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CNN CAPITAL GANG

Bush Administration Lifts Steel Tariffs; Interview With Former Treasury Secretary Robert Rubin; California's Governor Arnold Schwarzenegger Struggles With Budget Deficit

Aired December 6, 2003 - 19:00   ET

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

ANNOUNCER: Live from Washington, THE CAPITAL GANG.
MARK SHIELDS, HOST: Welcome to THE CAPITAL GANG. I'm Mark Shields with Al Hunt, Robert Novak and Kate O'Beirne. Our guest is Democratic congressman Rahm Emanuel of Illinois.

Thanks for coming in, Rahm.

REP. RAHM EMANUEL (D), ILLINOIS: Thank you.

SHIELDS: Good to have you here. As the World Trade Organization was about to retaliate against the United States, President Bush lifted steel tariffs that he had imposed 20 months ago.

(BEGIN VIDEO CLIP)

GEORGE WALKER BUSH, PRESIDENT OF THE UNITED STATES: The decision I make will be based upon my strong belief that America's consumers, the American economy is better off with a world that trades freely and a world that trades fairly.

ROBERT ZOELLICK, U.S. TRADE REPRESENTATIVE: We think we've got a much stronger industry. But obviously, we're pleased that we've avoided retaliation, as well.

REP. RICHARD GEPHARDT (D-MO), PRESIDENTIAL CANDIDATE: How can we protect the United States militarily if we make no more steel? We're on the brink of losing the steel industry entirely.

(END VIDEO CLIP)

SHIELDS: The president acted after the steelworkers union had pressed him to retain the tariffs.

(BEGIN VIDEO CLIP)

LEO GERARD, STEELWORKERS UNION PRESIDENT: We don't expect him to get pushed around and roll over by threats in the Europe Union and the Japanese. And we want him to know that these people represent the heartland of America.

(END VIDEO CLIP)

SHIELDS: Bob Novak, is this a dangerous political move for President George Bush, considering the all-important Rust Belt states next year?

ROBERT NOVAK, THE CAPITAL GANG: No, it's not going to have any effect on that. It was a stupid political move to put on the tariffs. Protectionism never hurts -- never helps anybody running for president, as Fritz Mondale and John Connally can testify. It was a bad political idea. Every -- and it backfired because you had the auto parts manufacturers being hurt by steel. On a political equilibrium, it was probably a negative. But the worst part is Leo Gerard of the Steelworkers, who had -- never gave him any credit for imposing the tariffs, now saying that he's been betrayed.

SHIELDS: Kate O'Beirne, you agree with Bob Novak?

KATE O'BEIRNE, THE CAPITAL GANG: I do agree, Mark. This administration is a free trade administration, but they fell into the temptations -- other administrations have, too -- to engage in a little small-scale protectionism in favor of a certain industry, which they did in this case. Sometimes you attempt -- he attempted to try to get away with it because the benefits are concentrated on, in this case, the steel industry, and the costs are diffuse throughout the economy, even though there are net costs to the economy in jobs.

But this time, because the steel-consuming industry got together and we were facing retaliatory tariffs from overseas, they had to pull back. But it's temptation a free trade administration should avoid.

SHIELDS: Rahm Emanuel, anytime the White House -- verbs flip- flop, renege, back down are associated with the president in the same sentence, as they are in this case on the steel tariffs, it's not good news for an administration.

EMANUEL: Oh, I mean, well, look, this decision is a political strategy in search of an economic rationale. That's true of when the first time he made the decision. It's true this time. And it's fitting as a metaphor for the administration. After three years, they've added $3 trillion to the nation's debt and 3 million Americans have lost their jobs. That is going to be the epitaph of their administration, and it's going to be what it's remembered for.

I think it was bad when he made the decision early on, and it's worse now -- once you make a decision, you should stick with it. I think it's going to look horrible...

NOVAK: No matter how bad it is?

EMANUEL: Look, I think it was a bad -- it was a bad decision.

NOVAK: But you say no matter how bad it is, you stick with it.

EMANUEL: You're asking on a political context. And I would say, look, when I worked in the Clinton administration, they didn't put this decision on, even for the political consequence, and it was an economic decision. They always put the economy before politics.

SHIELDS: In defense of the president, Al, it was a unanimous finding of the International Trade Commission that they were dumping at the time that the president imposed those tariffs.

AL HUNT, THE CAPITAL GANG: Mark, though, it was -- it was a dumb policy. Kate, this is not a free trade administration. It's far more protectionist than the Clinton administration was. This was not a small-scale action, it was a big-scale action. And they -- and the one thing -- actually, the worst thing, Bob, was not the Steelworkers president, it was -- it was George Bush and Bob Zoellick saying with a straight face, We're doing this because the policy worked. They're doing this because the policy didn't work. They faced retaliation from the World Trade Association, the Europeans. They were going to go after Florida agriculture products, Michigan automotive parts. Bob is right that higher tariffs don't work. I don't think it's going to have much effect electorally at all. I also think a tariff is a tax increase, and there are much more efficient, effective and fairer ways to have tax increases. And I would hope this administration...

NOVAK: You know them all!

