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

SYNOPSIS: Roundtable, where Paul and others discuss the possible appointment of Hillary Clinton as Secretary of State, the Obama transition, possible treasury secretaries. Paul Krugman speaks in favor of a rescue of the Big Three U.S. auto makers, arguing that their collapse will worsen the current financial crisis and that dysfunctional credit markets make Chapter 11 bankruptcy a bad option. Finally, Paul debunks some of George Will's misconceptions about the Great Depression

VIDEO: CAROLYN WASHBURN, EDITOR: With relatively little foreign policy experience of your own, how will you rely on so many Clinton advisers and still deliver the kind of break from the past that you're promising voters?

SENATOR BARACK OBAMA, PRESIDENT-ELECT Well, the - you know, I am...

SENATOR HILLARY CLINTON: I want to hear that.

SENATOR BARACK OBAMA: Well, Hillary, I'm looking forward to you advising me, as well.

GEORGE STEPHANOPOULOS: Who knew that was a year ago "The Des Moines Register" debate, Barack Obama and Hillary Clinton facing the same questions today. We're going to debate it on our roundtable this morning with George Will, Paul Krugman of "The New York Times" and Princeton, also the author of a new book, "The Return of Depression Economics." You see right under there, it says winner of the Nobel Prize in economics. You got that just hours after your last appearance on "This Week."

COKIE ROBERTS, ABC NEWS: That's right.

PAUL KRUGMAN, NEW YORK TIMES: That's right.

GEORGE STEPHANOPOULOS: We're your lucky charm.

COKIE ROBERTS: Right.

PAUL KRUGMAN: There we go.

COKIE ROBERTS: We take responsibility.

GEORGE STEPHANOPOULOS: And also welcome back to Sam Donaldson.

SAM DONALDSON, ABC NEWS: And I got to argue against him on economics?

GEORGE STEPHANOPOULOS: Well, at your peril, Sam. But go ahead.

SAM DONALDSON: I never refuse a challenge.

GEORGE STEPHANOPOULOS: You didn't even let me introduce Cokie, but, Cokie, welcome to you, as well. And let's begin with this buzz about secretary of state. Potentially Hillary Clinton. Clinton and Obama met on Thursday. George, everything I'm hearing is that both sides want this to happen. One big complication in that is the work of the Clinton Foundation, whether or not it can be structured in such a way so that there aren't conflict of interests if indeed she is secretary of state.

GEORGE WILL, ABC NEWS: Yes, the Clinton Foundation, her husband's foundation and some of his business dealings I should think would also warrant scrutiny and get it if she's nominated. The most famous political ad of the year was her ad saying, the 3:00 AM phone call, who do you want to answer it? Well, she might be making the 3:00 AM phone call to a sleeping president. She's one of those who passed through the furnace of that protracted campaign and did come out enlarged and looking tough enough for this job. Another thing that this suggests is they couldn't put a Republican in as secretary of state if they were going to keep a Republican Gates at defense. And this might mean that for the transition, which means for the transition out of Iraq, they might keep Gates at defense.

GEORGE STEPHANOPOULOS: And Cokie, George says she was enlarged by the campaign. I think Barack Obama was also impressed by how hard she worked over the course of the general election.

COKIE ROBERTS: Oh, she was the - and in the primary campaign. I mean, even though he was working against her, it was a very impressive performance. And, look, she's got followers and she's got followers both in this country and abroad. And so I think that from his perspective it's a very smart appointment. But this question of how do you separate former President Clinton has been her problem all along this year. You know, that she - if she were just sort of on her own, this would be an easier - she would have had an easier campaign, and she'd have an easier appointment.

GEORGE STEPHANOPOULOS: And if she did take the job and did get it, Sam Donaldson, this would firmly establish her independence.

SAM DONALDSON: Well, it would establish her independence in a sense but the president still is the chief foreign policy officer. He makes the policy. She's very tough...

COKIE ROBERTS: You mean independence from Bill or from...

GEORGE STEPHANOPOULOS: Bill. That was...

SAM DONALDSON: Oh, from Bill. I love the questionnaire, 62 questions you have to fill out if you're going to be considered for a top post in the Obama administration. One of them, is there anyone or any organization who overtly or covertly, fairly or unfairly, might be able to attack you, please name them. You know, Rush Limbaugh, Sean Hannity, go down the list.

COKIE ROBERTS: Right.

