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TERRY GROSS, host: This is FRESH AIR. I'm Terry Gross. As we face the costs of rebuilding the Gulf Coast and while the wars in Iraq and Afghanistan mount up unprecedented debt, is President Bush's economic plan, including his tax cuts, wise? My guests are two economists who approach this question from different points of view. Paul Krugman is a liberal columnist for The New York Times. He's also a professor of economics and international affairs at Princeton University. Stuart Butler is vice president of domestic and economic policy studies at the conservative think tank The Heritage Foundation. Stuart Butler, Paul Krugman, welcome to FRESH AIR. Before we get into details, President Bush has said that... (technical difficulties) We're having some technical problems with our interview that I recorded with Paul Krugman and Stuart Butler, so we'll get to that interview momentarily. I apologize for these problems, but we will hear it in a second, and we'll be talking about President Bush's economic plan. Here we are ready to go. Stuart Butler, Paul Krugman, welcome to FRESH AIR. Before we get into details, President Bush has said that rebuilding the Gulf Coast will cost whatever it costs, but he won't raise taxes to pay for it. And he also does not plan on raising taxes to pay for the war in Iraq. Paul Krugman, do you agree with his strategy of not raising taxes?

Professor PAUL KRUGMAN (Princeton University; The New York Times): To a certain extent, actually--this is going to surprise you--actually I do in the sense that, look, this is a--we hope, a one-time expense. It's not a reason to raise taxes at least more than a little bit to pay for it currently. It's the kind of thing that you ought to borrow for. The trouble is we start deep in deficit. We start with the government spending much, much more than it's taking in in revenue, and so this is just adding extra debt. So, you know, if we had started--if we had the budget right now that we had in 2000 with a substantial surplus, I'd say it was clear that you should not raise taxes to pay for Gulf Coast reconstruction. But starting from where we are now, it's starting to look like, you know, this would be a good occasion to have the tax increases that we need to do anyway.

GROSS: Stuart Butler, what do you think?

Mr. STUART BUTLER (The Heritage Foundation): Well, I actually agree with Paul in the sense that we have to differentiate between, as he called it, a short-term issue, the rebuilding, and our--what is appropriate policy over the long haul with regard to taxes and spending and deficits. And I am concerned, as he is, about the long term, and I think there really does have to be a debate about the course of spending and taxes. And I think the president does have to get more engaged in that than simply just saying whatever it costs to rebuild.

GROSS: Now my guess is that, Paul Krugman, you're going to say finally this--to make the country function we're going to need to raise taxes and my guess is, Stuart Butler, you'll say we'll need to cut programs.

Prof. KRUGMAN: I think you're right about that. It's a--I mean, now, look, is there waste? Are there things we shouldn't be spending money on? Of course, and this most recent highway bill, which I think everybody except the majority of Congress thinks it's a terrible idea, is an example of a lot of wasteful spending. But the fact of the matter is that we--we're not going to be able to supply the government services that the public expects without more revenue than we're now taking in. And that's the--a--you cannot resolve that without savage cuts that are not going to happen. You're going to have to have more tax revenue than we now have.

Mr. BUTLER: Well, I agree that certainly we have a situation of massive imbalance right now. We were as opposed to the highway bill for probably the same reasons that Paul was, both the pork aspect of it and looking at our priorities and saying, `Is this the time we need to spend this kind of money on the highways when we have all sorts of other problems and concerns?' When you look at the tax side, I think the debate really is--it's a debate that should take place and the debate is between those of us who are concerned that raising taxes to the level that would be necessary to honor all the promises that we currently have, particularly the large entitlement programs, the massive expansion of Medicare that just took place a couple years ago, would mean federal and state taxes in this country after the next about 20 years or so being of the same level as we see in Europe right now. And our concern is that if you see taxes at the level that we see in Europe and spending that we may get economic performance similar to that. And that's what worries us. And so I think it's very important to reopen a discussion over the big entitlement commitments we've made to the middle class, which includes upper-income people as well, in these areas like Medicare and Social Security and other areas, before we simply just raise taxes thinking that it's a sort of a bookkeeping change and ignoring that that could have very significant economic consequences to us.

GROSS: Stuart Butler, the president says that the funding for Katrina should come from cutting other programs. And what are some of the programs you think should be cut now?

