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CHRIS MATTHEWS, HOST: On the eve of the White House economic conference, interest rates are rising, the trade deficit is growing and Social Security faces a numbers problem. What does it mean to you? We‘ll ask some of the country‘s top economic thinkers. And will Bernard Kerik‘s close friend and business partner, Rudy Giuliani, pay a political price for Kerik‘s aborted nomination for secretary of homeland security? Let‘s play HARDBALL. Good evening. I‘m Chris Matthews. Interest rates are up again today. The Federal Reserve raised the key short-term interest rate a quarter point to 2.25 percent from 2 percent, where it was yesterday. It‘s the fifth time this year that Fed chairman Alan Greenspan has hiked the rate. And tomorrow, President Bush host a White House conference on the economy, where Social Security reform will no doubt get a lot of attention. Tonight we have some of the top economic minds in the country to join us here on HARDBALL. Brian Wesbury is chief economist of the investment bank Griffin, Kubik, Stephens and Thompson. Paul Krugman is a “New York Times” columnist, of course, also a Princeton economics professor. And Pete Peterson was secretary of the commerce in the Nixon administration. He‘s the author of “Running on Empty: How the Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It.” Let‘s start with you, Secretary Peterson. I‘ve got to ask you, are we really on the road to calamity with regard to our Social Security system?
PETE PETERSON, FORMER NIXON COMMERCE SECRETARY: Well, I think what we ought to be doing is looking at about three interrelated problems, Chris—the budget deficit, which is scheduled to—which is not only large now but scheduled to be another $5 trillion or so over the next 10 years; the current account deficit, the foreign deficit, concerns me mightily. It is now approaching the stratospheric level of 6 percent of the GDP, where we‘re borrowing $600 billion a year, heading north. And I think we should be very concerned about whatever we do to build confidence in foreigners, so they‘re willing to lend us money, while we fix the fundamental problem, which is to increase savings.
MATTHEWS: What‘s the No. 1 concern you‘ve got right now, Pete, the No. 1 economic concern?
PETERSON: My...
MATTHEWS: When you pick up the paper in the morning or you hear something on the market during the way, what worries you the most?
PETERSON: Yes. OK. This relates to Social Security, Chris. To be fair to the administration, I—all we know about is the plan to take a small part of this payroll tax and put it into private accounts. However, there‘s a lot of indication that they play to borrow the money, up to $2 trillion. Among the last signal I think we should be sending to foreign governments is that on top of all the mammoth borrowing we‘re doing now, we‘re quite benign in borrowing another $2 trillion. I think that would send a very unfortunate signal. What would the effects of that be? We must build confidence in foreign markets while we get our act together. I don‘t think that kind of a Social Security plan does anything but create serious doubts as to whether we‘re really serious about fixing our fiscal house.
MATTHEWS: Brian, we‘ve got a deficit right now, a fiscal deficit, of about $600 billion. It‘s—if you add another $200 billion a year, that‘s $800 billion, in order to get the Social Security system transformed to this new individual account basis. How do you—if you‘re a Chinese business or a money manager or a Japanese money manager, why would you continue to invest in dollars, if the United States keeps basically printing money, just running up bigger deficits every—and monetizing them?
BRIAN WESBURY, GRIFFIN, KUBIK, STEPHENS AND THOMPSON: Well...
MATTHEWS: Why do you go—why would you think the dollar would be a good investment?
WESBURY: Well, there‘s two parts to this question. The first is that we already have a $10 trillion unfunded liability in Social Security. That debt‘s already out there. So all we‘re doing is moving part of the financing of that up front. So we‘re really not increasing debt anymore, we‘re just changing the timing of it. The second thing is...
MATTHEWS: But we‘re changing the federal deficit from $600 billion a year now, which is already outlandish in historic terms, to $800 billion a year. Why doesn‘t that hurt our ability to borrow money? Doesn‘t it get harder to borrow, the more you borrow?
WESBURY: You—the trade deficit is $600 billion. The budget deficit is somewhere in the $300 billions right now. We might add $200 billion a year, $100 billion a year, no one really knows, if we go to private accounts. But what I‘m saying is, is that we have to fund those—those liabilities...