SAM DONALDSON: But I think she's imminently qualified, no question. But Barack Obama loves to quote Lincoln and how he surrounded himself with his enemies and turned them into his great supporters. I liked Lyndon Johnson better. More earthy. It's better to have them inside the tent peeing out rather than outside the tent peeing in. He checkmates her if in fact he doesn't do well and we come to '04 and she says I can do what Teddy Kennedy didn't. He checkmates her.

GEORGE STEPHANOPOULOS: Any downside?

PAUL KRUGMAN: You know, there's all this – but no, I mean the Democratic Party is making this big push for unity. And I think this – you know, it would leave kind of a warm glow. There would be a few people who would be out there saying, ooh, you know, Bill. But I think it's probably good for the party. I don't know if it's good for her. But it's good for the party.

COKIE ROBERTS: Well a warm glow in Washington, I'm not sure it would be so warm in the net roots that the people who have been very enthusiastic for Obama, have really worked in his campaign, who see the Clinton administration and Hillary Clinton as too right wing on foreign policy, too ready to be in Iraq in the first place, too unwilling to talk to Iran, all of those things and I think that that could be a problem.

GEORGE STEPHANOPOULOS: Just too many Clintonites overall in the administration.

COKIE ROBERTS: Well that's a bigger question.

GEORGE WILL: But that's what always happens is you draw from the existing talent pool. I remember when Jimmy Carter got elected as the farmer from outside Washington. Hamilton Jordan, the late Hamilton Jordan said you won't see the Brzezinskis advances in this administration. His first two appointments were Brzezinski advances.

COKIE ROBERTS: But you know...

PAUL KRUGMAN: And one of the great advantages that Obama has coming in is that he actually follows not too long after a successful Democratic administration.

COKIE ROBERTS: Right.

PAUL KRUGMAN: So it's not like Clinton coming in in '82 with nothing.

COKIE ROBERTS: That's a big difference. That's right.

PAUL KRUGMAN: He's got a big backlog of people who know how this town works and know how to get things done. So it's a good thing.

COKIE ROBERTS: Well that is...

SAM DONALDSON: But I take your point about competency and people who know how to do it but you dance with the people who brung you and the people who brung Mr Obama to the presidency are the minorities to a large point. I mean the data is clear. So all the names we've been hearing about and he may not appoint these people I understand, most of them are white and most of them are Clintonites.

GEORGE STEPHANOPOULOS: Well he did...

COKIE ROBERTS: And most of them are men.

GEORGE STEPHANOPOULOS: Well he appointed Valerie Jarrett...

SAM DONALDSON: And most of them are men.

GEORGE STEPHANOPOULOS: ...his senior adviser inside the White House, also a new deputy chief of staff, a woman today and, you know, one other person mentioned for a possible job, Susan Rice for a top foreign policy job.

GEORGE WILL: Well the fundamental attribute of leadership is capacity for robust disloyalty, Sam.

SAM DONALDSON: No, no, excuse me. If you're going to keep Gates and we know who he is and you're going to put Senator Clinton in as secretary of state, who's gonna be secretary of treasury? Larry Summers? He has experience. He was Clinton's secretary of the treasury.

COKIE ROBERTS: Well he...

SAM DONALDSON: I don't know. Go down the list.

GEORGE STEPHANOPOULOS: Well, but I…

SAM DONALDSON: For you to say that Jarrett who is very - I understand she's going to be very close and very powerful somehow balances the top members of the cabinet, I don't think it balances out in the country.

COKIE ROBERTS: You know what I find really interesting in this scenario if it comes to pass is that Bob Gates as secretary of defense would end up being the dove in the group. He has been so interesting on the question of public diplomacy and soft power and really has attracted a tremendous amount of support, both in this country and the...

GEORGE STEPHANOPOULOS: I completely agree with that, although that is the kind of rhetoric that all Democrats have used. It just gets less attention when the Democrats...

COKIE ROBERTS: Well, but he has really been, you know, he's been out there doing it and trying to make it happen and working with the State Department to do that and with foreign entities. So I think that would be a fascinating thing to watch play out.

GEORGE WILL: It's also interesting for two centuries we had white male secretaries of state. Now if you go back to the beginning with Madeleine Albright...

COKIE ROBERTS: That's right.

GEORGE WILL: ...Colin Powell, Condoleezza Rice and Hillary Clinton, you could have 18 years without.

