SYNOPSIS: Tim Russert interviews Krugman on The Great Unraveling, the Bush administration's economic policies and the U.S.'s budget woes

TIM RUSSERT: Good evening and welcome again. The economy, budget deficits--Where is America headed? One man with very strong opinions--You read his column every Tuesday and Friday in The New York Times. He now has a new book, "The Great Unraveling: Losing Our Way In The New Century." With us, Professor Paul Krugman, op-ed columnist for The New York Times. Welcome.

Professor PAUL KRUGMAN (Columnist, The New York Times): Glad to be on.

RUSSERT: "The Great Unraveling"--Where's the title come from?

Prof. KRUGMAN: Just from this general sense that things are coming apart. I mean, if you had s--three years ago, if you had said here's where we're going to be today, you know, that--with--with the budget deficits, the troubled economy, the collapse of a lot of our international alliances, you would have not believed it was possible. And amazingly quickly things have really gone to--well, as--as they say, you know, where am I going, and why am--why am I in this handbasket?

RUSSERT: In your book, the introduction, you say, very openly, 'This is not a happy book.'

Prof. KRUGMAN: These are not happy times. You know, I--I'm--I'm a professional economist before I became a columnist. And just looking at the economic things, the budget is--it's actually desperate. I mean, you actually try to figure out how we--how in the long run we pay our bills given this budget deficit, and you can't see it. And, yet, you ask: What's the possibility of us politically doing something reasonable? Given where we are now, you don't see it. You know, you go through a bunch of these things and it really is extremely frightening.

RUSSERT: Our budget deficit for the year is now projected to be close to $500 billion.

Prof. KRUGMAN: Yeah, and that's--of course, that's counting in the surplus that Social Security runs, which it needs to run to pay for the future. So if you take Social Security off the picture, what we've got is a situation where now more than one-third of federal spending is borrowed money. So we would have to have a--roughly a 60 percent increase in revenues to balance the budget in a real sense now, and probably more, if you take other--other liabilities into account. So we're really--this is Banana Republic territory. You know, we--we--we think we're America, but we're looking more and more like Argentina, if you actually look at the numbers.

RUSSERT: When you talk to people about budget deficits and you show the famous pie of the federal spending and outlays, and you see a category called interest on the public debt, explain that.

Prof. KRUGMAN: Yeah. Well, you know, we have, oh, $3 trillion of money owed to--owed to the--to the public, and--and another couple of trillion that's owed to internal government trust funds wi--so--which really should be counted as well, and, you know, it's borrowed money. It's just like the mortgage on your house. It has to be paid eventually. What we really should have in the budget is we should have a category for promises that we've made that aren't funded, which includes a lot of future Medicare spending, a lot of future Social Security spending. And you put all that together, and actually, we are--you know, it's very, very deep in the hole.

RUSSERT: You could eliminate the entire defense budget, and not balance the budget. You could eliminate Social Security and not balance the budget.

Prof. KRUGMAN: That's right.

RUSSERT: You could eliminate Medicare and not balance the budget, or if you chose to keep the Pentagon, keep Medicare, keep Social Security, you could eliminate all the rest of the United States government and not balance the budget.

Prof. KRUGMAN: Yeah. It's--basically, if you look at, you know, try and abstract from all of the twiddles and things, we're--we're running--we're running a deficit--we're--we're underfunding the US government by 30 percent, which is bigger than any one program. That's not--you know, the--and you--you say, well, let's eliminate all the waste and fraud, which is what they always say, and there's nothing there. And there's--we either have to make some very fundamental decision about being a different kind of society. Let's not have--let's--you know, let's--let's go back to the days of Herbert Hoover, no Social Security, no Medicare, or we have to get some more revenue. We just--and what we're doing right now is we're living in a fantasyland where we imagine that we can have it all--where--where you can have big tax cuts for--mostly for a relatively small number of people, and all these social programs that middle class Americans count on and an aggressive unilateralist foreign policy that costs a lot of money, and it's not possible.

RUSSERT: Both parties?

Prof. KRUGMAN: No. I mean, there's a--there are--there are differences. The--no politician--no politician who hopes to get elected can be entirely realistic. OK? No one is--is--you know, if I--if I tell you the numbers, and I tell you that we would have to--to make our way, we would have to not only roll back all of the Bush tax cuts, but then quite a bit more, or make substantial cuts in fundamental middle class social programs. No candidate is going to say that for the next election. But it is true that these days, the Republican Party is living in a complete--you know, a--a--a land where two minus one equals four, where they just believe that--or claim to believe that they can keep on cutting taxes without anybody ever feeling any pain.

RUSSERT: What caused this huge deficit?