Mr. BUTLER: Well, let me say first of all that I agree with the notion that when the priorities of the country change, then the spending patterns of the country change. I think that whether or not one is in favor of what's going on in Iraq, that was a change in priorities and federal spending should be adjusted. I think exactly--is the case with the effects of--dealing with the effects of Katrina. So I think it is very important to look at how to reduce spending and to change priorities. One I would do--and I think Paul would probably applaud me on this--is to say let us give back large chunks of the highway bill. If we're going to build bridges in this country, which we're committed to, maybe we should be building them in the Gulf area, not in Alaska right now. Maybe we ought to be looking at the huge new entitlement program, the Medicare drug bill, and say it's already being--it's already clear that it's going to cost far more than was imagined. Let us at least put it off for a year until we can figure out how to pay for this, whether it be raising taxes or something else. If you start to do that, you get serious money very quickly to reflect what I think is an appropriate change of priorities given what's happened.

GROSS: Wait a minute. Did I hear you say raise taxes or something else?

Mr. BUTLER: I said we should debate it.

GROSS: Oh, OK.

Prof. KRUGMAN: Interesting.

Mr. BUTLER: It should be debated. It should abs--and I'm very much in favor of that. We've been here at Heritage and The Brookings Institution and other organizations--have been discussing this publicly and saying there really are very few options under the current situation. Paul is right. Cutting massively entitlements would in principle would be one option. Raising taxes massively would be one option.

GROSS: Which do you think would be preferable, or would you like to see some combination of the two, raising taxes or cutting programs?

Mr. BUTLER: Well, I'm very concerned about raising taxes because I think that certainly to raise taxes substantially, of the scale necessary to make a di--I mean, you can raise taxes a small amount, but I can assure you that will not raise the money that you need to deal with the long-term issue with entitlements, particularly Medicare. But if you're going to raise them substantially, I think it ought to--we ought to be discussing that in the context of what might be the economic consequences of that. We shouldn't just discuss it as a bookkeeping change to make the books balance. It's an economic decision to say that we are going to raise taxes to--well above historical levels in this country in order to balance the books and then pretend that we've got no economic consequences.

Prof. KRUGMAN: Let me just weigh in here and say that, you know, first, it's important to have some perspective on what is big enough. The highway bill is an abomination, but even if you cancel the whole thing it doesn't come close to providing enough money. It's a--it's relatively speaking small change in all of this. It's just a symbol of what's wrong with our system but it's not, in fact, all that much money. The big bucks, actually in all of this, is in medical care. You ask why do long-term projections of the US budget--you know, of US spending look very high. It's medical care. Social Security is relatively minor. If you ask why are--you know, what has President Bush done that is really, really irresponsible? It's that drug bill, which I would say the problem is not the idea of providing drug coverage, but the idea of providing drug coverage through a bill that is an enormous gift to the pharmaceutical industry. So it's really--it really is a problem of controlling medical costs, and I don't think it's really a question of providing less services but of doing it better. But in any case, that's where the problem is. We can talk about Katrina. We can talk about the Iraq War. Those are big things, big--one necessary expense, in my view, one extremely wasteful expense, in my view. But ultimately the way to reconcile, the way to have tax increases that I think are sustainable together with the level of services that I think the public demands, is to do something about medical costs.

Mr. BUTLER: Well, I actually agree again very much with that. I think the interesting thing about this conversation is--that's important to emphasize--is that people like Paul Krugman and I who disagree on what the solutions are and our view of that, there is actually, I think, among responsible people an agreement of what the underlying problem is and the underlying dynamics that are at play in the budget. That--you know, we can argue at the margin about that, but it's not really a part of the disagreement. It really is a question of people saying--we actually agree that there are some fundamental options that are needed here and the public needs to know that, too. The public needs to know that.

Prof. KRUGMAN: It's the sad state of America that actually the place where the debate bogs down is on trying to say, look, you know, the arithmetic actually does apply, which you and I agree about, but, in fact, is deeply controversial in today's Washington. And if we could get past that, then you and I would have a quite bitter argument about our priorities, but, in fact, we aren't anywhere close to getting there.

Mr. BUTLER: Exactly.

GROSS: Well, before we begin the bitter argument about the priorities, can we just talk a little bit--like, do you agree on why--OK, you both agree that there's a problem that has to be addressed. There's some kind of serious national debate and you both agree that the people in politics now aren't seriously addressing that really fundamental, underlying problem. Why do you think that problem isn't being addressed?

