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Selling Uncle Tom to Arab Street; Interview With Paul Krugman

Aired October 11, 2003 - 13:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


ANNOUNCER: From New York City, America's financial capital, this is IN THE MONEY.
JACK CAFFERTY, HOST: Hello. Welcome to the program. I'm Jack Cafferty.

Coming up on today's edition of IN THE MONEY, selling Uncle Sam in the Arab street. A new report says America's reputation in the Arab world is bad, getting worse fast. We'll look at what's behind the image crisis? And what can be done to repair it.

Plus, the right and wrong; economist, Paul Krugman says George Bush and the radical right are leading this country straight into trouble. We're going to challenge him to back up his allegations in a few minutes.

And con jobs. Former U.S. Attorney Ed Meese under President Reagan wants to tap a labor pool that's cheap justify to beat Third- World pay rates. Why prisoners ought to do the jobs that other Americans won't.

Joining me today as always is CNN correspondent Susan Lisovicz and Andy Serwer, the "Fortune" magazine editor at large, the two adding a touch of class to the old homestead.

So the Democrats get together and have another debate and like a bunch of penguins at the appointed time, roll up sleeve, take off coats, walk down to the end of the stage, sit down and I mean it's like you know -- and this is supposed to, what, signify we're just with the folks here?

SUSAN LISOVICZ, CNNfn CORRESPONDENT: Common folk.

CAFFERTY: You know what I like? I like Carol Moseley Braun because she said right in front of them, you men have been running the country 200 years and you've done nothing but screwed it up. It's time to elect a woman. Bless her heart. She might be right.

LISOVICZ: I think Hillary was listening very intently to that...

CAFFERTY: Hillary who?

ANDY SERWER, CNN CONTRIBUTOR: You know what's interesting to me? First of all, I mean now that Bob Graham dropped out of the race, I mean all conduct is gone.

CAFFERTY: I know. The future is of the country is very much in doubt.

SERWER: It's really, really sad. Arianna Huffington and Gary Coleman now available now that the California election is over. But you know what? Seriously, I really wonder if Wesley Clark or Howard Dean is going to be the nominee. For some reason I just don't think so. I think it's going to be one of those middle of the pack, middle of the road guys like a Gephardt or Kerry, who's going to actually get the nomination. Not the two front-runners right now.

CAFFERTY: Washington insiders, those two you mentioned.

SERWER: It's true. I just feel like Dean is too out there. And Clark, I really wonder if America is ready for a general. But maybe they are right now.

CAFFERTY: All right. We've rung all the juice out of this orange. Moving on, from suicide bombing attacks to an Israeli air strike inside Syrian territory. It's been kind of an edgy week in the Middle East. And more and more it seems like the question isn't when will it stop there but how far will it go and how bad will it get?

For the bigger picture on all of this, we're joined now by Chris Burns in Jerusalem to give us the latest on what is an increasingly volatile and violent environment.

Chris, how are you doing?

CHRIS BURNS, CNN CORRESPONDENT: Well, good morning. Hi. Hi Jack, Susan, Andy. The suicide bombing last weekend in Haifa was seen by many as being just the thing that would push the Israeli government over the edge to kick Yasser Arafat out of the Palestinian territories. That suicide bombing killed at least 20 people now. More than 50 injured.

However, the Israeli government was under severe pressure from Washington not to expel Yasser Arafat, and cause wider problems within the Arab world. Instead, they struck inside Syria. What they said was a militant training camp for Palestinian militant. The Syrians deny that and say the Israelis were simply trying to draw attention away from the problem that the road map is not moving along. They're saying the Israelis are not lifting the clampdown on the Palestinian territories.

However, the -- Arafat was feeling the heat. The Palestinian authority president still saw that there was an eminent possibility of the Israelis kicking him out, and Arafat declared a state of emergency, declared an emergency cabinet, insisted that they will start taking measures to try to bring the militants under control, especially through his new Prime Minister Abu Ala or Ahmed Qorei. Mr. Qorei trying to push ahead with these efforts but in a power struggle with Arafat over a struggle of the security forces. And that has yet to be played out completely.

The Israelis are not taking chances, they're clamping down on the territories even further now with the week of Sukkoth, the holidays up ahead for Jewish Israelis. And that is why they are intensifying their clampdown. And their fears were in some ways proven because there was a suicide attack at a checkpoint this week. So that's showing that there is the potential for violence. And also, the Israelis are moving into Gaza in one of their biggest operations in months to try to seek out and root out tunnels to Egypt that could pass weapons into Gaza.

So the tensions continuing, Israelis continuing with an iron fist. But at the same time holding out an olive branch and insisting that they would like to cut some slack to the Ahmed Qorei, the Palestinian prime minister to try to get things under control.

CAFFERTY: You know Chris, there's a long line of people who have tangled with Yasser Arafat over control of those Palestinian security forces. Is there any reason to believe that Mr. Qorei is going to have any more success than any of his predecessors, which is to say none?

BURNS: It's a very good question. And there are a lot of people on both sides, the Palestinian and Israeli side, that don't think he has a chance in heck. But on the other hand, he was the chief and key negotiator for the Oslo Peace Agreement that brought about the Oslo Peace Process. And many people believe perhaps he does have, more than anybody else, a fighting chance. He's politically skilled. The Americans and Israelis respect him. Perhaps he can pull Arafat on his side as well. He also has slugged it out with Arafat on previous occasions. So perhaps he might just have the clout. But the jury is still out -- Jack.

CAFFERTY: All right. Chris Burns joining us today from Jerusalem. Thanks Chris, very much.

A new report meantime out this month, says the Arab world's view of the United States is headed straight south. And unless Washington does a better job of explaining itself and this country to Arab and Muslim countries, the image problem for America is just going to get worse. For a look at the findings and what's behind them we're joined from Houston, Texas, by Edward Djerejian, who is the panel -- led the panel that produced this report. He's a former U.S. ambassador to both Israel and Syria and is the director of the James Baker III Institute at Rice University.

Mr. Djerejian, thank you for joining us.

EDWARD DJEREJIAN, DIRECTOR, JAMES BAKER III INSTITUTE, RICE UNIVERSITY: A pleasure to be with you, Jack. I apologize for not being in a penguin suit.

CAFFERTY: Well, you're not running for president, sir. So your apology -- no need to apologize. That was reserved for the candidates. But I'm glad you were listening.

Let me ask you, beyond the militant Muslim world where it's a given that there is a deep-seeded hatred for this country, how widespread is America's image problem in the more moderate Arab street, if will you? DJEREJIAN: It is indeed widespread. That was one of our major findings. What is intriguing is that throughout the Muslim world and we have to differentiate. We're talking about 1.5 billion people and you have to take it country by country, because they are different. We found that America's image is very negative in terms of their attitudes toward our policies.

But at the same time -- and this is what's intriguing -- there is a very high favorable ratings on attitudes toward America's values, what we stand for, who we are in terms of our political system, democracy, human rights, quality before the law, et cetera. And that is the intriguing juxtaposition between negative toward our policies and highly attitudes towards our values system.

SERWER: Edward, what you're talking about in my understanding here, is establishing a White House position that would essentially be sort of PR function to the Arab world and to the Islamic world. But didn't we have a person who did that? Charlotte Beers, the Madison executive who came down to Washington and tried to improve our image and then had to leave earlier this year. I think some people would say that wasn't a very, successful tenure. So, haven't we tried it? And what would be different about your effort?

DJEREJIAN: No, we didn't try it because Charlotte Beers was the under secretary for Public Diplomacy in the State Department.

What we are recommending in our report is that a special position be created at the White House. Someone the president trusts, is close to the president, be it a Democratic or Republican president, who will be the person that whispers in the president's ear, saying Mr. President, Here is the policy line you just decide upon. Here's how the message is going to play in various parts of the world. Here is how the message should be conveyed.

We look back upon the model of Edward R. Murrow with JFK. Which was in many ways the perfect model, where you have someone of that stature next to the president of the United States who is counseling the president on how the message should be conveyed. Murrow's famous quote is, "Mr. President, I got to be in on a takeoff as well as the crash landings." And it worked.

LISOVICZ: You know, Edward, I don't think that there's anyone who would dispute the fact there needs to be better dialogue with the Arab world. But there's certainly many critics who would say what has the Arab world so incensed is the U.S. invasion of Afghanistan, the U.S. war in Iraq, the pro-Israeli policy by the United States. It's the actions that have the U.S. so hated in so many parts of the world. How do you try to counteract that?

DJEREJIAN: Well, we face this issue. And you've come to the heart of the issue very directly in our report. Let's face it. Policy and public diplomacy are linked extremely closely. I would agree that the policies that the United States advocates and executes are 80 percent of what forms attitudes towards us. But there's that critical 20 percent, is the manner in which we convey the message of our values and our policies, how we engage with foreign audiences, how we get feedback from those foreign audiences as to what our policies are and what the implication will be in terms of public opinion.

