Watch this broadcast on Video: Part 1, Part 2, Green Room (not transcribed)

SYNOPSIS:

GEORGE STEPHANOPOULOS (ABC NEWS): And to follow up on that interview taped just a few minutes ago, we're going to bring in our "Roundtable." I am joined, as always, by George Will, Ruth Marcus of the "Washington Post," our Chief White House correspondent, Jake Tapper, Paul Krugman of "The New York Times" and Princeton, and former Speaker of the House, Newt Gingrich. And George, let's follow up there right now. The hostage situation looks like a watch and wait situation right now off the coast of Somalia. But you heard the admiral there on the broader issue of piracy. Yes, it's a real problem. The answer is we need some kind of an international agreement to crack down on them, but against arming ships and not willing to speculate on the ties to al Qaeda.

GEORGE WILL (ABC NEWS): We don't need an international agreement to crack down on them. I mean the Danish Navy could take care of this. This is a small localized crime problem that is flourishing as crime usually does because it pays. And when we quit paying them or - which may be a rational response on our part that it's just not worth the trouble to sweep them off the seas. But sweeping them off the seas does not require an international agreement.

GEORGE STEPHANOPOULOS (ABC NEWS): And, Jake, the President has taken a real hands-off attitude as you might expect with a hostage situation. But how seized is the White House by the broader problem right now?

JAKE TAPPER (ABC NEWS): Well they're engaged very much. Two points. One is, they'd like this to be, they'd like this issue to be internationalized. And in fact, when the President was at the NATO summit in France, he, he praised behind the scenes the Spaniards and the Bulgarians for increasing their commitment to patrolling these areas of the seas. But, but the second point has to do with the fact that this problem is not one that the President wants to be talking about at all. At all. And behind the scenes, despite what the admiral told you, the administration is very strongly, what they call, interfacing with these private companies and saying, you need to get adjusted to the reality of the situation, in other words...

GEORGE STEPHANOPOULOS (ABC NEWS): Stop paying ransom?

JAKE TAPPER (ABC NEWS): Stop paying - well, they're not telling them what to do. But the reality is, paying ransom, not having insurance, not having weapons on these vehicles - on these, on these ships is not doing the trick.

NEWT GINGRICH (FORMER SPEAKER OF THE HOUSE): Well, this is an administration which keeps trying to find some kind of magical solution that doesn't involve effort and doesn't involve risk and doesn't involve making hard decisions. They've had 66 pirate attacks so far this year. Now this is, as George said...

GEORGE STEPHANOPOULOS (ABC NEWS): Only one against an American ship.

NEWT GINGRICH (FORMER SPEAKER OF THE HOUSE): Okay. So we're part of a world community. We have the most powerful Navy in history. We have the capacity to police the area if we want to. We have an entire NATO alliance, which is currently, which has total Navy dominance in the region. Nobody has the will to do anything. And so, now, we talk about having a new legal structure which I thought, frankly, was the last thing I'd like to hear out of the Coast Guard. They have a legal structure. There's a law of the sea. Piracy is outside the law. It is illegal. And it's been held so at least back to roman times. And we ought to simply, as, as a civilized world, say we are going to stop the pirates in the region, period. It's very good for the rest of the world, by the way - it's very good for the rest of the world to see that there's some place in the planet where people are willing to draw a line and say certain things won't be tolerated.

GEORGE STEPHANOPOULOS (ABC NEWS): Both Ruth and Paul want to jump in here. Ruth, go first and then Paul.

RUTH MARCUS ("WASHINGTON POST"): Well, I think it's easy to sort of say we already have a legal structure. And certainly, piracy is against international law. It's enforceable everywhere. But there have been complications about when you get these pirates, thugs, whatever they are, where it is exactly you can try them what - based on their nationality, based on the nationality of the ship. There's been work involving having them tried in Kenya. I think that's part of what the admiral is alluding to. I do totally agree that this is from my point of view, not terrorism so much, as a very sensible business model on the part of the pirates. There's very low barriers to entry. And there's - as long as the companies are continuing to, A, pay ransom and B, not pay the other costs of do - other costs of doing business to defend themselves against the pirates, not necessarily armed folks on the ships, but to have the kind of non weapon/weaponry. The sonar booms...

GEORGE STEPHANOPOULOS (ABC NEWS): High speed hoses, laser wire.

RUTH MARCUS ("WASHINGTON POST"): ... high speed hoses, exactly. You are going to encourage this. And so I think we need both to get the companies to take some responsibility and not to have us kind of come in, navies of the world, come in as a backup. And to have a legal structure that's effective.

GEORGE STEPHANOPOULOS (ABC NEWS): They have been making a rational choice though at the companies up until the last year.

PAUL KRUGMAN (ABC NEWS): Yeah, but you got to bear in mind just how much shipping there is. Right. We can talk some economics here. There's an incredible number of ships. 66 pirate attacks. I don't know what fraction that is of, of the number of ships that pass by there. But it's a very, very small fraction. This is a, a minor irritant, this is like muggings, right, this is not something that is totally changing the way life is lived. And that's also why it's not so easy to say let's just police it, right? There's a lot of sea. An incredible number of ships. You can't be escorting all of them except at a very great expense. And then if you say, well we're going to the pirates not by escorting the ships, but we're going to search them out, either you go after them on land, and nobody wants - you know, got to make that decision. Or you have to go around stopping ships on the open water and say, you look like pirates to us, we're going to seize you.