Mr. BUTLER: I think there are several reasons for it. There is a--you know, and I think the press has some role in this in terms of, I think, not presenting the stark choices that really are--that the public faces. I think the press needs to do a better job in doing that. But I think there's some other things at play, too. If you look at the way in which our budget process operates in this country, the decisions that actually congressmen are presented with, we basically hide the really long-term impact of spending--or taxes, for that matter--from politicians making decisions. The budget system allows them to basically ignore beyond five or 10 years, certainly. And therefore you get things like the drug bill. You get proposals that say, well, we'll put forward this legislation and pass it; everybody will be happy. And really the tab doesn't apply for 10, 20 years from now. We've got to change the budget process so that in the budget system we have the equivalent of getting your credit card in the mail and being told what your outstanding balance is and being told what you've got to pay off. That's got to be in the system. Unless that--those sorts of changes occur, I--we aren't going to get a proper debate over what the choices really are.

Prof. KRUGMAN: It's also important to realize that at the moment the US government is not having any difficulty selling its bonds. As long as financial markets--in this case, a very large part, foreign central banks are willing to buy up US government debt--then there is--you know, there's no action-forcing event. The--as long as--you know, in Washington they can pretend that they have a plan to bring things under control eventually and, meanwhile, take no hard decisions, and then as long as somebody is willing to lend the money to cover the gap in the interim, everything's OK. Now this has happened in other countries in other times before, and there's always, at some point, a very ugly moment when the bond market, in effect, says, `Hey, wait a second. This is--this doesn't make sense.' But at that--you know, right now it's very hard to convince people that that moment will ever come.

GROSS: Meanwhile, is--China is buying a lot of our bonds, right?

Prof. KRUGMAN: That's right. China is--and that's a long story in itself. But the Chinese government is buying huge quantities of US debt. And that plus, you know, oil--oil-rich countries are getting a big windfall and they're piling a lot of that, at least temporarily, into US debt, all of which is helping us go along for a while. It reminds me of--you know, I have friends--classmates who've been finance ministers in Latin American countries, and they always talk about how hard it is to do anything responsible when the money keeps on rolling in. And then when the money stops rolling in, you realize just what bad mistakes you made. But up until that point it's very hard.

Mr. BUTLER: And then you get cases like Argentina when that happens...

Prof. KRUGMAN: Yeah.

Mr. BUTLER: ...and, indeed, I mean, to place all our eggs, if you like, in the China basket and hoping that the Chinese and others will continue to prop up our spending habits for decades to come, I think, is, to put it mildly, naive and is tempting providence with a vengeance.

GROSS: Yeah, well, I'm wondering what you think of the politics of us being in debt to China right now.

Prof. KRUGMAN: Oh, it's very weird. I mean, it really is a kind of mutual assured destruction pact at the moment. The United States desperately needs that money to keep coming in from China 'cause all hell would break loose if it stops. But the Chinese, of course, if they--of course, if they try to pull their money out, then the dollar plunges and they lose a lot of the value of what they already have. And, in fact, even if they stop buying dollars, the value plunges. So we're kind of trapped together except that you project forward what's happening a few years and you've got the Chinese holding simply absurd amounts of essentially sterile dollars. So it does not go on forever.

Mr. BUTLER: But it also--we have to recognize, of course, there's a political dimension to this, that we don't know exactly how in the future our policy towards China militarily and politically will be affected by the huge amount of debt that they own. We know that certainly--I think it would be naive to presume other than our policy in the Middle East is at least affected by our dependency on oil.

Prof. KRUGMAN: And not to suggest moral equivalents here, but probably somewhere in China there's a debate on public radio saying `Is it really safe to have all our money with the Americans? Who knows what their politics...'

GROSS: (Laughs)

Mr. BUTLER: Yes, indeed. Well, we've got to keep that quiet from them.

GROSS: My guests are Paul Krugman, a columnist from The New York Times, and Stuart Butler of The Heritage Foundation. More after a break. This is FRESH AIR.

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GROSS: If you're just joining us, my guests are Paul Krugman and Stuart Butler. Paul Krugman is a columnist for The New York Times and a professor of economics and international affairs at Princeton University. Stuart Butler is vice president of domestic and economic policy studies at The Heritage Foundation. Now Paul Krugman is usually described as a liberal. Stuart Butler is described as--well, The Heritage Foundation is described as conservative. You agree that the president's headed in the wrong direction because he's increasing spending between Iraq, Katrina, the new Medicare prescription benefit and at the same time cutting taxes. You disagree, I think, about how that should be repaired. Paul Krugman, do you think the president should either be raising taxes or at least not further cutting back taxes?