That 20 percent is what our report focuses on. And more importantly, we let down our guard after the fall of the Soviet Union, the end of communism. Fukioma (ph) talked about the end of history. Well, history did it then.

We were reminded tragically of that on 9/11. We are engaged in a battle for ideas, especially in the Islamic world. There is a minority of Muslims, the political, radical Isalmists, who consider us to be profane; they consider their way to be sacred. With them, there cannot be much dialogue. But we advocate a public diplomacy that takes Casey Stengel's -- one of his principles of management. If you have a group of six guys here who hate you and you have a group of guys there who haven't made up their mind yet, we better get to the six guys who haven't made up their mind yet before the people who hate us do. This, in simple terms is what public diplomacy must do today.

CAFFERTY: But short term, Edward, many of this country's policies are being driven by the events of September 11. We're not in Afghanistan, and presumably not in Iraq, because we looking for some place to hold military exercises. We're there because over 3, 000 people were murdered in those attacks carried out by militant Muslim Arabs nationals, most of them from Saudi Arabia.

Now, certainly the people on the street that whose minds are not made up, perhaps yet, have to be able to understand in some way the emotions that were unleashed in this country by those acts of cold- blooded murder? And trying to wrap our short-term foreign policy in some sort of acceptable public relations message doesn't change the central issue. Which is, this country was attack. That was an act of war.

DJEREJIAN: Well, exactly what you've conveyed is what we should also be conveying in our public diplomacy, with that candor, with that frankness. And what we found is that we are simply not present in those daily debates and discussions that are taking place about us, America and Americans. And that is a gap that we have to fill.

For example, we saw in Egypt an Arab satellite talk show program. The title of which was "The Americanization Of Islam." In other words that there was a conspiracy afoot, that America wanted to hijack Islam. Americanize it. That's absurd. I mean anyone who knows America realizes we are a religious country but we advocate the freedom of religion and that we have millions of Muslims in our country.

The point that I'm making here is that we are not present. And we have to be present to express all the views just like the views you just expressed to these people. And that's why the bulk of our recommendations address this strategic end.

CAFFERTY: Very good, sir. I appreciate you joining us. I'd love to continue a discussion and perhaps at some future time we can.

DJEREJIAN: Thank you.

CAFFERTY: Edward Djerejian, the director of the James Baker Institute of Public Policy at Rice University. Interesting stuff.

Coming up on IN THE MONEY, a look at whether President George W. Bush is making our world better or worse. Sort of depends on who you talk to. And coming up, we're going to talking to Paul Krugman, one of the administration's toughest critics and the author of a book called "The Great Unraveling."

Plus, working hard, going nowhere. Find out whether America's convicts should do some of the jobs nobody else seems to want to do.

And the Kobe beef as basketball star Kobe Bryant goes to court. See what his problems could mean for the National Basketball Association. You're watching IN THE MONEY and we'll be back whether you like it or not.

(COMMERCIAL BREAK)

LISOVICZ: The president's popularity is taking a hit. The latest CBS/"New York Times" poll shows only 51 percent of Americans think Mr. Bush is doing a good job. That's a 15-point drop since June. Some say the president will bounce back. But others like our next guest think his handling of the economy and post-war Iraq have turned Americans off for good.

Paul Krugman joins us today to talk about his new book "The Great Unraveling: Losing Our Way In A New Century." He's also an economist at Princeton University, op ed columnist for "The New York Times," and a frequent critic of the Bush administration.

Welcome, Paul Krugman back to the program.

PAUL KRUGMAN, ECONOMIST, PRINCETON UNIV.: Glad to be on.

LISOVICZ: Two big issues that the president has to deal with. Let's just talk about the economy because we have a lot of interesting, new data. And a lot of it is promising. The weekly jobless claims this week came in lower than expected. Last week's, September unemployment report actually created jobs. We Hadn't seen that in a long time. The September retail sales, giving us clues as to what consumers are thinking. Very good. Corporate profits for the third quarter could be the best since the second quarter of 2000, the height of the market. Oh, speaking about the market, hitting 15-month highs.

So is the economy really so bad off? Aren't we seeing the light at the end of the tunnel?

KRUGMAN: If we are, we're seeing it for the third time. We had a great first quarter in 2002 that was temporary. We had a pretty good third quarter in 2002 that was temporary. We are having a pretty good third quarter in 2003.

On the output side, the jobs number you know, that's not -- that isn't even enough job creation to keep up with the growth and the working age population. So we haven't yet seen anything that points to the job market improving, you know, enough to make up any of the shortage we've had of jobs since all of these past couple of years.

The main thing to say is, you know, let me run a $500 billion deficit. And I could create a whole lot more jobs than we're now seeing. And so given the size of the budget deficit, this is actually a pretty disappointing performance.

SERWER: Paul, it's our former colleague, Andy Serwer "Fortune" magazine. How are you doing?

KRUGMAN: Hi there.

SERWER: Listen, aren't you being a little bit of a chicken little? A doomsayer. Listen, we have deficit throughout history. We run a deficit when the economy is weak. When there's a war on you run a deficit. When the economy's weak you cut taxes. I mean what's wrong with this picture, Paul? When the economy picks up, the deficit will go away. Isn't that what happens in the history of the economic cycles here?

KRUGMAN: Not if the deficit is this big and if the tax cuts you've passed are permanent tax cuts. Look, you know, it's not just critics of the Bush administration. A couple weeks ago, the controller general in the General Accounting Office delivered a hair- raising speech about the budget outlook. If you ask -- and we've got probably next year, $550 billion deficit. How much of that would go away if the economy fully recovered to unemployment rates like we had when George Bush took office? The answer by most estimates is well under 100 billion of it would go away.

We have got a fundamental shortfall, even taking into account future recovery. But also taking into account that, you know, baby boomers are going to retire. And we're going to need Social Security and Medicare payments. We've got a fundamental shortfall in federal revenues; long term, now about 25 percent to federal spending. We want to compare that.

And we just had a voter rebellion in California over a budget deficit that was about 10 percent of the state of California spending. The federal government is two and a half times worse off than that and it's not a short-term problem. It's a long-term problem. We really -- these are disastrous finances. Everyone who isn't basically on the administration's payroll says it's a disastrous long-term outlook. This is not -- this is not -- this is not trivial stuff. This is actually scary. This is Banana Republic finances.

CAFFERTY: Paul, Jack Cafferty. Any chance the government spent last money; they could cut into the deficit or is it all about taxes?

KRUGMAN: Well, yes. Let's take a look what we're going to cut on spending. You know, what is the federal government? It is, as Undersecretary of Treasury Peter Fisher said, it's a -- the government is a big insurance company with a side business in national defense. So, OK. Let's take... CAFFERTY: Fair enough. OK.

KRUGMAN: Defense is off the table, I think. Payment of interest on the debt is off the table. If you look at the rest, in order to close that gap, we'd have to cut spending between 40 and 50 percent. And spending what? Well, it's Social Security, Medicare and Medicaid. That's where the government's money goes.

CAFFERTY: I understand. But surely you would allow that, one; there are probably pockets of significant ways even in those entitlements programs you alluded to. And that there are others outside of those three entitlement programs, other government programs that don't exactly meet the test of being sound investments in the country's future?

KRUGMAN: There's always some of that. If you could find me $100 billion of that you would win a big prize.

CAFFERTY: Well I can't.

KRUGMAN: The truth is we're talking $500 billion. You know, we're just -- we're way past that point. If you were talking about a deficit of $100 billion, $200 billion, we could talk about that. But this is ridiculous. The idea that we're still talking about waste and fraud being the solution to this problem, it just means that you're not facing reality.

CAFFERTY: Quick question. And I've got no more time. If the job situation continues to improve, if the stock market continues to rally, if corporations continue to make money, it's likely President Bush's approval ratings will go up. And 13 months from now, he might be re-elected, no?

KRUGMAN: Oh, indeed. I -- look, I mean most of the -- you know, he might get credit for a recovery. But the trouble is, of course, the deficit won't go away. And somewhere down the line, he may be able to lob this off into a second term, he maybe able to lob this on to the next guy holding office. But the truth is that he has created and enormous budget hole and winning an election doesn't solve that problem.

CAFFERTY: I hear you. Paul, it's always a pleasure. Thanks for joining us. Appreciate you being on the program.

KRUGMAN: Thanks for having me on.

CAFFERTY: Paul Krugman, he's op-ed columnist for "The New York Times." He's a very bright guy. Enjoy reading his stuff. He's also the author of "The Great Unraveling: Loosing Our Way In The New Century."

Still ahead on IN THE MONEY, we will effort to find our way. We will look at a proposal for keeping jobs in America by sending them to prison.

And find out if LeBron James has the moves to lift pro basketball out of a slump that might be made worst by the Kobe Bryant situation.

And something to Yahoo about. See how the Internet portal is delivering big time for investors. Stick around.

(COMMERCIAL BREAK)

LISOVICZ: Let's look at the week's top stories in our "Money Minute." A drop in the number of people filing for unemployment benefits helped boost stocks. The number of Americans filing new claims fell to its lowest level since February. The news easing some fears of a jobless recovery.