Prof. KRUGMAN: Well, all right. About--if--if you look at the--what we think is going to happen next year, and that also turns out to be representative of the whole thing, about 60 percent of the deficit is directly attributable to the Bush tax cuts. Another $60 billion to a $100 billion is Homeland Security plus the war in Iraq. Now that's not really the whole story because we actually had a substantial surplus. And we ask where did--where did that go? And the answer is, well, a lot of that was the stock market bubble, a lot of capital gains revenue which we should never have counted on. And some of us told us--told--you know, told the politicians we shouldn't count on that. If you were reading my New York Times columns back in 2000, some of which are in here, you would have seen that--that we shouldn't count on that. And then there's the mystery factor. I mean, even when all is said and done there, if you look at the Congressional Budget Office estimates, there's something called technical factors. We're just collecting less revenue than we expected. Where that's coming from, you know, I--a lot of us have a suspicion that malefactors of great wealth are feeling they can get away with more these days, but that's not actually--there isn't actually any hard evidence for that. But whatever it is, we--the point is we had what was really a transitory bubble in--in revenue in the late '90s, you know, basically the Nasdaq was giving us a budget surplus; that went away. And then in spite of that, we just kept on cutting taxes, taking on new responsibilities and now we're very, very deep in the hole.

RUSSERT: Has the collapse of Enron and other companies had a drag on the economy?

Prof. KRUGMAN: A little bit. I mean, it's--it's hard to measure. I mean, business investment has been very slow to come back. Scandals may be part of that. Although, you have to say that with, you know, manufacturing running at--Whatever--75 percent of capacity, there's no real need for businesses to be building new factories right now. So it's--the--there--the collapse of--of the bubble, the excesses of the '90s all had a lot to do with slowing the economy. The--you know, I guess the--if the nex--nat--the natural next question is 'Why,' you know, 'should we be doing something different? Why haven't we had more of a recovery?' And the answer is, 'Well, we've had an economic policy that hasn't really responded to the--to the slump.'

RUSSERT: We're going to come back and talk a lot more about that. We're talking with Paul Krugman. He writes a column for The New York Times on Tuesdays and Fridays. His new book, "The Great Unraveling: Losing Our Way In The New Century." A lot more right after this.

(Announcements)

RUSSERT: And we are back talking to Paul Krugman. He writes a column for The New York Times on Tuesdays and Fridays. He has a new book, "The Great Unraveling." You've been called the most dangerous liberal columnist in America. How do you plead?

Prof. KRUGMAN: I--I hope I'm guilty. All right, I mean, that's--we're--we're supposed to. If--if you write a column in The New York Times, you know, the most valuable real estate in the world, journalistically, if you don't make a lot of people mad, you're not doing your job. And mostly what I just do is keep on pointing out that we're being snookered, you know, that--that our leaders aren't telling us the truth, and they're getting away with a lot of stuff.

RUSSERT: The president will say that he cut taxes because we're in a recession, economic situation was worsening, and if he hadn't done that, we'd be even worse off right now.

Prof. KRUGMAN: If we hadn't had any response to the recession, we'd be worse off, but that wasn't the question, right? What--what you normally do in a recession is you have a government policy that's supposed to pump spending into the economy now, which means you give aid to states and local governments so they don't have to slash their budgets. You provide money to lower income and working--working-class families who are likely to spend it. And what you don't do is you don't mortgage the future. If you talk about short-term measures designed to bridge you over a couple of years, not something that's going to deplete the Treasury forever. What Bush did was to use the recession as an opportunity to push long-term tax cuts mainly for people with very high incomes who are not likely to spend very much of the money while at the same time refusing to do all of the things that you usually do during a recession. So what he's ended up doing is--you know, if he's as--if we had done absolutely nothing, yeah, the recession would have been a little deeper, but that wasn't the question. I think the strategy that he's chosen basically gives us maximum deficits for minimum results, and you can see it. Here we are, you know, two and a half years into this thing, down 2.7 million jobs. It's 90 percent certain that Bush will be the first president since Herbert Hoover to end a term with fewer jobs than when he came in.

RUSSERT: You say 90 percent. Is there a suggestion that there may be a tick back up?

Prof. KRUGMAN: We've had--the summer had a tick back up in--in production, though not yet in jobs. It's always possible. You know, economics is very far from being an exact science, right? It's--it's possible that this is the real thing, although it would take an incredible pace in job creation to get him back on track. My guess is that this is going to be another false start. You know, three times since the--since the slump began, we've had a good quarter, and people started breaking out the champagne. And then the next quarter was kind of mm-hmm. And my guess is that this one is probably better than the last two, but it's still going to--we're still going to be talking about a jobless recovery a year from now.

RUSSERT: What's wrong? Why doesn't the economy just unleash itself?

Prof. KRUGMAN: Oh, this is--what I've tried to tell people is this is not your father's recession. This is your grandfather's recession. For the first time, really, since before World War II, we had a non-inflationary boom that went on a long time. Businesses invested a lot. They invested unfortunately a lot foolishly, so there's an overhang. There's too much--there--there are too many servers and routers and too much fiber optics in the ground and too much debt. And the normal springback that you get after a sort of traditional postwar recession can't happen. They--that doesn't mean there's nothing you can do about it. What this calls for is a real, sort of a mini New Deal, a bridging strategy that's designed to keep spending up, but it is--it is harder. We--we've come to rely--let me play technical economist now. Our standard recession has been--for the last 50 years, has been the Fed is worried about inflation, it raises interest rates, it squeezes. And then when it decides that inflation is under control, it lets go, and housing picks up, and pulls the rest of the economy with it. Housing has stayed strong all through this slump, so there isn't really a reserve for that kind of springback, and the usual--the usual policies don't work.