Prof. KRUGMAN: Yes. I mean, I can't conceive of any possible way to bring the US budget into balance without at least recapturing the revenue that was lost from Bush's tax cuts so far. There is nothing in there to suggest that we can actually--that there's a public willingness to accept a reduction in what the government does that would be necessary just to cut spending to make room for the tax cuts that have already happened. You know, they were sold in 2001 and then again in 2003 as something that was consistent with a reasonable fiscal policy with sound management. They aren't unless--you know, unless he's prepared to make the case for real cutbacks in entitlements programs, which he has never done. And so we're going to need that revenue back and certainly no more tax cuts.

GROSS: Stuart Butler, what do you think about new tax cuts or at least halt the tax cuts?

Mr. BUTLER: Well, let's be clear what we mean by tax cuts and sort of where we are with taxes. I think it's important to recognize that when you look at American taxes, what tax levels have been in this country really for decades, they've really hovered around--Paul can correct me--but sort of 16 to 20 percent of Gross Domestic Product. They've been around that. They dropped somewhat to around 16 percent after--immediately after the Bush tax cuts. So what we've done up to now is basically kept taxes at more or less the level they've been historically. Now the question in the future is: Should we raise that level of taxation in this country, not from 16, 17 percent but maybe to 25, 26 percent?--because that's what you need to do to avoid very significant changes in the entitlement programs. And that's what I think the issue is about. And so it's--I'm not necessarily in favor of more tax cuts in the sense of bringing it down any further, but I'm certainly very nervous about raising the total level of taxation in this country to what would be historic levels and levels that would be closer to that in Europe. And then my concern would be that we'd see the economic performance follow like we see in Germany and France and elsewhere.

Prof. KRUGMAN: The slightly misleading thing--what Stuart said is entirely true, but we've seen a huge increase in the amount of inequality in the United States, a huge increase in the concentration of income at the top end, so that if the tax rates had remained at the same level at any given level of income, we would have actually seen a substantial increase in tax revenue even though no really sort of--no individual's tax rate would have gone up. And what has happened under Bush is a big cut in the tax rates for the people with the highest incomes. And that's the sense in which we've had a tax cut. In fact, if you look at it, there is a kind of funny tax shift, which is that the taxes that bear most heavily on lower- and middle-income people, which the payroll tax is, at historic highs, whereas the taxes that bear most heavily on high-income people--income taxes, capital gains taxes, estate taxes--are historically low and, in the case of the estate tax, scheduled to go away entirely. Let's put it this way. I can't see any way that we can get anywhere close to a budget balance without rescinding those tax cuts that have taken place, which does mean that the share of taxes in GDP would be at the high end of its historic range, but, in fact, the tax rates on rich people would still be at the low end of their historic range.

GROSS: Stuart Butler, let me ask you. Would you agree with Paul Krugman's premise that it's currently the middle class and the working class who are paying comparatively more in taxes and being squeezed by it, whereas, the most wealthy in the country are getting a comparatively--not free ride, but are paying relatively less...

Mr. BUTLER: Well, it...

GROSS: ...that that's where the tax burden has been eased, in the very upper...

Mr. BUTLER: It's unfortunately a complicated question, a complicated answer, because you've got to look at what are the elements of the taxation. You've got to look at the difference between rates of taxation and total volume of taxation paid. It's a complicated equation. We certainly have seen lower-income people paying high payroll taxes. That's a great concern. On the other hand, we've seen more and more people taken out of the tax rolls completely at the bottom except for those payroll taxes. Many millions of Americans don't pay any income tax at all now, and that has been going up in recent years. You've got to then link also the incentives, indeed, the marginal rates and their impact on the economy. So if you've got--if you're trying to look at where the taxes are paid and who pays them and how much, it's a very complicated picture. And I don't think you can just say that the effect of the tax changes has been to somehow shift the burden substantially from one group to another. I don't think it's as simple as that.

Prof. KRUGMAN: I think it is pretty much that simple, that, in fact, it's a lot more fun to be rich now than it was during the days of that socialist Dwight Eisenhower when top rates were very, very high or even, of course, during the '60s. And it's--the tax rates that pay--people near the middle and certainly below the middle pay are substantially higher. We have, to our great credit, done a fair bit to help people at the bottom. So the tax system has actually gotten a little more favorable to the people at the very bottom. But it's--if you look at the center of gravity, it's shifted down.