Gas prices continued their slow but steady decline. The Energy Department says the average price of a gallon of gas is now $1.57. But the six-week slide may end soon as oil workers in Nigeria are threatening a strike that could reduce supplies for OPEC.

And Martha Stewart's lawyers want the securities fraud and obstruction of justice charges against her dismissed. There's no ruling yet on that motion. But her legal team won the right to question several of the prosecution's witnesses in the coming weeks. Stewart's trial in connection with the ImClone trial is scheduled to begin in January.

SERWER: All right. Susan, thank you.

Our stock of the week is another one of those Internet and tech sector, Bellwether's Yahoo! Yahoo! came out with strong quarterly earnings Wednesday night beating Wall Street estimates and doubling its numbers from the same period last year. And just look at that stock chart. Wow! Over the past year, Yahoo! is up a whopping 382 percent. It could go all the way! I hate to get that excited about...

CAFFERTY: Oh, no!

SERWER: This is just amazing. This stock was $9 last year at this time. It's now in the 40s. And you know, people are talking about irrational exuberance again. I mean what do you think? Is this redone?

LISOVICZ: OK. Well, there's this Old motto in stocks. Buy low, sell high. This is a stock, its P/E ratio, price to earnings ratio, is 77. Right? For the average S&P 500, it's more like 24. OK. So it's not only the price of the stock that you look at. It's the P/E ratio. The stock is high, but yet some big brokerage houses are upgrading the stocks and saying it has more room to grow.

CAFFERTY: There has to be something about Yahoo! though, that's attracting the attention of investors over other Internet stocks. Eighteen months, two years ago, there wasn't an Internet stock anyplace that anybody would buy. What is it about a Yahoo! or an eBay, about their business model perhaps, that suggests to investors they're different from the rest?

SERWER: What we're really seeing is just like you're saying, there's about three Internet companies that matter: eBay, Amazon and Yahoo! I have Yah -- Yahoo! is a fantastic company? Let's face it. I use Yahoo! all day. I mean it's really amazing. Terry Semel, a respected media executive has come in, really running this thing.

But you're right, Susan. This company made $65 million but it's worth $27 billion. I mean something's got to give here. I'll tell you what. I think it was too cheap back then. I think it's too expensive now. The answer lies somewhere in the middle.

CAFFERTY: But you buy stocks based on potential future earnings. You don't buy based on what they did yesterday. What are they going to do tomorrow?

SERWER: They're growing like crazy. They're growing like a weed.

LISOVICZ: It's a rich valuation, according to P/E ratio.

SERWER: Jack can afford it. Jack can afford it.

CAFFERTY: No, no, no. No stock tips from this old cowboy.

Coming up next on IN THE MONEY, as we continue looking up -- locking up jobs. We're going to look up locking them up so they don't go overseas. Former U.S. Attorney General Ed Meese wants to farm out some of the grunt work to America's prisoners. He says there's some solid economic thinking behind the idea. We'll look at the pros and cons.

And with hoops prodigy LeBron James hitting the big time, find out whether he's got the chops to win back NBA fans who may go AWOL, especially in light of the troubles Kobe Bryant could cause not only for himself but for the league. Stay with us.

(COMMERCIAL BREAK)

(NEWS BREAK)

CAFFERTY: Tough, boring, repetitive jobs tend to go where the work force is hungry and the wages are low, places like China and India. But former U.S. attorney general Ed Meese, who served in the Reagan administration says there is a way for U.S. companies to keep those jobs at home.

He wants to tap the country's more than 2 million prisoners as an ultra cheap labor source. These days Ed Meese is a distinguished fellow in public policy with the Heritage Foundation, which is a conservative think tank. We are delighted to have him join us from Washington, D.C. Mr. Meese, welcome to the program.

ED MEESE, HERITAGE FOUNDATION: Good to be with you.

CAFFERTY: Besides the fact that we have what, seven, eight, nine million people trying to find a job in this country, how would this idea of yours work to benefit perhaps, I guess, the corporations, but certainly -- you've got people looking for work that can't find it. Do we need to put more people into the labor force that looking for work, or am I missing something?

MEESE: The idea of having private sector jobs performed by prison inmates is a way of keeping jobs from going overseas. I don't think any of us want to take jobs away from people looking for them in the free population, but it's a fact of life that many jobs are going overseas, and if we can keep them here, we not only benefit the prisons in the sense of having prisoners being given useful work, there are a lot of advantages of that, which we can go into in a minute, but the important thing is, this created jobs in the private sector as well.

When prisons are used as the source of labor for private sector jobs, then the vendors, the support people and that sort of thing, come from the population around those prisons. So actually, it helps alleviate not only the costs and the jobs would go overseas, but also it helps alleviate unemployment in this country.

LISOVICZ: And less government's spending, right? Because what you're proposing, the plan you support, prisoners actually pay their room and board, but not their health care costs. That would be continued to be financed by the government?

MEESE: Well, it could -- they could actually pay a lot of things. Pay their room and board. They could pay restitution to the victims. They could pay child support. And there's no particular reason why they shouldn't pay for health care as well.

In other words, what's you're doing is, you're changing people from being essentially idle in prison, often thinking up mischief or building their muscles so they can be stronger and more dangerous on the outside, and putting them into constructive work that has three benefits.

Number one, the cost savings you mentioned. Secondly, the ability to manage prisons better and have less violence within the walls. And, thirdly, it's a tremendous aid for re-entry so that people will not go back and become recidivists and commit more crimes.

SERWER: Ed, though, isn't there a stigma attached to companies doing this? My understanding is, Dell was doing this for a while and reporters like me started nosing around, reporting it, and they had to pull back from that endeavor, isn't that correct? How do you get around that stigma?

MEESE: I don't think there's a stigma if the quality of the work is good. I don't know the particular situation with Dell, but I do know that many companies, many private sector companies are having very good results and they're not bothered by the fact that this has become public knowledge at all.

I think it's a matter of the quality of the work, and also particularly this idea that I mentioned earlier. That they're taking jobs that would otherwise go outside the country.

CAFFERTY: But in terms of, for example, a lot of the jobs go to a place like India. A lot of those jobs are computer and information technology jobs. My guess is, that Sing-Sing isn't full of a lot of guy whose can run computer programs?

MEESE: Sing-Sing may not be, but Allenwood certainly is and more so today. But aside from that, I think you're looking at certain selective jobs and the prisons would have to compete with overseas job placements and I think that would be a good thing. So, the system would work itself out.

CAFFERTY All right, we're going to have to leave it there, Mr. Meese. Appreciate you joining us on the program. Nice to see you again

MEESE: Thank you.

CAFFERTY: Ed Meese, former Reagan attorney general and a distinguished fellow in public policy at the Heritage Foundation. Joining us from Washington, D.C.

Still ahead on IN THE MONEY -- hey, maybe Sing-Sing has a lot of those guys. Who knows.

Baseball's back in the game. Raising the pulse, the Cubs and Red Sox in the playoffs. Who'd have thunk it? Whether the major leagues are on track for major attention.

Also coming up, dreaming of a green Christmas. Our Web site guy and an old, old buddy of mine, Allen Wastler of money.com will join us. Tell us how the season is shaping up for the stores and for the shoppers when IN THE MONEY continues.

(COMMERCIAL BREAK)

(NEWS BREAK)

SERWER: The preliminary hearing in the Kobe Bryant case has provided graphic details of the prosecution's case against the basketball star. No matter how the case ends, the allegations have tarnished the valuable image of the NBA brightest young star. And while the league deals with unwanted publicity, Major League Baseball is getting much needed attention with some exciting playoff matchups.

Joining us to talk about these stories and their financial implications is Roy Johnson, assistant managing editor for "Sports Illustrated" magazine. Welcome, Roy.

ROY JOHNSON, "SPORTS ILLUSTRATED": Thank you for having me.

SERWER: So where do we start? With Kobe? With baseball? Let's talk about Kobe first off and his...

JOHNSON: Let's get that out of the way. It's really a tragic thing for a lot of parties. Financially for the NBA, you know, some people have said, how bad is this? Well, certainly not good. We don't know yet exactly how bad it is. It will depend on how long the story runs. Certainly it will depend on what's in terms of the resolution, guilt or innocence. No matter what, he is tainted for a long time. We will never look at Kobe Bryant the same way. Those who are his staunchest fans may be able to get past this, if he is found not guilty, in whatever proceedings occur, but it's going to be difficult. I think we've reached a point where, for David Stern to see this every night on television, it has to be a bad way for him to end his day.

CAFFERTY: Well, indications are, too, that the criminal trial, assuming there is one, won't happen until sometime next year. Which mean we go through an entire season if he decides to go ahead play where this is going to be on the minds of every viewer at every arena he appears at around the country for a period of months.

JOHNSON: Absolutely. I suggested that if -- perhaps he should sit out. I mean, let's take -- step back from the trial. He's got to deal with family issues.

CAFFERTY: Sure.