RUSSERT: How would you rate the performance of Reserve Chairman Alan Greenspan?

Prof. KRUGMAN: Oh, on monetary policy, A minus. I mean, I would have done--I would have been even more aggressive than he's been about--about cutting rates. But I have to admit that he's been more aggressive than almost any other central banker would have been, so that's good. But, you know, he--he--he's going to owe a lot of time in purgatory for what he did on fiscal policy. Remember that when the first Bush tax cut was under consideration, Greenspan tied himself up in knots to generate a rationale for that tax cut. And he warned that we needed to cut taxes because otherwise we'd run excessively large budget surpluses. And that was decisive in pushing that through. So I think--I think Mr. Greenspan really owes the--the country and--and future generations some serious apologies.

RUSSERT: The president, in your book, you describe him as a radical.

Prof. KRUGMAN: Yeah.

RUSSERT: Why?

Prof. KRUGMAN: Well, I mean, you can look at all the various policy measures, and they really are much further to the right than anyone would have expected. And I think if you look at it more broadly, what he's doing on economic policy is, whether he knows it or not--I mean, one never knows quite what he understands--but he is in effect following the--the line, the--the--the path suggested by the really, really hard right, by people like Grover Norquist who say what we need to do is we basically need to create a fiscal crisis. We need to starve the government of revenue, and that's the way we can get those New Deal and Great Society programs off the table. We can--by creating a--a situation where there just isn't enough money we can shrink the government down to where we can drown it in the bathtub. And that's--that's essentially what Bush is doing, although, again, I'm not sure he knows that.

RUSSERT: David Stockman, who worked for Ronald Reagan, talked about starving the beasts.

Prof. KRUGMAN: Yeah.

RUSSERT: You subscribe that there are people who actually believe that theory?

Prof. KRUGMAN: Oh, it's not a question. There--there--it's right out there. They--they admit it. What's not--if you go to--if--Norquist, you go to Heritage Foundation, it's very clear. They're quite explicit, although usually not--you know, you can't--the--the--the stuff on the first page you get to on the Web site doesn't talk about it, but if you go, you know, a little bit further in, you can find lots of stuff about that. The administration will never admit that that's the plan. The congressional leadership will never admit that that's the plan, but the actual substance of the policies suggests that that is what they're trying to do.

RUSSERT: Bring it to such a point where either you eliminate major social programs or you raise taxes to such a level it is totally unacceptable?

Prof. KRUGMAN: Well, not--not that you raise them to a level that's totally unacceptable. Remember, we--we were--not very many people were complaining about excessive taxes in 2000. All right, this was not an issue that had a lot of public resonance, and the US does have the lowest overall taxes of any advanced country now. But what they hoped to do is to create facts. Once--it's much--a level of taxes that might seem perfectly tolerable, if it's been around for a long time, will seem intolerable if it involves increasing taxes sharply from where they are now. So their idea is to cut taxes to a level where those big social programs cannot be funded. And then dare anybody else to try and--and raise taxes to the level where they can be funded again.

RUSSERT: We're going to come back and talk about this, "The Great Unraveling." Paul Krugman is our guest. This is his new book. You can read his column in The New York Times on Tuesdays and Fridays. Right after this.

(Announcements)

RUSSERT: And we are back. Professor Krugman, I can see people all across the country saying, 'Who is this guy saying that we're undertaxed?' Why do you think that Americans are undertaxed?

Prof. KRUGMAN: Well, look, none of us likes taxes. I got my--my real estate bill from--from Princeton Township, and I'm not happy. But there are things we want to pay for. There are certain things we want. There are, you know, Social Security, Medicare, Medicaid, because you don't really want poor people dying because they don't have medical care, unemployment insurance, national defense. Add up all of those things, and it turns out that it's more than we're now collecting under the tax--you know, given where the taxes are now after three years of Bush tax cuts. You know, taxes are not--taxes are actually lower for the r--for the wealthy now than they've been for a long time. Once this last round of tax cuts has--has completely filtered through, once everything's been phased in, you know, rich people are going to be paying the lowest tax rates since the days of Herbert Hoover.

RUSSERT: Who do you consider wealthy?

Prof. KRUGMAN: Well, I mean, there's levels and levels. The truth is an amazing amount of recent tax cuts have actually been going to people with more than a million dollars a year in income. Right? That--this last tax cut, about 18 percent of it will go to people earning more than a million dollars a year. That's 0.13 percent of the population. Forty-two percent of that first tax cut, once fully phased in, goes to people in the top 1 percent, which starts about $330,000 a year. So we're really--we're not talking a--we're not talking about upper middle class here. We're really talking about vir--really, really well-off people getting the--the lion's share of these tax cuts.

