the end of the 1990s?

Prof. KRUGMAN: It's not what Bush has done, it's what he hasn't done. Right? There are a lot of reasons having to do with the overinvestment, the overhang from the '90s, why we have a sluggish economy, but the point was that instead of having a stimulus program that looked like a stimulus program, what we've got is something that is clearly aimed at some kind of other objective. You know, a lot of us were wailing and gnashing our teeth saying, 'Where's the actual job creation measures here? Where are the tax cuts to people who are likely to spend the money?' And we didn't get that.

MURRAY: The Bush tax cuts don't provide stimulus to the economy?

Prof. KRUGMAN: They do, but, you know, typical estimates say they look--they provide about half as much stimulus as the same amount of money on tax cuts for middle- and lower-income people and actual aid to state and local governments; you know, things that look like a normal stimulus program would have done.

MURRAY: Isn't it possible, if you had a Democratic administration that you wouldn't have gotten tax cuts at all?

Prof. KRUGMAN: That seems to me unlikely. There was some very strong pressure to do something. There were a lot of, you know--we would have had--we--the middle class stuff--the child tax credit, something like that would all have happened, plus probably more for lower-income families. You know, the thing to say is that this is--at each point, they've tried to take the drive to do something about the economy and hijack it or take a hitchhike on it to have long-term tax cuts for high-income families, which is not what you want to do for economic stimulus.

MURRAY: So if you look at these numbers that came out today, and add to them the numbers that came out a month ago, what does that mean for Fed Chairman Alan Greenspan? Should he be saying to himself, 'Hey, maybe we shouldn't raise interest rates on Tuesday after all'?

Prof. KRUGMAN: I didn't understand why they raised them last time, to be honest.

MURRAY: Really?

Prof. KRUGMAN: This is still a really weak labor market. You look at, you know, everything except the unemployment rate, which is not looking like the other numbers--that's another whole story--but everything suggests that this is still a pretty weak labor market. Duration of unemployment, the measure of how hard it is to find a job once you've lost it, is still close to a 20-year high. Payroll employment is seven million below where the White House two years ago projected it would be. So this is not a good economy.

MURRAY: All right. Stay with us, Paul Krugman. We're gonna come right in a minute. We've got a lot more to talk about. We're also gonna get a response from another man who knows a thing or two about money. That's Ben Stein, author, actor, economist. I remember him as the boring teacher in "Ferris Bueller's Day Off." Then later, wedding bells this weekend for George P. Bush, the president's nephew, who's known as a campaign hottie. That's what it says on the PrompTer here. You're watching CAPITAL REPORT on CNBC. Don't go away.

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ALAN MURRAY, co-host: We're back with New York Times columnist Paul Krugman. And joining us now from New York, actor, former Nixon speechwriter, Ben Stein. He's the author of the book, "Can America Survive?: The Rage of the Left, The Truth and What to do About it." Thank you both. I want to play for you something that John Kerry said yesterday about what George Bush did the morning of the 9/11 tragedy. Listen to it and then let's talk about it.

Senator JOHN KERRY (Democratic Presidential Nominee): Had I been reading to children and had my top aide whispered in my ear, 'America is under attack,' I would have told those kids very politely and nicely that, 'The president of the United States had something that he needed to attend to.'

MURRAY: Ben Stein, this is something that Michael Moore hits in his movie "Fahrenheit 9/11," that the president waited six minutes after hearing about the attacks before doing anything. Is this a fair attack?

Mr. BEN STEIN (Author, "Can America Survive?"; Former Nixon Speechwriter): I don't think six minutes would have made a damn bit of difference, to tell you the truth. He obviously wasn't told the scope of the catastrophe because nobody knew the scope of the catastrophe. He was trying to keep a calm facade and wait till he was briefed further. I mean, that's a typical Michael Moore kind of provocation. But may I speak to something that Professor Krugman said? He is an extremely distinguished professor with the credentials to prove it, but this really is not such a bad economy. Unemployment is not bad by historical standards in the last four decades, either Democratic or Republican administrations would have been happy to have this record in general. The GDP is up 14 percent in real terms since Mr. Bush took office. We have the highest percentage of the population's families owning houses there have ever been; highest profits there have ever been; disposable personal income up 25 percent after taxes.

MURRAY: All right.

Professor PAUL KRUGMAN (New York Times Columnist; Author, "The Great Unraveling"): Oh, I don't know about that...

Mr. STEIN: These are not bad numbers. I mean, Mr. Krugman has...

MURRAY: You've hijacked my question here, so let's go ahead and let him respond.

Mr. STEIN: OK.

Prof. KRUGMAN: Yeah, just on unemployment, the unemployment rate is relatively low because, for some reason, an unusually large fraction of the population has stopped saying that it's looking for work. If you actually look at the fraction of adults that are employed, it's way down from where it was in early 2001 and has not significantly recovered. So...

Mr. STEIN: But...

Prof. KRUGMAN: ...the drop in the unemployment rate--the unemployment rate was 6.3 percent, I guess, at its peaked. The drop since then is almost all people dropping out of the labor force. We don't know why. Every other indicator looks like the worst labor market certainly in 10 years probably close to the worst in 20 years. So, you know, people...

