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

SYNOPSIS:

SENATOR HILLARY CLINTON (2008 DEMOCRATIC PRESIDENTIAL CANDIDATE): The economy needs to work for everybody. And that's not what's happening today. It's working for some people but it's not working for most people.

VICE PRESIDENT DICK CHENEY (UNITED STATES): You can look at what Senator Clinton believes in and how she voted. You can look at Charlie Rangel's proposals with respect to tax policy. And the Democrats basically want to spend more money. They want to raise taxes. It's basically an anti-growth policy.

GEORGE STEPHANOPOULOS (ABC NEWS): Vice President Cheney and Senator Clinton, framing the economic debate for 2008. Here to get into that more, I'm joined, as always, by George Will also, Paul Krugman of "The New York Times, " also the author of a new book called, "The Conscience of a Liberal," and Chrystia Freeland, the US managing editor of the "Financial Times." Welcome. So George, you saw Senator Clinton and Vice President Cheney there. And the fundamental question before you even get to the policies is what will the economy be like heading into 2008? The president and his team have said fundamentals are still strong. Don't see recession around the corner. Democrats tend to disagree.

GEORGE WILL (ABC NEWS): There are three things happening that are not good. One is the increase in oil prices. It's not having nearly the effect it would have had 25 years ago because 25 years ago, we used twice as much energy per unit of output than we do now. Housing prices are going down. The last mini recession we had in 2001, was triggered by a collapse of asset prices, the tech stocks. The decline of housing, in turn affects consumer attitudes, the so-called wealth effect, that people feel wealthier as their houses appreciate. Consumer activity is 70% of the economic activity. So you could have a perfect storm here to produce a downturn.

PAUL KRUGMAN ("THE NEW YORK TIMES"): Well, yeah. I mean, you know, even if we don't actually have a recession, formally defined, people weren't feeling that great about the economy even before the storm hit. And you can have something which will feel a recession if it doesn't get declared one. And people are, you know - and the big thing to remember, to add to what George said, is most of the really bad lending took place in the final frenzies of the housing bubble. So there are all these loans that were made in late 2005 and 2006, many of which had - are, you know, 2/28s, two years of concessional interest rate and then it's going to reset. So you have these billions and billions of dollars of mortgage resets coming due now and through the rest of next year, which are going to greatly increase the pain value climate.

GEORGE STEPHANOPOULOS (ABC NEWS): And Chrystia, let me drill down, I guess it's a bad pun, on one of the factors George brought up, the oil prices, we see record oil prices again this week yet, it does appear that the country's kind of gotten used to it. The effect has not been as harmful, as severe as some would have predicted as we headed for $100 barrel oil.

CHRYSTIA FREELAND ("FINANCIAL TIMES"): Well, there have some studies about that. And if you look at the price adjusting for inflation, of course...

GEORGE STEPHANOPOULOS (ABC NEWS): It's not as high as it was in '80. '81.

CHRYSTIA FREELAND ("FINANCIAL TIMES"): ...it's not as high as it looks. And if you also look at the price adjusted for increased economic output, it's also not as high as it looks. Having said that, how long US economy, at a time where it's weakening for all sorts of other reasons and most people at Wall Street, are pricing it about a one-third probability of recession going forward, oil at $100. That's pretty hard to think that it's not going to have an impact.

GEORGE STEPHANOPOULOS (ABC NEWS): George, you add all this up, all three of you, and this is all bad news for any Republican candidate for president I would imagine.

GEORGE WILL (ABC NEWS): On the balance, you'd rather not run a recession, yes. But again, it's partly because, and Paul indicated, well, we might have a downturn. It wouldn't even be a recession and it would still make people cranky. We have an absurdly low pain threshold in our country for economic difficulties.

PAUL KRUGMAN ("THE NEW YORK TIMES"): No, I mean it's real. A lot of people - you look at things like foreclosure rates - I just saw a chart of foreclosure rates in California and they're off the - literally off the charts from the past. You have to rescale them because it's - you know so there's a lot of real pain here. People are feeling, hey, there was supposed to be a boom. I didn't see any of that. And now things are going sour. People are really, you know, justifiably upset. Except for corporate profits and high-end income, there's been no dramatic progress in the last five years.

GEORGE WILL (ABC NEWS): But let's be clear that not everyone losing a house is losing a home. There are a lot of speculators out there who got mortgages, with 2% down on un-built houses. Gambling on an increased depreciation. Their pain is earned.