GEORGE STEPHANOPOULOS (ABC NEWS): So the argument is on a pure-cost benefit basis, this might be an appropriate cost?

NEWT GINGRICH (FORMER SPEAKER OF THE HOUSE): Let me draw a different parallel for a second, okay? This is - because it is like muggings. And it's like muggings in New York City before Giuliani and Bratton versus muggings in New York City after Giuliani and Bratton. Before Giuliani and Bratton, civilization was decaying. People felt - people were leaving the city. People felt unsafe. So North Korea gets to fire a missile deliberately on the day the President gives a big speech on disarmament. The Iranians get to cheerfully announce their 7,300th centrifuge for nuclear weapon - I mean to make a nuclear weapon. The Hamas gets to fire a few more missiles into Gaza. The Pakistan gets to refuse to clean out the northwest frontier. The Somali pirates are one of, one of those little accidents of life...

GEORGE STEPHANOPOULOS (ABC NEWS): But given those other four things you just talked about, do you think we should be going after the Somali pirates?

NEWT GINGRICH (FORMER SPEAKER OF THE HOUSE): Wait, let me finish. We've talked about there's a Mexican war going on, there's a Mexican war going on and there is no place, where if you are bad, there's any great consequence, except that we wring our hands, talk about illegal convention and hope that some day, internationally, somebody other than us will do something.

GEORGE STEPHANOPOULOS (ABC NEWS): Well, I would think some of the al Qaeda leaders in, in Pakistan who have been getting those drone attacks might differ with you. But take, take the, the Speaker's point more broadly. Is this a test of President Obama?

GEORGE WILL (ABC NEWS): Good heavens, no. I mean, the Speaker's very litany of nuisances around the world, some rising considerably above nuisance, indicates just how down on the chain of concerns this should be. Again, this is, this is - I think what you've established is, that this is well below what mugging was in New York City because, as Paul said, the seas are really quite safe.

RUTH MARCUS ("WASHINGTON POST"): But I think that as a matter of reality George is right. But as a matter of political reality, you have an American ship, you have an American captive. It's the sort of Elian Gonzalezation of foreign policy. Because everybody cares as they should about this individual captain. And it is going to be...

GEORGE STEPHANOPOULOS (ABC NEWS): But it does seem like the President has been trying to avoid that, even though the ship is there, he's trying to stay out of it.

RUTH MARCUS ("WASHINGTON POST"): The - of course, the President has been trying to avoid that. But it is inevitably going to be taken by the president's critics if god forbid something goes awry with the holding of this captain, he is going to be held in some sense, whether fair or not, responsible. And so, this is a political problem as well as a, a real problem.

GEORGE STEPHANOPOULOS (ABC NEWS): And, Jake, it's coming at a time when there, there has been an underlying debate in the White House about whether and how to go after potential terrorists in Somalia on the ground. And you know, they've been, they've been debating this back and forth. There have been drone attacks in the previous administration, not yet under President Obama.

JAKE TAPPER (ABC NEWS): Right now, well the debate is whether or not attacking the terrorists in Somalia. And there have been US citizens who are now fighting jihad in Somalia. Whether or not attacking them just creates more blow-back or whether or not it's fending off the problem at the pass. But, but another point about the pirates is a lot of people draw the comparison with Thomas Jefferson in 1804 deciding it was no longer worth paying a payment the Barberry Pirates and declaring war. One of the things that is I think is a little bit different now than 1804 is, is that President Obama - people forget, the "USS William Bainbridge" is named after a, a commodore in the Navy, one of the first, who made his name fighting in both the first and second barberry wars. But he had, in addition to spectacular successes, spectacular failures fighting against these pirates. And if we engage with the pirates and President Obama starts talking about it the way that a lot of people want him to talk about it, instead of saying, pardon me guys, we're talking about housing right now which is what he said the other day in the White House when asked about this, you risk elevating and then you risk an asymmetrical war that we can't win.

GEORGE STEPHANOPOULOS (ABC NEWS): And he clearly doesn't want to do that. Meanwhile, this week, Defense Secretary Robert Gates came forward with some pretty significant reforms in the Pentagon budget, actually, an overall increase in the Pentagon budget of about 4%. But within that, more money devoted towards irregular asymmetric wars, less towards the traditional conventional wars. Here was the secretary.

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ROBERT GATES (DEFENSE SECRETARY): This budget represents an opportunity, one of those rare chances to match virtue to necessity. To critically and ruthlessly separate appetites from real requirements. Those things that are desirable in a perfect world from those things that are truly needed.

GEORGE STEPHANOPOULOS (ABC NEWS): And, George, the ruthless critics were out from day one in, in the Congress who simply, who don't want to go along with a lot of the changes that the secretary called, including stopping the F-22 fighter.

GEORGE WILL (ABC NEWS): F-22 fighter, instead of adding 500 and some as they had originally planned, he plans to add 4. This is a fighter that costs $150 billion apiece that has yet been used in the Afghan or Iraq theaters. Now, the problem is, the C-17 is on there for serious cuts, a cargo plane.

GEORGE STEPHANOPOULOS (ABC NEWS): The cargo plane.

GEORGE WILL (ABC NEWS): It has subcontractors in 40 states. Now, that's the secret of a good defense program is that you cover as many of the 435 Congressional districts as you can and that looks like a brilliantly constructed program. So this is all in the subjunctive mood has its say.

