SYNOPSIS:

DOBBS: Tim O'Brien, thanks a lot. Well, the divided Senate is set to debate and vote on that compromise tax cut package Monday. The $1.35 trillion proposal would be the most dramatic tax relief in decades. Joining me now, a passionate critic of the Bush tax cut and budget: economist Paul Krugman. He is a regular columnist for "The New York Times." He is the author of the new book, "Fuzzy Math: The Essential Guide to the Bush Tax Cuts." Good to have you with us.

PAUL KRUGMAN, "NEW YORK TIMES" COLUMNIST/ECONOMIST: Good to be on.

DOBBS: What's wrong with getting a little money back in the private sector, Paul?

KRUGMAN: What's wrong is that -- what's wrong is that I and my generation are going to retire not too far away, I hope, if I can.

(LAUGHTER)

And basically, what this does, the tax cut is undermining any effort to make realistic provisions for that impending event.

DOBBS: May we put up a couple quotes from both your column and the book? The first one, if we could see that please. There it is. "The White House has radically understated the cost of their plan while overstating the money available to pay that cost?" What does that mean?

KRUGMAN: A couple things. One is that there are land mines sort of built in to this. The biggest is the alternative minimum tax. I personally know that I'm going to get no tax cut under this, because I'm going to run straight into this thing called the alternative minimum tax. But since they're going to be about 30 million other people like me, they're going to have to change that, and that right away adds 400 billion to this -- to the tax number. The other thing is that surplus projections are really a joke. If you really start to look into them, you discover that there are hundreds of billions, quite possibly a trillion, of necessary expenditures, expenditures that everybody in both parties is going to want that there are not counted in. And...

DOBBS: Your next quote: "The White House has falsely sold the plan as an appropriate answer to the short-run economic slowdown when it is almost perfectly designed not to deal with that problem."

KRUGMAN: Most of the tax cut comes second half of the decade.

DOBBS: The backend loading thing.

KRUGMAN: That's right. And in fact, now there's a hundred billion, supposedly, of front end stuff, which the Republicans were dragged into kicking and screaming. As you may recall, there was an attempt a couple of weeks ago to welsh on the deal and take that hundred billion of immediate tax relief away so that you could keep the full tax cuts for the top marginal bracket.

DOBBS: You know, with your criticism of this -- and I take your point, entirely -- it is -- it has to be stunning to you to see this move into law, because it was only three or four months ago that nearly, you know, every Democrat, some Republicans were saying, "Tax cuts?" and George W. Bush was in many places ridiculed in the campaign for even suggesting such a thing.

KRUGMAN: Well, you know, partly it's Alan Greenspan bears some responsibility, I have to say, as one of those people still a little bit riled. You know, we used to say the Fed stood above politics just like the Supreme Court, and now we're 0 for 2. But...

DOBBS: Was that some partisanship I heard slip in there, Paul?

KRUGMAN: Yeah, a little. But no, I mean, the real thing is this is -- the timing -- this is the sweet spot. Right now is exactly the moment when we have the delusion that there's lots of money for the tax cut.

DOBBS: Right.

KRUGMAN: Even one year from now, certainly two years from now, we're going to be looking back and saying, my god, what did we do? But right now, just given the peculiar way in which budgets are made, it looks like we can afford this. And George Bush is lucky and somebody -- maybe him -- is very smart.

DOBBS: Well, it was, was it not, a Democratic administration who did a projection 10 years out to $5 trillion out there? Wasn't that...

KRUGMAN: Well, that's right. But the...

(LAUGHTER)

DOBBS: Some responsibility has to (UNINTELLIGIBLE) surely for that rosy scenario.

KRUGMAN: The trick is the 10 years, which is, you know, it's the worst possible horizon. It's long enough so that it's all science fiction and short enough so that you don't get the retirement of the baby boomers in there. Perfect.

DOBBS: Well, the fact is this economy, do you believe, as we wrap this up, irrespective of tax cut, which is assured, irrespective of the budget condition, which are dependent upon economic conditions, do you believe that we're going into recession?

KRUGMAN: I think not, though if anybody -- anyone who's confident doesn't know what he's talking about, right? But looks as if we may be skating just above a technical recession.

DOBBS: Well, it's -- and you'd give how much credit to Alan Greenspan?

KRUGMAN: Oh, to the Fed in general? Lots, and Greenspan is certainly doing that job.

DOBBS: Forgiving him his partisan foray down into the...

KRUGMAN: That's right. He does his proper job very, very well.

(LAUGHTER)

DOBBS: Paul Krugman, good to see you.

KRUGMAN: Thanks.

DOBBS: Good to see you. Come back soon. Straight ahead, ongoing trauma at Palm.

Originally broadcast, 5.18.01