CHRYSTIA FREELAND ("FINANCIAL TIMES"): I think one important thing to bring into the economic discussion, the influence on politics, is the rest of the world. Because the big economic story of the past decade has been global growth and a rebalancing of the global economy. And I think if the US is to avoid a recession next year, it's going to be because of the rest of the world picks up the slack. So that's really important. And my political fear about the United States, is actually that the reaction will be the opposite one and that we're going to see a return to protectionism, as people start feeling a little bit of pain in their pockets.

GEORGE STEPHANOPOULOS (ABC NEWS): That's clearly already happening, Paul, on the Democratic side. I mean NAFTA has no support among the Democratic candidates.

PAUL KRUGMAN ("THE NEW YORK TIMES"): Yeah. There's a big difference. You couldn't pass NAFTA if it came up now.

GEORGE STEPHANOPOULOS (ABC NEWS): No way.

PAUL KRUGMAN ("THE NEW YORK TIMES"): Will you see it repealed? No, it's not going to happen. I mean so there's one thing, there's a lot of mildly protectionists rhetoric, but there's no prospect of extreme action. And you know, the fact is, actually exports are the one reason we might manage to avoid a recession.

GEORGE STEPHANOPOULOS (ABC NEWS): But let me...

CHRYSTIA FREELAND ("FINANCIAL TIMES"): That's right, because the dollar is weaker and actually, the world is saving the United States right now.

GEORGE STEPHANOPOULOS (ABC NEWS): You may not repeal NAFTA. But if you have a president or a White House coming in and saying we're really not going to try to advance the trade agenda anymore. And I guess I'm asking everyone here, what kind of reaction will that create around the world?

PAUL KRUGMAN ("THE NEW YORK TIMES"): There's something called intrigue politics, called the bicycle theory. If you don't move forward, you fall over.

GEORGE STEPHANOPOULOS (ABC NEWS): Right.

PAUL KRUGMAN ("THE NEW YORK TIMES"): I actually never believed that. I just don't see it. I can't see - this is not going to be smooth wholly again. We're not going to roll back to a protectionist world. We're going to have - you know there are not going to be a lot of new trade agreements.

GEORGE STEPHANOPOULOS (ABC NEWS): You're not so sure. You're waving your hand there.

CHRYSTIA FREELAND ("FINANCIAL TIMES"): Yeah, I'm not quite so sanguine because I think it's not just about trade agreements. I mean an area I'm really worried about is the sovereign wealth funds, these big pools of money.

GEORGE STEPHANOPOULOS (ABC NEWS): Explain what they are.

CHRYSTIA FREELAND ("FINANCIAL TIMES"): The big pools of money that the emerging market economies and the oil states have, which are state-controlled. And right now we talk a lot about a liquidity crisis. No one wants to invest in anything. And that's freezing up the markets. Well these guys, Chinese guys, people from the Middle East, they have big checkbooks. And the question is going to be, especially with a weak US dollar, with weaker US asset prices, great time to buy US assets. What's America going to say going into 2008?

GEORGE STEPHANOPOULOS (ABC NEWS): And that's the reaction. We also have to by ports.

GEORGE WILL (ABC NEWS): What Paul calls mildly protectionist rhetoric seems to me more than that. If you listen to Mrs Clinton, she says she not only will not enter into others, she's going to go back and reopen and re-examine these. Now, this is from someone who accuses the Bush administration of unilateralist bullying of other countries. We're going to open previously-settled and arduously negotiated agreements and say your social policies must conform to American dictates or else.

PAUL KRUGMAN ("THE NEW YORK TIMES"): Now it's just - you just have to look at the numbers. You know the protectionist measures we have now are tiny. It's embarrassing. I teach a course on this stuff. It's embarrassing because there's hardly any subject matter anymore. So even if we backslide a little bit, it's going to be trivial stuff compared to health care, trade policy is such a small issue for the US and the world.

GEORGE STEPHANOPOULOS (ABC NEWS): Well unless, before you even get to taxes, which is where I want to take the conversation next. Charlie Rangel the Chairman of the House Ways and Means Committee, really, I think threw a major cluster behind the presidential campaign this week when he announced his tax plan, which was basically - I'll try to explain it simply. If you're making more than $200,000 a year, you're going to get a 4% surtax. Your taxes are going to go up more $500,000, they're going to go up 4. 5%. He says everyone below $200,000 is going to get a tax cut so this is all going to pay for itself. Here's what he said about it.

REPRESENTATIVE CHARLES RANGEL (CHAIR WAYS & MEANS COMMITTEE): People wanting me, you know, to get a full taste the next couple of weeks because we don't know which way this is going. But we do - we tried hard to make certain that it is fair and equitable and we raise the money to pay for it.