RUSSERT: The Republicans will counter that those are the people that create the jobs, that drive our economy, that really can help us re--go--see an economic recovery.

Prof. KRUGMAN: Well, gee, we've had a system for about 60 years in which rich people paid reasonably high taxes. That system has, by in large, worked. When Bill Clinton raised taxes on the top bracket in 1993, those same people who were saying this is what we need now is lower taxes on--those people s--predicted disaster, terrible things would happen. In fact, we had eight years of spectacular economic performance. We had the best growth performance in the later Clinton years that we'd had really since the 1920s. What's--you know, wha--where--where does this come from? This is faith-based economics. And it's odd--oddly the people who give the biggest campaign contributions seem to be the people who we have to reward to have economic growth.

RUSSERT: We did have the dot-com explosion under Clinton, though, which ga...

Prof. KRUGMAN: Oh, yeah.

RUSSERT: ...boosted the economy, probably artificially, right?

Prof. KRUGMAN: No, more really distinguished. The dot-com led to a lot of stock gains. The growth in productivity, the real acceleration, that--that took off for reasons. That--that was not an illusion. And I'm not saying Clinton did it, all right. A lot of that was just technologies maturing to the point where we actually knew how to use them productively. But the point was that Clinton raised tax rates on the top bracket to a level that was still well below what it was in the 1970s, and, no, nothing bad happened. It is possible to collect enough money to run government as we know it without destroying the economy despite what the people now in control would have you believe.

RUSSERT: Realistically as a liberal, but also understanding the pragmatism of politics, what would you advise a Democratic candidate to propose to fix this budget problem?

Prof. KRUGMAN: I think--you know, I am not a political expert. And I certainly don't consult and am not allowed to consult the candidates. So I would probably say, look, the most--we urgently need some more revenue soon, not this year, not next year, but we need to have the prospect of it coming in. And so you have to roll back at least some of those tax cuts. And the obvious ones to roll back are the tax cuts that go primarily to the upper bracket. So that means look--look at that top bracket marginal rate. Look at the dividend tax cuts. Ask what's happened to corporate taxes? We're collecting a lot less in corporate taxes than we used to. You see all--you probably should focus on--on tax increases at the upper end. Basically, do--you know, we have to redo what Clinton did back in 1993. We have to say, 'Wait a second. We have a budget problem. Those who benefit most from being part of our society probably should bear their--a special share of the burden of getting us back on track.'

RUSSERT: As I recall, he raised revenues, taxes about $250 billion, but also found cuts of some $250 billion, too. Is that possible?

Prof. KRUGMAN: It's a little com--no, I don't think that's--I don't it all added up. I think it wasn't neutral. I think--oh, you mean--you mean spending cuts.

RUSSERT: Yes.

Prof. KRUGMAN: Oh, yeah. No, there--and you should s--al--always look for spending cuts. You don't want to get into a situation where you just say, 'Oh, well, we're going to'--you know, 'money is free. Let's'--the--the--there's been a long time since any politician has been able to do that, and--and, of course, be careful.

RUSSERT: You got Democrats and Republicans, however, in Congress, seeing the record surpluses, go on a spending binge. They were spending at 8 percent, 9 percent a year.

Prof. KRUGMAN: Yeah. Yeah, although a lot of that--I mean, some of it was wasteful, some of it was--was making up for lost time. We had a lot of neglect under the--you know, during that long stretch from--from the Reagan tax cuts until budgets began to come back into--into surplus at the end of the '90s. We had a lot of neglect of--of little things, had--there was a lot of downgrading of government infrastructure and so on. So some of that made sense, some of it didn't. It was clearly necessary to crack the whip on all of that. But, you know, you actually--when you actually start going through it, and you ask how much wasteful excess spending do we have in the federal government? You know, it's billions and billions of dollars, but it's not very much compared with the whole picture.

RUSSERT: How long will it take us to get to a balanced budget?

Prof. KRUGMAN: It's all about the politics. You know, we're a rich country. We're a country with a lot of--where people are law-abiding. If we needed to, if it was a national emergency, we could balance the budget in a year. If--given--given the--the real--I mean, on our current course--on--on current legislation...

RUSSERT: Right.

Prof. KRUGMAN: ...never. The budget deficit is going to stay above $400 billion for the rest of this decade and then it's going to get bigger as the baby boomers start to retire. So right now--right now, we're on a cour--we're heading off the cliff. The cliff is maybe a decade or two out there, but right now we're driving straight off the cliff. And it's going to take a fundamental change in policy.

RUSSERT: I want to come back and talk about when the baby boom generation retires, what it's going to mean to our fiscal problem. A lot more of our conversation with Paul Krugman, you can read his Times column on Tuesdays and Fridays. His new book, "The Great Unraveling: Losing Our Way In The New Century." A lot more of our conversation right after this.

(Announcements)

RUSSERT: And we are back talking to Paul Krugman, op-ed columnist for The New York Times on Tuesdays and Fridays; his new book, "The Great Unraveling: Losing Our Way in the New Century." Why do you think deficits are bad? Explain to people why deficits are bad.