Mr. STEIN: But, sir...

Prof. KRUGMAN: By the way, this is a losing argument. You know, people know what it's like out there.

Mr. STEIN: Well, sir, with...

Prof. KRUGMAN: So I would advise them against trying to make this argument.

Mr. STEIN: Well, sir, with respect, there is this thing called the household survey diary data about employment which indicates employment is quite strong. And as to involuntary unemployment, any involuntary...

Prof. KRUGMAN: Now I don't think this is where Alan wants to take it. Look, let me just tell you...

MURRAY: I don't want to get...

Prof. KRUGMAN: Yeah.

MURRAY: ...into an argument about the two surveys. I'll tell you the reason I'm asking about 9/11 is because both of you write about this in your perspective books. And let me read something--first of all, Ben Stein, let me read something that you wrote in your book, "Can America Survive?" You wrote that 'America is under attack. We're under violent armed attack from Islamic terrorists, and we're under attack from seeds of self-doubt, self-loathing and confusion sown by homegrown troublemakers in universities, in Hollywood, in foundations, in the media.' Now you don't mention Paul Krugman by name, but you seem to be comparing the terrorists with liberals at home.

Mr. STEIN: I think we actually do mention Paul Krugman by name. But in any event, I would not describe him as a home-grown troublemaker, but there are people in this country who seem to think that the enemy is the United States of America, not the al-Qaida or not the terrorists, not Hamas or Hezbollah. I don't question that people should be free to criticize Mr. Bush. He's in the political game; he's fair game for criticism; so is Kerry; so is Nader. That's fine. But to say that America is a repressive country, that America is a fascistic, repressive, racist, imperialist country, this is nonsense. America is a great opportunity-laden, free country that's made incredible progress in the last postwar period in every decent ethical regard, in every decent material regard. And we should be realizing that we're the good guys in this struggle.

MURRAY: Paul Krugman?

Prof. KRUGMAN: I don't think I have ever said that we're a fascistic, repressive--any of those things. So--and this is a straw man; you can find a few people that say that, but that is not...

Mr. STEIN: Oh, believe me, we did.

Prof. KRUGMAN: ...that is--you can find an equal number of people on the right...

MURRAY: Well...

Prof. KRUGMAN: ...saying some pretty terrible things. You know, look--but let me--let's talk about "My Pet Goat" and the...

MURRAY: Yeah, let me...

Prof. KRUGMAN: Yeah.

MURRAY: Can I read what you said about 9/11?

Prof. KRUGMAN: Yeah.

MURRAY: Because I think it's relevant to this conversation. You wrote in your book, 'In the months after 9/11, a shocked nation wanted to believe the best of its leader, and Mr. Bush was treated with reverence. But he abused the trust placed in him, pushing a partisan agenda that has left the nation weakened and divided. Yes, I know that's a rude thing to say, but it's also the truth.'

Prof. KRUGMAN: Yeah, and what I would say is that he pushed an extremely hard-line partisan agenda. Look, just take the one thing. As far as I can make out, I know for sure that no US president has ever pushed tax cuts at a time of war. And I actually can't find anybody anywhere who's ever pushed tax cuts at a time of war, and tax cuts that are, in fact, highly controversial tax cuts that go very disproportionately to people with high incomes. That is a very divisive thing, even if they were a good thing economically, which they haven't been.

MURRAY: Let me--Ben Stein, your father wrote the book on the history of economic policies in this country. Is that a true statement?

Mr. STEIN: Well, he would have been heartbroken at the idea that there were tax cuts in a time of war, too, but he also would have been shocked that there was so much unemployment in a time of war, and I think he would have thought that fiscal stimulation was necessary if there was going to be this bizarre anomalous situation, stubbornly high unemployment in a time of war.

Prof. KRUGMAN: Well, it's--but the tax cuts, you know, were not a national unity kind of tax cut. It was not the kind of thing where a lot of people are going to, you know, get--What can I say?--where it's--we're all in this together, we're all going to get the--you know, if you want the number, tax cuts for people with incomes of more than $1 million a year, which is about 0.13 percent of the population, were larger in total than tax cuts for the bottom 60 percent of the population.

Mr. STEIN: But that's a kind of a straw man as well, to use your phrase, because an awful lot of people in the bottom 60 percent don't pay any tax at all.

MURRAY: OK. Well...

Mr. STEIN: But to your point, I think that the tax cuts...

Prof. KRUGMAN: You're sounding like the boring economist, not me.

MURRAY: All right. Quickly.

Mr. STEIN: But to your point, the tax cuts on the rich were too great, and Mr. Krugman is right about that.

MURRAY: All right. We got a point of agreement here; we'll end on that. Thank you very much, New York Times columnist Paul Krugman, former Nixon speechwriter Ben Stein. And when we come back, the debate over John Kerry's war record takes to the airwaves. The campaign brains sound off on that new ad that Senator John McCain has called dishonest. Then later, two candidates in the same town on the same day? The kings of late-night had twice as much fun. The best of this week's late-night laughs. You're watching CAPITAL REPORT on CNBC. Don't go away.

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Originally broadcast, 8.6.04