GEORGE STEPHANOPOULOS (ABC NEWS): George, he called it the mother of all tax reforms. Republicans pounced and said it was the first major mistake of Democrats in this campaign.

GEORGE WILL (ABC NEWS): Well, judging by the reaction of the Democratic presidential candidates, they're not thrilled to have a man come in and say I have a number trillion that I associate with the tax cut. Now, Will Rogers once said there is a difference between death and taxes. And that is, taxes don't - death doesn't get worse every time Congress meets. And the country hears this. And all they hear is taxes. We may talk about Social Security, the logic of what Mr Obama is saying, is raise taxes. The constant tax word is not helpful to Democrats.

GEORGE STEPHANOPOULOS (ABC NEWS): On the other hand, Chrystia, if you look at the numbers that he's proposing, it is true that he's saying everyone under $200,000 is going to get a tax cut and everyone over is going to get a tax increase. Can he sell it? Can the Democrats sell it?

CHRYSTIA FREELAND ("FINANCIAL TIMES"): Well I think that is exactly the important question right now. And there has been, at the same time that we've seen this, remarkable rise in global prosperity and in American prosperity. We have also seen incoming equality. Really astonishing. You know, if you look at the 2005 figures, the top 1% of Americans took home 21% of the income. That's really a lot. And it's a change from what America is accustomed to. From the sort of middle-class democracy that America likes to see itself as. If the Democrats can find a way of saying to Americans, we love America. We love growth. We love capitalism. But the way the system works right now, we think that rich people should pay more taxes than poor people.

GEORGE STEPHANOPOULOS (ABC NEWS): And the question is, does taxes get in the way of all that?

PAUL KRUGMAN ("THE NEW YORK TIMES"): You're missing the point here. What Rangel is talking about mostly, is there's this thing called the alternative minimum tax which has gone completely haywire. It was supposed to hit only rich people and it's hitting lots of middle-class people.

GEORGE STEPHANOPOULOS (ABC NEWS): $70,000 to $200,000 a year.

PAUL KRUGMAN ("THE NEW YORK TIMES"): Yeah, it's hitting the sort of upper middle-class people who live in high-tax states. It's sort of specifically targeted on me. Anyway, but it's...

CHRYSTIA FREELAND ("FINANCIAL TIMES"): "New York Times" readers.

PAUL KRUGMAN ("THE NEW YORK TIMES"): Right. And it's - something has to be done about it. And the Republican Congress has been living in a fool's paradise, pretending that we're not going to have to deal with this, not putting it into their budget plans. Rangel is saying we have to get rid of this thing. And to do that, we have to replace this with other taxes. And that's what it's - you know, that's the bulk of it. The other stuff - he has increased child deductions, Increased stuff for lower income people, but most of it is just taking this - it's really, it's taking a tax that is going to hit the wrong people, not the people it's intended to hit, and replacing it with a tax that actually does hit those people.

GEORGE STEPHANOPOULOS (ABC NEWS): I've been expecting, George, I've been expecting this issue to bite for many years now and it hasn't quite, this alternative minimum tax. This year alone, it's going to be a tax increase, $50 billion on people. And the Republican answer on Capitol Hill, at least, is to pay for it by increasing the deficit.

GEORGE WILL (ABC NEWS): In 1999, the Republican Congress repealed the alternative minimum tax. And Bill Clinton vetoed their repeal. That's why we're living with this. The Rangel problem is the problem as follows - three-quarters of those who would pay the increased higher marginal tax rate on income, three-quarters are small business owners and farmers, two of the most tenacious, ferocious lobbies in this town.

PAUL KRUGMAN ("THE NEW YORK TIMES"): It's misleading, yeah - you know it's a tax on people - you say 4% over $200,000. But it's on your income over $200,000. So if you're making $250,000 a year, that's $2,000 in extra taxes. And actually some of that's going to be offset by increased deductions. So, it may look like you're hitting a lot of people. But the fact of the matter is, the bulk of it is going to come on a small number of very high-income people.

CHRYSTIA FREELAND ("FINANCIAL TIMES"): And I'd just like to take up George's point on the farmers. They are, indeed, tenacious lobbyists. But I think we have to be careful not to let them pluck our heart strings too much right now. My dad's a farmer. And with high commodity prices...

PAUL KRUGMAN ("THE NEW YORK TIMES"): There's a statistic.

CHRYSTIA FREELAND ("FINANCIAL TIMES"): ...these guys are doing so well right now. Wheat at an all-time high. It's fantastic.

PAUL KRUGMAN ("THE NEW YORK TIMES"): Statistically...

GEORGE STEPHANOPOULOS (ABC NEWS): Go say that in Iowa.