Prof. KRUGMAN: Well, OK. The really bad thing about deficits, if they're big enough and go on long enough, is that governments, like people, can go bankrupt, all right? There can come a point when investors say, you know, 'I don't want your bonds, because I don't think you're going to be able to repay them,' and that happens. That has--that's happened to Argentina recently. It's happened to--Brazil's been skirting of--off the edge so they pulled it back a bit. It's--so the worst thing is just plain insolvency, you know, just plain--you--people--you can't--you can't run the government. You've got--people won't buy your debt. We're actually on course to having that happen. Ha--you know, if you--i--unless there's either a drastic cut in social programs or a major tax increase, we are eventually going to find ourselves in that position. That sounds u--incredible. Can't happen to America, but actually, that's the way the numbers look. Now that's a little ways off. Meanwhile, the problem is also that the government is borrowing a lot of money that could otherwise be financing real investment, so we're--you know, we're talking about essentially draining off funds that might otherwise be there to--to build factories, to improve technology, and--and to build housing, buildings, whatever, and wi--big enough now. Deficits at the rate we're now running are enough to probably knock a half point off our growth rate in the long run. But I--I--actually I'm--I'm fundamentally concerned just about solvency. I just think that we're witnessing the banana republicization of--of the United States, and it's pretty scary.

RUSSERT: Some Republicans are saying that as a percent of GDP, these deficits are not the largest in history, and what's the big worry?

Prof. KRUGMAN: Well, they're not the largest in history because in about one year--in the--in the '80s, Ronald Reagan ran a bigger one. They are--a couple of things. The--the most important point is that we have this huge problem looming over the budget which is the baby boomers, and that doesn't hit until about 2011, 2012. When Ronald Reagan was running huge deficits, that was 20 years away--sorry, 30 years away. Now that we're--but we're now running these things with only--with the--the retirement of baby boomers only--only 10 years away. So a--a deficit of 4.5 percent of GDP doesn't mean the same thing now that it did in the 1980s. It's a much more clear and present danger.

RUSSERT: The number of people on Social Security and Medicare is going to double. We used to have 35 workers per retiree. We're soon to have two workers per retiree.

Prof. KRUGMAN: That's right.

RUSSERT: What does this portend for us?

Prof. KRUGMAN: Well, it just means that--you know, the US government--what does the federal government do, all right? There's this great line by undersecretary of Treasury who says that the US government is basically a--a huge insurance company that has a side business in defense and homeland security, and that's about right. And mostly what it does in that insurance business is Medicare and Social Security, and Medicaid which also delivers a lot of its benefits to older Americans. So we're talking about a huge increase in the number of claims on that insurance company. It's--i--you know, it--it's--it's a--big relative to the budget. We just have a lot of known future expenses that should--we should be taking into account. We're in the good time now. We still have a little bit more than three workers per retiree. We should be building up reserves for the time--you know, by 2040, the United States has the age distribution of Florida today. We should be preparing for that now.

RUSSERT: You did write back in the--the '90s that the deficit is not nearly the monster that some people imagine.

Prof. KRUGMAN: That's right. And when we were talking about deficits of 2 percent of GDP, and particularly in the '80s when we were talking about deficits of 2 percent or 3 percent of GDP, then it wasn't--you know, we weren't talking something that was going to bring the house down. We were talking about--I guess so--somebody used the wo--we're talking about some termites. They slowly eat away at the--at the house, but it's not--it's not going to come crashing down.

RUSSERT: What percentage is it now?

Prof. KRUGMAN: Well, now it's a deficit of--you know, if I believe--well, if I believe the numbers that the CBO puts out, it's going to be 4.3 percent of GDP next year, but, you know, it's going to be more than that, because they thems--as they themselves admit, it's going to be 4.9, something like that, percent of GDP, or to put it another way, about a quarter of total federal spending, and it's--this is big, and again, we're--we're much closer to the date when these things--when--when push comes to shove, when the baby boomers hit--hit the retirement system.

RUSSERT: You mention the CBO, the Congressional Budget Office. Do you trust the numbers that the government provides?

Prof. KRUGMAN: It's a question of what you mean by that. I'm sorry. CBO is honest. They are rigorously honest. I won't say the same thing about OMB. But CB...

RUSSERT: The Office of Management and Budget which comes from the White House, and...

Prof. KRUGMAN: That's right. But--but let me say CBO is honest, but they operate under constraints. Their basic projection, by law, has to take the legislation as it now stands, even if it's absurd and they know that it's not going to stand. So if there's a ta--provision in the tax law that says this whole thing sunsets in two years, just goes poof, and all of a sudden, 10 million s--people's taxes suddenly go up, they have to make their estimates as if that's really going to happen, even though everybody knows it isn't. And so the CBO numbers are biased towards understating future deficits. This year, great thing: This latest report from CBO, they--they--their projection followed the rules, but then they had a supplement which said what would happen if we were--if we were actually realistic, and that--and of course, the numbers are much grimmer.