MATTHEWS: Yes.
WESBURY: ... for Social Security at some point. So whether we do it in 20 years or 30 years or 2 or 5 years really doesn‘t make a difference. So if I was a foreigner—in other words, I work in the financial market. I don‘t believe the financial markets will look at a change in Social Security, a reform in the system, that moves the recognition...
MATTHEWS: All right.
WESBURY: ... of the debt up in time as some kind of bad economic policy.
MATTHEWS: OK, let‘s talk about that unfunded liability, Paul Krugman. We‘ve seen ratio numbers right now. When Social Security was first started under Roosevelt back in the ‘30s, there was an incredible number of people working, at least double digits, from—compared to the people who were retired and getting the check. And now you have a situation where I understand it to be that we‘re going to reach the situation fairly soon where there‘ll be only three workers for every retiree, which means, basically, you got to pay a third of somebody‘s retirement out of your taxes every year. Can we sustain the current system if we don‘t change it?
PAUL KRUGMAN, COLUMNIST, “THE NEW YORK TIMES”: Well, the current system—yes. I mean, look, the—let‘s not be apocalyptic here. It is going to rise. You know, right now, Social Security is taking in about $1.25 for every $1 of benefits that it‘s paying. Now, over time, as the population ages, it‘s going to eventually reach a point where it‘s taking in less than the benefits it‘s scheduled to pay. So it‘s a very long-term issue, and we ought to be thinking about that. But you know, the rest of the federal government—by the way, your $600 billion is right because Brian is counting the Social Security surplus twice. He‘s counting it both as money that we can use for privatization, and he‘s counting it as part of the federal revenue. You can‘t do that both ways. The rest of the federal government right now—right now—is taking in about 70 cents for every dollar of spending. So we‘ve got, on the one side, the federal budget, 70 cents of revenue per dollar of spending. On the other hand, you‘ve got Social Security, right now, $1.25 of revenue for every dollar of spending. But 30 or 40 years out from now, when the Baby Boomers have all retired, you know, it‘s going to have a financial problem.
MATTHEWS: Well, go back to my math...
KRUGMAN: Which of these ought to be the priority? Which of these ought to be...
MATTHEWS: Well, go back to my math.
KRUGMAN: ... the priority?
MATTHEWS: Go back to my math, which is how many workers do you have for every...
KRUGMAN: Right now—right now, we‘ve got...
(CROSSTALK)
MATTHEWS: ... retirees watching right now imagine probably, if they think about it, they certainly say, Well, I paid in. I deserve to get the money at the end of my working years. Fine. But in real life, they sit back and say—but they understand that the way the money moves—it‘s a transfer payment from the people working to the people retired. How many people do you need to be working for you, Paul, to be satisfied we have a good system? Do you need, like, five or six workers for every retiree?
KRUGMAN: Look...
MATTHEWS: What would you consider...
KRUGMAN: Right now...
MATTHEWS: ... a solid system?
KRUGMAN: Right now, it‘s three. Right now, it‘s three. And right now, the burden is not so bad. Forty years from now, it‘s going to be two. And that‘s harder. Remember, it‘s not—you know, you‘re not paying people their full income. Social Security is not replacing everybody‘s income in full. It‘s—you know, it‘s—so it—look, it‘s not that big a thing. And if you look at these long-term projections about how big the burden of Social Security and Medicare is going to be—and they are pretty scary, it‘s Medicare, not Social Security, that does it. And it‘s not really the aging population. That‘s an issue, but it‘s really secondary. It‘s really...
MATTHEWS: So if somebody‘s calling...
KRUGMAN: ... medical costs.
MATTHEWS: Just to get...
KRUGMAN: So this is a—this is a fake crisis.
MATTHEWS: So let me just—let me go back again to Pete Peterson. If you figure you‘re getting $15,000 a year in Social Security benefits, a modest benefit—it‘s certainly not a lot of money—you figure three people are each paying $5,000 out of their taxes. Is that what is? Is that what‘s going on right now?
PETERSON: No. At the moment, we have a Social Security surplus.