GROSS: Paul Krugman and Stuart Butler will be back in the second half of the show. I'm Terry Gross, and this is FRESH AIR.

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GROSS: Coming up, the role of government in disaster relief and reconstruction. We continue our discussion with Paul Krugman, a columnist from The New York Times, and Stuart Butler of The Heritage Foundation.

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GROSS: This is FRESH AIR. I'm Terry Gross. We're talking with two economists about President Bush's economic plan, including his plans for the rebuilding of the Gulf Coast. My guests are Paul Krugman, a liberal columnist for The New York Times and a professor of economics and international affairs at Princeton University, and Stuart Butler, vice president of Domestic and Economic Policy Studies at the conservative think tank The Heritage Foundation. The president says he wants to create a Gulf Opportunity Zone. He's proposed school vouchers and waiving certain environmental laws, the prevailing wage law and the estate tax during the clean-up. This leads some people, including Paul Krugman, to suggest that the president is using the Gulf Coast as an opportunity to launch controversial policies he wants to enact nationally.

Prof. KRUGMAN: School vouchers is certainly one of the hot-button issues here because this is something that has repeatedly been, you know, turned back in conventional politics. And if they now attempt to institute a school voucher scheme under the cover, if you like, of the hurricane and particularly if it turns out that there's going to be federal money, in effect, going to religious schools, that's a--I don't know if you want to call it abuse, but it's certainly a power grab, making use of the hurricane.

Mr. BUTLER: No, I disagree with that completely because we're dealing with a situation here which we, in our lifetime, have never seen before. Some of the things have occurred in San Francisco and elsewhere, but in our lifetime we've never seen this. And there's a very basic question about: How do you help people in that situation? There's certainly many people, including myself, who say that the most effective way to help people to get an education right now is to provide them with the means to go to school and reimburse those schools for the cost of their education. You can go--it's a voucher program. What else can you call it? I don't think that's trying to take advantage of something. That's something that we think is absolutely essential right now.

Prof. KRUGMAN: No, if it violates--there had been a lot of discussion, and there are very strong reasons why some of us think that vouchers, certainly vouchers that can be topped up by the parents, are a step towards the disillusion of the public school system. Well, some of us...

Mr. BUTLER: The...

Prof. KRUGMAN: ...think that vouchers that can be used at religious schools are a step towards the disillusion of the division between church and state. And the point is, you know, look, if Congresses passes this and if the president signs it, then that's the way things work. But I think that those of us who are critical of that kind of thing have every right to say, `Hey, wait a second. Pay attention. This does not, in any obvious way, have anything to do with coping with the hurricane. This is an attempt to impose an ideological agenda that would not pass if it were proposed for the country as a whole.' So why do you think it should be applied here?

Mr. BUTLER: Because we're dealing with a catastrophe. It should be applied.

Prof. KRUGMAN: That's what I call doing it under cover of hurricane.

Mr. BUTLER: Yeah, but wait a minute. But wait a minute because the public schools in New Orleans and parts of Mississippi have disappeared.

Prof. KRUGMAN: So have people.

Mr. BUTLER: There aren't schools.

Prof. KRUGMAN: Yes, that's correct.

Mr. BUTLER: And--so that's...

Prof. KRUGMAN: So we can move them and record--there's no reason why you can't restore the status quo ante, not necessarily that we will. But...

Mr. BUTLER: Well...

Prof. KRUGMAN: ...that's--but this, as a decision, has nothing obvious to do with the fact that there was a hurricane.

Mr. BUTLER: And your view and a lot of other people's view is that we should warehouse people, put them in trailer parks, tell them to wait until we get the schools rebuilt, and then they can go back and life will be...

Prof. KRUGMAN: No.

Mr. BUTLER: ...just as it was before. That is not the case. You really can't do...

Prof. KRUGMAN: By the way, in--just to clarify the record, I'm violently against the trailer parks. I think this is one...

Mr. BUTLER: Good. I'm not...

Prof. KRUGMAN: ...of those areas where you and I agree that--rental vouchers, which is a highly successful program and worked very well after the earthquake in Los Angeles, is the way to go. And what's interesting is, of course, that the administration has rejected it, so that's an interesting story.