(LAUGHTER)

HUNT: Exactly. And I think this -- and Lord knows, we need something to restore fiscal sanity. But this administration, there are still things that could be done to help those steelworkers. They ought to look at training assistance. They ought to look at doing something about these legacy costs, rather than going this route.

NOVAK: Let me tell you -- let me tell you something very interesting. I think it's interesting, anyway. Several weeks ago -- several months ago, I got a tip from the vice president's office that this was going to be reversed. And everybody thought it was a bad idea, didn't work economically at all. It was an economic negative. So I wrote a column on that. And nothing happened. They didn't -- they didn't reverse it until they got the threat from the -- from the -- from the WTO. And the reason they didn't do it is that there was one area of dissent, and that was the political office. The political office didn't -- was very reluctant to roll back these -- this decision.

EMANUEL: I think -- I thought it was very fitting that they decided to hold the decision until after the fund-raiser, which I think is reflective...

(CROSSTALK)

O'BEIRNE: Oh, everybody knew. Everybody knew that it was going to be rolled back, Rahm. It was no surprise to anyone. And he went to Pennsylvania...

(CROSSTALK)

O'BEIRNE: ... Pennsylvania the same week he did it, I think which shows that they're not all that worried about Pennsylvania as a result of this decision.

EMANUEL: If they were going to have courage, they should have said it beforehand and then still done the fund-raiser and see what happened.

SHIELDS: Has any American family been victimized by global free trading?

O'BEIRNE: All American families...

(CROSSTALK)

HUNT: I think free traders have to face up to the fact that there are really some bad consequences and there ought to be -- and...

(CROSSTALK)

HUNT: ... requires corrective measures. You just can't say, you know, Let 'em -- let 'em eat cake, the way some people might be tempted to say.

O'BEIRNE: It helps all consumers.

EMANUEL: As a person who worked on a series of free trade agreements for President Clinton and believes in free trade -- but to walk around and think that it's a win-win situation is -- you know, you're deluding yourself and deluding every -- I was at -- in Franklin Park, the 4th largest industrial zone in this state of Illinois. Werner (ph) Ladder, OK? They pay -- it's union -- 20 bucks an hour when you took all the benefits in. They make the Gorilla (ph) ladder.

China now is paying close to about a buck an hour of labor. It is -- and they're only a five-buck difference at Home Depot. It is very hard for them to compete. And to say that there's only win-win out there is -- you're deluding yourself.

SHIELDS: Last word, Rahm Emanuel. Rahm Emanuel and THE GANG will be back with accusations of Republican bribery attempts on the floor of the United States House of Representatives.

ANNOUNCER: Here's your CAPITAL GANG trivia question of the week. Which of the following professions did Rahm Emanuel once consider? Was it, A, physical therapist; B, gourmet chef; or C, ballet dancer? We'll have the answer right after the break.

(COMMERCIAL BREAK)

ANNOUNCER: Before the break, we asked which of the following professions did Rahm Emanuel once consider? The answer is C, ballet dancer.

SHIELDS: Welcome back. A spokesman for Attorney General John Ashcroft said the Justice Department will review a Democratic demand for an investigation of an alleged bribe attempt on the floor of the House of Representatives. Published reports said retiring Republican congressman Nick Smith of Michigan was told by colleagues that if he voted for President Bush's Medicare bill, business interests would contribute $100,000 to his son, Brad's, campaign to succeed him.

Congressman Smith voted no. Democratic national chairman Terry McAuliffe said in a letter to the attorney general, quote, "Not only was this bribe offered to a member of Congress, it was offered on the floor of the House of Representatives by another member of Congress," end quote.

Kate O'Beirne, did the Republican leadership go too far in applying pressure to pass the Medicare bill?

O'BEIRNE: Mark, bribery is a very serious charge, and it's not one that Nick Smith is making against the Republican leadership. So that must be said. His son never got such great publicity. His son is running fifth or sixth in polls to replace him out there in that seat. They're always trading on the floor on votes. You know, you want a bridge in your district, sometimes you want a hearing in your committee. But the Medicare bill I think was very different. Stories have it, of course, that Nancy Pelosi, the Democratic leader, was threatening committee assignments with respect to her members, to make sure they voted against this bill.

On the Republican side, it was not the kind of bill that you could typically trade things over. There were ideological reservations. The conservatives were the problem in the House with the Republicans, many conservatives who didn't want to support it. And they were not going to be persuaded with bridges or transportation projects. You are not going to buy off those kinds of votes with those kinds of arguments. They had to make an argument on the policy.

SHIELDS: Legislative log-rolling is one thing, but $100,000, Bob Novak!

NOVAK: That was the figure that was mentioned by other members of Congress, I understand, not in the leadership, to...

O'BEIRNE: Right.

NOVAK: ... to -- that business interests would -- would contribute. That's -- it was not bribery, but -- but Kate, they were so ugly on the floor. They told Feeney, congressman from Florida, that if he voted no -- he did vote no -- they would take three years off the time before he got in the leadership. He's supposed to be a hot article coming up. They were just very mean and nasty for a bill that is not a Republican bill. It's going to cost so much money! It is socialism. And it was a bad -- bad scene by the Republican leadership.