GEORGE STEPHANOPOULOS (ABC NEWS): And, and this is Secretary Gates last job in the government so he's willing to take on the Congress...

PAUL KRUGMAN (ABC NEWS): And the thing that has been wonderful is watching Republican congressman saying, but this will cost jobs. The very same Republican Congressmen who are denouncing the stimulus plan saying government spending never creates jobs but cutting defense spending costs jobs. It's wonderful.

NEWT GINGRICH (FORMER SPEAKER OF THE HOUSE): Well, conversely, it was interesting that when they wanted - when they were looking for shovel-ready projects, none of them could in fact involve procurement. So even though they could have actually spent a fair amount of the money, as by the way, Roosevelt did with Carl Svenson in 1930s. Two of our most important aircraft carriers were built as a jobs program in the 1930s. None of the procurement could go into the stimulus package. So we blew - you know, we spent $787 billion and now, of course, we have to be very frugal on defense, having spent $780 billion.

GEORGE STEPHANOPOULOS (ABC NEWS): Well, it's an overall increase in defense.

NEWT GINGRICH (FORMER SPEAKER OF THE HOUSE): But it all depends on how you count the supplementals in the last couple years. But here's the key question. If you look at, at the growth of China and you look at the complexity of the world, at what point do we get involved in this warrism. That is, we're now going to make sure we're not going to invest in A, B, and C. And I'm not arguing for any one weapon system. We're going to do what's necessary for Afghanistan and Pakistan, and though that was the only contingency we're trying to deal with.

PAUL KRUGMAN (ABC NEWS): Yeah, but our military is still configured to stop soviet tanks from going across the...

GEORGE STEPHANOPOULOS (ABC NEWS): And the overall breakdown, as I understand it, Ruth, is still 50% of the budget going towards conventional warfare, 10% towards irregular and 40% to both?

RUTH MARCUS ("WASHINGTON POST"): Precisely. And I think that the word "frugal" has to been to be taken in some context here. If you look at the base defense budget with these increases that are being advised by the Obama administration it will have risen by 90% since 2000. That's a huge increase. And matching virtue to necessity may not be a particular attribute of Congress when it's faced with spending money. But the reality is, this is a very sensible set of proposals. The interesting thing will be it's not just that Republican Congressmen started howling about jobs. You heard things from Democratic, key Democratic Congressmen like good faith effort.

GEORGE STEPHANOPOULOS (ABC NEWS): And that's the question I want to bring to Jake. Because I know, Jake, the White House officials are very proud of Secretary Gates. They, they were touting his announcement on Monday, of course...

JAKE TAPPER (ABC NEWS): A visionary.

GEORGE STEPHANOPOULOS (ABC NEWS): Visionary announcement. On the other hand, it happened when the President was overseas. And there's a real question of how hard is the White House going to get behind these Gates' reforms?

JAKE TAPPER (ABC NEWS): Well, I think they know that they're not - that the Gates budget proposal is not going to be exactly what passes. And as George points out, Lockheed Martin, what everyone says about our military strategies in Afghanistan or Iraq the way Lockheed Martin has laid out its procurement strategies by put - by putting the F-22 in 46 different states is brilliant. And I'd love to hear what Speaker Gingrich has to say when, when Gates said my hope is that as we have tried to do here in the building, members of Congress will rise above parochial interests and consider what's in the best interest of the nation as a whole. As a former Speaker of the House, do you think members of Congress are willing?

NEWT GINGRICH (FORMER SPEAKER OF THE HOUSE): I think Gates is a great appointed official.

JAKE TAPPER (ABC NEWS): But do you think members of Congress are willing to...

RUTH MARCUS ("WASHINGTON POST"): Emphasis on appointed.

NEWT GINGRICH (FORMER SPEAKER OF THE HOUSE): I think that Gates has a very sophisticated understanding of large bureaucracies and probably has a pretty sophisticated understanding of, of the Congress.

GEORGE STEPHANOPOULOS (ABC NEWS): And, and, and the difficulty, of course, is not only are these cuts hard to make given the jobs impact, George. But it also coming when the President is going right at his base by asking for more money this week, this month, for Iraq and Afghanistan, $83 billion, I believe.

GEORGE WILL (ABC NEWS): A war supplemental of the sort that he said he was going to rise above because President Bush disguised the cost of the war kept coming back for supplementals for things we knew were absolutely predictable in the first place. So he is going against his base. And it will be interesting to see how they when they get this request from a man who voted against Iraq war funding measures when he was in the Senate...

GEORGE STEPHANOPOULOS (ABC NEWS): He said because there was no timetable for withdrawal.

GEORGE WILL (ABC NEWS): I understand. But is there really a timetable for withdrawal from Iraq today?

PAUL KRUGMAN (ABC NEWS): I think there is a timetable. Whether it will be honored is another question, but, yeah.

RUTH MARCUS ("WASHINGTON POST"): It's been quite fascinating to watch this president transition from the candidate he was into the President he is. When he was in Iraq this last week, he was talking - telling the troops what an amazing job they had done by giving the Iraqi people the opportunity to achieve democracy and to achieve freedom. Well, the obvious question there is gee, if it had been up to you, Mr President, you would have voted against that. The supplemental, I don't thing it's really fair to ding him with proposing the kind of supplemental that he said he was going to do away with. This is, he says, the last one. This is last year's budget. They do...

