SYNOPSIS: Krugman joins in the "Friday Mixer" roundtable discussion on Capitol Report with former Clinton Drug Czar Gen. Barry McCaffrey (Ret.) and House Rules Committee Chairman Congressman David Dreier (R-CA). This appearance is part of Krugman's The Great Unraveling promotion tour

ALAN MURRAY, co-host: Tonight, we're trying something a little different on CAPITAL REPORT. We call it our Friday Mixer. It's an opportunity to bring together some prominent people from very different walks of life to talk about the week's biggest news. Joining us tonight: from Washington, retired Army General Barry McCaffrey; from Los Angeles, Republican Congressman David Dreier, chairman of the House Rules Committee; and in New York, economist and New York Times columnist Paul Krugman, who's the author of the best-selling book "The Great Unraveling: Losing Our Way in the New Century." General McCaffrey, let me start with you. Big shift in Iraq policy this week. The coalition started bombing again in Baghdad, and we had this speeding up of the timetable for self-government. Doesn't this suggest that things are not going very well there?

General BARRY McCAFFREY (US Army, Retired): Well, I think it suggests that the administration is correctly trying to reassess what's happening and how they should move ahead. The big problem, it seems to me, Alan, is we declared victory during the first phase of this war, but the Iraqi Ba'athist Party, the Saddam regime, didn't feel they'd been defeated. So now what they're going to have to do is look at how do you connect economic reconstruction--and by the way, the fighting doesn't stop when the electricity comes on. I think that's been a misconception from the start. So we've got to get tough with them on the ground, kill these people who are involved in the insurgency, and at the same time, we've got to see some political connections so that the Sunni Muslims and others think they've got something to gain out of this process.

GLORIA BORGER, co-host: Well, Dave Dreier, does this mean, though, that the administration underestimated the difficulties it was going to have in a postwar Iraq?

Representative DAVID DREIER (Republican, California): Well, we all know that there's great uncertainty when you deal with war and even during a postwar period. We've found that throughout the history of the last century. And so I think that it was nice to hear Tom Brokaw go through that litany of positive reports and developments that have taken place in Iraq since May, but, obviously, there has been a lot of attention on some of these tragedies that are there. It's not a perfect situation. And as General McCaffrey correctly says, because of the challenges that are there--we saw Ambassador Bremer come back and meet with the president, and we've seen a reassessment taken. But I do think that it is important for those of us who do have an opportunity out there to underscore many of the positive things that have happened and juxtapose that to the very negative consequences, which everyone acknowledges, to having seen Saddam Hussein remain in power.

MURRAY: Paul Krugman, you're an economist, of course, but your column wanders into foreign policy fairly often these days. What do you think of this?

Professor PAUL KRUGMAN (Author, "The Great Unraveling"): It's clear that things have gone very much not according to plan. I'm sort of amazed that nobody's mentioned that leaked CIA report we heard about earlier this week, which was a quite bleak assessment, actually bleaker than anything you've been seeing on mainstream US media. And also, interestingly, was a report that clearly was in the hands of the White House even as it was doing the great Iraq push-back. They're trying to tell us these happy stories. So we have a problem in Iraq, and we have a problem which is made worse by the fact that the administration is trying to put happy faces, smiley faces on everything. It's a credibility problem. There is...

Rep. DREIER: Professor, nobody is trying to put happy faces on this. An attempt is being made to soberly look at a very serious situation, and that's exactly what the administration has done.

Prof. KRUGMAN: I don't think that's--well, we can argue about that, but it's clear that the situation is very serious. It's also clear that we don't have a lot of friends in this right now. We're not getting the active support from the Iraqi people that we were counting on. We're not getting support from our allies. We know Japan is canceling out on sending troops. And there really needs to be an effort to bring in allies, and that means, among other things, being truthful and being perceived as being truthful.

BORGER: Well, let me...

Prof. KRUGMAN: And I have to tell you, that's not the way this administration is seen around the world.

BORGER: Well, let me bring in General McCaffrey here, because I noticed, General, that you were kind of nodding when Paul mentioned this top-secret CIA report, which said that Iraqi opposition has become very intense and very sophisticated.

Gen. McCAFFREY: Well, you know, I was agreeing with Paul basically. Look, I supported the president when he took this on. I think he showed enormous political courage. I think we're much safer in the long run because we took down the Saddam regime. At the same time--look, we listened to General John Abizaid, who's one of the best people we've had in uniform in 25 years, talking about thousands of armed foreign--of Saddam's troops and hundreds of foreign fighters. This thing is going very badly. The economic reconstruction is taking place, the political reconstruction isn't, and the security situation is worsening. And, I might add, that CIA report correctly pointed to the real big concern which is: What will the Shia do? If they think we're withdrawing by next summer, by, you know...

MURRAY: Yeah.