MATTHEWS: Yes, but who‘s paying the—who‘s paying in? Most of the money that goes to people...
PETERSON: No, but the point is...
MATTHEWS: ... who are retired right now?
PETERSON: ... we use fancy words like “trust funds” and “surpluses,” as though we‘re setting them aside. For the last 50, 60 years, we‘ve been spending those surpluses on other items, and that‘s what leads to this unfunded system. But I want to pick up on what Paul said. To me, the big, big elephant in the room that we‘re pretending is not there, and we hope no one else notices, is Medicare. It‘s three to four times the size of the problem, in terms of unfunded entitlements. And in my opinion, we ought to really be honest with ourselves and fix Social Security and really fix it because it‘s far easier to solve, instead of adding to the problem of Social Security, which just makes the Medicare problem that much more difficult.
KRUGMAN: Chris, if I can just come back...
(CROSSTALK)
KRUGMAN: The point—and the really important thing to say is that the Social Security fix—when people like Brian talk about—when $11 trillion—you know, it‘s actually more like $3 trillion, but who‘s counting? The—but the point is, this fix is not a fix. It‘s actually going to make things worse. And so this is phony. This is really—this is using—crying wolf about...
MATTHEWS: OK...
KRUGMAN: ... a long-term crisis to sell a program that‘s going to make things worse.
MATTHEWS: OK, that‘s a very strong argument. I want you to respond to that.
WESBURY: Well...
MATTHEWS: What I understand the president‘s plan to be, his rough outline, is that instead of this transfer situation we live in today—which basically is a person now 70 to 80 years old right is getting a check, which most of it comes from the fact that people are getting to pay a payroll tax, 6.2 percent, on up to $87,900 a year. Right?
WESBURY: Right.
MATTHEWS: That‘s it. That‘s a simple system. He‘s saying, NO, I don‘t like that system. That‘s a bad system. That‘s redistribution. I want to have a system where starting at the time you have your first paper route, you‘re paying into a system that‘s going to give you equity returns, as if you‘re going into the equity market at 14 when you serve that first newspaper—you throw the first newspaper, you start making money. It‘s your money. By the time you retire at 62 or 65 or 70, it‘s all going to be your money. You can give it to your kids.
WESBURY: Right.
MATTHEWS: You can spend it all on a big around-the-world trip, if you want to do it. Right? But it ain‘t the government‘s money.
WESBURY: Right.
MATTHEWS: That‘s the philosophy, right?
WESBURY: That‘s exactly the philosophy.
MATTHEWS: Why—why is that—why do you know that to be a sound idea? And let me ask you this. If I‘m working at a factory and I‘m 42 years old and there‘s an accident in the factory, and I get hurt badly and I can‘t work again...
WESBURY: Right.
MATTHEWS: ... who‘s—now the government pays that money because it‘s a Social Security insurance program.
WESBURY: Right.
MATTHEWS: Who‘s going to pay that money if I haven‘t paid in enough in the new
WESBURY: Well...
MATTHEWS: Who‘s going to—I‘m—I‘ve invested all my money in the stock market.
WESBURY: Right.
MATTHEWS: I just got hurt. I can‘t work. Well, what, am I stuck then?
WESBURY: Well, first...
MATTHEWS: Who‘s going to pay that?
WESBURY: I mean, first of all, we have to realize that your hypothetical person should be, I believe, taken care of somehow. Using personal accounts in Social Security does not take away helping people that truly need help. What it does,...
MATTHEWS: Why should they...
WESBURY: What it does is it...
MATTHEWS: If they haven‘t paid in as much as everybody else has paid in, why should they get the same help that a person who‘s been paying in straight—I‘m putting all my money in the federal government. I trust the federal government. I trust this old-time system. I don‘t want an individual retirement account. I want everything in my benefits. Shouldn‘t that person get more when they get in trouble halfway through their working life?
WESBURY: I mean, I—I...
MATTHEWS: They choose that route?
WESBURY: These are all these hypothetical questions...
MATTHEWS: They‘re not hypothetical!
WESBURY: I don‘t...
MATTHEWS: Everybody watching knows what I‘m talking about.
WESBURY: Well, I—I don‘t. Who is...