JOHNSON: Personal issues. This is really the only time he's going to get to deal with that. The feeling was that he should, perhaps, not play. Not subject his teammates and the franchise to the type of scrutiny and the negative publicity that will be surrounding every visit they make to a visiting arena and probably even in Los Angeles. It will a different type of cheering at the arena. For him and taunting. And there will be people outside protesting. It just can't be a good way to start the season.

CAFFERTY: If he stays out what kind of message does that send about whether or not he may, in fact, be guilty of this?

JOHNSON: Depends how you view it. It may send a message, hey, my family is more important to me than this. I'm staying home, try to repair my relationship at home and take care of what's more important than basketball. It could send that message, if that is what he, in fact, says. You know, people want to view it as saying, you know, maybe I'm guilty, then that's them. But I think it's up to him to say why he would do that.

LISOVICZ: How has the NBA handled what has to be an extremely perilous and delicate issue? And how have the Lakers handled it?

JOHNSON: The league has generally said all the right thing with regard to, look everyone is innocent until proven guilty. We are not going to restrict him from playing or make any other precautions or statements that will change that.

But the Lakers have to be prepared. They've hired another P.R. person to handle almost just the Kobe inquiries. Certainly the number of media following that team is up dramatically. It's something that they've had to deal with and certainly will deal with for a long time now.

SERWER: Switching over to baseball, maybe a happier topic.

JOHNSON: Absolutely. SERWER: Some really fascinating and terrific matchups we're seeing here. But everyone's looking for the Cubbies against the Red Sox, right? Wouldn't that be the dream matchup?

JOHNSON: It could be the dream matchup for two just -- just long-suffering cities who, at least one of them, would know that they would come out of it happy. I personally don't think that's going to happen. I said before, these series began, I thought the Yankees and Cubs would be in the world series. We'll see what happens.

Certainly, if both get there, we'll at least be rid of one sort of group of just miserable people.

SERWER: Yes, right. Tired of listening to belly aching.

JOHNSON: Thinking of a time back a century ago when they were last successful.

SERWER: No matter who prevails, ultimately, it's fantastic news for Fox! right? Not only do you have have had these lovable...

SERWER: For who?

JOHNSON: No, it's great for television. It's great for...

SERWER: Advertising rates have gone up. Viewership increased.

JOHNSON: Baseball did not have a great season relative to ratings and attendance and they could not have probably picked a better group of teams for this point in the season. You've got huge markets, New York, Chicago, Boston. You've got Florida with the upstarts and Dantrel Willis, who, to me, was just a face of new baseball.

So right now, they're loving it. Ratings seem to be responding. People seem to be responding, and everyone's waiting to see what's going to happen with the curse of the Bambino and these long-suffering fans in Chicago.

CAFFERTY: Great story. One of the greatest baseball stories for this late in the season in the last 20-30 years.

JOHNSON: Absolutely. It's much better than the Anaheim Angels.

SERWER: I'd forgotten about that already.

CAFFERTY: Who are you rooting for, Roy?

JOHNSON: I don't root.

SERWER: He makes calls!

JOHNSON: I wish we had two great series. I'd love to see a six or seven game series in the A.L. and the National League series.

SERWER: Talking about the Yankees an Cubbies. Whose going to win? Who are you calling to win?

JOHNSON: Let them get there, bring me back and we can talk about the winner.

CAFFERTY: Roy Johnson, assistant editor at "Sports Illustrated" magazine. We'll do it again.

Coming up, our web master Allen Wastler tells us why the big retailers may find a lump of coal in their Christmas stockings this year.

And you can tell us if we've been naughty or nice by e-mailing us at inthemoney@CNN.com. Stick around.

(COMMERCIAL BREAK)

CAFFERTY: Well, believe it or not, the most crucial time of the year has begun for the national retailers as they try to reel you and me in for the Christmas season.

Joining us for now for some thoughts on how strong or weak this season might be for the big chains, an old friend of mine, Allen Wastler whose also the managing editor of money.com the Web site of this here organization. Nice to you see you.

ALLEN WASTLER, MONEY.COM: Nice to see you again, Jack.

CAFFERTY: So, what do you think? Lump of coal or...

WASTLER: I've got several reasons why I think Christmas is really going to really stink. No. 1, the people who make the forecasts, they never get it right. If you look at their numbers, okay? 2001 they said, oh, Christmas is going to be terrible. Actually, it was pretty good!

CAFFERTY: Right.

WASTLER: The next year, hey, Christmas should be okay. And, you know what? It stunk. This year they're saying, 5.7 percent growth. It's going to be pretty good! So...mmmmmmm!

CAFFERTY: How's it possible to tell? I mean, one, the shoppers aren't shopping yet. Two, we don't know what items there's usually half a dozen that catch the public's's buying fancy; I've got to the have that or I got to have this. We don't know what the economy's going to do...

WASTLER: There's a bigger wild card now, too, the Internet. With the Internet a few days before Christmas, oh, yes. Christmas. Amazon, here I come and start, bang, bang, bang.

LISOVICZ: You know, Allen, the second best season for retailers is back-to-school. And back-to-school looks terrific. Gap up 13 percent. Wal-mart up 6 percent.

SERWER: She's extrapolating again WASTLER: So you got numbers for you, Susan. If you look at what people have been doing with their credit cards, okay? They've been wacking the credit card. If you look over the years, bang, bang, bang, up and up and up. The last 12 months, right after last Christmas, they said ooh, we charged up a little too much. Better back down a little bit. But now, with your back-to-school season, bang, bang, bang, they're doing it up.

LISOVICZ: They spent.

WASTLER: And if you look what's happening in the car market, even with lower interest rates in the car market, they haven't been wise, you know, typical American consumer. Gosh, you want me to be smart? No. With cheap money did they say, oh, I'll buy the Ford Focus at a lower price. I will save. No, they went you mean I can get more car? Cool! I'm buying the Expedition, baby, let's go!

CAFFERTY: The Tahoe.

LISOVICZ: That's the American way.

WASTLER: It's the American way, but what's going to happen, you watch. End of November, early December, they're going to turn around, they're going to have the credit card bill, car payment bill. Ooh, dudes, I'm tapped. On top of it, you wrote an interesting article in "Fortune."

CAFFERTY: That's a switch.

WASTLER: Where you got retail space piling on the consumer. The average consumer, when you think about how many stores are trying to just grip their consumers...

LISOVICZ: It's like 83 square foot per retail per person.

WASTLER: It's huge.

CAFFERTY: One of the things you and I used to do a long time ago, in another life, on another planet, where we did a morning show on CNNfn, is you would go around the Web and find some goofy little Web site that people can have fun with.

WASTLER: I brought you one. I brought you one buddy.

CAFFERTY: See, that was your price of admission.

WASTLER: November 1, folks, I hope you're living out there, okay? There's going to be a beard and mustache competition in Carson City, Nevada. First time. The world -- it's the world's --

SERWER: That's awesome.

WASTLER: Look at that!

SERWER: That's a bunch of bikers, Allen!

WASTLER: This is the first time it will be held in the United States. And people, they're still taking entries for contestants.

SERWER: That's a biker.

WASTLER: It's worldbeardchampionship.com.

CAFFERTY: Worldbeardchampionship.com.

LISOVICZ: Gillette is not a sponsor.

SERWER: Very good.

WASTLER: You go there. First time in America. The German team has always dominated this event. So it's time that we come back.

CAFFERTY: Good to see you. See you next week. Be here with us.

Time to check the e-mails from the past week. We had a big response to the e-mail question, which was this, "will President George Bush be re-elected in 2004?" Herb wrote this, "with $200 million dollars to spend it's unlikely Bush will have a difficult time. And with another $87 billion to dole out to his corporate cronies, he'll have plenty of support from board rooms across the country." Hannah said, "I don't believe George W. Bush will be re-elected. He's the worst thing for the economy and our standing with other nations."

And Joshua from Long Island weighed in with this, "President Bush will be re-elected. The tax cuts are starting to push the economy. And we will soon find the WMD." That would be weapons of mass destruction, in case you have forgot. And it's entirely possible you have.

The overall sentiment in our unscientific poll ran strongly against President Bush. Just over 70 percent you you who responded don't think President Bush will get a second term in office, which would make his career it's a nation's chief executive exactly like his daddy's.

Time now for our e-mail question of this week. It's based on our discussion with former attorney general Ed Meese earlier on the program. "What jobs would you send convicts out to do in your community?"

SERWER: Oh, don't get me started on that one.

LISOVICZ: I'm writing my list right now.

CAFFERTY: Send you answers at inthemoney@cnn.com

And that brings us to this, thank you for joining us for this edition of IN THE MONEY. Thanks for our regular gang, CNN financial correspondent Susan Lisovicz, "Fortune" magazine editor-at-large, Andy Serwer and Allen Wastler, managing editor of money.com.

We're back at 3:00 tomorrow afternoon Eastern time where we'll talk about a growing trend of millionaire candidates. Guy's like Arnold Schwarzenegger using their own money for an end run around campaign finance laws. That's tomorrow on IN THE MONEY, and we will expect you to be on time. See you then.

TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com





Krugman>


Aired October 11, 2003 - 13:00   ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
ANNOUNCER: From New York City, America's financial capital, this is IN THE MONEY.
JACK CAFFERTY, HOST: Hello. Welcome to the program. I'm Jack Cafferty.

Coming up on today's edition of IN THE MONEY, selling Uncle Sam in the Arab street. A new report says America's reputation in the Arab world is bad, getting worse fast. We'll look at what's behind the image crisis? And what can be done to repair it.

Plus, the right and wrong; economist, Paul Krugman says George Bush and the radical right are leading this country straight into trouble. We're going to challenge him to back up his allegations in a few minutes.

And con jobs. Former U.S. Attorney Ed Meese under President Reagan wants to tap a labor pool that's cheap justify to beat Third- World pay rates. Why prisoners ought to do the jobs that other Americans won't.

Joining me today as always is CNN correspondent Susan Lisovicz and Andy Serwer, the "Fortune" magazine editor at large, the two adding a touch of class to the old homestead.

So the Democrats get together and have another debate and like a bunch of penguins at the appointed time, roll up sleeve, take off coats, walk down to the end of the stage, sit down and I mean it's like you know -- and this is supposed to, what, signify we're just with the folks here?

SUSAN LISOVICZ, CNNfn CORRESPONDENT: Common folk.

CAFFERTY: You know what I like? I like Carol Moseley Braun because she said right in front of them, you men have been running the country 200 years and you've done nothing but screwed it up. It's time to elect a woman. Bless her heart. She might be right.

LISOVICZ: I think Hillary was listening very intently to that...

CAFFERTY: Hillary who?

ANDY SERWER, CNN CONTRIBUTOR: You know what's interesting to me? First of all, I mean now that Bob Graham dropped out of the race, I mean all conduct is gone.

CAFFERTY: I know. The future is of the country is very much in doubt.

SERWER: It's really, really sad. Arianna Huffington and Gary Coleman now available now that the California election is over. But you know what? Seriously, I really wonder if Wesley Clark or Howard Dean is going to be the nominee. For some reason I just don't think so. I think it's going to be one of those middle of the pack, middle of the road guys like a Gephardt or Kerry, who's going to actually get the nomination. Not the two front-runners right now.

CAFFERTY: Washington insiders, those two you mentioned.

SERWER: It's true. I just feel like Dean is too out there. And Clark, I really wonder if America is ready for a general. But maybe they are right now.

CAFFERTY: All right. We've rung all the juice out of this orange. Moving on, from suicide bombing attacks to an Israeli air strike inside Syrian territory. It's been kind of an edgy week in the Middle East. And more and more it seems like the question isn't when will it stop there but how far will it go and how bad will it get?

For the bigger picture on all of this, we're joined now by Chris Burns in Jerusalem to give us the latest on what is an increasingly volatile and violent environment.

Chris, how are you doing?

CHRIS BURNS, CNN CORRESPONDENT: Well, good morning. Hi. Hi Jack, Susan, Andy. The suicide bombing last weekend in Haifa was seen by many as being just the thing that would push the Israeli government over the edge to kick Yasser Arafat out of the Palestinian territories. That suicide bombing killed at least 20 people now. More than 50 injured.

However, the Israeli government was under severe pressure from Washington not to expel Yasser Arafat, and cause wider problems within the Arab world. Instead, they struck inside Syria. What they said was a militant training camp for Palestinian militant. The Syrians deny that and say the Israelis were simply trying to draw attention away from the problem that the road map is not moving along. They're saying the Israelis are not lifting the clampdown on the Palestinian territories.

However, the -- Arafat was feeling the heat. The Palestinian authority president still saw that there was an eminent possibility of the Israelis kicking him out, and Arafat declared a state of emergency, declared an emergency cabinet, insisted that they will start taking measures to try to bring the militants under control, especially through his new Prime Minister Abu Ala or Ahmed Qorei. Mr. Qorei trying to push ahead with these efforts but in a power struggle with Arafat over a struggle of the security forces. And that has yet to be played out completely.

The Israelis are not taking chances, they're clamping down on the territories even further now with the week of Sukkoth, the holidays up ahead for Jewish Israelis. And that is why they are intensifying their clampdown. And their fears were in some ways proven because there was a suicide attack at a checkpoint this week. So that's showing that there is the potential for violence. And also, the Israelis are moving into Gaza in one of their biggest operations in months to try to seek out and root out tunnels to Egypt that could pass weapons into Gaza.

So the tensions continuing, Israelis continuing with an iron fist. But at the same time holding out an olive branch and insisting that they would like to cut some slack to the Ahmed Qorei, the Palestinian prime minister to try to get things under control.

CAFFERTY: You know Chris, there's a long line of people who have tangled with Yasser Arafat over control of those Palestinian security forces. Is there any reason to believe that Mr. Qorei is going to have any more success than any of his predecessors, which is to say none?

BURNS: It's a very good question. And there are a lot of people on both sides, the Palestinian and Israeli side, that don't think he has a chance in heck. But on the other hand, he was the chief and key negotiator for the Oslo Peace Agreement that brought about the Oslo Peace Process. And many people believe perhaps he does have, more than anybody else, a fighting chance. He's politically skilled. The Americans and Israelis respect him. Perhaps he can pull Arafat on his side as well. He also has slugged it out with Arafat on previous occasions. So perhaps he might just have the clout. But the jury is still out -- Jack.

CAFFERTY: All right. Chris Burns joining us today from Jerusalem. Thanks Chris, very much.

A new report meantime out this month, says the Arab world's view of the United States is headed straight south. And unless Washington does a better job of explaining itself and this country to Arab and Muslim countries, the image problem for America is just going to get worse. For a look at the findings and what's behind them we're joined from Houston, Texas, by Edward Djerejian, who is the panel -- led the panel that produced this report. He's a former U.S. ambassador to both Israel and Syria and is the director of the James Baker III Institute at Rice University.

Mr. Djerejian, thank you for joining us.

EDWARD DJEREJIAN, DIRECTOR, JAMES BAKER III INSTITUTE, RICE UNIVERSITY: A pleasure to be with you, Jack. I apologize for not being in a penguin suit.

CAFFERTY: Well, you're not running for president, sir. So your apology -- no need to apologize. That was reserved for the candidates. But I'm glad you were listening.

Let me ask you, beyond the militant Muslim world where it's a given that there is a deep-seeded hatred for this country, how widespread is America's image problem in the more moderate Arab street, if will you? DJEREJIAN: It is indeed widespread. That was one of our major findings. What is intriguing is that throughout the Muslim world and we have to differentiate. We're talking about 1.5 billion people and you have to take it country by country, because they are different. We found that America's image is very negative in terms of their attitudes toward our policies.

But at the same time -- and this is what's intriguing -- there is a very high favorable ratings on attitudes toward America's values, what we stand for, who we are in terms of our political system, democracy, human rights, quality before the law, et cetera. And that is the intriguing juxtaposition between negative toward our policies and highly attitudes towards our values system.

SERWER: Edward, what you're talking about in my understanding here, is establishing a White House position that would essentially be sort of PR function to the Arab world and to the Islamic world. But didn't we have a person who did that? Charlotte Beers, the Madison executive who came down to Washington and tried to improve our image and then had to leave earlier this year. I think some people would say that wasn't a very, successful tenure. So, haven't we tried it? And what would be different about your effort?

DJEREJIAN: No, we didn't try it because Charlotte Beers was the under secretary for Public Diplomacy in the State Department.

What we are recommending in our report is that a special position be created at the White House. Someone the president trusts, is close to the president, be it a Democratic or Republican president, who will be the person that whispers in the president's ear, saying Mr. President, Here is the policy line you just decide upon. Here's how the message is going to play in various parts of the world. Here is how the message should be conveyed.

We look back upon the model of Edward R. Murrow with JFK. Which was in many ways the perfect model, where you have someone of that stature next to the president of the United States who is counseling the president on how the message should be conveyed. Murrow's famous quote is, "Mr. President, I got to be in on a takeoff as well as the crash landings." And it worked.

LISOVICZ: You know, Edward, I don't think that there's anyone who would dispute the fact there needs to be better dialogue with the Arab world. But there's certainly many critics who would say what has the Arab world so incensed is the U.S. invasion of Afghanistan, the U.S. war in Iraq, the pro-Israeli policy by the United States. It's the actions that have the U.S. so hated in so many parts of the world. How do you try to counteract that?

DJEREJIAN: Well, we face this issue. And you've come to the heart of the issue very directly in our report. Let's face it. Policy and public diplomacy are linked extremely closely. I would agree that the policies that the United States advocates and executes are 80 percent of what forms attitudes towards us. But there's that critical 20 percent, is the manner in which we convey the message of our values and our policies, how we engage with foreign audiences, how we get feedback from those foreign audiences as to what our policies are and what the implication will be in terms of public opinion.