GEORGE WILL (ABC NEWS): Do you believe that?

RUTH MARCUS ("WASHINGTON POST"): I do. I mean, they do need more money. They have built that into the budget going forward and...

GEORGE STEPHANOPOULOS (ABC NEWS): For Afghanistan as well?

RUTH MARCUS ("WASHINGTON POST"): You can, you can tell me in the year that I was hopelessly naive. But he never promised not to ask for more money this year. It's obvious more money is needed.

GEORGE STEPHANOPOULOS (ABC NEWS): And, and Paul does get at an important question, the President wants to have the troops mostly withdrawn by 2010, fully out in 2011, because that's what's required by the Status of Forces Agreement. But a lot of concern over whether that's gonna be really possible. Whether the Iraqis in the end will have to ask us to actually maintain some forces there in order to keep the security. Because we've seen, even in the last couple weeks, bombings going up again. We're going to take a quick break, come back and do the economy when we come back. President Obama says he sees glimmers of hope. Is the economy taking a turn? We're gonna have that and later "The Sunday Funnies."

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GEORGE STEPHANOPOULOS (ABC NEWS): While you were getting made up, they went into the control room and played director and producer. And they actually gave me a question they wanted me to ask you. You know exactly what it's going to be.

PRESIDENT BARACK OBAMA (UNITED STATES): Uh-oh. Uh-oh. Go ahead.

GEORGE STEPHANOPOULOS (ABC NEWS): What kind of a dog are we getting and when are we getting it?

PRESIDENT BARACK OBAMA (UNITED STATES): They seem to have narrowed it down to a labradoodle or a Portuguese water hound.

GEORGE STEPHANOPOULOS (ABC NEWS): A medium-sized.

PRESIDENT BARACK OBAMA (UNITED STATES): A medium-sized dog. And, so, we're now going to start looking at shelters to see when one of those, one of those dogs might come up.

GEORGE STEPHANOPOULOS (ABC NEWS): So you are closing in on it?

PRESIDENT BARACK OBAMA (UNITED STATES): We're, we're closing in on it. This, this has been tougher than finding a commerce secretary.

GEORGE STEPHANOPOULOS (ABC NEWS): Three months later, Sasha and Maria finally have a dog. It's going to be delivered on Tuesday. But "The Washington Post" had it on its front page this morning.

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GEORGE STEPHANOPOULOS (ABC NEWS): Take a look. There he is, Bo. Actually Bo's original name was Charlie. Came from the same breeder that bred Senator Ted Kennedy's, two dogs, Sonny and Splash. A big gift from Senator Kennedy.

GEORGE STEPHANOPOULOS (ABC NEWS): With that, let me bring in our "Roundtable" to get an important comment on the breaking news out of the White House. George Will, Ruth Marcus, Jake Tapper, Paul Krugman and, and Speaker Gingrich. And, and Jake, since you do cover the White House every day, what have I missed there?

JAKE TAPPER (ABC NEWS): Well, the dog arrives on Tuesday. The dog's name is Bo because both because one of their cousins have a pet named Bo and also because Michelle Obama, the first lady's father was nicknamed Diddley. So you have the little Bo Diddley. And also what's missing here is that Portuguese water hounds are hypoallergenic meaning - and Malia is allergic to dogs. So that's one of the reasons they got it. And because this is a pure bred dog, the Obamas will be making a donation to the Humane Society. Because they feel a little guilty about not getting a shelter dog.

GEORGE WILL (ABC NEWS): That was my point. I thought this was a grand liberal gesture. Didn't he say in that clip there that they're going to pound? They went to the Kennedy's breeder?

JAKE TAPPER (ABC NEWS): But the daughters, Malia is allergic. Malia is allergic.

GEORGE WILL (ABC NEWS): Oh come on.

GEORGE STEPHANOPOULOS (ABC NEWS): This was, this was something - Ted Kennedy has been working on this for a long time. He wanted those girls to have one of his dogs.

GEORGE WILL (ABC NEWS): I see.

GEORGE STEPHANOPOULOS (ABC NEWS): You can forgive him that.

GEORGE WILL (ABC NEWS): They're also allergic to public schools. I got it. Okay.

RUTH MARCUS ("WASHINGTON POST"): It is a very big political deal to go to the breeder as opposed to go to the pound. There's a lot of pressure to go to the pound. And - but the problem is there aren't...

GEORGE WILL (ABC NEWS): So this is an act of courage?

RUTH MARCUS ("WASHINGTON POST"): No. It's a - no. Well sort of.

JAKE TAPPER (ABC NEWS): It's an act of...

GEORGE STEPHANOPOULOS (ABC NEWS): Friendship before politics I think is the...

RUTH MARCUS ("WASHINGTON POST"): And there aren't any lot of Portuguese water dogs at the pound.

GEORGE WILL (ABC NEWS): Okay.

NEWT GINGRICH (FORMER SPEAKER OF THE HOUSE): Can I make a...

GEORGE STEPHANOPOULOS (ABC NEWS): I just, I couldn't wait to see what you were going to say about this, Mr Speaker.

NEWT GINGRICH (FORMER SPEAKER OF THE HOUSE): I hope that the girls love the dog. I hope the family and all the pressure they're going to be in finds it useful. And I think this whole thing is fairly stupid. It's great that they have a dog. It's great that the kids are adjusting. And were they got it from, who cares. A nice gesture on Senator Kennedy's part to give it to them. But who cares. And of course they've now done their liberal gesture because they have donated money to the pound, George.