Mr. BUTLER: Well, I can agree with you on that. But I think you have to be, I think, open to the fact that, you know, reasonable people can say that in an emergency like this, the first priority is to enable children to go to the schools that are available--Indeed, dare I say it?--even religious school if they're available in their area and that we also reimburse those schools for expanding their activities and hiring teachers to--that is a voucher program.

Prof. KRUGMAN: I don't buy the premise that this is--that in the case of schools, it's a faster route. There's just no reason to think that private schools can add capacity and teachers any faster than the public schools can.

Mr. BUTLER: I think it should be either, both. I mean, by that...

Prof. KRUGMAN: Well, no, that--there we go. OK.

GROSS: Now let me move this on. Stuart Butler, is there a policy that the president is applying--is there another policy that the president is applying in the Gulf Coast that you think is a good policy and that you'd like to see applied nationally after it's applied to the Gulf Coast?

Mr. BUTLER: Well, there is. I mean, I have generally--I supported the idea of what he calls opportunity zones. The--President Clinton also called them opportunity zones. And they go way back, and I've been involved with this for a long time--which is basically saying when you've got--when you need to have a fresh approach, you have to have radical change in an area, whether it be a depressed part of a city, like the South Bronx, or the situation we face in St. Louis--in the Gulf area. Then what we must do is reduce, as far as possible, barriers, tax barriers and regulatory barriers, to encourage people to invest as quickly as possible, to seek the best ways of turning around those areas. That's the heart of the president's proposal on so-called opportunity zones. It's something I've supported for many years, and it has had broad support for many years.

GROSS: Paul Krugman...

Mr. BUTLER: Yeah.

GROSS: ...your thoughts on that?

Prof. KRUGMAN: Well, if you look at the--we don't have a lot of detail about what might actually be involved here. But what it looks like is that a lot of it has nothing to do with actually providing incentives at the margin. It's just tax breaks that are really not going to encourage people to move in. You know, I have nothing against tax holidays, tax breaks in some cases. But the one thing we know for sure is that it can't be the core of how you're going to redevelop. The thing that's--there were very good reasons why New Orleans and the Gulf Coast had a lot of important economic activity in it. Those reasons will still be there. What's blocking people from moving back in is destruction of infrastructure--it must be rebuilt; fear that they aren't physically protected. And all of those are things that the government has got to provide. And let me also say that some of the things--one of the things that, Terry, I think you mentioned about--or maybe Stuart, either one--about, you know, the estate tax, one of the most cynical things I think I've seen, but it is kind of funny as well, is the desperate search to find somebody who died from Katrina who was actually rich enough to owe estate tax. That, I think, is the definition of political opportunism.

GROSS: My guests are Paul Krugman, a columnist for The New York Times, and Stuart Butler of The Heritage Foundation. More after a break. This is FRESH AIR.

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GROSS: My guests are Paul Krugman, a liberal columnist for The New York Times and a professor of economics and international affairs at Princeton University, and Stuart Butler, vice president of Domestic and Economic Policy at the conservative think tank The Heritage Foundation. I think in some ways the government's role in the Gulf Coast recovery after Katrina raises the question: What is the role of government? What should government be paying for, and what are people on their own to--you know, left on their own to take care of? And that gets to a larger question, which is: Just what is the role of government? What should government be paying for? And I'm wondering if Katrina has helped you either kind of clarify or rethink the question of: What is the role of government?

Mr. BUTLER: I think it's--I think the role of government has to be seen in several different ways or several different functions of government here. I would agree with Paul that when you're looking at basic infrastructure of roads and bridges, the basic facilities, we made a decision in this country long ago that that should be--that that is best carried out by government at some level, and I agree with that. I think that when you then start going on saying, `We're going to rebuild this area,' and then we start to think, `Well, what is the role of the government in designing what a rebuilt area will look like? What is New Orleans going to look like?'--then I think it's less clear that the government should come in and say, `We've figured out what New Orleans should look like. We've figured out who's going to live where. We're going to build this and put certain people in those buildings and so forth.' I think it's a question of looking at how communitywide action takes place and looking at the difference between reducing barriers to creative action and trying to lead that from the government itself.