That 20 percent is what our report focuses on. And more importantly, we let down our guard after the fall of the Soviet Union, the end of communism. Fukioma (ph) talked about the end of history. Well, history did it then.

We were reminded tragically of that on 9/11. We are engaged in a battle for ideas, especially in the Islamic world. There is a minority of Muslims, the political, radical Isalmists, who consider us to be profane; they consider their way to be sacred. With them, there cannot be much dialogue. But we advocate a public diplomacy that takes Casey Stengel's -- one of his principles of management. If you have a group of six guys here who hate you and you have a group of guys there who haven't made up their mind yet, we better get to the six guys who haven't made up their mind yet before the people who hate us do. This, in simple terms is what public diplomacy must do today.

CAFFERTY: But short term, Edward, many of this country's policies are being driven by the events of September 11. We're not in Afghanistan, and presumably not in Iraq, because we looking for some place to hold military exercises. We're there because over 3, 000 people were murdered in those attacks carried out by militant Muslim Arabs nationals, most of them from Saudi Arabia.

Now, certainly the people on the street that whose minds are not made up, perhaps yet, have to be able to understand in some way the emotions that were unleashed in this country by those acts of cold- blooded murder? And trying to wrap our short-term foreign policy in some sort of acceptable public relations message doesn't change the central issue. Which is, this country was attack. That was an act of war.

DJEREJIAN: Well, exactly what you've conveyed is what we should also be conveying in our public diplomacy, with that candor, with that frankness. And what we found is that we are simply not present in those daily debates and discussions that are taking place about us, America and Americans. And that is a gap that we have to fill.

For example, we saw in Egypt an Arab satellite talk show program. The title of which was "The Americanization Of Islam." In other words that there was a conspiracy afoot, that America wanted to hijack Islam. Americanize it. That's absurd. I mean anyone who knows America realizes we are a religious country but we advocate the freedom of religion and that we have millions of Muslims in our country.

The point that I'm making here is that we are not present. And we have to be present to express all the views just like the views you just expressed to these people. And that's why the bulk of our recommendations address this strategic end.

CAFFERTY: Very good, sir. I appreciate you joining us. I'd love to continue a discussion and perhaps at some future time we can.

DJEREJIAN: Thank you.

CAFFERTY: Edward Djerejian, the director of the James Baker Institute of Public Policy at Rice University. Interesting stuff.

Coming up on IN THE MONEY, a look at whether President George W. Bush is making our world better or worse. Sort of depends on who you talk to. And coming up, we're going to talking to Paul Krugman, one of the administration's toughest critics and the author of a book called "The Great Unraveling."

Plus, working hard, going nowhere. Find out whether America's convicts should do some of the jobs nobody else seems to want to do.

And the Kobe beef as basketball star Kobe Bryant goes to court. See what his problems could mean for the National Basketball Association. You're watching IN THE MONEY and we'll be back whether you like it or not.

(COMMERCIAL BREAK)

LISOVICZ: The president's popularity is taking a hit. The latest CBS/"New York Times" poll shows only 51 percent of Americans think Mr. Bush is doing a good job. That's a 15-point drop since June. Some say the president will bounce back. But others like our next guest think his handling of the economy and post-war Iraq have turned Americans off for good.

Paul Krugman joins us today to talk about his new book "The Great Unraveling: Losing Our Way In A New Century." He's also an economist at Princeton University, op ed columnist for "The New York Times," and a frequent critic of the Bush administration.

Welcome, Paul Krugman back to the program.

PAUL KRUGMAN, ECONOMIST, PRINCETON UNIV.: Glad to be on.

LISOVICZ: Two big issues that the president has to deal with. Let's just talk about the economy because we have a lot of interesting, new data. And a lot of it is promising. The weekly jobless claims this week came in lower than expected. Last week's, September unemployment report actually created jobs. We Hadn't seen that in a long time. The September retail sales, giving us clues as to what consumers are thinking. Very good. Corporate profits for the third quarter could be the best since the second quarter of 2000, the height of the market. Oh, speaking about the market, hitting 15-month highs.

So is the economy really so bad off? Aren't we seeing the light at the end of the tunnel?

KRUGMAN: If we are, we're seeing it for the third time. We had a great first quarter in 2002 that was temporary. We had a pretty good third quarter in 2002 that was temporary. We are having a pretty good third quarter in 2003.

On the output side, the jobs number you know, that's not -- that isn't even enough job creation to keep up with the growth and the working age population. So we haven't yet seen anything that points to the job market improving, you know, enough to make up any of the shortage we've had of jobs since all of these past couple of years.

The main thing to say is, you know, let me run a $500 billion deficit. And I could create a whole lot more jobs than we're now seeing. And so given the size of the budget deficit, this is actually a pretty disappointing performance.

SERWER: Paul, it's our former colleague, Andy Serwer "Fortune" magazine. How are you doing?

KRUGMAN: Hi there.

SERWER: Listen, aren't you being a little bit of a chicken little? A doomsayer. Listen, we have deficit throughout history. We run a deficit when the economy is weak. When there's a war on you run a deficit. When the economy's weak you cut taxes. I mean what's wrong with this picture, Paul? When the economy picks up, the deficit will go away. Isn't that what happens in the history of the economic cycles here?

KRUGMAN: Not if the deficit is this big and if the tax cuts you've passed are permanent tax cuts. Look, you know, it's not just critics of the Bush administration. A couple weeks ago, the controller general in the General Accounting Office delivered a hair- raising speech about the budget outlook. If you ask -- and we've got probably next year, $550 billion deficit. How much of that would go away if the economy fully recovered to unemployment rates like we had when George Bush took office? The answer by most estimates is well under 100 billion of it would go away.

We have got a fundamental shortfall, even taking into account future recovery. But also taking into account that, you know, baby boomers are going to retire. And we're going to need Social Security and Medicare payments. We've got a fundamental shortfall in federal revenues; long term, now about 25 percent to federal spending. We want to compare that.

And we just had a voter rebellion in California over a budget deficit that was about 10 percent of the state of California spending. The federal government is two and a half times worse off than that and it's not a short-term problem. It's a long-term problem. We really -- these are disastrous finances. Everyone who isn't basically on the administration's payroll says it's a disastrous long-term outlook. This is not -- this is not -- this is not trivial stuff. This is actually scary. This is Banana Republic finances.

CAFFERTY: Paul, Jack Cafferty. Any chance the government spent last money; they could cut into the deficit or is it all about taxes?

KRUGMAN: Well, yes. Let's take a look what we're going to cut on spending. You know, what is the federal government? It is, as Undersecretary of Treasury Peter Fisher said, it's a -- the government is a big insurance company with a side business in national defense. So, OK. Let's take... CAFFERTY: Fair enough. OK.

KRUGMAN: Defense is off the table, I think. Payment of interest on the debt is off the table. If you look at the rest, in order to close that gap, we'd have to cut spending between 40 and 50 percent. And spending what? Well, it's Social Security, Medicare and Medicaid. That's where the government's money goes.

CAFFERTY: I understand. But surely you would allow that, one; there are probably pockets of significant ways even in those entitlements programs you alluded to. And that there are others outside of those three entitlement programs, other government programs that don't exactly meet the test of being sound investments in the country's future?

KRUGMAN: There's always some of that. If you could find me $100 billion of that you would win a big prize.

CAFFERTY: Well I can't.

KRUGMAN: The truth is we're talking $500 billion. You know, we're just -- we're way past that point. If you were talking about a deficit of $100 billion, $200 billion, we could talk about that. But this is ridiculous. The idea that we're still talking about waste and fraud being the solution to this problem, it just means that you're not facing reality.

CAFFERTY: Quick question. And I've got no more time. If the job situation continues to improve, if the stock market continues to rally, if corporations continue to make money, it's likely President Bush's approval ratings will go up. And 13 months from now, he might be re-elected, no?

KRUGMAN: Oh, indeed. I -- look, I mean most of the -- you know, he might get credit for a recovery. But the trouble is, of course, the deficit won't go away. And somewhere down the line, he may be able to lob this off into a second term, he maybe able to lob this on to the next guy holding office. But the truth is that he has created and enormous budget hole and winning an election doesn't solve that problem.

CAFFERTY: I hear you. Paul, it's always a pleasure. Thanks for joining us. Appreciate you being on the program.

KRUGMAN: Thanks for having me on.

CAFFERTY: Paul Krugman, he's op-ed columnist for "The New York Times." He's a very bright guy. Enjoy reading his stuff. He's also the author of "The Great Unraveling: Loosing Our Way In The New Century."

Still ahead on IN THE MONEY, we will effort to find our way. We will look at a proposal for keeping jobs in America by sending them to prison.

And find out if LeBron James has the moves to lift pro basketball out of a slump that might be made worst by the Kobe Bryant situation.

And something to Yahoo about. See how the Internet portal is delivering big time for investors. Stick around.

(COMMERCIAL BREAK)

LISOVICZ: Let's look at the week's top stories in our "Money Minute." A drop in the number of people filing for unemployment benefits helped boost stocks. The number of Americans filing new claims fell to its lowest level since February. The news easing some fears of a jobless recovery.