RUTH MARCUS ("WASHINGTON POST"): Everybody cares. It's a cute puppy. Everybody cares.

PAUL KRUGMAN (ABC NEWS): You know, it's like the pirates, it may not be objectively important, but it's photogenic. And so we're all focused on that.

RUTH MARCUS ("WASHINGTON POST"): More photogenic than pirates.

GEORGE STEPHANOPOULOS (ABC NEWS): And with that, we will get to the serious stuff now, Mr Speaker. That is, of course, the economy, this week. When we saw this, a pretty determined effort from the White House this week to, while not wanting to declare a mission accomplished moment at all on the economy, highlight what President Obama called glimmers of hope in the economy. And, and Larry Summers, the chief economic advisor, went a little farther in his speech at the Washington Economic Club.

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LAWRENCE SUMMERS (DIRECTOR): The sense of a ball falling off a table which is what the economy has felt like since the middle of last, since the middle of last fall, I think that is gonna, I think we can be reasonably confident that that's going to end.

GEORGE STEPHANOPOULOS (ABC NEWS): And, Paul, obviously, they're being careful here, but I think there is a sense that the worst case scenario, kind of a financial collapse, depression, is increasingly less likely. They think we're moving towards stabilization. Eventually recovery.

PAUL KRUGMAN (ABC NEWS): Well, we're moving towards at least a pause. I mean, all the news says that the economy's getting worse. But it does appear to be getting worse.

GEORGE STEPHANOPOULOS (ABC NEWS): What do you mean by that?

PAUL KRUGMAN (ABC NEWS): Industrial production is falling. Unemployment is rising. All of these things. All of the measures you use about the health of the economy are continuing to deteriorate. But they're getting worse more slowly. So, I mean, Larry's right. It's you know, we were crashing, it looks like we're leveling off. But if you look at history, you know, there were several points like that in the Great Depression, too. So it's not clear this is the end of the story.

GEORGE STEPHANOPOULOS (ABC NEWS): Can I just press one point there. Because you're right on the industrial production. But I thought in the last couple weeks durable goods orders were actually up. Housing sales starting to come back.

PAUL KRUGMAN (ABC NEWS): Yeah, there are bits and pieces that are - but you know, overall, demand is still dropping. But there might be some slight perk-up in industrial production because inventories have been run down and now they need to ramp up production again. Nothing that looks like a fundamental turn, not yet.

GEORGE WILL (ABC NEWS): When times are good and there's a small downturn in the stock market, people are reminded that the stock market has predicted nine of the last three recessions. And in this case, you somebody similarly aware. Because the one exception to what Paul is citing, is the stock market is up a little bit.

GEORGE STEPHANOPOULOS (ABC NEWS): Five weeks in a row.

GEORGE WILL (ABC NEWS): That's right. But the question is, does that reflect fundamentals or some minor adjustment.

PAUL KRUGMAN (ABC NEWS): The stock market has predicted six of the last one recoveries.

GEORGE WILL (ABC NEWS): It still is the case that a third of all residential mortgages are worth more than the houses that are the collateral for them. It is the case, and I believe this week, the Treasury announced that the deficit for the first half of 2009 was $1 trillion. So we have still problems.

RUTH MARCUS ("WASHINGTON POST"): We have still problems. And I think the White House is exquisitely aware that we still have problems. And they're very carefully calibrating what they're saying. They don't want to be talking down the economy. But they don't want to be talking it up too much. And so you see these very careful phrases...

GEORGE STEPHANOPOULOS (ABC NEWS): But they do want to increase confidence.

RUTH MARCUS ("WASHINGTON POST"): Glimmers, glimmers of hope. Green chutes. The end of the freefall. Well, if you read the totality of Summers' speech it was not exactly happy days are here again. It is, well, after the freefall, what happens? The parachute opens up but you're still - and he didn't use this - still continuing to fall, and you find yourself at the bottom of a very big ditch. And the biggest problem that the White House is painfully aware of is that the measure that people are most aware of...

GEORGE STEPHANOPOULOS (ABC NEWS): Jobs.

RUTH MARCUS ("WASHINGTON POST"): ... which is jobs are the - is the last thing that's apt to recover. And they are facing the prospect of near double-digit unemployment in the middle of next year when voters may be thinking about how they feel.

GEORGE STEPHANOPOULOS (ABC NEWS): And that's if everything goes well, that's if we actually start recovering at the end this year.

NEWT GINGRICH (FORMER SPEAKER OF THE HOUSE): I think what Paul Krugman said is the biggest thing that people have to worry about. Are we in fact on a sort of shaky plateau from which we drop again. And, and I'll just give one example, which I think you've written about, which is, if you look at the proposal that Geithner's put out, to have the public basically pay for all - most of the debt that's toxic in assets. In a very rigged complex formula.

GEORGE STEPHANOPOULOS (ABC NEWS): 93% finance it.

NEWT GINGRICH (FORMER SPEAKER OF THE HOUSE): Right. And then you realize that around April 25th of this month, we will have spent all of the tax money we'll collect this year. Everything after the 25th of April will be pure deficit spending on a scale that if a family were living on their credit cards you'd think they were crazy. And that's before you count in the off-budget things like the guarantees of the Treasury. The guarantees of the Federal Reserve. So you have two possibilities. One is that the sheer weight of the additional bad debt pulls you down off the plateau. The other is that just as you start to recover, if you do, that the sheer weight of the cost of interest and the cost of inflation hit. Because once the dollar's no longer seen as the last flight to safety, interest rates are going to go up. And they're now going to go up on a huge federal deficit.