Gen. McCAFFREY: ...the following Christmas, they're going to consolidate their position to make sure they're not under the thumb of the Saddam regime again by the following year.

MURRAY: Well, I think that's pretty critical, David Dreier. I mean, the administration argued at the beginning that it was important to get a constitution in place before you have an election so that everyone will know that the rights of minorities are going to be protected and we're going to have a real democracy and we're not going to have another Iran, another Shiite theocracy. Now we're turning it all upside down. We're saying, 'We've got to have an election quickly, get an Iraqi government in place, so we can start to pull troops out.'

Rep. DREIER: But, remember, Alan, it was Ambassador Bremer who several months ago said that he believed that within a year elections could be held. Obviously, self-determination is a very important part of the equation here. You know, few people have argued that we'd be able to be out quickly, and, obviously, in the society that we live in today, everyone wants everything to come to an end as soon as possible...

BORGER: OK.

Rep. DREIER: ...and expect it to happen immediately.

BORGER: Paul Krugman, go ahead.

Prof. KRUGMAN: I mean, when you say few people said this, you know, we have repeated interviews with people like Paul Wolfowitz just after the fall of Baghdad saying, 'We'll be down to 50,000 or 30,000 troops by now.'

Rep. DREIER: Well, you know...

Prof. KRUGMAN: So come on. I mean, we have to recognize that things have gone very contrary to the way they were predicted and...

Rep. DREIER: ...my Republican colleague, Dick Lugar, made it very clear that we would be there up to five years and possibly longer.

Prof. KRUGMAN: But we've got--it comes back to this credibility problem. We have some people who made some very brass predictions, have tied up a very large part of America's military strength. There's been no accountability. The only people who've been fired are the people who were fired for being right, like General Shinseki, who said it was going to take a long occupation by a large number of soldiers, or Larry Lindsey, who said this was going to cost...

MURRAY: Yeah.

Prof. KRUGMAN: ...a couple of million dollars.

Rep. DREIER: So, Paul, are you for cutting and running?

Prof. KRUGMAN: No, actually I'm not. I'm for making...

Rep. DREIER: OK. Good. I think it's important...

Prof. KRUGMAN: ...but I think we need to be clear. This is going to be a country that's going to be run, in large part, by the Shia, and the Shia clerics are going to be an important force. And we have got to recognize that, and I think the administration is still thrashing around trying to pretend that somehow it can get its favorite people on the IGC in charge.

BORGER: OK, folks, I want to give General McCaffrey one last word on Iraq.

Gen. McCAFFREY: Well, you know, one of the things I might add, being a great admirer of Paul Wolfowitz--I actually think the notion of having elections and letting an elected crew try and sort out a constitution probably isn't all that bad an idea. I'm not convinced we ought to be concerned about the eventual political outcome in Iraq, what form of federal government they end up with. What we need to be concerned about is: Do we have the political will to establish security in the coming 24 months? It's not clear to me that we do.

Rep. DREIER: I think this administration does, and that's something that we're going to do.

BORGER: OK. OK, guys, hang on to your thoughts for one moment. We're going to take a break, and when we come back, we're going to come back with more of our Friday Mixer, and we're going to talk about that big tax refund you may be getting next year and whether it's going to keep the economy growing strong.

MURRAY: Then, later, we'll visit with the campaign brains from the Wesley Clark and Dick Gephardt campaigns. The burning question: Which of them can do the best job of stopping Howard Dean from winning their party's nomination, if either? Stay with us. You're watching CAPITAL REPORT on CNBC.

(Announcements)

BORGER: And we're back on CAPITAL REPORT with our Friday Mixer: Retired Army General Barry McCaffrey, Republican Congressman David Dreier of California and New York Times economic columnist Paul Krugman. Let me go to you first, Paul. USA Today front page, big headline: Tax Refund Checks Will Increase 27 Percent To An Average Of About $2,500 A Family.

Prof. KRUGMAN: I'm...

BORGER: Isn't that good news for the economy?

Prof. KRUGMAN: A little bit. I mean, there's something wrong with that number. We can't really try and talk through, but, yeah, there's going to be--you know, a lot of the tax cut that was passed this year hasn't yet showed up in people's pockets, and there's going to be some more next year. So it's going to be a lot of money, but it's going to be going in a way to the wrong people. You know, it's going to be going to the people who are least--that these are tax cuts very heavily tilted towards the affluent. It's going to be going to the people who are least cash constrained, least likely to go out and do extra spending because of it. There was an interesting economic story this week which said that Wal-Mart is not doing too well on its sales, and it's noticing that sales are peaking on paydays, which is telling you that people who are relatively low-income, purchasing at Wal-Mart, are very much cash constrained.

MURRAY: Yeah.

Prof. KRUGMAN: Those are the people who should be getting big rebate checks. They're not going to be getting it.

Rep. DREIER: Well, that's...

Prof. KRUGMAN: So there's going to be some stimulus as that cut's going to help.