Prof. KRUGMAN: Well, I actually don't have a view on how the communities should be rebuilt. I think actually we need a lot of study and a lot of thinking before we commit ourselves to this. Rushing into that would be, you know, a big mistake. What I thought was really interesting about the whole Katrina experience was that the way the governments failed even on the functions that I thought everyone agreed it should be ready to do. And we--in an economics textbook like mine, we make a distinction between two types of government role: One is the role of the government in providing public goods, things that really the private sector cannot, like national defense, security and, in many cases, infrastructure, so on. And then there's the broader issue of social insurance, things like Social Security and Medicare, where government protects people against some of the vicissitudes of life, which is--you know, I'm strongly in favor of but which is controversial. But where the government failed here was in the things that only government can do and we thought everyone agreed. So the helicopters were not there when they were needed. The 82nd Airborne wasn't ordered into action until way too late. The basic maintenance of the levees--you know, if you're going to tell people that you are protected by levees, then that's a public good to maintain them.

GROSS: Well, Paul Krugman, are you saying that you blame the government's ineffectiveness in Katrina--that you blame that on the cuts to programs over the years and...

Prof. KRUGMAN: Some of it was cuts. Now Stuart will probably say--and he'd be right--that, you know, the Army Corps of Engineers wastes a great deal of money and that there's a lot of--that you could probably get good results with the same amount of money if it was spent better, which is always true. But, still, there were certainly cuts. FEMA's budget was cut. But, also, it was an attitude. There was an attitude towards government which said, `Who cares about these functions? Let me just put the friend of my campaign manager in charge of this agency. Let's reserve large numbers of the key spots,' as a, you know, cynic here, `for political operatives.' And all of that led to this incredible inability--the Third World-level response to a natural catastrophe.

GROSS: Stuart Butler, let me ask you if you were to agree with Paul Krugman's point that the attempts of some administrations to scale back government agencies and put the reliance on the private sector helped lead to the really bad response, the inadequate government response to Katrina?

Mr. BUTLER: Well, I don't think that the levees were not in great shape and that FEMA didn't work because of political changes made by this administration any more than any other. I think there's something structurally unable--there's an inability in the way the political system in general operates in terms of making these decisions, the way money is--I mean, you know, there was money passed to put a bike path on the levees in New Orleans at the same time as money was not, you know, put to actually strengthen them by essentially pressure from the local area. So it's not just decisions made in the White House. It's right through the system. And that's what just basically makes me feel that if we're going to say, `What is the best course to turn this area around?' I don't want the same people that are making those kinds of decision, whether they be Republicans or Democrats or mayors or presidents. I want to see people affected who can look at their future and give them the help directly to make those decisions.

Prof. KRUGMAN: But let's be clear that FEMA was considered an excellent agency during the '90s. It was--the leadership was praised. It had highly professional people throughout the organization. I--it was only after 2000 that the--several top levels were put in the hands of political appointees with no disaster experience. It was only after 2000 that lower-level employees began to complain that they were--important work was being outsourced to private contractors, and they began to leave in large numbers. Now I'm not saying, you know, that agencies aren't badly run under many different kinds of political, you know--under different administrations. But this was really a case in which the agency was treated with contempt, and it's deteriorated as a result. And I would argue more broadly that what we have here is a situation in which, for 25 years, one side of the political spectrum has been telling us that government is the problem, not the solution, and has more or less acted to make sure that that's how it turns out when it turns out you really do need the government; that it's a little bit like the classic definition of chutzpa. You know, you've destroyed the--you killed your father and your mother, and then you plead for mercy 'cause you're an orphan. Here, you've destroyed the effective of government and say, `See? I was right. Government is no good.'

Mr. BUTLER: And I'm basically arguing that, notwithstanding the effects of administrative decisions on an agency, that we've learned the hard way over many, many years that trying to look at turning around an area like the Gulf now and relying on these kinds of agencies generally and on a top-down approach by government is not likely to be as successful as giving people more direct assistance, whether it be for tax cuts to low-income people or subsidies to them or...

Prof. KRUGMAN: Well...

Mr. BUTLER: ...vouchers and so on and allowing them to be in the driver's seat of what actually happens. Now that's the difference between us.

GROSS: You know, because so many people who couldn't evacuate in New Orleans and ended up in the Superdome were poor and were African-American, I'm wondering if Katrina has crystalized for you in any way what the government does or should be doing to help people who are poor, whether it crystalized what the government should or should not be doing in your mind at all. Stuart Butler?