RUSSERT: When I had Howard Dean on "Meet the Press," I asked the Treasury Department for some numbers...

Prof. KRUGMAN: Yeah.

RUSSERT: ...about the Bush tax cut, which they provided. It's not unusual, because the Clinton administration provided me numbers on a regular basis, too. But there was a lot of things written, yourself included, that you didn't trust the numbers provided by the Treasury Department.

Prof. KRUGMAN: Na--what they provided you with, were not--they were honest numbers, but a dishonest sample. That is, they--it--it looked like it was a sheaf of representative families and how the tax cut affected them. But it wasn't. It was a carefully selected sample of families designed to make the tax cuts look bigger for typical families than they really are. That's by and large what they do in this administration. Some of their numbers are just plain dishonest, but that's rare. Usually what they do is selective--selective exhibits, selective presentation, so if you see somebody talk about the average family will receive a tax cut, you have to remember that the average family is not the typical family, because it's--it can be Bill Gates and 10,000 other people, and Bill Gates dominates the sample because he gets most of the tax cut. So there's a lot of dishonesty in spirit even if it's--if it's accurate in--in--in literal letter of--of the--what they--what they said.

RUSSERT: But if Howard Dean says he's going to roll back the Bush tax cut, he is going to have to confront the political reality that Republicans will justifiably say, 'You're raising taxes.'

Prof. KRUGMAN: Well, this is--this is--that's part of the plan, right? You cut taxes to a level which is too low to finance the government, and then if anybody tries to say, 'Well, you know, we can't--we--we got to do something,' you say, 'You want to raise taxes.' Now that's--that--again, that's part of the plan. It's--there's a--this is a fiscal crisis by design, and it's--it's all about dismantling as much as they can of the legacy of Franklin Roosevelt.

RUSSERT: Another quick break. We're talking to Paul Krugman; his new book, "The Great Unraveling." More after this.

(Announcements)

RUSSERT: And we are back talking to Paul Krugman; his new book, "The Great Unraveling." You also write a group of Republicans are 'a revolutionary power whose leaders do not accept the legitimacy of our current political system.'

Prof. KRUGMAN: Well, it sounds pretty strong, but if you look at--you look at all of the little things, look at the Texas redistricting fight, look at the number of times that--you know, it's--think about the fact that a--a number of Republicans in Congress all through the Clinton years referred to Bill Clinton as your president, not the president, but your president. They never really accepted his legitimacy in that office. These guys play hardball. They don't really thi--and they really don't seem to think that--that there should be any--there should ever be a time when--when the pendulum swings and--and the other party is back in power.

RUSSERT: Do you see yourself now assuming the role almost as the loyal opposition?

Prof. KRUGMAN: Yeah, I--I guess. I mean, it--try to do what you can. I don't know--I mean, I assume that--that, you know, it--there was a point--I have to say there were a few months after September 11th when it really seemed as if everybody had, I think entirely wrongly, out of the spirit of the country, but had decided that criticism or--or, you know, discussion--open discussion of--of the administration's policies was inappropriate in a time of war, and I was almost all alone in--in the mainstream media saying, 'Hey, wait, I don't--you know, you don't want--they're--they're not doing the right thing, and they're not leveling with us.' Now I think it--it's--at least there's a more open climate, at least for the time being, for that kind of discussion.

RUSSERT: Is--are you suggesting there was political exploitation of that period?

Prof. KRUGMAN: That's a j--flatly. I mean, it was extraordinary. It was incredible how--and it--it began immediately, by the way. I mean, there's this myth out there in the--in the media and the country that there were--there was a period of national unity after September 11th. I was--you know, my congressional sources were telling me--I--I think within a day after--after the--the attack on the towers, 'You--you won't believe what they're doing. They're say--they're trying to push through a--a cut in the capital gains tax as a response to terrorism.' And it was the--right away the--the exploitation began. If you look at the legislation that--that the House--Republican leadership in the House tried to push through in the immediate aftermath of September 11th, it was outrageous, and it was spectacular political exploitation of--of the event.

RUSSERT: You were--you are an economist. You came to Washington for the first time to work on the staff of the Council on Economic Advisers for Ronald Reagan.

Prof. KRUGMAN: Well, that was a kind of interesting experience. Martin Feldstein of--of Harvard was the new chairman. He brought down a bunch of Cambridge whiz kids to--most of them registered Democrats, actually, to be on staff level. I mean, I was the top international economist. The top domestic economist was a guy named--oh, Summers, Larry Summers. Wonder whatever happened to him? So...

RUSSERT: Secretary of Treasury, now president of Harvard.

Prof. KRUGMAN: That's right. So, you know, we--it--was--it wasn't--that was an apolitical role, you know. It was in the middle of things, but it was essentially a technical role. It was--it was very eye-opening.

RUSSERT: Yeah. You write about that. Why was it so eye-opening, and what did you take from that experience in terms of the level of discourse and debate you witnessed?