SHIELDS: Rahm Emanuel, here's what -- here's what the congressman himself has written since then. "Other members and groups made offers of extensive financial campaign support endorsements for my son, Brad, who is running for my seat. They also made threats of working against Brad if I voted no."

That's pretty serious stuff, isn't it?

EMANUEL: It is serious stuff, and I think that -- you know, there was a -- having been on the floor that night, you know, around this bill and for -- and I will say you may think that there were conservative elements, Kate, that were -- you had to argue on principle. That piece of legislation was like a three-week "Wheel of Fortune," and that's how it was dealt with. Now, whether he got any member of Congress or anybody said anything about specifically money, there was no doubt they were leaning on him, both physically, as well as politically, on the floor. Everybody saw it. And all your colleagues who were standing up right over in the press gallery watched what they were doing.

HUNT: It was a zoo.

EMANUEL: And -- it was. But the fact is, it's fitting for a bill in which they basically were bartering out to the highest bidder as it came to the special interests. They were also trying to barter out to members of Congress. And whether it happened with this particular member or others, everybody knew what was going on going into the vote.

SHIELDS: Al?

HUNT: Well, first of all, I want to give credit. Bob Novak broke this story over a week ago, and I think that's still the definitive piece, and people ought to read that before they look at what Nick Smith is now saying, as he's trying to back pedal. I think it may be bribery, as a matter of fact. I don't think there's a ghost of a chance that John Ashcroft's Justice Department will seriously investigate this.

NOVAK: You want to bet on that?

HUNT: Will seriously investigate this. I don't think there's a ghost of a chance...

NOVAK: Oh, OK.

HUNT: ... that they will. And -- but you know, Mark, you look at the broader question. And you take every critique that the Republicans leveled 10 years ago against the Democratic Congress in all the years that they had been in there, many of them justified, they have gone and violated every single thing they complained about -- destroying the rules of the House, keeping a vote open for three hours, crossing the line between log-rolling and bribery, earmarked projects. That was a centerpiece of what Gingrich talked about in 1994. They now have 30-fold more, pork-barrel spending. These people are so arrogant, and only -- it took the Democrats 40 years to do what they've done in 10.

NOVAK: (UNINTELLIGIBLE) Kate on one thing, that Brad Smith, the son, according to the -- our sources, "The Evans-Novak Political Report," is -- did the best in the debate, is the most likely to be nominated, so...

O'BEIRNE: He has the lowest name ID, even given the fact that his father's in office...

NOVAK: That's -- that's...

(CROSSTALK) NOVAK: That's what the hacks say. It isn't true, though.

EMANUEL: ... take it away from his son. His son has a right to run and...

O'BEIRNE: Right.

EMANUEL: ... run for that seat. But the fact is, though, you got to get back to the -- what was in this piece of legislation and how this legislation was even put together, whether it was for the pharmaceutical industry, the hospital industry or any other...

NOVAK: It's for old people! It's for poor old people. It's socialism.

EMANUEL: It is not!

(LAUGHTER)

O'BEIRNE: What's going to happen to the Democrats who voted no? They're losing committee assignments?

EMANUEL: No.

SHIELDS: OK. That's it. Kate O'Beirne, last word.

Next on CAPITAL GANG: Can anyone stop the Dean machine?

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

GEPHARDT: I'm going to win Iowa. I really have the best organization there, but I've also got the best ideas, the boldest, biggest, the most realistic ideas.

(END VIDEO CLIP)

SHIELDS: This week's Zogby poll in Iowa showed Congressman Dick Gephardt of Missouri trailing former Vermont governor Howard Dean by 4 percentage points in a two-way race. In New Hampshire, Zogby's poll gave Governor Dean a 30-point lead over Massachusetts senator John Kerry, as Dean defended his refusal to unseal the records of his governorship.

(BEGIN VIDEO CLIP)

HOWARD DEAN (D-VT), FORMER GOVERNOR, PRESIDENTIAL CANDIDATE: You can see by the cottage industry that's sprung up in Montpelier, with all the opposition's campaigns running up and -- and finding out what's in my records.

(END VIDEO CLIP)

SHIELDS: Al Hunt, is Dick Gephardt in Iowa the last chance to stop Howard Dean? HUNT: Mark if Howard Dean wins Iowa and New Hampshire, I can't think of a realistic scenario whereby he is denied the nomination. Thus the import of Iowa. New Hampshire's going to be closer than that poll. The closing days in New Hampshire always have some unanticipated dynamics. But the Dean support there is not only wide, it's very deep. It's very committed. And to shake, you know, 20, 25 percent of those Dean supporters is going to be very, very hard.

I think there's only a couple ways that Howard Dean can be stopped: if he makes a major gaffe or if he makes a series of mistakes, like that silly refusal to reveal his records as governor of Vermont, or in a more remote way, if the perception of a lot of elected Democratic politicians that he can't win a general against George Bush takes hold with rank-and-file Democrats, which is highly unlikely.