GEORGE STEPHANOPOULOS: Paul, how about what Sam brought up about Larry Summers? Does it make this more difficult if Senator Clinton becomes secretary of state for Summers to become secretary of treasury? And if so is that a good or a bad thing?

PAUL KRUGMAN: It might make it more difficult. It would be just a little too much maybe like just recreating and, of course, Larry Summers has vocal opponents. You know, this is my bailiwick and I can't get really excited about treasury thing because...

GEORGE STEPHANOPOULOS: Why not?

PAUL KRUGMAN: Because there is really not an ideological hairs worth of difference among the various people. Geithner is a Summers protege. Tim Geithner,New York Fed president whose the likely alternative. They all basically played the same role. Other people who are on the list, possibly Paul Volcker as a temporary or Jon Corzine, they're all, you know, they're all basically the same position. So it's not clear it matter that much. But it might be a little harder to put Larry Summers in that role if Hillary is there.

COKIE ROBERTS: Also, think about the African Americans on the Harvard faculty and Larry Summers. I mean I think that's a real problem for him.

PAUL KRUGMAN: I have to say Larry is the Henry Higgins principal from "My Fair Lady." He insults everybody. So he really is equal opportunity. There's nothing about that.

SAM DONALDSON: I hate to repeat myself but then what else is new? You got to dance with the people who brung you. He has got to have, all right, he's got to have diversity and not just one or two women. Not just one or two African Americans. He represents something different and new. We can argue maybe later on how long that would last, but he's got to fulfill that promise.

COKIE ROBERTS: And can't be less...

GEORGE STEPHANOPOULOS: Well, no, but don't...

COKIE ROBERTS: And can't be less diverse than the Bush administration which has been very diverse and to have the first African American president come in and...

GEORGE STEPHANOPOULOS: I guess I don't disagree with that except you have to focus on excellence first and they're not incompatible in any way but you can't say that diversity should be the control rationale right now.

SAM DONALDSON: But George, I know you don't mean to make this argument, but are you saying these other people I've talked about aren't excellent.

GEORGE STEPHANOPOULOS: No, I said exactly the opposite actually.

SAM DONALDSON: Thank you. Scramble back on here.

PAUL KRUGMAN: Be part of what Obama is – what people are looking for is not just ideology, not just identity, but they're also looking for somebody that can actually run the country. You know, that's sort of what we've been lacking.

GEORGE STEPHANOPOULOS: Number one. But let's talk about some of the challenges they are going to face, specifically on the economy. The Congress is going to face this week the issue of whether or not to send a lifeline to the auto companies. We heard what Arnold Schwarzenegger said about it. Here is Governor Jennifer Granholm of Michigan.

GOVERNOR JENNIFER GRANHOLM, DEMOCRAT The auto industry would crumble if one of them went into bankruptcy. If GM is not buying from suppliers, those same suppliers are supplying to the rest of the auto industry too. But if they see a major collapse in their major customer, then they are not going to be able to survive.

GEORGE STEPHANOPOULOS: Some estimates, George Will, that a collapse would cost the federal government in the long run $200 billion.

GEORGE WILL: Yes, because among other things the pensions would then go to the Pension Benefit Guaranty Corporation which is already $14 billion in debt. But earth to Governor Granholm, she said the automobile industry would crumble. It's crumbled. It's collapsed. People who say General Motors is too big to fail have not noticed that it has failed. This week a statement from General Motors, official statement said that General Motors' board sees nothing, nothing in the performance of its management team to cause them to lose confidence in it. How about the complete evaporation of shareholder value?

PAUL KRUGMAN: You know, this is an agonizing thing. If this were any - if it were any kind of normal time, the answer would be clear. Let the thing go into bankruptcy, Chapter 11, continues to operate, restructure a lot of stuff. There are two reasons why this is a big problem now and why I'm kind of very reluctantly screaming in favor of some kind of bailout. One is that the credit markets are frozen. So normally a company can keep operating, declare Chapter 11 but keeps operating but that depends on being able to continue to get credit lines to do business. And you can't do that right now. So Chapter 11 quickly becomes Chapter 7 which is liquidation. So we actually see the thing disappear and then we're talking about a million plus jobs probably disappearing. The other is we're in the middle of this terrible, terrible slump and letting GM go under is an enormous anti-stimulus policy. It would be working towards a major negative blow to the economy just, you know, so we're really in St Augustine territory here. Grant me chastity in continence, but not yet. You know, this is not a good time to stand on principle and say we shouldn't bail these guys out.