GEORGE STEPHANOPOULOS (ABC NEWS): Are we at the point already where deficit spending is a bigger drag than. - you know, that we'll...

PAUL KRUGMAN (ABC NEWS): No, not remotely. I mean, advance countries - I'm sorry, I'm going to get a little wonky here - advanced countries have historically have been able to run up to debt to GDP ratios of well over 100% before they get in trouble. We're at about 60% now. That gives us, you know, $6 trillion of running room just by historical standards. So, no, I think, you know, what the Speaker is saying is something that might be an issue seven, eight years from now. Not now.

GEORGE STEPHANOPOULOS (ABC NEWS): The immediate issue the White House is dealing with, at the end of this month as well, Jake, is the stress tests on the banks are likely to be done by April 30th. And they're trying to figure out now exactly how to announce them. But in some ways, the news this week from Wells Fargo, where they announced $3 billion in profit in the first quarter of this year, complicates their job because, right now, people are going to start to say, wait do the banks really need any help?

JAKE TAPPER (ABC NEWS): Well, these stress tests have been very complicated. First of all, you have, in addition to the fact the banks do the stress test. And Then the FDIC, the FCC or the Fed come in and analyze whether or not they're doing them correctly. And, and a lot of these banks are operating like rogue operators. They want to get out there and say everything's fine with our bank. Everything's cool. We don't need federal infusions of funds. We don't want federal infusions of funds. And of course, the government is saying, we don't want you saying anything to these 19 banks because if you announce that everything is fine and you're not going to need money whether from private investors or the government, then the banks that don't say that, their stocks are going to start plummeting. Is they've been telling the banks just be quiet.

GEORGE STEPHANOPOULOS (ABC NEWS): Keep quiet. And meanwhile, a lot of the banks are trying to rush to give back the money as quickly as they can, led by the investment bank Goldman Sachs.

GEORGE WILL (ABC NEWS): The government doesn't want its money back because the government wants to continue to control as a public utility the flow of credit in this country. What's going on also during this - and I'd like Paul's opinion on this actually - is while we - one of the reasons for this plan was so that the states would not have to raise taxes. At least 11 states are raising taxes substantially. And these are not little states, California, Illinois, New York, New Jersey where more than half the American people live, are on the verge of raising taxes in the midst of all of this.

PAUL KRUGMAN (ABC NEWS): That's, well that's the - that's what moderation does to you. The three - at the price of their - as the price of supporting the stimulus cut back the aid to state governments which was a key part of the stimulus plan. So this would still be happening but not on the same scale if we'd gotten the stimulus plan as originally written. Now...

GEORGE WILL (ABC NEWS): Now Geithner has to go back, does he not, for another bunch of money?

PAUL KRUGMAN (ABC NEWS): They say, no. But I think yes is the final answer.

GEORGE STEPHANOPOULOS (ABC NEWS): They say now that there's about $135 billion left in the TARP left in the financial rescue plan...

GEORGE WILL (ABC NEWS): But we've not yet bought a toxic asset.

PAUL KRUGMAN (ABC NEWS): Well, this is - I mean if you - you know, they had this elaborate scheme with the FDIC providing backing off budget for this thing. But I think they're going to have to come back for another stimulus plan in the end because unemployment is going to keep rising. Even if we have an end to the recession formally. You know, the last recession unemployment kept rising 18 months after the recession was declared over. That's going to happen again. So they're going to probably find that they need to do something more for the economy and that's...

GEORGE STEPHANOPOULOS (ABC NEWS): And this leads to another question because if you - you can't get both. You cannot get more money, politically, you can't get more money for the TARP and money for the second stimulus plan. And that would then, I think, lead to the temptation in the Treasury Department to sugarcoat what they're gonna see out of the banks so they don't have to ask for more money.

PAUL KRUGMAN (ABC NEWS): You know, the stress test, I have to say, it's sounding like a class in self-esteem. You're all wonderful, each in your own way. I mean it's...

RUTH MARCUS ("WASHINGTON POST"): It's like...

PAUL KRUGMAN (ABC NEWS): They really are not - I don't think they're going to let anybody fail.

NEWT GINGRICH (FORMER SPEAKER OF THE HOUSE): Look, the thing I'm struck with is, we haven't seen a crisis on this scale in 80 years. And I would urge the government to get all of the worst news out in the open as early as possible for the reason that Paul is saying. If you need a truly gigantic response, you're going to need a big public fight. You're going to need the country to pay attention and say, you know, we have no choice.

GEORGE STEPHANOPOULOS (ABC NEWS): Isn't that what the President did at the beginning of the year?

NEWT GINGRICH (FORMER SPEAKER OF THE HOUSE): Right. But when he did it, he owned it. Okay? The problem may be - and I think there will be a second stimulus, I prefer to see it on the tax side, rather than the spending side. But I think there's going to have to be some dramatic effort. Because I think this is not going to work. I mean I think they're going to find out they're not able to turn it around. If you talk about stopping the slide it may or may not work, if you talk about launching a major recovery, I think there's almost no hope the current plan is going to...