SHIELDS: Well, if anything, what we saw this week in Washington was sort of -- as reported by "The Washington Post," is sort of the establishment moving toward Dean, Washington being a great establishment town, a great frontrunner town. We've seen it whoever, whether it was Ronald Reagan or Jimmy Carter or whoever. Is Gephardt the surrogate for all the other Democrats? If Gephardt doesn't win Iowa, does that mean...

NOVAK: That -- that's exactly right. And so -- I mean, it's how insane this system is. Richard (UNINTELLIGIBLE) once said the way the Democrats have screwed up their system, you can end up with an Abraham Lincoln or a Benito Mussolini, but you didn't know which. And I don't know which Howard Dean is, but I do -- I do know this, that for a bunch of radical Iowans on a Monday night to go out and spend three hours, two hours, three hours, four hours, and that's going to pick the Democratic nominee for president? But that's what it is. If they don't stop him in Iowa, he's going, I think.

SHIELDS: Those radical Iowans who, let it be known, Kate O'Beirne, supported George W. Bush in the year 2000. Go ahead.

O'BEIRNE: And now I'm supporting Howard Dean. Please nominate this man. I agree. I think Dick Gephardt's the one who might be able to stop him. Dean is leading Kerry in Massachusetts, way ahead, of course, now in New Hampshire. But if Dick Gephardt does beat him in Iowa, it'll be probably close, and then heads to New Hampshire -- look off the current poll. Dick Gephardt has a lot of ground to make up in New Hampshire.

NOVAK: He got 3 percent.

O'BEIRNE: My guess would be he would take any bounce he gets out of Iowa out of Kerry. I'm not sure he would take it out of Dean's devoted supporters. And I agree with -- with Al. I think Dean is gaffe-prone, but he might not make the gaffe during the primaries. He might wait for the general election for the gaffe. And it might be that they come to their senses, enough Democrats, and figure he'll have a very tough time in the general. But you tend not to make that calculation about a guy you like. You tend to think, A guy I like, everybody's going to like. SHIELDS: Kate, I just remind our viewers that "The Chicago Tribune" in 1948...

(LAUGHTER)

SHIELDS: "Dewey Wins." Remember "Dewey Wins"? We'll keep this one around.

Rahm Emanuel, what's your assessment from (UNINTELLIGIBLE) somebody'll be on the ballot next November.

EMANUEL: Mark, I think -- well, a couple things. One is -- first is everybody who's saying Dean -- can Dean be stopped, five months ago said there's no way that Dean could be nominated. So -- and I -- and having -- and having worked in a series of elections where everybody -- for Bill Clinton, where everybody says, This is it, it's over, forget it, he can't -- my view is the voters have a voice here. They're going to have a chance. I believe that there's a lot of time between both -- not only here to Iowa but Iowa to New Hampshire. I think it's going to go through multiple states.

And I think if you just -- and I happen to be -- truth in advertising -- supporting, as everybody knows, General Clark. I think if you look, I think the most important thing that's happened in the last couple weeks is the spot that Bill Clinton occupied in New Hampshire, the Clinton spot -- that is, the story coming out of New Hampshire is open. General Clark is making a move. He's moved up in there, and he's only a couple points away from Kerry. I think Iowa matters, but it is not the end of the game. It's just the beginning of the game.

NOVAK: Don't you think -- don't you think that General Clark, to barely stay alive, now must be the runner-up in New Hampshire?

EMANUEL: He -- look, I think he has to -- he has to get the story, and I think he's in a position to do that.

NOVAK: That isn't what I said.

EMANUEL: Right. And that is what I'm...

NOVAK: Don't you think he has to be the runner-up?

EMANUEL: Sure. He's running -- and he's running ads to do that.

HUNT: But the other advantage that Dean has, even if Gephardt should beat him in Iowa and we have a protracted fight, this is the guy that has money. No one will come close to him.

O'BEIRNE: Right.

HUNT: So Dean is not only positioned for an early knock-out, he is well-positioned for a protracted struggle, too, short of making that cataclysmic gaffe.

NOVAK: I've had some Democrats tell me that -- that Howard Dean's problems is he's not likable, and that's going to kill him. But that isn't -- I mean, he's likable to the kind of people...

O'BEIRNE: Right.

NOVAK: ... who are active in Democratic politics.

O'BEIRNE: Right.

NOVAK: They like the hell out of him.

O'BEIRNE: Right. He's not just...

SHIELDS: Richard Nixon failed the likability test.

O'BEIRNE: He's not just...

NOVAK: That's the one exception to the likability rule.

O'BEIRNE: He's not just angry. I think what his supporters like is the fact that he comes across like this tough guy. Thus the rolling-up of sleeves and the veins popping in his forehead. The Democrats think that they lost last November in the mid-year elections because they weren't tough enough on George Bush, didn't take him on. I think that's a misreading of what happened. But as long as they think that's the case, they think Dean's the man who's going to take on George Bush.

SHIELDS: One of the emerging points of contention in this race -- just quickly around -- is that whether the United States is now more secure, more safe than it was and whether, in fact, the good will, the global good will toward the United States after September 11 has been squandered. That's a recurring theme...

NOVAK: What's that got to do with -- with...

SHIELDS: The Democrats...