(CROSSTALK)
MATTHEWS: ... you thought about a problem that...
WESBURY: I mean, who is this person?
MATTHEWS: If everybody lives happily to their retirement years and everybody lived to be 75 or 85, everybody would benefit. But it doesn‘t work out that way.
WESBURY: Well, the—here‘s the issue, and that is that this system, as it exists today, must be changed. Tax rates have to go up or benefits have to go down. That‘s the point. And so the way out of this—in fact, Chris, no company in the last 20 years that has started has put in a defined benefit pension plan. They put in defined contribution plans. The reason is, is they don‘t work. In fact, Paul Krugman wrote in 1996, 1997, in “The Boston Review” that this is a ponzi scheme. In 2001...
MATTHEWS: You mean Social Security is.
WESBURY: Yes. He—in 2001, he wrote that he...
MATTHEWS: OK, he‘s got to respond...
(CROSSTALK)
MATTHEWS: Paul, your response?
KRUGMAN: My response is that‘s out of context. The point is, Social Security needs to be running a surplus now to build up assets. And it should not be squandered by having the rest of the government run a deficit. So this is all a reason. If you actually ask, What was I saying in 2001? I was saying, Don‘t do these Bush tax cuts. Don‘t squander the Social Security surplus, which they went ahead and did that, and now they say, Oh! We‘ve got a Social Security problem. No. We have a budget problem. And they‘re making Social Security the whipping boy for a problem that has vastly more to do with the Bush tax cuts.
MATTHEWS: OK...
PETERSON: You see, Chris, if I may, one of my colleagues here said because these programs are unfunded long-term, you either have to cut the benefits or increase the taxes or try to borrow the money. I‘ve heard precious little about what they‘re going to do to reduce the benefits.
WESBURY: Yes. Chris, if I could just get in on that...
(CROSSTALK)
PETERSON: If they don‘t, then the idea that you‘re playing kind of a three-card Monte game...
MATTHEWS: Right.
PETERSON: ... like we have on 5th Avenue, where on the one hand, we borrow the money, and on the other hand, we give the public back the money we just borrowed, is to me a—it‘s truly that kind of a game. Now, I think...
MATTHEWS: Oh, in other words, selling T-bonds...
(CROSSTALK)
MATTHEWS: In other words, selling T-bonds, Pete—you sell T-bonds to raise enough money from retirees who are buying T-bonds to pay for their benefits. You‘re right.
PETERSON: Well, to invest in the market.
MATTHEWS: Right.
PETERSON: And then you say, Gee, that‘s going to earn a lot of money if you put it in the market. But what they don‘t tell you is they borrowed the money to put in the market.
MATTHEWS: We‘ll be right back with Brian Wesbury, Paul Krugman and Pete Peterson. And on Thursday‘s HARDBALL, we‘re going to have a special program for you that you won‘t want to miss. We‘ll be at Walter Reed Medical Center for “A Soldier‘s Journey Home.” You‘re watching HARDBALL on MSNBC.
(COMMERCIAL BREAK)
MATTHEWS: I‘m back with Brian Wesbury, chief economist for the investment bank Griffin, Kubik, Stephens and Thompson, and Paul Krugman of “The New York Times”—of course, he‘s also a Princeton economics professor—and Pete Peterson, former secretary of commerce. He‘s the author of “Running on Empty: How the Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It.” Let me start with some politics, my favorite area. Let me go with Brian first. The vice president, in his usual indelicate way, said that deficits don‘t matter politically. In other words—I don‘t—I agree with him, by the way. I don‘t think any party‘s ever lost an election for running up a big deficit. But let me ask you this. Do they matter economically? Does it matter, the fact that—we argue about it, but we have a sizable fiscal deficit right now.
WESBURY: Right.
MATTHEWS: We‘re making—we‘re spending more money than we‘re bringing in...
WESBURY: Right.
MATTHEWS: ... year after year after year.
WESBURY: Right.
MATTHEWS: Are you saying that has no impact?
WESBURY: Well, what I would say is that there‘s many a—many things people say it has an impact on. I don‘t believe so. Lots of people say deficits raise interest rates. If the last two or three years haven‘t shown that that‘s not true, I don‘t know what will. When I analyze the federal budget...