Gas prices continued their slow but steady decline. The Energy Department says the average price of a gallon of gas is now $1.57. But the six-week slide may end soon as oil workers in Nigeria are threatening a strike that could reduce supplies for OPEC.

And Martha Stewart's lawyers want the securities fraud and obstruction of justice charges against her dismissed. There's no ruling yet on that motion. But her legal team won the right to question several of the prosecution's witnesses in the coming weeks. Stewart's trial in connection with the ImClone trial is scheduled to begin in January.

SERWER: All right. Susan, thank you.

Our stock of the week is another one of those Internet and tech sector, Bellwether's Yahoo! Yahoo! came out with strong quarterly earnings Wednesday night beating Wall Street estimates and doubling its numbers from the same period last year. And just look at that stock chart. Wow! Over the past year, Yahoo! is up a whopping 382 percent. It could go all the way! I hate to get that excited about...

CAFFERTY: Oh, no!

SERWER: This is just amazing. This stock was $9 last year at this time. It's now in the 40s. And you know, people are talking about irrational exuberance again. I mean what do you think? Is this redone?

LISOVICZ: OK. Well, there's this Old motto in stocks. Buy low, sell high. This is a stock, its P/E ratio, price to earnings ratio, is 77. Right? For the average S&P 500, it's more like 24. OK. So it's not only the price of the stock that you look at. It's the P/E ratio. The stock is high, but yet some big brokerage houses are upgrading the stocks and saying it has more room to grow.

CAFFERTY: There has to be something about Yahoo! though, that's attracting the attention of investors over other Internet stocks. Eighteen months, two years ago, there wasn't an Internet stock anyplace that anybody would buy. What is it about a Yahoo! or an eBay, about their business model perhaps, that suggests to investors they're different from the rest?

SERWER: What we're really seeing is just like you're saying, there's about three Internet companies that matter: eBay, Amazon and Yahoo! I have Yah -- Yahoo! is a fantastic company? Let's face it. I use Yahoo! all day. I mean it's really amazing. Terry Semel, a respected media executive has come in, really running this thing.

But you're right, Susan. This company made $65 million but it's worth $27 billion. I mean something's got to give here. I'll tell you what. I think it was too cheap back then. I think it's too expensive now. The answer lies somewhere in the middle.

CAFFERTY: But you buy stocks based on potential future earnings. You don't buy based on what they did yesterday. What are they going to do tomorrow?

SERWER: They're growing like crazy. They're growing like a weed.

LISOVICZ: It's a rich valuation, according to P/E ratio.

SERWER: Jack can afford it. Jack can afford it.

CAFFERTY: No, no, no. No stock tips from this old cowboy.

Coming up next on IN THE MONEY, as we continue looking up -- locking up jobs. We're going to look up locking them up so they don't go overseas. Former U.S. Attorney General Ed Meese wants to farm out some of the grunt work to America's prisoners. He says there's some solid economic thinking behind the idea. We'll look at the pros and cons.

And with hoops prodigy LeBron James hitting the big time, find out whether he's got the chops to win back NBA fans who may go AWOL, especially in light of the troubles Kobe Bryant could cause not only for himself but for the league. Stay with us.

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CAFFERTY: Tough, boring, repetitive jobs tend to go where the work force is hungry and the wages are low, places like China and India. But former U.S. attorney general Ed Meese, who served in the Reagan administration says there is a way for U.S. companies to keep those jobs at home.

He wants to tap the country's more than 2 million prisoners as an ultra cheap labor source. These days Ed Meese is a distinguished fellow in public policy with the Heritage Foundation, which is a conservative think tank. We are delighted to have him join us from Washington, D.C. Mr. Meese, welcome to the program.

ED MEESE, HERITAGE FOUNDATION: Good to be with you.

CAFFERTY: Besides the fact that we have what, seven, eight, nine million people trying to find a job in this country, how would this idea of yours work to benefit perhaps, I guess, the corporations, but certainly -- you've got people looking for work that can't find it. Do we need to put more people into the labor force that looking for work, or am I missing something?

MEESE: The idea of having private sector jobs performed by prison inmates is a way of keeping jobs from going overseas. I don't think any of us want to take jobs away from people looking for them in the free population, but it's a fact of life that many jobs are going overseas, and if we can keep them here, we not only benefit the prisons in the sense of having prisoners being given useful work, there are a lot of advantages of that, which we can go into in a minute, but the important thing is, this created jobs in the private sector as well.

When prisons are used as the source of labor for private sector jobs, then the vendors, the support people and that sort of thing, come from the population around those prisons. So actually, it helps alleviate not only the costs and the jobs would go overseas, but also it helps alleviate unemployment in this country.

LISOVICZ: And less government's spending, right? Because what you're proposing, the plan you support, prisoners actually pay their room and board, but not their health care costs. That would be continued to be financed by the government?

MEESE: Well, it could -- they could actually pay a lot of things. Pay their room and board. They could pay restitution to the victims. They could pay child support. And there's no particular reason why they shouldn't pay for health care as well.

In other words, what's you're doing is, you're changing people from being essentially idle in prison, often thinking up mischief or building their muscles so they can be stronger and more dangerous on the outside, and putting them into constructive work that has three benefits.

Number one, the cost savings you mentioned. Secondly, the ability to manage prisons better and have less violence within the walls. And, thirdly, it's a tremendous aid for re-entry so that people will not go back and become recidivists and commit more crimes.

SERWER: Ed, though, isn't there a stigma attached to companies doing this? My understanding is, Dell was doing this for a while and reporters like me started nosing around, reporting it, and they had to pull back from that endeavor, isn't that correct? How do you get around that stigma?

MEESE: I don't think there's a stigma if the quality of the work is good. I don't know the particular situation with Dell, but I do know that many companies, many private sector companies are having very good results and they're not bothered by the fact that this has become public knowledge at all.

I think it's a matter of the quality of the work, and also particularly this idea that I mentioned earlier. That they're taking jobs that would otherwise go outside the country.

CAFFERTY: But in terms of, for example, a lot of the jobs go to a place like India. A lot of those jobs are computer and information technology jobs. My guess is, that Sing-Sing isn't full of a lot of guy whose can run computer programs?

MEESE: Sing-Sing may not be, but Allenwood certainly is and more so today. But aside from that, I think you're looking at certain selective jobs and the prisons would have to compete with overseas job placements and I think that would be a good thing. So, the system would work itself out.

CAFFERTY All right, we're going to have to leave it there, Mr. Meese. Appreciate you joining us on the program. Nice to see you again

MEESE: Thank you.

CAFFERTY: Ed Meese, former Reagan attorney general and a distinguished fellow in public policy at the Heritage Foundation. Joining us from Washington, D.C.

Still ahead on IN THE MONEY -- hey, maybe Sing-Sing has a lot of those guys. Who knows.

Baseball's back in the game. Raising the pulse, the Cubs and Red Sox in the playoffs. Who'd have thunk it? Whether the major leagues are on track for major attention.

Also coming up, dreaming of a green Christmas. Our Web site guy and an old, old buddy of mine, Allen Wastler of money.com will join us. Tell us how the season is shaping up for the stores and for the shoppers when IN THE MONEY continues.

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(NEWS BREAK)

SERWER: The preliminary hearing in the Kobe Bryant case has provided graphic details of the prosecution's case against the basketball star. No matter how the case ends, the allegations have tarnished the valuable image of the NBA brightest young star. And while the league deals with unwanted publicity, Major League Baseball is getting much needed attention with some exciting playoff matchups.

Joining us to talk about these stories and their financial implications is Roy Johnson, assistant managing editor for "Sports Illustrated" magazine. Welcome, Roy.

ROY JOHNSON, "SPORTS ILLUSTRATED": Thank you for having me.

SERWER: So where do we start? With Kobe? With baseball? Let's talk about Kobe first off and his...

JOHNSON: Let's get that out of the way. It's really a tragic thing for a lot of parties. Financially for the NBA, you know, some people have said, how bad is this? Well, certainly not good. We don't know yet exactly how bad it is. It will depend on how long the story runs. Certainly it will depend on what's in terms of the resolution, guilt or innocence. No matter what, he is tainted for a long time. We will never look at Kobe Bryant the same way. Those who are his staunchest fans may be able to get past this, if he is found not guilty, in whatever proceedings occur, but it's going to be difficult. I think we've reached a point where, for David Stern to see this every night on television, it has to be a bad way for him to end his day.

CAFFERTY: Well, indications are, too, that the criminal trial, assuming there is one, won't happen until sometime next year. Which mean we go through an entire season if he decides to go ahead play where this is going to be on the minds of every viewer at every arena he appears at around the country for a period of months.

JOHNSON: Absolutely. I suggested that if -- perhaps he should sit out. I mean, let's take -- step back from the trial. He's got to deal with family issues.

CAFFERTY: Sure.