NOVAK: ... what we've been talking about?

SHIELDS: That's what the Democrats -- that's a Democratic argument...

(CROSSTALK)

NOVAK: That's Democratic propaganda! It's not an argument.

O'BEIRNE: It is their argument. It is their argument. And Dean wants to give a French veto to the use of American force, as does General Clark! And I don't -- let -- we'll fight that out next year. I'm happy...

(CROSSTALK)

NOVAK: That has -- that has nothing to do with what happens in Iowa.

EMANUEL: I think the -- I think this election will be fought -- and an argument Democrats are going to make in November, as well in the process is, is that George Bush has gotten America stuck in a jobless economy and an endless occupation. And that's the argument we're going to take to him, and that's why the White House thinks it's going to be a close election because that's the argument that's going to be held.

SHIELDS: OK, last word, Rahm Emanuel. Thank you for joining us.

Coming up on the second half of CAPITAL GANG, our "Newsmaker of the Week" is former secretary of the treasury Robert Rubin. "Beyond the Beltway" looks at Arnold Schwarzenegger's first crisis as governor with California political columnist Dan Walters. And our "Outrage of the Week." That's all after the latest news headlines.

(COMMERCIAL BREAK)

(NEWS BREAK)

ANNOUNCER: Live from Washington, THE CAPITAL GANG.

SHIELDS: Welcome back to the second half of CAPITAL GANG. I'm Mark Shields with Al Hunt, Robert Novak and Kate O'Beirne.

Our "Newsmaker of the Week" is former secretary of the treasury Robert Rubin, author of a new memoir, "In an Uncertain World." Robert E. Rubin. Age 65. Religion, Jewish. Residence, New York City. Undergraduate degree, Harvard. Law degree, Yale. Co-chairman and partner Goldman Sachs. Clinton administration national economic director and secretary of the treasury. Currently chairman of the executive committee at Citigroup.

Our own Al Hunt sat down with Bob Rubin earlier this week.

(BEGIN VIDEO CLIP)

HUNT: Mr. Secretary, in your book, you declare that a major factor in the great economy of the '90s was the 1993 Budget Deficit Reduction Act, which, of course, included a tax increase. Is that a prescription for the current situation?

ROBERT RUBIN, FORMER TREASURY SECRETARY: In terms of the tax increase, Al, as you remember, that was an income tax increase on the top 1.2 percent of Americans. And I think that there's no question that that restoration of fiscal discipline was central to what happened in the '90s. Today we face a different situation. I think it was correct, when difficult conditions started about three years ago, to put in place a short-term stimulus. But the problem is, it should have been a temporary tax cut aimed toward middle-income and lower-income people who spend the largest part of what they get, if they get a windfall. Instead, we had this set of tax cuts that have only a small impact in the current time, and the (UNINTELLIGIBLE) in the outer years has contributed critically to long-term deficits that are now a very serious threat to our long-term economic wellbeing.

HUNT: We have turned a $5.5 trillion surplus into what your alma mater, Goldman Sachs, predicts will be a $5.5 trillion deficit over the next decade. But we have a booming economy.

RUBIN: Well, what you have right now is an enormous stimulus in the economy from -- partly from the Fed and partly from defense spending, partly homeland security spending. And independent estimates estimate about 15 to 20 percent of it comes from that portion of the tax cuts that fall into this period.

But you could have had any level of stimulus, fiscal stimulus you wanted in this period with temporary tax cuts.

HUNT: Would it be better to repeal all of those permanent Bush tax cuts or just those that go to the upper-income Americans?

RUBIN: Al, I think our hole now is so deep and so serious that this problem is only going to be solved with increase revenues and serious discipline around expenses. It is only going to happen when you have a bipartisan process led by a president, involving both houses of Congress and both parties, and they sit down and decide they're going to make these extremely difficult decisions.

HUNT: In talking about the great successes you had in the '90s, you said that the reason that '93 act was so important, because it did eventually result in lower interest rates, which lower the cost of capital. Conservatives say, Gee, tax cuts do the same thing.

RUBIN: Well, I think it actually did two things, Al. No. 1, it clearly had a substantial impact on interest rates, so that interest rates remained materially below where they would have been had that action not been taken. And they remained consistent with long-term growth and they contributed to long-term growth.

But they did something else that was very important that was little noticed at the time, and that is that they contributed substantially to improve consumer and business confidence, which was also a very important part of what happened in the 1990s.

HUNT: In your book, you depict Bill Clinton as a really hands-on president, when it comes to the economy.

RUBIN: I worked with President Clinton for six-and-a-half years, Al, and there is no question that he had a really deep understanding of the issues of what I think is a really somewhat different economy today than existed 15 or 20 years ago -- globalization, the new technologies, the spread of market-based economics. And he was deeply involved, as the leader of our economic team. That is absolutely correct.

HUNT: You also write that the Lewinsky scandal you don't think really had any effect on governmental policy.

RUBIN: I don't think that we would have had a different set of outcomes. I was working with him very closely at that time, and he remained enormously focused on what he was doing. Also, it is worth remembering, during that period, there were some substantial accomplishments. Particularly, he managed to maintain the focus on fiscal discipline. HUNT: Final question. What will the economy look like, just to pick a random date, 10 months from now?