PAUL KRUGMAN ("THE NEW YORK TIMES"): You are right. At this point...

CHRYSTIA FREELAND ("FINANCIAL TIMES"): My dad's a farmer. I can say it kind of.

PAUL KRUGMAN ("THE NEW YORK TIMES"): At this point, more world of war craft players in the United States than there are farmers. We are not a rural country anymore.

GEORGE STEPHANOPOULOS (ABC NEWS): And we're seeing all this consolidation. Let's bring up the point that George raised on Social Security. Barack Obama, taking the advice of - that he seems to be getting from pundits and fundraisers for the last several months to be tougher on Senator Clinton. Yesterday, he said she wasn't truthful on a number of issues. Social security was his number one issue. He said that Senator Clinton has made a mistake to hedge and not say what she would do about Social Security.

SENATOR BARACK OBAMA (2008 DEMOCRATIC PRESIDENTIAL CANDIDATE): Conventional thinking in Washington says that Social Security is the third rail of American politics. It says you should hedge and dodge and spin - but at all costs, don't answer. I reject that notion.

GEORGE STEPHANOPOULOS (ABC NEWS): Paul, he rejects it and says that he would lift the payroll tax on all income, now it's capped at about $97,000 a year. You're shaking your head. Does that mean you think he's making a mistake?

PAUL KRUGMAN ("THE NEW YORK TIMES"): Yeah, Social Security, if you go through the federal government, piece-by-piece, and ask which programs are seriously under-funded and which are close to being completely funded, Social Security is one of the best. It's not even for certain that Social Security has a problem. Why on earth - and, of course, it's something that the right has always wanted to kill, not because it doesn't work, but because it does. And for Obama to go after this program, at this time, you just have to wonder. All of my progressive friends are saying what on Earth is going through his mind to raise this issue.

GEORGE STEPHANOPOULOS (ABC NEWS): So you think basically the Hillary Clinton position, which we take care of it by fiscal responsibility, and basically it'll take care of itself, we can look at some small fixes is the right one?

PAUL KRUGMAN ("THE NEW YORK TIMES"): Yeah. She is.

CHRYSTIA FREELAND ("FINANCIAL TIMES"): Well, I would just also really question the politics. I think it's absolutely the case that people felt Barack Obama needed to show a little bit of machismo...

GEORGE STEPHANOPOULOS (ABC NEWS): Right.

CHRYSTIA FREELAND ("FINANCIAL TIMES"): ...versus Hillary, sort of perverse as that may sound. And people wanted him to kind of show he could take her on. So I think that calculation is the right one. But who's going to support him on Social Security? I struggle to see which constituency that's playing to.

GEORGE STEPHANOPOULOS (ABC NEWS): And this is exactly what the Hillary campaign is saying. They're saying in a Democratic primary, this isn't going to cut. On the other hand, he does need to make some distinctions.

GEORGE WILL (ABC NEWS): Sixty-five days from now the first of 78 million baby boomers begin to retire. And most Americans who collect Social Security, begin to collect it at age 62, which is absurd. We have the public subsidizing the increasingly long and comfortable retirement of people for a third to a half of their adult lifetimes. Now, that's why one in four voters in 2004 was over 60 years old. The elderly have the biggest stake in the welfare state, which exists to transfer wealth to them. So, this is politically, a loser.

GEORGE STEPHANOPOULOS (ABC NEWS): And meanwhile, on the Republican side, Fred Thompson, the only candidate who's willing to talk about restricting benefits. If that gets to a General Election, every Democrat is going to go after it.

PAUL KRUGMAN ("THE NEW YORK TIMES"): Yeah, I mean this is, you know and this is not - Social Security is not the problem. On the long list of things I'm not sure it makes the top ten. So, it's just bizarre to go after this. I mean and, you know, we had the public's verdict in 2005. They like this program. Don't tamper with it.

GEORGE STEPHANOPOULOS (ABC NEWS): And on that note, we're going to have to end today. Paul Krugman, Chrystia Freeland, and George Will. Thank you all very much. This roundtable is going to continue in the green room.

GRAPHICS: THE GREEN ROOM

GEORGE STEPHANOPOULOS (ABC NEWS): You can join in later on ABCNews.com.

GRAPHICS: THE NOTE

GEORGE STEPHANOPOULOS (ABC NEWS): And get the latest political news and analysis there every day from "The Note." Coming up here, Molly Bingham and "The Sunday Funnies."

COMMERCIAL BREAK

GRAPHICS: THIS WEEK WITH GEORGE STEPHANOPOULOS

Originally broadcast, 10.28.07