JOHNSON: Personal issues. This is really the only time he's going to get to deal with that. The feeling was that he should, perhaps, not play. Not subject his teammates and the franchise to the type of scrutiny and the negative publicity that will be surrounding every visit they make to a visiting arena and probably even in Los Angeles. It will a different type of cheering at the arena. For him and taunting. And there will be people outside protesting. It just can't be a good way to start the season.

CAFFERTY: If he stays out what kind of message does that send about whether or not he may, in fact, be guilty of this?

JOHNSON: Depends how you view it. It may send a message, hey, my family is more important to me than this. I'm staying home, try to repair my relationship at home and take care of what's more important than basketball. It could send that message, if that is what he, in fact, says. You know, people want to view it as saying, you know, maybe I'm guilty, then that's them. But I think it's up to him to say why he would do that.

LISOVICZ: How has the NBA handled what has to be an extremely perilous and delicate issue? And how have the Lakers handled it?

JOHNSON: The league has generally said all the right thing with regard to, look everyone is innocent until proven guilty. We are not going to restrict him from playing or make any other precautions or statements that will change that.

But the Lakers have to be prepared. They've hired another P.R. person to handle almost just the Kobe inquiries. Certainly the number of media following that team is up dramatically. It's something that they've had to deal with and certainly will deal with for a long time now.

SERWER: Switching over to baseball, maybe a happier topic.

JOHNSON: Absolutely. SERWER: Some really fascinating and terrific matchups we're seeing here. But everyone's looking for the Cubbies against the Red Sox, right? Wouldn't that be the dream matchup?

JOHNSON: It could be the dream matchup for two just -- just long-suffering cities who, at least one of them, would know that they would come out of it happy. I personally don't think that's going to happen. I said before, these series began, I thought the Yankees and Cubs would be in the world series. We'll see what happens.

Certainly, if both get there, we'll at least be rid of one sort of group of just miserable people.

SERWER: Yes, right. Tired of listening to belly aching.

JOHNSON: Thinking of a time back a century ago when they were last successful.

SERWER: No matter who prevails, ultimately, it's fantastic news for Fox! right? Not only do you have have had these lovable...

SERWER: For who?

JOHNSON: No, it's great for television. It's great for...

SERWER: Advertising rates have gone up. Viewership increased.

JOHNSON: Baseball did not have a great season relative to ratings and attendance and they could not have probably picked a better group of teams for this point in the season. You've got huge markets, New York, Chicago, Boston. You've got Florida with the upstarts and Dantrel Willis, who, to me, was just a face of new baseball.

So right now, they're loving it. Ratings seem to be responding. People seem to be responding, and everyone's waiting to see what's going to happen with the curse of the Bambino and these long-suffering fans in Chicago.

CAFFERTY: Great story. One of the greatest baseball stories for this late in the season in the last 20-30 years.

JOHNSON: Absolutely. It's much better than the Anaheim Angels.

SERWER: I'd forgotten about that already.

CAFFERTY: Who are you rooting for, Roy?

JOHNSON: I don't root.

SERWER: He makes calls!

JOHNSON: I wish we had two great series. I'd love to see a six or seven game series in the A.L. and the National League series.

SERWER: Talking about the Yankees an Cubbies. Whose going to win? Who are you calling to win?

JOHNSON: Let them get there, bring me back and we can talk about the winner.

CAFFERTY: Roy Johnson, assistant editor at "Sports Illustrated" magazine. We'll do it again.

Coming up, our web master Allen Wastler tells us why the big retailers may find a lump of coal in their Christmas stockings this year.

And you can tell us if we've been naughty or nice by e-mailing us at inthemoney@CNN.com. Stick around.

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CAFFERTY: Well, believe it or not, the most crucial time of the year has begun for the national retailers as they try to reel you and me in for the Christmas season.

Joining us for now for some thoughts on how strong or weak this season might be for the big chains, an old friend of mine, Allen Wastler whose also the managing editor of money.com the Web site of this here organization. Nice to you see you.

ALLEN WASTLER, MONEY.COM: Nice to see you again, Jack.

CAFFERTY: So, what do you think? Lump of coal or...

WASTLER: I've got several reasons why I think Christmas is really going to really stink. No. 1, the people who make the forecasts, they never get it right. If you look at their numbers, okay? 2001 they said, oh, Christmas is going to be terrible. Actually, it was pretty good!

CAFFERTY: Right.

WASTLER: The next year, hey, Christmas should be okay. And, you know what? It stunk. This year they're saying, 5.7 percent growth. It's going to be pretty good! So...mmmmmmm!

CAFFERTY: How's it possible to tell? I mean, one, the shoppers aren't shopping yet. Two, we don't know what items there's usually half a dozen that catch the public's's buying fancy; I've got to the have that or I got to have this. We don't know what the economy's going to do...

WASTLER: There's a bigger wild card now, too, the Internet. With the Internet a few days before Christmas, oh, yes. Christmas. Amazon, here I come and start, bang, bang, bang.

LISOVICZ: You know, Allen, the second best season for retailers is back-to-school. And back-to-school looks terrific. Gap up 13 percent. Wal-mart up 6 percent.

SERWER: She's extrapolating again WASTLER: So you got numbers for you, Susan. If you look at what people have been doing with their credit cards, okay? They've been wacking the credit card. If you look over the years, bang, bang, bang, up and up and up. The last 12 months, right after last Christmas, they said ooh, we charged up a little too much. Better back down a little bit. But now, with your back-to-school season, bang, bang, bang, they're doing it up.

LISOVICZ: They spent.

WASTLER: And if you look what's happening in the car market, even with lower interest rates in the car market, they haven't been wise, you know, typical American consumer. Gosh, you want me to be smart? No. With cheap money did they say, oh, I'll buy the Ford Focus at a lower price. I will save. No, they went you mean I can get more car? Cool! I'm buying the Expedition, baby, let's go!

CAFFERTY: The Tahoe.

LISOVICZ: That's the American way.

WASTLER: It's the American way, but what's going to happen, you watch. End of November, early December, they're going to turn around, they're going to have the credit card bill, car payment bill. Ooh, dudes, I'm tapped. On top of it, you wrote an interesting article in "Fortune."

CAFFERTY: That's a switch.

WASTLER: Where you got retail space piling on the consumer. The average consumer, when you think about how many stores are trying to just grip their consumers...

LISOVICZ: It's like 83 square foot per retail per person.

WASTLER: It's huge.

CAFFERTY: One of the things you and I used to do a long time ago, in another life, on another planet, where we did a morning show on CNNfn, is you would go around the Web and find some goofy little Web site that people can have fun with.

WASTLER: I brought you one. I brought you one buddy.

CAFFERTY: See, that was your price of admission.

WASTLER: November 1, folks, I hope you're living out there, okay? There's going to be a beard and mustache competition in Carson City, Nevada. First time. The world -- it's the world's --

SERWER: That's awesome.

WASTLER: Look at that!

SERWER: That's a bunch of bikers, Allen!

WASTLER: This is the first time it will be held in the United States. And people, they're still taking entries for contestants.

SERWER: That's a biker.

WASTLER: It's worldbeardchampionship.com.

CAFFERTY: Worldbeardchampionship.com.

LISOVICZ: Gillette is not a sponsor.

SERWER: Very good.

WASTLER: You go there. First time in America. The German team has always dominated this event. So it's time that we come back.

CAFFERTY: Good to see you. See you next week. Be here with us.

Time to check the e-mails from the past week. We had a big response to the e-mail question, which was this, "will President George Bush be re-elected in 2004?" Herb wrote this, "with $200 million dollars to spend it's unlikely Bush will have a difficult time. And with another $87 billion to dole out to his corporate cronies, he'll have plenty of support from board rooms across the country." Hannah said, "I don't believe George W. Bush will be re-elected. He's the worst thing for the economy and our standing with other nations."

And Joshua from Long Island weighed in with this, "President Bush will be re-elected. The tax cuts are starting to push the economy. And we will soon find the WMD." That would be weapons of mass destruction, in case you have forgot. And it's entirely possible you have.

The overall sentiment in our unscientific poll ran strongly against President Bush. Just over 70 percent you you who responded don't think President Bush will get a second term in office, which would make his career it's a nation's chief executive exactly like his daddy's.

Time now for our e-mail question of this week. It's based on our discussion with former attorney general Ed Meese earlier on the program. "What jobs would you send convicts out to do in your community?"

SERWER: Oh, don't get me started on that one.

LISOVICZ: I'm writing my list right now.

CAFFERTY: Send you answers at inthemoney@cnn.com

And that brings us to this, thank you for joining us for this edition of IN THE MONEY. Thanks for our regular gang, CNN financial correspondent Susan Lisovicz, "Fortune" magazine editor-at-large, Andy Serwer and Allen Wastler, managing editor of money.com.

We're back at 3:00 tomorrow afternoon Eastern time where we'll talk about a growing trend of millionaire candidates. Guy's like Arnold Schwarzenegger using their own money for an end run around campaign finance laws. That's tomorrow on IN THE MONEY, and we will expect you to be on time. See you then.

TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com





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