RUBIN: Well, there's enormous stimulus right now. That'll run out probably sometime in the -- in the second quarter of next year. And I don't think there's any way to put odds on what's going to happen after that. You could have a self-sustaining recovery, or you could move back into sluggish conditions. But whatever happens, whatever happens, the risk that we have created for ourselves with these enormous long-term deficits will continue. That, I think, is almost certainly going to have significant adverse -- or I'd say severe adverse impact on our economy unless we deal with it. And presently, we're worsening the situation, rather than trying to repair it.

(END VIDEO CLIP)

SHIELDS: Al Hunt, was Bob Rubin kind of hinting that the economy could turn down just in time for the 2004 presidential election?

HUNT: No, Mark, but he's saying that the rate of growth will slow down from the rapid growth we have now, which, by the way, isn't producing sufficient jobs. The real crisis that he talks about is what'll happen when the private demand for capital and the Baby Boomer retirement collides with these massive deficits that we've created. That'll be a disaster, he fears. And coming from the architect of the best economy of our lifetime, we ought to pay attention.

SHIELDS: Bob?

NOVAK: Al, Bob Rubin is a very charming guy and a great arbitrager. But since he's being canonized, almost deified by people like Hunt, let me say a few things about him. He's an ultra-left-wing ideologue. He is one of the most partisan people in the Clinton administration, doesn't know much about economics. And the last thing I would ever want to do is to take his advice on wrecking what is a buoyant economy and take him seriously as a non-partisan economist.

O'BEIRNE: Look, Bill Clinton benefited by inheriting when he came into office a recovering economy. And once -- from '94 on, with the Republican Congress, he couldn't raise taxes or raise spending significantly, and the benefited him. But I do think Rubin probably helped him be better on the economy than he might have been -- a capital gains tax cut, deregulation. But he's a good enough politician, Bob Rubin, that he ducked your tax question. He's not like Howard Dean, wanting to raise taxes across the board.

SHIELDS: Al Hunt?

HUNT: Can you imagine? The co-chair of Goldman Sachs and vice chair of Citigroup being called an ultra-leftist? Only from our dear friend, Robert Novak!

(LAUGHTER)

HUNT: This is one of the most -- this is one of the most valued and respected business leaders in the last...

NOVAK: You respect him.

HUNT: ... in the last 30 years.

SHIELDS: And you don't value him?

NOVAK: No.

SHIELDS: That's it. Coming up: "The CAPITAL GANG Classic." The Supreme Court weighs in on the 2000 presidential election.

(COMMERCIAL BREAK)

SHIELDS: Welcome back. Three years ago this week, the United States Supreme Court by a 5-to-4 vote halted the statewide Florida recount of election votes that had been ordered by the Florida supreme court. CAPITAL GANG discussed this on December 9, 2000. Our guest was Republican congresswoman Jennifer Dunn of Washington.

(BEGIN VIDEO CLIP)

HUNT: For the Supreme Court, the five-person majority, to argue that a mere count or recount would do "irreparable harm" is simply a cover.

NOVAK: What was at stake was very frankly put by Democratic politicians to get the counting, the recounting going under -- with no standards, anything can happen, anything -- trying to get the votes...

MARGARET CARLSON, THE CAPITAL GANG: I wouldn't have said that the United States Supreme Court 5-to-4 is an activist majority trying to settle the election unless you said that the Florida supreme court 4-to-3 is an activist majority.

SHIELDS: Every time a decision went against the Bush folks, Jim Baker savaged the judiciary, showed himself to be what he was, a 1988 people hit man in the case against Michael Dukakis.

REP. JENNIFER DUNN (R), WASHINGTON: The Florida supreme court is infamously liberal, and it is very much an activist court and it has proved it again because yesterday it extended the deadline again, after it set the deadline the first time.

(END VIDEO CLIP)

SHIELDS: Kate O'Beirne, doesn't this debate over the interrupted recount continue some three years later?

O'BEIRNE: Mark, let me set the record straight. There was a U.S. Supreme Court 7-2 decision that Florida had ignored its own procedures for federal elections. It then went to the Florida supreme court, who unanimously found -- they had the last say -- that they had, indeed, violated their own procedures. And George Bush won every single media recount. But yes, it's not over because Democrats still love waving the bloody shirt. They were doing it as recently as today in Florida.

SHIELDS: Bob Novak?

NOVAK: Kate is exactly right about the Democrats. In the absence of issues, they just love to feed on this. They work themselves into some kind of a state of frenzy. I was watching on C- Span this zoo down in Florida. That's the only thing they like to talk about. And of course, the press recounts indicated that Bush won Florida.

SHIELDS: We weren't talking about the recounts then, though, were we, Al?

HUNT: No, we weren't.

(CROSSTALK)

HUNT: Of course, the recounts were more mixed than that, if you actually read what that -- that big consortium said. This was a politically motivated decision in 2000. It still is.

SHIELDS: Still is. Remains that.