GEORGE STEPHANOPOULOS (ABC NEWS): But how do you reconcile your call for a second, the need for a second stimulus with what you were just saying earlier about the problems of debts and deficits?

NEWT GINGRICH (FORMER SPEAKER OF THE HOUSE): I think that Paul's right. You have $6 trillion of running room. If you want to become Italy. But the fact is, that we are in substantial trouble. And I think part of what we ought to look at in the long run is maybe some of these states, instead of raising taxes, should actually be controlling government and cutting spending.

GEORGE STEPHANOPOULOS (ABC NEWS): Meanwhile, Ruth, this is all coming - when Congress comes back in two weeks what the White House wants to be pushing is their budget which is, you know, includes major new investments in education, health care and energy.

RUTH MARCUS ("WASHINGTON POST"): And especially health care. And you can see increasingly that that is where the President is putting all of his political capital and all of his cards. And that's where you have...

GEORGE STEPHANOPOULOS (ABC NEWS): They won't say so, but they've pretty much given up on cap in trade?

RUTH MARCUS ("WASHINGTON POST"): For this year, yeah. And so you'll probably see a budget resolution that provides for the stick, the potential stick of doing health care reform, with a majority vote, if everybody hasn't sort of come around the table, held hands and agreed on this complicated thing by September or so.

GEORGE WILL (ABC NEWS): Cap in trade is an interesting thing to give up because it's $659 billion over the next ten years in their extremely fictitious budget. So if you give up on that, you've blown a big hole in your budget. I'm delighted to see that hole.

RUTH MARCUS ("WASHINGTON POST"): Yes, but, the smart thing that the - from my point of view, that the administration did in proposing its cap and trade was to link that to continuing the making work pay tax credits.

GEORGE STEPHANOPOULOS (ABC NEWS): The tax cut.

RUTH MARCUS ("WASHINGTON POST"): And so, therefore, you can - that, that was actually the most fiscally responsible thing that they did.

GEORGE WILL (ABC NEWS): I think it's a climate change thing. That is we're going to keep the planet from warming by having all these dollars going back and forth, it will block the sunlight. Every dollar that comes in, I gather they're going to somehow shuffle out to people and make good the increased energy prices, right? You can't stop laughing.

RUTH MARCUS ("WASHINGTON POST"): I'm going to let Newt talk.

NEWT GINGRICH (FORMER SPEAKER OF THE HOUSE): Let me just do two points. One, there is no cap in trade. It's an energy tax. You know it's an energy tax because it's in the budget, as an energy tax.

RUTH MARCUS ("WASHINGTON POST"): Yes.

NEWT GINGRICH (FORMER SPEAKER OF THE HOUSE): And so they ought to just say...

GEORGE STEPHANOPOULOS (ABC NEWS): Which is why it's not going anywhere.

NEWT GINGRICH (FORMER SPEAKER OF THE HOUSE): Which is why - yeah, because it turns out it's an energy tax. I mean nobody wants to raise the price of electricity in this kind of economy on every senior citizen in the country.

RUTH MARCUS ("WASHINGTON POST"): They're not talking about raising it right away. They're talking about raising it in a few years.

NEWT GINGRICH (FORMER SPEAKER OF THE HOUSE): But you don't get $649 billion in 10 years on a 100-year plan. The second thing though is, what will be interesting to watch on health is whether they are absolutely addicted to creating a government corporation in this environment in order to bring Medicaid to everybody. I mean, you know, one of the plans they're talking about is to creating a government competitor, subsidized by the taxpayer which will inevitably decay into a Medicaid-style program. Because we're not - there's no possibility of us financing...

GEORGE STEPHANOPOULOS (ABC NEWS): And, Jake, this is the - one of the key fault lines in the debate. It seems like the White House is coming around to the idea that the President opposed in the campaign that there should be an individual mandate for health care. But this whole idea of how to set up a public insurance plan to compete with the privates could be the biggest, most contentious debate of the summer.

JAKE TAPPER (ABC NEWS): I think so. And I think one of the interesting things, we've seen a lot of candidate Obama changing when he became President Obama. Whether it comes to state secrets or the war in Iraq or whatever. And I think health care is going to be one of the big differences between the post-inaugural Obama and President Obama. Because even after he was president, they were talking about they wanted this to be bipartisan. They wanted health care to be written by Democrats and Republicans. It was a big bill, it needed a big mandate in Congress. And I don't know that that's possible.

GEORGE STEPHANOPOULOS (ABC NEWS): Go ahead.

PAUL KRUGMAN (ABC NEWS): This is though, this is a little different, most of the places Obama has shifted, he's shifted to the right from his campaign promises.

JAKE TAPPER (ABC NEWS): And this is a shift to the left.

PAUL KRUGMAN (ABC NEWS): This is a shift to the left.

JAKE TAPPER (ABC NEWS): Right.

PAUL KRUGMAN (ABC NEWS): This is going for true universality. He has basically said, you know, Hillary Clinton was right, basically.

GEORGE STEPHANOPOULOS (ABC NEWS): Well that, and he's also saying, and this goes to what Ruth was talking about before, if they decide to go with this budget mechanism that lets it get through on 51 votes as opposed to 60, he's basically saying no one is going to care how I got there if I make good on what was a fundamental promise.

PAUL KRUGMAN (ABC NEWS): If he gets health care, you know...