MATTHEWS: Well, why are the interest rates going up now?
WESBURY: Well, because the Federal Reserve...
MATTHEWS: Today.
WESBURY: ... held them so low, and now they‘re...
MATTHEWS: Is there a connection between the big deficits we‘re running...
WESBURY: No.
MATTHEWS: ... and the fact that...
WESBURY: I do not believe so.
MATTHEWS: ... Alan Greenspan raised the rates again today?
WESBURY: In fact, you know, long-term interest...
MATTHEWS: OK, let me ask that around. Let me go...
WESBURY: Long-term...
MATTHEWS: ... around the table.
WESBURY: Long-term interest rates fell today, by the way.
MATTHEWS: Paul Krugman, is there a relationship between an ongoing deficit policy of this administration, which is a deficit policy—they chose not to raise taxes.
KRUGMAN: Right. They‘ve chosen not to cut spending or stop the increase in spending. Is that policy related to the fact that Alan Greenspan has to now five times this year raise rates? No. I‘ll give Brian that. I mean, in the long run, it‘s going to do a lot to raise rates, but that‘s not the problem. But look, let‘s get to your bigger problem here about the deficit. The public doesn‘t care. The public doesn‘t know. You know, they shouldn‘t. They‘ve got other things to do with their lives. But look, what matters—and this comes back to what Pete Peterson said at the beginning. What matters is the United States has this huge trade deficit to cover that. To not have the dollar go into free fall, we need foreigners to lend us about a billion-and-a-half a day. And the size of that deficit—if—we‘ve got a bigger trade deficit as a share of GDP than Indonesia before their economy went blooey in ‘97. We‘ve got a bigger budget deficit as a share of GDP than Argentina before their economy went blooey in ‘01. The reason that doesn‘t happen is because the markets give us the benefit of the doubt because they say to themselves, Well, this is America. It is not a banana republic...
MATTHEWS: When won‘t they, Paul?
KRUGMAN: What?
MATTHEWS: When won‘t they? When will there be...
KRUGMAN: That‘s the point.
MATTHEWS: ... a tipping point when they say...
KRUGMAN: That‘s the point.
MATTHEWS: ... We‘ve already leant you so much money, the Chinese investors, sitting over there and thinking, You know, they‘re running a deficit, huge trade and...
(CROSSTALK)
KRUGMAN: The day when the markets conclude that, Hey, you know, America really is a banana republic, they are never going to get their act together, at least not under current management, that‘s the day when it all goes blooey. And this administration is doing everything it can to convince them of that. When you have...
(CROSSTALK)
KRUGMAN: The government of the United States say we can solve our long-term budget problems by borrowing more money, what kind of signal does that send?
PETERSON: Chris? Chris...
MATTHEWS: Pete Peterson, I‘ve learned a new word, “blooey.” It doesn‘t sound good.
(CROSSTALK)
PETERSON: Chris...
MATTHEWS: Are you in agreement that if we keep running these deficits in trade and fiscal policy, we‘re going to have a bang—a bang-up bad news day?
PETERSON: Chris, let me give you my slant on the deficit. I think, frankly, we spend too much time talking about the effect on short-term interest rates. Many things affect interest rates. Let‘s get back to the savings problem of the country. Deficits are bad from this because they‘re negative savings and they devour our limited savings pool because we have a very low personal savings rate.
MATTHEWS: Right.
PETERSON: It is at a shocking level today. It‘s .2 percent of the GDP. Ten, twelve years ago, it was it was 7, 8 percent.
MATTHEWS: OK...
PETERSON: That‘s what makes us recklessly dependent on foreigners to finance it, and that‘s the problem we have to attack.
MATTHEWS: OK, thank you, Pete Peterson, author of “Running on Empty.” Thank you, Brian Wesbury. And thank you, Paul Krugman. When we come back, we‘ll take a look at what may have derailed Bernard Kerik‘s nomination, his aborted nomination as secretary of homeland security. You‘re watching HARDBALL on MSNBC.
Originally broadcast, 12.14.04