Next on CAPITAL GANG, "Beyond the Beltway" looks at Governor Arnold Schwarzenegger's winning some and losing a big one in California. That's with political columnist Dan Walters of "The Sacramento Bee."

(COMMERCIAL BREAK)

SHIELDS: Welcome back.

Last night, the Democratic-controlled California legislature rejected Republican governor Arnold Schwarzenegger's proposed spending cap and $15 billion bond issue.

(BEGIN VIDEO CLIP)

DON PERATA (D), CALIFORNIA STATE SENATOR: I think he got very bad political advice. People are using his -- misusing his popularity.

ROB STUTZMAN, SCHWARZENEGGER SPOKESMAN: The governor had hoped the legislature would do the right thing, that they would have gotten the message of the election this past October, which is that the voters want politics as usual to end.

(END VIDEO CLIP)

SHIELDS: Earlier in the week, the new governor reported on two promises kept.

(BEGIN VIDEO CLIP)

GOV. ARNOLD SCHWARZENEGGER (R), CALIF.: Promise No. 1 was to repeal the tripling of the car tax. Right after I was sworn in, I left the West Steps of the Capitol, went inside my office, sat behind my desk and took out the pen. And I signed the first executive order.

I also promise you that I will call a special session of the legislature to repeal the law that gives driver's license to undocumented immigrants. Tomorrow I will be again sitting at my desk in the office and sign that bill into law.

(END VIDEO CLIP)

SHIELDS: Joining us now from Sacramento is columnist Dan Walters of "The Sacramento Bee." Thanks for coming in, Dan.

DAN WALTERS, "SACRAMENTO BEE": You're welcome.

SHIELDS: Dan, now, just understand this. The governor's proposal to cover the current budget's reckless deficit is $15 billion in long-term bonds that would be paid off by your grandchildren and other kids now in kindergarten?

WALTERS: Well, yes and no. The bonds were never really the issue in this thing. It was the spending limit was the issue. They could have made a deal on the bonds. And the bonds are really nothing much. They were just -- they were just to refinance the debt that's already there. They added really very little to the whole thing. The real battle was over the spending limit that would have put a severe clamp on California's budget spending for years and years to come. The Democrats wouldn't go for it.

NOVAK: Dan, the wire reports are almost indecipherable about what happened there, and -- and can you tell us what is the meaning of the 34-to-nothing vote in the senate? Does that mean that all the Republicans were against their own new governor, or is it -- does it indicate something else?

WALTERS: Well, you have to understand the California legislature. It was like a lot of things (UNINTELLIGIBLE) It was more symbolic than anything. It was telling the world that this spending limit measure proposed by the governor is the best the Democrats are going to get. We're going to reject it because we're going to put, they're saying, a tougher spending limit on the ballot through an initiative next November. So it was a -- it was a kind of a symbolic gesture, which is -- consumes about 90 percent of the time of the California legislature, symbolic gestures.

SHIELDS: Kate O'Beirne?

O'BEIRNE: Dan, is it risky for the legislature to be fighting with its new popular governor? Do they have any reason to fear next year that they'll suffer the fate of Gray Davis?

WALTERS: No, they don't, not at least directly. The redistricting plan that was adopted two years ago makes virtually every incumbent legislator safe in their districts. Only one or two may have to worry about it a little bit. No, that's not their worry. If they have a concern along those lines, it's that someone will put on the ballot another initiative -- you know, we do everything by initiative in California -- another initiative that will punish the legislature in the same way that Gray Davis got punished, making it part-timers perhaps, cutting their salaries in half, doing another mid-term redistricting sort of thing. That's -- if they have any fear, that's the fear.

SHIELDS: Al Hunt?

HUNT: Dan, as you probably recall, in 1967, Governor Ronald Reagan came in under not terribly different circumstances, and after fighting for spending cuts, finally very successfully negotiated a deal where he got some of his spending cuts in return for agreeing to some tax increases. Any chance of that happening this time?

WALTERS: I'd say there's a chance, but not a very good one because Arnold Schwarzenegger, campaigning for governor, made it very clear he's not going to raise taxes. Now, Democrats seem to believe they can push him into doing so, and he claims he will not do so. I think the world's changed a lot in California since 1967. Ronald Reagan would be considered a moderate in today's Republican Party. And the state, like the nation, is polarized. The Democratic Party's dominated by liberal groups, the Republican Party by conservative groups. And there's very little room to compromise. And the redistricting plan I mentioned earlier drives both parties to their extremes and makes it even more difficult.

At midnight last night, they were standing on the Assembly floor -- this is midnight on a Friday night in December, mind you. They were standing on the Assembly floor, going at each other, denouncing each other in very strong language. It's just like business as usual. Partisan gridlock.

SHIELDS: But Dan, what we're looking at now is California with the worst credit rating of any state in the union. The state could run out of money in June, just go broke, because it's got $14 billion due, right, in the refinancing that was done last year in bonds.

WALTERS: Yes, and Schwarzenegger's bond issue was supposed to refinance that. Actually, there's another bond issue that's pending. His bond issue is just to replace one that might be legally suspect, but nobody really knows for sure. So we could run out of money in June, or we could not. Depends on what the courts do and what happens subsequently.