SAM DONALDSON: Well, thank goodness I can take a forthright position. I'm with both these guys. In the long run - George is right - in the long run we need to preserve the marketplace philosophy of how we've run all these years. In the short run I think Paul is right. If we don't try of get hold of this tape worm with this terrible medicine right now because the medicine is not something we want to keep in our system, believe me, I think the tape worm can consume enough that we're going to be for years regretting it. It's better to put money into it now and people say, well, they'll be back in a year, they'll be back in a year for more. They may be.

COKIE ROBERTS: But that, there was – there is...

GEORGE STEPHANOPOULOS: And that's the real problem. That somehow the money won't work anyway.

COKIE ROBERTS: That's the problem is that they're basically saying, trust us, and you know, they're saying, don't use the 25 million that we've already got in the pipeline because that is there to have us get more fuel efficient cars. And we have to have more fuel efficient cars in order to survive. So let's keep going with that money to do the thing that will be a long-term survival and give us some short-term money to keep us up and going. But that means you have to trust them that they're going to do the right thing and have the...

SAM DONALDSON: Well, we have to have strings, Cokie.

GEORGE WILL:We would also have to trust the Congress which gave us Amtrak that it's - they know how to design automobiles. That's what they're doing in that building behind us is deciding what automobiles ought to be designed on what timetable and will the market buy them? Well, they've already decided the market won't buy the Volt, the electric GM car, because the Congress has already written in a $7,500 tax credit to try and bribe buyers for this otherwise unsaleable product.

SAM DONALDSON: How do you know? It's not out. It won't be out till next year.

COKIE ROBERTS: Until the end of next year.

GEORGE WILL: They've already written it in. They know.

GEORGE STEPHANOPOULOS: But it leads to a separate question because it does look because of these complications like Congress probably will not act...

PAUL KRUGMAN: Yeah.

GEORGE STEPHANOPOULOS: ...this week.

COKIE ROBERTS: That's right.

GEORGE STEPHANOPOULOS: And then nobody is back until January 20th. And I guess one of the questions I have is can GM especially last until January 20th? And if they go into bankruptcy, will consumers just say, wait a second, there is no way I'm buying a car from a bankrupt company.

PAUL KRUGMAN: Right. This is, you know, from a political point of view almost if you're a Democrat, you say this is good because the issue will be taken out of our hands by force. But from the point of view of the economy, it's another major blow. So I think you have to - if I were Democratic congressional leaders, if I were Obama, I would say you have to make every effort to get something in place because, you know, this is - the trouble is the economy is in a deep nose dive right now and this is adding to it. This is just a really bad time to be doing long run virtuous things.

GEORGE WILL: Paul, one of the arguments made against bankruptcy this week was that that would obviate and perhaps, shred the existing labor contracts, under which GM retirees get health care. And it was said in print that would be terrible because that would hurt retirees too young for Medicare. Why are there retirees too young for Medicare? If people want to retire before 65 or 35, that's their business but it is not a national crisis.

PAUL KRUGMAN: Well, there's - that's - there are a lot of reasons why that happens. It's too complicated to get into.

COKIE ROBERTS: Right.

PAUL KRUGMAN: But the point of the matter is, look, again, everything is - if this were 1999, and we had 4% unemployment and a booming economy, I would have no hesitation in saying let the thing go. Let the market work. But it's not.

COKIE ROBERTS: Also, the labor contracts have been renegotiated to be very much in line with the labor contracts of foreign car manufacturers. So they've been trying to solve those kinds of problems. I just think that what Congress needs to do is come back this week and do a quick public works public service bill like they did in 1982 in the lame duck session after that congressional election when unemployment was at 10% and they came back and, you know, quickly got some infrastructure stuff up and running. We can always use better roads and bridges and there you go.

GEORGE STEPHANOPOULOS: Well that may be what they should do but it doesn't look like that's gonna happen this week either.

PAUL KRUGMAN: Right.

GEORGE STEPHANOPOULOS: And now Sam, though, but because the problem is so great, economic advisers are telling Senator Obama, President-Elect Obama and I think Paul Krugman wrote this on Friday - $600 billion, that they're going to need a stimulus package far more than anybody talked about, $500 billion, $600 billion.