Rep. DREIER: That headline was obviously focused on the average family, and I think it's also important to note that the tax cut is going to taxpayers, people who pay taxes. We've gotten some very positive news here in California. Just, today, the Los Angeles Times has a story about the fact that we've seen a dramatic increase in our exports to China. We're beginning to see the very passionate, strong free-trade agenda that we've been pursuing starting to pay off. And so I think that's another important thing to note, and then, of course, the 7.2 percent growth that we saw in the third quarter. No one is anticipating a continuation of that, but if we have growth in excess of 3.7 percent, we know that it will be job creating, and I believe that--you can't count on it--we've laid the groundwork. As long as we can do some other things that are important--tort reform, an energy bill, some other job creators--I think we have a great opportunity to ensure this expansion for the foreseeable future.

MURRAY: General McCaffrey, let me ask you a political question about that. Obviously, we have the economy looking better than it was looking before. We have the situation in Iraq looking worse than it was before. Which of those do you think is more important to the American people?

Gen. McCAFFREY: Well, first of all, I think the economy is coming back. I'm all over this country dealing with business community. All the indications are there. It's going to surge; in the next 24 months, we're going to look better. Having said that, you know, the Iraqi thing is a huge concern to the American people. I think they're going to look at the presidential candidates to decide who can they trust to deal with this situation, but I wouldn't underestimate the American people. I think they're going to want to know that what's happening makes sense. They're sad about the casualties. I do believe that the people have the political will to stay with this.

BORGER: Well, Paul Krugman, let me ask you this question. Is this going to be a wartime election or is it going to be a peacetime election that we're heading into that'll be about the economy?

Prof. KRUGMAN: My guess, to be honest, is it's going to be wartime. I think that, in fact, my expertise is going to be peculiarly irrelevant here 'cause I think that the economy is going to be doing well enough that people who want to believe that Bush knows what he's doing will find justification. He'll still be a net-job-loss president, but it'll be not as bad as some might have expected.

Rep. DREIER: I didn't...

Prof. KRUGMAN: But it's not going to be good enough for him to run on mourning in America either. So I think it's going to be a kind of ambiguous thing and is probably going to be other issues that determines it.

Rep. DREIER: I was very constrained in not seizing on that peculiarly irrelevant assessment of policy...

Prof. KRUGMAN: Well, I said my expertise, and political pundits are king.

Rep. DREIER: Yes, I know, but I didn't want to say exactly where it would go. I mean, frankly, you know, you and I have debated before on this, Paul...

Prof. KRUGMAN: Yeah.

Rep. DREIER: ...and I will tell you that I believe that as we look at where we're going today, clearly the old adage of James Carville's, 'It's the economy, stupid,' I think at the end of the day, it will be about that. And, obviously, we do--we're going to pursue policies and do everything possible, even if some modifications need to be made, to try and bring about greater peace and stability in Iraq and the region.

BORGER: OK. Barry McCaffrey, to you, war election, peace election?

Gen. McCAFFREY: Well, I think, you know, I read George Will's stuff very closely. He says the vote will be about foreign policy, security policy. I think it will be, and I do believe the president still retains an awful lot of credibility in the American people that he'll keep us safe. I think that's one of his strong points.

MURRAY: You say you read...

Rep. DREIER: Now, remember, a lot of this is terrorist acts.

MURRAY: Yeah, you...

Rep. DREIER: These are terrorist acts we're dealing with, too.

Prof. KRUGMAN: By the way, folks, something amazing just happened. I agree with George Will.

MURRAY: But, Barry McCaffrey...

Prof. KRUGMAN: I think it's going to be a national security election, but I think it might count the other way, because this is really an incredible screw-up in Iraq. You just have to face that.

MURRAY: But, Barry McCaffrey, you're not saying you don't read Paul Krugman, are you?

Gen. McCAFFREY: Oh, no. God, I think he's terrific, too.

Rep. DREIER: I read Paul Krugman all the time. I do.

Gen. McCAFFREY: In fact, anything he says about the economy, I'm willing to sign up for.

Rep. DREIER: Oh, my gosh.

BORGER: Oh, my gosh.

Rep. DREIER: I need to talk to you, Barry.

BORGER: I think we've made some news here tonight. Thanks so much.

Prof. KRUGMAN: A US Army endorse. Thank you.

Rep. DREIER: Nice to be with you all. We've got a big swearing-in here on Monday, which we don't want you all to miss.

BORGER: OK. Thanks so much to all of you guys...

MURRAY: Arnold. Arnold.

BORGER: ...which we call our Friday Mixers: Congressman Dave Dreier, General Barry McCaffrey and Paul Krugman of The New York Times. Thanks again, guys.

Rep. DREIER: Thanks.

Gen. McCAFFREY: Good to be with you.

Prof. KRUGMAN: Thanks a lot.

Originally broadcast, 11.14.03