GEORGE STEPHANOPOULOS (ABC NEWS): That's the point.

PAUL KRUGMAN (ABC NEWS): That's an enormous political strategic thing. If the Democrats get universal health care in any way shape, or form, that is going to change the political landscape for a generation.

RUTH MARCUS ("WASHINGTON POST"): And it's a little - if I can just say one very quick thing, it's a little odd to describe his views on health care as a shift to the left. It is a shift to the Hillary Clinton there should be an individual mandate model, but that is something that the insurance industry is demanding as the price of extending coverage on the same scale to everybody.

GEORGE STEPHANOPOULOS (ABC NEWS): And they don't want the mandate on employers.

GEORGE WILL (ABC NEWS): Don't count the - Paul, the political chickens until they're hatched. In 1965 Medicare gets passed. In 1968, the next presidential election, the Democrats begin a series of losing the seven of the next ten.

GEORGE STEPHANOPOULOS (ABC NEWS): I know. But it's because of Medicare...

PAUL KRUGMAN (ABC NEWS): On economics Richard Nixon was a liberal.

NEWT GINGRICH (FORMER SPEAKER OF THE HOUSE): Can I just go back on this health care for a second?

GEORGE STEPHANOPOULOS (ABC NEWS): Sure.

NEWT GINGRICH (FORMER SPEAKER OF THE HOUSE): First of all, remember that places like Medi-Cal, the Medicaid program pays 39% of costs. That the American system is operated because private sector insurers have cost shifted. You go to every hospital administrator in this country and say, do you really want a government insurance program which gradually decays because it will steadily be underfunded? And if 75% is one prediction indicated. 75% of the private insurance goes into this government corporation. Now, where does your cost shifting come from? And I think you're find every hospital in this country will oppose this program if it is a government-run insurance program.

GEORGE STEPHANOPOULOS (ABC NEWS): We've got a few minutes left. Before we go, I want to point up some real changes on the issue of gay marriage in the last couple of weeks. The Vermont legislature passes a gay marriage initiative. The state supreme court in Iowa also legalizes gay marriage in that state. And it's created a bit of a backlash from a group called the National Organization for Marriage.

GRAPHICS: THIS WEEK WITH GEORGE STEPHANOPOULOS

SPOKESPERSON (AD): There's a storm gathering. The clouds are dark and the winds are strong. And I am afraid. Some who advocate for same-sex marriage have taken the issue far beyond same-sex couples. They want to bring the issue into my life. My freedom will be taken away.

GEORGE STEPHANOPOULOS (ABC NEWS): And, George, this issue now could be actually hitting on a national level because the city council of the District of Columbia is moving on a plan to recognize marriages performed in other states. That could bring in the Congress on a test vote of gay marriage nationally?

GEORGE WILL (ABC NEWS): I'm not sure Congress will do this because Congress is happy to have issues like this driven by the judiciary. That is what embitters this fight, is the sense that people feel if they didn't get a fair chance to persuade. My view is...

GEORGE STEPHANOPOULOS (ABC NEWS): What complicates it is in Vermont it was done by the legislature and not the judiciary.

GEORGE WILL (ABC NEWS): Correct. Correct. But that's "Vermont. And again, when you try to - when you begin to get one size fits all solutions this is where federalism does earn its keep. It gives people a sense that their little community has had its say.

RUTH MARCUS ("WASHINGTON POST"): Well, I guess I would respond by saying perhaps the constitutional envisions certain one size fits all solutions. This was a pretty remarkable week on the gay marriage front. First of all, to have a state like Iowa, not the left coast kind of state like Massachusetts or the - sorry, the east coast state like Massachusetts or the left coast state like California to have an unanimous Iowa Supreme Court in a decision written by a Republican appointee find that the state constitution guarantee of equal protection made its ban on same-sex marriage unconstitutional is pretty remarkable as is having even Vermont legislature not just adopt this, but override a gubernatorial veto.

NEWT GINGRICH (FORMER SPEAKER OF THE HOUSE): I just want to pick up on what George said. There's nothing more embittering than watching seven lawyers rewrite a state's constitution on an issue...

GEORGE STEPHANOPOULOS (ABC NEWS): You're talking about Iowa here?

NEWT GINGRICH (FORMER SPEAKER OF THE HOUSE): In Iowa. Where in 23 states there is not a single case of the state not automatically deciding a favorable traditional marriage of its popular vote. You may have the same thing happening in California where the court may for the second time overturn a constitution.

GEORGE STEPHANOPOULOS (ABC NEWS): We only have 15 seconds left. In Iowa, it's gonna be very, very difficult. It has to be overturned by the legislature twice.

NEWT GINGRICH (FORMER SPEAKER OF THE HOUSE): Pass a bill and the governor sign it that says this won't be implemented.

GEORGE STEPHANOPOULOS (ABC NEWS): And you think they're gonna do it?

NEWT GINGRICH (FORMER SPEAKER OF THE HOUSE): No, they won't, because the, because the fix is in. But it's very dangerous for the country to have the judiciary become the chief agent of social change.

GEORGE STEPHANOPOULOS (ABC NEWS): We're out of time here. You guys continue this all in the green room.

GEORGE STEPHANOPOULOS (ABC NEWS): You can check it out later on ABCNews.com. And for political updates all week long, follow me on Facebook and Twitter. Coming up here, "The Sunday Funnies."

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Originally broadcast, 4.12.09