SAM DONALDSON: So, let's do it. So let's do it. I mean, again, this idea that somehow we shouldn't use extraordinary measures that we wouldn't ordinarily believe is good for us economically to try to stave off absolute disaster is nonsense. We need more, if that's what it takes. I agree politically, Cokie, it looks like nothing is going to happen in the lame duck session.

GEORGE STEPHANOPOULOS: Now.

SAM DONALDSON: Now. But next year, I hope it's not too late. There should be a massive program and I'm for infusing it at the local level, for instance, mortgages, I want - I think John McCain had some sort of idea although he took it - let's buy out the mortgages of individual homeowners rather than say to the banks, okay, here we are. We'll help you and see if we can't keep people this their homes that way.

GEORGE WILL: Sam, one of the ways we turned a depression into the Great Depression that didn't end until the Japanese fleet appeared off Hawaii was that there were no rules and investors went on strike because the government was completely improvising. Net investment was negative through almost all of the '30s because, again, people did not know the environment in which they were operating because the government had the fidgets and would not let rules and markets work.

PAUL KRUGMAN: This is not the way - okay. Well, it's not the way I read the history. It's not the way - no.

GEORGE WILL: Am I wrong about net investment?

SAM DONALDSON: Yes.

PAUL KRUGMAN: No, the negative net investment was because, you know, when you have 20% unemployment and all the factories are standing idle, who wants to build a new one? You don't need to invoke the government to explain that. No, what actually happened was, you know, there was a collapse of the financial system, which was not restored for a long time. There was a persistent deep slump in consumer demand and, therefore, no investment demand and so you were stuck in this trap. Roosevelt got the economy moving somewhat. By 1937 things were a lot better than they were in 1933. Then he was persuaded to balance the budget or try to and he raised taxes and cut spending and the economy went back down again and then it took a enormous public works program known as World War II to bring the economy out of the depression.

COKIE ROBERTS: Well, which is what Sam is saying. Throw anything at it that you can to try to stave off anything that disastrous.

GEORGE STEPHANOPOULOS: And that means most likely, Sam, though that the president-elect will have to put off any plans for tax increases.

SAM DONALDSON: Yeah.

COKIE ROBERTS: Or for health care or for a variety of other things.

SAM DONALDSON: George is right.

PAUL KRUGMAN: No, the way at least people like me are pushing, I think what will happen is there's going to be push for legislation to do things on health care. But that wasn't really ever going to happen. It wasn't ever going to go into effect until 2011. Because we weren't going to so much raise taxes as let the Bush tax cuts expire.

GEORGE STEPHANOPOULOS: In 2010. So you have a year's grace period.

PAUL KRUGMAN: In 2010. And so, no, so it's not clear that - no one, no one was really going to talk about doing a lot of new spending of that kind, long-term spending next year anyway.

SAM DONALDSON: Excuse me, Paul. Who is no one? Barack Obama, while he didn't put a price tag on it and said, I will promise to spend this much money, his supporters, young people particularly, who saw him as walking on water may - you bring an interesting point - may be very disillusioned if he wisely cannot pursue all of these programs.

GEORGE STEPHANOPOULOS: But I think Paul does at least point the way towards a rhetorical solution. You say you're for health care. You introduce it. But you just…

COKIE ROBERTS: Don't pass it.

GEORGE STEPHANOPOULOS: ...well you don't pass it. Well it's going to take months to pass it anyway.

PAUL KRUGMAN: Yeah.

GEORGE STEPHANOPOULOS: But the mechanism is the expiration of the Bush tax cuts. You don't impose any kind of a tax increase.

PAUL KRUGMAN: Yeah. The Bush tax cuts were written blessedly from the point of the view of the Democrats to turn to a pumpkin on the last day of 2010...

SAM DONALDSON: What am I listening to? I can recite people making over $250,000 a year, a very small percentage will only go back to where President Clinton's tax rates were and we need to do this out of fairness. I mean, I can recite his speech.

GEORGE STEPHANOPOULOS: But if that happened 2010 instead of 2009, that's a broken promise?

COKIE ROBERTS: Well, we'll see.

PAUL KRUGMAN: Yeah, I don't think it's...

SAM DONALDSON: Well, it depends.

GEORGE STEPHANOPOULOS: We'll see. That is the open question. You guys can debate it in the green room. And you all can join in later on ABCNews.com. Still to some here, "The Sunday Funnies."

Originally broadcast, 11.16.08