Prof. KRUGMAN: Well, you know, I was a--at that time I was a pure professor. I've never been in that kind of thing before, you know, in that role, and what you realize is, it's--it's very simple stuff that--that--that works, and by and large, top officials, certainly the political appointees in--in many government departments, have no idea what they're talking about. They really are--you know, they don't understand even very basic things, and you get--it's a--it's a great experience to--to be able to sit in those rooms, you know, behind the--behind your boss' chair passing up the slips of paper reminding him what he should--should talk about, and listen to the--to people saying things that really make you want to bang your head on the table. My God, doesn't he understand--basically doesn't understand that things add up, doesn't understand the difference between a nominal interest rate and a real interest rate, which is the interest rate corrected for inflation. So it was really quite--quite an amazing thing, and it does a lot to puncture any reverence you might tend to have towards--towards people whose faces you see on TV.

RUSSERT: You say that a high official's golf partner can have more influence on his or her view than some of the data that is provided by staff.

Prof. KRUGMAN: Well, you know, there's an example of that right now. The administration has just rolled back a very crucial part of the Clean Air Act, new source review, and you'd think, well, that must be based on some careful analysis, but the General Accounting Office says actually there is no solid evidence of that. This appears to have been based on anecdotal evidence from people in the power industry. And you know, some kinds of people get to tell their anecdotes to top government officials and other kinds don't. So it's definitely true, that what--the--the anecdotes, the--the people you--you play golf with have a disproportionate influence on policy.

RUSSERT: I found your views on trade quite striking. 'Trade is less an issue than traffic congestion.'

Prof. KRUGMAN: Well...

RUSSERT: There's a view, particularly within the Democratic Party...

Prof. KRUGMAN: Right.

RUSSERT: ...that the loss of manufacturing jobs in the country is directly tied to the cheap products coming into the country vis a trade.

Prof. KRUGMAN: Yeah. And like many views there's--there's some truth to it, but it's--it's not--if you actually do the numbers, it's not that big. And I--I--you know, right now, this--this--this past week, all of a sudden, China, you know, the--the president has decided to talk tough on China. And, you know, there's a real issue. There are some factories that are closing because of Chinese imports, but if you actually go through it, it turns out it's a drop in the bucket compared with the other stuff that's going on. I'm not a--I--I--I'm a--I'm a free trader. I've--basically--basically because I think it's the best chance we have of getting real development in very poor countries. That puts me sometimes at odds with--with people that I'm right now, you know, allied with in--in trying to fight this right-wing nonsense that's taking over the country, and if we ever get out of this dark tunnel of policy insanity, then we can have that discussion again. So I--you know, I mean, it's a--that--I--it really is--I have to say, it's a--it is an exaggerated issue. Trade is certainly important. It's very important for smaller countries, but right now, if you were going to ask, what's happening in the United States, what is the core of what's going wrong, it's really--it's not part of it.

RUSSERT: Cheap labor in other countries has not stolen American jobs?

Prof. KRUGMAN: Cheap labor has led to the loss of some American jobs. Export opportunists have led to the gain of some American jobs. Overall, has international trade had a big impact on the number of jobs? No. Now, that's not very much comfort for the guy whose furniture factory in North Carolina has just closed and he doesn't know what to do. And the answer to that, I think, is--is we need to have a booming economy. During the '90s, we didn't hear a lot about trade, even though there was a lot of growth of imports, and the reason was we had a very healthy domestic economy, lots of jobs were available. You also want to have a social safety net, so that if your factory closes, you still have medical care for your children. You know, thi--this is--this is--i--I--I'm a free trader but there's--you know, there are conditions. You know it's--it's not going to be tolerable unless you have--have the surrounding environment that makes it work.

RUSSERT: Another quick break. We're talking to Paul Krugman; you can read his column in The New York Times. He has a new book called "The Great Unraveling." A lot more after this.

(Announcements)

RUSSERT: And we are back talking to Paul Krugman, columnist for The New York Times; his new book, "The Great Unraveling." The National Review Online has the Krugman Truth Squad.

Prof. KRUGMAN: Yeah.

RUSSERT: They monitor every word you write, and they will pick apart every column and say, 'He no longer is just an economist. He's an ideologue, and he just is trying to twist facts in order to prove a political point.'

Prof. KRUGMAN: They would say that, wouldn't they? No, I mean, it's--it's--I'm subject to a level of scrutiny I don't think anyone else in--in journalism is. I think that given--given that I'm writing a hundred columns a year, the number of things they've actually been able to make stick is pretty small, so it's--I think I'm doing OK. It's--it's not fun. It's wa--part of the reason why few--not very many people do the kind of thing I'm doing, if you take on our current leadership, you will be pursued. You will be stalked, ha--so far, just stalked int--intellectually, but it's--it's pretty scary sometimes.

RUSSERT: Has--have you changed from just being a--a university professor, an economist to someone who is now--thinks much more politically?