It certainly is a danger, but it's not an absolute certainty that it'll happen, like so much in the thing -- the big issue here in the short term is what the governor is going to do about the $14 billion deficit. Disconnected from that $14 billion, another $14 billion deficit in next year's budget, along with a several billion dollar deficit in the budget now standing. He's already proposing spending cuts. The Democrats are already howling. He's saying he won't raise taxes. In fact, he cut taxes. He added $4 billion a year to the deficit by cutting taxes.

So this is -- this is another one of those classic California battles, the same battle we've been fighting for 25 years, ever since the passage of Proposition 13. What do we want, and what are we willing to pay for it? And nobody knows, and they just fight and fight and fight and fight. And the reason -- by coming to a stalemate, that's why we have these big deficits. Republicans won't raise taxes, Democrats won't cut spending. The only way out is to borrow ever greater amounts of money, and that's what they've been doing for the last three years.

NOVAK: Now, what is -- what is the recourse for Governor Schwarzenegger, having lost this vote? What -- what can he do to -- does he wait until the November ballot for a -- for a referendum? What can he do in the shorter term?

WALTERS: In the shorter term, he'll go out there on the hustings, like he's been doing for the last couple of weeks, on the radio talk shows, on the rallies and whatnot, trying to bring pressure to bear on the legislature. The next big battle will be over spending cuts in this year's budget. The local governments, who depended on that money that the governor cut out of -- the tax cut money, the car tax money -- they're scrambling. They're losing money. Los Angeles County is losing $2 million a day because Schwarzenegger cut the car tax. They're screaming. All the local governments are screaming.

And he's saying the way to finance that is to cut social spending, mostly social health spending. Democrats have got their backs up on that, so they're right into it. And then even if they resolve that, they've got another $14 billion deficit popping up in next year's budget. It's a big mess. But then, on the other hand, Arnold Schwarzenegger volunteered, didn't he. Nobody forced him to do this.

HUNT: Dan, we only have about 20 seconds left. Just ask -- just answer quickly. Is this going to help or hurt Schwarzenegger's popularity?

WALTERS: I think, in the short run, at least, it will help his popularity because I think he will portray the legislature, which has very little public standing -- maybe lower than Gray Davis's, as a matter of fact -- portray them as obstructionists. And I think he'll -- it will help him. If he cannot deliver in the longer run, however, on his promises to clean up California's mess, it'll hurt him.

SHIELDS: OK. Dan Walters, thank you very much for being with us.

The GANG will be back with the "Outrages of the Week."

(COMMERCIAL BREAK)

SHIELDS: Now for the "Outrage of the Week." Last week, during our debate over the reinstatement of the military draft, which I support, I said that General Jim Jones, former commandant of the Marine Corps and current supreme commander of NATO, supported a draft. I was wrong. General Jones supports the volunteer military. I apologize to him and to you for this misstatement. General Jones has, in fact, spoken approvingly of Charles Moscoss's (ph) truly excellent idea for shorter enlistments tied to college tuition benefits.

Bob Novak? NOVAK: Deputy defense secretary Paul Wolfowitz has always been a hard-line supporter of Israel. So it was an important step toward peace when he agreed to meet with negotiators of the unofficial Israeli-Palestinian peace plan. Then the White House pressured Wolfowitz to cancel the meeting. Israeli prime minister Ariel Sharon considers the unofficial peace initiative counterproductive, as, indeed, he does any step toward a Palestinian state. The White House has signaled that it walks in lockstep with General Sharon, and that is a tragedy more than an outrage.

SHIELDS: Kate O'Beirne?

O'BEIRNE: Washington state awarded Joshua Davey (ph) a scholarship available to needy promising students, but took it away because one of Davey's majors was theology. Washington has a Blaine amendment, adopted in earlier nativist times when prohibitions on sectarian schools meant Catholic. The case over whether there can be such a religious exclusion for state aid was heard by the Supreme Court this week. The damage, though, goes well beyond the outrageous discrimination. As a result of the dispute, Davey decided to become a lawyer instead of a minister.

SHIELDS: Al Hunt?

HUNT: As a non-conservative admirer of Ronald Reagan, I strongly supported naming Washington's airport after him. But the current attempt by some right-wingers to replace Franklin Roosevelt's likeness on the dime with Reagan is an ill-disguised smear on FDR, the polio- stricken president who inspired the March of Dimes. Two people who would agree with me: Nancy Reagan, who said last night that her husband, who idolized FDR, would oppose it as it's, quote, "wrong," end quote, to remove an honor given to a, quote, "great president," end quote. Amen, Mrs. Reagan.

SHIELDS: This is Mark Shields saying good night for THE CAPITAL GANG. Coming up next: "CNN PRESENTS: HOUSE OF WAR, UPRISING AT MAZAR E SHARIF." At 9:00 PM, "LARRY KING LIVE," secret love story, Amy Grant and Vince Gill. And at 10:00 PM, the latest news.

Thank you for joining us.

END

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Former Treasury Secretary Robert Rubin; California's Governor Arnold Schwarzenegger Struggles With Budget Deficit>


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