Mr. BUTLER: I think it does, and I think that's one of the--you know, if there's any silver lining, I suppose, in all of this, it has been that they are thinking much harder about that than we've done in the past. And I think there are different answers to that, assuming that we are all well-intentioned. I think one answer is to explore: Are large concentrations of people in parts of our cities who are very poor and are stuck in those areas, whether it be because they're subsidized to live there or because it's inexpensive and so on, is that the right way to think about this? And do we need to focus on giving resources more and more to those people? Or should we be encouraging people to seek opportunities elsewhere to a large degree? I think that's a debate that comes out of this because I think if you look at the evidence on this, I think that taking an approach of encouraging people to seek opportunities and subsidize them to do that through housing vouchers, for example, that Paul and I, I think, both agree on. Another approach is the way to go--we see in New Orleans, in my view, the results not only of the immediate issue of Katrina but the fact that we had large concentrations of people who've known nothing more than poverty and dependence all their lives. And how we address that in general in our cities is what we should be trying to ponder after the Katrina event.

GROSS: Paul Krugman.

Prof. KRUGMAN: Well, it wasn't--didn't crystalize anything for me because I was already quite aware of just how severe poverty is in the United States. And I guess I was shocked, even so, that there wasn't a better effort to evacuate people and, you know, basically that the help didn't arrive for five days. I'd like to believe that it would really lead to a change in national perception, that people will say, `Oh, my God,' you know, `we really--many of us are really barricaded off from the American Dream, and we need to do something to ensure that there's good education, good health care for people, no matter what their color, no matter what their income level.' Truth is I don't believe it. Now I found myself thinking, while I was watching the very emotional coverage of all that--unfortunately, I found myself thinking about the Onions headline--the satirical newsweekly's headline after 9/11, which was: `Rest of Country Temporarily Feels Deep Sympathy for New York City.' I'm feeling that this--I have a feeling, unfortunately, that this is all going to fade away. You can already see some of that happening as we return to politics as usual.

Mr. BUTLER: Well, I'm fearful you're right. I hope you're not right. And I think we do have an opportunity to crystalize these debates rather more.

GROSS: When we started this conversation, you both agreed that the government can't really proceed in the direction that it's going now of raising spending and cutting taxes at the same time. Your answers to how the government should be proceeding disagree, but you do agree on that basic premise. So I'm wondering what programs you think are likely to be cut now. The president has said he was going to recommend program cuts in order to pay for Katrina, and we'll probably end up doing that to pay for the war in Iraq as well. What do you think we can be--what do you think we should be expecting to see either disappear or be dramatically cut?

Mr. BUTLER: I think the political response in general will be to talk about cuts and to promise them and not actually to do anything. I think that's the default position that we face. I and others have been focusing particularly on the highway legislation because I think if you're talking about shifting functions, shifting bridges and moving resources in that way, that's the number one target. And I think that there's a decent chance that we will see a revision in the highway legislation in the near future. I think that's the most probable one that will see any change. But there's enormous resistance to cutting anything in either party.

GROSS: Paul Krugman, what do you think we can expect to see cut?

Prof. KRUGMAN: Very little, if anything. I think we'll see some gesturing, some fuzzy math, make it seem as if things are being cut, and some random acts of cruelty to powerless people. So we're talking about restricting food stamps. But I'm afraid that nothing is really going to happen that's going to matter for the overall picture.

GROSS: You disagree on a lot of economic solutions and a lot of economic principles, but you agree on some basic things, too. Is it nice for you to both find things that you agree on, in spite of your disagreements?

Mr. BUTLER: Well...

Prof. KRUGMAN: It's a relief, but we're both dangerous radicals for believing that addition actually works.

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Mr. BUTLER: Well, and let me just add that I think you may not realize this in the media, but there's a lot more conversations like the one that Paul and I have had, where people of goodwill really do agree that there are enormous problems. And they basically agree what those are, and there are well-meaning discussions going on, honest discussions, about the choices that face us. But we're not seeing that in the Congress yet, and we're not seeing that normally in the media, except for programs like this.

GROSS: I thank you both very much for talking with us.

Prof. KRUGMAN: Well, thank you.

Mr. BUTLER: My pleasure.

GROSS: Paul Krugman is a columnist for The New York Times and a professor of economics and international affairs at Princeton University. Stuart Butler is vice president of Domestic and Economic Policy at The Heritage Foundation. Coming up, Jean-Luc Godard's 1966 film "Masculine Feminine" is now out on DVD, and John Powers has a review. This is FRESH AIR.

Originally broadcast, 10.6.05