Prof. KRUGMAN: Well, I certainly think about politics a lot because, after all, that's--that's where the decisions are going to be made. I have no political ambitions. I don't want a gover--a job in a future government, and th--you know, so in that sense, no. And I don't think my views have changed much at all. I think if you look at what I was saying about economic policy during the Clinton years, it's not very different from what I say now. It's just that the actual policies have moved way over there, and I mean, there to the right, and also in the direction of irresponsibility. So I end up spending a lot of time being harshly critical of what our current leadership is doing right now.

RUSSERT: There was one interesting analysis where they said, 'Well, Krugman writes that things in California are a disaster, they're just awful, and then later writes another column about Arnold Schwarzenegger saying, you know, "Arnold, things really aren't all that bad."'

Prof. KRUGMAN: I don't think I ever said things were a disaster. I said they had--they had big problems, which they do, but it's not the economy in California. I mean, that's one of those things. You know, Schwarzenegger is doing the usual line, you know, let's--don't worry about the budget details. What we need to do is bring business back. It never left. The California economy actually holds up pretty well on national comparisons.

RUSSERT: What's the problem?

Prof. KRUGMAN: The problem is that the budget developed a big hole mostly because the California tax system relies heavily on income taxes, which meant it was getting a lot of money from stock options in Silicon Valley, which went away, and also because of the California energy crisis which depleted the state treasury as well as--as disrupting everything. And you know, actually, there--the truth is they're not coping with it all that badly. You know, they--they balanced the budget for this year with a fair bit of hocus-pocus, but not more than other states are doing. Next year's deficit is $8 billion, which is nasty, but--but manageable.

RUSSERT: But growing, also, and if they repeal the car tax, it's going to be higher.

Prof. KRUGMAN: That's right. But it's--it's not--name me--there--there are very few states that aren't in fiscal trouble, and it's not--the big problem in California is--is with their constitution. You know, they have--they have a bunch of things in there that make it very hard to respond intelligently. But you don't want to--you don't want to overstate it.

RUSSERT: One of the things that got you hopping mad is when people questioned your authenticity, when they said, 'Well, you know, Krugman, you--you took money from Enron. Who are you to lecture us?'

Prof. KRUGMAN: Yeah. In my premier Times days, I did a lot of business speaking, no--not--you know, mostly going, talking to groups of people, and Enron, which at that time was regarded as a praiseworthy company, hired a bunch of people to come twice a year and--and do a talk shop about--not about their business, but about the state of the world, and I did that, and I was getting somewhat less than my usual speaking fee rate for that--for those occasions. You know, it's--it's odd that people never mention that Bill Kristol was--was on that same board for much longer than I did, and received much more money than I ever did. That's...

RUSSERT: He's at The Weekly Standard, right?

Prof. KRUGMAN: That's right.

RUSSERT: True.

Prof. KRUGMAN: It's--it's--so it's--it's--but it's amazing. It--again, it--it shows--it shows why it's not very pleasant to be a liberal critic of the Bush administration because they will come after you. They'll look for anything they can think of. It's--it's really--it's pretty sta--they--you know, it's--it's an ugly world out there.

RUSSERT: But you give it back...

Prof. KRUGMAN: Oh, yeah.

RUSSERT: ...very directly. In fact, one of your fellow economists, Lester Thurow, said, 'He's too personal. He makes it hard to have a debate.'

Prof. KRUGMAN: Well, you know, af--after all--I--I think the problem has been, actually--I think part of the problem has been that--that liberals--and I'm not a raving liberal, I'm a moderate liberal, you know, I--the--the American Prospect once ran a cover story accusing me of being too free market. The liberals have tried to play by Marquis of Qu--Queensberry Rules. They've tri--tried to pretend we're having a--a gentle debate among gentlemen, while the other side has not hesitated to go all-out and--and play as dirty as they feel like. I don't think I play dirty, but I play tough. Why not? I think--I think it's the only way we're going to be able to--to--to throw this back a bit.

RUSSERT: How do you think the press corps has behaved?

Prof. KRUGMAN: Press corps did not do a very good job. All through the 2000 campaign, they allowed Bush to get away with what were flat-out untruths, things that just a minute with the numbers could tell you were--were not true, a minute with his own numbers could tell you weren't true. He was just saying things that were--were just nonsense and he got a free pass. All through the debate about the first tax cut, he got away with saying things that weren't true. And it has not--the press corps has not done a good job of--of clarifying the issues. They--I think of the media as being in two parts. There's the Murdoch media, etc., which is essentially an arm of the Republican Party, and there's the rest which will find two sides to any issue. If someone says the Earth is flat, they'll say, 'Shape of the Earth, views differ.' And that's the problem.

RUSSERT: And that's not Paul Krugman's problem.

Prof. KRUGMAN: Right.

RUSSERT: He finds the one side and rides it.

Prof. KRUGMAN: That's right.

RUSSERT: He does it in his book, "The Great Unraveling: Losing Our Way in the New Century." Thank you very much for sharing your views.

Prof. KRUGMAN: Thank you.

RUSSERT: And we'll see you next weekend right here on CNBC.

Originally broadcast, 9.6.03